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PACIFIC SELECT
PROSPECTUS
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[LOGO OF PACIFIC SELECT]
Variable Universal Life
PROSPECTUSES FOR
PACIFIC SELECT
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
PACIFIC MUTUAL LIFE INSURANCE COMPANY
DATED MAY 1, 1997
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PACIFIC SELECT FUND
DATED MAY 1, 1997
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[LOGO OF PACIFIC SELECT]
PACIFIC SELECT
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
ISSUED BY PACIFIC MUTUAL LIFE INSURANCE
COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
1-800-800-7681
This prospectus describes Pacific Select--a Flexible Premium Variable Life
Insurance Policy (individually, the "Policy," and collectively, the
"Policies") offered by Pacific Mutual Life Insurance Company ("Pacific Mutual
Life," "we," "us," or "our"). The Policy provides lifetime insurance
protection on the Insured named in the Policy through the Maturity Date so
long as the Policy is not surrendered or in default beyond the Grace Period.
The Policy also provides for a Net Cash Surrender Value if it is surrendered
during the lifetime of the Insured. The Policy can be purchased for a minimum
initial premium of $10,000. The Policy provides considerable flexibility to
pay additional premiums, although it may under certain circumstances provide
insurance protection through the Maturity Date for only the initial premium.
Premium payments may be allocated at the Policyholder's ("Policy Owner",
"Owner", "you", or "your") discretion to one or more of the Investment Options
currently available. Each of the Variable Investment Options are funded by one
of our separate accounts, the Pacific Select Separate Account (the "Separate
Account"). Any portion of the premium payments allocated to the Variable
Accounts is invested in one or more of the corresponding Portfolios of the
Pacific Select Fund (the "Fund"):
Money Market Portfolio Equity Income Portfolio
High Yield Bond Portfolio Multi-Strategy Portfolio
Managed Bond Portfolio Equity Portfolio
Government Securities Portfolio Bond and Income Portfolio
Growth Portfolio Equity Index Portfolio
Aggressive Equity Portfolio International Portfolio
Growth LT Portfolio Emerging Markets Portfolio
A fixed option (the "Fixed Account") is also available to you. The Accumulated
Value in the Fixed Account will accrue interest at an interest rate that is
guaranteed by us.
To the extent that all or a portion of the premium payments are allocated to
the Separate Account, the Accumulated Value under the Policy will vary based
upon the investment performance of the Variable Accounts to which the
Accumulated Value is allocated. No minimum amount of Accumulated Value is
guaranteed.
The death benefit will be the Face Amount of insurance stated in the Policy
or, under certain circumstances, a higher amount. Although the Accumulated
Value allocated to the Variable Accounts will vary, the amount and duration of
the death benefit may or may not vary with the investment performance of the
Variable Accounts depending upon several factors. At the death of the Insured,
we will pay the Beneficiary the death benefit minus any Indebtedness under the
Policy.
The Policy is a type of life insurance policy classified as a modified
endowment contract (other than certain Policies entered into before June 21,
1988). For information on the tax treatment of modified endowment contracts,
see "Federal Income Tax Considerations," on page 23.
It may not be advantageous to replace existing insurance with the Policy. A
Policy may be returned according to the terms of its Free-Look Right (see
"Right to Examine a Policy--Free-Look Right," page 19), during which time
premium payments allocated to the Separate Account will be invested in the
Money Market Variable Account.
This prospectus generally describes only the portion of the Policy involving
the Separate Account. For a brief summary of the Fixed Account, see "The Fixed
Account," page 29.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECU-
RITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTA-
TION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE PACIFIC
SELECT FUND. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
DATE: MAY 1, 1997
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THE POLICY IS NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN AS CONTAINED IN THIS PROSPECTUS, THE
FUND'S PROSPECTUS OR THE STATEMENT OF ADDITIONAL INFORMATION OF THE FUND OR
ANY SUPPLEMENT THERETO.
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TABLE OF CONTENTS
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Important Terms............................................................ 4
Summary of the Policy...................................................... 6
Purpose of the Policy.................................................... 6
Policy Values............................................................ 6
The Death Benefit........................................................ 6
Premium Features......................................................... 6
Investment Options....................................................... 7
Free-Look Right.......................................................... 7
Surrender Right.......................................................... 7
Preferred and Partial Withdrawal Benefits................................ 7
Policy Loans............................................................. 7
Charges and Deductions................................................... 7
Fund Annual Expenses After Expense Limitation............................ 9
Tax Treatment of Increases in Accumulated Value.......................... 9
Tax Treatment of Death Benefit........................................... 10
The Fixed Account........................................................ 10
Contacting Pacific Mutual Life and Timing of Transactions................ 10
Information About Pacific Mutual Life, the Separate Account
and the Fund.............................................................. 10
Pacific Mutual Life Insurance Company.................................... 10
Pacific Select Separate Account.......................................... 11
The Pacific Select Fund.................................................. 11
The Investment Adviser and Portfolio Managers............................ 13
The Policy................................................................. 14
Application for a Policy................................................. 14
Premiums................................................................. 14
Additional Premium Payments.............................................. 14
Allocation of Premiums................................................... 15
Portfolio Rebalancing.................................................... 15
Dollar Cost Averaging Option............................................. 15
Transfer of Accumulated Value............................................ 16
Death Benefit............................................................ 16
Changes in Face Amount................................................... 17
Policy Values............................................................ 18
Determination of Accumulated Value....................................... 18
Policy Loans............................................................. 19
Benefits at Maturity..................................................... 20
Surrender................................................................ 20
Preferred and Partial Withdrawal Benefits................................ 20
Right to Examine a Policy--Free-Look Right............................... 21
Lapse.................................................................... 21
Reinstatement............................................................ 22
Charges and Deductions..................................................... 22
Premium Load from the Initial Premium.................................... 22
Premium Load from Additional Premiums.................................... 23
Variations in Premium Load............................................... 23
Deductions from Accumulated Value........................................ 23
Deductions from the Variable Accounts.................................... 24
Other Charges............................................................ 24
Guarantee of Certain Charges............................................. 25
Other Information.......................................................... 25
Federal Income Tax Considerations........................................ 25
Charge for Our Income Taxes.............................................. 28
Voting of Fund Shares.................................................... 28
Disregard of Voting Instructions......................................... 28
Confirmation Statements and Other Reports to Owners...................... 28
Substitution of Investments.............................................. 29
Changes to Comply with Law............................................... 29
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Performance Information.................................................... 29
The Fixed Account.......................................................... 30
General Description...................................................... 30
Death Benefit............................................................ 31
Policy Charges........................................................... 31
Transfers, Surrenders, Withdrawals, and Policy Loans..................... 31
More About the Policy...................................................... 31
Ownership................................................................ 31
Beneficiary.............................................................. 32
Exchange of Insured...................................................... 32
The Contract............................................................. 32
Payments................................................................. 32
Assignment............................................................... 33
Errors on the Application................................................ 33
Incontestability......................................................... 33
Payment in Case of Suicide............................................... 33
Participating............................................................ 33
Policy Illustrations..................................................... 34
Payment Plan............................................................. 34
Distribution of the Policy............................................... 34
More About Pacific Mutual Life............................................. 34
Management............................................................... 34
State Regulation......................................................... 37
Telephone Transfer and Loan Privileges................................... 37
Legal Proceedings........................................................ 37
Legal Matters............................................................ 37
Registration Statement................................................... 37
Independent Auditors..................................................... 38
Financial Statements..................................................... 38
Appendix...................................................................
Illustrations.............................................................. 74
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IMPORTANT TERMS
Accumulated Value--The total value of the amounts in the Investment Options
for the Policy as well as any amount set aside in the Loan Account, including
any accrued interest, as of any Valuation Date.
Age--The Insured's age as of his or her nearest birthday as of the Policy
Date, increased by the number of complete policy years elapsed. With respect
to any increases in Face Amount, riders, or other policy benefits which have
an effective date not falling on a Policy Anniversary, Age means age nearest
birthday as of the effective date increased by the number of complete years
elapsed since the effective date.
Beneficiary--The person or persons you name in the application or by proper
later designation to receive the death benefit proceeds upon the death of the
Insured.
Cash Surrender Value--The Accumulated Value less any applicable unrecovered
deferred load.
Face Amount--The minimum death benefit for so long as the Policy remains in
force. The Face Amount may be increased or decreased under certain
circumstances.
Fixed Account--An account that is part of our General Account to which all or
a portion of premium payments may be allocated for accumulation at a fixed
rate of interest (which may not be less than 4.0%) declared by us.
General Account--All of our assets other than those allocated to the Separate
Account or to any of our other segregated separate accounts.
Guideline Single Premium or Guideline Level Premiums--The maximum amount of
premium or premiums that can be paid to qualify a Policy as life insurance for
tax purposes as specified in Section 7702 of the Internal Revenue Code.
Home Office--The Policy Benefits and Services Department at our main office at
700 Newport Center Drive, Newport Beach, California 92660.
Indebtedness--The unpaid loan balance including accrued loan interest.
Insured--The person upon whose life the Policy is issued and whose death is
the contingency upon which the death benefit proceeds are payable.
Investment Option--A Variable Account or the Fixed Account.
Loan Account--An account to which amounts are transferred from the Investment
Options as collateral for policy loans.
Maturity Date--The Policy Anniversary on which the Insured is Age 95.
Monthly Payment Date--The day each month on which certain deductions and
charges are assessed against the Accumulated Value. The first Monthly Payment
Date is the Policy Date.
Net Cash Surrender Value--The Cash Surrender Value less Policy Indebtedness.
Policyholder, Policy Owner, Owner, you, or your--The person who owns the
Policy. The Policy Owner will be the Insured unless otherwise stated in the
application. If your Policy has been absolutely assigned, the assignee becomes
the Owner. A collateral assignee is not the Owner.
Policy Date--The date used to determine the Monthly Payment Date, Policy
Years, and Policy Monthly, Quarterly, Semi-Annual, and Annual Anniversaries.
It is usually the date the initial premium is received at our Home Office. The
term "Issue Date" is substituted for Policy Date with respect to Policies
issued to residents of the Commonwealth of Massachusetts.
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Premium Load--A charge assessed in connection with each premium payment
consisting of a sales load, an administrative load, and a state and local
premium tax charge. The Premium Load assessed against the first premium is
deferred and deducted monthly starting on the first and continuing to the
eleventh Policy Anniversary.
Valuation Date--Each date on which the Separate Account is valued, which
currently includes each day that the New York Stock Exchange is open for
trading and on which our administrative offices are open. The New York Stock
Exchange is closed on weekends and on: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving, and Christmas. Our
administrative offices are normally not open on the following: the Monday
before New Year's Day, July Fourth, or Christmas Day if any of these holidays
falls on a Tuesday; the Tuesday before Christmas Day if that holiday falls on
a Wednesday; the Friday after New Year's Day, July Fourth or Christmas Day if
any of these holidays falls on a Thursday; and the Friday after Thanksgiving.
If any transaction or event called for under a Policy is scheduled to occur on
a day that is not a Valuation Date, such transaction or event will be deemed
to occur on the next following Valuation Date unless otherwise specified.
Valuation Period--The period that starts at the close of a Valuation Date and
ends at the close of the next succeeding Valuation Date.
Variable Account--A separate account of ours or a subaccount of such a
separate account, which is used only to support the variable death benefits
and policy values of variable life insurance policies, and the assets of which
are segregated from our General Account and our other separate accounts. The
Pacific Select Separate Account serves as the funding vehicle for the
Policies. The Money Market Variable Account, High-Yield Bond Variable Account,
Managed Bond Variable Account, Government Securities Variable Account, Growth
Variable Account, Aggressive Equity Variable Account, Growth LT Variable
Account, Equity Income Variable Account, Multi-Strategy Variable Account,
Equity Variable Account, Bond and Income Variable Account, Equity Index
Variable Account, International Variable Account, and Emerging Markets
Variable Account are all subaccounts of the Pacific Select Separate Account.
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SUMMARY OF THE POLICY
This summary is intended to provide a brief overview of the more significant
aspects of the Policy. Further detail is provided in this prospectus and in the
Policy. Unless the context indicates otherwise, the discussion in this summary
and the remainder of the prospectus relates to the portion of the Policy
involving the Separate Account. The Fixed Account is briefly described under
"The Fixed Account," on page 29 and in the Policy.
PURPOSE OF THE POLICY
The Policy offers you insurance protection on the life of the Insured through
the Maturity Date so long as your Policy is not surrendered or in default
beyond the Grace Period. Like traditional fixed life insurance, the Policy
provides for a death benefit equal to its Face Amount, accumulation of cash
values, and surrender and loan privileges. Unlike traditional fixed life
insurance, the Policy offers a choice of investment alternatives and an
opportunity for the Policy's Accumulated Value and, under certain
circumstances, its death benefit to grow based on investment results.
POLICY VALUES
You may allocate premium payments among the various Variable Accounts that
comprise the Separate Account and which invest in corresponding Portfolios of
the Pacific Select Fund (and to the Fixed Account).
Depending on the investment experience of the selected Variable Accounts, the
Accumulated Value may increase or decrease on any day. The death benefit may or
may not increase or decrease depending upon several factors, although the death
benefit will never decrease below the Face Amount provided your Policy is in
force. There is no guarantee that your Policy's Accumulated Value and death
benefit will increase. You bear the investment risk on that portion of the
Accumulated Value allocated to the Variable Accounts.
Your Policy will remain in force unless Indebtedness equals or exceeds Cash
Surrender Value or unless Cash Surrender Value less Indebtedness is
insufficient to pay certain charges deducted on each Monthly Payment Date, and
a Grace Period expires without sufficient additional premium payments or loan
repayments by you.
THE DEATH BENEFIT
Upon the death of the Insured, we will pay to the named Beneficiary death
benefit proceeds, which will be the death benefit under your Policy reduced by
any Policy Indebtedness. The death benefit will be the greater of the Face
Amount under your Policy or the Accumulated Value multiplied by a specified
percentage (see "Death Benefit," page 14).
PREMIUM FEATURES
The Policy can be purchased for a minimum initial premium payment of the
greater of $10,000 or 50% of the Guideline Single Premium. The Guideline Single
Premium is the maximum premium that can be paid for any given Face Amount in
order for an insurance policy to qualify as a life insurance contract for tax
purposes. As a flexible premium Policy, the Policy provides considerable
flexibility to pay additional premiums at your discretion, so you have some
flexibility to vary premium payments to reflect changing financial conditions.
Your Policy may provide insurance protection through the Maturity Date for only
the initial premium, or alternatively, additional premium payments may be
required to keep your Policy in force, depending upon the Face Amount you
choose, the investment performance of the Variable Accounts selected, and other
factors.
The Policy is not available to insure residents of certain municipalities in
Kentucky where premium taxes in excess of 4.0% are imposed.
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INVESTMENT OPTIONS
The Variable Accounts invest in portfolios of a mutual fund, which offers you
the opportunity to direct us to invest in diversified portfolios of stocks,
bonds, money market instruments, or a combination of these securities, or in
securities of foreign issuers. Each of the available Variable Accounts invests
exclusively in shares of a designated Portfolio of the Fund. Each of the
Portfolios of the Fund, which are shown in the chart on page , has a different
investment objective or objectives. See "The Pacific Select Fund," page 10.
You may choose to allocate premium payments to any of the Investment Options
available to you. You may transfer Accumulated Value among the Variable
Accounts, and, subject to certain limitations, between the Variable Accounts
and the Fixed Account. Transfer may be made by telephone if a properly
completed Authorization for Telephone Requests has been filed at our Home
Office. See "Transfer of Accumulated Value," page 14.
FREE-LOOK RIGHT
You may obtain a full refund of the premium paid if your Policy is returned
within 10 days after you receive it (30 days if you reside in California and
are age 60 or older) or 45 days after the application for your Policy is
completed, whichever is later. In Pennsylvania, you may obtain a full refund of
the premium paid only if your Policy is returned within 10 days after you
receive it. During the Free-Look Period, premiums will be allocated to the
Money Market Variable Account which invests in the Money Market Portfolio of
the Fund. See "Allocation of Premiums," page 13.
SURRENDER RIGHT
You can surrender the Policy during the life of the Insured and receive its
Net Cash Surrender Value, which is equal to the Accumulated Value less
unrecovered deferred load and less any outstanding Policy Indebtedness.
PREFERRED AND PARTIAL WITHDRAWAL BENEFITS
Two partial surrender benefits are available under the Policy. The first, the
Preferred Withdrawal Benefit, permits one withdrawal per year of up to 10% of
the sum of your premium payments without a surrender charge and without
reducing the death benefit under your Policy. However, a preferred withdrawal
may increase the Face Amount. This benefit is available on the first Policy
Anniversary until the 15th Policy Anniversary. On the 15th Policy Anniversary
and thereafter, the second surrender benefit, the Partial Withdrawal Benefit,
is available, which permits you to make Partial Withdrawals of Net Cash
Surrender Value within certain limits.
POLICY LOANS
You may borrow from us up to 90% of your Cash Surrender Value, less any
Policy Indebtedness. The minimum loan that can be taken at any time is $1,000
($200 in Connecticut, $250 in Oregon, $500 in Indiana). The Policy will be the
only security required for the loan. See "Policy Loans," page 17. The amount of
any Policy Indebtedness will be subtracted from Death Benefit or your Cash
Surrender Value, if your Policy matures or is surrendered.
A Policy loan is treated as a distribution from a Policy that is a modified
endowment contract and therefore may result in taxable income. See "Federal
Income Tax Considerations," page 23.
CHARGES AND DEDUCTIONS
Premium Load from the Initial Premium
We do not make any deductions from the initial premium payment before
allocating it to your Accumulated Value.
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A Premium Load that consists of certain charges is assessed in connection
with each premium payment. The Premium Load assessed in connection with the
initial premium, referred to as "deferred load," is deferred and deducted from
Accumulated Value in equal monthly deductions starting on the first Policy
Anniversary to the eleventh. Deferred load is not deducted during the first
Policy Year unless you surrender your Policy, in which case the deferred load
will be deducted in full. The Premium Load consists of the following items:
--A sales load equal to 4.15% of the premium;
--A charge to pay applicable state and local premium taxes equal to 2.35%;
and
--An administrative load, the amount of which varies with the size of the
premium payment as follows: 3.0% of the premium if it is less than
$50,000, 1.50% of the premium if it is at least $50,000 but less than
$100,000, and 0.50% of the premium if it is $100,000 and over.
Deferring Premium Load on the initial premium payment as opposed to charging
it at the Policy Date has the effect of transferring to you the investment
experience on the portion of the Premium Load that remains in the Accumulated
Value. If you surrender your Policy, the unrecovered deferred load will be
deducted from the Accumulated Value.
Premium Load from Additional Premiums
Additional premium payments after the initial premium payment are subject to
Premium Load to the same extent as described above under "Premium Load from the
Initial Premium." The Premium Load on an additional premium will be assessed
upon acceptance of the additional premium and will not be deferred.
Deductions from Accumulated Value
--Cost of Insurance Charge: A cost of insurance charge is deducted on each
Monthly Payment Date to compensate us for the cost of providing life
insurance coverage for the Insured;
--Administrative Charge: We charge an administrative charge equal to $5 on
each Monthly Payment Date. This charge is waived on Policies with initial
premium payments of $20,000 or more; and
--Face Amount Increase Charge: If you request an increase in Face Amount
that is accepted by us, a charge of $100 will be deducted on the effective
date of the increase to cover processing costs.
Deductions from the Variable Accounts
--Mortality and Expense Risk Charge: We make a daily charge against the
Variable Accounts to compensate us for mortality and expense risks
assumed. This charge is equal to an annual rate of 0.70% of the average
daily net assets.
The operating expenses of the Separate Account are paid by us. Investment
advisory fees and operating expenses of the Fund are paid by the Fund. For a
description of these charges, see "Charges and Deductions," page 20.
We sometimes use the simplified method of underwriting, which involves no
medical or paramedical examination of the Insured. Because this method presents
additional mortality risks for us in determining rates for the cost of
insurance, we have assumed less favorable mortality experience than that
provided in the 1980 Commissioners Standard Ordinary ("CSO") Mortality Table B,
and have established guaranteed rates that are 137.5% of the 1980 CSO Mortality
Table B. If the guaranteed rates are in effect, Insureds in a standard
underwriting classification will pay a higher cost of insurance than if they
had been medically underwritten in an otherwise identical policy, which may be
viewed as charging substandard rates for Insureds in a standard underwriting
classification. However, we currently use cost of insurance rates that are
lower (i.e., less expensive) than the guaranteed rates. These current rates are
less than or equal to 100% of the 1980 CSO Mortality Table B at all ages
(except for smokers of certain ages on Policies entered into before October 21,
1988).
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FUND ANNUAL EXPENSES AFTER EXPENSE LIMITATION (as a percentage of each
Portfolio's average daily net assets)
Investment advisory fees and operating expenses for the Fund are paid by the
Fund. Fund expenses are not specified under the terms of the Policy, and they
may vary from year to year.
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ADVISORY OTHER TOTAL
FEE EXPENSES EXPENSES
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Money Market Portfolio............................... .40% .08% .48%
High Yield Bond Portfolio............................ .60% .10% .70%
Managed Bond Portfolio............................... .60% .09% .69%
Government Securities Portfolio...................... .60% .10% .70%
Growth Portfolio..................................... .65% .09% .74%
Aggressive Equity Portfolio.......................... .80% .15% .95%
Growth LT Portfolio.................................. .75% .10% .85%
Equity Income Portfolio.............................. .65% .08% .73%
Multi-Strategy Portfolio............................. .65% .11% .76%
Equity Portfolio..................................... .65% .08% .73%
Bond and Income Portfolio............................ .60% .09% .69%
Equity Index Portfolio............................... .21% .08% .29%
International Portfolio.............................. .85% .21% 1.06%
Emerging Market Portfolio............................ 1.10% 1.05% 2.15%
</TABLE>
The expenses listed for the Fund Portfolio reflect expenses for the year
ended December 31, 1996, adjusted to reflect a decrease in fees for certain
operating expenses. The Aggressive Equity and Emerging Markets Portfolios did
not begin operations until April 1, 1996 and their "other expenses" are on an
annualized basis and reflect the policy adopted by us as Investment Adviser to
the Fund, to waive its fees or otherwise reimburse expenses so that operating
expenses (exclusive of advisory fees, additional custodial fees associated with
holding foreign securities, foreign taxes on dividends, interest or capital
gains, and extraordinary expenses) are not greater than 0.25% of average daily
net assets per year. We began the policy in 1989 and intend to continue this
policy until at least December 31, 1998. In the absence of this policy, such
expenses for the Emerging Markets Portfolio would have exceeded this expense
cap in 1996 and total adjusted expenses would have been approximately 2.22% on
an annualized basis. No reimbursement to the other Portfolios was necessary for
the Fund's fiscal year 1996. There can be no assurance that the expense
reimbursement arrangement will continue after December 31, 1998, and any
unreimbursed expenses would be reflected in the Policy Owner's Accumulated
Value and in some instances, the death benefit. Actual total expenses after
reimbursement and before the adjustment for the year ended December 31, 1996,
were: Money Market Portfolio--0.50%; High Yield Bond Portfolio--0.71%; Managed
Bond Portfolio--0.71%; Government Securities Portfolio--0.72%; Growth
Portfolio--0.76%; Aggressive Equity Portfolio (annualized)--1.02%; Growth LT
Portfolio--0.87%; Equity Income Portfolio--0.75%; Multi-Strategy Portfolio--
0.78%; Equity Portfolio--0.74%; Bond and Income Portfolio--0.71%; Equity Index
Portfolio--0.31%; International Portfolio--1.07%; and Emerging Markets
Portfolio (annualized)--2.18%.
The Fund's expenses are assessed at the Fund level and are not direct charges
against the Variable Accounts or the Policy's Accumulated Value. These expenses
are taken into account in computing each Portfolio's per share net asset value,
which in turn is used to compute the corresponding Variable Account's
Accumulation Unit Value. The Fund's investment advisory fees and operating
expenses are more fully described in the Fund's prospectus, which accompanies
this Prospectus.
TAX TREATMENT OF INCREASES IN ACCUMULATED VALUE
We believe that the Accumulated Value under the Policy is currently subject
to the same federal income tax treatment as the cash value under traditional
fixed life insurance. Therefore, generally, you will not be deemed to be in
constructive receipt of the Accumulated Value unless and until actual surrender
of a Policy or upon making
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a Preferred or Partial Withdrawal or a Policy Loan. Any such distribution may
give rise to taxable income to you and may, under certain circumstances,
subject you to an additional income tax of 10% of the amount includable in
taxable income. For more information on the tax treatment of the Policy and the
tax treatment of distributions see "Federal Income Tax Considerations," page
23.
TAX TREATMENT OF DEATH BENEFIT
We believe that the death benefit under the Policy is currently subject to
federal income tax treatment consistent with that of traditional fixed life
insurance. Therefore, generally the death benefit will be fully excludable from
the gross income of the Beneficiary under the Internal Revenue Code. See
"Federal Income Tax Considerations," page 23.
THE FIXED ACCOUNT
You may allocate all or a portion of premium payments and transfer
Accumulated Value to the Fixed Account. Amounts allocated to the Fixed Account
are held in our General Account. We guarantee that the Accumulated Value
allocated to the Fixed Account will be credited interest monthly at a rate
equivalent to an effective annual rate of 4%. In addition, we may in our sole
discretion pay interest in excess of the guaranteed amount at a rate that will
be effected thereafter on each Policy Anniversary and guaranteed until the next
Policy Anniversary. See "The Fixed Account," page 29.
CONTACTING PACIFIC MUTUAL
All written requests, notices, and forms required by the Policies, and any
questions or inquiries should be directed to our Policy Benefits and Services
Department, at 700 Newport Center Drive, P.O. Box 7500, Newport Beach,
California 92658-7500.
The effective date of certain notices or of instructions is determined by the
date and time on which we "receive" the notice or instructions. Unless
otherwise stated, we "receive" this information only when it arrives "properly
completed" at our Home Office. Premium payments after your initial premium
payment, loan requests, loan repayments, transfer requests, and withdrawal
requests we receive before 4:00 p.m. Eastern time (or the close of the New York
Stock Exchange, if earlier) will normally be effective as of the end of
Valuation Date that we receive them "properly completed," unless the
transaction or event is scheduled to occur on another day. Transactions are
effected as of the end of the Valuation Date on which they are effective.
"Properly completed" may require, among other things, a signature guarantee or
other verification of authenticity. We do not generally require a signature
guarantee unless it appears that your signature may have changed over time or
due to other circumstances. Requests regarding death benefits must be
accompanied by both proof of death and instructions regarding payment
satisfactory to us. You should call your registered representative or us if you
have questions regarding the required form of a request.
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INFORMATION ABOUT PACIFIC MUTUAL LIFE, THE SEPARATE ACCOUNT, AND THE FUND
PACIFIC MUTUAL LIFE INSURANCE COMPANY
We are a mutual life insurance company organized under the laws of the State
of California. We were authorized to conduct business as a life insurance
company on January 2, 1868, as Pacific Mutual Life Insurance Company of
California, and were reincorporated under our present name on July 22, 1936.
We offer a complete line of life insurance policies and annuity contracts,
as well as financial and retirement services. We are admitted to do business
in the District of Columbia, and in all states except New York. As of the end
of 1996, we had $50.8 billion of individual life insurance in force and total
admitted assets of $21.2 billion. We have been ranked according to admitted
assets as the 23rd largest life insurance carrier in the nation for 1995.
Together with our subsidiaries and affiliated enterprises, we had total assets
and funds under management of over $136.7 billion.
On April 21, 1997, the Board of Directors of Pacific Mutual Life Insurance
Company approved a Plan of Conversion ("Plan") under which Pacific Mutual Life
would convert from a mutual life insurance company to a stock life insurance
company ultimately controlled by a mutual holding company. This transactions
in intended to result in a corporate structure that provides, among other
things, better access to external sources of capital. Under the Plan, upon the
conversion, the insurance company would issue voting stock to a newly-formed
stock holding company called Pacific LifeCorp, and all of Pacific LifeCorp's
initially issued voting stock would be owned by a newly-created mutual holding
company called Pacific Mutual Holding Company. It is anticipated that Pacific
LifeCorp could, subsequent to the conversion, offer shares of its stock
publicly or privately; however Pacific Mutual Holding Company must always hold
at least 51% of the voting stock of Pacific LifeCorp. Pacific LifeCorp would
always own 100% of the voting stock of the insurance company. No plans have
been formulated to issue any shares of capital stock or debt securities of
Pacific LifeCorp at this time.
Since Pacific Mutual Life currently is a mutual life insurance company,
owners ("policyholders") of Pacific Mutual Life's annuity contracts and life
insurance policies ("policies") have certain membership interests in Pacific
Mutual Life consisting principally of the right to vote on the election of the
Board of Directors and on other matters and certain rights upon liquidation or
dissolution of Pacific Mutual Life. Under the Plan, policyholders continue to
be policyholders in the same insurance company, but would no longer have a
membership interest in the insurance company; rather, policyholders would have
membership interests in Pacific Mutual Holding Company. These interests in the
mutual holding company would be substantially the same as the membership
interests that policyholders have in Pacific Mutual Life prior to the
conversion, consisting principally of the right to vote on the election of the
Board of Directors and on other matters and certain rights upon liquidation or
dissolution of Pacific Mutual Holding Company. After the conversion, persons
who acquire policies from the insurance company would automatically be members
in Pacific Mutual Holding Company. The conversion will not, in any way,
increase premium payments or reduce policy benefits, values, guarantees or
other policy obligations to policyholders. The Plan is subject to approval by
Pacific Mutual Life's policyholders and the consent of the Insurance
Commissioner of California, among other approvals and conditions. If the
necessary approvals are obtained and conditions met, the conversion could
occur in 1997. Under the Plan, the insurance company's name will change to
Pacific Life Insurance Company.
The principal underwriter for the Policies is Pacific Mutual Distributors,
Inc. ("PMD") one of our wholly-owned subsidiaries. PMD is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC").
PACIFIC SELECT SEPARATE ACCOUNT
The Pacific Select Separate Account is a separate investment account of ours
used only to support the variable death benefits and policy values of variable
life insurance policies. The assets in the Separate Account are kept separate
from the assets of our General Account and our other separate accounts.
We own the assets in the Separate Account and are required to maintain
sufficient assets in the Separate Account to meet anticipated obligations of
the Policies funded by the Account. The Separate Account is divided
11
<PAGE>
into subaccounts called Variable Accounts. The income, gains, or losses,
realized or unrealized, of each Variable Account are credited to or charged
against the assets held in the Variable Account without regard to our other
income, gains, or losses. Assets in the Separate Account attributable to the
reserves and other liabilities under the Policies are not chargeable with
liabilities arising from any other business that we conduct. However, we may
transfer to our General Account assets which exceed anticipated obligations of
the Account. All obligations arising under the Policy are our general
corporate obligations. We may accumulate in the Account proceeds from
recovered deferred charges and other charges and investment results applicable
to those assets.
The Separate Account was established under California law by a resolution of
our Board of Directors adopted on November 20, 1986. The Separate Account is
registered as a unit investment trust with the SEC. Such registration does not
involve any supervision by the SEC of the administration or investment
practices or policies of the Account.
Each Variable Account invests exclusively in shares of a designated
Portfolio of the Fund. We may in the future establish additional Variable
Accounts within the Separate Account, which may invest in other Portfolios of
the Fund or in other securities.
THE PACIFIC SELECT FUND
The Fund is a diversified, open-end management investment company of the
series type. The Fund is registered with the SEC under the Investment Company
Act of 1940. The Fund currently offers fourteen separate Portfolios that fund
the Variable Investment Options available to you. Each Portfolio pursues
different investment objectives and policies. We purchase the shares of each
Portfolio for the corresponding Variable Account at net asset value, i.e.,
without sales load. All dividends and capital gains distributions received
from a Portfolio are automatically reinvested in such Portfolio at net asset
value, unless we, on behalf of the Separate Account, elect otherwise. Fund
shares will be redeemed by us at their net asset value to the extent necessary
to make payments under the Policies.
Shares of the Fund currently are offered only to separate accounts of ours
and an affiliated insurer to serve as an investment medium for variable life
insurance policies and for variable annuity contracts issued or administered
by these insurers. Shares of the Fund may also be sold in the future to
separate accounts of other insurance companies, either affiliated or not
affiliated with us. Investment in the Fund by other separate accounts in
connection with variable annuity and variable life insurance contracts may
potentially create conflicts. See "MORE ON THE FUND'S SHARES" in the
accompanying prospectus of the Fund.
The following chart summarizes some basic data about each Portfolio of the
Fund offered to the Separate Account. There can be no assurance that any
Portfolio will achieve its objective. This chart is only a summary. You should
read the more detailed information which is contained in the accompanying
prospectus of the Fund, including information on the risks associated with the
investments and investment techniques of each of the Portfolios.
12
<PAGE>
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Current income Highest quality money Pacific Mutual Life
consistent with market instruments
preservation of capital
- --------------------------------------------------------------------------------------------
High-Yield High level of current Intermediate and long- Pacific Mutual Life
Bond income term, high-yielding, lower
and medium quality (high
risk) fixed-income
securities
- --------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific Investment
consistent with prudent marketable debt Management Company
investment management securities. Will normally
maintain an average
portfolio duration of 3-7
years
- --------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government securities Pacific Investment
Securities consistent with prudent including futures and Management Company
investment management options thereon and high-
grade corporate debt
securities. Will normally
maintain an average
portfolio duration of 3-7
years
- --------------------------------------------------------------------------------------------
Growth Growth of capital Common stock Capital Guardian
Trust Company
- --------------------------------------------------------------------------------------------
Aggressive Capital appreciation Common stock of small Columbus Circle
Equity emerging growth and medium Investors
capitalization companies
- --------------------------------------------------------------------------------------------
Growth LT Long-term growth of Common stock Janus Capital
capital consistent with Corporation
the preservation of
capital
- --------------------------------------------------------------------------------------------
Equity Income Long-term growth of Dividend paying common J.P. Morgan
capital and income stock Investment Management
Inc.
- --------------------------------------------------------------------------------------------
Multi- High total return Equity and fixed income J.P. Morgan
Strategy securities Investment Management
Inc.
- --------------------------------------------------------------------------------------------
Equity Capital appreciation Common stocks and Greewich Street
securities convertible Advisors
into or exchangeable for
common stocks
- --------------------------------------------------------------------------------------------
Bond and High level of current Investment grade debt Greewich Street
Income income consistent with securities Advisors
prudent investment
management and
preservation of capital
- --------------------------------------------------------------------------------------------
Equity Index Provide investment Stocks included in the S&P Bankers Trust Company
results that correspond 500
to the total return
performance of common
stocks publicly traded
in the U.S.
- --------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Templeton Investment
appreciation corporations domiciled Counsel, Inc.
outside the United States
- --------------------------------------------------------------------------------------------
Emerging Long-term growth of Common stocks of companies Blairlogie Capital
Markets capital domiciled in emerging Management
market countries
</TABLE>
THE INVESTMENT ADVISER AND PORTFOLIO MANAGERS
We serve as Investment Adviser to each Portfolio of the Fund. We are
registered with the SEC as an Investment Adviser. For twelve of the Portfolios,
we and the Fund have engaged other firms to serve as Portfolio Managers which
are shown in the chart above.
13
<PAGE>
THE POLICY
The variable life insurance benefits provided by your Policy are funded
through your Accumulated Value in the Pacific Select Separate Account and the
Fixed Account. The information included below describes the benefits,
features, charges, and other major provisions of the Policy.
APPLICATION FOR A POLICY
Any person wishing to purchase the Policy may submit an application to us. A
Policy can be issued on the life of an Insured for ages up to and including
age 80 with evidence of insurability satisfactory to us. The Insured's age is
calculated as of the Insured's nearest birthday. Acceptance is subject to our
underwriting rules, and we reserve the right to request additional information
and to reject an application.
After your Policy is issued, insurance coverage under the Policy will be
deemed to have begun as of the Policy Date. Your Policy Date is usually the
date the initial premium is received at our Home Office. Your Policy Date is
the date used to determine Policy Years, Policy Months, and Policy Monthly,
Quarterly, Semi-Annual and Annual Anniversaries. For purposes of determining
the Monthly Payment Date for all Policies issued, the Policy Date will never
be the 29th, 30th, or 31st of any month.
Insureds are assigned to underwriting classes which are used in calculating
the cost of insurance rates. In assigning Insureds to underwriting classes, we
will usually use either simplified or medical underwriting, although other
forms of underwriting may be used when deemed appropriate by us.
PREMIUMS
The minimum initial premium to purchase the Policy is $10,000. You may
choose a minimum initial premium payment that constitutes at least 50% and up
to 100% of the Guideline Single Premium for the initial Face Amount. The
Guideline Single Premium is the maximum premium that can be paid for a given
Face Amount in order for an insurance policy to qualify as a life insurance
contract for tax purposes. We may reduce the minimum initial premium required
under certain circumstances, such as for group or sponsored arrangements. The
maximum initial premium that will be routinely accepted is $1,000,000. Larger
premiums may be accepted on a case-by-case basis subject to prior approval.
ADDITIONAL PREMIUM PAYMENTS
The Policy is a flexible-premium policy, and it provides considerable
flexibility, subject to the limitations described below, to pay additional
premiums at your discretion. Depending upon the Face Amount you choose and the
investment performance of the Variable Accounts among other factors, your
Policy may provide insurance protection through the Maturity Date for only the
initial premium, or alternatively, additional premium payments may be required
to keep your Policy in force.
The minimum additional premium payment amount is $5,000, except smaller
amounts may be paid during the Grace Period. We may require evidence of
insurability for any payment that would result in an immediate increase in the
difference between the death benefit and Accumulated Value. Any portion of a
premium payment will be returned to you if it would exceed the limitations
based on the Guideline Single Premium or Guideline Level Premiums. A premium
or a portion thereof may also be returned to you if it would result in an
immediate increase in the difference between the death benefit and the
Accumulated Value and we have not received satisfactory evidence of
insurability.
Additional payments will first be treated as repayments of Policy
Indebtedness unless you request otherwise. Any portion of a payment that
exceeds the amount of Indebtedness will be applied as an additional premium
payment. For Policies entered into before June 21, 1988, making an additional
premium payment may result in the Policy becoming a modified endowment
contract. For more information, see "Federal Income Tax Considerations".
14
<PAGE>
ALLOCATION OF PREMIUMS
In the application for your Policy, you select the Investment Options to
which premium payments will be allocated after the Free-Look Period. During
the Free-Look Period, premium payments will be allocated to the Money Market
Variable Account, which invests in the Money Market Portfolio of the Fund
(except for amounts allocated to the Loan Account to secure a Policy loan).
Your Accumulated Value will be automatically allocated according to your
instructions contained in the application (or if received more recently, in
written instructions) the later of 15 days after the Policy is issued or 45
days after the application is completed, or, if longer, upon receipt of the
minimum initial premium (the "Free-Look Period"). Currently, fourteen Variable
Accounts and the Fixed Account are available to you.
Additional premium payments less the premium load will be allocated among
the Variable Accounts and the Fixed Account according to your most recent
instructions. You may change the allocation of payments by submitting a proper
written request to our Home Office, or by telephone if a properly completed
Authorization for Telephone Requests has been filed at our Home Office.
PORTFOLIO REBALANCING
You may direct us to automatically re-set the percentage of your Accumulated
Value allocated to each Variable Account at a predetermined level. This
process is called portfolio rebalancing. (The Fixed Account is not available
for portfolio rebalancing.) Over time, the variations in each Variable
Account's investment results will shift the percentage allocations of your
Accumulated Value. The portfolio rebalancing feature will automatically
transfer your Accumulated Value among the Variable Accounts back to the preset
percentages. Rebalancing can be made quarterly, semi-annually or annually,
measured from your Policy Date ("frequency period"). Rebalancing may result in
transferring amounts from a Variable Account with relatively higher investment
performance to a Variable Account with relatively lower investment
performance.
You may initiate portfolio rebalancing by sending our Home Office a signed,
written request in good form or a properly completed Automatic Portfolio
Rebalancing form. You must specify the frequency for rebalancing and a
beginning date. The first rebalancing will usually occur on your Monthly
Payment Date that starts the frequency period you elected and that occurs on
or follows the beginning date you elected. If you stop portfolio rebalancing,
you must wait 30 days to begin again. Portfolio rebalancing cannot be used
with the Dollar Cost Averaging Option.
We may modify, terminate or suspend the portfolio rebalancing feature at any
time.
DOLLAR COST AVERAGING OPTION
We currently offer an option under which you may dollar cost average your
allocations in the Variable Accounts under your Policy by authorizing us to
make periodic allocations of Accumulated Value from any one Variable Account
to one or more of the other Variable Accounts. Dollar cost averaging is a
systematic method of investing in which securities are purchased at regular
intervals in fixed dollar amounts so that the cost of the securities gets
averaged over time and possibly over various market cycles. The option will
result in the allocation of Accumulated Value to one or more Variable
Accounts, and these amounts will be credited at the Accumulation Unit values
as of the end of the Valuation Dates on which the transfers are processed.
Since the value of Accumulation Units will vary, the amounts allocated to a
Variable Account will result in the crediting of a greater number of units
when the Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Similarly, the amounts transferred from a
Variable Account will result in a debiting of a greater number of units when
the Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Dollar cost averaging does not guarantee
profits, nor does it assure that you will not have losses.
A Dollar Cost Averaging Request form is available upon request. On the form,
you must designate the specific dollar amounts or percentage to be
transferred, the Variable Account or Accounts to which the transfer will be
made, the desired frequency of the transfer, which may be on a monthly,
quarterly, semi-annual, or annual basis, and the length of time during which
the transfers shall continue or the total amount to be transferred over time.
15
<PAGE>
To elect the Dollar Cost Averaging Option, your Accumulated Value in the
Variable Account from which the Dollar Cost Averaging transfers will be made
must be at least $5,000; the Dollar Cost Averaging Request form will not be
considered complete until this requirement is met. After we have received a
Dollar Cost Averaging Request in proper form at our Home Office, we will
transfer Accumulated Value in amounts you designate from the Variable Account
from which transfers are to be made to the Variable Account or Accounts you
choose. The minimum amount that may be transferred to any one Variable Account
is $50. After the Free-Look Period, the first transfer will be effected on
your Policy's Monthly, Quarterly, Semi-Annual, or Annual Anniversary,
whichever corresponds to the period selected by you, coincident with or next
following receipt at our Home Office of a Dollar Cost Averaging Request in
proper form, and subsequent transfers will be processed on the following
Monthly, Quarterly, Semi-Annual, or Annual Anniversary for so long as you
designate until the total amount elected has been transferred, until
Accumulated Value in the Variable Account from which transfers are made has
been depleted, or until your Policy enters the Grace Period. Amounts
periodically transferred under this option will not be subject to any transfer
charges that may be imposed by us in the future, except as may be required by
applicable law.
You may instruct us at any time to terminate the option by written request
to our Home Office. In that event, the Accumulated Value in the Variable
Account from which transfers were being made that has not been transferred
will remain in that Variable Account, subject to monthly deductions, unless
you instruct otherwise or until your Policy enters the Grace Period. If you
wish to continue transferring on a dollar cost averaging basis after the
expiration of the applicable period, the total amount elected has been
transferred, or the Variable Account has been depleted, or after the Dollar
Cost Averaging Option has been cancelled, a new Dollar Cost Averaging Request
must be completed and sent to our Home Office. The Variable Account from which
transfers are to be made must meet the $5,000 minimum amount of the
Accumulated Value. We may discontinue, modify, or suspend the Dollar Cost
Averaging Option at any time.
TRANSFER OF ACCUMULATED VALUE
You may transfer Accumulated Value among the Variable Accounts after the
Free-Look Period upon proper written request to our Home Office. Transfers
(other than transfers in connection with the Dollar Cost Averaging Option) may
be made by telephone if a properly completed, Authorization for Telephone
Requests is on file at our Home Office. Currently, there are no limitations on
the number of transfers between Variable Accounts, no minimum amount required
for a transfer, nor any minimum amount required to be remaining in a given
Variable Account after a transfer (except as required under the Dollar Cost
Averaging Option). No transfers are allowed during the Grace Period if the
required premium has not been paid. No charges are currently imposed upon such
transfers. We reserve the right, however, at a future date to limit the size
of transfers and remaining balances, to assess transfer charges, to limit the
number and frequency of transfers, and to modify, suspend and/or discontinue
telephone transfers.
Accumulated Value may also be transferred from the Variable Accounts to the
Fixed Account, however, such a transfer will only be permitted in the Policy
Month preceding a Policy Anniversary, except that if you reside in
Connecticut, Georgia, Maryland, North Carolina, North Dakota, or Pennsylvania,
you may make such a transfer at any time during the first 18 Policy Months.
Transfers from the Fixed Account to the Variable Accounts are restricted as
described in "The Fixed Account".
DEATH BENEFIT
When your Policy is issued, we will determine the initial amount of
insurance for the initial premium payment based on the instructions provided
in your application. That amount will be shown on the specifications page of
the Policy and is called the "Face Amount."
Upon the death of the Insured, we will pay to your named Beneficiary death
benefit proceeds, which will be the death benefit under your Policy reduced by
adjustments for any outstanding Policy Indebtedness. The death benefit will be
the greater of the Face Amount under your Policy or Accumulated Value
multiplied by a specified percentage. The specified percentages vary according
to the Age of the Insured, and will be at least equal to the cash value
corridor in Section 7702 of the Internal Revenue Code, which addresses the
definition of a life
16
<PAGE>
insurance policy for tax purposes. A table showing the specified percentages
is in the Appendix and in the Policy. Because the specified percentage is
applied to your Accumulated Value, an increase in Accumulated Value may
increase the death benefit. However, because the death benefit will never be
less than the Face Amount, a decrease in Accumulated Value may decrease the
death benefit but never below the Face Amount. The following examples
illustrate how the death benefit will be determined:
EXAMPLES
<TABLE>
<CAPTION>
POLICY A POLICY B
-------- --------
<S> <C> <C>
Face Amount........................................... $100,000 $100,000
Insured's Age......................................... 40 40
Accumulated Value on Date of Death.................... $ 46,500 $ 34,000
Specified Percentage.................................. 250% 250%
</TABLE>
- --------
In Policy A, the death benefit equals $116,250, i.e., the greater of $100,000
(the Face Amount) or $116,250 (the Accumulated Value at the date of death of
$46,500 multiplied by the specified percentage of 250%). Assuming that there
is no outstanding Policy Indebtedness, this amount constitutes the death
benefit proceeds that would be paid to the Beneficiary.
In Policy B, the death benefit is $100,000, i.e., the greater of $100,000 (the
Face Amount) or $85,000 (the Accumulated Value of $34,000 multiplied by the
specified percentage of 250%).
The death benefit will be reduced by the amount of any outstanding
Indebtedness (and, if in the Grace Period, any overdue charges). All
calculations of death benefit will be made as of the end of the Valuation
Period during which the Insured dies.
Death benefit proceeds may be paid to your Beneficiary in a lump sum or
under the payment plan offered by us under the Policy. The plan offers monthly
income for the lifetime of the Beneficiary with a minimum period of ten years.
The Policy should be consulted for details.
CHANGES IN FACE AMOUNT
After the first Policy Year, you may request an increase or decrease in the
Face Amount under your Policy subject to our approval. Increasing or
decreasing the Face Amount could increase or decrease the death benefit under
your Policy, and the amount of change in the death benefit will depend, among
other things, upon whether, and the degree to which, the death benefit under
your Policy exceeds the Face Amount prior to the change. Changing the Face
Amount could affect the subsequent level of the death benefit while your
Policy is in force and the subsequent level of Policy values. A change in the
Face Amount may affect the net amount at risk under your Policy, which may
affect your cost of insurance charge. For these purposes, the net amount at
risk is equal to the death benefit less your Accumulated Value.
Any request for an increase or decrease must be in writing and received at
our Home Office. It will become effective on the Monthly Payment Date on or
next following our acceptance of the request. You may make only one request
for a change per Policy Year. If you are not the Insured, we will also require
the consent of the Insured before accepting a request. For Policies entered
into before June 21, 1988, changing the Face Amount may result in the Policy
becoming a modified endowment contract. For more information see "Federal
Income Tax Considerations".
Increases
A written application must be submitted to us for an increase in Face
Amount. Additional evidence of insurability satisfactory to us will also be
required. An increase in Face Amount will not be given for amounts less than
$10,000. An increase need not be accompanied by an additional premium. A
charge of $100 will be deducted from the Accumulated Value on the effective
date of the increase in Face Amount to cover the costs of processing the
request. This fee will be deducted from the Investment Options in the
proportion that each bears to your Accumulated Value less Indebtedness.
17
<PAGE>
Decreases
A written application must be submitted to us for a decrease in Face Amount.
Any decrease in Face Amount will first be applied to the most recent
increases, then the next most recent increases successively, and finally to
the original Face Amount. If a decrease in the Face Amount would result in
total premiums paid exceeding the premium limitations prescribed under tax law
to qualify your Policy as a life insurance contract, we will pay you the
amount of such excess above the premium limitations.
We reserve the right to disallow a requested decrease, and will not permit a
requested decrease, among other reasons, (1) if compliance with the guideline
premium limitations under tax law resulting from the requested decrease would
result in immediate termination of your Policy or likely result in its
termination before its Maturity Date, or (2) if, to effect the requested
decrease, payments to you would have to be made from Accumulated Value for
compliance with the guideline premium limitations, and the amount of such
payments would exceed the Net Cash Surrender Value under your Policy.
POLICY VALUES
Accumulated Value
Your Accumulated Value is the sum of the amounts under your Policy held in
each Investment Option, as well as the amount set aside in the Loan Account to
secure any Policy Indebtedness.
On each Valuation Date, the portion of your Accumulated Value allocated to
any particular Variable Account will be adjusted to reflect the investment
experience of that Variable Account (see "Determination of Accumulated Value,"
described below) and to collect any applicable charges.
Cash Surrender Value
Your Cash Surrender Value of your Policy equals your Accumulated Value less
any unrecovered deferred load. Thus, your Accumulated Value will exceed your
Policy's Cash Surrender Value by the amount of unrecovered deferred load. Once
all deferred load has been recovered, your Accumulated Value will equal your
Cash Surrender Value. Your Policy's Cash Surrender Value increases or
decreases daily to reflect the investment experience of the selected Variable
Accounts. No minimum amount of Cash Surrender Value is guaranteed. You bear
the risk for the investment experience of such amounts.
Net Cash Surrender Value
Your Net Cash Surrender Value is the Cash Surrender Value minus any
outstanding Policy Indebtedness. You can surrender your Policy at any time
while the Insured is living and receive your Net Cash Surrender Value (see
"Surrender").
DETERMINATION OF ACCUMULATED VALUE
Although your Policy's death benefit can never be less than the Face Amount
for as long as your Policy is in force, the Policy's Accumulated Value in the
Separate Account will vary to a degree that depends upon several factors,
including investment performance of the Variable Accounts to which Accumulated
Value has been allocated, payment of additional premiums, the amount of any
outstanding Policy Indebtedness, any Preferred or Partial Withdrawals, and the
charges assessed in connection with your Policy. There is no guaranteed
minimum Accumulated Value and you bear the entire investment risk relating to
the investment performance of the Variable Accounts.
The amounts allocated to the Variable Accounts will be invested in shares of
the corresponding Portfolios of the Fund. The investment performance of each
Variable Account will reflect increases or decreases in the net asset value
per share of the corresponding Portfolio and any dividends or distributions
declared by a Portfolio. Any dividends or distributions from any Portfolio of
the Fund will be automatically reinvested in shares of the same Portfolio,
unless we, on behalf of the Separate Account, elect otherwise.
18
<PAGE>
Since your Accumulated Value during the first 11 Policy Years will exceed
your Cash Surrender Value by the amount of unrecovered deferred load, the
effect of the addition of the deferred load to your Accumulated Value during
this period provides a larger amount for allocation to the Variable Accounts
than if the amount of the deferred load had been taken from premiums when
paid. This has the effect of transferring to you the investment experience on
the portion of deferred load that remains in Accumulated Value. However, the
full amount of the deferred load for the initial payment will be deducted from
your Accumulated Value over a 10-year period according to the terms described
in this prospectus.
Assets in the Variable Accounts are divided into accumulation units, which
are a measure of value used for bookkeeping purposes. When you allocate
premiums to a Variable Account, your Policy is credited with accumulation
units. In addition, other transactions including loans, surrender, Preferred
or Partial Withdrawals, transfers, and assessment of charges against your
Policy affect the number of accumulation units credited to your Policy. The
number of units credited or debited in connection with any such transaction is
determined by dividing the dollar amount of such transaction by the unit value
of the affected Variable Account. The unit value of each Variable Account is
determined on each Valuation Date at or about 4:00 p.m. Eastern time. The
number of units credited will not change because of subsequent changes in unit
value.
The accumulation unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated
by adjusting the unit value from the previous Valuation Date for (1) the
investment performance of the Variable Account, which is based upon the
investment performance of the corresponding Portfolio of the Fund, (2) any
dividends or distributions paid by the corresponding Portfolio, and (3) the
charge assessed on each Valuation Period for assumption of mortality and
expense risks as well as any charges that may be assessed by us for income
taxes attributable to the operation of the Variable Account.
POLICY LOANS
You may borrow money from us using your Policy as the only security for the
loan by submitting a proper written request to our Home Office. We may in our
discretion permit loans to be made by telephone if an Authorization for
Telephone Requests has been completed, signed and filed at our Home Office. A
loan may be taken any time your Policy is in force. The minimum loan that can
be taken at any time is $1,000 ($200 in Connecticut, $250 in Oregon, $500 in
Indiana). The maximum amount that can be borrowed at any time is 90% of the
Policy's Cash Surrender Value, less any Policy Indebtedness.
When you take a loan, an amount equal to the loan is transferred out of your
Accumulated Value in the Investment Options into the Loan Account to secure
the loan. Unless you request otherwise, loan amounts will be deducted from the
Investment Options in the proportion that each bears to the Accumulated Value
less Indebtedness.
The interest rate on loans is 4.75% a year. We will credit interest monthly
on amounts held in the Loan Account to secure the loan at an annual rate of
4.0%.
You may repay all or part of the loan at any time while your Policy is in
force. Interest on a loan is accrued daily and is due on each Policy
Anniversary for the prior year. If interest is not paid when due, it will be
added to the amount of the loan principal and interest will begin accruing
thereon from that date. An amount equal to the loan interest charged will be
transferred to the Loan Account from the Variable Accounts and Fixed Account
on a proportional basis.
Unless you request otherwise, any loan repayment will be transferred into
the Investment Options in accordance with your current premium allocation
instructions. In addition, any interest earned on the loan balance held in the
Loan Account will be transferred to each of the Investment Options in
accordance with your current premium allocation instructions.
While the amount to secure the loan is held in the Loan Account, you forgo
the investment experience of the Variable Accounts. Thus, a loan, whether or
not repaid, will have a permanent effect on the Policy's values and may have
an effect on the amount and duration of the death benefit. If not repaid, your
Policy Indebtedness
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will be deducted from the amount of death proceeds paid upon the death of the
Insured, the Cash Surrender Value paid upon surrender or maturity, or the
refund of premium upon exercise of the Free-Look Right.
A loan may affect the length of time your Policy remains in force. Your
Policy will lapse when Indebtedness equals or exceeds your Cash Surrender
Value and the minimum payment required is not made during the Grace Period.
Moreover, your Policy may enter the Grace Period more quickly when a loan is
outstanding, because the loaned amount is not available to cover monthly
deductions and charges. Additional payments or repayment of a portion of
Indebtedness may be required to keep the Policy in force (see "Lapse").
A loan is treated as a distribution from a Policy that is a modified
endowment contract, and therefore may give rise to taxable income to you. For
information on the tax treatment of loans, see "Federal Income Tax
Considerations".
BENEFITS AT MATURITY
If the Insured is living on your Policy Anniversary nearest the Insured's
Age 95, we will pay to you your Accumulated Value, reduced by any Policy
Indebtedness. Payment ordinarily will be made within seven days of your Policy
Anniversary, although payments may be postponed in certain circumstances (see
"Payments").
SURRENDER
You may fully surrender your Policy at any time during the life of the
Insured. The amount received in the event of a full surrender is your Policy's
Net Cash Surrender Value, which is equal to your Accumulated Value less
unrecovered deferred load and less any outstanding Policy Indebtedness.
PREFERRED AND PARTIAL WITHDRAWAL BENEFITS
We offer two partial surrender benefits by which you can obtain a portion of
your Net Cash Surrender Value: the Preferred Withdrawal Benefit and the
Partial Withdrawal Benefit. The Preferred Withdrawal Benefit is available on
your first Policy Anniversary until your 15th Policy Anniversary. Under this
Benefit, you may make one "Preferred Withdrawal" per year of up to 10% of the
amount of your initial premium payment and any additional payments received
and accepted prior to the withdrawal. Preferred Withdrawals do not result in
the assessment of any charge and do not reduce the death benefit under the
Policy. No withdrawals other than Preferred Withdrawals may be made until your
15th Policy Anniversary.
The Partial Withdrawal Benefit is available on your 15th Policy Anniversary
and thereafter. Under this Benefit, you may make "Partial Withdrawals" of your
Net Cash Surrender Value. The limit of one withdrawal per year and the limit
on the amount that can be withdrawn of 10% of premiums paid do not apply to
Partial Withdrawals.
Both Preferred Withdrawals and Partial Withdrawals must be for at least
$1000. The amount of any withdrawal, Preferred or Partial, may not exceed your
Cash Surrender Value. In addition, the amount that can be withdrawn is limited
so that after the withdrawal, (1) your Accumulated Value is at least $5000 and
(2) any Policy Indebtedness is no greater than 90% of your new Cash Surrender
Value. If you do not exercise the Preferred Withdrawal Benefit during one of
your first 15 Policy Years, the amount that you could have withdrawn does not
carry over to the following year.
You may make a Preferred or Partial Withdrawal by submitting a proper
written request to us. As of the effective date of any withdrawal, your
Accumulated Value and Cash Surrender Value will be reduced by the amount of
the withdrawal. The amount of the withdrawal will be allocated proportionately
to your Accumulated Value in the Investment Options unless you request
otherwise. If the Insured dies after the request for a withdrawal is sent to
us and prior to the withdrawal being effected, the amount of the withdrawal
will be deducted from the death benefit proceeds, which will be determined
without taking into account the withdrawal.
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No surrender charge or withdrawal fee will be charged for a Preferred
Withdrawal. However, the amount of the deferred load determined at the time of
your initial premium payment remains the same. No surrender or withdrawal fee
will be charged for a Partial Withdrawal.
A Preferred Withdrawal will not affect your Policy's death benefit. If the
death benefit is greater than the Face Amount at the time of the Preferred
Withdrawal, the Face Amount will be increased to the level of the death
benefit as of the Valuation Date immediately preceding the Preferred
Withdrawal. This adjustment is necessary to ensure the death benefit will not
decrease as a result of the Preferred Withdrawal (see "Death Benefit").
When a Partial Withdrawal is made, the Face Amount under the Policy is
decreased by the lesser of (1) the amount of the Partial Withdrawal or (2) if
the death benefit prior to the withdrawal is greater than the Face Amount, the
amount, if any, by which the Face Amount exceeds the difference between the
death benefit and the amount of the Partial Withdrawal. A Partial Withdrawal
may cause the death benefit under your Policy to decrease by an amount other
than the amount of the Partial Withdrawal to the extent the death benefit is
based upon the Accumulated Value times the specified percentage applicable to
the Insured (see "Death Benefit").
A Preferred or Partial Withdrawal is treated as a distribution from the
Policy that may give rise to taxable income to you. For information on the tax
treatment of Preferred and Partial Withdrawals, see "Federal Income Tax
Considerations".
RIGHT TO EXAMINE A POLICY--FREE-LOOK RIGHT
You have a Free-Look Right, under which your Policy may be returned within
10 days after you receive it (30 days if you are a resident of California and
age 60 or older), or within 45 days after you complete the application for
insurance, whichever is later. However, in Pennsylvania, you have a different
Free-Look Right, under which your Policy may be returned only within 10 days
after you receive it. It can be mailed or delivered to us or our agent. The
returned Policy will be treated as if we never issued it and we will promptly
refund the full amount of the premium paid. If you have taken a loan during
the Free-Look Period, your Policy Indebtedness will be deducted from the
amount refunded. During the Free-Look Period, premiums will be allocated to
the Money Market Variable Account which invests in the Money Market Portfolio
of the Fund (except for amounts allocated to the Loan Account to secure a
Policy loan). See "Allocation of Premiums".
LAPSE
Your Policy will lapse only when your Net Cash Surrender Value is
insufficient to cover deductions and your charges on a Monthly Payment Date,
and a Grace Period expires without you making a sufficient payment. If your
Net Cash Surrender Value is insufficient to cover deductions and charges on a
Monthly Payment Date, you must pay during the Grace Period an amount equal to
the amount by which your Net Cash Surrender Value is less than zero plus a
minimum of three times the full charges and deductions due on the Monthly
Payment Date when the insufficiency occurred to avoid termination. We will not
accept such payment if it would cause your total premium payment to exceed the
maximum permissible premium under the Internal Revenue Code. This will
probably not be a problem unless you have outstanding Policy Indebtedness, in
which case you could repay a sufficient portion of the Indebtedness to avoid
termination.
To avoid recurrence of the potential lapse, you may wish to repay a portion
of any Indebtedness. If premium payments have not exceeded the maximum
permissible premium, you may wish to make a larger payment.
If your Net Cash Surrender Value is insufficient to cover the deductions and
charges on a Monthly Payment Date, we will deduct the amount available to pay
for any portion of the monthly deductions and charges due. The amount
available is equal to the amount by which your Accumulated Value exceeds your
Cash Surrender Value. Any remaining Accumulated Value in the Variable Accounts
will be transferred to the Money Market Variable Account. We will notify you
(and any assignee of record) of the payment required to keep the Policy in
force. You will then have a "Grace Period" of 61 days, measured from the date
the notice is sent, to make the
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required payment. Your Policy will remain in force through the Grace Period.
Failure to make the required payment within the Grace Period will result in
termination of coverage under your Policy, and your Policy will lapse with no
value. If the required payment is made during the Grace Period, any premium
paid and any Accumulated Value in the Money Market Variable Account will be
allocated among the Investment Options in accordance with your current premium
allocation instructions. Any monthly deductions and charges due will be
charged to the Investment Options on a proportionate basis. If the Insured
dies during the Grace Period, the death benefit proceeds will equal the amount
of the death benefit immediately prior to the commencement of the Grace
Period, reduced by any unpaid monthly deductions and charges due and any
Policy Indebtedness.
REINSTATEMENT
We will reinstate a lapsed Policy (but not a Policy which has been
surrendered for its Net Cash Surrender Value) at any time within five years
after the end of the Grace Period but before the Maturity Date provided we
receive the following: (1) your written application; (2) evidence of
insurability satisfactory to us; and (3) payment of all monthly charges and
deductions that were due and unpaid during the Grace Period, payment of the
amount by which Net Cash Surrender Value was less than zero at the beginning
of the Grace Period, and payment of a premium at least equal to three times
the most recent monthly deduction.
When your Policy is reinstated, your Accumulated Value will be equal to your
Accumulated Value on the date of the lapse subject to the following: If your
Policy is reinstated after your first Monthly Payment Date following lapse,
your Accumulated Value will be reduced by the amount of Policy Indebtedness on
the date of lapse and no Policy Indebtedness will exist on the date of the
reinstatement. If your Policy is reinstated on your Monthly Payment Date next
following lapse, any Policy Indebtedness on the date of lapse will also be
reinstated. No interest on amounts held in the Loan Account to secure Policy
Indebtedness will be paid or credited between lapse and reinstatement.
Reinstatement will be effective as of your Monthly Payment Date on or next
following the date of our approval, and your Accumulated Value minus Policy
Indebtedness will be allocated among the Investment Options in accordance with
your current premium allocation instructions.
CHARGES AND DEDUCTIONS
PREMIUM LOAD FROM THE INITIAL PREMIUM
We do not make any deductions from the initial premium payment before
allocating it to your Accumulated Value.
A Premium Load that consists of certain charges is assessed in connection
with each premium payment. The Premium Load assessed in connection with the
initial premium, referred to as "deferred load," is deferred and deducted from
Accumulated Value in monthly deductions starting on your first Policy
Anniversary and continuing to your eleventh Policy Anniversary. Deferred load
is not deducted during your first Policy Year unless you surrender the Policy,
in which case the deferred load will be deducted in full. The Premium Load
consists of the following items:
Sales Load. A sales load equal to 4.15% of the premium is assessed to
compensate us for sales and other expenses of distributing the Policies.
The amount we derive from the sales load is not expected to be sufficient
to cover the sales expenses in connection with a Policy. To the extent that
all sales expenses are not recovered from the sales load, such expenses may
be recovered from other charges, including amounts derived indirectly from
the charge for mortality and expense risks and from mortality gains.
Administrative Load. We assess an administrative load for administrative
expenses, the amount of which varies with the size of your premium payment
as follows: 3.0% of your premium if it is less than $50,000; 1.50% of your
premium if it is at least $50,000 but less than $100,000; and .50% of your
premium if it is $100,000 or greater.
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The administrative load is to cover administrative expenses in connection
with the Policies including expenses of underwriting and issuing the
Policy, recordkeeping, determining Policy values and benefits, processing
death benefit claims, processing withdrawals and transfers, preparing
reports to Policy Owners, and overhead costs. We do not expect to profit
from this charge.
State and Local Premium Tax Charge. A charge equal to 2.35% is assessed
to pay applicable state and local premium taxes. Premium taxes vary from
state to state, and in some instances, among municipalities. The 2.35% rate
approximates the average tax rate expected to be paid on premiums from all
states. The Policy is not available to insure residents of certain
municipalities in Kentucky where premium taxes in excess of 4.0% are
imposed.
As long as your Policy remains in force, the deferred load attributable to
your initial premium payment is not collected until after the end of your
first Policy Year (unless your Policy is surrendered in full during the first
year). It is then deducted from your Accumulated Value in equal monthly
installments during your second through the eleventh Policy Years. Any
unrecovered portion of the deferred load is deducted from your Accumulated
Value in the event of a full cash surrender, or lapse (see "Surrender," page
18 and "Lapse," page 19).
The monthly deduction for deferred load is collected on Monthly Payment
Dates. The amount of this monthly charge is calculated by taking the total
amount of the deferred load and dividing it by 120. Each time this expense
charge is collected, the unrecovered deferred load is reduced by the same
amount. Thus, the unrecovered deferred load decreases each month until it is
reduced to zero following the last monthly deduction made in the eleventh
Policy year. Due to the effects of rounding, the last deduction may differ
slightly from that of other months.
PREMIUM LOAD FROM ADDITIONAL PREMIUMS
Additional premium payments after your initial premium payment are subject
to the Premium Load to the same extent as described above under "Premium Load
from the Initial Premium." Premium Load on additional premium payments will
not be deferred, but will be assessed upon acceptance of an additional
premium.
The total amount of the Premium Load will range from 7.0% to 9.5% of your
additional premium payments depending upon the amount of your premium payment.
The Premium Load will consist of the sales load of 4.15%; an administrative
load of 3.0% of your additional premium if it is less than $50,000, 1.5% if it
is at least $50,000 but less than $100,000, and .50% if it is $100,000 or
greater, and the state and local premium tax charge of 2.35%.
VARIATIONS IN PREMIUM LOAD
We may reduce or waive the amount of the administrative load, sales load or
other charges for Policies where the expenses associated with the sale of the
Policy or the administrative costs associated with the Policy are reduced for
reasons such as the amount of the initial premium payment, the amounts of
projected premium payments, or that the Policy is sold in connection with a
group or sponsored arrangement. We may also reduce or waive the sales load on
Policies sold to the directors or employees of Pacific Mutual or any of its
affiliates or to trustees or any employees of the Fund.
DEDUCTIONS FROM ACCUMULATED VALUE
Cost of Insurance. A charge for the cost of insurance is deducted from your
Accumulated Value on each Monthly Payment Date. This monthly charge
compensates us for the anticipated cost of paying death benefits in excess of
Accumulated Value to Beneficiaries of Insureds who die. We may use any profit
derived from this charge for any lawful purpose, including the cost of claims
processing and investigation. The amount of the charge is equal to the net
amount at risk under your Policy at the beginning of the month multiplied by
the current cost of insurance rate. The net amount at risk for this purpose is
equal to the amount of death benefit payable at the beginning of the Policy
Month divided by 1.004074 (a discount factor to account for return deemed to
be
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earned during the month) less your Accumulated Value at the beginning of your
Policy Month. The cost of insurance rate is calculated based on the Age and
underwriting classification of the Insured. Your Policy contains guaranteed
rates, but, as of the date of this prospectus, we charge "current rates" that
are lower (i.e., less expensive) than the guaranteed rates. We may also charge
current rates in the future. The cost of insurance rate generally increases
with the Age of the Insured.
In reviewing applications for Policies, we may use the simplified method of
underwriting, depending, among other things, upon the Insured's Age and the
amount of the initial premium payment. Simplified underwriting involves no
medical or paramedical examination of the Insured. Because the health
information obtained on many Insureds is limited when the simplified
underwriting method is used, this method presents us with additional mortality
risks. As a result, in determining the guaranteed rates for the cost of
insurance, we have assumed less favorable mortality experience than that
provided in the 1980 Commissioners Standard Ordinary ("CSO") Mortality Table
B, and have established guaranteed rates that are 137.5% of the 1980 CSO
Mortality Table B. If the guaranteed rates are in effect, Insureds in a
standard underwriting classification will pay a higher cost of insurance than
if they had been medically underwritten in an otherwise identical policy,
which may be viewed as charging substandard rates for Insureds in a standard
underwriting classification. However, the current cost of insurance rates are
lower (i.e., less expensive) than the guaranteed rates. These current rates
are less than or equal to 100% of the 1980 CSO Mortality Table B at all ages
(except for smokers of certain ages on Policies entered into before October
21, 1988).
Administrative Charge. A monthly charge of $5 is imposed to reimburse us for
the expenses associated with administration and maintenance of the Policies.
This charge will be waived if your initial premium payment is at least
$20,000. This charge contains no element of anticipated profit. It is first
deducted from your Accumulated Value on your Policy Date, and deducted
thereafter on each succeeding Monthly Payment Date.
Face Amount Increase Charge. If you request an increase in Face Amount that
is accepted by us, a charge of $100 will be deducted from your Accumulated
Value on the effective date of the increase to cover processing costs. The
charge will be deducted from the Investment Options in the proportion each
bears to your Accumulated Value less Indebtedness.
DEDUCTIONS FROM THE VARIABLE ACCOUNTS
Mortality and Expense Risk Charges. We make a daily charge to the Variable
Accounts for mortality and expense risks we assume which is equal to an annual
rate of 0.70% of daily net assets. This charge is made to compensate us for
assuming certain mortality and expense risks under the Policies. The mortality
risk assumed is that Insureds, as a group, may live for a shorter period of
time than estimated and, therefore, the cost of insurance charges specified in
the Policy will be insufficient to meet actual claims. The expense risk
assumed is that other expenses incurred in issuing and administering the
Policies and operating the Separate Account will be greater than the charges
assessed for such expenses. We will realize a gain from this charge to the
extent it is not needed to provide the mortality benefits and expenses under
the Policies, and will realize a loss to the extent the charge is not
sufficient. We may use any profit derived from this charge for any lawful
purpose, including any distribution expenses not covered by the sales load.
OTHER CHARGES
We may charge the Variable Accounts for the federal income taxes incurred by
us that are attributable to the Separate Account and its Variable Accounts or
to our operations with respect to the Policies. No such charge is currently
assessed (see "Charge for Our Taxes").
We will bear the direct operating expenses of the Separate Account. Each
Variable Account available to you purchases shares of the corresponding
Portfolio of the underlying Fund. The Fund and each of its Portfolios incur
certain charges, including the investment advisory fee, and certain operating
expenses. The Fund is governed by its Board of Trustees. The Fund's expenses
are not fixed or specified under the terms of the Policy and these expenses
may vary from year to year. The advisory fees and other expenses are more
fully described in "Summary of the Policy: Fund Annual Expenses After Expense
Limitation" and in the prospectus of the Fund.
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GUARANTEE OF CERTAIN CHARGES
We guarantee that certain charges will not increase, including the
guaranteed rates for the cost of insurance, the charge for mortality and
expense risk, the administrative load, and the administrative charge.
OTHER INFORMATION
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion provides a general description of the federal
income tax considerations relating to the Policy. This discussion is based
upon our understanding of the present federal income tax laws as they are
currently interpreted by the Internal Revenue Service ("IRS"). This discussion
is not intended as tax advice. Because of the inherent complexity of such laws
and the fact that tax results will vary according to the particular
circumstances of the individual involved, tax advice may be needed by a person
contemplating the purchase of the Policy. It should therefore be understood
that these comments concerning federal income tax consequences are not an
exhaustive discussion of all tax questions that might arise with respect to
the Policy and that special rules which are not discussed herein may apply in
certain situations. Moreover, no representation is made as to the likelihood
of continuation of federal income tax or estate tax laws or of the current
interpretations by the IRS or the courts. Future legislation may adversely
affect the tax treatment of life insurance policies or other tax rules
described in this discussion or that relate directly or indirectly to life
insurance policies. Finally, these comments do not take into account any
considerations relating to state or local income or other taxes which may be
involved in the purchase or ownership of the Policy.
While we believe that the Policy meets the statutory definition of life
insurance under Section 7702 of the Interal Revenue Code ("IRC") and hence
will receive federal income tax treatment consistent with that of traditional
fixed life insurance the area of the tax law relating to the definition of
life insurance does not explicitly address all relevant issues (including, for
example, the treatment of substandard risk Policies and Policies with term
insurance on the Insured). We reserve the right to make changes to the Policy
if changes are deemed appropriate by us to attempt to assure qualification of
the Policy as a life insurance contract. If a Policy were determined not to
qualify as life insurance, the Policy would not provide the tax advantages
normally provided by life insurance. The discussion below summarizes the tax
treatment of life insurance contracts.
The death benefit under a Policy should be excludable from the gross income
of the Beneficiary under Section 101(a)(1) of the IRC for purposes of the
regular federal income tax and you generally should not be deemed to be in
constructive receipt of the cash values, including increments thereof, under
your Policy until a full or partial surrender thereof, maturity or lapse of
your Policy, or until receipt of deemed distributions (including, in the case
of a modified endowment contract, policy loans). PROSPECTIVE OWNERS THAT
INTEND TO USE POLICIES TO FUND DEFERRED COMPENSATION ARRANGEMENTS FOR THEIR
EMPLOYEES ARE URGED TO CONSULT THEIR TAX ADVISERS WITH RESPECT TO THE TAX
CONSEQUENCES OF SUCH ARRANGEMENTS. PROSPECTIVE CORPORATE OWNERS SHOULD CONSULT
THEIR TAX ADVISERS ABOUT THE TREATMENT OF LIFE INSURANCE IN THEIR PARTICULAR
CIRCUMSTANCES FOR PURPOSES OF THE ALTERNATIVE MINIMUM TAX APPLICABLE TO
CORPORATIONS AND THE ENVIRONMENTAL TAX UNDER IRC SECTION 59A. Changing the
Policy Owner may also have tax consequences. Exchanging a Policy for another
involving the same Insured generally will not result in the recognition of
gain or loss according to Section 1035(a) of the IRC. Changing the Insured
under a Policy will, however, not be treated as a tax-free exchange under
Section 1035, but rather as a taxable exchange.
Diversification Requirements. To comply with regulations under Section
817(h) of the IRC, each Portfolio of the Fund will be required to diversify
its investments. For details on these diversification requirements, see "What
is the Federal Income Tax Status of the Fund" in the Fund's prospectus.
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 those circumstances, income
and gains from the separate account assets would be includable in the variable
policy owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do
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not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor [i.e.,
the Policy Owner], rather than the insurance company, to be treated as the
owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular subaccounts
without being treated as owners of the underlying assets." As of the date of
this prospectus, no such guidance has been issued.
The ownership rights under your Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, you have additional flexibility in allocating premium payments and
Policy Values. These differences could result in you being treated as the
owner of your Policy's pro rata portion of the assets of the Separate Account.
In addition, we do not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. We therefore reserve the right to modify the Policy, as deemed
appropriate by us, to attempt to prevent you from being considered the owner
of your Policy's pro rata share of the assets of the Separate Account.
Moreover, in the event that regulations are adopted or rulings are issued,
there can be no assurance that the Portfolios will be able to operate as
currently described in the Prospectus, or that the Fund will not have to
change any Portfolio's investment objective or investment policies.
Modified Endowment Contracts. IRC Section 7702A defines a class of insurance
contracts referred to as modified endowment contracts. Under this provision,
the Policies will be treated for tax purposes in one of two ways. Pacific
Select Policies entered into on or after June 21, 1988 will be modified
endowment contracts.
A life insurance contract becomes a "modified endowment contract" if, at any
time during the first seven contract years, the sum of actual premiums paid
exceeds the sum of the "seven pay premium." Generally, the "seven-pay premium"
is the level annual premium, such that if paid for each of the first seven
years, will fully pay for all future death and endowment benefits under a
contract. For example, if the "seven-pay premium" were $1,000, the maximum
premiums that could be paid during the first seven years to avoid "modified
endowment" treatment would be $1,000 in the first year; $2,000 through the
first two years; and $3,000 through the first three years, etc.
Pre-death distributions from modified endowment contracts may give rise to
taxable income. Upon full surrender or maturity of your Policy, you would
recognize ordinary income for federal income tax purposes equal to the amount
by which the Net Cash Surrender Value plus Indebtedness exceeds the investment
in your Policy (usually the premiums paid plus pre-death distributions that
were taxable less any premiums previously recovered that were excludable from
gross income). Upon Preferred and Partial Withdrawals and Policy loans, you
would recognize ordinary income to the extent allocable to income (which
includes all previously non-taxed gains) on your Policy. The amount allocated
to income is the amount by which the Accumulated Value of your Policy exceeds
investment in the Policy immediately before the distribution. Under a tax law
provision, if two or more policies which are classified as modified endowment
contracts are purchased from any one insurance company, including us, during
any calendar year, all such policies will be aggregated for purposes of
determining the portion of the pre-death distributions allocable to income on
the policies and the portion allocable to investment in the policies.
If you assign or pledge (or agree to assign or pledge) any portion of the
value of a modified endowment contract, such amount or portion generally will
be treated as a pre-death distribution.
The portion of pre-death distributions that are treated as taxable income
will also be subject to an additional income tax of 10%, except where the
distribution (1) occurs on or after the date on which the taxpayer attains age
59 1/2, (2) is attributable to the taxpayer becoming disabled, or (3) occurs
as part of a series of substantially equal (annual or more frequent) periodic
payments made for the life (or life expectancy) of the taxpayer or the joint
lives (or joint life expectancies) of the taxpayer and his or her beneficiary.
With respect to Policy loans, it is unclear whether interest paid (or
accrued by an accrual basis taxpayer) constitutes interest for federal income
tax purposes. Tax law provisions may limit the deduction of interest payable
on loans and on loan proceeds that are used to purchase or carry certain life
insurance policies.
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Policies that are Not Modified Endowment Contracts. Policies entered into
before June 21, 1988, may not be subject to treatment as modified endowment
contracts even though they fail to meet the seven-pay premium test provided
that such Policies do not experience a "material change." The definition of
"material change" is complex, but, in general, if you do not pay any further
premium or institute any changes to the death benefits, there will be no
material change. In this connection, an additional premium payment necessary
to keep your Policy in force should not constitute a material change so long
as the death benefit under the Policy does not increase. If a Policy that was
not a modified endowment contract becomes one, under Treasury Department
regulations which may be prescribed, pre-death distributions received in
anticipation of a failure of a Policy to meet the seven-pay premium test will
be treated as pre-death distributions from a modified endowment contract (and,
therefore, will be taxable as described above) even though, at the time of the
distribution(s), the Policy was not yet a modified endowment contract. For
this purpose, pursuant to the IRC, any distribution made within two years
before the Policy is classified as a modified endowment contract shall be
treated as being made in anticipation of the Policy's failing to meet the
seven-pay premium test.
Pre-death distributions from Policies that are not modified endowment
contracts may also give rise to taxable income. Upon full surrender or
maturity of your Policy for its Net Cash Surrender Value, the excess, if any,
of the Net Cash Surrender Value plus any outstanding Policy Indebtedness over
the cost basis under your Policy will be treated as ordinary income for
federal income tax purposes. Your Policy's cost basis will usually equal the
premiums paid less any premiums previously recovered in Preferred or Partial
Withdrawals. Under Section 7702 of the IRC, if a partial withdrawal is
accompanied by a reduction in benefits under a life insurance contract,
special rules apply to determine whether part or all of the cash received is
paid out of the income of the contract and is taxable. Provided that the cash
received by you on a Preferred Withdrawal within 15 years of the Policy Date
does not exceed investment in your Policy (generally, premiums paid less any
premiums previously recovered in Preferred Withdrawals), we believe that no
portion of such cash will be treated as paid out of the income of your Policy
and taxed to you because the death benefit under your Policy is not reduced.
The absence of regulations or other authority interpreting Section 7702,
however, creates some uncertainty and thus there can be no assurance that the
IRS might not take the position that a portion of the cash distributed to you
on a Preferred Withdrawal should be treated as being paid out of income of
your Policy and taxed to you. Cash distributed to you on Partial Withdrawals
occurring more than 15 years after the Policy Date will be taxable as ordinary
income to you to the extent that it exceeds the cost basis under your Policy.
We also believe that loans received under Policies that are not modified
endowment contracts will be treated as Indebtedness of the Owner, and that no
part of any loan under the Policy will constitute income to you unless your
Policy is surrendered or matures or lapses. However, interest on Policy
Indebtedness paid (or accrued by an accrual basis taxpayer) may be deductible.
Tax law provisions may limit the deduction of interest payable on loans and on
loan proceeds that are used to purchase or carry certain life insurance
policies.
Other. Another provision of the tax law deals with allowable charges for
mortality costs and other expenses that are used in making calculations to
determine whether a contract qualifies as life insurance for federal income
tax purposes. For life insurance policies entered into on or after October 21,
1988, these calculations must be based upon reasonable mortality charges and
other charges reasonably expected to be actually paid. The Treasury Department
has issued proposed regulations and is expected to promulgate temporary or
final regulations governing reasonableness standards for mortality charges.
While we believe under IRS pronouncements currently in effect, that the
mortality costs and other expenses used in making calculations to determine
whether the Policy qualifies as life insurance meet the current requirements,
complete assurance cannot be given that the IRS would necessarily agree. It is
possible that future regulations will contain standards that would require us
to modify our mortality charges used for the purpose of the calculations in
order to retain the qualification of the Policy as life insurance for federal
income tax purposes, and we reserve the right to make any such modifications.
Federal estate and gift and state and local estate, inheritance, and other
tax consequences of ownership or receipt of Policy proceeds depend on the
jurisdiction and the circumstances of each Owner or Beneficiary.
FOR COMPLETE INFORMATION ON FEDERAL, STATE, LOCAL AND OTHER TAX
CONSIDERATIONS, A QUALIFIED TAX ADVISER SHOULD BE CONSULTED.
WE DO NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY POLICY.
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<PAGE>
CHARGE FOR OUR INCOME TAXES
In the provisions of the IRC on life insurance, variable life insurance
generally is treated in a manner consistent with traditional fixed life
insurance. We will periodically review the question of a charge to the
Separate Account or the Policy for our federal income taxes. A charge may be
made for any federal income taxes incurred by us that are attributable to the
Separate Account. Charges might become necessary if our tax treatment is
ultimately determined to be other than what we currently believe it to be, if
there are changes made in the federal income tax treatment of variable life
insurance at the insurance company level, or if there is a change in our tax
status.
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 charge the Account for such taxes, if any, attributable
to the Account.
VOTING OF FUND SHARES
In accordance with our view of present applicable law, we will exercise
voting rights attributable to the shares of each Portfolio of the Fund held in
the Variable Accounts at any regular and special meetings of the shareholders
of the Fund on matters requiring shareholder voting under the Investment
Company Act of 1940 or by the Fund. We will exercise these voting rights based
on instructions received from persons having the voting interest in
corresponding Variable Accounts of the Separate Account. However, if the
Investment Company Act of 1940 or any regulations thereunder should be
amended, or if the present interpretation thereof should change, and as a
result we determine that we are permitted to vote the shares of the Fund in
its own right, we may elect to do so.
You are the person having the voting interest under a Policy. Unless
otherwise required by applicable law, the number of votes as to which you will
have the right to instruct will be determined by dividing your Accumulated
Value in a Variable Account by the net asset value per share of the
corresponding Portfolio of the Fund. Fractional votes will be counted. The
number of votes as to which you will have the right to instruct will be
determined as of the date coincident with the date established by the Fund for
determining shareholders eligible to vote at the meeting of the Fund. If
required by the Securities and Exchange Commission, we reserve the right to
determine in a different fashion the voting rights attributable to the shares
of the Fund based upon instructions received from Policy Owners. Voting
instructions may be cast in person or by proxy.
If there are shares of a Portfolio held by a Variable Account for which we
do not receive timely voting instructions, we will vote those shares in the
same proportion as the voting instructions for all other shares of that
Portfolio held by that Variable Account for which we have received timely
voting instructions. If we hold shares of a Portfolio in our General Account
and/or if any of our non-insurance subsidiaries holds shares of a Portfolio,
we will vote those shares in the same proportion as other votes cast by all of
our separate accounts in the aggregate.
DISREGARD OF VOTING INSTRUCTIONS
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that voting rights be
exercised so as to cause a change in the subclassification or investment
objective of a Portfolio or to approve or disapprove an investment advisory
contract. In addition, we may disregard voting instructions of changes
initiated by Policy Owners in the investment policy or the investment adviser
(or portfolio manager) of a Portfolio, provided that our disapproval of the
change is reasonable and is based on a good faith determination that the
change would be contrary to state law or otherwise inappropriate, considering
the Portfolio's objectives and purpose, and considering the effect the change
would have on us. In the event we do disregard voting instructions, a summary
of that action and the reasons for such action will be included in the next
report to Owners.
CONFIRMATION STATEMENTS AND OTHER REPORTS TO OWNERS
We will send you confirmations for premium payments and transfers, loans,
loan repayments, loan interest transfers, Preferred and Partial Withdrawals, a
surrender, and on payment of any death benefit proceeds.
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<PAGE>
Confirmation of scheduled transactions under dollar cost averaging, portfolio
rebalancing, and monthly deductions will appear on your quarterly statement.
A statement will be sent quarterly to you setting forth a summary of the
transactions which occurred during the quarter, indicating the death benefit,
Accumulated Value, Cash Surrender Value, and any Policy Indebtedness as of the
end of each quarter. In addition, the statement will indicate the allocation
of Accumulated Value among the Investment Options and any other information
required by law.
You will also be sent annual financial statements for the Separate Account
and the Fund, the latter of which will include a list of the portfolio
securities of the Fund, as required by the Investment Company Act of 1940,
and/or such other reports as may be required by federal securities laws.
SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to compliance with the laws as then in effect,
to make additions to, deletions from, or substitutions for the securities that
are held by the Separate Account or any Variable Account or that the Separate
Account or any Variable Account may purchase. If shares of any or all of the
Portfolios of the Fund should no longer be available for investment, or if, in
the judgment of our management, further investment in shares of any or all
Portfolios of the Fund should become inappropriate in view of the purposes of
the Policies, we may substitute shares of another Portfolio of the Fund or of
a different fund for shares already purchased, or to be purchased in the
future, under the Policies.
Where required, we will not substitute any shares attributable to your
interest in a Variable Account or the Separate Account without notice, your
approval, or prior approval of the Securities and Exchange Commission and
without following the filing or other procedures established by applicable
state insurance regulators.
We also reserve the right to establish additional Variable Accounts which
may include additional Subaccounts of the Separate Account to serve as
investment options under the Policies, which may be managed separate accounts
or may invest in a new Portfolio of the Fund, or in shares of another
investment company, a portfolio thereof, or suitable investment vehicle, with
a specified investment objective. New Variable Accounts may be established
when, in our sole discretion, marketing needs or investment conditions
warrant, and any new Variable Accounts will be made available to existing
Policy Owners on a basis to be determined by us. We may also eliminate one or
more Variable Accounts if, in our sole discretion, marketing, tax, or
investment conditions so warrant.
In the event of any such substitution or change, we may, by appropriate
endorsement, make such changes in this and other policies as may be necessary
or appropriate to reflect such substitution or change. If deemed by us to be
in the best interests of persons having voting rights under the Policies, the
Separate Account may be operated as a management investment company under the
Investment Company Act of 1940 or any other form permitted by law, it may be
deregistered under that Act in the event such registration is no longer
required, or it may be combined with other separate accounts of ours or an
affiliate of ours. Subject to compliance with applicable law, we also may
combine one or more Variable Accounts and may establish a committee, board, or
other group to manage one or more aspects of the operation of the any such
entity.
CHANGES TO COMPLY WITH LAW
We reserve the right to make any change without your consent to the
provisions of the Policy to comply with, or give you the benefit of, any
federal or state statute, rule, or regulation, including but not limited to,
requirements for life insurance contracts, under the Internal Revenue Code,
under regulations of the United States Treasury Department or any state
statute.
PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account
may appear in advertisements, sales literature, or reports to Policy Owners or
prospective purchasers. Performance information in
29
<PAGE>
advertisements or sales literature may be expressed in any fashion permitted
under applicable law, which may include presentation of a change in a Policy
Owner's Accumulated Value attributable to the performance of one or more
Variable Accounts, or as a change in a Policy Owner's death benefit.
Performance quotations of a change in a Policy Owner's Accumulated Value may
be expressed in terms of a change in a Policy Owner's Accumulated Value over
time or in terms of the average annual compounded rate of return on the Policy
Owner's Accumulated Value. Performance quotations may be based upon a
hypothetical Policy in which premiums have been allocated to a particular
Variable Account over certain periods of time that will include one year, or
from the commencement of operation of the Variable Account. If a Portfolio has
been in existence for a longer period of time than its corresponding Variable
Account, we may also present hypothetical returns that the Variable Account
would have achieved had it invested in its Corresponding Portfolio for periods
through the commencement of operations of the Portfolio. For the period that a
particular Variable Account has been in existence, the performance will be
actual performance and not hypothetical in nature. Any such quotation may
reflect the deduction of all applicable charges to the Policy including
premium load, the cost of insurance, and the mortality and expense risk
charge. The quotation may also reflect the deduction of the unrecovered
deferred load, if applicable, by assuming a surrender at the end of the
particular period, although other quotations may simultaneously be given that
do not assume a surrender and do not take into account deduction of
unrecovered deferred load.
Performance information for a Variable Account may be compared, in
advertisements, sales literature, and reports to Policy Owners to: (i) other
variable life separate accounts, mutual funds, or investment products tracked
by research firms, ratings services, companies, publications, or persons who
rank separate accounts or investment products on overall performance or other
criteria; and (ii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from the purchase of a Policy. Reports and promotional
literature may also contain our rating or a rating of our claim-paying ability
as determined by firms that analyze and rate insurance companies and by
nationally recognized statistical rating organizations.
Performance information for any Variable Account of the Separate Account
reflects only the performance of a hypothetical Policy whose Accumulated Value
is allocated to the Variable Account during a particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives and policies, characteristics and quality
of the Portfolio of the Fund in which the Variable Account invests, and the
market conditions during the given period of time, and should not be
considered as a representation of what may be achieved in the future.
THE FIXED ACCOUNT
You may allocate all or a portion of your premium payments and transfer
Accumulated Value to our Fixed Account. Amounts allocated to the Fixed Account
become part of our General Account, which supports insurance and annuity
obligations. Because of exemptive and exclusionary provisions, interests in
the Fixed Account have not been registered under the Securities Act of 1933
and the Fixed Account has not been registered as an investment company under
the Investment Company Act of 1940. Accordingly, neither the Fixed Account nor
any interest therein is generally subject to the provisions of these Acts and,
as a result, the staff of the Securities and Exchange Commission has not
reviewed the disclosure in this prospectus relating to the Fixed Account.
Disclosures regarding the Fixed Account may, however, be subject to certain
generally applicable provisions of the federal securities laws relating to the
accuracy and completeness of statements made in the prospectus. For more
details regarding the Fixed Account, see the Policy itself.
GENERAL DESCRIPTION
Amounts allocated to the Fixed Account become part of our General Account
which consists of all assets owned by us other than those in the Separate
Account and our other separate accounts. Subject to applicable law, we have
sole discretion over the investment of the assets of our General Account.
You may elect to allocate premium payments to the Fixed Account, the
Variable Account, or both. You may also transfer Accumulated Value from the
Variable Accounts to the Fixed Account, or from the Fixed Account to the
Variable Accounts, subject to the limitations described below. We guarantee
that the Accumulated Value in the Fixed Account will be credited with interest
at a rate of 0.327374% per month, compounded
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<PAGE>
monthly, for an effective annual rate of 4%. Such interest will be paid
regardless of the actual investment experience of the Fixed Account. In
addition, we may in our sole discretion pay current interest in excess of the
4% guarantee. The current interest rate will be that rate in effect on the
Policy Date and as effected thereafter for each Policy Anniversary. Once
declared for a Policy on its anniversary, the current rates are guaranteed for
one year until the next Policy Anniversary. The portion of your Accumulated
Value that has been used to secure Policy Indebtedness will accrue interest at
a rate of 0.327374% per month, compounded monthly, for an effective annual
rate of 4%.
We bear the full investment risk for the Accumulated Value allocated to the
Fixed Account.
DEATH BENEFIT
The death benefit under the Policy will be determined in the same fashion
for an Owner who has Accumulated Value in the Fixed Account as for an Owner
who has Accumulated Value in the Variable Accounts. The death benefit will be
the greater of the Face Amount or Accumulated Value multiplied by a specified
percentage (see "Death Benefit").
POLICY CHARGES
Premium load and the Policy charges for the administrative charge and the
cost of insurance will be the same whether you allocate premium payments or
transfer Accumulated Value to the Fixed Account or allocate premium payments
to the Variable Accounts. The charge for mortality and expense risks will not
be assessed against the Fixed Account, and any amounts that we pay for income
taxes allocable to the Variable Accounts will not be charged against the Fixed
Account. In addition, the investment advisory fees and operating expenses paid
by the Fund will not be paid directly or indirectly by you to the extent the
Accumulated Value is allocated to the Fixed Account; however, to such extent,
you will not participate in the investment experience of the Variable
Accounts.
TRANSFERS, SURRENDERS, WITHDRAWALS, AND POLICY LOANS
Amounts may be transferred from the Variable Accounts to the Fixed Account
and from the Fixed Account to the Variable Accounts, subject to the following
limitations. You may not make more than one transfer from the Fixed Account to
the Variable Accounts in any 12-month period. Further, you may not transfer
more than the greater of 25% of your accumulated value in the Fixed Account or
$5,000 in any year. Currently there is no charge imposed upon transfers;
however, we reserve the right to assess such a charge in the future and to
impose other limitations on the number of transfers, the amount of transfers,
and the amount remaining in the Fixed Account or Variable Accounts after a
transfer. Transfers from the Variable Accounts to the Fixed Account may only
be made in the Policy Month preceding a Policy Anniversary, except that Policy
Owners residing in Connecticut, Georgia, Maryland, North Carolina, North
Dakota or Pennsylvania may make such a transfer at any time during the first
18 Policy Months.
You may also make full surrenders, Preferred Withdrawals, and Partial
Withdrawals to the same extent as a Policy Owner who has allocated Accumulated
Value to the Variable Accounts. See "Surrender", and "Preferred and Partial
Withdrawal Benefits". In addition, to the same extent as Policy Owners with
Accumulated Value in the Variable Accounts, you may obtain a Policy Loan and
borrow up to 90% of Cash Surrender Value attributable to the Fixed Account
less Policy Indebtedness. See "Policy Loans". Transfers, surrenders, and
withdrawals payable from the Fixed Account, and the payment of Policy loans
allocated to the Fixed Account may be delayed for up to six months.
MORE ABOUT THE POLICY
OWNERSHIP
The Policy Owner is the individual named as such in the application or in
any later change shown in our records. While the Insured is living, the Policy
Owner alone has the right to receive all benefits and exercise all rights that
the Policy grants or we allow.
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<PAGE>
Joint Owners. If more than one person is named as Policy Owner, they are
joint owners. Any Policy transaction requires the signature of all persons
named jointly. Unless otherwise provided, if a joint owner dies, ownership
passes to the surviving joint owner(s). When the last joint owner dies,
ownership passes through that person's estate, unless otherwise provided.
BENEFICIARY
The Beneficiary is the individual named as such in the application or any
later change shown in our records. You may change the Beneficiary at any time
during the life of the Insured by written request on forms provided by us and
received by us at our Home Office. The change will be effective as of the date
this form is signed. Contingent and/or concurrent Beneficiaries may be
designated. You may designate a permanent Beneficiary, whose rights under the
Policy cannot be changed without his or her consent. Unless otherwise
provided, if no designated Beneficiary is living upon the death of the
Insured, you or your estate is the Beneficiary.
We will pay the death benefit proceeds to the Beneficiary. Unless otherwise
provided, in order to receive proceeds at the Insured's death, the Beneficiary
must be living at the time of the Insured's death.
EXCHANGE OF INSURED
After the first Policy year and subject to our approval, you may exchange
the named Insured on the Policy upon written application, evidence of
insurability satisfactory to us, and payment of a charge of $100. The exchange
is effective the first Monthly Payment Date on or after the date the exchange
is approved. Coverage on the new Insured will become effective on the exchange
date. Coverage on the current Insured will terminate on the day preceding the
exchange date. The Policy Date will not be changed unless the new Insured was
born after the Policy Date. In such case, the Policy Date will be changed to
the Policy anniversary on or next following the birth date of the new Insured.
The cost of insurance charge will be based on the new Insured's Age and risk
classification.
We reserve the right to disallow a requested exchange of the named Insured,
and will not permit a requested exchange, among other reasons, (1) if
compliance with the guideline premium limitations under tax laws resulting
from the exchange of Insured would result in the immediate termination of the
Policy or likely result in its termination before the Policy's Maturity Date,
or (2) if, to effect the requested exchange of Insured, payments to you would
have to be made from Accumulated Value for compliance with the guideline
premium limitations, and the amount of such payments would exceed the Net Cash
Surrender Value under the Policy.
The charge of $100 will be imposed to cover the costs of processing an
exchange of Insured. This amount will not be credited to or deducted from
Accumulated Value, but must be paid directly to us by you before the request
for an exchange of Insured will be processed.
THE CONTRACT
The Policy is a contract between you and us. The entire contract consists of
the Policy, a copy of the initial application, all subsequent applications to
change the Policy, any endorsements, and all additional Policy information
sections (specification pages) added to the Policy.
PAYMENTS
We ordinarily will pay death benefit proceeds, Net Cash Surrender Value on
surrender, Preferred Withdrawals, Partial Withdrawals, and loan proceeds based
on allocations made to the Variable Accounts, and will effect a transfer
between Variable Accounts or from a Variable Account to the Fixed Account
within seven days after we receive all information needed to process a payment
or transfer or, if sooner, other period required by law.
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However, we can postpone the calculation or payment of such a payment or
transfer of amounts based on investment performance of the Variable Accounts
if:
. The New York Stock Exchange is closed on other than customary weekend
and holiday closings or trading on the New York Stock Exchange is
restricted as determined by the SEC; or
. An emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of the Account's net
assets; or
. The SEC by order permits postponement for the protection of Policy
Owners.
ASSIGNMENT
You may assign a Policy as collateral security for a loan or other
obligation. No assignment will bind us unless the original, or a copy, is
received and recorded by our Home Office. An assignment does not change the
ownership of the Policy. However, after an assignment, the rights of any Owner
or Beneficiary will be subject to the assignment. The entire Policy, including
any attached option or rider, will be subject to the assignment. We will not
be responsible for the validity of any assignment. Unless otherwise provided,
the assignee may exercise all rights this Policy grants except (a) the right
to change the Owner or Beneficiary; and (b) the right to elect a payment
option. Assignment of a Policy that is a modified endowment contract may
generate taxable income. (See "Federal Income Tax Considerations".)
ERRORS ON THE APPLICATION
If the Age of the Insured has been misstated, the death benefit under this
Policy will be the greater of that which would be purchased by the most recent
cost of insurance charge at the correct Age, or the death benefit derived by
multiplying Accumulated Value by the specified percentage for the correct Age.
INCONTESTABILITY
We may contest the validity of this Policy if any material misstatements are
made in the application. However, this Policy will be incontestable after the
expiration of the following: the initial Face Amount cannot be contested after
the Policy has been in force during the Insured's lifetime for two years from
the Policy Date; if the Insured is changed, the Policy cannot be contested
after it has been in force during the new Insured's lifetime for two years
from the effective date of the exchange; and an increase in the Face Amount
cannot be contested after the increase has been in force during an Insured's
lifetime for two years from its effective date.
PAYMENT IN CASE OF SUICIDE
If the Insured dies by suicide, while sane or insane, within two years from
the Policy Date, we will limit the death benefit proceeds to the premium
payments less any Policy Indebtedness and less the amount of any Preferred
Withdrawals. If the Insured has been changed and the new Insured dies by
suicide, while sane or insane, within two years of the exchange date, we will
limit the death benefit proceeds to the Net Cash Surrender Value as of the
exchange date, plus the premiums paid since the exchange date, less the sum of
any Indebtedness, withdrawal amounts, and any dividends paid in cash since the
exchange date. If an Insured dies by suicide, while sane or insane, within two
years of the effective date of any increase in the Face Amount, we will refund
the cost of insurance charges made with respect to such increase.
PARTICIPATING
The Policy is participating and will share in our surplus earnings. However,
the current dividend scale is zero and we do not anticipate that dividends
will be paid. Any dividends that do become payable will be paid in cash.
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<PAGE>
POLICY ILLUSTRATIONS
Upon request, we will send you an illustration of estimated future benefits
under the Policy based on both guaranteed and current cost factor assumptions.
However, we reserve the right to charge a fee for requests for illustrations
in excess of one per Policy Year.
PAYMENT PLAN
Maturity, surrender, or withdrawal benefits may be used to purchase a
payment plan providing monthly income for the lifetime of the Insured, and
death benefit proceeds may be used to purchase a payment plan providing
monthly income for the lifetime of the Beneficiary. The monthly payments
consisting of proceeds plus interest will be paid in equal installments for at
least ten years. The purchase rates for the payment plan are guaranteed not to
exceed those shown in the Policy, but current rates that are lower (i.e.,
providing greater income) may be established by us from time to time. This
benefit is not available if the income would be less than $25 a month.
Maturity, surrender, withdrawal, or death benefits may be used to purchase any
other Payment Plan that we make available at that time.
DISTRIBUTION OF THE POLICY
Pacific Mutual Distributors, Inc. ("PMD"), a wholly-owned subsidiary of
ours, is principal underwriter (distributor) of the Policies. PMD is
registered as a broker-dealer with the SEC and is a member of the National
Association of Securities Dealers ("NASD"). We pay PMD for acting as principal
underwriter under a Distribution Agreement.
We and PMD have sales agreements with various broker-dealers under which the
Policy will be sold by registered representatives of the broker-dealers. The
registered representatives are required to be authorized under applicable
state regulations to sell variable life insurance. The broker-dealers are
required to be registered with the SEC and members of the NASD. We pay
compensation directly to broker-dealers for promotion and sales of the Policy.
The compensation payable to a broker-dealer by us and PMD for sales of the
product may vary with the Sales Agreement, but is not expected to exceed 5% of
premium payments. Broker-dealers may also receive an annual renewal
compensation of no more than .20% of the excess of Accumulated Value less
Policy Indebtedness over $50,000, computed monthly and payable at the end of
each Policy Year. In addition, we may also pay override payments, expense
allowances, bonuses, wholesaler fees and training allowances. Registered
representatives earn commissions from the broker-dealers with whom they are
affiliated for selling our Policies. Compensation arrangements vary among
broker-dealers. In addition, registered representatives who meet specified
production levels may qualify, under sales incentive programs adopted by us,
to receive non-cash compensation such as expense-paid trips, expense-paid
educational seminars and merchandise and may elect to receive Compensation on
a deferred basis. We make no separate deductions, other than as previously
described, from premiums to pay sales commissions or sales expenses.
MORE ABOUT PACIFIC MUTUAL LIFE
MANAGEMENT
Our directors and officers are listed below together with information as to
their principal occupations during the past five years and certain other
current affiliations. Unless otherwise indicated, the business address of each
director and officer is c/o Pacific Mutual Life Insurance Company, 700 Newport
Center Drive, Newport Beach, California 92660.
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Thomas C. Sutton Director, Chairman of the Board and Chief Executive Officer
Director, Chairman of of Pacific Mutual Life; Equity Board Member of PIMCO
the Advisors L.P.; Director of: Newhall Land & Farming; The
Board and Chief Execu- Irvine Company; Edison International; Pacific Corinthian
tive Life Insurance Company; similar positions with other
Officer subsidiaries of Pacific Mutual Life.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Glenn S. Schafer Director (since November 1994) and President of Pacific
Director and President Mutual Life, January 1995 to present; Executive Vice
President and Chief Financial Officer of Pacific Mutual
Life, March 1991 to January 1995; Equity Board Member of
PIMCO Advisors L.P.; Director of Pacific Corinthian Life
Insurance Company; similar positions with other
subsidiaries of Pacific Mutual Life.
Richard M. Ferry Director of Pacific Mutual Life; President, Director and
Director Chairman of Korn/Ferry International; Director of: Avery
Dennison Corporation; ConAm Management; First Business
Bank; Mullin Consulting, Inc.; Northwestern Restaurants,
Inc.; Dole Food Co. Address: 1800 Century Park East, Suite
900, Los Angeles, California 90067.
Donald E. Guinn Director of Pacific Mutual Life; Chairman Emeritus and
Director Director of Pacific Telesis Group; Director of: The Dial
Corp.; Bank of America NT & SA; BankAmerica Corporation.
Address: Pacific Telesis Center, 130 Kearny Street, Room
3704, San Francisco, California 94108-4818.
Ignacio E. Lozano, Jr. Director of Pacific Mutual Life; Chairman and former Editor-
Director in-Chief of La Opinion; Director of: BankAmerica
Corporation; Bank of America NT&SA; The Walt Disney
Company; Pacific Enterprises. Address: 411 West Fifth
Street, 12th Floor, Los Angeles, California 90013.
Charles A. Lynch Director of Pacific Mutual Life; Chairman and former Chief
Director Executive Officer of Fresh Choice, Inc.; Director of:
Nordstrom, Inc.; PST Vans, Inc.; SRI International, Inc.;
Age Wave; Bojangles Acquisition Corp.; Cucina Holdings,
Inc.; KRH' Thermal Systems; La Salsa Restaurants; Mid
Peninsula Bank; Chairman of Market Value Partners Company.
Address: 2901 Tasman Drive, Suite 109, Santa Clara,
California 95054-1169.
Dr. Allen W. Mathies, Director of Pacific Mutual Life ; Director and President
Jr. Director Emeritus of Huntington Memorial Hospital; Director of
Occidental College; former President and Chief Executive
Officer of Huntington Memorial Hospital. Address: 314
Arroyo Drive, South Pasadena, California 91030.
Charles D. Miller Director of Pacific Mutual Life; Director, Chairman, and
Director Chief Executive Officer of Avery Dennison Corporation;
Director of: Great Western Financial Corporation;
Korn/Ferry International; Nationwide Health Properties,
Inc.; Edison International. Address: 150 North Orange Grove
Boulevard, Pasadena, California 91103.
Donn B. Miller Director of Pacific Mutual Life; President and Chief
Director Executive Officer of Pearson-Sibert Oil Co. of Texas;
Director of: The Irvine Company; Automobile Club of
Southern California; St. John's Hospital and Health Center
Foundation; former Senior Partner with the law firm of
O'Melveny & Meyers. Address: 136 El Camino, Suite 216,
Beverly Hills, California 90212.
Jacqueline C. Morby Director of Pacific Mutual Life, February 1996 to present;
Director Managing Director and former Partner of TA Associates,
Inc., Director of: Ontrack Data International, Inc.; ANSYS,
Inc., Pivot Point, Inc.; R&D Systems, Inc.; Axent
Technologies Inc. Address: 116 Woodland Road, Pittsburgh,
Pennsylvania 15232
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
J. Fernando Niebla Director of Pacific Mutual Life, May 1995 to present; Vice
Director Chairman and Director of Pacer Infotec, Inc.; Director,
Chairman and Chief Executive Officer of Infotec Commercial
Systems, formerly Infotec Development, Inc.; Director of:
Union Bank of California. Address: 3611 South Harbor
Boulevard, Suite 260, Santa Ana, CA 92704.
Susan Westerberg Prager Director of Pacific Mutual Life; Dean of the UCLA School of
Director Law at the University of California at Los Angeles;
Director of Lucille Salter Packard Children's Hospital of
Stanford. Address: 405 Hilgard Avenue, Room 3374, Los
Angeles, California 90095-1476.
Richard M. Rosenberg Director of Pacific Mutual Life, November 1995 to present;
Director Director, Chairman and Chief Executive Officer (Retired) of
BankAmerica Corporation; Director of: Airborne Express
Corporation; K-2 Incorporated; Northrop Grumman
Corporation; Potlatch Corporation; Pacific Telesis Group.
Address: 555 California Street, 11th Floor, San Francisco,
California 94104.
James R. Ukropina Director of Pacific Mutual Life; Partner with the law firm
Director of O'Melveny & Meyers; former Chairman and Chief Executive
Officer of Pacific Enterprises; Director of Lockheed Martin
Corporation; Trustee of Stanford University. Address: 400
S. Hope Street, 16th Floor, Los Angeles, California 90071-
2899.
Raymond L. Watson Director of Pacific Mutual Life; Vice Chairman and Director
Director of The Irvine Company; Director of: The Walt Disney
Company; The Mitchell Energy and Development Company and
The Tejon Ranch. Address: 550 Newport Center Drive, Ninth
Floor, Newport Beach, California 92660.
Lynn C. Miller Executive Vice President, Individual Insurance, of Pacific
Executive Vice President Mutual Life, January 1995 to present; Senior Vice
President, Individual Insurance of Pacific Mutual Life 1989
to 1995.
David R. Carmichael Senior Vice President and General Counsel of Pacific Mutual
Senior Vice President Life; Director of: Pacific Corinthian Life Insurance
and General Counsel Company; PM Group Life Insurance Company.
Audrey L. Milfs Vice President and Corporate Secretary of Pacific Mutual
Vice President and Life; Similar positions with other subsidiaries of Pacific
Corporate Secretary Mutual Life.
Edward Byrd Vice President and Controller of Pacific Mutual Life, August
Vice President and 1992 to present; Vice President, Corporate Audit and
Controller Financial Planning of Pacific Mutual Life, November 1991 to
August 1992.
Khanh T. Tran Senior Vice President and Chief Financial Officer of Pacific
Senior Vice President Mutual Life, June 1996 to present; Vice President and
and Chief Financial Of- Treasurer of Pacific Mutual Life, November 1991 to June
ficer 1996; Chief Financial Officer to other subsidiaries of
Pacific Mutual Life.
</TABLE>
No officer or director listed above receives any compensation from the
Separate Account. No separately allocable compensation has been paid by us or
any of our affiliates to any person listed for services rendered to the
Account.
36
<PAGE>
STATE REGULATION
We are subject to the laws of the state of California governing insurance
companies and to regulation by the Commissioner of Insurance of California. In
addition, we are subject to the insurance laws and regulations of the other
states and jurisdictions in which we are licensed or may become licensed to
operate. An annual statement in a prescribed form must be filed with the
Commissioner of Insurance of California and with regulatory authorities of
other states on or before March 1st in each year. This statement covers our
operations for the preceding year and our financial condition as of December
31st of that year. Our affairs are subject to review and examination at any
time by the Commissioner of Insurance or his agents, and subject to full
examination of our operations at periodic intervals.
TELEPHONE TRANSFER AND LOAN PRIVILEGES
You may request a transfer of Accumulated Value or a Policy Loan by
telephone if a properly completed Authorization for Telephone Requests
("Telephone Authorization") is on file at our Home Office. All or part of
any telephone conversation with respect to transfer or loan instructions may
be recorded by us. Telephone instructions received by us by 1:00 P.M. Pacific
time, or the close of the New York Stock Exchange, if earlier, on any
Valuation Date will be processed as of the end of that Valuation Date in
accordance with your instructions (presuming that the Free-Look Period has
expired). We reserve the right to deny any telephone transfer or loan request.
If all telephone lines are busy (which might occur, for example, during
periods of substantial market fluctuations), you might not be able to request
transfers and loans by telephone and would have to submit written requests.
We have established procedures to confirm that instructions communicated by
telephone are genuine. Under the procedures, any person requesting a transfer
by telephone must provide certain personal identification as requested by us,
and we will send a written confirmation of all transfers requested by
telephone within 7 days of the transfer. Upon your submission of a Telephone
Authorization, you authorize us to accept and act upon telephone instructions
for transfers or loans involving your Policy, and agree that neither we, any
of our affiliates, Pacific Select Fund, nor any of their directors, trustees,
officers, employees or agents, will be liable for any loss, damages, cost, or
expense (including attorneys fees) arising out of any requests effected in
accordance with the Telephone Authorization and believed by us to be genuine,
provided that we have complied with our procedures. As a result of this policy
on telephonic requests, you will bear the risk of loss arising from the
telephone transfer and loan privileges.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a
party, or which would materially affect the Separate Account.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Policies
described in this prospectus and our organization, our authority to issue the
Policies under California law, and the validity of the forms of the Policies
under California law have been passed on by our General Counsel.
Legal matters relating to the federal securities and federal income tax laws
have been passed upon by Dechert Price & Rhoads.
REGISTRATION STATEMENT
A registration statement under the Securities Act of 1933 has been filed
with the SEC relating to the offering described in this prospectus. This
prospectus does not include all of the information set forth in the
registration statement, as portions have been omitted pursuant to the rules
and regulations of the SEC. The omitted information may be obtained at the
SEC's principal office in Washington, D.C., upon payment of the SEC's
prescribed fees.
37
<PAGE>
INDEPENDENT AUDITORS
The audited consolidated financial statements for Pacific Mutual Life as of
December 31, 1996 and 1995 and for the three years ended December 31, 1996 and
the audited financial statements for Pacific Select Separate Account as of
December 31, 1996 and for the two years ended December 31, 1996 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included herein
in reliance upon their authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
The audited financial statements of Pacific Select Separate Account as of
December 31, 1996 and for the two years then ended, are set forth herein,
starting on page 39. The audited consolidated financial statements of Pacific
Mutual Life as of December 31, 1996 and December 31, 1995 and for the three
years then ended December 31, 1996 are set forth herein starting on page 47.
The financial statements of Pacific Mutual Life should be distinguished from
the financial statements of the Separate Account and should be considered only
as bearing upon our ability to meet our obligations under the Policies.
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Mutual Life Insurance Company
We have audited the accompanying statement of assets and liabilities of the
Pacific Select Separate Account (comprised of the Money Market, High Yield
Bond, Managed Bond, Government Securities, Growth, Growth LT, Equity Income,
Multi-Strategy, Equity Index, and International Variable Accounts) as of
December 31, 1996 and the related statement of operations for the year then
ended and statement of changes in net assets for each of the two years in the
period then ended. These financial statements are the responsibility of the
Separate Account's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
variable accounts constituting the Pacific Select Separate Account as of
December 31, 1996 and the results of their operations for the year then ended
and the changes in their net assets for each of the two years then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 14, 1997
39
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT GROWTH EQUITY MULTI- EQUITY INTER-
MARKET BOND BOND SECURITIES GROWTH LT INCOME STRATEGY INDEX NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Money Market Portfolio
(21 Shares; cost
$209)................. $209
High Yield Bond Portfo-
lio (563 shares; cost
$5,166)............... $5,593
Managed Bond Portfolio
(49 shares; cost
$514)................. $525
Government Securities
Portfolio (31 shares;
cost $336)............ $325
Growth Portfolio (253
shares; cost $3,972).. $5,420
Growth LT Portfolio (75
shares; cost $975).... $1,235
Equity Income Portfolio
(139 shares; cost
$2,135)............... $2,850
Multi-Strategy Portfo-
lio (65 shares; cost
$777)................. $954
Equity Index Portfolio
(115 shares; cost
$2,083)............... $2,345
International Portfolio
(257 shares; cost
$3,374)............... $3,954
---- ------ ---- ---- ------ ------ ------ ---- ------ ------
TOTAL ASSETS............ 209 5,593 525 325 5,420 1,235 2,850 954 2,345 3,954
==== ====== ==== ==== ====== ====== ====== ==== ====== ======
LIABILITIES
Payables:
Mortality and expense
risk fee.............. 10 1 9 2 5 2 4 7
---- ------ ---- ---- ------ ------ ------ ---- ------ ------
TOTAL LIABILITIES....... 10 1 9 2 5 2 4 7
---- ------ ---- ---- ------ ------ ------ ---- ------ ------
NET ASSETS.............. $209 $5,583 $524 $325 $5,411 $1,233 $2,845 $952 $2,341 $3,947
==== ====== ==== ==== ====== ====== ====== ==== ====== ======
</TABLE>
See Notes to Financial Statements.
40
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT GROWTH EQUITY MULTI- EQUITY INTER-
MARKET BOND BOND SECURITIES GROWTH LT INCOME STRATEGY INDEX NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends.............. $ 28 $ 429 $ 36 $ 24 $ 547 $ 10 $ 159 $ 70 $ 39 $ 71
EXPENSES
Mortality and expense
risk fee.............. 5 33 3 2 45 8 18 6 10 20
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET INVESTMENT INCOME... 23 396 33 22 502 2 141 64 29 51
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVEST-
MENTS
Net realized gain
(loss) from security
transactions.......... (1) 5 3 (3) 860 32 49 6 24 31
Net unrealized
appreciation
(depreciation) on
investments........... 7 103 (18) (13) 231 145 267 31 188 465
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS......... 6 108 (15) (16) 1,091 177 316 37 212 496
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET INCREASE IN NET AS-
SETS RESULTING FROM OP-
ERATIONS............... $ 29 $ 504 $ 18 $ 6 $ 1,593 $ 179 $ 457 $ 101 $ 241 $ 547
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
See Notes to Financial Statements.
41
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT GROWTH EQUITY MULTI- EQUITY INTER-
MARKET BOND BOND SECURITIES GROWTH LT INCOME STRATEGY INDEX NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment income.. $ 23 $ 396 $ 33 $ 22 $ 502 $ 2 $ 141 $ 64 $ 29 $ 51
Net realized gain
(loss) from security
transactions........... (1) 5 3 (3) 860 32 49 6 24 31
Net unrealized
appreciation
(depreciation) on
investments............ 7 103 (18) (13) 231 145 267 31 188 465
------- ------- ----- ----- ------- ------- ------- ----- ------- -------
NET INCREASE IN NET AS-
SETS
RESULTING FROM OPERA-
TIONS................... 29 504 18 6 1,593 179 457 101 547
------- ------- ----- ----- ------- ------- ------- ----- ------- -------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY TRANSACTIONS
Transfers of net premi-
ums.................... 2 2
Transfers--policy
charges and deductions. (8) (39) (5) (5) (108) (12) (80) (16) (26) (52)
Transfers in (from
other variable ac-
counts)................ 11,217 5,077 79 12 4,076 496 413 9 1,899 2,052
Transfers out (to other
variable accounts)..... (12,403) (3,676) (42) (20) (7,965) (332) (241) (2) (17) (90)
Transfers--other....... (13) (3) (29) (141) (16) (67) 2 (20) (81)
------- ------- ----- ----- ------- ------- ------- ----- ------- -------
NET INCREASE (DECREASE)
IN NET ASSETS
DERIVED FROM POLICY
TRANSACTIONS............ (1,207) 1,359 32 (42) (4,136) 136 27 (7) 1,829
------- ------- ----- ----- ------- ------- ------- ----- ------- -------
NET INCREASE (DECREASE)
IN NET ASSETS.......... (1,178) 1,863 50 (36) (2,543) 315 484 94 2,077 2,376
NET ASSETS
Beginning of year...... 1,387 3,720 474 361 7,954 918 2,361 858 264 1,571
------- ------- ----- ----- ------- ------- ------- ----- ------- -------
End of year............ $ 209 $ 5,583 $ 524 $ 325 $ 5,411 $ 1,233 $ 2,845 $ 952 $ 2,341 $ 3,947
======= ======= ===== ===== ======= ======= ======= ===== ======= =======
</TABLE>
See Notes to Financial Statements.
42
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT GROWTH EQUITY MULTI- EQUITY INTER-
MARKET BOND BOND SECURITIES GROWTH LT INCOME STRATEGY INDEX NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $ 67 $ 254 $ 24 $ 17 $ 14 $ 59 $ 20 $ 21 $ 4 $ 20
Net realized gain
(loss) from security
transactions.......... (2) 15 1 (3) 155 15 136 32 24 25
Net unrealized appreci-
ation on investments.. 3 304 36 42 1,508 112 451 115 52 111
------ ------ ---- ---- ------ ---- ------ ---- ---- ------
NET INCREASE IN NET
ASSETS
RESULTING FROM
OPERATIONS............. 68 573 61 56 1,677 186 607 168 80 156
------ ------ ---- ---- ------ ---- ------ ---- ---- ------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY
TRANSACTIONS
Transfers--policy
charges and
deductions*........... (26) (41) 2 (5) (109) (7) (50) (15) (16) (45)
Transfers in (from
other variable
accounts)............. 35 47 330 25 1,201 688 498 15 473
Transfers out (to other
variable accounts).... (1,065) (34) (22) (16) (1,098) (32) (927) (9) (70)
Transfers--other*...... (27) (27) (9) (24) (110) (13) (105) (39) (88)
------ ------ ---- ---- ------ ---- ------ ---- ---- ------
INCREASE (DECREASE) IN
NET ASSETS DERIVED FROM
POLICY TRANSACTIONS.... (1,083) (55) 301 (20) (116) 636 (584) 0 (64) 270
------ ------ ---- ---- ------ ---- ------ ---- ---- ------
NET INCREASE (DECREASE)
IN NET ASSETS.......... (1,015) 518 362 36 1,561 822 23 168 16 426
NET ASSETS
Beginning of year...... 2,402 3,202 112 325 6,393 96 2,338 690 248 1,145
------ ------ ---- ---- ------ ---- ------ ---- ---- ------
End of year............ $1,387 $3,720 $474 $361 $7,954 $918 $2,361 $858 $264 $1,571
====== ====== ==== ==== ====== ==== ====== ==== ==== ======
</TABLE>
- -----
* Prior year amounts have been reclassified to conform with current year
presentation.
See Notes to Financial Statements.
43
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Pacific Select Separate Account (the "Separate Account") is registered
as a unit investment trust under the Investment Company Act of 1940, as
amended, and during 1996 was comprised of twelve subaccounts called Variable
Accounts: the Money Market Variable Account, the High Yield Bond Variable
Account, the Managed Bond Variable Account, the Government Securities Variable
Account, the Growth Variable Account, the Aggressive Equity Variable Account,
the Growth LT Variable Account, the Equity Income Variable Account, the Multi-
Strategy Variable Account, the Equity Index Variable Account, the
International Variable Account, and the Emerging Markets Variable Account. The
assets in each Variable Account are invested in shares of the corresponding
portfolios of Pacific Select Fund (the "Fund"), each of which pursues
different investment objectives and policies. The financial statements of the
Fund, including the portfolios of investments, are included elsewhere in this
report and should be read in conjunction with the separate Account's financial
statements.
The Separate Account has organized and registered with the Securities and
Exchange Commission two new Variable Accounts, the Aggressive Equity Variable
Account and the Emerging Markets Variable Account, under the Investment
Company Act of 1940. There was no operational activity through December 31,
1996 in both Variable Accounts.
The Separate Account was established by Pacific Mutual Life Insurance
Company ("Pacific Mutual") on November 20, 1986 and commenced operations on
January 7, 1988. Under applicable insurance law, the assets and liabilities of
the Separate Account are clearly identified and distinguished from the other
assets and liabilities of Pacific Mutual. The assets of the Separate Account
will not be charged with any liabilities arising out of any other business
conducted by Pacific Mutual, but the obligations of the Separate Account,
including benefits related to variable life insurance, are obligations of
Pacific Mutual.
The Separate Account held by Pacific Mutual represents funds from individual
flexible premium variable life policies. The assets of these accounts are
carried at market value.
The preparation of the accompanying financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
A. Valuation of Investments
Investments in shares of the Fund are valued at the reported net asset
values of the respective portfolios. Valuation of securities held by the Fund
is discussed in the notes to their financial statements.
B. Security Transactions
Transactions are recorded on the trade date. Realized gains and losses on
sales of investments are determined on the basis of identified cost.
C. Federal Income Taxes
The operations of the Separate Account will be reported on the Federal
income tax return of Pacific Mutual, which is taxed as a life insurance
company under the provisions of the Tax Reform Act of 1986. Under current tax
law, no Federal income taxes are expected to be paid by Pacific Mutual with
respect to the operations of the Separate Account.
2. DIVIDENDS
During 1996, the Fund has declared dividends for each portfolio except for
the Emerging Markets Portfolio. The amounts accrued by the Separate Account
for its share of the dividends were reinvested in additional full and
fractional shares of each related portfolio.
3. CHARGES AND EXPENSES
Pacific Mutual charges the Separate Account daily for mortality and expense
risks assumed with respect to variable life insurance policies funded by the
Separate Account at an annual rate of 0.70% of the average daily net assets of
each Variable Account. Under the policies, Pacific Mutual makes certain
deductions from the net assets of each Variable Account for sales load,
administrative expenses, state premium taxes, cost of insurance and charges
for optional benefits. The operating expenses of the Separate Account are paid
by Pacific Mutual.
44
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY AGREEMENT
Pacific Mutual Distributors, Inc., a wholly-owned subsidiary of Pacific
Mutual, is the principal underwriter of variable life insurance policies
funded by interests in the Separate Account and is compensated by Pacific
Mutual.
5. SELECTED ACCUMULATION UNIT** INFORMATION
Selected accumulation unit information for the year ended December 31, 1996
were as follows:
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT
MARKET BOND BOND SECURITIES GROWTH
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
ACCUMULATION UNIT
VALUE:
Beginning $ 14.45 $ 21.16 $ 19.64 $ 18.89 $ 27.60
======== ======== ======== ======== ========
Ending $ 15.08 $ 23.39 $ 20.34 $ 19.31 $ 33.90
======== ======== ======== ======== ========
Number of Units Outstanding at
End of Year 13,843 238,658 25,744 16,830 159,620
<CAPTION>
GROWTH EQUITY MULTI- EQUITY INTER-
LT INCOME STRATEGY INDEX NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
ACCUMULATION UNIT
VALUE:
Beginning $ 15.28 $ 23.16 $ 21.06 $ 18.26 $ 16.84
======== ======== ======== ======== ========
Ending $ 17.89 $ 27.47 $ 23.54 $ 22.19 $ 20.39
======== ======== ======== ======== ========
Number of Units Outstanding at
End of Year 68,915 103,533 40,429 105,503 193,550
</TABLE>
- -------
** Accumulation Unit: unit of measure used to calculate the value of a
Contract Owner's interest in a Variable Account during the Accumulation
Period.
45
<PAGE>
PACIFIC SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. POLICY OWNERS' COST OF INVESTMENT IN THE FUND SHARES
The investment in the Fund shares are carried at identified cost, which
represents the amount available for investment (including reinvested
distributions of net investment income and realized gains) in such shares
after deduction of mortality and expense risk (M&E) charges. Total cost and
market value of total Policy Owners' investments in the Fund as of December
31, 1996 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
MONEY HIGH YIELD MANAGED GOVERNMENT
MARKET BOND BOND SECURITIES GROWTH
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Total cost of investments at
beginning of year $ 1,395 $ 3,398 $ 445 $ 358 $ 6,741
Add: Total proceeds from
sales of units net of
M&E charges 3 1,412 77 2 142
Reinvested distributions
from the Fund:
(a) Net investment income 28 391 27 16 26
(b) Net realized gain 38 9 8 521
------- -------- ------- ------- -------
Sub-Total 1,426 5,239 558 384 7,430
Less: Cost of investments
disposed during the
year 1,217 73 44 48 3,458
------- -------- ------- ------- -------
Total cost of investments at
end of year 209 5,166 514 336 3,972
Add: Unrealized
appreciation
(depreciation) 427 11 (11) 1,448
------- -------- ------- ------- -------
Total market value of
investments at end of year $ 209 $ 5,593 $ 525 $ 325 $ 5,420
======= ======== ======= ======= =======
<CAPTION>
GROWTH EQUITY MULTI- EQUITY INTER-
LT INCOME STRATEGY INDEX NATIONAL
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Total cost of investments at
beginning of year $ 803 $ 1, 915 $ 713 $ 189 $ 1,458
Add: Total proceeds from
sales of units net of
M&E charges 243 307 10 1,893 2,019
Reinvested distributions
from the Fund:
(a) Net investment income 10 34 26 32 71
(b) Net realized gain 125 44 7
------- -------- ------- ------- -------
Sub-Total 1,056 2,381 793 2,121 3,548
Less: Cost of investments
disposed during the
year 81 246 16 38 174
------- -------- ------- ------- -------
Total cost of investments at
end of year 975 2,135 777 2,083 3,374
Add: Unrealized appreciation 260 715 177 262 580
------- -------- ------- ------- -------
Total market value of
investments at end of year $ 1,235 $ 2,850 $ 954 $ 2,345 $ 3,954
======= ======== ======= ======= =======
</TABLE>
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
Pacific Mutual Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated statements of financial
position of Pacific Mutual Life Insurance Company and subsidiaries (the
"Company") as of December 31, 1996 and 1995, and the related
consolidated statements of operations and equity and cash flows for
each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Pacific Mutual Life
Insurance Company and subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company has adopted all applicable generally accepted accounting
principles relating to mutual life insurance companies for all periods
presented.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 1997
47
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1996 1995
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at fair value:
Fixed maturity securities $12,193.8 $11,359.2
Equity securities 260.8 218.5
Short-term investments 66.1 103.3
Mortgage loans 1,477.3 1,346.2
Real estate 280.0 288.6
Policy loans 3,131.8 2,793.3
Other investments 208.0 214.6
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS 17,617.8 16,323.7
Cash and cash equivalents 109.0 286.1
Deferred policy acquisition costs 531.5 391.1
Accrued investment income 202.5 198.8
Other assets 462.4 416.5
Separate account assets 8,142.1 5,686.9
- -------------------------------------------------------------------------------
TOTAL ASSETS $27,065.3 $23,303.1
- -------------------------------------------------------------------------------
LIABILITIES AND EQUITY
Liabilities:
Universal life, annuity and other investment contract de-
posits $13,877.4 $12,719.4
Future policy benefits 2,442.0 2,378.9
Policyholders' dividends payable 64.5 65.3
Borrowings 120.5 83.0
Surplus notes 149.6 149.6
Other liabilities 572.0 586.6
Separate account liabilities 8,142.1 5,686.9
- -------------------------------------------------------------------------------
Total Liabilities 25,368.1 21,669.7
- -------------------------------------------------------------------------------
Commitments and contingencies
Equity:
Retained earnings 1,318.0 1,151.4
Unrealized gain on available for sale securities, net 379.2 482.0
- -------------------------------------------------------------------------------
Total Equity 1,697.2 1,633.4
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $27,065.3 $23,303.1
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
48
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Insurance premiums $ 465.4 $ 458.5 $ 455.9
Policy fees from universal life, annuity and
other investment contract deposits 348.6 309.0 280.0
Net investment income 1,063.0 1,022.3 933.6
Net realized capital gains (losses) 68.3 77.6 (2.1)
Investment management fees 14.1 12.9 144.6
Other income 188.6 139.4 203.6
- -------------------------------------------------------------------------------
TOTAL REVENUES 2,148.0 2,019.7 2,015.6
- -------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 653.2 654.2 638.6
Policy benefits paid or provided 664.7 668.5 590.2
Commission expenses 199.8 167.8 139.9
Operating expenses 350.0 308.3 433.8
- -------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 1,867.7 1,798.8 1,802.5
- -------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 280.3 220.9 213.1
Provision for income taxes 113.7 86.1 111.7
- -------------------------------------------------------------------------------
NET INCOME 166.6 134.8 101.4
Equity, beginning of year 1,633.4 809.3 942.8
Change in unrealized gain (loss) on available for
sale securities, net (102.8) 689.3 (234.9)
- -------------------------------------------------------------------------------
EQUITY, END OF YEAR $1,697.2 $1,633.4 $ 809.3
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
49
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 166.6 $ 134.8 $ 101.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization (1.4) (30.4) (28.3)
Deferred income taxes (49.7) (30.3) 26.2
Net realized capital (gains) losses (68.3) (77.6) 2.1
Deferred policy acquisition costs (140.4) 48.8 (126.5)
Interest credited to universal life, annuity
and other investment contract deposits 653.2 654.2 638.6
Change in accrued investment income (3.7) (16.1) 28.5
Change in future policy benefits 63.1 89.3 48.7
Change in policyholders' dividends payable (0.8) (0.5) (0.2)
Change in other assets and liabilities 169.7 172.9 (51.2)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 788.3 945.1 639.3
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Purchases (4,525.0) (3,001.3) (4,376.9)
Sales 2,511.0 1,940.3 2,690.3
Maturities and repayments 1,184.7 926.9 1,220.4
Held to maturity securities:
Purchases (181.9) (415.0)
Sales 62.3
Maturities and repayments 111.0 202.2
Repayments of mortgage loans 220.4 267.7 399.1
Proceeds from sales of mortgage loans and real
estate 14.5 27.4 52.8
Purchases of mortgage loans and real estate (414.3) (244.7) (237.7)
Distributions from partnerships 78.8 49.0
Change in policy loans (338.5) (389.8) (349.7)
Change in short-term investments 37.2 (66.7) 129.0
Other investing activity, net (120.1) (121.1) 15.7
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,351.3) (620.9) (669.8)
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
50
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1996 1995 1994
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 2,105.0 $ 1,437.9 $ 1,355.0
Withdrawals (1,756.6) (1,774.2) (1,376.0)
Net change in borrowings 37.5 (43.8) 36.9
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING AC-
TIVITIES 385.9 (380.1) 15.9
- -------------------------------------------------------------------------------
Net change in cash and cash equivalents (177.1) (55.9) (14.6)
Cash and cash equivalents, beginning of year 286.1 342.0 356.6
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 109.0 $ 286.1 $ 342.0
- -------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMA-
TION
Federal income taxes paid $ 185.9 $ 96.9 $ 82.8
Interest paid $ 27.2 $ 23.3 $ 24.1
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
51
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Mutual Life Insurance Company ("Pacific Mutual Life") was
established in 1868 and is organized under the laws of the State of
California as a mutual life insurance company. Pacific Mutual Life
conducts business in every state except New York.
Pacific Mutual Life and its subsidiaries and affiliates have primary
business operations which consist of life insurance, annuities, pension
products, group employee benefits and investment management and advisory
services. These primary business operations provide a broad range of life
insurance, accumulation and investment products for individuals and
businesses and offer a range of investment products to institutions and
pension plans. Additionally, through its major subsidiaries and
affiliates, Pacific Mutual Life provides a variety of group employee
benefits, as well as investment management and advisory services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Pacific Mutual Life
Insurance Company and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Mutual Life and its wholly-owned
insurance subsidiaries, Pacific Corinthian Life Insurance Company ("PCL"-
Note 3), PM Group Life Insurance Company ("PM Group") and World-Wide
Holdings Limited, and its noninsurance subsidiaries, Pacific Financial
Asset Management Corporation ("PFAMCo"), Pacific Mutual Distributors,
Inc. ("PMD"), Pacific Mutual Realty Finance, Inc., Pacific Mezzanine
Associates, L.L.C. and MC Associates, LLC. All significant intercompany
transactions and balances have been eliminated. Pacific Mutual Life
prepares its regulatory financial statements based on accounting
practices prescribed or permitted by the Insurance Department of the
State of California. These consolidated financial statements differ from
those followed in reports to regulatory authorities (Note 2).
On December 21, 1995, Pacific Mutual Life completed a subsidiary
reorganization in which PFAMCo became a direct, wholly-owned subsidiary
of Pacific Mutual Life. Prior to the reorganization PFAMCo was a wholly-
owned, second-tier subsidiary of Pacific Mutual Life. The intermediate
company, Pacific Financial Holding Company ("PFHC"), and certain of its
assets and liabilities were merged into PFAMCo in connection with this
reorganization. The remaining assets were merged into Pacific Mutual Life
which consisted of investments in subsidiaries as follows: PFAMCo, PMD
and PM Group.
ACCOUNTING PRONOUNCEMENTS ADOPTED
Pacific Mutual Life has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts," and Interpretation No.
40, "Applicability of Generally Accepted Accounting Principles to Mutual
Life Insurance and Other Enterprises" (the "Interpretation") issued by
the Financial Accounting Standards Board. SFAS No. 120 and the
Interpretation require that mutual life insurance companies and their
insurance subsidiaries adopt all applicable authoritative GAAP
pronouncements in any general purpose financial statements that they may
issue. This differs from prior years when Pacific Mutual Life issued its
regulatory financial statements as general purpose financial statements.
The accompanying consolidated financial statements for 1996, 1995 and
1994 reflect the effects of implementing SFAS No. 120 and the
Interpretation.
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires that long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used
shall be assessed for recoverability if certain events or changes in
circumstances are present. An impairment loss shall be recognized if the
carrying amount of
52
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the asset exceeds the fair value of the asset. Adoption of this
accounting standard did not have a significant impact on the consolidated
financial position or consolidated results of operations of the Company.
On January 1, 1996, the Company also adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights." SFAS No. 122 requires that rights
acquired to service mortgage loans for others be recognized separately
from the mortgage loan asset. SFAS No. 122 also requires that capitalized
mortgage servicing rights be assessed for impairment based on the fair
value of those rights and any impairment should be recognized through a
valuation allowance. Adoption of this accounting standard did not have a
significant impact on the consolidated financial position or consolidated
results of operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This
statement provides consistent accounting standards for securitizations
and other transfers of financial assets, determines when financial assets
(liabilities) should be considered sold (settled) and removed from the
statement of financial position, and determines when related revenues and
expenses should be recognized. The Company currently plans to adopt SFAS
No. 125 beginning on January 1, 1997. The adoption is not expected to
have a significant impact on the consolidated financial position or
consolidated results of operations of the Company.
INVESTMENTS
Fixed maturity securities and equity securities are reported at fair
value, with unrealized gains and losses, net of deferred income tax and
adjustments to related deferred policy acquisition costs, included as a
separate component of equity on the accompanying consolidated statements
of financial position. Trading securities, which are included in short-
term investments, are reported at fair value with unrealized gains and
losses included in net realized capital gains (losses) on the
accompanying consolidated statements of operations.
For mortgage-backed securities included in fixed maturity securities the
Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since
the acquisition of the securities. This adjustment is reflected in net
investment income.
In the first and second quarter of 1995, Pacific Mutual Life sold two
securities from the held to maturity category. The amortized cost of the
securities was $62.3 million and a net after tax loss of $0.7 million was
realized on the sales. The securities were sold due to the significant
deterioration of the issuer's creditworthiness.
Beginning with the third quarter of 1995, Pacific Mutual Life transferred
approximately $1.5 billion of securities from the held to maturity
category to the available for sale category. This amount represented the
amortized cost of the securities at the date of transfer. The fair value
of those securities was approximately $1.6 billion, resulting in a net
after tax unrealized gain of $52.5 million, which was reflected as a
direct increase to equity. The change in classification was a result of a
change in management's intent with respect to these securities. In order
to have the flexibility to respond to changes in interest rates and to
take advantage of changes in the availability of and the yield on
alternative investments, management has determined that the
reclassification of these securities as available for sale was
appropriate.
53
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in revenues.
Short-term investments are carried at fair value and include all trading
securities.
Derivative financial instruments are carried at fair value. Unrealized
gains and losses of derivatives used to hedge securities classified as
available for sale are reflected in a separate component of equity,
similar to the accounting of the underlying hedged assets. Realized gains
and losses on derivatives used for hedging are deferred and amortized
over the average life of the related hedged assets or insurance
liabilities. Unrealized gains and losses of other derivatives are
reflected in operations.
Mortgage loans and policy loans are stated at unpaid principal balances.
Real estate is carried at depreciated cost, or for real estate acquired
in satisfaction of debt, estimated fair value less estimated selling
costs at the date of acquisition if lower than the related unpaid
balance.
On November 15, 1994, PFAMCo and five of its subsidiaries (Pacific
Investment Management Company and subsidiaries, Parametric Portfolio
Associates, Inc., Cadence Capital Management Corporation, NFJ Investment
Group, Inc. and Blairlogie Capital Management Limited) entered into an
agreement and plan of consolidation with Thomson Advisory Group L.P., a
Delaware limited partnership with publicly traded units, to merge into a
newly capitalized partnership named PIMCO Advisors L.P. ("PIMCO
Advisors"). Collectively, PFAMCo and various of its subsidiaries
beneficially own approximately 42% of the outstanding General and Limited
Partner units of PIMCO Advisors as of December 31, 1996 and 1995. This
investment, which is included in other investments on the accompanying
consolidated statements of financial position, is accounted for on the
equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid debt instruments with an
original maturity of three months or less.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business, principally commissions,
medical examinations, underwriting, policy issue and other expenses, all
of which vary with and are primarily related to the production of new
business, have been deferred. For universal life, annuity and other
investment contract products, such costs are generally amortized in
proportion to the present value of expected gross profits using the
assumed crediting rate. Adjustments are reflected in earnings or equity
in the period the Company experiences deviations in gross profit
assumptions. Adjustments directly affecting equity result from experience
deviations due to changes in unrealized gains and losses in investments
classified as available for sale. For life insurance products, such costs
are being amortized over the premium-paying period of the related
policies in proportion to premium revenues recognized, using assumptions
consistent with those used in computing policy reserves. For the years
ended December 31, 1996, 1995 and 1994, net amortization of deferred
policy acquisition costs included in operating expenses amounted to $70.0
million, $63.3 million and $44.2 million, respectively, on the
accompanying consolidated statements of operations and equity.
PRESENT VALUE OF FUTURE PROFITS
Included in other assets is $16.1 million and $38.4 million which
represents the present value of estimated future profits of acquired
business in connection with the rehabilitation of First Capital Life
Insurance Company ("FCL" -Note 3) as of December 31, 1996 and 1995,
respectively. The aforementioned future profits are discounted to
54
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provide an appropriate rate of return and are being amortized over the
rehabilitation plan period. Amortization for the years ended December 31,
1996, 1995 and 1994 amounted to $24.2 million, $17.1 million and $4.7
million, respectively. During 1996, the Company changed certain
assumptions regarding the estimated life which resulted in an increase in
amortization in 1996 of approximately $17.0 million.
UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Universal life, annuity and other investment contract deposits are valued
using the retrospective deposit method and consist principally of
deposits received plus interest credited less accumulated assessments.
Interest credited to these policies ranged from 4% to 8.4% during 1996,
1995 and 1994.
The following detail of universal life, annuity and other investment
contract deposits is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------------
(In Millions)
<S> <C> <C>
Universal life $ 7,562.5 $ 6,930.7
Annuity 2,459.3 2,426.6
Other investment contract deposits 3,855.6 3,362.1
-------------------
$13,877.4 $12,719.4
-------------------
</TABLE>
The following detail of universal life, annuity and other investment
contract deposits policy fees and interest credited is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees
Universal life $318.4 $292.6 $267.1
Annuity 26.6 12.8 9.4
Other investment contract deposits 3.6 3.6 3.5
--------------------
Total policy fees $348.6 $309.0 $280.0
--------------------
Interest credited
Universal life $279.3 $258.6 $226.9
Annuity 131.9 125.2 120.7
Other investment contract deposits 242.0 270.4 291.0
--------------------
Total interest credited $653.2 $654.2 $638.6
--------------------
</TABLE>
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions range from 4.5% to 9.3% for 1996, 1995 and
1994. Mortality, morbidity and withdrawal assumptions are generally based
on the Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for participating business are provided for
in the liability for future policy benefits. Included in policy benefits
paid or provided on the accompanying consolidated statements of
operations and equity are dividends to policyholders.
55
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Dividends are provided based on dividend formulas approved by the Board
of Directors and reviewed for reasonableness and equitable treatment of
policyholders by an independent consulting actuary. As of December 31,
1996 and 1995, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
STATE GUARANTY FUND ASSESSMENTS
Insurance companies are subject to assessments by life and health
guaranty associations in most states in which they are licensed to do
business. These assessments are based on the volume and type of business
they sell in those states and may be partially recovered in some states
through a future reduction in premium taxes. Based on current information
available from the National Organization of Life and Health Guaranty
Association, the Company, as of December 31, 1996, has accrued in other
liabilities on the accompanying consolidated statements of financial
position an amount adequate for anticipated payments of known
insolvencies, net of estimated recoveries of premium tax offsets.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized
when incurred.
Generally, receipts for universal life, annuities and other investment
contracts are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Investment management fees are recorded as revenues during the period
such services are performed.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 15 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over varying periods ranging from 3 to 40 years. Depreciation of
investment real estate is included in net investment income on the
accompanying consolidated statements of operations and equity.
Depreciation and amortization of other assets is included in operating
expenses on the accompanying consolidated statements of operations and
equity.
FEDERAL INCOME TAXES
Pacific Mutual Life is taxed as a life insurance company for Federal
income tax purposes and files a consolidated Federal income tax return
with all its includable domestic subsidiaries. The amount of Federal
income tax expense includes an equity tax calculated by a prescribed
formula that incorporates a differential earnings rate between stock and
mutual life insurance companies. Deferred income taxes are provided for
timing differences in the recognition of revenues and expenses for
financial reporting and income tax purposes.
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in
accounts with individual investment objectives. The investment results of
separate account assets generally pass through to separate account
policyholders and contract owners.
56
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 5
and 6 have been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented may not be indicative of the amounts
the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
significant effect on the estimated fair value amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. STATUTORY RESULTS
The following are reconciliations of statutory surplus and statutory net
income for Pacific Mutual Life as calculated in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, to the amounts reported as equity and net
income included in the accompanying consolidated financial statements:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Millions)
<S> <C> <C>
Statutory surplus $ 815.2 $ 723.2
Deferred policy acquisition costs 542.0 411.9
Unrealized gain on available for sale securi-
ties, net 379.2 482.0
Asset valuation reserve 209.4 191.4
Deferred income tax 174.6 129.2
Subsidiary equity 60.7 66.0
Non-admitted assets 22.8 22.5
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (340.4) (249.1)
Other (16.7) 5.9
------------------
Equity as reported herein $1,697.2 $1,633.4
------------------
</TABLE>
57
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-----------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $113.1 $ 85.1 $ 81.0
Deferred policy acquisition costs 111.2 76.4 59.4
Deferred income tax 70.9 31.5 (27.7)
Interest maintenance reserve 3.8 12.2 (7.7)
Net realized gain (loss) on trading
securities (11.6) 13.2 (2.0)
Earnings of subsidiaries (33.0) 5.9 20.7
Insurance and annuity reserves (91.3) (95.5) (28.2)
Other 3.5 6.0 5.9
----------------------
Net income as reported herein $166.6 $134.8 $101.4
----------------------
</TABLE>
RISK-BASED CAPITAL
Each insurance company's state of domicile imposes minimum risk-based
capital requirements that were developed by the National Association of
Insurance Commissioners ("NAIC"). The formulas for determining the amount
of risk-based capital specify various weighting factors that are applied
to financial balances or various levels of activity based on the
perceived degree of risk. Regulatory compliance is determined by a ratio
of a company's regulatory total adjusted capital, as defined by the NAIC,
to its authorized control level risk-based capital, as defined by the
NAIC. Companies below specific trigger points or ratios are classified
within certain levels, each of which requires specified corrective
action. As of December 31, 1996 and 1995, the Company's ratios exceeded
the minimum risk-based capital requirements.
DIVIDENDS
Dividends to Pacific Mutual Life from its insurance subsidiaries are
subject to regulatory restrictions and approvals. The maximum amount of
dividends that can be paid by PM Group cannot exceed the lesser of 10% of
surplus as regards to policyholders, or the net statutory gain from
operations, without prior approval from the Insurance Commissioner of the
State of Arizona. During 1996, 1995 and 1994, PM Group received approval
to pay extraordinary dividends in excess of these limitations. PM Group
paid dividends of $25 million, $25 million and $20 million for the years
ended December 31, 1996, 1995 and 1994 of which $18 million, $17.2
million and $12.4 million, respectively, were considered extraordinary.
In accordance with the terms of the rehabilitation agreement (Note 3),
PCL is precluded from paying any dividends during the rehabilitation
period without the prior consent of the Insurance Department of the State
of California. No such dividends have been paid.
3. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
Pursuant to a five-year rehabilitation agreement approved by a California
Superior Court and the Insurance Department of the State of California in
July 1992, Pacific Mutual Life, through its wholly-owned subsidiary, PCL,
will facilitate the rehabilitation of FCL. In accordance with the five-
year rehabilitation agreement, insurance policies of FCL were
restructured and substantially all the assets and certain liabilities of
FCL were assumed by PCL on December 31, 1992, pursuant to an assumption
reinsurance agreement and asset purchase agreement and have been
accounted for as a purchase transaction.
58
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY (CONTINUED)
The rehabilitation agreement provides for the holders of restructured
policies to share in a substantial percentage of the unallocated
statutory surplus of PCL at the end of the rehabilitation period.
Policyholders have the option to surrender their restructured policies
with reduced benefits during this five-year period. During the
rehabilitation plan period, PCL is prohibited from issuing new insurance
policies. PCL will merge into Pacific Mutual Life, with Pacific Mutual
Life as the surviving entity, within thirty days following September 30,
1997, the end of the rehabilitation period.
In the event PCL is unable to pay contract benefits, Pacific Mutual Life
is obligated to contribute funds to pay those benefits in accordance with
the rehabilitation agreement.
4. ACQUISITION OF INSURANCE BLOCK OF BUSINESS
In 1996, Pacific Mutual Life signed a definitive agreement to acquire a
block of corporate-owned life insurance ("COLI") policies from
Confederation Life Insurance Company (U.S.) in Rehabilitation, which is
currently under rehabilitation. This block consists of approximately
40,000 policies, having a face amount of $9 billion and reserves of $1.7
billion. This block is primarily non-leveraged COLI. The transaction is
expected to close during the first half of 1997.
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities are shown below. The
estimated fair value of publicly traded securities is based on quoted
market prices. For securities not actively traded, estimated fair values
were provided by independent pricing services specializing in "matrix
pricing" and modeling techniques. The Company also estimates certain fair
values based on interest rates, credit quality and average maturity or
from securities with comparable trading characteristics.
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Amortized ---------------- Fair
Cost Gains Losses Value
-------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Available for Sale Securities
As of December 31, 1996:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 297.9 $ 11.2 $ 0.3 $ 308.8
Obligations of states, political
subdivisions and foreign
governments 638.1 46.2 1.0 683.3
Corporate securities 6,848.3 506.3 91.9 7,262.7
Mortgage-backed and asset-backed
securities 3,753.6 98.0 19.4 3,832.2
Redeemable preferred stock 102.5 6.4 2.1 106.8
-------------------------------------
Total Fixed Maturity Securities $11,640.4 $668.1 $114.7 $12,193.8
-------------------------------------
Equity Securities $ 229.6 $ 40.8 $ 9.6 $ 260.8
-------------------------------------
</TABLE>
59
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Amortized ----------------- Fair
Cost Gains Losses Value
-------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Available for Sale Securities
As of December 31, 1995:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 378.4 $ 33.4 $ 411.8
Obligations of states, political
subdivisions and foreign
governments 625.1 70.7 $ 3.3 692.5
Corporate securities 6,179.1 537.1 45.0 6,671.2
Mortgage-backed and asset-backed
securities 3,366.9 138.6 12.0 3,493.5
Redeemable preferred stock 89.4 3.1 2.3 90.2
-------------------------------------
Total Fixed Maturity Securities $10,638.9 $782.9 $62.6 $11,359.2
-------------------------------------
Equity Securities $ 192.3 $ 32.2 $ 6.0 $ 218.5
-------------------------------------
</TABLE>
The amortized cost and estimated fair values of fixed maturity securities
as of December 31, 1996, by contractual repayment date of principal, are
shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------------------
(In Millions)
<S> <C> <C>
Available for Sale:
Due in one year or less $ 1,482.3 $ 1,489.0
Due after one year through five years 2,830.0 3,042.3
Due after five years through ten years 1,907.4 1,991.7
Due after ten years 1,667.1 1,838.6
----------------------
7,886.8 8,361.6
Mortgage-backed and asset-backed securities 3,753.6 3,832.2
----------------------
Total $11,640.4 $12,193.8
----------------------
</TABLE>
Proceeds from sales of all available for sale securities during 1996,
1995 and 1994 were $2.5 billion, $1.9 billion and $2.7 billion,
respectively. Gross gains of $89.3 million, $58.0 million and $56.0
million and gross losses of $29.9 million, $32.3 million and $70.8
million were realized on those sales during 1996, 1995 and 1994,
respectively.
60
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 831.6 $ 808.1 $ 741.3
Equity securities 17.8 7.3 8.9
Mortgage loans 107.9 112.9 136.3
Real estate 51.3 43.2 37.2
Policy loans 113.0 105.2 89.0
Other 48.9 47.1 3.3
--------------------------
Gross investment income 1,170.5 1,123.8 1,016.0
Investment expense 107.5 101.5 82.4
--------------------------
Net investment income $1,063.0 $1,022.3 $ 933.6
--------------------------
</TABLE>
The change in gross unrealized gain (loss) on investments in available
for sale and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
--------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale and trading
securities:
Fixed maturity $(169.1) $1,039.3 $(320.6)
Equity 6.5 17.2 (29.7)
--------------------------
Total $(162.6) $1,056.5 $(350.3)
--------------------------
</TABLE>
As of December 31, 1996 and 1995, investments in fixed maturity
securities with a carrying value of $19.6 million and $20.5 million,
respectively, were on deposit with state insurance departments to satisfy
regulatory requirements.
No investment, aggregated by issuer, exceeded 10% of total equity as of
December 31, 1996.
The Company has no non-income producing fixed maturity securities,
mortgage loans, real estate or other long-term investments as of December
31, 1996.
61
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities (Note 5) $12,454.6 $12,454.6 $11,577.7 $11,577.7
Mortgage loans 1,477.3 1,533.9 1,346.2 1,535.1
Policy loans 3,131.8 3,131.8 2,793.3 2,793.3
Cash and cash equivalents 109.0 109.0 286.1 286.1
Derivative financial in-
struments:
Interest rate floors and
caps, options and
swaptions 59.3 59.3 39.4 39.4
Interest rate swap con-
tracts 1.0 1.0 2.4 2.4
Credit and total return
swaps 1.1 1.1 1.0 1.0
Liabilities:
Guaranteed interest con-
tracts 2,948.3 3,056.1 2,375.9 2,459.3
Deposit liabilities 799.6 800.6 876.3 899.4
Annuity liabilities 2,459.4 2,459.4 2,427.2 2,427.2
Surplus notes 149.6 157.5 149.6 157.7
Derivative financial in-
struments:
Options written 1.5 1.5 1.5 1.5
Asset swap contracts 12.5 12.5 3.5 3.5
Foreign currency deriva-
tives 4.3 4.3 5.0 5.0
</TABLE>
The following methods and assumptions were used to estimate the fair
value of these financial instruments as of December 31, 1996 and 1995:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flow, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The carrying amounts of policy loans are a reasonable estimate of their
fair values.
CASH AND CASH EQUIVALENTS
The carrying amounts of these items are a reasonable estimate of their
fair values.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose value or cash flows are
"derived" from another source, such as an underlying security. They can
facilitate total return and, when used for hedging, they achieve the
lowest cost and most efficient execution of positions. Derivatives can
also be used to leverage by using very large notional amounts or by
creating formulas that multiply changes in the underlying security. The
Company's approach is to avoid highly leveraged or overly complex
investments. The Company utilizes certain derivative financial
instruments to diversify its business risk and to minimize its exposure
to fluctuations in market prices, interest rates or basis risk as well as
for facilitating total return. Risk is limited through modeling
derivative performance in product portfolios for hedging and setting loss
limits in total return portfolios.
62
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
Derivatives used by the Company involve elements of credit risk and
market risk in excess of amounts recognized in the accompanying
consolidated financial statements. The notional amounts of these
instruments reflect the extent of involvement in the various types of
financial instruments. The estimated fair values of these instruments are
based on quoted market prices, dealer quotations or internal price
estimates believed to be comparable to dealer quotations. These amounts
estimate what the Company would have to pay or receive if the contracts
were terminated. The Company determines, on an individual counterparty
basis, the need for collateral or other security to support financial
instruments with off-balance sheet counterparty risk.
A reconciliation of the notional or contract amounts and discussion of
the various derivative instruments is as follows:
<TABLE>
<CAPTION>
Balance Balance
Beginning Terminations End
of Year Acquisitions and Maturities of Year
---------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1996:
Interest rate floors and
caps, options and
swaptions $2,159.6 $3,075.0 $ 371.4 $4,863.2
Interest rate swap con-
tracts 619.6 620.9 252.2 988.3
Asset swap contracts 20.0 15.3 5.3 30.0
Credit and total return
swaps 146.1 307.2 96.8 356.5
Financial futures con-
tracts 310.1 3,358.9 3,059.8 609.2
Foreign currency deriva-
tives 15.4 43.1 17.1 41.4
December 31, 1995:
Interest rate floors and
caps, options and
swaptions 1,950.9 1,126.6 917.9 2,159.6
Interest rate swap con-
tracts 370.5 339.0 89.9 619.6
Asset swap contracts 30.0 10.0 20.0
Credit and total return
swaps 116.3 99.8 70.0 146.1
Financial futures con-
tracts 137.6 1,877.0 1,704.5 310.1
Foreign currency deriva-
tives 35.2 19.8 15.4
</TABLE>
Interest Rate Floors and Caps, Options and Swaptions
----------------------------------------------------
The Company uses interest rate floors and caps, options and swaptions to
hedge against fluctuations in interest rates and in its total return
portfolios. Interest rate floor agreements entitle the Company to receive
the differential, if below, between the specified rate and the current
value of the underlying index. Interest rate cap agreements entitle the
Company to receive the differential, if above, between the specified rate
and the current value of the underlying index. Options purchased involve
the right, but not the obligation, to purchase the underlying securities
at a specified price during a given time period. Swaptions are options to
enter into a swap transaction at a specified price. The Company uses
written covered call options on a limited basis. Gains and losses on
covered calls are offset by gains and losses on the underlying position.
Options and floors are reported as assets and options written are
reported as liabilities in the consolidated statements of financial
position. Cash requirements for these instruments are generally limited
to the premium paid by the Company at acquisition. The purchase premium
of these instruments is amortized on a constant effective yield basis and
included as a component of net investment income over the term of the
agreement. Interest rate floors and caps, options and swaptions mature
during fiscal years 1997 through 2007.
63
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
Interest Rate Swap Contracts
----------------------------
The Company uses interest rate swaps to manage interest rate risk. The
interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments or the exchange of floating to floating
interest payments tied to different indexes. Generally, no premium is
paid to enter into the contract and no principal payments are made by
either party. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. The interest rate swap contracts mature during fiscal
years 1997 through 2026.
Asset Swap Contracts
--------------------
The Company uses asset swap contracts to manage interest rate and equity
risk to better match portfolio duration to liabilities. Asset swap
contracts involve the exchange of upside equity potential for preferred
cash flow streams. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. The asset swap contracts mature during fiscal years
1998 through 2000.
Credit and Total Return Swaps
-----------------------------
The Company uses credit and total return swaps to take advantage of
market opportunities. Credit swaps involve the receipt of floating or
fixed rate payments in exchange for assuming potential credit losses of
an underlying security. Total return swaps involve the exchange of
floating rate payments for the total return performance of a specified
index or market. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. Credit and total return swaps mature during fiscal
years 1997 through 2013.
Financial Futures Contracts
---------------------------
The Company uses exchange-traded financial futures contracts to hedge
cash flow timing differences between assets and liabilities and overall
portfolio duration. Assets and liabilities are rarely acquired or sold at
the same time, which creates a need to hedge their change in value during
the unmatched period. In addition, foreign currency futures may be used
to hedge foreign currency risk on non U.S. dollar denominated securities.
Financial futures contracts obligate the holder to buy or sell the
underlying financial instrument at a specified future date for a set
price and may be settled in cash or delivery of the financial instrument.
Price changes on futures are settled daily through the daily margin cash
flows. The notional amounts of the contracts do not represent future cash
requirements, as the Company intends to close out open positions prior to
expiration.
Foreign Currency Derivatives
----------------------------
The Company enters into foreign exchange forward contracts and swaps to
hedge against fluctuations in foreign currency exposure. Foreign currency
derivatives involve the exchange of foreign currency denominated payments
for U.S. dollar denominated payments. Gains and losses on foreign
exchange forward contracts offset currency gains and losses on the
related assets. The amounts to be received or paid under the foreign
currency swaps are accrued and recognized in the consolidated statements
of operations through an adjustment to net investment income over the
life of the agreements. Foreign currency derivatives expire during fiscal
years 1997 through 2006.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
-----------------------------------------------------
The estimated fair values of fixed maturity guaranteed interest contracts
are estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of deposit liabilities
with no defined maturities is the amount payable on demand.
64
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
ANNUITY LIABILITIES
The fair value of annuity liabilities approximates carrying value and
primarily includes policyholder deposits and accumulated credited
interest.
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Mutual Life has issued PRO GIC and Diversifier GIC contracts to
plan sponsors totaling $1.1 billion as of December 31, 1996, pursuant to
the terms of which the plan sponsor retains direct ownership and control
of the assets related to these contracts. Pacific Mutual Life agrees to
provide benefit responsiveness in the event that plan benefit requests
exceed plan cash flows. In return for this guarantee, Pacific Mutual Life
receives a fee which varies by contract. Pacific Mutual Life sets the
investment guidelines to provide for appropriate credit quality and cash
flow matching.
7. CONCENTRATION OF CREDIT RISK
The Company manages its investments to limit credit risk by diversifying
its portfolio among various security types and industry sectors. The
credit risk of financial instruments is controlled through credit
approvals, limits and monitoring procedures. Real estate and mortgage
loan investments are diversified by geographic location and property
type. Management believes that significant concentrations of credit risk
do not exist.
The Company is exposed to credit loss in the event of nonperformance by
the counterparties to interest rate swap contracts and other derivative
securities. However, the Company does not anticipate nonperformance by
the counterparties.
8. BORROWINGS
Pacific Mutual Life borrows for short-term needs by issuing commercial
paper. There were no commercial paper borrowings outstanding as of
December 31, 1996 and 1995. Pacific Mutual Life has a revolving credit
facility available of $250 million as of December 31, 1996 and 1995.
There were no borrowings under the revolving credit facility outstanding
as of December 31, 1996 and 1995.
PFHC had the ability to borrow up to $50 million from certain banks at
variable rates of interest. On December 21, 1995, outstanding loans
totaling $37 million were transferred to PFAMCo (Note 1). The borrowing
limit as of December 31, 1996 and 1995 was $150 million and $100 million,
respectively. The interest rate averaged 5.6%, 6.1% and 4.6% for the
years ended December 31, 1996, 1995 and 1994, respectively. The balance
outstanding as of December 31, 1996 and 1995 totaled $95.5 million and
$53 million, respectively. Outstanding borrowings are due and payable in
1997 and are subject to renewal.
During 1992, PFHC entered into a credit agreement with a group of banks
for borrowings of $45 million. Proceeds of this note were paid to PCL in
connection with the issuance of a certificate of contribution by PCL
(Note 3). On December 31, 1996 and 1995, the applicable interest rate was
6.2% and 6.5%, respectively. The outstanding balance of $25 million as of
December 31, 1996 was prepaid per the terms of the agreement on January
27, 1997.
65
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SURPLUS NOTES
Pacific Mutual Life has $150 million of Surplus Notes outstanding at an
interest rate of 7.9% maturing on December 30, 2023. Interest is payable
semiannually on June 30 and December 30. The Surplus Notes may not be
redeemed at the option of Pacific Mutual Life or any holder of the Notes.
The Surplus Notes are unsecured and subordinated to all present and
future senior indebtedness and policy claims of Pacific Mutual Life. Each
payment of interest on and the payment of principal of the Surplus Notes
may be made only with the prior approval of the Insurance Commissioner of
the State of California. Interest expense amounted to $11.8 million for
the years ended December 31, 1996, 1995 and 1994 and is included in net
investment income in the accompanying consolidated statements of
operations and equity.
10. INCOME TAXES
As required by SFAS No. 109, "Accounting for Income Taxes," the Company
accounts for income taxes using the liability method. Under SFAS No. 109,
the deferred tax consequences of changes in tax rates or laws must be
computed on the amounts of temporary differences and carryforwards
existing at the date a new law is enacted. Recording the effects of the
change involves adjusting deferred tax liabilities and assets with a
corresponding charge or credit recognized in the provision for income
taxes. The objective is to measure a deferred tax liability or asset
using the enacted tax rates and laws expected to apply to taxable income
in the periods in which the deferred tax liability or asset is expected
to be settled or realized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------------------
(In Millions)
<S> <C> <C> <C>
Current $163.5 $116.4 $ 85.5
Deferred (49.8) (30.3) 26.2
----------------------
$113.7 $ 86.1 $111.7
</TABLE>
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------------------
(In Millions)
<S> <C> <C> <C>
Deferred policy acquisition costs $ 2.1 $ (6.0) $ (5.0)
Interest in advance 2.0 2.9 25.4
Investment valuation (7.3) 8.1 11.4
Reserves (28.5) (28.7) 7.1
Other (18.1) (6.6) (12.7)
----------------------
$(49.8) $(30.3) $ 26.2
----------------------
</TABLE>
66
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes based on the
prevailing corporate tax rate to the provision reflected in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $ 98.1 $ 77.3 $ 74.6
Equity tax-current year 16.3 36.1
Amortization of intangibles on equity
method investments 6.5 6.5
Non-taxable investment income (2.1) (2.1) (4.7)
Equity tax-recomputation of prior years (17.3)
Other 12.2 4.4 5.7
---------------------------
$113.7 $ 86.1 $111.7
---------------------------
</TABLE>
The net deferred tax asset (liability) included in other assets on the
accompanying consolidated statement of financial position was comprised
of the tax effects of the following temporary differences:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------------
(In Millions)
<S> <C> <C>
Reserves $ 244.9 $ 216.4
Deferred compensation 27.6 25.4
Investment valuation 24.0 16.7
Postretirement benefits 9.8 9.4
Dividends 9.6 10.4
Interest in advance 1.7 3.6
Depreciation (9.8) (10.0)
Deferred policy acquisition costs (43.9) (41.8)
Other 22.1 6.1
----------------
Deferred taxes from operations 286.0 236.2
Unrealized gain on available for sale securities (204.5) (259.6)
----------------
Net deferred tax asset (liability) $ 81.5 $ (23.4)
----------------
</TABLE>
11. REINSURANCE
The Company accounts for reinsurance transactions utilizing SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration And Long-
Duration Contracts." SFAS No. 113 establishes the conditions required for
a contract with a reinsurer to be accounted for as reinsurance and
prescribes accounting and reporting standards for those contracts.
Amounts receivable from reinsurers for reinsurance on future policy
benefits, universal life deposits, and unpaid losses is reported as an
asset and included in other assets on the accompanying consolidated
statements of financial position.
67
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. REINSURANCE (CONTINUED)
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger risks
or, in the case of the producer-owned reinsurance company, to diversify
risk and retain top producing agents. All assets associated with
reinsured business remain with, and under the control of the Company.
Approximate amounts recoverable (payable) from (to) reinsurers include
the following amounts:
<TABLE>
<CAPTION>
December 31,
1996 1995
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(35.9) $(42.7)
Future policy benefits 90.0 87.7
Unpaid claims 4.6 7.8
Paid claims 8.4 7.9
</TABLE>
As of December 31, 1996, 85% of the reinsurance recoverables were from
one reinsurer, of which 100% is secured by payables to the reinsurer. To
the extent that the assuming companies become unable to meet their
obligations under these agreements, the Company remains contingently
liable. The Company does not anticipate nonperformance by the assuming
companies.
Revenues and benefits are shown net of the following reinsurance
transactions:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance
premiums $ 44.3 $ 29.2 $ 26.0
Assumed reinsurance included in insurance
premiums 17.8 15.6 20.2
Ceded reinsurance netted against policy fees 71.0 66.5 66.7
Ceded reinsurance netted against net
investment income 192.5 176.6 151.0
Ceded reinsurance netted against interest
credited 155.2 140.0 119.9
Ceded reinsurance netted against policy
benefits 56.7 51.4 45.4
Assumed reinsurance included in policy
benefits 9.9 14.5 16.8
</TABLE>
68
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT INFORMATION
The operations of the Company have been classified into four business
segments as follows: Individual Life Insurance and Annuities, Pensions,
Group Employee Benefits and Corporate and Other. These segments are based
on the organization of the Company and are generally distinguished by the
products offered. The Corporate and Other segment generally includes the
assets and operations that do not support the other segments such as
certain non-life insurance related subsidiary operations. Depreciation
expense and capital expenditures are not material and have not been
reported. Revenues, income before income taxes and assets by segment are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Individual Life Insurance and Annuities $ 962.1 $ 927.0 $ 795.9
Pensions 507.3 513.9 464.0
Group Employee Benefits 454.2 419.3 423.7
Corporate and Other 224.4 159.5 332.0
-----------------------------
$ 2,148.0 $ 2,019.7 $ 2,015.6
-----------------------------
Income before income taxes:
Individual Life Insurance and Annuities $ 92.0 $ 102.3 $ 94.8
Pensions 80.7 53.3 34.3
Group Employee Benefits 24.7 25.2 36.5
Corporate and Other 82.9 40.1 47.5
-----------------------------
$ 280.3 $ 220.9 $ 213.1
-----------------------------
<CAPTION>
December 31,
1996 1995 1994
-----------------------------
(In Millions)
<S> <C> <C> <C>
Assets:
Individual Life Insurance and Annuities $15,484.4 $12,953.2 $10,912.3
Pensions 8,097.2 7,592.5 6,497.9
Group Employee Benefits 344.4 329.8 341.3
Corporate and Other 3,139.3 2,427.6 1,954.3
-----------------------------
$27,065.3 $23,303.1 $19,705.8
-----------------------------
</TABLE>
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLAN
Pacific Mutual Life provides a qualified noncontributory defined benefit
pension plan which covers all eligible employees who have one year of
continuous employment and have attained age 21. The full-benefit vesting
period for all participants is five years.
Benefits for employees are based on years of service and the highest five
consecutive years of compensation during the last ten years of
employment. Pacific Mutual Life's funding policy is to contribute amounts
to the plan sufficient to meet the minimum funding requirements set forth
in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as may be determined appropriate. Contributions are
intended to provide not only for benefits attributed to employment to
date but also for those expected to be earned in the future. All
69
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
such contributions are made to a tax-exempt trust. Plan assets consist
primarily of group annuity contracts issued by Pacific Mutual Life, as
well as participating units of a real estate trust and mutual funds
managed by an indirect subsidiary of Pacific Mutual Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December
31,
1996 1995 1994
------------------------
(In Millions)
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 3.7 $ 2.8 $ 3.2
Interest cost on projected benefit obligation 9.4 8.8 8.5
Actual return on plan assets (19.7) (24.1) 0.6
Amortization of net obligations and prior
service cost 8.0 14.0 (11.4)
------------------------
Net periodic pension cost $ 1.4 $ 1.5 $ 0.9
------------------------
</TABLE>
The following table sets forth the Plan's funded status and
amounts recognized on Pacific Mutual Life's consolidated
statements of financial position:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------------
(In Millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 114.4 $ 115.8
Nonvested benefits 1.2 0.8
----------------
Accumulated benefit obligation 115.6 116.6
Effect of projected future compensation increases 18.5 19.5
----------------
Projected benefit obligation 134.1 136.1
Plan assets at fair value (141.2) (125.6)
----------------
Plan assets (in excess) less than projected benefit
obligation (7.1) 10.5
Unrecognized net gain (loss) 2.5 (15.5)
Unrecognized transition asset 6.0 7.2
Unrecognized prior service cost 2.2 2.5
----------------
Accrued pension cost $ 3.6 $ 4.7
----------------
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1996 and 1995, the weighted average
discount rate used was 7.5% and 7%, respectively, and the rate of
increase in future compensation levels was 6% for both years. The
expected long-term rate of return on plan assets was 8.5% in 1996 and
1995.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE PLANS
Pacific Mutual Life sponsors a defined benefit health care plan and a
defined benefit life insurance plan ("the Plans") that provide
postretirement benefits for all eligible retirees and their dependents.
Generally, qualified employees may become eligible for these benefits if
they reach normal retirement age, have been covered under Pacific Mutual
Life's policy as an active employee for a minimum continuous period prior
to the date retired, and have an employment date before January 1, 1990.
The Plans contain cost-sharing features such as deductibles and
coinsurance, and require retirees to make contributions which can be
adjusted annually. Pacific Mutual Life's
70
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
commitment to qualified employees who retire after April 1, 1994 is
limited to specific dollar amounts. Pacific Mutual Life reserves the
right to modify or terminate the Plans at any time. As in the past, the
general policy is to fund these benefits on a pay-as-you-go basis. The
amount of benefits paid under the programs during 1996, 1995 and 1994 was
approximately $1.6 million, $1.7 million and $1.7 million, respectively.
Components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995 1994
----------------------
(In Millions)
<S> <C> <C> <C>
Service cost $ 0.2 $ 0.2 $ 0.2
Interest cost 1.5 1.9 1.8
Amortization (0.3) (0.3) (0.3)
----------------------
Net periodic postretirement benefit cost $ 1.4 $ 1.8 $ 1.7
----------------------
</TABLE>
The following table sets forth the Plan's funded status and amounts
recorded in other liabilities on the accompanying consolidated statements
of financial position:
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------
(In Millions)
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $17.3 $20.9
Fully eligible active plan participants 2.0 1.7
Other active plan participants 2.5 2.3
----------
Total accumulated postretirement obligation 21.8 24.9
Fair value of plan assets -- --
----------
Unfunded accumulated postretirement obligation 21.8 24.9
Unrecognized net gain 3.7 0.4
Prior service cost 1.3 1.6
----------
Accrued postretirement benefit liability $26.8 $26.9
----------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 9% for 1996 and 10% for 1995 and is assumed to
decrease gradually to 4% in 2003 and remain at that level thereafter. The
amount reported is materially effected by the health care cost trend rate
assumptions. If the health care cost trend rate assumptions were
increased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1996 and 1995 would be increased by 11.5% and 10.9%,
respectively. The effect of this change would increase the aggregate of
the service and interest cost components of the net periodic benefit cost
by 12.3%, 11.4% and 13.6% for 1996, 1995 and 1994, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7.5% and 7% for 1996 and 1995, respectively.
OTHER PLANS
Pacific Mutual Life has a voluntary Retirement Incentive Savings Plan
pursuant to Section 401(k) of the Internal Revenue Code covering all
eligible employees of the Company. Pacific Mutual Life matches 50% of
each employees' contributions, up to a maximum of six percent of eligible
compensation.
71
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
Pacific Mutual Life also has a deferred compensation plan which permits
certain employees to defer portions of their compensation and earn a
guaranteed interest rate on the deferred amounts. The interest rate is
determined annually and is guaranteed for one year. The compensation
which has been deferred has been accrued and the primary expense, other
than compensation, related to this plan is interest on the deferred
amounts.
The Company also has performance based incentive compensation plans for
its employees.
14. TRANSACTIONS WITH AFFILIATES
Pacific Mutual Life serves as the investment advisor for the Pacific
Select Fund, the investment vehicle provided to the Company's variable
life and variable annuity contractholders. Pacific Mutual Life charges
fees based upon the net asset value of the portfolios of the Pacific
Select Fund, which amounted to $14.3 million, $6.5 million and $3.0
million for the years ended December 31, 1996, 1995 and 1994,
respectively. In addition, Pacific Mutual Life entered into an agreement
with the Pacific Select Fund on October 1, 1995, to provide certain
support services for an administration fee which is based on an
allocation of actual costs. Such administration fees amounted to $108,000
and $28,550 for the years ended December 31, 1996 and 1995, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $6.2 million, $5.0 million and $0.4 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
Included in equity securities on the accompanying consolidated statements
of financial position are investments in mutual funds and other
investments managed by PIMCO Advisors which amounted to $110.6 million
and $77.6 million as of December 31, 1996 and 1995, respectively.
Pacific Mutual Life provides certain support services to PIMCO Advisors.
Charges for these services are based on an allocation of actual costs and
amounted to $1.4 million, $1.9 million and $0.2 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
15. SUBSIDIARY PROFIT-SHARING PLANS AND OTHER COMPENSATION PLANS
Prior to the PIMCO Advisors transaction (Note 1), certain of PFAMCo's
direct subsidiaries had nonqualified profit-sharing plans (the "Profit-
Sharing Plans") covering certain key employees ("Key Employees") and
other employees. The Profit-Sharing Plans provided for awards based on
the profitability of the respective subsidiary, as defined in the
employment agreements. Such profitability was primarily based on income
before income taxes and before profit-sharing. The awards ranged from 40%
to 80% of such amounts depending on the level of profitability. The
profit-sharing awards were fully vested as of the PIMCO Advisors
transaction date of November 15, 1994.
In addition, Key Employees of certain indirect subsidiaries participated
in long-term incentive plans that provided compensation under the Profit-
Sharing Plans for a specified period of time subsequent to their
termination of employment. These plans were terminated as of the PIMCO
Advisors transaction date.
Effective November 15, 1994, termination and non-competition agreements
were entered into with certain Key Employees. These agreements provide
terms and conditions for the allocation of future proceeds from
distributions and sales of certain PIMCO Advisors units and other
noncompete payments. When the amount of future payments to be made to a
Key Employee is determinable, a liability for such amount is established
and is included in other liabilities in the consolidated statements of
financial position.
For the years ended December 31, 1996, 1995 and 1994, approximately $35.3
million, $28.6 million and $166.9 million, respectively, is included in
operating expenses in the consolidated statements of operations related
to the above agreements.
72
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. INVESTMENT COMMITMENTS
The Company has outstanding commitments to make investments in fixed
maturities and other investments as follows (In Millions):
<TABLE>
<CAPTION>
Years Ending
December 31:
------------
<S> <C>
1997 $193.1
1998-2001 109.0
2002 and thereafter 19.5
------
Total $321.6
------
</TABLE>
17. LITIGATION
The Company is a respondent in a number of legal proceedings, some of
which involve extra-contractual damages. In the opinion of management,
the outcome of these proceedings is not likely to have a material adverse
effect on the consolidated financial position of the Company.
--------------------------------------------------------------------------
73
<PAGE>
ILLUSTRATIONS
The following tables illustrate how the death benefits, Accumulated Values
and Net Cash Surrender Values of a hypothetical policy may vary over an
extended period of time assuming hypothetical rates of return equivalent to
constant gross annual rates of 0%, 6% and 12%.
The policies illustrated include the following:
1. Age 45, Single Premium of $10,000, and initial death benefit of
$36,268
2. Age 45, Single Premium of $50,000, and initial death benefit of
$198,748
3. Age 45, Single Premium of $100,000, and initial death benefit of
$400,221
4. Age 55, Single Premium of $50,000, and initial death benefit of
$134,670
5. Age 55, Single Premium of $100,000, and initial death benefit of
$271,084
The values would be different from those shown if the gross annual
investment 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.
It should be noted that the illustrated values are the same for both males
and females.
The second column of each table labeled "Total Premium Paid Plus Interest at
5%," shows the amount which would accumulate if an amount equal to the single
premium (after taxes) were invested to earn interest at 5% compounded
annually. All premium payments are illustrated as if they were made at the
beginning of the year. These illustrations assume that no Policy loans have
been made. The values were calculated using the guaranteed maximum Cost of
Insurance Charges.
The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values, reflect the fact that the net investment return on the
Variable Accounts is lower than the gross investment return on the assets as a
result of charges levied against the Variable Accounts. These values also take
into account the premium load and any administration charges. The daily
investment advisory fee is assumed to be equivalent to an annual weighted rate
of 0.62% of the aggregate average daily net assets of the Fund. This
hypothetical rate is representative of the weighted average investment
advisory fee applicable to the Portfolios of the Fund available to the
Separate Account. The daily charge by us for assuming mortality and expense
risk is equivalent to a charge at an annual rate of 0.70% of the average net
assets of the Variable Accounts.
The tables also reflect other expenses of the Fund at the weighted rate of
0.18% of the average daily net assets of a Portfolio, adjusted to reflect a
decrease in fees for certain operating expenses, which amounts to 0.80% of the
average daily net assets of a Portfolio including the investment advisory fee,
operating expenses, and any foreign taxes for the year ended December 31,
1996, were the following percentages of the average daily net assets of the
Portfolios: 0.02% for the Equity Income Portfolio; 0.01% for the Multi-
Strategy Portfolio; 0.38% for the International Portfolio; 0.02% for the
Growth LT Portfolio; 0.01% for the Equity Portfolio; and 0.01% for the Equity
Index Portfolio. For the Emerging Markets Portfolio, which commenced
operations as of April 1, 1996, foreign taxes (annualized) were 0.14% of
average daily net assets.
After deduction of the charges and Fund expenses described above, the
illustrated gross annual investment rates of return of 0%, 6%, and 12%
correspond to approximate net annual rates of return of -1.49%, 4.42%, and
10.33%. The hypothetical values shown in the tables do not reflect any charges
against the Variable Accounts for income taxes that may be attributable to the
Variable Accounts in the future, since we are not currently making these
charges.
We will furnish upon request a comparable illustration reflecting the
proposed Insured's Age, Face Amount and premium amounts requested. In
addition, upon request, illustrations will be furnished reflecting allocation
of premiums to specified Variable Accounts. Such illustrations will reflect
the expenses of the Portfolio of the Fund in which the Variable Account
invests. Illustrations that use a hypothetical gross rate of return in excess
of 12% are available to certain large institutional investors upon request.
74
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 45 SINGLE PREMIUM AMOUNT: $10,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $36,268
<TABLE>
<CAPTION>
END OF YEAR DEATH
BENEFIT ASSUMING
TOTAL HYPOTHETICAL GROSS
PREMIUMS ANNUAL INVESTMENT RETURN
END OF PAID PLUS OF
POLICY INTEREST AT ----------------------------
YEAR 5% 0% 6% 12%
------ ----------- ------- ------- --------
<S> <C> <C> <C> <C>
1 $10,500 $36,268 $36,268 $ 36,268
2 $11,025 $36,268 $36,268 $ 36,268
3 $11,576 $36,268 $36,268 $ 36,268
4 $12,155 $36,268 $36,268 $ 36,268
5 $12,763 $36,268 $36,268 $ 36,268
6 $13,401 $36,268 $36,268 $ 36,268
7 $14,071 $36,268 $36,268 $ 36,268
8 $14,775 $36,268 $36,268 $ 36,268
9 $15,513 $36,268 $36,268 $ 36,268
10 $16,289 $36,268 $36,268 $ 36,268
15 $20,789 $36,268 $36,268 $ 44,330
20 $26,533 $ 0 * $36,268 $ 63,504
25 $33,864 $ 0 * $36,268 $ 95,000
30 $43,219 $ 0 * $ 0 * $138,460
35 $55,160 $ 0 * $ 0 * $216,694
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED END OF YEAR NET CASH
VALUE SURRENDER VALUE
ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
GROSS ANNUAL GROSS ANNUAL
END OF INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY --------------------------- ---------------------------
YEAR 0% 6% 12% 0% 6% 12%
------ ------ ------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
1 $9,635 $10,221 $ 10,806 $8,685 $ 9,271 $ 9,856
2 $9,166 $10,342 $ 11,588 $8,311 $ 9,487 $ 10,733
3 $8,686 $10,456 $ 12,443 $7,926 $ 9,696 $ 11,683
4 $8,197 $10,562 $ 13,380 $7,532 $ 9,897 $ 12,715
5 $7,694 $10,657 $ 14,408 $7,124 $10,087 $ 13,838
6 $7,176 $10,741 $ 15,536 $6,701 $10,266 $ 15,061
7 $6,639 $10,810 $ 16,775 $6,259 $10,430 $ 16,395
8 $6,081 $10,861 $ 18,139 $5,796 $10,576 $ 17,854
9 $5,496 $10,889 $ 19,642 $5,306 $10,699 $ 19,452
10 $4,881 $10,892 $ 21,302 $4,786 $10,797 $ 21,207
15 $1,595 $10,816 $ 33,082 $1,595 $10,816 $ 33,082
20 $ 0 * $ 9,582 $ 52,052 $ 0 * $ 9,582 $ 52,052
25 $ 0 * $ 5,491 $ 81,896 $ 0 * $ 5,491 $ 81,896
30 $ 0 * $ 0 * $129,402 $ 0 * $ 0 * $129,402
35 $ 0 * $ 0 * $206,375 $ 0 * $ 0 * $206,375
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
* Additional payment will be required to prevent policy termination.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT ACTUAL
PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
75
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 45 SINGLE PREMIUM AMOUNT: $50,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $198,748
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT
TOTAL ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 52,500 $198,748 $198,748 $ 198,748
2 $ 55,125 $198,748 $198,748 $ 198,748
3 $ 57,881 $198,748 $198,748 $ 198,748
4 $ 60,775 $198,748 $198,748 $ 198,748
5 $ 63,814 $198,748 $198,748 $ 198,748
6 $ 67,005 $198,748 $198,748 $ 198,748
7 $ 70,355 $198,748 $198,748 $ 198,748
8 $ 73,873 $198,748 $198,748 $ 198,748
9 $ 77,566 $198,748 $198,748 $ 198,748
10 $ 81,445 $198,748 $198,748 $ 198,748
15 $103,946 $198,748 $198,748 $ 232,181
20 $132,665 $ 0* $198,748 $ 335,048
25 $169,318 $ 0* $198,748 $ 503,557
30 $216,097 $ 0* $ 0* $ 736,095
35 $275,801 $ 0* $ 0* $1,154,155
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED END OF YEAR NET CASH
VALUE SURRENDER VALUE
ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
GROSS ANNUAL GROSS ANNUAL
END OF INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ---------------------------- ----------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ ------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $48,369 $51,304 $ 54,240 $44,369 $47,304 $ 50,240
2 $46,282 $52,191 $ 58,450 $42,682 $48,591 $ 54,850
3 $44,136 $53,046 $ 63,050 $40,936 $49,846 $ 59,850
4 $41,926 $53,868 $ 68,088 $39,126 $51,068 $ 65,288
5 $39,637 $54,642 $ 73,605 $37,237 $52,242 $ 71,205
6 $37,262 $55,362 $ 79,658 $35,262 $53,362 $ 77,658
7 $34,780 $56,011 $ 86,304 $33,180 $54,411 $ 84,704
8 $32,177 $56,574 $ 93,611 $30,977 $55,374 $ 92,411
9 $29,427 $57,029 $ 101,654 $28,627 $56,229 $ 100,854
10 $26,506 $57,355 $ 110,523 $26,106 $56,955 $ 110,123
15 $10,269 $58,210 $ 173,269 $10,269 $58,210 $ 173,269
20 $ 0* $52,991 $ 274,629 $ 0* $52,991 $ 274,629
25 $ 0* $32,862 $ 434,101 $ 0* $32,862 $ 434,101
30 $ 0* $ 0* $ 687,939 $ 0* $ 0* $ 687,939
35 $ 0* $ 0* $1,099,195 $ 0* $ 0* $1,099,195
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
* Additional payment will be required to prevent policy termination.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
76
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 45 SINGLE PREMIUM AMOUNT: $100,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $400,221
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT
TOTAL ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $105,000 $400,221 $400,221 $ 400,221
2 $110,250 $400,221 $400,221 $ 400,221
3 $115,763 $400,221 $400,221 $ 400,221
4 $121,551 $400,221 $400,221 $ 400,221
5 $127,628 $400,221 $400,221 $ 400,221
6 $134,010 $400,221 $400,221 $ 400,221
7 $140,710 $400,221 $400,221 $ 400,221
8 $147,746 $400,221 $400,221 $ 400,221
9 $155,133 $400,221 $400,221 $ 400,221
10 $162,889 $400,221 $400,221 $ 400,221
15 $207,893 $400,221 $400,221 $ 466,902
20 $265,330 $ 0* $400,221 $ 673,762
25 $338,635 $ 0* $400,221 $1,012,623
30 $432,194 $ 0* $ 0* $1,480,244
35 $551,602 $ 0* $ 0* $2,320,937
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED END OF YEAR NET CASH
VALUE SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL ANNUAL
END OF INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ----------------------------- -----------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ ------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $96,722 $102,591 $ 108,462 $89,722 $ 95,591 $ 101,462
2 $92,631 $104,448 $ 116,967 $86,331 $ 98,148 $ 110,667
3 $88,418 $106,246 $ 126,262 $82,818 $100,646 $ 120,662
4 $84,076 $107,979 $ 136,439 $79,176 $103,079 $ 131,539
5 $79,575 $109,621 $ 147,586 $75,375 $105,421 $ 143,386
6 $74,898 $111,156 $ 159,815 $71,398 $107,656 $ 156,315
7 $70,007 $112,554 $ 173,242 $67,207 $109,754 $ 170,442
8 $64,869 $113,783 $ 188,005 $62,769 $111,683 $ 185,905
9 $59,436 $114,801 $ 204,255 $58,036 $113,401 $ 202,855
10 $53,659 $115,564 $ 222,176 $52,959 $114,864 $ 221,476
15 $21,071 $117,447 $ 348,435 $21,071 $117,447 $ 348,435
20 $ 0* $107,029 $ 552,264 $ 0* $107,029 $ 552,264
25 $ 0* $ 66,656 $ 872,951 $ 0* $ 66,656 $ 872,951
30 $ 0* $ 0* $1,383,405 $ 0* $ 0* $1,383,405
35 $ 0* $ 0* $2,210,417 $ 0* $ 0* $2,210,417
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
* Additional payment will be requried to prevent policy termination.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
77
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 55 SINGLE PREMIUM AMOUNT: $50,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT: $134,670
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT
TOTAL ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT --------------------------------
YEAR 5% 0% 6% 12%
------- ----------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
1 $ 52,500 $134,670 $134,670 $ 134,670
2 $ 55,125 $134,670 $134,670 $ 134,670
3 $ 57,881 $134,670 $134,670 $ 134,670
4 $ 60,755 $134,670 $134,670 $ 134,670
5 $ 63,814 $134,670 $134,670 $ 134,670
6 $ 67,005 $134,670 $134,670 $ 134,670
7 $ 70,355 $134,670 $134,670 $ 134,670
8 $ 73,873 $134,670 $134,670 $ 134,670
9 $ 77,566 $134,670 $134,670 $ 134,670
10 $ 81,445 $134,670 $134,670 $ 134,670
15 $103,946 $ 0 * $134,670 $ 197,560
20 $132,665 $ 0 * $134,670 $ 288,792
25 $169,318 $ 0 * $ 0 * $ 452,810
30 $216,097 $ 0 * $ 0 * $ 714,027
35 $275,801 $ 0 * $ 0 * $1,101,929
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED END OF YEAR NET CASH
VALUE SURRENDER VALUE
ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
GROSS ANNUAL GROSS ANNUAL
END OF INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ------------------------------ ------------------------------
YEAR 0% 6% 12% 0% 6% 12%
------- ------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $48,114 $51,051 $ 53,989 $44,114 $47,051 $ 49,989
2 $45,724 $51,646 $ 57,923 $42,124 $48,046 $ 54,323
3 $43,222 $52,170 $ 62,228 $40,022 $48,970 $ 59,028
4 $40,595 $52,613 $ 66,955 $37,795 $49,813 $ 64,155
5 $37,826 $52,963 $ 72,162 $35,426 $50,563 $ 69,762
6 $34,891 $53,202 $ 77,914 $32,891 $51,202 $ 75,914
7 $31,760 $53,306 $ 84,289 $30,160 $51,706 $ 82,689
8 $28,392 $53,247 $ 91,378 $27,192 $52,047 $ 90,178
9 $24,740 $52,985 $ 99,291 $23,940 $52,185 $ 98,491
10 $20,749 $52,481 $ 108,168 $20,349 $52,081 $ 107,768
15 $ 0 * $46,635 $ 170,311 $ 0 * $46,635 $ 170,311
20 $ 0 * $25,334 $ 269,899 $ 0 * $25,334 $ 269,899
25 $ 0 * $ 0 * $ 431,247 $ 0 * $ 0 * $ 431,247
30 $ 0 * $ 0 * $ 680,026 $ 0 * $ 0 * $ 680,026
35 $ 0 * $ 0 * $1,049,456 $ 0 * $ 0 * $1,049,456
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
* Additional payment will be required to prevent policy termination.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
78
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES
BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 55 SINGLE PREMIUM AMOUNT: $100,000
CLASS: MALE NONSMOKER GUIDELINE MINIMUM DEATH BENEFIT $271,084
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT
TOTAL ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT --------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $105,000 $271,084 $271,084 $ 271,084
2 $110,250 $271,084 $271,084 $ 271,084
3 $115,763 $271,084 $271,084 $ 271,084
4 $121,551 $271,084 $271,084 $ 271,084
5 $127,628 $271,084 $271,084 $ 271,084
6 $134,010 $271,084 $271,084 $ 271,084
7 $140,710 $271,084 $271,084 $ 271,084
8 $147,746 $271,084 $271,084 $ 271,084
9 $155,133 $271,084 $271,084 $ 271,084
10 $162,889 $271,084 $271,084 $ 271,084
15 $207,893 $ 0 * $271,084 $ 397,126
20 $265,330 $ 0 * $271,084 $ 580,516
25 $338,635 $ 0 * $ 0 * $ 910,215
30 $432,194 $ 0 * $ 0 * $1,435,301
35 $551,602 $ 0 * $ 0 * $2,215,043
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED END OF YEAR NET CASH
VALUE SURRENDER VALUE
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL ANNUAL
END OF INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ------------------------------- -------------------------------
YEAR 0% 6% 12% 0% 6% 12%
------ ------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $96,205 $102,078 $ 107,954 $89,205 $ 95,078 $ 100,954
2 $91,500 $103,344 $ 115,898 $85,200 $ 97,044 $ 109,598
3 $86,568 $104,469 $ 124,590 $80,968 $ 98,869 $ 118,990
4 $81,384 $105,434 $ 134,134 $76,484 $100,534 $ 129,234
5 $75,914 $106,218 $ 144,648 $71,714 $102,018 $ 140,448
6 $70,109 $106,781 $ 156,262 $66,609 $103,281 $ 152,762
7 $63,911 $107,080 $ 169,133 $61,111 $104,280 $ 166,333
8 $57,238 $107,053 $ 183,445 $55,138 $104,953 $ 181,345
9 $49,992 $106,625 $ 199,420 $48,592 $105,225 $ 198,020
10 $42,068 $105,717 $ 217,342 $41,368 $105,017 $ 216,642
15 $ 0 * $ 94,142 $ 342,350 $ 0 * $ 94,142 $ 342,350
20 $ 0 * $ 51,446 $ 542,538 $ 0 * $ 51,446 $ 542,538
25 $ 0 * $ 0 * $ 866,872 $ 0 * $ 0 * $ 866,872
30 $ 0 * $ 0 * $1,366,953 $ 0 * $ 0 * $1,366,953
35 $ 0 * $ 0 * $2,109,564 $ 0 * $ 0 * $2,109,564
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
* Additional payment will be required to prevent policy termination.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
79
<PAGE>
[LOGO OF PACIFIC SELECT]
Issued By: Principal Underwriter:
Pacific Mutual Life Insurance Company Pacific Mutual Distributors, Inc.
700 Newport Center Drive Member: NASD/SIPC
P.O. Box 9000 700 Newport Center Drive
Newport Beach, California 92660 P.O. Box 9000
Newport Beach, California 92660
<PAGE>
Sponsored by:
[LOGO OF PACIFIC MUTUAL LIFE]
PACIFIC MUTUAL LIFE INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
Distributed by:
[LOGO OF PACIFIC MUTUAL DISTRIBUTORS, INC.]
Pacific Mutual Distributors, Inc.
Member NASD & SIPC
700 NEWPORT CENTER DRIVE, NB-3
NEWPORT BEACH, CA 92660
1-800-800-7681
FORM NO. 15-15756-10
