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[LOGO of PACIFIC SELECT EXEC]
Flexible Premium
Variable Universal Life
PROSPECTUSES FOR
PACIFIC SELECT EXEC
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
PACIFIC LIFE INSURANCE COMPANY
DATED MAY 1, 1997
AS SUPPLEMENTED SEPTEMBER 2, 1997
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PACIFIC SELECT FUND
DATED MAY 1, 1997
AS SUPPLEMENTED SEPTEMBER 2, 1997
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PROSPECTUS
PACIFIC SELECT EXEC
FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY
ISSUED BY PACIFIC LIFE INSURANCE
COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
[LOGO of PACIFIC SELECT EXEC] 1-800-800-7681
This prospectus describes Pacific Select Exec--a Flexible Premium Variable
Life Insurance Policy (individually, the "Policy," and collectively, the
"Policies") offered by Pacific Life Insurance Company ("Pacific Life", "we",
"us", or "our", formerly known as Pacific Mutual Life Insurance Company). The
Policy, for so long as it remains in force, provides lifetime insurance
protection on the Insured named in the Policy through the Maturity Date. The
Policy is designed to provide maximum flexibility in connection with premium
payments and death benefits by permitting the Policyholder ("Policy Owner,"
"Owner," "you" or "your"), subject to certain restrictions, to vary the
frequency and amount of premium payments and to increase or decrease the death
benefit payable under the Policy. This flexibility allows you to provide for
changing insurance needs under a single insurance policy. A Policy may also be
surrendered for its Cash Surrender Value less outstanding Policy Debt.
Net premium payments may be allocated at your discretion to one or more of
the Investment Options available to you. Each of the Variable Investment
Options ("Variable Account") is a subaccount of our separate account called
the Pacific Select Exec Separate Account (the "Separate Account"). Any portion
of a net premium allocated to one or more of the Variable Accounts available
to you invests in the corresponding portfolios of the Pacific Select Fund (the
"Fund"):
<TABLE>
<S> <C>
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.
</TABLE>
A fixed option called the Fixed Account is also available. Your Accumulated
Value in the Fixed Account will accrue interest at an interest rate that is
guaranteed by us. 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 33.
To the extent that all or a portion of net 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 Policy also permits you to choose from two death benefit options: under
one option, the death benefit remains fixed at the Face Amount you choose (or,
if greater, it equals Accumulated Value multiplied by a certain percentage)
(Option A); under the other option, the death benefit equals the Face Amount
plus Accumulated Value (or, if greater, Accumulated Value multiplied by a
certain percentage) (Option B). Under the latter option, the death benefit
will vary daily with the investment performance of the Variable Accounts for
any Owner who has allocated Accumulated Value to the Variable Accounts. Under
either option, for so long as the Policy remains in force, the death benefit
will never be less than the current Face Amount.
It may not be advantageous to replace existing insurance with the Policy.
The Policy may be returned according to the terms of its Free-Look Right (see
"Right to Examine a Policy--Free-Look Right," page 23).
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION 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 AS SUPPLEMENTED SEPTEMBER 2, 1997
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
<TABLE>
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PAGE
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IMPORTANT TERMS............................................................ 4
SUMMARY OF THE POLICY...................................................... 5
Purpose Of The Policy.................................................... 5
Policy Values............................................................ 5
The Death Benefit........................................................ 5
Premium Features......................................................... 5
Investment Options....................................................... 6
Transfer Of Accumulated Value............................................ 6
Policy Loans............................................................. 6
Free-Look Right.......................................................... 7
Surrender Right.......................................................... 7
Preferred And Partial Withdrawal Benefits................................ 7
Charges and Deductions................................................... 7
Fund Annual Expenses After Expense Limitation............................ 9
Tax Treatment of Increases In Accumulated Value.......................... 10
Tax Treatment Of Death Benefit........................................... 10
Contacting Pacific Life and Timing of Transactions....................... 10
INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT AND THE FUND.......... 11
Pacific Life Insurance Company........................................... 11
Pacific Select Exec Separate Account..................................... 11
The Pacific Select Fund.................................................. 12
The Investment Adviser and Portfolio Managers............................ 13
THE POLICY................................................................. 14
Application For A Policy................................................. 14
Premiums................................................................. 14
Allocation Of Net Premiums............................................... 15
Portfolio Rebalancing.................................................... 16
Dollar Cost Averaging Option............................................. 16
Transfer Of Accumulated Value............................................ 17
Death Benefit............................................................ 17
Changes in Death Benefit Option.......................................... 18
Changes In Face Amount................................................... 19
Policy Values............................................................ 20
Determination Of Accumulated Value....................................... 20
Policy Loans............................................................. 21
Benefits At Maturity..................................................... 22
Surrender................................................................ 22
Preferred And Partial Withdrawal Benefits................................ 22
Right To Examine A Policy--Free-Look Right............................... 23
Lapse.................................................................... 23
Reinstatement............................................................ 24
CHARGES AND DEDUCTIONS..................................................... 24
Premium Load............................................................. 24
Deductions From Accumulated Value........................................ 24
Surrender Charge......................................................... 26
Corporate and Other Purchasers........................................... 27
Other Charges............................................................ 27
Guarantee Of Certain Charges............................................. 27
</TABLE>
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<TABLE>
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PAGE
<S> <C>
OTHER INFORMATION.......................................................... 27
Federal Income Tax Considerations........................................ 27
Charge For Our Income Taxes.............................................. 30
Voting Of Fund Shares.................................................... 30
Disregard Of Voting Instructions......................................... 31
Confirmation Statements and Other Reports To Owners...................... 31
Substitution Of Investments.............................................. 31
Changes To Comply With Law............................................... 32
PERFORMANCE INFORMATION.................................................... 32
THE FIXED ACCOUNT.......................................................... 33
General Description...................................................... 33
Death Benefit............................................................ 33
Policy Charges........................................................... 33
Transfers, Surrenders, Withdrawals, And Policy Loans..................... 34
MORE ABOUT THE POLICY...................................................... 34
Ownership................................................................ 34
Beneficiary.............................................................. 34
Exchange Of Insured...................................................... 35
The Contract............................................................. 35
Payments................................................................. 35
Assignment............................................................... 35
Errors On The Application................................................ 36
Incontestability......................................................... 36
Payment In Case Of Suicide............................................... 36
Participating............................................................ 36
Policy Illustrations..................................................... 36
Payment Plan............................................................. 36
Optional Insurance Benefits and Other Policies........................... 37
Life Insurance Retirement Plans.......................................... 37
Risks of Life Insurance Retirement Plans................................. 38
Distribution Of The Policy............................................... 38
MORE ABOUT PACIFIC LIFE.................................................... 39
Management............................................................... 39
State Regulation......................................................... 41
Telephone Transfer and Loan Privileges................................... 41
Legal Proceedings........................................................ 42
Legal Matters............................................................ 42
Registration Statement................................................... 42
Independent Auditors..................................................... 42
Financial Statements..................................................... 42
APPENDIX................................................................... 82
ILLUSTRATIONS.............................................................. 83
</TABLE>
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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 earned 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.
Beneficiary--The person or persons named by you 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 the surrender charge.
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 net 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.
Home Office--The Policy Benefits and Services Department at our main office at
700 Newport Center Drive, Newport Beach, California 92660.
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 the monthly deduction is due
against the Accumulated Value. The first Monthly Payment Date is the Policy
Date.
Net Cash Surrender Value--The Cash Surrender Value less Policy Debt.
Planned Periodic Premium--The premium determined by you as a level amount
planned to be paid at fixed intervals over a specified period of time.
Policy Date--The date used to determine the Monthly Payment Date, Policy
Months, 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, although it will never be the 29th, 30th, or 31st of any month.
The term "Issue Date" is substituted for Policy Date with respect to Policies
issued to residents of the Commonwealth of Massachusetts.
Policy Debt--The unpaid Policy loan balance including accrued loan interest
charged.
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.
Sales Surrender Target--The maximum amount of premiums paid against which the
sales surrender charge may be applied. The Sales Surrender Target is equal to
the premium that would be payable under a Policy for one year if a Policy
Owner were to pay level annual premiums for the life of the Policy, taking
into account certain Policy charges including the premium load, the guaranteed
cost of insurance rates, and the mortality and expense risk charge, and
assuming net investment earnings at an annual rate of 5%.
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 Day, and Christmas
Day. 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 Exec 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 Exec 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 33 and in the Policy.
PURPOSE OF THE POLICY
The Policy offers you insurance protection on the life of the Insured through
the Maturity Date for so long as your Policy is in force. Like traditional
fixed life insurance, your Policy provides for a death benefit equal to its
Face Amount, accumulation of cash value, and surrender and loan privileges.
Unlike traditional fixed life insurance, your Policy offers a choice of
investment alternatives and an opportunity for your Policy's Accumulated Value
and, if elected by you and under certain circumstances, its death benefit to
grow based on investment results. The Policy is a flexible premium policy, so
that, unlike many other insurance policies and subject to certain limitations,
you may choose the amount and frequency of premium payments.
POLICY VALUES
You may allocate net premium payments among the various Investment Options
available to you.
You bear the investment risk on that portion of your net premiums and
Accumulated Value allocated to the Variable Accounts. The death benefit may or
may not increase or decrease depending upon several factors, including the
death benefit option you select, 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.
Your Policy will remain in force until the earliest of the Maturity Date, the
death of the Insured, lapse, or a full surrender of your Policy.
THE DEATH BENEFIT
You may elect one of two Options to calculate the amount of death benefit
payable under the Policy. Under Option A, the death benefit will be equal to
the Face Amount of the Policy or, if greater, Accumulated Value multiplied by a
death benefit percentage. Under Option B, the death benefit will be equal to
the Face Amount of the Policy plus the Accumulated Value (determined as of the
date of the Insured's death) or, if greater, Accumulated Value multiplied by a
death benefit percentage. Owners seeking to have favorable investment
performance reflected in increasing Accumulated Value should choose Option A;
Owners seeking to have favorable investment performance reflected in increasing
insurance coverage should choose Option B. You may change the death benefit
option subject to certain conditions. See "Death Benefit" and "Changes in Death
Benefit Option," pages 17 and 18, respectively.
PREMIUM FEATURES
We require you to pay an initial premium equal to at least 25% of an annual
premium that will be estimated by us. Thereafter, subject to certain
limitations, you may choose the amount and frequency of premium payments. The
Policy, therefore, provides you with the flexibility to vary premium payments
to reflect varying financial conditions.
When applying for a Policy, you will determine a Planned Periodic Premium
that provides for the payment of level premiums over a specified period of
time. You will receive a premium reminder notice or listbill for multiple
policies on an annual, semi-annual, or quarterly basis, or if a listbill, a
monthly basis, at your option; however, you are not required to pay Planned
Periodic Premiums. Premiums may be paid monthly under the
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Uni-check electronic funds transfer plan where you authorize us to withdraw
premiums from your checking account each month. The minimum initial premium
required must be paid before the Uni-check plan will be accepted by us.
The amount, frequency, and period of time over which you pay premiums may
affect whether or not the Policy will be classified as a modified endowment
contract, which is a type of life insurance contract subject to different tax
treatment for certain pre-death distributions. For more information on the tax
treatment of life insurance contracts, including those classified as modified
endowment contracts, see "Federal Income Tax Considerations," page 27.
Payment of the Planned Periodic Premiums will not guarantee that a Policy
will remain in force. Instead, the duration of the Policy depends upon the
Policy's Accumulated Value. Even if Planned Periodic Premiums are paid, the
Policy will lapse any time Accumulated Value less Policy Debt is insufficient
to pay the current monthly deduction and a Grace Period expires without
sufficient payment. Any premium payment must be for at least $50. We also may
reject or limit any premium payment that would result in an immediate increase
in the net amount at risk under the Policy, although such a premium may be
accepted with satisfactory evidence of insurability.
INVESTMENT OPTIONS
You may choose to allocate net premium payments to one or more of the
Investment Options available to you.
The Variable Accounts available to you 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, shown in the chart on page 13,
has a different investment objective or objectives. See "The Pacific Select
Fund," page 12.
You may also allocate all or a portion of net premium payments and transfer
Accumulated Value to the Fixed 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%, and may in our sole discretion
pay interest in excess of the guaranteed amount. See "The Fixed Account," page
33.
TRANSFER OF ACCUMULATED VALUE
You may transfer Accumulated Value among the Variable Accounts, and, subject
to certain other limitations, between the Variable Accounts and the Fixed
Account. Transfers may be made by telephone if an Authorization For Telephone
Requests has been properly completed, signed and filed at our Home Office. See
"Transfer of Accumulated Value," page 17.
POLICY LOANS
You may borrow from us an amount up to the greater of (1) 90% of your
Policy's Accumulated Value allocated to the Variable Accounts and 100% of
Accumulated Value allocated to the Fixed Account, less any surrender charges
that would have been imposed if your Policy were surrendered on the date the
loan is taken, or (2) 100% of the product of (a x b/c - d) where (a) equals
your Policy's Accumulated Value less any surrender charge that would be imposed
if your Policy were surrendered on the date the loan is taken and less 12 times
the current monthly deduction; (b) equals 1 plus the annual loan interest rate
credited; (c) equals 1 plus the annual loan interest rate currently charged;
and (d) equals any existing Policy Debt. The minimum loan is $500 ($200 in
Connecticut, $250 in Oregon). Your Policy will be the only security required
for a loan. See "Policy Loans," page 21.
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The amount of any Policy Debt is subtracted from the death benefit or from
your Cash Surrender Value upon surrender. See "Policy Loans," page 21. Your
Policy will lapse when Accumulated Value less Policy Debt is insufficient to
cover the current monthly deduction on a Monthly Payment Date, and a Grace
Period expires without a sufficient premium or repayment of Policy Debt.
FREE-LOOK RIGHT
You may return the Policy within the Free-Look Period, which is usually 10
days after you receive it (15 days in Colorado, 20 days in North Dakota, and 30
days if you reside in California and are age 60 or older), or 45 days after the
application for the Policy is signed, whichever is latest. 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. During the Free-Look
Period, net premiums will be allocated to the Money Market Variable Account,
which invests in the Money Market Portfolio of the Fund. See "Allocation of Net
Premiums," page 15.
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 the
surrender charge and less any outstanding Policy Debt.
PREFERRED AND PARTIAL WITHDRAWAL BENEFITS
Two partial surrender benefits are available under the Policy. The first, the
Preferred Withdrawal Benefit, permits one withdrawal of Net Cash Surrender
Value per year. The portion of a Preferred Withdrawal of up to 10% of the sum
of your total premium payments will not reduce the Face Amount under your
Policy. Any excess withdrawal amount will affect the Face Amount under a Policy
in the same manner as a Partial Withdrawal. This benefit is available on your
first Policy Anniversary until the 15th Policy Anniversary. The second partial
surrender benefit, the Partial Withdrawal Benefit, is available on and after
the 15th Policy Anniversary. Under this Benefit, you may make "Partial
Withdrawals" of Net Cash Surrender Value. A Partial Withdrawal may decrease the
Face Amount on a Policy on which the Owner has elected death benefit Option A,
and will decrease the death benefit if the death benefit is greater than the
Face Amount under either Option A or B. See "Preferred and Partial Withdrawal
Benefits," page 22.
Among other restrictions, both Preferred and Partial Withdrawals must be for
a least $500, and the Policy's Net Cash Surrender Value after the withdrawal
must be at least $500. No surrender charge will be assessed upon a Preferred or
Partial Withdrawal.
CHARGES AND DEDUCTIONS
Premium Load
A premium load is deducted from each premium payment under your Policy prior
to allocation of the net premium to your Accumulated Value. The premium load
consists of the following items:
--A sales load equal to 4% of each premium paid during the first ten Policy
Years and 2% of each premium paid thereafter. (For information on the sales
surrender charge, see page 26.)
--A state and local premium tax charge equal to 2.35% of each premium paid.
Deductions from Accumulated Value
A charge called the monthly deduction is deducted from a Policy's Accumulated
Value on each Monthly Payment Date. The monthly deduction consists of the
following items:
--Cost of Insurance: This monthly charge compensates us for providing life
insurance coverage for the Insured. The amount of the charge is equal to a
current cost of insurance rate multiplied by the net amount at risk under a
Policy at the beginning of the Policy Month.
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--Administrative Charge. A monthly administrative charge is deducted equal to
$25 in each of the first 12 Policy Months and, after the first Policy Year,
is equal to $7.50 per month for Face Amounts of less than $100,000, and $5.00
per month for Face Amounts of $100,000 or more. This charge is guaranteed not
to exceed $25 in each of the first 12 Policy Months and $10.00 per month
thereafter.
--Mortality and Expense Risk Charge: A monthly charge is deducted for
mortality and expense risks we assume. During the first ten Policy Years,
this charge is equal to .000625 multiplied by a Policy's Accumulated Value
less any amount in the Loan Account, which is equivalent to an annual rate of
.75% of Accumulated Value less any amount in the Loan Account. After the
tenth Policy Year, the charge is equal to .000208333 multiplied by a Policy's
Accumulated Value less any amount in the Loan Account, which is equivalent to
an annual rate of .25% of Accumulated Value less any amount in the Loan
Account.
--Optional Insurance Benefits Charges: The monthly deduction will include
charges for any optional insurance benefits added to the Policy by Rider.
A death benefit change charge, if applicable, will also be deducted from your
Accumulated Value. If you request and we accept an increase in Face Amount or a
change in death benefit option from Option A to Option B, a charge of $100 will
be deducted from Accumulated Value on the effective date of the increase or
option change to cover processing costs.
Surrender Charge
Pacific Life will assess a surrender charge against Accumulated Value upon
surrender of a Policy until the tenth Policy Anniversary. The surrender charge
consists of two charges: an underwriting surrender charge and a sales surrender
charge.
--Underwriting Surrender Charge: The underwriting surrender charge is equal
to a specified amount that varies with the Age of the Insured for each $1,000
of a Policy's initial Face Amount in accordance with a schedule shown on page
26. The amount of the charge remains level for five Policy Years. After the
fifth Policy Year, the charge decreases by 1.666% per month until it reaches
zero at the end of the 120th Policy Month.
--Sales Surrender Charge: The sales surrender charge is equal to 26% of the
lesser of the premiums paid under the Policy or a maximum amount that is
called the Sales Surrender Target. The Sales Surrender Target is an
estimation of an annual premium that you would pay based upon the Age of the
Insured and the Face Amount on the Policy Date. After the fifth Policy Year,
the charge decreases from its maximum by 1.666% per month until it reaches
zero at the end of the 120th Policy Month.
The operating expenses of the Separate Account are paid by us. For a
description of these charges, see "Charges and Deductions," page 24.
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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.
<TABLE>
<CAPTION>
ADVISORY OTHER TOTAL
FEE EXPENSES EXPENSES
-------- -------- --------
<S> <C> <C> <C>
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 Markets Portfolio........................... 1.10% 1.05% 2.15%
</TABLE>
The expenses listed for the Fund Portfolios 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.
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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 your Accumulated Value unless and until you are deemed
to be in receipt of a distribution from your Policy. For information on the tax
treatment of the Policy and on the tax treatment of a surrender, a Preferred or
Partial Withdrawal, or a Policy loan, see "Federal Income Tax Considerations,"
page 27.
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 27.
CONTACTING PACIFIC LIFE AND TIMING OF TRANSACTIONS
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, transfer requests, loan requests, loan repayments, 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 the
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.
10
<PAGE>
INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT, AND THE FUND
PACIFIC LIFE INSURANCE COMPANY
We are a life insurance company that is domiciled in California. Our
operations include both life insurance and annuity products as well as
financial and retirement services. As of the end of 1996, we had over
$50.8 billion of individual life insurance in force and total admitted assets
of approximately $21.2 billion. We have been ranked according to admitted
assets as the 22nd largest life insurance carrier in the nation for 1996.
Together with our subsidiaries and affiliated enterprises, we have total
assets and funds under management of over $136 billion. We are authorized to
conduct life insurance and annuity business in the District of Columbia and
all states except New York. Our principal offices are located at 700 Newport
Center Drive, Newport Beach, California 92660.
We were originally organized on January 2, 1868, under the name "Pacific
Mutual Life Insurance Company of California" and reincorporated as "Pacific
Mutual Life Insurance Company" on July 22, 1936. On September 1, 1997, we
converted from a mutual life insurance company to a stock life insurance
company ultimately controlled by a mutual holding company and were authorized
by California regulatory authorities to change our name to Pacific Life
Insurance Company. As part of the process we have applied for authorization to
do business as Pacific Life Insurance Company in all states in which we do
business. It may be necessary for us to use forms bearing the name Pacific
Mutual Life Insurance Company at some times and places and forms bearing the
name Pacific Life Insurance Company at other times and places during the
transition period. Any request in proper order or any transaction made on a
form bearing either of these names will be honored.
We are a subsidiary of Pacific LifeCorp, a holding company which, in turn,
is a subsidiary of Pacific Mutual Holding Company, a mutual holding company.
Under their respective charters, Pacific Mutual Holding Company must always
hold at least 51% of the outstanding voting stock of Pacific LifeCorp, and
Pacific LifeCorp must always own 100% of the voting stock of Pacific Life.
Owners of Pacific Life's annuity contracts and life insurance policies have
certain membership interests in Pacific Mutual Holding Company, consisting
principally of the right to vote on the election of the Board of Directors of
the mutual holding company and on other matters, and certain rights upon
liquidation or dissolutions of the mutual holding 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 EXEC SEPARATE ACCOUNT
The 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 Separate Account supports the Policies as well as
other variable life insurance policies issued by us. The assets in the
Separate Account are kept separate from our General Account assets 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 insurance policies funded by the Account. The Separate Account is divided
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 variable life insurance policies
funded by the Separate Account are not chargeable with liabilities arising
from any other business that we conduct. However, we may transfer to our
General Account any assets which exceed anticipated obligations of the
Separate Account. All obligations arising under the Policy are our general
corporate obligations. We may accumulate in the Separate Account proceeds from
various Policy charges and investment results applicable to those assets.
The Separate Account was established on May 12, 1988 under California law
under the authority of our Board of Directors. The Separate Account is
registered as a unit investment trust with the SEC. Such registration
11
<PAGE>
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. Such registration does not involve supervision by the SEC of the
investments or investment policies of the Fund. 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 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 Life
consistent with market instruments
preservation of capital
- --------------------------------------------------------------------------------------------
High-Yield High level of current Intermediate and long- Pacific 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 Pacific Investment
Securities consistent with prudent securities including Management Company
investment management futures and 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 Investors
medium 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 Investment
capital and income stock Management Inc.
- --------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed income J.P.Morgan Investment
securities Management Inc.
- --------------------------------------------------------------------------------------------
Equity Capital appreciation Common stocks and Greenwich Street
securities convertible Advisors
into or exchangeable for
common stocks
- --------------------------------------------------------------------------------------------
Bond and High level of current Investment grade debt Greenwich Street
Income income consistent with securities Advisors
prudent investment
management and
preservation of capital
- --------------------------------------------------------------------------------------------
Equity Index Provide investment Stocks included in the Bankers Trust Company
results that correspond S&P 500
to the total return
performance of common
stocks publicly traded
in the U.S.
- --------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Morgan Stanley Asset
appreciation corporations domiciled Management Inc.
outside the United
States
- --------------------------------------------------------------------------------------------
Emerging Long-term growth of Common stocks of Blairlogie Capital
Markets capital companies domiciled in Management
emerging 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 the Policies are funded
through the Policy Owner's Accumulated Value in the Separate Account and the
Fixed Account. The information included below describes the benefits,
features, charges, and other major provisions of the Policies.
APPLICATION FOR A POLICY
The Policy is designed to meet the needs of individuals and for corporations
who wish to provide coverage and benefits for key employees. Anyone 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 birthday nearest the Policy Date. Acceptance is subject to our
underwriting rules, and we reserve the right to request additional information
and to reject an application.
Each Policy is issued with a Policy Date. If the application is accompanied
by all or a portion of the initial premium and is accepted by us, the Policy
Date is usually the date the application and premium payment were received at
our Home Office, although the Policy Date will never be the 29th, 30th, or
31st of any month. If an application is not accompanied by all or a portion of
the initial premium payment, the Policy Date is usually the date the
application is accepted by us. We first become obligated under the Policy on
the date the total initial premium is received or on the date the application
is accepted, whichever is later. Any monthly deductions due will be taken on
the Monthly Payment Date on or next following the date we become obligated.
The initial premium must be received within 20 days after your Policy is
issued, although we may waive the 20 day requirement at our discretion. If the
initial premium is not received or the application is rejected by us, your
Policy will be cancelled and any partial premium received will be refunded.
Subject to our approval, your Policy may be backdated, but the Policy Date
may not be more than six months prior to the date of the application.
Backdating can be advantageous if the Insured's lower issue Age results in
lower cost of insurance rates. If your Policy is backdated, the minimum
initial premium required will include sufficient premium to cover the
backdating period. Monthly deductions will be made for the period the Policy
Date is backdated.
Insureds are assigned to underwriting (insurance risk) classes which are
used in calculating the cost of insurance charges. In assigning Insureds to
underwriting classes, we will normally use the medical or paramedical
underwriting method, which may require a medical examination of a proposed
Insured, although other forms of underwriting may be used when deemed
appropriate by us.
PREMIUMS
The Policy is a flexible-premium policy, and it provides considerable
flexibility, subject to the limitations described below, to pay premiums at
your discretion. We usually require you to pay a minimum initial premium equal
to at least 25% of the sum of your Policy's monthly deductions plus premium
load for the first year, which will be based upon your Policy's Face Amount
and the Age, smoking status, gender (unless unisex cost of insurance rates
apply, see "Charges and Deductions: Cost of Insurance"), and underwriting
class of the Insured. Thereafter, subject to the limitations described below,
you may choose the amount and frequency of premium payments. The Policy,
therefore, provides you with the flexibility to vary premium payments to
reflect varying financial conditions.
When applying for a Policy, you will determine a Planned Periodic Premium
that provides for the payment of level premiums over a specified period of
time. You will receive a premium reminder notice, or a listbill for multiple
policies, on an annual, semiannual, or quarterly basis, or, if a listbill, a
monthly basis, at your option; however, you are not required to pay Planned
Periodic Premiums. Premiums may be paid monthly under the Uni-check electronic
funds transfer plan where you authorize us to withdraw premiums from your
checking account each month. The minimum initial premium required must be paid
before the Uni-check plan will be accepted by us. You may elect the day each
month on which premiums are paid under the Uni-check plan,
14
<PAGE>
provided the day elected is between the 4th and the 28th day of the month. If
you do not elect a payment day, the day on which premiums are paid will be the
Monthly Anniversary.
Payment of the Planned Periodic Premium will not guarantee that your Policy
will remain in force. Instead, the continuation of your Policy depends upon
your Policy's Accumulated Value. Even if Planned Periodic Premiums are paid,
your Policy will lapse any time Accumulated Value less Policy Debt is
insufficient to pay the current monthly deduction and a Grace Period expires
without sufficient payment. See "Lapse".
Any premium payment must be for at least $50. We also may reject or limit
any premium payment that would result in an immediate increase in the net
amount at risk under the Policy, although such a premium may be accepted with
satisfactory evidence of insurability. See "Charges and Deductions: Cost of
Insurance". A premium payment would result in an immediate increase in the net
amount at risk if the death benefit under your Policy is, or upon acceptance
of the premium would be, equal to your Accumulated Value multiplied by a death
benefit percentage. See "Death Benefit". If satisfactory evidence of
insurability is not received, the payment, or portion thereof may be returned.
All or a portion of a premium payment will be rejected and returned to you if
it would exceed the maximum premium limitations prescribed by federal tax law.
The amount, frequency and period of time over which you pay premiums may
affect whether the Policy will be classified as a modified endowment contract,
which is a type of life insurance contract subject to different tax treatment
for certain pre-death distributions than conventional life insurance
contracts. Accordingly, variations from the Planned Periodic Premiums on a
Policy that is not otherwise a modified endowment contract may result in the
Policy becoming a modified endowment contract for tax purposes.
In order for your Policy to avoid being treated as a modified endowment
contract, the sum of the premiums paid less a portion of any Partial
Withdrawals may not exceed the "seven pay premium" limit as defined in the
Internal Revenue Code ("IRC"). (See "Federal Income Tax Considerations"). If
we receive any premium payment that we believe, if applied to your Policy in
that Policy year, would cause your Policy to become a modified endowment
contract, the portion of the payment that we believe would cause your Policy
to become a modified endowment contract will not be applied to your Policy,
but will be returned to you, unless you had previously notified us that
payments that cause your Policy to become a modified endowment contract may be
accepted by us and applied to your Policy. However, for premium payments
received by us at our Home Office within 20 days before the upcoming Annual
Anniversary of your Policy, we may apply the portion of the premium payment
that we believe would cause your Policy to become a modified endowment
contract to your Policy on the upcoming Annual Anniversary.
Certain charges will be deducted from each premium payment. See "Charges and
Deductions". The remainder of the premium, known as the net premium, will be
allocated as described below under "Allocation of Net Premiums." Except in
Texas, additional payments will first be treated as repayments of Policy Debt
unless you request otherwise. Any portion of a payment that exceeds the amount
of Policy Debt will be applied as an additional premium payment.
ALLOCATION OF NET PREMIUMS
In your application for the Policy, you select the Investment Options to
which net premium payments will be allocated. During the Free-Look Period, net
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). Your Accumulated Value will be
automatically allocated according to your instructions contained in the
application 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"). Net premiums received after the
Free-Look Period will be allocated upon receipt among the Investment Options
according to your most recent instructions.
You may change the allocation of net premiums by submitting a proper written
request to our Home Office. Changes in net premium allocation instructions may
be made by telephone if a properly completed Authorization
15
<PAGE>
for Telephone Requests has been filed at our Home Office. We reserve the right
to discontinue telephone net premium allocation instructions.
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 values. 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. 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. 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 period you select, coincident with or
next following receipt at our Home Office of a Dollar Cost Averaging Request
in proper form. Subsequent transfers will be effected 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.
16
<PAGE>
You may instruct us at any time to terminate this option by written request
to our Home Office. 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 has been filed 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 transfer may be made if your
Policy is in the Grace Period and a payment required to avoid lapse is not
paid. See "Lapse". 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 suspend and discontinue telephone transfers.
Accumulated Value may also be transferred after the Free-Look Period 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 based on the instructions provided in your application. That amount
will be shown on the specifications page of your Policy and is called the
"Face Amount." The minimum Face Amount at issuance of a Policy is $50,000. We
may reduce the minimum Face Amount required at issuance under certain
circumstances, such as for group or sponsored arrangements.
For so long as your Policy remains in force, we will, upon proof of the
death of an Insured, pay death benefit proceeds to a named Beneficiary. Death
benefit proceeds will consist of the death benefit under the Policy, plus any
insurance proceeds provided by rider, reduced by any outstanding Policy Debt
(and, if in the Grace Period, any overdue charges).
You may select one of two death benefit options: Option A or Option B.
Generally, an applicant designates the death benefit option in the
application. If no option is designated, Option A will be assumed by us to
have been selected. Subject to certain restrictions, you can change the death
benefit option selected. So long as the Policy remains in force, the death
benefit under either option will never be less than the Face Amount of the
Policy.
Option A. Under Option A, the death benefit will be equal to the Face Amount
of the Policy or, if greater, Accumulated Value (determined as of the end of
the Valuation Period during which the Insured dies) multiplied by a death
benefit percentage. The death benefit 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
insurance policy for tax purposes. The death benefit percentage is 250% for an
Insured at Age 40 or under, and it declines for older Insureds. A table
showing the death benefit percentages is in the Appendix to this Prospectus
and in the Policy. Policy Owners who are seeking to have favorable investment
performance reflected in increasing Accumulated Value, and not in increasing
insurance coverage, should choose Option A.
Option B. Under Option B, the death benefit will be equal to the Face Amount
of the Policy plus the Accumulated Value (determined as of the end of the
Valuation Period during which the Insured dies) or, if greater, Accumulated
Value multiplied by a death benefit percentage. The specified percentage is
the same as that used in connection with Option A and as stated in the
Appendix. The death benefit under Option B will always vary as Accumulated
Value varies. Therefore, Policy Owners who seek to have favorable investment
performance reflected in increased insurance coverage should choose Option B.
17
<PAGE>
Examples of Options A and B. The following examples demonstrate the
determination of death benefits under Options A and B. The examples show three
Policies--Policies I, II, and III--with the same Face Amount, but Accumulated
Values that vary as shown, and which assume an Insured is Age 40 at the time
of death and that there is no outstanding Policy Debt.
<TABLE>
<CAPTION>
POLICY POLICY
POLICY I II III
-------- -------- --------
<S> <C> <C> <C>
Face Amount................................. $100,000 $100,000 $100,000
Accumulated Value on Date of Death.......... $ 25,000 $ 50,000 $ 75,000
Death Benefit Percentage.................... 250% 250% 250%
Death Benefit Under Option A................ $100,000 $125,000 $187,500
Death Benefit Under Option B................ $125,000 $150,000 $187,500
</TABLE>
Under Option A, the death benefit for Policy I is equal to $100,000 since
the death benefit is the greater of the Face Amount ($100,000) or the
Accumulated Value at the date of death multiplied by the death benefit
percentage ($25,000 x 250% = $62,500). In contrast, for both Policies II and
III under Option A, the Accumulated Value multiplied by the death benefit
percentage ($50,000 x 250% = $125,000 for Policy II; $75,000 x 250% =$187,500
for Policy III) is greater than the Face Amount ($100,000), so the death
benefit is equal to the higher value. Under Option B, the death benefit for
Policy I is equal to $125,000 since the death benefit is the greater of Face
Amount plus Accumulated Value ($100,000 + $25,000 = $125,000) or the
Accumulated Value multiplied by the death benefit percentage ($25,000 x 250% =
$62,500). Similarly, in Policy II, Face Amount plus Accumulated Value
($100,000 + $50,000 = $150,000) is greater than Accumulated Value multiplied
by the death benefit percentage ($50,000 x 250% = $125,000). In contrast, in
Policy III, the Accumulated Value multiplied by the death benefit percentage
($75,000 x 250% = $187,500) is greater than the Face Amount plus Accumulated
Value ($100,000 + $75,000 = $175,000), so the death benefit is equal to the
higher value.
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 a payment plan offered under
the Policy. The Policy should be consulted for details.
CHANGES IN DEATH BENEFIT OPTION
You may request that the death benefit under your Policy be changed from
Option A to Option B, or from Option B to Option A. Changes in the death
benefit option may be made only once per Policy Year and should be made in
writing to our Home Office. A change from Option B to Option A may be made
without evidence of insurability; a change from Option A to Option B will
require evidence of insurability satisfactory to us. The effective date of any
such change shall be the next Monthly Payment Date after the change is
accepted.
A change in the death benefit from Option A to Option B will result in a
reduction in the Face Amount of your Policy by the amount of the Policy's
Accumulated Value, with the result that the death benefit payable under Option
B at the time of the change will equal that which would have been payable
under Option A immediately prior to the change. The change in option will
affect the determination of the death benefit from that point on since
Accumulated Value will then be added to the new Face Amount, and the death
benefit will then vary with Accumulated Value. This change will not be
permitted if it would result in a Face Amount of less than $50,000, although
we reserve the right to waive this minimum under certain circumstances, such
as for group or sponsored arrangements. A charge of $100 will be deducted from
your Accumulated Value on the effective date of the change from Option A to
Option B 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 Debt.
A change in the death benefit from Option B to Option A will result in an
increase in the Face Amount of your Policy by the amount of your Policy's
Accumulated Value, with the result that the death benefit payable under Option
A at the time of the change will equal that which would have been payable
under Option B immediately prior to the change. However, the change in option
will affect the determination of the death benefit from that point on since
your Accumulated Value will no longer be added to the Face Amount in
determining
18
<PAGE>
the death benefit. From that point on, the death benefit will equal the new
Face Amount (or, if higher, the Accumulated Value times the applicable
specified percentage). No charge will be made on a change from Option B to
Option A.
A change in death benefit option may affect the monthly cost of insurance
charge since this charge varies with the net amount at risk, which generally
is the amount by which the death benefit exceeds Accumulated Value. See
"Charges and Deductions: Cost of Insurance". Assuming that the Policy's death
benefit would not be equal to Accumulated Value times a death benefit
percentage under either Option A or B, changing from Option B to Option A will
generally decrease the net amount at risk, and therefore decrease the cost of
insurance charges. Changing from Option A to Option B will generally result in
a net amount at risk that remains level. Such a change, however, will result
in an increase in the cost of insurance charges over time, since the cost of
insurance rates increase with the Insured's Age.
CHANGES IN FACE AMOUNT
You may request an increase or decrease in the Face Amount under your Policy
subject to our approval. A change in Face Amount may only be made once per
year, and a decrease in Face Amount may only be made after the fifth Policy
Year, or after the fifth Policy Year following the last increase in Face
Amount. Increasing the Face Amount could increase the death benefit under your
Policy, and decreasing the Face Amount could decrease the death benefit. The
amount of change in the death benefit will depend, among other things, upon
the death benefit option chosen by you and 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. An increase in Face Amount may increase the net amount at risk under
your Policy, which will increase your cost of insurance charge. Conversely, a
decrease in Face Amount may decrease the net amount at risk, which will
decrease your cost of insurance charge.
Any request for an increase or decrease in Face Amount must be made by
written application to our Home Office. It will become effective on the
Monthly Payment Date on or next following our acceptance of the request. If
you are not the Insured, we will also require the consent of the Insured
before accepting a request.
Increases. Additional evidence of insurability satisfactory to us will be
required for an increase in Face Amount. An increase will not be given for
increments of Face Amount less than that indicated in the table below. 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 Debt.
<TABLE>
<CAPTION>
AGE AT TIME MINIMUM
OF INCREASE INCREASE
----------- --------
<S> <C>
0-19 $17,000
20-24 13,000
25-29 12,000
30-33 11,000
34-74 10,000
75 11,000
76 13,000
77 16,000
78 20,000
79 31,000
80 50,000
</TABLE>
Decreases. 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. A decrease will not be permitted if the
Face Amount would fall below $50,000, although we reserve the right to waive
the minimum Face Amount under certain circumstances, such as for group or
sponsored arrangements. No charge will be deducted in connection with a
decrease. If a decrease in the Face Amount would result in total premiums paid
exceeding the
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<PAGE>
premium limitations prescribed under tax law to qualify your Policy as a life
insurance contract, we will refund to 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 (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, including any accrued earned interest, to secure any Policy
Debt.
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. On each Monthly Payment Date, the portion
of the Accumulated Value allocated to a particular Investment Option also will
be adjusted to reflect the assessment of the monthly deduction. See
"Determination of Accumulated Value". No minimum amount of Accumulated Value
is guaranteed. You bear the risk for the investment experience of Accumulated
Value allocated to the Variable Accounts.
Cash Surrender Value. The Cash Surrender Value of your Policy equals your
Accumulated Value less the surrender charge. Thus, your Accumulated Value will
exceed your Policy's Cash Surrender Value by the amount of the surrender
charge. Once the surrender charge has expired, your Accumulated Value will
equal the Cash Surrender Value.
Net Cash Surrender Value. The Net Cash Surrender Value of your Policy equals
your Cash Surrender Value less any outstanding Policy Debt. 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 death benefit under your Policy can never be less than the
Policy's Face Amount, the Accumulated Value 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 premiums,
the amount of any outstanding Policy Debt, Preferred or Partial Withdrawals,
and the charges assessed in connection with the Policy.
The amounts allocated to the Variable Accounts will be invested in shares of
the corresponding Portfolio 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.
Assets in the Variable Accounts are divided into accumulation units, which
are a measure of value used for bookkeeping purposes. When you allocate net
premiums to a Variable Account, your Policy is credited with accumulation
units. In addition, other transactions including loans, a surrender, Preferred
and 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
20
<PAGE>
(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
charges, if any, we may assess 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 a properly completed
Authorization For Telephone Requests has been 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 $500 ($200 in Connecticut, $250 in Oregon). The maximum
amount that can be borrowed at any time is the greater of (1) 100% of the
Accumulated Value in the Fixed Account plus 90% of the Accumulated Value in
the Variable Accounts, and less any surrender charges that would have been
imposed if the Policy were surrendered on the date the loan is taken or (2)
100% of the product of (a x b/c - d) where (a) equals the Policy's Accumulated
Value less any surrender charge that would be imposed if the Policy were
surrendered on the date the loan is taken and less 12 times the current
monthly deduction; (b) equals 1 plus the annual loan interest rate credited;
(c) equals 1 plus the annual loan interest rate currently charged; and (d)
equals any existing Policy Debt.
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 your Accumulated Value
less Debt.
The Policy loan annual effective interest rate maximum is 4.75% per year for
the first 10 years and 4.25% thereafter. We will credit interest monthly on
amounts held in the Loan Account to secure the loan at an annual effective
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 for the prior year on
each Policy Anniversary. 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 Investment Options on a proportional basis.
Unless you request otherwise, any loan repayment will be transferred into
the Investment Options in accordance with your most recent premium allocation
instructions. In addition, on each Policy Anniversary, 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 most recent 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 and the current interest
rate of the Fixed Account on the loaned amount. Thus a loan, whether or not
repaid, will have a permanent effect on your Policy's values and may have an
effect on the amount and duration of the death benefit. If not repaid, your
Policy Debt will be deducted from the amount of death benefit paid upon the
death of the Insured, the Cash Surrender Value 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 Accumulated Value minus Policy Debt is insufficient to
cover the monthly deduction against your Policy's Accumulated Value on any
Monthly Payment Date 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 the monthly deduction. Additional payments or repayment of a portion of
Policy Debt may be required to keep the Policy in force. See "Lapse".
A loan will not be treated as a distribution from your Policy and will not
result in taxable income to you unless your Policy is a modified endowment
contract, or unless the Policy is surrendered or upon maturity or lapse of the
Policy, in which case a loan will be treated as a distribution that may give
rise to taxable income.
For information on the tax treatment of loans, see "Federal Income Tax
Considerations".
21
<PAGE>
BENEFITS AT MATURITY
If the insured is living on your Policy Anniversary nearest the Insured's
Age 95, we will pay you, as an endowment benefit, your Accumulated Value,
reduced by any Policy Debt. 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 any
applicable surrender charge and less any outstanding Policy Debt.
You may surrender your Policy by sending a written request together with
your Policy to our Home Office. The proceeds will be determined as of the end
of the Valuation Period during which your request for a surrender is received.
You may elect to have the proceeds paid in cash or applied under a payment
plan offered under the Policy. See "Payment Plan". For information on the tax
effects of a surrender of a Policy, see "Federal Income Tax Considerations".
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
starting on your first Policy Anniversary and before your 15th Policy
Anniversary. Under this Benefit, you may make one "Preferred Withdrawal" of
the Net Cash Surrender Value per year. The portion of a Preferred Withdrawal
of up to 10% of the amount of your total premium payments received and
accepted prior to the withdrawal will not reduce the Face Amount under your
Policy. The excess of any Preferred Withdrawal over 10% of total premiums
received and accepted prior to the withdrawal will be treated in the same
manner as a "Partial Withdrawal" and therefore may cause a reduction in Face
Amount if the death benefit option is Option A, as described below.
The Partial Withdrawal Benefit is available on and after your 15th Policy
Anniversary. Under this Benefit, you may make "Partial Withdrawals" of Net
Cash Surrender Value. The limit of one withdrawal per year does not apply to
Partial Withdrawals.
Both Preferred and Partial Withdrawals must be for at least $500, and your
Policy's Net Cash Surrender Value after the withdrawal must be at least $500.
If there is any Policy Debt, the maximum Partial Withdrawal is limited to the
excess, if any, of the Cash Surrender Value immediately prior to the
withdrawal over the result of the Policy Debt divided by 90%. In addition, the
amount of a Partial Withdrawal is further limited on Policies on which the
Owner has chosen death benefit Option A so that the withdrawal will not cause
the Face Amount to be less than $50,000, although we reserve the right to
waive the minimum Face Amount under certain circumstances, such as for group
or sponsored arrangements. If the Policy Owner does not exercise the Preferred
Withdrawal Benefit during one of the first 15 Policy Years, the amount that
the Policy Owner could have withdrawn without affecting Face Amount does not
carry over in the following year.
You may make a Preferred or Partial Withdrawals by submitting a proper
written request to our Home Office. As of the effective date of any
withdrawal, your Accumulated Value, Cash Surrender Value, and Net 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.
No surrender charge or withdrawal fee will be charged for a Preferred or
Partial Withdrawal.
When a Partial Withdrawal is made on a Policy on which the Owner has
selected death benefit Option A, the Face Amount under the Policy is decreased
by the lesser of (1) the amount of the Partial Withdrawal or (2) if
22
<PAGE>
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
will not change the Face Amount of a Policy on which the Owner has selected
death benefit Option B. However, assuming that the death benefit is not equal
to Accumulated Value times a death benefit percentage, the Partial Withdrawal
will reduce the death benefit by the amount of the Partial Withdrawal. To the
extent the death benefit is based upon the Accumulated Value times the death
benefit percentage applicable to the Insured, a Partial Withdrawal may cause
the death benefit to decrease by an amount greater than the amount of the
Partial Withdrawal. See "Death Benefit".
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 (15 days in Colorado; 20 days in North Dakota;
and 30 days if you are a resident of California and are 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.
Certain states require different Free-Look Rights if you purchase the Policy
in exchange for another policy, in which case we will notify you of your
Right. 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 Debt will be deducted from the amount refunded. During the
Free-Look Period, net 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 Net Premiums".
LAPSE
Your Policy will lapse only when your Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction on a Monthly Payment Date,
and a Grace Period expires without you making a sufficient payment. If
Accumulated Value less Policy Debt is insufficient to cover the current
monthly deduction on a Monthly Payment Date, you must pay during the Grace
Period a minimum of three times the full monthly deduction due on the Monthly
Payment Date when the insufficiency occurred to avoid termination of your
Policy. We will not accept any payment if it would cause your total premium
payments to exceed the maximum permissible premium for your Policy's Face
Amount under the IRC. This is unlikely to occur unless you have outstanding
Policy Debt, in which case you could repay a sufficient portion of the Policy
Debt to avoid termination. In this instance, you may wish to repay a portion
of Policy Debt to avoid recurrence of the potential lapse. If premium payments
have not exceeded the maximum permissible premiums for your Policy's Face
Amount, you may wish to make larger or more frequent premium payments to avoid
recurrence of the potential lapse.
If your Accumulated Value less Policy Debt is insufficient to cover the
monthly deduction on a Monthly Payment Date, we will deduct the amount that is
available. We will notify you (and any assignee of record) of the payment
required to keep your Policy in force. You will then have a "Grace Period" of
61 days, measured from the date the notice is sent, to make the 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 will be
allocated among the Investment Options in accordance with your current premium
allocation instructions. Any monthly deduction 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 any Policy Debt.
23
<PAGE>
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 deductions
that were due and unpaid during the Grace Period, and payment of a premium at
least sufficient to keep the Policy in force for three months after the date
of reinstatement.
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 Debt on the
date of lapse and no Policy Debt will exist on the date of the reinstatement.
If your Policy is reinstated on your Monthly Payment Date next following
lapse, any Policy Debt on the date of lapse will also be reinstated. No
interest on amounts held in the Loan Account to secure Policy Debt 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, if applicable, Policy Debt will be
allocated among the Investment Options in accordance with your most recent
premium allocation instructions.
CHARGES AND DEDUCTIONS
PREMIUM LOAD
A premium load is deducted from each premium payment under your Policy prior
to allocation of the net premium to your Accumulated Value. The premium load
consists of the following items:
Sales Load. The sales load is equal to 4% of each premium paid during the
first ten Policy Years and 2% of each premium paid thereafter.
The sales load is deducted to compensate us for the cost of distributing
the Policies. The amount we derive from the sales load is not expected to
be sufficient to cover the sales and distribution expenses in connection
with the Policies. If surrendered within 10 years after issuance, the
Policy will also be subject to a sales surrender charge. See "Surrender
Charge," below. To the extent that sales and distribution expenses exceed
sales loads and any amounts derived from the sales surrender charge, such
expenses may be recovered from other charges, including amounts derived
indirectly from the charge for mortality and expense risks and from
mortality gains.
We may reduce or waive the sales load on Policies sold to our directors
or employees, any of our affiliates or to trustees or any employees of the
Fund.
State and Local Premium Tax Charge. A charge equal to 2.35% is assessed
against each premium 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.
DEDUCTIONS FROM ACCUMULATED VALUE
A charge called the monthly deduction is deducted from your Accumulated
Value in the Investment Options beginning on the Monthly Payment Date on or
next following the date we first become obligated under your Policy and on
each Monthly Payment Date thereafter. Unless you request otherwise, the
monthly deduction will be deducted from the Investment Options on a pro rata
basis. The monthly deduction consists of the following items:
Cost of Insurance. 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 a current cost of insurance rate multiplied
by the net amount at risk under your Policy at the beginning of the Policy
Month. The net amount at risk for these purposes is equal to the amount of
death benefit
24
<PAGE>
payable at the beginning of the Policy Month divided by 1.004074 (a discount
factor to account for return deemed to be earned during the month) less your
Accumulated Value at the beginning of your Policy Month.
The Policy contains guaranteed cost of insurance rates that may not be
increased. The guaranteed rates are no greater than certain of the 1980
Commissioners Standard Ordinary Mortality Tables (and where unisex cost of
insurance rates apply, the 1980 Commissioners Ordinary Mortality Table B).
These rates are based on the Age and underwriting class of the Insured. They
are also based on the sex of the Insured, except that unisex rates are used
where appropriate under applicable law, including in the state of Montana and
in Policies purchased by employers and employee organizations in connection
with employment-related insurance or benefit programs. As of the date of this
prospectus, we charge "current rates" that are lower (i.e., less expensive)
than the guaranteed rates, and we may also charge current rates in the future.
Like the guaranteed rates, the current rates also vary with the Age, gender,
where permissable, and underwriting class of the Insured. In addition, they
also vary with the Insured's smoking status, size of the Face Amount, and the
policy duration. Policies with Face Amounts of $500,000 or more receive more
favorable rates than Policies with smaller Face Amounts. The cost of insurance
rate generally increases with the Age of the Insured.
If there have been increases in your Face Amount, then for purposes of
calculating the cost of insurance charge, your Accumulated Value will first be
applied to the initial Face Amount. If your Accumulated Value exceeds the
initial Face Amount divided by 1.004074, the excess will then be applied to
any increase in Face Amount in the order of the increases. If the death
benefit equals Accumulated Value multiplied by the applicable death benefit
percentage, any increase in Accumulated Value will cause an automatic increase
in the death benefit. The underwriting class and duration for such increase
will be the same as that used for the most recent increase in Face Amount
(that has not been eliminated through a subsequent decrease in Face Amount).
Administrative Charge. A monthly administrative charge is deducted equal to
$25 in each of the first 12 Policy Months and which varies with the size of a
Policy's Face Amount thereafter. For Face Amounts of less than $100,000, the
charge is equal to $7.50 per month; for Face Amounts of $100,000 or more, the
charge is equal to $5.00 per month. For purposes of this charge, only the
initial Face Amount is considered. The administrative charge is assessed to
reimburse us for the expenses associated with administration and maintenance
of the Policies. The administrative charge is guaranteed never to exceed $25
during the first 12 Policy Months and $10 per month thereafter. We do not
expect to profit from this charge.
Mortality and Expense Risk Charge. A monthly charge is deducted for
mortality and expense risks assumed by us. During the first ten Policy Years,
this charge is equal to .000625 multiplied by a Policy's Accumulated Value
less any amount in the Loan Account, which is equivalent to an annual rate of
.75% of Accumulated Value less any amount in the Loan Account. After the tenth
Policy Year, the charge is equal to .000208333 multiplied by a Policy's
Accumulated Value less any amount in the Loan Account, which is equivalent to
an annual rate of .25% of Accumulated Value less any amount in the Loan
Account. For purposes of this charge, the Accumulated Value is based upon its
value on the Monthly Payment Date after the deduction of the charge for the
cost of insurance and any optional insurance benefits added by rider.
The mortality and expense risk charge is assessed 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 or
sales surrender charge. See "Surrender Charge," below.
Optional Insurance Benefits Charges. The monthly deduction will include
charges for any optional insurance benefits added to the Policy by Rider. See
"Optional Insurance Benefits".
A death benefit change charge, if applicable, will also be deducted from
your Accumulated Value. If you request and we accept an increase in Face
Amount or a change in death benefit option from Option A to Option
25
<PAGE>
B, a charge of $100 will be deducted from your Accumulated Value on the
effective date of the increase or option change to cover processing costs. The
charge will be deducted from the Investment Options in the proportion each
bears to the Accumulated Value of your Policy less Policy Debt.
SURRENDER CHARGE
We will assess a surrender charge against your Accumulated Value upon
surrender of your Policy within ten years after its issuance. The surrender
charge consists of two charges: an underwriting surrender charge and a sales
surrender charge.
Underwriting Surrender Charge. The underwriting surrender charge is equal to
a specified amount that varies with the Age of the Insured for each $1,000 of
a Policy's initial Face Amount in accordance with the following schedule:
<TABLE>
<CAPTION>
AGE OF INSURED AT
ISSUANCE OF POLICY CHARGE PER $1,000
------------------ -----------------
<S> <C>
0-20 $2.50
21-30 2.50
31-40 3.50
41-50 4.50
51-60 5.50
61-80 6.50
</TABLE>
The amount of the charge remains level for five Policy Years. After the fifth
Policy Anniversary, the charge decreases by 1.666% per month until it reaches
zero at the end of the 120th Policy Month.
The charge is based upon the Age of the Insured and the Face Amount on the
Policy Date, and it does not increase as the Insured gets older or with
changes in the Face Amount. For example, if an Insured Age 25 purchases a
Policy with an initial Face Amount of $50,000 and surrenders the Policy in the
third Policy Year, the underwriting surrender charge would be $125.
The underwriting surrender charge is designed to cover the administrative
expenses associated with underwriting and issuing a Policy, including the
costs of processing applications, conducting medical examinations, determining
insurability and the Insured's underwriting class, and establishing policy
records. We do not expect to profit from the underwriting surrender charge.
Sales Surrender Charge. The sales surrender charge is equal to 26% of the
lesser of the premiums paid under the Policy or a maximum amount that is
called the Sales Surrender Target. The Sales Surrender Target is equal to the
premium that would be payable under a Policy for one year if a Policy Owner
were to pay level annual premiums for the life of the Policy, and taking into
account certain Policy charges including the premium load, the guaranteed cost
of insurance, and the mortality and expense risk charge, and assuming net
investment earnings at an annual rate of 5%. The Sales Surrender Target does
not increase as the Insured gets older or with changes in the Face Amount.
Generally, if a Policy Owner pays Planned Periodic Premiums, the sales
surrender charge will be 26% of premium payments until the first Policy
Anniversary, and will be 26% of the Sales Surrender Target thereafter. The
sales surrender charge will not exceed 26% of the Sales Surrender Target for
five Policy Years. After the fifth Policy Year, the charge decreases from its
maximum by 1.666% per month until it reaches zero at the end of the 120th
Policy Month.
For example, if a Male Insured Age 25 purchases a Policy with a Face Amount
of $50,000, the sales surrender target, based upon the assumptions described
above, would be $387.50. The maximum sales surrender charge during the first
five Policy Years would be 26% of this amount, or $100.75.
The purpose of the sales surrender charge is to reimburse us for some of the
expenses of distributing the Policies.
We may reduce or waive the sales surrender charge on Policies sold to our
directors or employees, any of our affiliates or to trustees or any employees
of the Fund.
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CORPORATE AND OTHER PURCHASERS
The Policy is available for individuals and for corporations and other
institutions. For corporate or other group or sponsored arrangements
purchasing one or more Policies, we may reduce the amount of the sales
surrender charge, underwriting surrender charge, or other charges where the
expenses associated with the sale of, or the underwriting or other
administrative costs associated with the Policy or Policies are reduced.
Sales, underwriting or other administrative expenses may be reduced for
reasons such as expected economies resulting from a corporate purchase or a
group or sponsored arrangement, from the amount of the initial premium payment
or payments, or the amount of projected premium payments.
OTHER CHARGES
We may charge the Variable Accounts for 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 Income 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.
GUARANTEE OF CERTAIN CHARGES
We guarantee that certain charges will not increase. This includes the
charge for mortality and expense risks, the administrative charge with respect
to the guaranteed rates described above, the premium load, the guaranteed cost
of insurance rates, and the surrender 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 under 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 or gift 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
state or local income tax considerations which may be involved in the purchase
of the Policy.
While we believe that the Policy meets the statutory definition of life
insurance under Section 7702 of the Internal 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.
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The death benefit under a Policy should be excludable from the gross income
of the Beneficiary (whether the Beneficiary is a corporation, individual or
other entity) under IRC Section 101(a)(1) 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 the Policy
until a full surrender thereof, maturity of the Policy, or a Preferred or
Partial Withdrawal. In addition, certain Policy loans may be taxable in the
case of Policies that are modified endowment contracts. PROSPECTIVE OWNERS
THAT INTEND TO USE POLICIES TO FUND DEFERRED COMPENSATION ARRANGEMENTS FOR
THEIR EMPLOYEES ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
TAX CONSEQUENCES OF SUCH ARRANGEMENTS. PROSPECTIVE CORPORATE OWNERS SHOULD
CONSULT THEIR TAX ADVISORS 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 IRC Section 1035(a). Changing the
Insured under a Policy will, however, not be treated as a tax-free exchange
under IRC 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 is 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 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 the 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 your 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 ruling 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.
Tax Treatment of Policies. IRC Section 7702A defines a class of life
insurance contracts referred to as modified endowment contracts. Under this
provision, the Policies will be treated for tax purposes in one of two ways.
Policies that are not classified as modified endowment contracts will be taxed
as conventional life insurance contracts, as described below. Taxation of pre-
death distributions from Policies that are classified as modified endowment
contracts and that are entered into on or after June 21, 1988 is somewhat
different, as described below.
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 premiums" 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
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the first three years, etc. Under this test, a Select Exec Policy may or may
not be a modified endowment contract, depending on the amount of premiums paid
during each of the Policy's first seven contract years. Changes in the policy,
including changes in death benefits, may require "retesting" of a Policy to
determine if it is to be classified as a modified endowment contract.
Conventional Life Insurance Policies. If a Policy is not a modified
endowment contract, upon full surrender or maturity of a Policy for its Net
Cash Surrender Value, the excess, if any, of the Net Cash Surrender Value plus
any outstanding Policy Debt over the cost basis under a Policy will be treated
as ordinary income for federal income tax purposes. Such a Policy's cost basis
will usually equal the premiums paid less any premiums previously recovered in
Preferred or Partial Withdrawals. Under IRC Section 7702, if a Preferred
Withdrawal occurring within 15 years of the Policy Date is accompanied by a
reduction in benefits under the Policy, special rules apply to determine
whether part or all of the cash received is paid out of the income of the
Policy and is taxable. Cash distributed to a Policy Owner on Partial
Withdrawals occurring more than 15 years after the Policy Date will be taxable
as ordinary income to the Policy Owner to the extent that it exceeds the cost
basis under a Policy.
We also believe that loans received under Policies that are not modified
endowment contracts will be treated as indebtedness of the Owner for federal
income tax purposes, and that no part of any loan under the Policy will
constitute income to the Owner unless the Policy is surrendered or matures or
lapses. Consult with your tax advisor on whether interest paid (or accrued by
an accrual basis taxpayer) on a loan under a Policy that is not a modified
endowment contract may be deductible. Tax law provisions may limit the
deduction of interest payable on loan proceeds that are used to purchase or
carry certain life insurance policies.
CONSULT WITH YOUR TAX ADVISOR ON WHETHER INTEREST PAID (OR ACCRUED BY AN
ACCRUAL BASIS TAXPAYER) ON A POLICY THAT IS NOT A MODIFIED ENDOWMENT CONTRACT
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.
Modified Endowment Contracts. Pre-death distributions from modified
endowment contracts may give rise to taxable income. Upon full surrender or
maturity of the Policy, the Policy Owner would recognize ordinary income for
federal income tax purposes equal to the amount by which the Net Cash
Surrender Value plus Policy Debt exceeds the investment in the Policy (usually
the premiums paid plus certain 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, the Policy Owner
would recognize ordinary income to the extent allocable to income (which
includes all previously non-taxed gains) on the Policy. The amount allocated
to income is the amount by which the Accumulated Value of the 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.
Amounts received under a modified endowment contract that are included in
gross income are subject to an additional tax equal to 10% of the amount
included in gross income, unless an exception applies. The 10% additional tax
does not apply to any amount received: (i) when the taxpayer is at least 59
1/2 years old; (ii) which is attributable to the taxpayer becoming disabled;
or (iii) which is part of a series of substantially equal periodic payments
(not less frequently than annually) 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.
If a Policy was not originally a modified endowment contract but becomes
one, under Treasury Department regulations which are yet to be prescribed,
pre-death distributions received in anticipation of a failure of a Policy to
meet the seven-pay premium test are to be treated as pre-death distributions
from a modified endowment contract (and, therefore, are to 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.
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It is unclear whether interest paid (or accrued by an accrual basis
taxpayer) on Policy Debt with respect to a modified endowment contract
constitutes interest for federal income tax purposes. CONSULT YOUR TAX
ADVISOR. 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.
Reasonableness Requirement for Charges. 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
purposes 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.
Other. 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.
CHARGE FOR OUR INCOME TAXES
For federal income tax purposes, variable life insurance generally is
treated in a manner consistent with traditional fixed life insurance. We will
review the question of a charge to the Separate Account or the Policy for our
federal income taxes periodically. A charge may be made for any federal income
taxes incurred by us that are attributable to the Separate Account or to our
operations with respect to the Policy. 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 a Policy
Owner will have the right to instruct will be determined by dividing
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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 the 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 such 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 Policy Owners.
CONFIRMATION STATEMENTS AND OTHER REPORTS TO OWNERS
A statement will be sent quarterly to you setting forth a summary of the
transactions which occurred during the quarter and indicating the death
benefit, Face Amount, Accumulated Value, Cash Surrender Value, and any Policy
Debt. In addition, the statement will indicate the allocation of Accumulated
Value among the Investment Options and any other information required by law.
Confirmations will be sent out upon premium payments, transfers, loans, loan
repayments, withdrawals, and surrenders. Confirmations of scheduled
transactions under dollar cost averaging, portfolio rebalancing and monthly
deductions will appear on your quarterly statements.
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 law 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
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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, at 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. We may also terminate and liquidate
any Variable Account.
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 Separate
Account.
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 and modified endowment contracts
under the IRC, under regulations of the United States Treasury Department or
any state.
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 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 may be
expressed as 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, 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 operation 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, the
administrative charge, and the mortality and expense risk charge. The varying
death benefit options will result in different expenses for the cost of
insurance, and the varying expenses will result in different Accumulated
Values. Since the Guideline Minimum Death Benefit is equal to a percentage
(e.g. 250% for an Insured Age 40) times Accumulated Value, it will vary with
Accumulated Value. The cost of insurance charge varies according to the Ages
of the Insureds and therefore the cost of insurance charge reflected in the
performance for the hypothetical Policy is based on the hypothetical Insureds
and death benefit option assumed. The quotation may also reflect the deduction
of the surrender charge, 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 the
surrender charge or other charges.
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
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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 net 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 SEC 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 net premium payments to the Fixed Account, the
Separate 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 a
minimum interest rate of .32737% per month, compounded monthly, for a minimum
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 declare current interest in excess of the 4%, which will be
guaranteed for one year. (The portion of your Accumulated Value that has been
used to secure Policy Debt will be credited with an interest rate of .32737%
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 under
Option A will be equal to the Face Amount of the Policy or, if greater,
Accumulated Value multiplied by a death benefit percentage. Under Option B,
the death benefit will be equal to the Face Amount of the Policy plus the
Accumulated Value or, if greater, Accumulated Value multiplied by a death
benefit percentage. See "Death Benefit".
POLICY CHARGES
Policy charges will be the same whether you allocate net premiums or
transfer Accumulated Value to the Fixed Account or allocate net premiums to
the Variable Accounts. These charges consist of the premium load,
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including the sales load and state and local premium tax charge; the
deductions from Accumulated Value, including the charges for the cost of
insurance, administrative charge, mortality and expense risk charge, the
charge for any optional insurance benefits added by rider, any death benefit
change charge; and the surrender charge, including the underwriting surrender
charge and the sales surrender charge. Any amounts that we pay for income
taxes allocable to the Variable Accounts will not be charged against the Fixed
Account. In addition, the operating expenses of the Variable Accounts, as well
as the investment advisory fee charged 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 after the Free-Look Period from the Variable
Accounts to the Fixed Account and from the Fixed Account to the Variable
Accounts, subject to the following limitations. No transfer may be made if the
Policy is in a Grace Period and the required premium has not been paid. 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 be made in the
Policy Month preceding a Policy Anniversary, except that if you reside 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 from the Fixed Account to the same extent as an Owner who has
invested in the Variable Accounts. See "Surrender" and "Preferred and Partial
Withdrawal Benefits". You may borrow up to the greater of (1) 90% of the
Accumulated Value in the Variable Accounts and 100% of the Accumulated Value
in the Fixed Account, less any surrender charges that would have been imposed
if your Policy were surrendered on the date the loan is taken or (2) 100% of
the product of (a x b/c - d) where (a) equals your Policy's Accumulated Value
less any surrender charge that would be imposed if your Policy were
surrendered on the date the loan is taken and less 12 times the current
monthly deduction; (b) equals 1 plus the annual loan interest rate credited;
(c) equals 1 plus the annual loan interest rate currently charged; and (d)
equals any existing policy Debt. 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.
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,
which must be 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
34
<PAGE>
provided, if no designated Beneficiary is living upon the death of the
Insured, you are the Beneficiary, if living; otherwise 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 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
underwriting class.
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 law resulting from
the exchange of Insured would result in the immediate termination of the
Policy, 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.
A fee of $100 will be charged to cover the costs of processing the 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
This Policy is a contract between the Owner and Pacific Life. The entire
contract consists of the Policy, a copy of the initial application, all
subsequent applications to change the Policy, any endorsements, any Riders,
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 the information needed to process a
payment or transfer or, if sooner, any other period required by law.
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 closing 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 a Variable 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
35
<PAGE>
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 payment option, Endorsement 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 Policy 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 or sex of the Insured has been misstated, the death benefit under
your Policy will be the greater of that which would be purchased by the most
recent cost of insurance charge at the correct Age and sex, or the death
benefit derived by multiplying Accumulated Value by the death benefit
percentage for the correct Age and sex. If the Insured's Age or sex is
misstated in the application, the Accumulated Value will be modified by
recalculating all prior cost of insurance charges and other monthly deductions
based on the correct Age and sex. If unisex cost of insurance rates apply, no
adjustment will be made for a misstatement of sex. See "Cost of Insurance".
INCONTESTABILITY
We may contest the validity of your Policy if any material misstatements are
made in the application. However, your Policy will be incontestable after the
expiration of the following: the initial Face Amount cannot be contested after
your Policy has been in force during the Insured's lifetime for two years from
the Policy Date; if the Insured is changed, your 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 withdrawal amounts and less any Policy Debt. If the Insured
has been changed and the new Insured dies by suicide, while sane or insane,
within two years of the exchange date, the death benefit proceeds will be
limited to your Net Cash Surrender Value as of the exchange date, plus the
premiums paid since the exchange date, less the sum of any increases in Debt,
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.
POLICY ILLUSTRATIONS
Upon request, we will send you an illustration of future benefits under your
Policy based on both guaranteed and current cost factor assumptions. However,
we reserve the right to charge a $25 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
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<PAGE>
guaranteed not to exceed those shown in your 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, or withdrawal benefits or death benefit proceeds
may be used to purchase any other payment plan that we make available at that
time.
OPTIONAL INSURANCE BENEFITS AND OTHER POLICIES
At the time you complete the application for a Policy and subject to certain
requirements, you may elect to add one or more Riders to the Policy as
optional insurance benefits (subject to approval of state insurance
authorities). These optional benefits are: additional insurance coverage for
the accidental death of the Insured (Accidental Death Rider); term insurance
on the Insured's children (Children's Term Rider); annual renewal term
insurance on the Insured or any member of his or her immediate family (Annual
Renewable Term Rider); added protection benefit on the Insured (Added
Protection Benefit Rider); the right to purchase additional insurance on the
Insured's life on certain specified dates without proof of insurability
(Guaranteed Insurability Rider); additional protection in the event of a
disability (Waiver of Charges Rider); or early payment of coverage if the
Insured is diagnosed with a terminal illness (Accelerated Living Benefit
Rider). The cost of any additional insurance benefits will be deducted as part
of the monthly deduction against Accumulated Value. See "Charges and
Deductions". The amounts of these benefits are fully guaranteed at issue.
Certain restrictions may apply and are described in the applicable Rider.
Under certain circumstances, a Policy can be combined with an annual renewable
term insurance rider (or added protection benefit rider) to result in a
combined coverage amount equal to the same Face Amount that could be acquired
under a single Policy. Combining a Policy and such a benefit will result in
certain charges, including a surrender charge and possibly cost of insurance
charges, for the Policy that are lower than for the single Policy providing
the same coverage amount. We offer other variable life insurance policies that
provide insurance protection on the life of a single insured or on the lives
of two insureds, whose loads and charges may vary. An insurance agent
authorized to sell the Policy can describe these extra benefits further.
Samples of the provisions for the extra optional benefits are available from
us upon written request.
LIFE INSURANCE RETIREMENT PLANS
Any Policy Owners or applicants who wish to consider using the Policy as a
funding vehicle for (non-qualified) retirement purposes may obtain additional
information from us. An Owner could pay premiums under a Policy for a number
of years, and upon retirement, could utilize a Policy's loan and partial
withdrawal features to access Accumulated Value as a source of retirement
income for a period of time. This use of a Policy does not alter an Owner's
rights or our obligations under a Policy; the Policy would remain a life
insurance contract that, so long as it remains in force, provides for a death
benefit payable when the Insured dies.
Ledger illustrations are available upon request that portray how the Policy
can be used as a funding mechanism for (non-qualified) retirement plans,
referred to herein as "life insurance retirement plans," for individuals.
Ledger illustrations provided upon request show the effect on Accumulated
Value, Net Cash Surrender Value, and the net death benefit of premiums paid
under a Policy and Partial Withdrawals and loans taken for retirement income;
or reflecting allocation of premiums to specified Variable Accounts. This
information will be portrayed at hypothetical rates of return that are
requested. Charts and graphs presenting the results of the ledger
illustrations or a comparison of retirement strategies will also be furnished
upon request. Any graphic presentations and retirement strategy charts must be
accompanied by a corresponding ledger illustration; ledger illustrations must
always include or be accompanied by comparable information that is based on
guaranteed cost of insurance rates and that presents a hypothetical gross rate
of return of 0%. Retirement illustrations will not be furnished with a
hypothetical gross rate of return in excess of 12%.
The hypothetical rates of return in ledger illustrations are illustrative
only and should not be interpreted as a representation of past or future
investment results. Policy values and benefits shown in the ledger
illustrations would be different if the gross annual investment rates of
return were different from the hypothetical rates portrayed, if premiums were
not paid when due, and loan interest was paid when due. Withdrawals or loans
may have an adverse effect on Policy benefits.
37
<PAGE>
RISKS OF LIFE INSURANCE RETIREMENT PLANS
Using your Policy as a funding vehicle for retirement income purposes
presents several risks, including the risk that if your Policy is
insufficiently funded in relation to the income stream from your Policy, your
Policy can lapse prematurely and result in significant income tax liability to
you in the year in which the lapse occurs. Other risks associated with
borrowing from your Policy also apply. Loans will be automatically repaid from
the gross death benefit at the death of the Insured, resulting in the
estimated payment to the Beneficiary of the net death benefit, which will be
less than the gross death benefit and may be less than the Face Amount. Upon
surrender or maturity, the loan will be automatically repaid, resulting in the
payment to you of the Net Surrender Value. Similarly, upon lapse, the loan
will be automatically repaid. The automatic repayment of the loan upon
maturity, lapse, or surrender will cause the recognition of taxable income to
the extent that Net Surrender Value plus the amount of the repaid loan exceeds
your basis in the Policy. Thus, under certain circumstances, maturity,
surrender, or lapse of your Policy could result in tax liability to you. In
addition, to reinstate a lapsed Policy, you would be required to make certain
payments as described under "Reinstatement". Thus, you should be careful to
fashion a life insurance retirement plan so that your Policy will not lapse
prematurely under various market scenarios as a result of withdrawals and
loans taken from your Policy.
Your Policy will lapse if your Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction on any Monthly Payment
Date, and a Grace Period expires without you making a sufficient payment. To
avoid lapse of your policy, it is important to fashion a payment stream that
does not leave your Policy with insufficient Accumulated Value. Determinations
as to the amount to withdraw or borrow each year warrant careful
consideration. Careful consideration should also be given to any assumptions
respecting the hypothetical rate of return, to the duration of withdrawals and
loans, and to the amount of Accumulated Value that should remain in your
Policy upon its maturity. Poor investment performance can contribute to the
risk that your Policy may lapse. In addition, the cost of insurance generally
increases with the Age of the Insured, which can further erode existing
Accumulated Value and contribute to the risk of lapse.
Further, interest on a Policy loan is due to us for any Policy Year on the
Policy Anniversary. If this interest is not paid when due, it is added to the
amount of the outstanding Policy Debt, and interest will begin accruing
thereon from that date. This can have a compounding effect, and to the extent
that the outstanding loan balance exceeds your basis in the Policy, the
amounts attributable to interest due on the loans can add to your federal (and
possibly state) income tax liability.
You should consult with your financial advisers in designing a life
insurance retirement plan that is suitable. Further, you should continue to
monitor the Accumulated Value net of loans remaining in a Policy to assure
that the Policy is sufficiently funded to continue to support the desired
income stream and so that it will not lapse. In this regard, you should
consult your periodic statements to determine the amount of their remaining
Accumulated Value minus the outstanding loan balance. Illustrations showing
the effect of charges under the Policy upon existing Accumulated Value or the
effect of future withdrawals or loans upon the Policy's Accumulated Value and
death benefit are available from your agent. Consideration should be given
periodically to whether the Policy is sufficiently funded so that it will not
lapse prematurely.
Because of the potential risks associated with borrowing from a Policy, use
of the Policy in connection with a life insurance retirement plan may not be
suitable for all Policy Owners. These risks should be carefully considered
before borrowing from the Policy to provide an income stream.
DISTRIBUTION OF THE POLICY
Pacific Mutual Distributors, Inc. ("PMD") 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. PMD is a wholly-owned subsidiary of ours. PMD's principal business
address is 700 Newport Center Drive, Newport Beach, California 92660.
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<PAGE>
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 for sales of the Policy may vary
with the Sales Agreement, but is not expected to exceed 90% of expected first
year premiums commissions, 4% of premiums paid through the 10th Policy Year
and 2% premiums paid thereafter. Broker-dealers may also receive annual
renewal compensation of up to .20% of Accumulated Value less Policy Debt,
depending upon the circumstances. The annual renewal compensation will be
computed monthly and payable starting on the fifth or the tenth Policy Year,
depending upon the circumstances. 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 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 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 Life; Equity Board Member of PIMCO Advisors
the Board and L.P.; Director of: Newhall Land & Farming; The Irvine
Chief Executive Officer Company; The Edison Company; Pacific Corinthian Life
Insurance Company; similar positions with other
subsidiaries of Pacific Life.
Glenn S. Schafer Director (since November 1994) and President of Pacific
Director and President Life, January 1995 to present; Executive Vice President and
Chief Financial Officer of Pacific Life, April 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 Life.
Richard M. Ferry Director of Pacific Life; President, Director and Chairman
Director 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 Life; Chairman Emeritus and Director of
Director 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 Life; Chairman and former Editor-in-
Director 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.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Charles A. Lynch Director of Pacific 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, Jr. Director of Pacific Life; Director and President Emeritus of
Director 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 Life; Director, Chairman, and Chief
Director 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 Life; President, and Chief Executive
Director Officer of Pearson-Sibert Oil Co. of Texas; Director of:
The Irvine Company; Automobile Club of Southern California;
St. John's Hospital & 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 Life, February 1996 to present; Managing
Director Director and former Partner of TA Associates, Inc.,
Director of: Ontrack Data International, Inc.; ANSYS, Inc.;
Pivot Point, Inc.; R&D Systems, Inc.; Axent Inc. Address:
116 Woodland Road, Pittsburgh, Pennsylvania 15232.
J. Fernando Niebla Director of Pacific Life, May 1995 to present; Vice Chairman
Director and Director of Infotec Commercial Systems, formerly
Infotec Development, Inc.; Director of Union Bank of Cali-
fornia. Address: 3611 South Harbor Boulevard, Suite 260,
Santa Ana, California 92704.
Susan Westerberg Prager Director of Pacific Life; Dean of the UCLA School of Law at
Director the University of California at Los Angeles; Director of
Lucille Salter Packard Children's Hospital of Stanford. Ad-
dress: 405 Hilgard Avenue, Room 3374, Los Angeles, Califor-
nia 90095-1476.
Richard M. Rosenberg Director of Pacific Life, November 1995 to present; Direc-
Director tor, Chairman and Chief Executive Officer (Retired) of
BankAmerica Corporation; Director of: Airborne Express Cor-
poration; 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 Life; Partner with the law firm of
Director O'Melveny & Meyers; Director, 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 Life; Vice Chairman and Director of The
Director Irvine Company; Director of: The Walt Disney Company; The
Mitchell Energy and Development Company; and The Tejon
Ranch. Address: 550 Newport Center Drive, 9th Floor,
Newport Beach, California 92660.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<S> <C>
Lynn C. Miller Executive Vice President, Individual Insurance, of Pacific
Executive Vice President Life, January 1995 to present; Senior Vice President,
Individual Insurance of Pacific Life, 1989 to 1995.
David R. Carmichael Senior Vice President and General Counsel of Pacific Life;
Senior Vice President Director of: Pacific Corinthian Life Insurance Company; PM
and General Counsel Group Life Insurance Company.
Audrey L. Milfs Vice President and Corporate Secretary of Pacific Life; sim-
Vice President ilar positions with other subsidiaries of Pacific Life.
and Corporate Secretary
Edward Byrd Vice President and Controller of Pacific Life, August 1992
Vice President and Controller to present; Vice President, Corporate Audit and Financial
Planning of Pacific Life, November 1991 to June 1992.
Khanh T. Tran Senior Vice President and Chief Financial Officer of Pacific
Senior Vice President and Life, June 1996 to present; Vice President and Treasurer of
Chief Financial Officer Pacific Life, November 1991 to June 1996; Chief Financial
Officer to other subsidiaries of Pacific 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.
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") has been filed 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 our or their directors,
trustees, officers, employees or agents, will be liable for any loss, damages,
cost, or expense (including attorney's fees) arising out of any requests
effected in accordance
41
<PAGE>
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.
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 Exec 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 have been so
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
FINANCIAL STATEMENTS
The audited financial statements of Pacific Select Exec Separate Account as
of December 31, 1996 and for the two years then ended are set forth herein,
starting on page 43. The audited consolidated financial statements of Pacific
Mutual Life as of December 1996 and 1995 and for the three years ended
December 31, 1996 are set forth herein starting on page 55.
The financial statements of Pacific Mutual Life should be distinguished from
the financial statements of the Pacific Select Exec Separate Account and
should be considered only as bearing upon our ability to meet our obligations
under the Policies.
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<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 Exec Separate Account (comprised of the Money Market, High
Yield Bond, Managed Bond, Government Securities, Growth, Aggressive Equity,
Growth LT, Equity Income, Multi-Strategy, Equity Index, International,
Emerging Markets, Variable Account I, Variable Account II, Variable Account
III, and Variable Account IV 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 Exec 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
43
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT AGGRESSIVE GROWTH EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Money Market Portfolio
(2,731 shares; cost
$27,433)............... $ 27,430
High Yield Bond
Portfolio (2,609
shares; cost $25,201).. $ 25,937
Managed Bond Portfolio
(6,420 shares; cost
$67,913)............... $ 69,000
Government Securities
Portfolio (754 shares;
cost $7,723)........... $ 7,830
Growth Portfolio (5,590
shares; cost $98,748).. $119,910
Aggressive Equity
Portfolio (309 shares;
cost $3,264)........... $ 3,331
Growth LT Portfolio
(5,399 shares; cost
$79,297)............... $ 89,067
Equity Income Portfolio
(4,199 shares; cost
$71,762)............... $85,860
Receivables:
Due from Pacific Mutual
Life Insurance Company. 94 55 46 51 130 57
Fund shares redeemed... 3 20
-------- -------- -------- -------- -------- -------- -------- -------
TOTAL ASSETS............ 27,524 25,992 69,046 7,881 120,040 3,334 89,087 85,917
-------- -------- -------- -------- -------- -------- -------- -------
LIABILITIES
Payables:
Due to Pacific Mutual
Life Insurance Company. 3 20 57
Fund shares purchased.. 99 55 46 51 130
-------- -------- -------- -------- -------- -------- -------- -------
TOTAL LIABILITIES....... 99 55 46 51 130 3 20 57
-------- -------- -------- -------- -------- -------- -------- -------
NET ASSETS.............. $ 27,425 $ 25,937 $ 69,000 $ 7,830 $119,910 $ 3,331 $ 89,067 $85,860
======== ======== ======== ======== ======== ======== ======== =======
</TABLE>
See Notes to Financial Statements.
44
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS & LIABILITIES (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MULTI- EQUITY INTER- EMERGING
STRATEGY INDEX NATIONAL MARKETS
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT I ACCOUNT II ACCOUNT III ACCOUNT IV
--------- --------- --------- --------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Multi-Strategy
Portfolio (5,365
shares; cost $71,200). $ 79,132
Equity Index Portfolio
(6,132 shares; cost
$99,779).............. $ 125,197
International Portfolio
(6,328 shares; cost
$83,435).............. $ 97,439
Emerging Markets
Portfolio (339 shares;
cost $3,318).......... $ 3,279
Edinburgh Overseas
Equity Portfolio (8
shares; cost $77)..... $ 77
Turner Core Growth
Portfolio (14 shares;
cost $177)............ $ 167
Frontier Capital
Appreciation Portfolio
(42 shares; cost
$527)................. $ 522
Enhanced U.S. Equity
Portfolio (34 shares,
cost $416)............ $ 397
Receivables:
Due from Pacific Mutual
Life Insurance
Company............... 64 45 95 19
Dividends.............. 6 21 18
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL ASSETS............ 79,196 125,242 97,534 3,298 77 173 543 415
--------- --------- --------- --------- --------- --------- --------- ---------
LIABILITIES
Payables:
Fund shares purchased.. 64 45 95 19
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES....... 64 45 95 19
--------- --------- --------- --------- --------- --------- --------- ---------
NET ASSETS.............. $ 79,132 $ 125,197 $ 97,439 $ 3,279 $ 77 $ 173 $ 543 $ 415
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
45
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT AGGRESSIVE GROWTH EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT(1) ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends.............. $ 1,359 $ 1,753 $ 4,145 $ 490 $ 6,582 $ 2 $ 608 $ 3,386
------- ------- ------- ------- ------- ------- ------- -------
NET INVESTMENT INCOME... 1,359 1,753 4,145 490 6,582 2 608 3,386
------- ------- ------- ------- ------- ------- ------- -------
REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS
Net realized gain
(loss) from security
transactions........... 13 300 (203) 62 2,826 (958) 4,372 667
Net unrealized
appreciation
(depreciation) on
investments............ 58 144 (914) (316) 12,466 67 5,509 8,024
------- ------- ------- ------- ------- ------- ------- -------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS.......... 71 444 (1,117) (254) 15,292 (891) 9,881 8,691
------- ------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS......... $ 1,430 $ 2,197 $ 3,028 $ 236 $21,874 $ (889) $10,489 $12,077
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
See Notes to Financial Statements.
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
46
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MULTI- EQUITY INTER- EMERGING
STRATEGY INDEX NATIONAL MARKETS
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT (1) ACCOUNT I (1) ACCOUNT II (1) ACCOUNT III (1) ACCOUNT IV (1)
-------- -------- -------- ----------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends............ $ 4,627 $ 3,825 $ 1,980 $ 6 $ 21 $ 18
-------- -------- -------- -------- -------- -------- -------- ---------
NET INVESTMENT INCOME. 4,627 3,825 1,980 6 21 18
-------- -------- -------- -------- -------- -------- -------- ---------
REALIZED AND
UNREALIZED GAIN
(LOSS)
ON INVESTMENTS
Net realized gain
(loss) from security
transactions........ 356 1,223 564 $ (3) 1
Net unrealized
appreciation
(depreciation) on
investments......... 2,459 14,294 12,594 (39) (10) (6) (19)
-------- -------- -------- -------- -------- -------- -------- ---------
NET REALIZED AND
UNREALIZED GAIN
(LOSS)
ON INVESTMENTS....... 2,815 15,517 13,158 (42) (10) (5) (19)
-------- -------- -------- -------- -------- -------- -------- ---------
NET INCREASE
(DECREASE) IN NET
ASSETS
RESULTING FROM
OPERATIONS........... $ 7,442 $ 19,342 $ 15,138 $ (42) $ 0 $ (4) $ 16 $ (1)
======== ======== ======== ======== ======== ======== ======== =========
</TABLE>
See Notes to Financial Statements.
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
47
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT AGGRESSIVE GROWTH EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT (1) ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment income.. $ 1,359 $ 1,753 $ 4,145 $ 490 $ 6,582 $ 2 $ 608 $ 3,386
Net realized gain
(loss) from security
transactions........... 13 300 (203) 62 2,826 (958) 4,372 667
Net unrealized
appreciation
(depreciation) on
investments............ 58 144 (914) (316) 12,466 67 5,509 8,024
-------- -------- -------- -------- -------- -------- -------- -------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS......... 1,430 2,197 3,028 236 21,874 (889) 10,489 12,077
-------- -------- -------- -------- -------- -------- -------- -------
INCREASE (DECREASE) IN
NET ASSETS FROM POLICY
TRANSACTIONS
Transfer of net
premiums............... 59,965 6,552 21,068 2,042 29,298 911 24,407 21,368
Transfers--policy
charges and deductions. (3,056) (1,528) (2,686) (580) (7,697) (146) (5,343) (4,205)
Transfers in (from
other variable
accounts).............. 64,487 12,323 8,787 2,504 54,635 11,133 48,532 18,530
Transfers out (to other
variable accounts)..... (115,717) (7,278) (8,044) (2,257) (62,175) (7,395) (39,922) (8,965)
Transfers--other....... (2,862) (920) (843) (379) (3,544) (283) (2,855) (2,661)
-------- -------- -------- -------- -------- -------- -------- -------
NET INCREASE IN NET
ASSETS DERIVED FROM
POLICY TRANSACTIONS..... 2,817 9,149 18,282 1,330 10,517 4,220 24,819 24,067
-------- -------- -------- -------- -------- -------- -------- -------
NET INCREASE IN NET
ASSETS.................. 4,247 11,346 21,310 1,566 32,391 3,331 35,308 36,144
NET ASSETS
Beginning of year...... 23,178 14,591 47,690 6,264 87,519 53,759 49,716
-------- -------- -------- -------- -------- -------- -------- -------
End of year............ $ 27,425 $ 25,937 $ 69,000 $ 7,830 $119,910 $ 3,331 $ 89,067 $85,860
======== ======== ======== ======== ======== ======== ======== =======
</TABLE>
See Notes to Financial Statements.
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
48
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MULTI- EQUITY INTER- EMERGING
STRATEGY INDEX NATIONAL MARKETS
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT (1) ACCOUNT I (1) ACCOUNT II (1) ACCOUNT III (1) ACCOUNT IV (1)
-------- -------- -------- ----------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment
income............... $ 4,627 $ 3,825 $ 1,980 $ 6 $ 21 $ 18
Net realized gain
(loss) from security
transactions......... 356 1,223 564 $ (3) 1
Net unrealized
appreciation
(depreciation) on
investments.......... 2,459 14,294 12,594 (39) (10) (6) (19)
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE
(DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS............ 7,442 19,342 15,138 (42) (4) 16 (1)
-------- -------- -------- -------- -------- -------- -------- --------
INCREASE (DECREASE) IN
NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net
premiums............. 22,669 31,284 26,068 549 7
Transfers--policy
charges and
deductions........... (3,698) (5,239) (5,477) (77) $ (1) (1) (5) (2)
Transfers in (from
other variable
accounts)............ 5,320 30,324 25,962 3,170 78 178 539 418
Transfers out (to
other variable
accounts)............ (4,577) (11,107) (18,655) (299)
Transfers--other (2,330) (2,082) (2,024) (22) (14)
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS DERIVED FROM
POLICY TRANSACTIONS... 17,384 43,180 25,874 3,321 77 177 527 416
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS................ 24,826 62,522 41,012 3,279 77 173 543 415
NET ASSETS
Beginning of year.... 54,306 62,675 56,427
-------- -------- -------- -------- -------- -------- -------- --------
End of year.......... $ 79,132 $125,197 $ 97,439 $ 3,279 $ 77 $ 173 $ 543 $ 415
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
49
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<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>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income................ $ 1,418 $ 944 $ 2,208 $ 294 $ 656
Net realized gain (loss) from
security transactions............... 31 (92) (141) (41) (1,046)
Net unrealized appreciation on
investments......................... 65 1,042 4,063 624 16,423
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............ 1,514 1,894 6,130 877 16,033
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums............. 72,942 5,029 7,113 1,962 25,318
Transfers--policy charges and
deductions*......................... (3,157) (1,065) (1,983) (490) (6,369)
Transfers in (from other variable
accounts)........................... 29,120 7,781 15,186 2,845 30,352
Transfers out (to other variable
accounts)........................... (110,816) (6,185) (2,813) (2,390) (22,297)
Transfers--other*.................... (1,021) (242) (508) (449) (2,935)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS..... (12,932) 5,318 16,995 1,478 24,069
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS. (11,418) 7,212 23,125 2,355 40,102
NET ASSETS
Beginning of year.................... 34,596 7,379 24,565 3,909 47,417
-------- -------- -------- -------- --------
End of year.......................... $ 23,178 $ 14,591 $ 47,690 $ 6,264 $ 87,519
======== ======== ======== ======== ========
</TABLE>
* Prior year amounts have been reclassified to conform with current year
presentation.
See Notes to Financial Statements.
50
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<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>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment income................. $ 3,592 $ 577 $ 1,401 $ 1,015 $ 1,070
Net realized gain from security trans-
actions.............................. 1,225 785 71 2,069 574
Net unrealized appreciation on invest-
ments................................ 3,892 7,737 7,406 10,698 2,646
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............. 8,709 9,099 8,878 13,782 4,290
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net premiums.............. 12,930 13,169 14,278 11,713 16,778
Transfers--policy charges and deduc-
tions*............................... (2,765) (2,773) (2,760) (2,873) (3,967)
Transfers in (from other variable ac-
counts).............................. 32,699 16,222 5,601 17,636 25,476
Transfers out (to other variable ac-
counts).............................. (8,074) (4,940) (2,670) (6,615) (16,093)
Transfers--other*..................... (1,148) (1,283) (1,192) (1,361) (1,211)
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS
DERIVED FROM POLICY TRANSACTIONS...... 33,642 20,395 13,257 18,500 20,983
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS............. 42,351 29,494 22,135 32,282 25,273
NET ASSETS
Beginning of year..................... 11,408 20,222 32,171 30,393 31,154
-------- -------- -------- -------- --------
End of year........................... $ 53,759 $ 49,716 $ 54,306 $ 62,675 $ 56,427
======== ======== ======== ======== ========
</TABLE>
*Prior year amounts have been reclassified to conform with current year
presentation.
See Notes to Financial Statements.
51
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Pacific Select Exec 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 sixteen 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, the Emerging Markets Variable Account, and the
Variable Accounts I through IV. The assets in each of the first twelve
Variable Accounts are invested in shares of the corresponding portfolios of
Pacific Select Fund and the assets of the last four Variable Accounts are
invested in shares of corresponding portfolios of M Fund, Inc. (Collectively,
the "Funds"). Each Variable Account pursues different investment objectives
and policies. The financial statements of the Funds, including the portfolios
of investments, are either included elsewhere in the report or provided
separately 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 six new Variable Accounts, the Aggressive Equity Variable
Account, the Emerging Markets Variable Account, Variable Account I, Variable
Account II, Variable Account III, and Variable Account IV. The Aggressive
Equity Portfolio and the Emerging Markets Portfolio commenced operations on
April 8, 1996, Variable Account I and Variable Account III commenced
operations on October 11, 1996, Variable Account II commenced operations on
October 17, 1996, and Variable IV commenced operations on November 18, 1996.
The Separate Account was established by Pacific Mutual Life Insurance
Company ("Pacific Mutual") on May 12, 1988 and commenced operations on
November 22, 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 Funds are valued at the reported net asset
values of the respective portfolios. Valuation of securities held by the Funds
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 Funds have 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 the related portfolio.
52
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CHARGES AND EXPENSES
With respect to variable life insurance policies funded by the Separate
Account, Pacific Mutual makes certain deductions from premiums for sales load
and state premium taxes before amounts are allocated to the Separate Account.
Pacific Mutual also makes certain deductions from the net assets of each
Variable Account for the mortality and expense risks Pacific Mutual assumes,
administrative expenses, cost of insurance, charges for optional benefits and
any sales and underwriting surrender charges. The operating expenses of the
Separate Account are paid by Pacific Mutual.
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 AGGRESSIVE GROWTH EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATION UNIT
VALUE:
Beginning $ 14.52 $ 21.74 $ 19.86 $ 19.28 $ 23.89 $ 10.00 $ 15.49 $ 23.72
========= ========= ========= ======= ========= ======= ========= =========
Ending $ 15.26 $ 24.20 $ 20.70 $ 19.85 $ 29.53 $ 10.86 $ 18.25 $ 28.32
========= ========= ========= ======= ========= ======= ========= =========
Number of Units Out-
standing
at End of Year 1,797,662 1,071,818 3,332,577 394,531 4,060,628 306,793 4,879,333 3,031,251
</TABLE>
<TABLE>
<CAPTION>
MULTI- EQUITY INTER- EMERGING
STRATEGY INDEX NATIONAL MARKETS
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT I ACCOUNT II ACCOUNT III ACCOUNT IV
-------- -------- -------- -------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATION UNIT
VALUE:
Beginning $ 21.60 $ 20.21 $ 15.55 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
========= ========= ========= ======= ======= ======= ======= =======
Ending $ 24.31 $ 24.73 $ 18.96 $ 9.82 $ 10.08 $ 10.18 $ 10.46 $ 9.97
========= ========= ========= ======= ======= ======= ======= =======
Number of Units Out-
standing
at End of Year 3,255,044 5,062,679 5,140,103 333,810 7,649 17,011 51,927 41,571
</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
53
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. POLICY OWNERS' COST OF INVESTMENT IN THE FUNDS SHARES
The investment in the Funds shares are carried at identified cost, which
represents the amount available for investment (including reinvested
distributions of net investment income and realized gains). Total cost and
market value of total Policy Owners' investments in the Funds as of
December 31, 1996 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT AGGRESSIVE GROWTH EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT (1) ACCOUNT ACCOUNT
-------- -------- -------- ----------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total cost of invest-
ments at beginning of
year $ 23,106 $ 13,881 $ 45,342 $ 5,877 $ 78,927 $ 49,540 $ 43,643
Add: Total proceeds
from sales of units 79,532 13,771 23,511 2,711 36,760 $ 11,359 41,766 28,447
Reinvested distri-
butions from the
Funds:
(a) Net investment
income 1,359 1,593 3,180 352 455 2 608 841
(b) Net realized
gain 160 965 138 6,127 2,545
-------- -------- -------- -------- -------- -------- -------- --------
Sub-Total 103,997 29,405 72,998 9,078 122,269 11,361 91,914 75,476
Less: Cost of invest-
ments disposed during
the year 76,564 4,204 5,085 1,355 23,521 8,097 12,617 3,714
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of invest-
ments at end of year 27,433 25,201 67,913 7,723 98,748 3,264 79,297 71,762
Add: Unrealized ap-
preciation (deprecia-
tion) (3) 736 1,087 107 21,162 67 9,770 14,098
-------- -------- -------- -------- -------- -------- -------- --------
Total market value of
investments at end of
year $ 27,430 $ 25,937 $ 69,000 $ 7,830 $119,910 $ 3,331 $ 89,067 $ 85,860
======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
MULTI- EQUITY INTER- EMERGING
STRATEGY INDEX NATIONAL MARKETS
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT (1) ACCOUNT I (1) ACCOUNT II (1) ACCOUNT III (1) ACCOUNT IV (1)
-------- -------- -------- ----------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total cost of invest-
ments at beginning of
year $ 48,796 $ 51,564 $ 54,916
Add: Total proceeds
from sales of units 21,499 46,889 31,432 $ 3,410 $ 78 $ 172 $ 522 $ 399
Reinvested distri-
butions from the
Funds:
(a) Net investment
income 1,796 1,856 1,980 1 4
(b) Net realized
gain 2,831 1,969 5 21 14
-------- -------- -------- -------- -------- -------- -------- --------
Sub-Total 74,922 102,278 88,328 3,410 78 178 543 417
Less: Cost of invest-
ments disposed during
the year 3,722 2,499 4,893 92 1 1 16 1
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of invest-
ments at end of year 71,200 99,779 83,435 3,318 77 177 527 416
Add: Unrealized ap-
preciation (deprecia-
tion) 7,932 25,418 14,004 (39) (10) (5) (19)
-------- -------- -------- -------- -------- -------- -------- --------
Total market value of
investments at end of
year $ 79,132 $125,197 $ 97,439 $ 3,279 $ 77 $ 167 $ 522 $ 397
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
54
<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
55
<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
56
<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
57
<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
58
<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
59
<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
60
<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.
61
<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
62
<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.
63
<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.
64
<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
securities, 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>
65
<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.
66
<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>
67
<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.
68
<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.
69
<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.
70
<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.
71
<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.
72
<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.
73
<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>
74
<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.
75
<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>
76
<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
77
<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
78
<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.
79
<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.
80
<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.
--------------------------------------------------------------------------
81
<PAGE>
APPENDIX
DEATH BENEFIT PERCENTAGES
<TABLE>
<CAPTION>
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
---- ---------- --- ---------- --- ---------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250% 50 185% 60 130% 70 115%
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 94 101
</TABLE>
82
<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 40, Option A, $10,000 annual premium, Current Cost of Insurance
Rates.
2. Age 40, Option A, $10,000 annual premium, Guaranteed Cost of Insurance
Rates.
3. Age 40, Option B, $10,000 annual premium, Current Cost of Insurance
Rates.
4. Age 40, Option B, $10,000 annual premium, Guaranteed Cost of Insurance
Rates.
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.
The second column of each table, labeled "Total Premiums Paid Plus Interest
at 5%," shows the amount which would accumulate if an amount equal to the
annual 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 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 loads, the administrative charges and the mortality
and expense risk 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 as options under the Policy. The amounts shown would differ if
unisex rates were used or if the Insureds were females and female rates were
used. On those illustrations assuming current rates, the amounts would also
differ if either Insured were a smoker and smoker rates were used.
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. 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 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 -0.80%, 5.15%, and
11.10%. 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, underwriting class, Face Amount, death benefit 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.
83
<PAGE>
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH
SURRENDER VALUES BASED ON CURRENT COST OF INSURANCE RATES
ISSUE AGE: 40 FACE AMOUNT: $560,336
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: A
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS
END OF PAID PLUS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $560,336 $560,336 $ 560,336
2 $ 21,525 $560,336 $560,336 $ 560,336
3 $ 33,101 $560,336 $560,336 $ 560,336
4 $ 45,256 $560,336 $560,336 $ 560,336
5 $ 58,019 $560,336 $560,336 $ 560,336
6 $ 71,420 $560,336 $560,336 $ 560,336
7 $ 85,491 $560,336 $560,336 $ 560,336
8 $100,266 $560,336 $560,336 $ 560,336
9 $115,779 $560,336 $560,336 $ 560,336
10 $132,068 $560,336 $560,336 $ 560,336
15 $226,575 $560,336 $560,336 $ 560,336
20 $347,193 $560,336 $560,336 $ 735,408
25 $501,135 $560,336 $560,336 $1,185,124
30 $697,608 $560,336 $607,632 $1,932,871
35 $948,363 $560,336 $760,295 $3,009,919
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR NET CASH
END OF YEAR ACCUMULATED VALUE SURRENDER VALUE ASSUMING
ASSUMING HYPOTHETICAL GROSS HYPOTHETICAL GROSS ANNUAL
END OF ANNUAL INVESTMENT RETURN OF INVESTMENT RETURN OF
POLICY ----------------------------- -----------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ -------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 7,827 $ 8,336 $ 8,846 $ 3,610 $ 4,119 $ 4,628
2 $ 15,743 $ 17,254 $ 18,827 $ 11,526 $ 13,036 $ 14,609
3 $ 23,318 $ 26,339 $ 29,608 $ 19,101 $ 22,121 $ 25,390
4 $ 30,706 $ 35,753 $ 41,433 $ 26,488 $ 31,535 $ 37,215
5 $ 37,909 $ 45,512 $ 54,415 $ 33,691 $ 41,294 $ 50,197
6 $ 44,936 $ 55,641 $ 68,684 $ 41,561 $ 52,266 $ 65,310
7 $ 51,794 $ 66,161 $ 84,386 $ 49,263 $ 63,631 $ 81,855
8 $ 58,491 $ 77,099 $ 101,680 $ 56,803 $ 75,412 $ 99,993
9 $ 65,033 $ 88,480 $ 120,745 $ 64,189 $ 87,637 $ 119,901
10 $ 71,427 $100,332 $ 141,778 $ 71,427 $100,332 $ 141,778
15 $104,628 $172,760 $ 293,235 $104,628 $172,760 $ 293,235
20 $133,509 $263,817 $ 548,812 $133,509 $263,817 $ 548,812
25 $153,463 $377,297 $ 971,413 $153,463 $377,297 $ 971,413
30 $160,386 $523,821 $1,666,268 $160,386 $523,821 $1,666,268
35 $146,022 $710,556 $2,813,008 $146,022 $710,556 $2,813,008
</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.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER 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.
84
<PAGE>
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH
SURRENDER VALUES BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 40 FACE AMOUNT: $560,336
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: A
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS
END OF PAID PLUS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT -----------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $560,336 $560,336 $ 560,336
2 $ 21,525 $560,336 $560,336 $ 560,336
3 $ 33,101 $560,336 $560,336 $ 560,336
4 $ 45,256 $560,336 $560,336 $ 560,336
5 $ 58,019 $560,336 $560,336 $ 560,336
6 $ 71,420 $560,336 $560,336 $ 560,336
7 $ 85,491 $560,336 $560,336 $ 560,336
8 $100,266 $560,336 $560,336 $ 560,336
9 $115,779 $560,336 $560,336 $ 560,336
10 $132,068 $560,336 $560,336 $ 560,336
15 $226,575 $560,336 $560,336 $ 560,336
20 $347,193 $560,336 $560,336 $ 648,816
25 $501,135 $560,336 $560,336 $1,041,700
30 $697,608 $560,336 $560,336 $1,686,089
35 $948,363 $ 0* $572,833 $2,604,446
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED END OF YEAR NET CASH
VALUE ASSUMING HYPOTHETICAL SURRENDER VALUE ASSUMING
GROSS ANNUAL HYPOTHETICAL 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 $ 7,275 $ 7,766 $ 8,259 $ 3,057 $ 3,548 $ 4,041
2 $ 14,492 $ 15,930 $ 17,429 $ 10,274 $ 11,712 $ 13,211
3 $ 21,477 $ 24,331 $ 27,423 $ 17,259 $ 20,113 $ 23,205
4 $ 28,216 $ 32,962 $ 38,312 $ 23,998 $ 28,744 $ 34,094
5 $ 34,711 $ 41,835 $ 50,193 $ 30,493 $ 37,617 $ 45,975
6 $ 40,947 $ 50,947 $ 63,161 $ 37,572 $ 47,573 $ 59,786
7 $ 46,927 $ 60,310 $ 77,336 $ 44,396 $ 57,780 $ 74,805
8 $ 52,642 $ 69,929 $ 92,845 $ 50,955 $ 68,242 $ 91,158
9 $ 58,091 $ 79,815 $ 109,838 $ 57,248 $ 78,971 $ 108,994
10 $ 63,256 $ 89,964 $ 128,467 $ 63,256 $ 89,964 $ 128,467
15 $ 87,001 $149,203 $ 260,749 $ 87,001 $149,203 $ 260,749
20 $100,086 $217,853 $ 484,191 $100,086 $217,853 $ 484,191
25 $ 97,489 $298,823 $ 853,852 $ 97,489 $298,823 $ 853,852
30 $ 67,256 $398,179 $1,453,525 $ 67,256 $398,179 $1,453,525
35 $ 0* $535,358 $2,434,061 $ 0* $535,358 $2,434,061
</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 DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER 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.
85
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER VALUES
BASED ON CURRENT COST OF INSURANCE RATES
ISSUE AGE: 40 FACE AMOUNT: $223,050
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: B
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS
END OF PAID PLUS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT -------------------------------
YEAR 5% 0% 6% 12%
------ ----------- --------- --------- -----------
<S> <C> <C> <C> <C>
1 $ 10,500 $231,436 $231,962 $ 232,489
2 $ 21,525 $239,777 $241,351 $ 242,988
3 $ 33,101 $247,954 $251,113 $ 254,528
4 $ 45,256 $255,987 $261,283 $ 267,234
5 $ 58,019 $263,876 $271,875 $ 281,224
6 $ 71,420 $271,620 $282,907 $ 296,627
7 $ 85,491 $279,223 $294,397 $ 313,590
8 $100,266 $286,687 $306,367 $ 332,272
9 $115,779 $294,015 $318,838 $ 352,851
10 $132,068 $301,211 $331,834 $ 375,525
15 $226,575 $338,708 $410,871 $ 537,291
20 $347,193 $372,773 $509,547 $ 805,927
25 $501,135 $400,690 $629,798 $1,252,133
30 $697,608 $420,087 $774,385 $2,037,735
35 $948,363 $427,009 $944,914 $3,184,203
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR NET CASH SURRENDER
END OF YEAR ACCUMULATED VALUE VALUE ASSUMING HYPOTHETICAL
ASSUMING HYPOTHETICAL GROSS GROSS ANNUAL INVESTMENT RETURN
END OF ANNUAL INVESTMENT RETURN OF OF
POLICY ------------------------------- -------------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ --------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 8,386 $ 8,912 $ 9,439 $ 6,707 $ 7,233 $ 7,760
2 $ 16,727 $ 18,301 $ 19,938 $ 15,048 $ 16,622 $ 18,259
3 $ 24,904 $ 28,063 $ 31,478 $ 23,225 $ 26,384 $ 29,799
4 $ 32,937 $ 38,233 $ 44,184 $ 31,258 $ 36,554 $ 42,505
5 $ 40,826 $ 48,825 $ 58,174 $ 39,147 $ 47,146 $ 56,495
6 $ 48,570 $ 59,857 $ 73,577 $ 47,227 $ 58,514 $ 72,234
7 $ 56,173 $ 71,347 $ 90,540 $ 55,165 $ 70,340 $ 89,532
8 $ 63,637 $ 83,317 $ 109,222 $ 62,965 $ 82,645 $ 108,550
9 $ 70,965 $ 95,788 $ 129,801 $ 70,629 $ 95,452 $ 129,466
10 $ 78,161 $108,784 $ 152,475 $ 78,161 $108,784 $ 152,475
15 $115,658 $187,821 $ 314,241 $115,658 $187,821 $ 314,241
20 $149,723 $286,497 $ 582,877 $149,723 $286,497 $ 582,877
25 $177,640 $406,748 $1,026,338 $177,640 $406,748 $1,026,338
30 $197,037 $551,335 $1,756,668 $197,037 $551,335 $1,756,668
35 $203,959 $721,864 $2,961,153 $203,959 $721,864 $2,961,153
</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.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER 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.
86
<PAGE>
FLEXIBLE PREMIUM SURVIVORSHIP VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH
SURRENDER VALUES BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 40 FACE AMOUNT: $223,050
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: B
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS
END OF PAID PLUS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $231,307 $231,829 $ 232,352
2 $ 21,525 $239,556 $241,115 $ 242,736
3 $ 33,101 $247,618 $250,744 $ 254,124
4 $ 45,256 $255,487 $260,723 $ 266,610
5 $ 58,019 $263,164 $271,066 $ 280,303
6 $ 71,420 $270,644 $281,777 $ 295,318
7 $ 85,491 $277,927 $292,873 $ 311,790
8 $100,266 $285,009 $304,362 $ 329,860
9 $115,779 $291,890 $316,257 $ 349,688
10 $132,068 $298,560 $328,564 $ 371,444
15 $226,575 $331,707 $401,603 $ 524,640
20 $347,193 $358,240 $488,692 $ 774,341
25 $501,135 $375,905 $590,688 $1,182,146
30 $697,608 $380,267 $706,026 $1,883,321
35 $948,363 $364,595 $829,996 $2,930,702
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED END OF YEAR NET CASH
VALUE ASSUMING HYPOTHETICAL SURRENDER VALUE ASSUMING
GROSS ANNUAL INVESTMENT HYPOTHETICAL GROSS ANNUAL
END OF RETURN OF INVESTMENT RETURN OF
POLICY ---------------------------- ----------------------------
YEAR 0% 6% 12% 0% 6% 12%
- ------ -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 $ 8,257 $ 8,779 $ 9,302 $ 6,578 $ 7,100 $ 7,623
2 $ 16,506 $ 18,065 $ 19,686 $ 14,827 $ 16,386 $ 18,007
3 $ 24,568 $ 27,694 $ 31,074 $ 22,889 $ 26,015 $ 29,395
4 $ 32,437 $ 37,673 $ 43,560 $ 30,758 $ 35,994 $ 41,881
5 $ 40,114 $ 48,016 $ 57,253 $ 38,435 $ 46,337 $ 55,574
6 $ 47,594 $ 58,727 $ 72,268 $ 46,251 $ 57,384 $ 70,925
7 $ 54,877 $ 69,823 $ 88,740 $ 53,870 $ 68,815 $ 87,732
8 $ 61,959 $ 81,312 $ 106,810 $ 61,288 $ 80,640 $ 106,138
9 $ 68,840 $ 93,207 $ 126,638 $ 68,504 $ 92,871 $ 126,302
10 $ 75,510 $105,514 $ 148,394 $ 75,510 $105,514 $ 148,394
15 $108,657 $178,553 $ 301,590 $108,657 $178,553 $ 301,590
20 $135,190 $265,642 $ 551,291 $135,190 $265,642 $ 551,291
25 $152,855 $367,638 $ 959,096 $152,855 $367,638 $ 959,096
30 $157,217 $482,976 $1,623,553 $157,217 $482,976 $1,623,553
35 $141,545 $606,946 $2,707,652 $141,545 $606,946 $2,707,652
</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.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER 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.
87
<PAGE>
[LOGO OF PACIFIC SELECT EXEC]
Issued By Principal Underwriter
Pacific 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 LIFE]
PACIFIC 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. 15-16636-12
