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[LOGO OF PACIFIC SELECT ESTATE MAXIMIZER APPEARS HERE]
OF PACIFIC SELECT ESTATE MAXIMIZER
VARIABLE UNIVERSAL LIFE
PROSPECTUS FOR
PACIFIC SELECT ESTATE MAXIMIZER
MODIFIED SINGLE 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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PACIFIC SELECT ESTATE MAXIMIZER
MODIFIED SINGLE PREMIUM VARIABLE LIFE
INSURANCE POLICY
ISSUED BY PACIFIC INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
[LOGO OF PACIFIC NEWPORT BEACH, CALIFORNIA 92660
SELECT ESTATE MAXIMIZER 1-800-800-7681
APPEARS HERE]
This prospectus describes Pacific Select Estate Maximizer--a Modified Single
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 provides lifetime insurance protection on the
Insured or Joint Insureds (the "Insureds") named in the Policy so long as the
Policy is in force. A Policy may be surrendered for its Cash Surrender Value
less any outstanding Policy Debt during the lifetime of the Insured(s). The
Policy can be purchased for a minimum initial premium of $10,000; however, if
the Insured (Younger Insured if this is a last survivor Policy) is age 70 or
over, the minimum initial premium is $50,000. The Policy provides limited
flexibility to pay additional premiums.
Policies can provide insurance protection on the life of one Insured or, as
a last survivor Policy, on the lives of two Insureds. A last survivor Policy,
for so long as it remains in force, provides a death benefit the proceeds of
which are payable when the last surviving Insured dies while the Policy is in
force. The death benefit will be the Face Amount of insurance stated in the
Policy or, under certain circumstances, a higher amount. After the death of
the Insured(s), we will pay the Beneficiary the death benefit minus any Debt
under the Policy.
Premium payments may be allocated at the Policyholder's ("Policy Owner,"
"Owner," "you" or "your") discretion to one or more of the Investment Options
currently available. Each of the Variable Investment Options ("Variable
Account") is a subaccount of our separate account called the Pacific Select
Exec Separate Account (the "Separate Account"). Any portion of the premium
payments allocated to one of more of the Variable Accounts available to you is
invested in one or more of 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>
Accumulated Value allocated to the Variable Accounts will vary based upon
the investment performance of the Variable Accounts. No minimum amount of
Accumulated Value is guaranteed. A fixed option called the Fixed Account is
also available. 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 30.
The Policies usually will be a type of life insurance policy classified as a
modified endowment contract. For information on the tax treatment of modified
endowment contracts, see "Federal Income Tax Considerations," on page 24.
It may not be advantageous to replace existing insurance with the Policy. A
Policy may be returned according to the terms of its Free-Look Right (see
"Right to Examine a Policy--Free-Look Right," page 20), during which time
premium payments allocated to the Separate Account will be invested in the
Money Market Variable Account.
The Contract is titled a "Flexible Premium Variable Life Insurance Policy"
in Texas.
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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 ACCURACYOR
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>
<CAPTION>
PAGE
<S> <C>
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....................................................... 5
Transfer of Accumulated Value............................................ 6
Free-Look Right.......................................................... 6
Surrender and Partial Withdrawal Rights.................................. 6
Policy Loans............................................................. 6
Policy Charges and Deductions............................................ 7
Fund Annual Expenses After Expense Limitation............................ 8
Tax Treatment of Increases in Accumulated Value.......................... 9
Tax Treatment of Death Benefit........................................... 9
Contacting Pacific Life and Timing of Transactions....................... 9
INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT AND THE FUND.......... 10
Pacific Life Insurance Company........................................... 10
Pacific Select Exec Separate Account..................................... 10
The Pacific Select Fund.................................................. 11
The Investment Adviser and Portfolio Managers............................ 12
THE POLICY................................................................. 13
Application for a Policy................................................. 13
Premiums................................................................. 13
Additional Premium Payments.............................................. 13
Allocation of Premiums................................................... 14
Portfolio Rebalancing.................................................... 14
Dollar Cost Averaging Option............................................. 14
Transfer of Accumulated Value............................................ 15
Death Benefit............................................................ 15
Policy Values............................................................ 17
Determination of Accumulated Value....................................... 17
Policy Loans............................................................. 18
Duration of Contract..................................................... 19
Surrender................................................................ 19
Partial Withdrawals...................................................... 19
Right to Examine a Policy--Free-Look Right............................... 20
Lapse.................................................................... 20
Reinstatement............................................................ 20
Last Survivor Policies................................................... 21
CHARGES AND DEDUCTIONS..................................................... 21
Load from Premiums....................................................... 21
Surrender Charge......................................................... 21
Deductions from Accumulated Value........................................ 22
Other Charges............................................................ 23
Guarantee of Certain Charges............................................. 23
Variations in Charges.................................................... 23
</TABLE>
2
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<TABLE>
<CAPTION>
PAGE
<S> <C>
OTHER INFORMATION.......................................................... 24
Federal Income Tax Considerations........................................ 24
Charge for Our Income Taxes.............................................. 27
Voting of Fund Shares.................................................... 27
Disregard of Voting Instructions......................................... 28
Confirmation Statements and Other Reports to Owners...................... 28
Substitution of Investments.............................................. 28
Changes to Comply with Law............................................... 29
PERFORMANCE INFORMATION.................................................... 29
THE FIXED ACCOUNT.......................................................... 30
General Description...................................................... 30
Transfers, Surrenders, Withdrawals, and Policy Loans..................... 30
MORE ABOUT THE POLICY...................................................... 31
Ownership................................................................ 31
Beneficiary.............................................................. 31
The Contract............................................................. 31
Payments................................................................. 31
Assignment............................................................... 32
Errors on the Application................................................ 32
Incontestability......................................................... 32
Payment in Case of Suicide............................................... 32
Dividends................................................................ 32
Policy Illustrations..................................................... 32
Payment Plan............................................................. 32
Optional Insurance Benefits and Other Policies........................... 33
Life Insurance Retirement Plans.......................................... 33
Risks of Life Insurance Retirement Plans................................. 33
Distribution of the Policy............................................... 34
MORE ABOUT PACIFIC LIFE.................................................... 35
Management............................................................... 35
State Regulation......................................................... 37
Telephone Transfer and Loan Privileges................................... 37
Legal Proceedings........................................................ 37
Legal Matters............................................................ 37
Registration Statement................................................... 37
Independent Auditors..................................................... 38
Financial Statements..................................................... 38
APPENDIX................................................................... 78
ILLUSTRATIONS.............................................................. 79
</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--An Insured's age as of his or her last birthday as of the Policy Date,
increased by the number of complete Policy Years elapsed.
Beneficiary--The person or persons you name in the application or by proper
later designation to receive the death benefit proceeds upon the death of the
Insured(s).
Cash Surrender Value--The Accumulated Value, less any applicable surrender
charge.
Death Benefit--The greater of the Face Amount under a Policy or Accumulated
Value multiplied by a specified percentage shown in the Appendix.
Debt--The unpaid loan balance including accrued loan interest.
Face Amount--The minimum death benefit for so long as the Policy remains in
force.
Fixed Account--An account that is part of our General Account to which all or
a portion of premium payments may be allocated for accumulation at a fixed
rate of interest (which may not be less than 3.0%) declared periodically by
us.
Free Withdrawal Amount--The lesser of contract earnings under the Policy or
10% of the initial premium. For purposes of determining this amount, earnings
under the Policy are Accumulated Value less total premiums paid, plus all
prior partial withdrawals deemed to be withdrawals of premium for surrender
charge purposes.
General Account--All of our assets other than those allocated to the Separate
Account or to any of our other segregated separate accounts.
Guideline Single Premium or Guideline Level Premiums--The maximum amount of
premium or premiums that can be paid to qualify a Policy as life insurance for
tax purposes as specified in Section 7702 of the Internal Revenue Code.
Home Office--The Policy Benefits and Services Department at our main office at
700 Newport Center Drive, Newport Beach, California 92660.
Insured or Insured(s)--The person or persons 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 Variable
Accounts and the Fixed Account as collateral for Policy loans.
Monthly Payment Date--The day each month on which certain deductions and
charges are assessed against the Accumulated Value. The first Monthly Payment
Date is the Policy Date.
Net Cash Surrender Value--The Cash Surrender Value less Policy Debt.
Policy Date--The date used to determine the Monthly Payment Date, Policy
Years, and Policy Monthly, Quarterly, Semi-Annual, and Annual Anniversaries.
It is usually the date the initial premium is received at our Home Office. The
term "Issue Date" is substituted for Policy Date with respect to Policies
issued to residents of the Commonwealth of Massachusetts.
Policyholder Policy Owner, Owner, you, or your--The person or persons who own
the Policy. The Policy Owner will be the Insured(s) 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.
Survivor--In a last survivor Policy, the Insured remaining alive after the
first death of the two Insureds that occurs while the last survivor Policy is
in force.
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 those
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 at the end of 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 30 and in the Policy.
PURPOSE OF THE POLICY
The Policy offers you insurance protection on the life of the Insured(s) so
long as your Policy is not surrendered or in default beyond the Grace Period.
Like traditional fixed life insurance, your Policy provides for a death benefit
equal to its Face Amount, accumulation of cash values, and surrender and loan
privileges. Unlike traditional fixed life insurance, your Policy offers a
choice of investment alternatives and an opportunity for the Policy's
Accumulated Value and, under certain circumstances, its death benefit to grow
based on investment results.
POLICY VALUES
You may allocate premium payments among the various Investment Options
available to you. Depending on the investment experience of the selected
Variable Accounts, the Accumulated Value may increase or decrease on any day.
You bear the investment risk on that portion of the Accumulated Value
allocated to the Variable Accounts. The death benefit may or may not increase
or decrease depending upon several factors, although the death benefit will
never decrease below the Face Amount provided your Policy is in force. There is
no guarantee that your Policy's Accumulated Value and death benefit will
increase.
Your Policy will remain in force until the earliest of the death of the
Insured(s) or a full surrender of your Policy, or unless the Net Cash Surrender
Value is insufficient to pay certain charges deducted on each Monthly Payment
Date, and a Grace Period expires without sufficient additional premium payments
or loan repayments by you.
THE DEATH BENEFIT
Upon the death of the Insured, or, for a last survivor Policy, upon the death
of the Survivor, we will pay to the named Beneficiary death benefit proceeds,
which will be the death benefit under your Policy reduced by any Policy Debt.
The death benefit will be the greater of the Face Amount under your Policy or
the Accumulated Value multiplied by a specified percentage. See "Death
Benefit," page 15.
PREMIUM FEATURES
The Policy can be purchased for a minimum initial premium payment of $10,000,
or $50,000 if the Insured's Age (or Younger Insured's Age if this is a last
survivor Policy) is 70 or over. In determining the Face Amount, you may elect
that the initial premium be equal to 80%, 90% or 100% of the Guideline Single
Premium. The Guideline Single Premium is the maximum premium that can be paid
for any given Face Amount in order for an insurance policy to qualify as a life
insurance contract for tax purposes. The Face Amount in the state of West
Virginia may not be less than $25,000. Additional premiums may be paid under
certain circumstances. See "Additional Premium Payments," page 13.
INVESTMENT OPTIONS
You may choose to allocate net premium payments to one or more of the
Investment Options available to you.
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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, which are shown in the chart on
page 12, has a different investment objective or objectives. See "The Pacific
Select Fund," page 11.
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 3%, and may in our sole discretion
pay interest in excess of the guaranteed amount. See "The Fixed Account," page
30.
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 a properly completed
Authorization For Telephone Requests has been filed at our Home Office. See
"Transfer of Accumulated Value," page 15.
FREE-LOOK RIGHT
You may obtain a full refund of the premium paid if your Policy is returned
within 10 days after you receive it (15 days in Colorado, 20 days in North
Dakota, and 30 days if you reside in California and are age 60 or older), 10
days after we mail or deliver this notice of right of withdrawal included in
this prospectus, or 45 days after the application for your Policy is signed,
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. Until the Free-Look Transfer Date, premiums will be allocated to
the Money Market Variable Account which invests in the Money Market Portfolio
of the Fund. See "Allocation of Premiums," page 14.
SURRENDER AND PARTIAL WITHDRAWAL RIGHTS
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 any
outstanding Policy Debt and less any applicable surrender charge.
Partial withdrawals may be taken beginning on the first Policy Anniversary.
The minimum partial withdrawal is $1,000. The amount that can be withdrawn (1)
can be no greater than the excess of Cash Surrender Value immediately prior to
the withdrawal over Policy Debt divided by 90% and (2) is limited so that after
the withdrawal, the Net Cash Surrender Value is at least $10,000. Partial
withdrawals will reduce the death benefit under a Policy by an amount
proportionate to the reduction in Accumulated Value caused by the partial
withdrawal and may reduce the Face Amount. However, decreases in the Face
Amount and death benefit will be limited so that the policy complies with the
definition of life insurance in the Internal Revenue Code ("IRC"). Upon
surrender of a Policy or a partial withdrawal during the first nine Policy
Years a surrender charge may be assessed. No surrender charge is imposed on the
amount of the first withdrawal in any Policy Year (including a surrender) that
does not exceed the Free Withdrawal Amount. Surrender or partial withdrawals
may give rise to taxable income to you. See "Federal Income Tax
Considerations," page 24.
POLICY LOANS
You may borrow from us using your Policy as security for the loan. You may
borrow up to 50% of Accumulated Value during the first Policy Year, and up to
the greater of (1) 100% of your Accumulated Value in the Fixed Account and 90%
in the Variable Accounts, and (2) 98% of the excess of the Accumulated Value
over twelve times the current monthly deduction thereafter. The maximum amount
is reduced by the amount of any existing Debt and any surrender charge that
would be imposed if you surrendered your Policy on the date the loan is taken.
The minimum loan that can be taken at any time is $500 ($200 in Connecticut,
$250 in
6
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Oregon). See "Policy Loans," page 17. The amount of any Policy Debt will be
subtracted from the death benefit under the Policy, and from your Cash
Surrender Value upon surrender. You will pay interest to us on Policy Debt at
an annual rate of 6.00% in the first ten Policy Years and 5.00% thereafter. A
portion of your Policy Debt may qualify as a Preferred Loan, and will bear
interest at 5.25% in the first ten Policy Years, and 4.75% thereafter. Such
portion will be redetermined on each policy anniversary.
When you take a loan, an amount equal to the loan is transferred from your
Accumulated Value in the Investment Options to the Loan Account to secure the
loans. We will pay interest on amounts in the Loan Account at an annual rate of
4.5%.
A Policy loan is treated as a distribution from a Policy that is a modified
endowment contract and therefore may result in taxable income to you. See
"Federal Income Tax Considerations," page 24.
POLICY CHARGES AND DEDUCTIONS
Load from Premiums
We do not make any deductions from any premium payment before allocating it
to your Accumulated Value.
Surrender Charge
As discussed above under "Surrender and Partial Withdrawal Rights," if you
surrender your policy or take a partial withdrawal within the first nine Policy
Years, a surrender charge may be deducted from Accumulated Value. Approximately
twenty-five percent of the Surrender Charge is assessed to compensate us for
premium taxes paid. Approximately seventy-five percent of the Surrender Charge
is assessed to compensate us for sales expenses. The Surrender Charge will not
exceed 10% of the initial premium payment.
Monthly Deductions
An amount called the monthly deduction is deducted from your Accumulated
Value in the Variable Accounts and the Fixed Account beginning on the Policy
Date and on each Monthly Payment Date thereafter. The monthly deduction will be
assessed to each account in proportion to the Policy's Accumulated Value in
each Variable Account and the Fixed Account, unless you specify otherwise in
writing. The monthly deduction consists of the following charges:
--Cost of Insurance Charge: A cost of insurance charge is deducted to
compensate us for the cost of providing life insurance coverage for the
Insured(s); and
--Administrative Charge: An administrative charge equal to 0.00025 (0.30%
annually) of Accumulated Value in the Variable Accounts and the Fixed
Account is assessed. In addition, if Accumulated Value is below $50,000 on
any Policy Anniversary Date, a $40 fee is charged on that Monthly Payment
Date; and
--Tax Expense Charge: A charge equal to 0.000333333 (0.40% annually) of the
Accumulated Value is assessed to pay applicable state and local premium
taxes and federal taxes imposed under Section 848 of the Internal Revenue
Code of 1986, as amended (the "Code"). This charge is eliminated after 10
Policy Years; and
--Mortality and Expense Risk Charge: A charge is assessed to compensate us
for mortality and expense risks assumed. This charge is equal to 0.00075
(0.90% annually) of Accumulated Value in the Variable Accounts and the
Fixed Account. After 10 Policy Years this charge is reduced to 0.000583333
(0.70% annually).
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The operating expenses of the Separate Account are paid by us. The Policy's
charges and deductions shown above are specified under the terms of the Policy.
For a more complete description of these charges, see "Charges and Deductions,"
page 21.
FUND ANNUAL EXPENSES AFTER EXPENSE LIMITATION (as a percentage of each
Portfolio's average daily net assets)
Investment advisory fees and operating expenses of 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
ending 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 this 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 Portfolios was necessary for the
Fund's fiscal year 1996. There can be no assurance that the 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 actual
surrender of a Policy or upon making a partial withdrawal or a Policy Loan. Any
such distribution may give rise to taxable income to you and may, under certain
circumstances, subject you to an additional income tax of 10% of the amount
includable in taxable income. For more information on the tax treatment of the
Policy and the tax treatment of distributions see "Federal Income Tax
Considerations," page 24.
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 IRC. See "Federal Income Tax
Considerations," page 24.
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.
9
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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 received 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 in addition to the
Policies. 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 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.
10
<PAGE>
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 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 to the Separate Account that fund the Variable
Investment Options available to you. Each Portfolio pursues different
investment objectives and policies. We purchase the shares of each Portfolio
for the corresponding Variable Account at net asset value, i.e., without sales
load. All dividends and capital gains distributions received from a Portfolio
are automatically reinvested in such Portfolio at net asset value, unless we,
on behalf of the Separate Account, elect otherwise. Fund shares will be
redeemed by us at their net asset value to the extent necessary to make
payments under the Policies.
Shares of the Fund currently are offered for purchase only to separate
accounts of ours and an affiliated issuer, 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.
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<PAGE>
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
(UNDER NORMAL
PORTFOLIO OBJECTIVE CIRCUMSTANCES) PORTFOLIO MANAGER
<C> <C> <S> <C>
Money Market Current income consistent with Highest quality money Pacific Life
preservation of capital market
instruments
- -------------------------------------------------------------------------------------------------------
High-Yield High level of current income Intermediate and long- Pacific Life
Bond term,
high-yielding, lower and
medium quality (high
risk)
fixed-income securities
- -------------------------------------------------------------------------------------------------------
Managed Bond Maximize total return consistent Investment grade Pacific Investment
with prudent investment marketable Management Company
management debt securities. Will
normally maintain an
average portfolio
duration of 3-7 years
- -------------------------------------------------------------------------------------------------------
Government Maximize total return consistent U.S. Government Pacific Investment
Securities with prudent investment securities including Management Company
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 Eq- Capital appreciation Common stock of small Columbus Circle Investors
uity emerging growth and
medium
capitalization companies
- -------------------------------------------------------------------------------------------------------
Growth LT Long-term growth of capital Common stock Janus Capital Corporation
consistent with the preservation
of capital
- -------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Dividend paying common J.P. Morgan Investment
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 Advisors
securities
convertible into or
exchangeable
for common stocks
- -------------------------------------------------------------------------------------------------------
Bond and In- High level of current income Investment grade debt Greenwich Street Advisors
come consistent with prudent securities
investment management and
preservation of capital
- -------------------------------------------------------------------------------------------------------
Equity Index Provide investment results that Stocks included in the Bankers Trust Company
correspond to the total return S&P 500
performance of common stocks
publicly traded in the U.S.
- -------------------------------------------------------------------------------------------------------
International Long-term capital appreciation Equity securities of Morgan Stanley Asset
corporations Management Inc.
domiciled outside the
United
States
- -------------------------------------------------------------------------------------------------------
Emerging Mar- Long-term growth of capital Common stocks of Blairlogie Capital
kets companies Management
domiciled in 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.
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<PAGE>
THE POLICY
The variable life insurance benefits provided by your Policy are funded
through your 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 Policy.
APPLICATION FOR A POLICY
Any person or persons wishing to purchase the Policy may submit an
application to us. A Policy can be issued on the life of a single Insured for
issue Ages up to and including age 85 and Insureds under a last survivor
Policy for issue Ages between 20 and 85, and, in both cases, with evidence of
insurability satisfactory to us. The Insured's Age is calculated as of the
Insured's last birthday. Acceptance is subject to our underwriting rules, and
we reserve the right to request additional information and to reject an
application.
After your Policy is issued, insurance coverage under the Policy will be
deemed to have begun as of the Policy Date. Your Policy Date is usually the
date the initial premium is received at our Home Office. Your Policy Date is
the date used to determine Policy Years, Policy Months, and Policy Monthly,
Quarterly, Semi-Annual and Annual Anniversaries. For purposes of determining
the Monthly Payment Date for all Policies issued, the Policy Date will never
be the 29th, 30th, or 31st of any month. 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 the
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, the Policy will be cancelled and any premium received will be
refunded.
Insureds are assigned to underwriting (insurance risk) classes which are
used in calculating the cost of insurance rates. In assigning Insureds to
underwriting classes, we will usually use either simplified or medical
underwriting, although other forms of underwriting may be used when deemed
appropriate by us.
PREMIUMS
The minimum initial premium to purchase a Policy is $10,000 if the Insured's
issue Age is less than 70 and $50,000 if the Insured's issue Age is greater
than 69. If this is a last survivor Policy, the minimum initial premium is
based upon the issue Age of the younger Insured. You may elect the initial
premium to be 80%, 90% or 100% of the Guideline Single Premium. The Guideline
Single Premium is the maximum premium that can be paid for a given Face Amount
in order for an insurance policy to qualify as a life insurance contract for
tax purposes. If you reside in the state of West Virginia the Face Amount of
the Policy must be at least $25,000. We may reduce the minimum initial premium
required under certain circumstances, such as for group or sponsored
arrangements.
ADDITIONAL PREMIUM PAYMENTS
You have limited ability to make additional premium payments. Subsequent
premium payments of at least $1,000 are permitted under the following
circumstances:
1. an additional premium payment is required to keep the Policy in force
(see "Lapse"); or
2. the premium payment would not cause total premiums to exceed the premium
limits prescribed by the Internal Revenue Service ("IRS") to qualify the
Policy as a life insurance contract.
We reserve the right to require satisfactory evidence of insurability before
accepting any additional premium payment that results in an immediate increase
in the death benefit. A premium payment would result in an immediate increase
in the death benefit if the death benefit under your Policy is, or upon
acceptance of the premium would be, greater than the Face Amount. See "Death
Benefit." If satisfactory evidence of insurability is not received, the
payment, or a portion thereof, may be returned. The Company may require that
existing Policy Debt be repaid prior to accepting any additional premium
payments.
13
<PAGE>
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. We also reserve the right to make distributions from your Policy to the
extent we deem it necessary to continue to qualify your Policy as life
insurance under the IRC.
If your Policy is issued in exchange for a policy that is not a modified
endowment contract, then in order for your Policy to continue to avoid being
treated as a modified endowment contract, the sum of the premiums less a
portion of any Partial Withdrawals may not exceed the "seven pay premium"
limit as defined in the 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 have 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 Policy Anniversary, 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
Policy Anniversary.
ALLOCATION OF PREMIUMS
In the application for your Policy, you select the Investment Options to
which premium payments will be allocated after the Free-Look Transfer Date.
Until the Free-Look Transfer Date, premium payments will be allocated to the
Money Market Variable Account, which invests in the Money Market Portfolio of
the Fund (except for amounts allocated to the Loan Account to secure a Policy
loan). Your Accumulated Value will be automatically allocated according to
your instructions contained in the application (or if received more recently,
in written instructions) the later of 15 days after the Policy is issued or 45
days after the application is completed (the "Free-Look Transfer Date").
Additional premium payments will be allocated among the Variable Accounts
and the Fixed Account according to your most recent instructions. You may
change the allocation of payments by submitting a proper written request to
our Home Office, or by telephone if an Authorization for Telephone Requests
for changes in premium allocation instruction has been completed, signed and
filed at our Home Office.
PORTFOLIO REBALANCING
You may direct us to automatically re-set the percentage of your Accumulated
Value allocated to each Variable Account at a predetermined level. This
process is called portfolio rebalancing. (The Fixed Account is not available
for portfolio rebalancing.) Over time, the variations in each Variable
Account's investment results will shift the percentage allocations of your
Accumulated Value. The portfolio rebalancing feature will automatically
transfer your Accumulated Value among the Variable Accounts back to the preset
percentages. Rebalancing can be made quarterly, semi-annually or annually,
measured from your Policy Date ("frequency period"). Rebalancing may result in
transferring amounts from a Variable Account with relatively higher investment
performance to a Variable Account with relatively lower investment
performance.
You may initiate portfolio rebalancing by sending our Home Office a signed,
written request in good form or a properly completed Automatic Portfolio
Rebalancing form. You must specify the frequency for rebalancing and a
beginning date. The first rebalancing will usually occur on your Monthly
Payment Date that starts the frequency period you elected and that occurs on
or follows the beginning date you elected. If you stop portfolio rebalancing,
you must wait 30 days to begin again. Portfolio rebalancing cannot be used
with the Dollar Cost Averaging Option.
We may modify, terminate or suspend the portfolio rebalancing feature at any
time.
DOLLAR COST AVERAGING OPTION
We currently offer an option under which you may dollar cost average your
allocations in the Variable Accounts under your Policy by authorizing us to
make periodic allocations of Accumulated Value from any one Variable Account
to one or more of the other Variable Accounts. Dollar cost averaging is a
systematic method
14
<PAGE>
of investing in which securities are purchased at regular intervals in fixed
dollar amounts so that the cost of the securities gets averaged over time and
possibly over various market cycles. The option will result in the allocation
of Accumulated Value to one or more Variable Accounts, and these amounts will
be credited at the Accumulation Unit values as of the end of the Valuation
Dates on which the transfers are processed. Since the value of Accumulation
Units will vary, the amounts allocated to a Variable Account will result in
the crediting of a greater number of units when the Accumulation Unit value is
low and a lesser number of units when the Accumulation Unit value is high.
Similarly, the amounts transferred from a Variable Account will result in a
debiting of a greater number of units when the Accumulation Unit value is low
and a lesser number of units when the Accumulation Unit value is high. Dollar
cost averaging does not guarantee profits, nor does it assure that you will
not have losses.
A Dollar Cost Averaging Request form is available upon request. 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 corresponds to the 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 processed on
the following Monthly, Quarterly, Semi-Annual, or Annual Anniversary for so
long as you designate, until the total amount elected has been transferred,
until Accumulated Value in the Variable Account from which transfers are made
has been depleted, or until your Policy enters the Grace Period. Amounts
periodically transferred under this option will not be subject to any transfer
charges that may be imposed by us in the future, except as may be required by
applicable law.
You may instruct us at any time to terminate 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
After the Free-Look Transfer Date, you may transfer Accumulated Value among
the Variable Accounts upon proper written request to our Home Office.
Transfers (other than transfers in connection with the Dollar Cost Averaging
Option) may be made by telephone if a properly completed, Authorization for
Telephone Requests is on file at our Home Office. Currently, there are no
limitations on the number of transfers between Variable Accounts, no minimum
amount required for a transfer, nor any minimum amount required to be
remaining in a given Variable Account after a transfer (except as required
under the Dollar Cost Averaging Option). No transfers are allowed during the
Grace Period if the required premium has not been paid. No charges are
currently imposed upon such transfers. We reserve the right, however, at a
future date to limit the size of transfers and remaining balances, to assess
transfer charges, to limit the number and frequency of transfers, and to
modify, suspend and/or discontinue telephone transfers.
Accumulated Value may also be transferred from the Variable Accounts to the
Fixed Account; however, such a transfer will only be permitted in the Policy
Month preceding a Policy Anniversary, except that you may make such a transfer
at any time during the first 18 Policy Months. Transfers from the Fixed
Account to the Variable Accounts are restricted as described in "The Fixed
Account."
DEATH BENEFIT
When your Policy is issued, we will determine the initial amount of
insurance for the initial premium payment based on the instructions provided
in your application. That amount will be shown on the specifications page of
the Policy and is called the "Face Amount."
Upon due proof of the death of the Insured(s), we will pay to your named
Beneficiary death benefit proceeds, which will be the death benefit under your
Policy reduced by any outstanding Policy Debt (and if in the Grace Period, any
overdue charges). The death benefit will be the greater of the Face Amount
under your
15
<PAGE>
Policy or Accumulated Value multiplied by a specified percentage. (which is
referred to as the Guideline Minimum Death Benefit.) The specified percentages
vary according to the Age of the Insured, or, in the case of a last survivor
Policy, the Youngest Insured, and will be at least equal to the cash value
corridor in Section 7702 of the IRC, which addresses the definition of a life
insurance policy for tax purposes. A table showing the specified percentages
is in the Appendix and in the Policy. Because the specified percentage is
applied to your Accumulated Value, an increase in Accumulated Value may
increase the death benefit. However, because the death benefit will never be
less than the Face Amount, a decrease in Accumulated Value may decrease the
death benefit but never below the Face Amount. The following examples
illustrate how the death benefit will be determined:
EXAMPLES
<TABLE>
<CAPTION>
POLICY A POLICY B
-------- --------
<S> <C> <C>
Face Amount........................................... $100,000 $100,000
Insured's Age......................................... 40 40
Accumulated Value on Date of Death.................... $ 46,500 $ 34,000
Specified Percentage.................................. 250% 250%
</TABLE>
In Policy A, the death benefit equals $116,250, i.e., the greater of
$100,000 (the Face Amount) or $116,250 (the Accumulated Value at the date of
death of $46,500 multiplied by the specified percentage of 250%). Assuming
that there is no outstanding Policy Debt, this amount constitutes the death
benefit proceeds that would be paid to the Beneficiary.
In Policy B, the death benefit is $100,000, i.e., the greater of $100,000
(the Face Amount) or $85,000 (the Accumulated Value of $34,000 multiplied by
the specified percentage of 250%).
If the death benefit is equal to the Guideline Minimum Death Benefit, we
reserve the right to reduce the death benefit by requiring Partial Withdrawals
be made in order to maintain the net amount at risk at a level that will not
exceed three times the death benefit on the Policy Date.
The Policy is intended to qualify as a life insurance contract under the
Internal Revenue Code for Federal tax purposes, and the death benefit under
the Policy is intended to qualify for the income tax exclusion under the
Internal Revenue Code. If your Policy is issued in exchange for another life
insurance policy that was not a modified endowment contract, then unless
otherwise specified by you in writing, it is intended that the Policy will not
be treated as a modified endowment contract under the Internal Revenue Code.
To these ends, the provisions of the Policy, including any other Rider,
Benefit, or endorsement, are to be interpreted to ensure such tax
qualification and to prevent the Policy from being treated as a modified
endowment contract, notwithstanding any other provisions to the contrary.
If at any time the premiums paid under your policy exceed the amount
allowable for such tax qualification, such excess amount shall be removed from
the Policy as of the date of its payment, and any appropriate adjustment in
the death benefit shall be made as of such date. The excess amount shall be
refunded to you no later than 60 days after the end of the applicable Policy
Year. The excess amount removed from the Policy and refunded to you may be
adjusted for interest or for changes in Accumulated Value attributable to the
excess amount. If for some reason this excess amount is not refunded by then,
the death benefit under this Policy shall be increased retroactively and
prospectively so that at no time is the death benefit ever less than the
amount needed to ensure such tax qualification. To the extent that the death
benefit as of any time is increased by this provision, appropriate adjustments
shall be made retroactively in any cost of insurance charge or supplemental
benefits as of that time that are consistent with such an increase.
If your Policy is issued in exchange for another life insurance policy that
was not a modified endowment contract, then at any time the premiums or other
amounts paid under the Policy exceed the limit for avoiding modified endowment
contract treatment, and you have not specified in writing that such treatment
is acceptable to you, such excess amount shall be removed from the Policy as
of the date of its payment, and any appropriate adjustment in the Policy's
death benefit shall be made as of such date. This excess amount shall be
refunded to
16
<PAGE>
you no later than 60 days after the end of the applicable Policy Year. The
excess amount removed from the Policy and refunded to you may be adjusted for
interest or for changes in Accumulated Value attributable to the excess
amount. If this excess amount is not refunded by then, the death benefit under
your Policy shall be increased retroactively and prospectively to the minimum
amount necessary so that at no time is the death benefit ever less than the
amount needed to avoid modified endowment contract treatment. To the extent
the death benefit as of any time is increased by this provision, appropriate
adjustments shall be made, retroactively or otherwise, in any cost of
insurance or supplemental benefits as of that time that are consistent with
such an increase.
All calculations of death benefit will be made as of the end of the
Valuation Period during which the Insured (or for a last survivor Policy, the
Survivor) dies. Death benefit proceeds may be paid to your Beneficiary in a
lump sum or under a payment plan offered by us under the Policy. The plan
offers monthly income for the lifetime of the Beneficiary with a minimum
period of ten years. The Policy should be consulted for details.
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, a portion
of your 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 any Surrender Charge. Once the duration of the
surrender charge has expired, your Cash Surrender Value will equal your
Accumulated Value.
Net Cash Surrender Value. The Net Cash Surrender Value is the Cash Surrender
Value minus any outstanding Policy Debt. You can surrender your Policy at any
time while the Insured (either Insured if this is a last survivor Policy) is
living and receive your Net Cash Surrender Value.
DETERMINATION OF ACCUMULATED VALUE
Although your Policy's death benefit can never be less than the Face Amount
for as long as your Policy is in force, your Accumulated Value in the Separate
Account will vary to a degree that depends upon several factors, including
investment performance of the Variable Accounts to which Accumulated Value has
been allocated, payment of additional premiums, the amount of any outstanding
Policy Debt, any Partial Withdrawals, and the charges assessed in connection
with your Policy.
The amounts allocated to the Variable Accounts will be invested in shares of
the corresponding Portfolios of the Fund. The investment performance of each
Variable Account will reflect increases or decreases in the net asset value
per share of the corresponding Portfolio and any dividends or distributions
declared by a Portfolio.
Assets in the Variable Accounts are divided into accumulation units, which
are a measure of value used for bookkeeping purposes. When you allocate
premiums to a Variable Account, your Policy is credited with accumulation
units. In addition, other transactions including loans, surrender, partial
withdrawals, transfers, and assessment of charges against your Policy affect
the number of accumulation units credited to your Policy. The
17
<PAGE>
number of units credited or debited in connection with any such transaction is
determined by dividing the dollar amount of such transaction by the unit value
of the affected Variable Account. The unit value of each Variable Account is
determined on each Valuation Date at or about 4:00 p.m. Eastern time. The
number of units credited will not change because of subsequent changes in unit
value.
The accumulation unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated
by adjusting the unit value from the previous Valuation Date for (1) the
investment performance of the Variable Account, which is based upon the
investment performance of the corresponding Portfolio of the Fund, (2) any
dividends or distributions paid by the corresponding Portfolio, and (3) any
charges that may be assessed by us for income taxes attributable to the
operation of the Variable Account (which are currently not anticipated).
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 in the first Policy Year is 50% of your
Accumulated Value, and thereafter the maximum at any time is the greater of
(1) 100% of your Accumulated Value in the Fixed Account and 90% in the
Variable Accounts, and (2) 98% of the excess of the Accumulated Value over
twelve times the current monthly deduction. The maximum amount is reduced by
any existing Debt and the amount of any Surrender Charge that would be imposed
if you surrendered your Policy on the date the loan is taken.
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 proportionately.
The interest rate we charge on loans is 6.00% a year on Policy Debt in the
first ten Policy Years and 5.00% thereafter.
A portion of your Policy Debt may qualify as a Preferred Loan. We charge a
lower rate of interest on Preferred Loans. Subject to the limitations
described above, the maximum amount available as Preferred Loans is the excess
of the Accumulated Value over the premiums paid. We will determine the amount
of a loan that is Preferred on the date of the loan, and we will redetermine
the total amount of Preferred Loans on each Policy Anniversary. Loan
repayments will be considered repayment of Preferred Loans last. We will
charge interest on Preferred Loans at an annual rate of 5.25% in the first ten
Policy Years, and 4.75% thereafter.
We will credit interest monthly on amounts held in the Loan Account to
secure the loan at an annual rate of 4.5%.
You may repay all or part of the loan at any time while your Policy is in
force. Interest on a loan is accrued daily and is due on each Policy
Anniversary for the prior year, or on termination of the Policy. 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 cause an equal amount
to be transferred from the Loan Account into the Investment Options in
accordance with your current premium allocation instructions. In addition, any
interest earned on the amount held in the Loan Account will be transferred to
each of the Investment Options in accordance with your current premium
allocation instructions on each Policy Anniversary and on full repayment of
your Policy Debt.
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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
rates of the Fixed Account. Thus, a loan, whether or not repaid, will have a
permanent effect on the Policy's values and may have an effect on the amount
and duration of the death benefit. If not repaid, your Policy Debt will be
deducted from the amount of the death benefit payable upon the death of the
Insured (or the Survivor Insured for a last survivor Policy), the Cash
Surrender Value paid upon surrender, 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 Debt equals or exceeds your Cash Surrender Value and
the minimum payment required is not made during the Grace Period. Moreover,
your Policy may enter the Grace Period more quickly when a loan is
outstanding, because the loaned amount is not available to cover monthly
deductions. Additional payments or repayment of a portion of Debt may be
required to keep the Policy in force. See "Lapse".
A loan is treated as a distribution from a Policy that is a modified
endowment contract, and therefore may give rise to taxable income to you. For
information on the tax treatment of loans, see "Federal Income Tax
Considerations."
DURATION OF CONTRACT
The Policy does not mature. Coverage under a Policy will remain in effect
until the Policy is surrendered; until the death of a single Insured or, for a
last survivor Policy, the Survivor; or until the Policy lapses.
SURRENDER
You may surrender your Policy at any time during the life of the Insured(s).
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 outstanding
Policy Debt, and applicable surrender charges. Surrender could give rise to
taxable income.
PARTIAL WITHDRAWALS
Partial withdrawals may be taken beginning on the first Policy Anniversary
and thereafter. Under this Benefit, you may withdraw a portion of your Net
Cash Surrender Value.
A partial withdrawal must be for at least $1,000. The amount that can be
withdrawn (1) can be no greater than the excess of the Cash Surrender Value
prior to the withdrawal over the Policy Debt divided by 90% and (2) is limited
so that after the withdrawal, your Net Cash Surrender Value is at least
$10,000.
You may make a partial withdrawal by submitting a proper written request to
us. As of the effective date of any withdrawal, your Accumulated Value will be
reduced by the amount of the withdrawal and any applicable Surrender Charge.
The reduction in Accumulated Value will be allocated proportionately to your
Accumulated Value in the Investment Options unless you request otherwise. If
the Insured(s) 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.
Preferred Withdrawal. A Preferred Withdrawal is a portion of the first
withdrawal in any Policy Year. This portion is the lesser of the withdrawal
and the Free Withdrawal Amount. No Surrender Charge is imposed on Preferred
Withdrawals. Amounts in excess of the Free Withdrawal Amount and any
subsequent withdrawals in the same Policy Year may be subject to the Surrender
Charge. See "Surrender Charge". If there is no Free Withdrawal Amount at the
time of the first withdrawal in a Policy Year, the next withdrawal in the same
Policy Year will be considered the first.
When a partial withdrawal is made, the death benefit under the Policy is
decreased by an amount proportionate to the reduction in Accumulated Value
caused by the partial withdrawal, and the Face Amount may also be reduced. For
example, if you withdraw one-half of your Accumulated Value, the death benefit
after the withdrawal will be one-half of the death benefit prior to the
withdrawal. If the death benefit prior to a partial
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withdrawal is the Face Amount, the Face Amount will be reduced by the entire
amount of the reduction in death benefit. If the death benefit prior to a
partial withdrawal is equal to a Policy's Accumulated Value multiplied by the
applicable specified percentage, the Face Amount after the withdrawal will be
equal to the new death benefit if the new death benefit is less than the Face
Amount prior to the withdrawal, and to the prior Face Amount otherwise.
However decreases in the Face Amount and death benefit will be limited so that
the Policy complies with the definition of life insurance in the IRC without
any additional distribution from the Policy at the time of the withdrawal.
A partial withdrawal is treated as a distribution from the Policy that may
give rise to taxable income to you. 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 age 60 or older), 10 days
after we mail or deliver this notice of right of withdrawal included in this
prospectus, or within 45 days after you sign the application for insurance,
whichever is later. However, in Pennsylvania, you have a different Free-Look
Right, under which your Policy may be returned only within 10 days after you
receive it. It can be mailed or delivered to us or our agent. The returned
Policy will be treated as if we never issued it and we will promptly refund
the full amount of the premium paid. If you have taken a loan during the Free-
Look Period, your Policy Debt will be deducted from the amount refunded. Until
the Free-Look Transfer Date, premiums will be allocated to the Money Market
Variable Account which invests in the Money Market Portfolio of the Fund
(except for amounts allocated to the Loan Account to secure a Policy loan).
See "Allocation of Premiums."
LAPSE
Your Policy will lapse only when your Net Cash Surrender Value is
insufficient to cover Policy charges on a Monthly Payment Date, and a Grace
Period expires without you making a sufficient payment. You must pay during
the Grace Period an amount equal to the amount by which your Cash Surrender
Value less Policy Debt is less than zero plus a minimum of three times the
full charges and deductions due on the Monthly Payment Date when the
insufficiency occurred to avoid termination.
To avoid potential lapse, you may wish to repay a portion of any Policy
Debt. If premium payments have not exceeded the maximum permissible premiums,
you may wish to make a premium payment.
If your Net Cash Surrender Value is insufficient to cover the deductions and
charges on a Monthly Payment Date, we will deduct the amount available to pay
for any portion of the monthly deductions and charges due. Any remaining
Accumulated Value in the Variable Accounts will be transferred to the Money
Market Variable Account. We will notify you (and any assignee of record) of
the payment required to keep the Policy in force. You will then have a "Grace
Period" of 61 days, measured from the date the notice is sent, to make the
required payment. Your Policy will remain in force through the Grace Period.
Failure to make the required payment will result in termination of coverage
under your Policy upon expiration of the Grace Period, and your Policy will
lapse with no value. If the required payment is made during the Grace Period,
any premium paid and any Accumulated Value in the Money Market Variable
Account will be allocated among the Investment Options in accordance with your
current premium allocation instructions. Any monthly deductions and charges
due will be charged to the Investment Options on a proportionate basis. If the
Insured (or Survivor if this is a last survivor Policy) dies during the Grace
Period, the death benefit proceeds will equal the amount of the death benefit
immediately prior to the commencement of the Grace Period, reduced by any
unpaid monthly deductions and charges due and any Policy Debt.
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 three years
after the end of the Grace Period provided we receive the following: (1) your
written application; (2) evidence of insurability satisfactory to us; and (3)
payment of all monthly
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charges and deductions that were due and unpaid during the Grace Period,
payment of the amount by which Net Cash Surrender Value was less than zero at
the beginning of the Grace Period, and payment of a premium at least equal to
three times the most recent monthly deduction.
When your Policy is reinstated, your Accumulated Value will be equal to your
Accumulated Value on the date of the lapse, plus any additional premium
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 or
before 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 Policy Debt will be allocated among the Investment Options in accordance
with your current premium allocation instructions.
LAST SURVIVOR POLICIES
Policies are offered that provide insurance protection, either on the life
of one Insured or--as a last survivor Policy--on the lives of two Insureds. A
last survivor Policy provides a death benefit the proceeds of which are paid
on the death of the Survivor Insured. The other significant differences
between single Insured and last survivor Policies are listed below:
1. The cost of insurance charges under last survivor Policies are different
in that they are determined in a manner that reflects the anticipated
mortality of the two Insureds. See "Charges and Deductions" and the last
survivor illustrations in the "Appendix".
2. In an application for a last survivor Policy, we require evidence of
insurability satisfactory to us for both Insureds.
3. For a last survivor Policy to be reinstated, both Insureds must be alive
on the date of reinstatement.
4. The Policy provisions regarding misstatement of age or sex, suicide and
incontestability apply to both Insureds.
CHARGES AND DEDUCTIONS
LOAD FROM PREMIUMS
We do not make any deductions from the premium payment before allocating it
to your Accumulated Value.
SURRENDER CHARGE
A Surrender Charge may be assessed upon a surrender or a partial withdrawal
within the first nine Policy Years. The Surrender Charge is assessed against
the portion of the resulting reduction in Accumulated Value considered to be a
return of initial premium. For the purpose of determining the Surrender Charge
only, a reduction in Accumulated Value upon a surrender or withdrawal will be
deemed to be a distribution of earnings from the available Free Withdrawal
Amount, if any, first, a return of initial premium next, then a return of
additional premium, and a distribution from remaining earnings last. The
available Free Withdrawal Amount is the amount available as a Preferred
Withdrawal, if any. The Surrender Charge varies with the Policy Year according
to the following schedule:
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<TABLE>
<CAPTION>
SURRENDER
TIME OF WITHDRAWAL CHARGE
------------------ ---------
<S> <C>
Policy Year 1-2 10%
Policy Year 3 9%
Policy Year 4 8%
Policy Year 5 7%
Policy Year 6 6%
Policy Year 7 5%
Policy Year 8 4%
Policy Year 9 3%
Policy Year 10 and thereafter 0%
</TABLE>
In no event will the Surrender Charges imposed exceed the maximum prescribed
by state nonforfeiture laws for life insurance.
Approximately twenty-five percent of the Surrender Charge is assessed to
compensate us for premium taxes. Approximately seventy-five percent is
assessed to compensate us for sales expenses. The Surrender Charge is not
assessed against premiums other than the initial premium.
DEDUCTIONS FROM ACCUMULATED VALUE
The charges described below are deducted from Accumulated Value on the
Policy Date, and on each Monthly Payment date thereafter. Each charge will be
assessed to the Fixed Account and to each Variable Account in proportion to
the Policy's Accumulated Value in that account, unless you specify otherwise
in writing.
Cost of Insurance. A cost of insurance charge is deducted to compensate us
for the anticipated cost of paying death benefits under the Policies. We may
use any profit derived from this charge for any lawful purpose including the
cost of claims processing and investigation.
The guaranteed maximum cost of insurance charge will be the net amount at
risk under the Policy multiplied by the guaranteed maximum cost of insurance
rates shown in your Policy. The net amount at risk is the death benefit less
the Accumulated Value. For the purpose of this charge, the death benefit is
divided by 1.002466 (a discount factor to account for interest deemed to be
earned during the month). Guaranteed maximum cost of insurance rates are based
on the Age, sex (where permissible), and underwriting classification of the
Insured(s). The cost of insurance rates generally increase with the Age of the
Insured(s). If your initial premium was 100% of the Guideline Single Premium
we may charge less than the guaranteed maximum cost of insurance charge.
Administrative Charge. We assess an administrative charge of 0.00025 (0.30%
annually) of the Accumulated Value in the Variable Accounts and the Fixed
Account for administrative expenses. In addition, if the Accumulated Value is
less than $50,000 on any Policy Anniversary Date a $40 fee is charged on that
Monthly Payment Date.
The administrative charge is to cover administrative expenses in connection
with the Policies, including expenses of underwriting and issuing the Policy,
recordkeeping, determining Policy values and benefits, processing death
benefit claims, processing withdrawals and transfers, preparing reports to
Policy Owners, and overhead costs. We do not expect to profit from this
charge.
Tax Expense Charge. A charge equal to 0.000333333 (0.40% annually) of the
Accumulated Value is assessed to pay applicable state and local premium taxes
and federal taxes under Section 848 of the Code. This charge is eliminated
after 10 Policy Years. The deduction over 10 Policy Years approximates our
average expenses for taxes on premiums. Premium taxes vary from state to
state, and in some instances, among municipalities. We do not expect to profit
from this charge.
Mortality and Expense Risk Charges. A charge equal to 0.00075 (0.90%
annually) of Accumulated Value in the Variable Accounts and the Fixed Account
will be assessed to compensate us for mortality and expense risks assumed.
After 10 Policy Years, this charge is reduced to 0.000583333% (0.70%
annually).
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This charge is made to compensate us for assuming certain mortality and
expense risks under the Policies. The mortality risk assumed is that Insureds,
as a group, may live for a shorter period of time than estimated and,
therefore, the cost of insurance charges specified in the Policy will be
insufficient to meet actual claims. The expense risk assumed is that other
expenses incurred in issuing and administering the Policies and operating the
Separate Account will be greater than the charges assessed for such expenses.
We will realize a gain from this charge to the extent it is not needed to
provide the mortality benefits and expenses under the Policies, and will
realize a loss to the extent the charge is not sufficient. We may use any
profit derived from this charge for any lawful purpose, including any
distribution expenses not covered by the Surrender Charge.
OTHER CHARGES
We may charge the Variable Accounts for the federal income taxes incurred by
us that are attributable to the Separate Account and its Variable Accounts or
to our operations with respect to the Policies. No such charge is currently
assessed. See "Charge for Our Income Taxes".
We will bear the 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 they 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, including the
guaranteed rates for the cost of insurance, the administrative charge, the tax
charge, and the charge for mortality and expense risk.
VARIATIONS IN CHARGES
We may agree to reduce or waive the Surrender Charge or administrative
charges, or other charges, or credit additional amounts under our Policies, in
situations where selling and/or maintenance costs associated with the Policies
are reduced, such as the sale of several Policies to the same Policyowner(s),
sales of large Policies, sales of Policies in connection with a group or
sponsored arrangement or mass transactions over multiple Policies.
In addition, we may agree to reduce or waive some or all of such charges
and/or credit additional amounts under our Policies, for those Policies sold
to persons who meet criteria established by us, who may include registered
representatives and employees of broker/dealers with a current selling
agreement with us and immediate family members of such persons ("Eligible
Persons"). We will credit additional amounts to Policies owned by Eligible
Persons if such Policies are purchased directly through Pacific Mutual
Distributors, Inc. Under such circumstances, Eligible Persons will not be
afforded the benefit of services of any other broker/dealer nor will
commissions be payable to any broker/dealer in connection with such purchases.
Eligible Persons must contact us directly with servicing questions, contract
changes and other matters relating to their Policies. The amount credited to
Policies owned by Eligible Persons will equal the reduction in expenses we
enjoy by not incurring brokerage commissions in selling such Policies, with
the determination of the expense reduction and of such crediting being made in
accordance with our administrative procedures.
We will only reduce or waive such charges or credit additional amounts on
any Policy where expenses associated with the sale of the Policy and/or costs
associated with administering and maintaining the Policy are reduced. We
reserve the right to terminate waiver, reduced charge and crediting programs
at any time, including for issued Policies.
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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 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. These comments concerning federal income tax consequences are not
an exhaustive discussion of all tax questions that might arise under the
Policy. 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 or other tax considerations which may be involved in the
purchase or ownership of the Policy.
While we believe that the Policy meets the statutory definition of life
insurance under Section 7702 of the 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). We reserve the right to
make changes to the Policy if changes are deemed appropriate by us to attempt
to assure qualification of the Policy as a life insurance contract. If a
Policy were determined not to qualify as life insurance, the Policy would not
provide the tax advantages normally provided by life insurance. The discussion
below summarizes the tax treatment of life insurance contracts.
The death benefit under a Policy should be excludable from the gross income
of the Beneficiary (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 your Policy
until a full or partial surrender thereof, or lapse of your Policy, or until
receipt of deemed distributions (including, in the case of a modified
endowment contract, policy loans). PROSPECTIVE OWNERS THAT INTEND TO USE
POLICIES TO FUND DEFERRED COMPENSATION ARRANGEMENTS FOR THEIR EMPLOYEES ARE
URGED TO CONSULT THEIR TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES OF
SUCH ARRANGEMENTS. PROSPECTIVE CORPORATE OWNERS SHOULD CONSULT THEIR TAX
ADVISERS ABOUT THE TREATMENT OF LIFE INSURANCE IN THEIR PARTICULAR
CIRCUMSTANCES FOR PURPOSES OF THE ALTERNATIVE MINIMUM TAX APPLICABLE TO
CORPORATIONS AND THE ENVIRONMENTAL TAX UNDER IRC SECTION 59A. Changing the
Policy Owner may also have tax consequences. Exchanging a Policy for another
involving the same Insured generally will not result in the recognition of
gain or loss according to 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 will be required to diversify
its investments. For details on these diversification requirements, see "What
is the Federal Income Tax Status of the Fund" in the Fund's prospectus.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income
and gains from the separate account assets would be includable in the variable
policy owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor [i.e., the Policy Owner], rather than the insurance
company, to be treated as the owner of the assets in the account." This
announcement also stated that guidance would be issued by way of regulations
or rulings on the "extent to which policyholders may direct their investments
to particular subaccounts without being treated as owners of the underlying
assets." As of the date of this prospectus, no such guidance has been issued.
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<PAGE>
The ownership rights under your Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, you have additional flexibility in allocating premium payments and
Policy Values. These differences could result in you being treated as the
owner of your Policy's pro rata portion of the assets of the Separate Account.
In addition, we do not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. We therefore reserve the right to modify the Policy, as deemed
appropriate by us, to attempt to prevent you from being considered the owner
of your Policy's pro rata share of the assets of the Separate Account.
Moreover, in the event that regulations are adopted or rulings are issued,
there can be no assurance that the Portfolios will be able to operate as
currently described in the Prospectus, or that the Fund will not have to
change any Portfolio's investment objective or investment policies.
Modified Endowment Contracts. IRC Section 7702A defines a class of insurance
contracts referred to as modified endowment contracts. Under this provision,
the Policies will be treated for federal tax purposes in one of two ways. It
is expected that most of the Policies will be modified endowment contracts.
A life insurance contract becomes a "modified endowment contract" if, at any
time during the first seven contract years, the sum of actual premiums paid
exceeds the sum of the "seven-pay premium." Generally, the "seven-pay premium"
is the level annual premium, such that if paid for each of the first seven
years, will fully pay for all future death and endowment benefits under a
contract. For example, if the "seven-pay premium" were $1,000, the maximum
premiums that could be paid during the first seven years to avoid "modified
endowment" treatment would be $1,000 in the first year; $2,000 through the
first two years; and $3,000 through the first three years, etc.
Pre-death distributions from modified endowment contracts may give rise to
taxable income. Upon full surrender of your Policy, you would recognize
ordinary income for federal income tax purposes equal to the amount by which
the Net Cash Surrender Value plus Debt exceeds the investment in your Policy
(usually the premiums paid plus pre-death distributions that were taxable less
any premiums previously recovered that were excludable from gross income).
Upon partial withdrawals and Policy loans, you would recognize ordinary income
to the extent allocable to income (which includes all previously non-taxed
gains) on your Policy. The amount allocated to income is the amount by which
the Accumulated Value of your Policy exceeds investment in the Policy
immediately before the distribution. Under a tax law provision, if two or more
policies which are classified as modified endowment contracts are purchased
from any one insurance company, including Pacific Life, during any calendar
year, all such policies will be aggregated for purposes of determining the
portion of the pre-death distributions allocable to income on the policies and
the portion allocable to investment in the policies.
If you assign or pledge (or agree to assign or pledge) any portion of the
value of a modified endowment contract, such amount or portion generally will
be treated as a pre-death distribution.
The portion of pre-death distributions that are treated as taxable income
will also be subject to an additional income tax of 10%, except where the
distribution (1) occurs on or after the date on which the taxpayer attains age
59 1/2, (2) is attributable to the taxpayer becoming disabled, or (3) occurs
as part of a series of substantially equal (annual or more frequent) periodic
payments made for the life (or life expectancy) of the taxpayer or the joint
lives (or joint life expectancies) of the taxpayer and his or her beneficiary.
With respect to Policy loans, it is unclear whether interest paid (or
accrued by an accrual basis taxpayer) constitutes interest for federal income
tax purposes. CONSULT YOUR TAX ADVISOR. Tax law provisions may limit the
deduction of interest payable on loan proceeds that are used to purchase or
carry certain life insurance policies.
Policies That Are Not Modified Endowment Contracts. Policies entered into
before June 21, 1988, may not be subject to treatment as modified endowment
contracts even though they fail to meet the seven-pay premium test provided
that such Policies do not experience a "material change." The definition of
"material change" is complex, but, in general, if you do not pay any further
premium or institute any changes to the death benefits, there will be no
material change. In this connection, an additional premium payment necessary
to keep your
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Policy in force should not constitute a material change so long as the death
benefit under the Policy does not increase. If a Policy that was not a
modified endowment contract becomes one, under Treasury Department regulations
which may be prescribed, pre-death distributions received in anticipation of a
failure of a Policy to meet the seven-pay premium test will be treated as pre-
death distributions from a modified endowment contract (and, therefore, will
be taxable as described above) even though, at the time of the
distribution(s), the Policy was not yet a modified endowment contract. For
this purpose, pursuant to the IRC, any distribution made within two years
before the Policy is classified as a modified endowment contract shall be
treated as being made in anticipation of the Policy's failing to meet the
seven-pay premium test.
Pre-death distributions from Policies that are not modified endowment
contracts may also give rise to taxable income. Upon full surrender or
maturity of your Policy for its Net Cash Surrender Value, the excess, if any,
of the Net Cash Surrender Value plus any outstanding Policy Debt over the cost
basis under your Policy will be treated as ordinary income for federal income
tax purposes. Your Policy's cost basis will usually equal the premiums paid
less any premiums previously recovered in partial withdrawals. Under IRC
Section 7702 , if a partial withdrawal is accompanied by a reduction in
benefits under a life insurance contract, special rules apply to determine
whether part or all of the cash received is paid out of the income of the
contract and is taxable. Cash distributed to you on partial withdrawals
occurring more than 15 years after the Policy Date will be taxable as ordinary
income to you to the extent that it exceeds the cost basis under your Policy.
We also believe that loans received under Policies that are not modified
endowment contracts will be treated as Debt of the Owner, and that no part of
any loan under the Policy will constitute income to you unless your Policy is
surrendered or lapses. However, interest on Policy Debt paid (or accrued by an
accrual basis taxpayer) 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.
Last Survivor Policies. While we believe that last survivor Policies meet
the statutory definition of life insurance under IRC Section 7702 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 relating to
last survivor life insurance policies. We reserve the right to make changes to
the last survivor Policy if changes are deemed appropriate by us to attempt to
assure qualification of the last survivor Policy as a life insurance contract.
If a last survivor Policy were determined not to qualify as life insurance,
the Policy would not provide the tax advantages normally provided by life
insurance, including the excludability of the death benefit from the gross
income of the Beneficiary.
Other. Another provision of the tax law deals with allowable charges for
mortality costs and other expenses that are used in making calculations to
determine whether a contract qualifies as life insurance for federal income
tax purposes. These calculations must be based upon reasonable mortality
charges and other charges reasonably expected to be actually paid. The
Treasury Department has issued proposed regulations and is expected to
promulgate temporary or final regulations governing reasonableness standards
for mortality charges. While we believe under IRS pronouncements currently in
effect, that the mortality costs and other expenses used in making
calculations to determine whether the Policy qualifies as life insurance meet
the current requirements, complete assurance cannot be given that the IRS
would necessarily agree. It is possible that future regulations will contain
standards that would require us to modify our mortality charges used for the
purpose of the calculations in order to retain the qualification of the Policy
as life insurance for federal income tax purposes, and we reserve the right to
make any such modifications.
Federal estate and gift and state and local estate, inheritance, and other
tax consequences of ownership or receipt of Policy proceeds depend on the
jurisdiction and the circumstances of each Owner or Beneficiary.
FOR COMPLETE INFORMATION ON FEDERAL, STATE, LOCAL AND OTHER TAX
CONSIDERATIONS, A QUALIFIED TAX ADVISER SHOULD BE CONSULTED.
Accelerated Living Benefits. An Accelerated Living Benefit Rider is
available in connection with the Policy. Benefits under the Accelerated Living
Benefit Rider may be taxable. The IRS has issued proposed regulations and is
expected to issue final regulations in the near future under which accelerated
living benefits that meet the
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requirements set forth in the regulations can be received without incurring a
federal income tax. The precise requirements which will be incorporated in the
final regulations are not known.
In some cases, there may be a question as to whether a life insurance policy
that has an accelerated living benefit rider can meet certain technical
aspects of the definition of "life insurance contract" under the IRC. The IRS
regulations mentioned above are expected to set forth the requirements under
which a policy with an accelerated living benefits rider will be deemed to
meet the definitional requirements of a life insurance contract. We reserve
the right to (but are not obligated to) modify the Rider to conform with
requirements under the final regulations. OWNERS CONSIDERING ADDING AN
ACCELERATED LIVING BENEFIT RIDER OR EXERCISING RIGHTS UNDER THE RIDER SHOULD
FIRST CONSULT A QUALIFIED TAX ADVISOR.
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 it is permitted to vote the shares of the Fund in its
own right, we may elect to do so.
You are the person having the voting interest under a Policy. Unless
otherwise required by applicable law, the number of votes as to which you will
have the right to instruct will be determined by dividing your Accumulated
Value in a Variable Account by the net asset value per share of the
corresponding Portfolio of the Fund. Fractional votes will be counted. The
number of votes as to which you will have the right to instruct will be
determined as of the date coincident with the date established by the Fund for
determining shareholders eligible to vote at the meeting of the Fund. If
required by the Securities and Exchange Commission, we reserve the right to
determine in a different fashion the voting rights attributable to the shares
of the Fund based upon instructions received from Policy Owners. Voting
instructions may be cast in person or by proxy.
If there are shares of a Portfolio held by a Variable Account for which we
do not receive timely voting instructions, we will vote those shares in the
same proportion as the voting instructions for all other shares of that
Portfolio held by that Variable Account for which we have received timely
voting instructions. If we hold shares of a Portfolio in our General Account
and/or if any of our non-insurance subsidiaries holds shares of a Portfolio,
such shares will be voted in the same proportion as other votes cast by all of
our separate accounts in the aggregate.
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DISREGARD OF VOTING INSTRUCTIONS
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that voting rights be
exercised so as to cause a change in the subclassification or investment
objective of a Portfolio or to approve or disapprove an investment advisory
contract. In addition, we may disregard voting instructions of changes
initiated by Policy Owners in the investment policy or the investment adviser
(or portfolio manager) of a Portfolio, provided that our disapproval of the
change is reasonable and is based on a good faith determination that the
change would be contrary to state law or otherwise inappropriate, considering
the Portfolio's objectives and purpose, and considering the effect the change
would have on us. In the event we do disregard voting instructions, a summary
of that action and the reasons for such action will be included in the next
report to Owners.
CONFIRMATION STATEMENTS AND OTHER REPORTS TO OWNERS
We will send you confirmations for premium payments and transfers, loans,
loan repayments, loan interest transfers, partial withdrawals, a surrender,
and on payment of any death benefit proceeds. Confirmation of scheduled
transactions under Dollar Cost Averaging, portfolio rebalancing, and monthly
deductions will appear on your quarterly statement.
A statement will be sent quarterly to you setting forth a summary of the
transactions which occurred during the quarter, indicating the death benefit,
Accumulated Value, Cash Surrender Value, and any Policy Debt. In addition, the
statement will indicate the allocation of Accumulated Value among the
Investment Options and any other information required by law.
You will also be sent annual financial statements for the Separate Account
and the Fund, the latter of which will include a list of the portfolio
securities of the Fund, as required by the Investment Company Act of 1940,
and/or such other reports as may be required by federal securities laws.
SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to compliance with the laws as then in effect,
to make additions to, deletions from, or substitutions for the securities that
are held by the Separate Account or any Variable Account or that the Separate
Account or any Variable Account may purchase. If shares of any or all of the
Portfolios of the Fund should no longer be available for investment, or if, in
the judgment of our management, further investment in shares of any or all
Portfolios of the Fund should become inappropriate in view of the purposes of
the Policies, we may substitute shares of another Portfolio of the Fund or of
a different fund for shares already purchased, or to be purchased in the
future, under the Policies.
Where required, we will not substitute any shares attributable to your
interest in a Variable Account or the Separate Account without notice, your
approval, or prior approval of the SEC and without following the filing or
other procedures established by applicable state insurance regulators.
We also reserve the right to establish additional Variable Accounts which
may include additional subaccounts of the Separate Account to serve as
investment options under the Policies which may be managed separate accounts
or may invest in a new Portfolio of the Fund, or in shares of another
investment company, a portfolio thereof, or suitable investment vehicle with a
specified investment objective. New Variable Accounts may be established when,
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
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<PAGE>
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 changes 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 or the Fund 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 cost of insurance charge varies
according to the Insured (or joint Insureds if a last survivor Policy), and
therefore the cost of insurance charge reflected in performance for the
hypothetical Policy is based on the hypothetical Insured (or joint Insureds)
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 no 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 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 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.
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<PAGE>
THE FIXED ACCOUNT
You may allocate all or a portion of your premium payments and transfer
Accumulated Value to our Fixed Account. Amounts allocated to the Fixed Account
become part of our General Account, which supports insurance and annuity
obligations. Because of exemptive and exclusionary provisions, interests in
the Fixed Account have not been registered under the Securities Act of 1933,
and the Fixed Account has not been registered as an investment company under
the Investment Company Act of 1940. Accordingly, neither the Fixed Account nor
any interest therein is generally subject to the provisions of these Acts and,
as a result, the staff of the 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 other separate accounts of ours. Subject to applicable law, we
have sole discretion over the investment of the assets of our General Account.
You may elect to allocate premium payments to the Fixed Account, the
Variable Account, or both. You may also transfer Accumulated Value from the
Variable Accounts to the Fixed Account, or from the Fixed Account to the
Variable Accounts, subject to the limitations described below. We guarantee
that the Accumulated Value in the Fixed Account will be credited with interest
at a rate of 0.24663% per month, compounded monthly, for an effective annual
rate of 3%. Such interest will be paid regardless of the actual investment
experience for the Fixed Account. In addition, we may in our sole discretion
pay current interest in excess of the 3% guarantee. The initial rate of
interest, or 6% if less, will be guaranteed until the first Policy
Anniversary. Current interest rates will be effected thereafter on each Policy
Anniversary. Once declared for a Policy on a Policy's Anniversary, the current
rates are guaranteed for one year until the next Policy Anniversary. The
portion of your Accumulated Value in the Loan Account that is used to secure
Policy Debt will be credited with interest at a rate of 0.36748% per month,
compounded monthly, for an effective annual rate of 4.5%.
We bear the full investment risk for the Accumulated Value allocated to the
Fixed Account.
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 Surrender Charge and the Policy charges, cost of insurance,
administrative, tax, and mortality and expense risk, will be the same whether
you transfer Accumulated Value to the Fixed Account or to the Variable
Accounts. The administrative charges and mortality and expense risk charges
will not be assessed against the Loan Account, and any amounts that we pay for
income taxes allocable to the Variable Accounts will not be charged against
the Fixed Account. In addition, the investment advisory fees and operating
expenses paid by the Fund will not be paid directly or indirectly by you to
the extent the Accumulated Value is allocated to the Fixed Account; however,
to such extent, you will not participate in the investment experience of the
Variable Accounts.
TRANSFERS, SURRENDERS, WITHDRAWALS, AND POLICY LOANS
Amounts may be transferred from the Variable Accounts to the Fixed Account
and from the Fixed Account to the Variable Accounts, subject to the following
limitations. No transfer may be made if the Policy is in the 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 twelve month
period. Further, you may not transfer more than the greater of 25% of your
Accumulated Value in the Fixed Account or $5,000 in any year. Currently there
is no charge imposed upon transfers; however, we reserve the right to assess
such a charge in the future and to impose other limitations on the number of
transfers, the amount of transfers, and the amount remaining in the Fixed
Account or Variable Accounts after a transfer. Transfers from the Variable
Accounts to the Fixed Account may only be made in the Policy Month preceding a
Policy Anniversary, except that you may make such a transfer at any time
during the first 18 Policy Months.
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You may also make full surrenders and partial withdrawals from the Fixed
Account to the same extent as an Owner who has invested in the Variable
Accounts. See "Surrender"and "Partial Withdrawals". In addition, to the same
extent as Policy Owners with Accumulated Value in the Variable Accounts, you
may obtain a Policy Loan and borrow up to 100% of your Accumulated Value in
the Fixed Account (50% in the first Policy Year) less 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 (or either Insured, if this is a last survivor
Policy) 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 provided, if no
designated Beneficiary is living upon the death of the Insured (or Survivor,
if this is a last survivor Policy), 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 (or Survivor's, if
this is a last survivor Policy) death, the Beneficiary must be living at the
time of the Insured's (or Survivor's) death.
THE CONTRACT
The Policy is a contract between you and us. The entire contract consists of
the Policy, a copy of the initial application, all subsequent applications to
change the Policy, any endorsements, any Riders and Benefits 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, 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, 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
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. 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
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 or Rider, Benefit, and Endorsement, will be
subject to the assignment. We will rely solely on the assignee's statement as
to the amount of the assignee's interest. We will not be responsible for the
validity of any assignment. Unless otherwise provided, the assignee may
exercise all rights this Policy grants except (a) the right to change the
Owner or Beneficiary; and (b) the right to elect a payment option. Assignment
of a Policy that is a modified endowment contract may generate taxable income.
See "Federal Income Tax Considerations".
ERRORS ON THE APPLICATION
If the Age of an Insured has been misstated, the death benefit under this
Policy will be the greater of that which would be purchased by the original
initial premium, using the Guideline Single Premium at issue for the correct
Age and the original elected percent of the Guideline Single Premium, or the
death benefit derived by multiplying Accumulated Value by the specified
percentage for the correct Age.
INCONTESTABILITY
We may contest the validity of this Policy if any material misstatements are
made in the application. However, your Policy will be incontestable after the
expiration of the following: the initial Face Amount cannot be contested with
respect to an Insured after the Policy has been in force during that Insured's
lifetime for two years from the Policy Date; and reinstatement cannot be
contested after it has been in force during an Insured's lifetime for two
years from the date of reinstatement.
PAYMENT IN CASE OF SUICIDE
If the Insured (or either Insured, if this is a last survivor Policy) dies
by suicide, while sane or insane, within two years from the Policy Date, we
will limit the death benefit proceeds to the premium payments less any Policy
Debt and less the amount of any partial withdrawals.
DIVIDENDS
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 estimated 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
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
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will be paid in equal installments for at least ten years. The purchase rates
for the payment plan are guaranteed not to exceed those shown in the Policy,
but current rates that are lower (i.e., providing greater income) may be
established by us from time to time. This benefit is not available if the
income would be less than $100 a month. Surrender, withdrawal, 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
Subject to certain requirements, you may elect to add an Accelerated Living
Benefit Rider at any time while this Policy is in force. This Rider provides
Policy Owner access to a portion of the Policy's proceeds if the Insured (or
the Survivor Insured in the case of a last survivor Policy) has been diagnosed
with a terminal illness resulting in a life expectancy of six months or less
(or such other period that may be required by state insurance authorities). We
offer other variable life insurance policies that provide insurance protection
on the lives of two insureds or on the life of a single insured, whose loads
and charges may vary. An insurance agent authorized to sell the Policy can
describe other policies further.
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 Survivor 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 comparisons
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.
RISKS OF LIFE INSURANCE RETIREMENT PLANS
Using the Policy as a funding vehicle for retirement income purposes
presents several risks, including the risk that if the Policy is
insufficiently funded in relation to the income stream from the Policy, the
Policy can lapse prematurely and result in significant income tax liability to
the Owner in the year in which the lapse occurs. Other risks associated with
borrowing from the Policy also apply. Loans will be automatically repaid from
the gross death benefit at the death of the Survivor, 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, the loan will be automatically repaid, resulting in the payment to
you of the Net Cash Surrender Value. Similarly, upon lapse, the loan will be
automatically repaid. The automatic repayment of the loan upon lapse or
surrender will cause the recognition of taxable income to the extent that Net
Cash Surrender Value plus the
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amount of the repaid loan exceeds your basis in the Policy. Thus, under
certain circumstances, surrender or lapse of the 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 plan so that the Policy will
not lapse prematurely under various market scenarios as a result of
withdrawals and loans taken from your Policy.
The Policy will lapse if your Net Cash Surrender Value less Policy Debt is
insufficient to cover the current monthly deduction on any Monthly Payment
Date, and a grace period expires without your 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 attorney and 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
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.
We and PMD have sales agreements with various broker-dealers under which the
Policy will be sold by registered representatives of the broker-dealers. The
registered representatives are required to be authorized under applicable
state regulations to sell variable life insurance. The broker-dealers are
required to be registered with the SEC and members of the NASD. We pay
compensation directly to broker-dealers for promotion and sales of the Policy.
The compensation payable to a broker-dealer by Pacific Life and PMD for sales
of the product may vary with the Sales Agreement, but is not expected to
exceed 6.75% of the initial premium payment. Broker-dealers may also receive
an annual renewal compensation of approximately 0.25% of Accumulated Value
less Policy Debt. 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.
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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
----------------- ------------------------------------
<C> <S>
Thomas C. Sutton Director, Chairman of the Board and Chief Executive
Director, Chairman of the Officer of Pacific Life; Equity Board Member of
Board and Chief Executive PIMCO Advisors L.P.; Director of: Newhall Land &
Officer Farming; The Irvine Company; The Edison Company;
Pacific Corinthian Life Insurance Company; similar
positions with other subsidiaries of Pacific Life.
Glenn S. Schafer Director and President of Pacific Life, January 1995
Director and President to present; Executive Vice President and Chief
Financial Officer of Pacific Life, March 1991 to
January 1995; Equity Board Member of PIMCO Advisors
L.P.; Director of Pacific Corinthian Life Insurance
Company; similar positions with other subsidiaries
of Pacific Life.
Richard M. Ferry Director of Pacific Life; President, Director and
Director Chairman of Korn/Ferry International; Director of:
Avery Dennison Corporation; ConAm Management; First
Business Bank; Mullin Consulting, Inc.; Northwestern
Restaurants, Inc.; Dole Food Co. Address: 1800
Century Park East, Suite 900, Los Angeles,
California 90067.
Donald E. Guinn Director of Pacific Life; Chairman Emeritus and
Director Director of Pacific Telesis Group; Director of: The
Dial Corp.; Bank of America NT & SA; BankAmerica
Corporation. Address: Pacific Telesis Center, 130
Kearny Street, Room 3704, San Francisco, California
94108-4818.
Ignacio E. Lozano, Jr. Director of Pacific Life; Chairman and former
Director Editor-in-Chief of La Opinion; Director of:
BankAmerica Corporation; Bank of America NT&SA; The
Walt Disney Company; Pacific Enterprises. Address:
411 West Fifth Street, 12th Floor, Los Angeles,
California 90013.
Charles A. Lynch Director of Pacific 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
Acquisitions 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
Director Emeritus of Huntington Memorial Hospital; Director
of Occidental College; former President and Chief
Executive Officer of Huntington Memorial Hospital.
Address: 314 Arroyo Drive, South Pasadena, CA 91030.
Charles D. Miller Director of Pacific Life; Director, Chairman, and
Director Chief Executive Officer of Avery Dennison
Corporation; Director of: Great Western Financial
Corporation; Korn/Ferry International; Nationwide
Health Properties, Inc.; Edison International.
Address: 150 North Orange Grove Boulevard, Pasadena,
California 91103.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
----------------- ------------------------------------
<C> <S>
Donn B. Miller Director of Pacific Life; President and Chief
Director Executive Officer of Pearson-Sibert Oil Co. of Texas;
Director of: The Irvine Company; Automobile Club of
Southern California; St. John's Hospital & 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;
Director Managing Director and former Partner of TA
Associates, Inc.; Director of Ontrack Data
International; ANSYS, Inc.; Pivot Point, Inc.; R & D
Systems, Inc.; Axent Technologies Inc. Address:
116 Woodland Road, Pittsburgh, Pennsylvania 15232
J. Fernando Niebla Director of Pacific Life, May 1995 to present; Vice
Director Chairman and Director of Pacer Infotec, Inc.;
Director, Chairman and Chief Executive Officer of
Infotec Commercial Systems, formerly Infotec
Development, Inc.; Director of: Bank of California.
Address: 3611 South Harbor Boulevard, Suite 260,
Santa Ana, CA 92704.
Susan Westerberg Prager Director of Pacific Life; Dean of the UCLA School of
Director Law at the University of California at Los Angeles;
Director of Lucille Salter Packard Children's
Hospital of Stanford. Address: 405 Hilgard Avenue,
Room 3374, Los Angeles, California 90095-1476.
Richard M. Rosenberg Director of Pacific Life, November 1995 to present;
Director Director, Chairman and Chief Executive Officer
(Retired) of BankAmerica Corporation; Director of:
Airborne Express Corporation; K-2 Incorporated;
Northrop Grumman Corporation; Potlatch Corporation;
Pacific Telesis Group. Address: 555 California
Street, 11th Floor, San Francisco, California 94104.
James R. Ukropina Director of Pacific Life; Partner with the law firm
Director of O'Melveny & Meyers; former Chairman and Chief
Executive Officer of Pacific Enterprises; Director of
Lockheed Martin Corporation; Trustee of Stanford
University. Address: 400 S. Hope Street, 16th Floor,
Los Angeles, California 90071-2899.
Raymond L. Watson Director of Pacific Life; Vice Chairman and Director
Director of The Irvine Company; Director of: The Walt Disney
Company; The Mitchell Energy and Development Company
and The Tejon Ranch. Address: 550 Newport Center
Drive, 9th Floor, Newport Beach, California 92660.
Lynn C. Miller Executive Vice President, Individual Insurance, of
Executive Vice President Pacific 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
Senior Vice President Life; Director of: Pacific Corinthian Life Insurance
and General Counsel Company; PM Group Life Insurance Company.
Audrey L. Milfs Vice President and Corporate Secretary of Pacific
Vice President and Life; Secretary to other subsidiaries of Pacific
Corporate Secretary Life.
Edward R. Byrd Vice President and Controller of Pacific Life, August
Vice President and 1992 to present; Vice President, Corporate Audit and
Controller Financial Planning of Pacific Life, November 1991 to
August 1992.
Khanh T. Tran Senior Vice President and Chief Financial Officer of
Senior Vice President Pacific Life, June 1996 to present; Vice President
and Chief Financial and Treasurer of Pacific Life, November 1991 to June
Officer 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
Separate Account.
36
<PAGE>
STATE REGULATION
We are subject to the laws of the state of California governing insurance
companies and to regulation by the Commissioner of Insurance of California. In
addition, we are subject to the insurance laws and regulations of the other
states and jurisdictions in which we are licensed or may become licensed to
operate. An annual statement in a prescribed form must be filed with the
Commissioner of Insurance of California and with regulatory authorities of
other states on or before March 1st in each year. This statement covers our
operations for the preceding year and our financial condition as of December
31st of that year. Our affairs are subject to review and examination at any
time by the Commissioner of Insurance or his agents, and subject to full
examination of our operations at periodic intervals.
TELEPHONE TRANSFER AND LOAN PRIVILEGES
You may request a transfer of Accumulated Value or a Policy Loan by
telephone if a properly completed Authorization for Telephone Requests
("Telephone Authorization") 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 effected 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 telephonic 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 attorneys fees) arising out of any requests
effected in accordance with the Telephone Authorization and believed by us to
be genuine, provided that we have complied with our procedures. As a result of
this policy on telephonic requests, you will bear the risk of loss arising
from the telephone transfer and loan privileges.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a
party, or which would materially affect the Separate Account.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Policies
described in this Prospectus and our organization, our authority to issue the
Policies under California law, and the validity of the forms of the Policies
under California law have been passed on by our General Counsel.
Legal matters relating to the federal securities and federal income tax laws
have been passed upon by Dechert Price & Rhoads.
REGISTRATION STATEMENT
A registration statement under the Securities Act of 1933 has been filed
with the SEC relating to the offering described in this prospectus. This
prospectus does not include all of the information set forth in the
registration statement, as portions have been omitted pursuant to the rules
and regulations of the SEC. The omitted information may be obtained at the
SEC's principal office in Washington, D.C., upon payment of the SEC's
prescribed fees.
37
<PAGE>
INDEPENDENT AUDITORS
The audited consolidated financial statements for Pacific Mutual Life as of
December 31, 1996 and 1995 and for the three years ended December 31, 1996 and
the audited financial statements for Pacific Select 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 indicated in their report appearing herein, and have been so
included in reliance 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 39. The audited consolidated financial statements of Pacific
Mutual Life as of December 31, 1996 and 1995 and for the three years ended
December 31, 1996 are set forth herein starting on page 51.
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 ability of Pacific Mutual Life to
meet its obligations under the Policies.
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Mutual Life Insurance Company
We have audited the accompanying statement of assets and liabilities of the
Pacific Select 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
39
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH
MONEY YIELD MANAGED GOVERNMENT AGGRESSIVE GROWTH
MARKET BOND BOND SECURITIES GROWTH EQUITY LT
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- ---------- --------
<S> <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)...............
Receivables:
Due from Pacific Mutual
Life Insurance Company. 94 55 46 51 130
Fund shares redeemed... 3 20
-------- -------- -------- -------- -------- -------- --------
TOTAL ASSETS............ 27,524 25,992 69,046 7,881 120,040 3,334 89,087
-------- -------- -------- -------- -------- -------- --------
LIABILITIES
Payables:
Due to Pacific Mutual
Life Insurance Company. 3 20
Fund shares purchased.. 99 55 46 51 130
-------- -------- -------- -------- -------- -------- --------
TOTAL LIABILITIES....... 99 55 46 51 130 3 20
-------- -------- -------- -------- -------- -------- --------
NET ASSETS.............. $ 27,425 $ 25,937 $ 69,000 $ 7,830 $119,910 $ 3,331 $ 89,067
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
EQUITY
INCOME
VARIABLE
ACCOUNT
--------
<S> <C>
ASSETS
Investments:
Money Market Portfolio
(2,731 shares; cost
$27,433)...............
High Yield Bond
Portfolio (2,609
shares; cost $25,201)..
Managed Bond Portfolio
(6,420 shares; cost
$67,913)...............
Government Securities
Portfolio (754 shares;
cost $7,723)...........
Growth Portfolio (5,590
shares; cost $98,748)..
Aggressive Equity
Portfolio (309 shares;
cost $3,264)...........
Growth LT Portfolio
(5,399 shares; cost
$79,297)............... $85,860
Equity Income Portfolio
(4,199 shares; cost
$71,762)...............
Receivables:
Due from Pacific Mutual
Life Insurance Company. 57
Fund shares redeemed... -------
TOTAL ASSETS............ 85,917
-------
LIABILITIES
Payables:
Due to Pacific Mutual
Life Insurance Company.
Fund shares purchased.. 57
-------
TOTAL LIABILITIES....... 57
-------
NET ASSETS.............. $85,860
=======
</TABLE>
See Notes to Financial Statements.
40
<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.
41
<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
MARKET BOND BOND SECURITIES GROWTH EQUITY LT
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT(1) ACCOUNT
-------- -------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends.............. $ 1,359 $ 1,753 $ 4,145 $ 490 $ 6,582 $ 2 $ 608
------- ------- ------- ------- ------- ------- -------
NET INVESTMENT INCOME... 1,359 1,753 4,145 490 6,582 2 608
------- ------- ------- ------- ------- ------- -------
REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS
Net realized gain
(loss) from security
transactions........... 13 300 (203) 62 2,826 (958) 4,372
Net unrealized
appreciation
(depreciation) on
investments............ 58 144 (914) (316) 12,466 67 5,509
------- ------- ------- ------- ------- ------- -------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS.......... 71 444 (1,117) (254) 15,292 (891) 9,881
------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS.............. $ 1,430 $ 2,197 $ 3,028 $ 236 $21,874 $ (889) $10,489
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
EQUITY
INCOME
VARIABLE
ACCOUNT
--------
<S> <C>
INVESTMENT INCOME
Dividends.............. $ 3,386
-------
NET INVESTMENT INCOME... 3,386
-------
REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS
Net realized gain
(loss) from security
transactions........... 667
Net unrealized
appreciation
(depreciation) on
investments............ 8,024
-------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS.......... 8,691
-------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS.............. $12,077
=======
</TABLE>
See Notes to Financial Statements.
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
42
<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).
43
<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
MARKET BOND BOND SECURITIES GROWTH EQUITY LT
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT (1) ACCOUNT
-------- -------- -------- ---------- -------- ----------- --------
<S> <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
Net realized gain
(loss) from security
transactions........... 13 300 (203) 62 2,826 (958) 4,372
Net unrealized
appreciation
(depreciation) on
investments............ 58 144 (914) (316) 12,466 67 5,509
-------- -------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS.............. 1,430 2,197 3,028 236 21,874 (889) 10,489
-------- -------- -------- -------- -------- -------- --------
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
Transfers--policy
charges and deductions. (3,056) (1,528) (2,686) (580) (7,697) (146) (5,343)
Transfers in (from
other variable
accounts).............. 64,487 12,323 8,787 2,504 54,635 11,133 48,532
Transfers out (to other
variable accounts)..... (115,717) (7,278) (8,044) (2,257) (62,175) (7,395) (39,922)
Transfers--other....... (2,862) (920) (843) (379) (3,544) (283) (2,855)
-------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS
DERIVED FROM POLICY
TRANSACTIONS............ 2,817 9,149 18,282 1,330 10,517 4,220 24,819
-------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS.................. 4,247 11,346 21,310 1,566 32,391 3,331 35,308
NET ASSETS
Beginning of year...... 23,178 14,591 47,690 6,264 87,519 53,759
-------- -------- -------- -------- -------- -------- --------
End of year............ $ 27,425 $ 25,937 $ 69,000 $ 7,830 $119,910 $ 3,331 $ 89,067
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
EQUITY
INCOME
VARIABLE
ACCOUNT
--------
<S> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $ 3,386
Net realized gain
(loss) from security
transactions........... 667
Net unrealized
appreciation
(depreciation) on
investments............ 8,024
-------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS.............. 12,077
-------
INCREASE (DECREASE) IN
NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net
premiums............... 21,368
Transfers--policy
charges and deductions. (4,205)
Transfers in (from
other variable
accounts).............. 18,530
Transfers out (to other
variable accounts)..... (8,965)
Transfers--other....... (2,661)
-------
NET INCREASE IN NET
ASSETS
DERIVED FROM POLICY
TRANSACTIONS............ 24,067
-------
NET INCREASE IN NET
ASSETS.................. 36,144
NET ASSETS
Beginning of year...... 49,716
-------
End of year............ $85,860
=======
</TABLE>
See Notes to Financial Statements.
(1) Operations commenced during 1996 (See Note 1 to Financial Statements).
44
<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).
45
<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.
46
<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.
47
<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.
48
<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
49
<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).
50
<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
51
<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
52
<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
53
<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
54
<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
55
<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
56
<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.
57
<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
58
<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.
59
<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.
60
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 5
and 6 have been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented may not be indicative of the amounts
the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
significant effect on the estimated fair value amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. STATUTORY RESULTS
The following are reconciliations of statutory surplus and statutory net
income for Pacific Mutual Life as calculated in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, to the amounts reported as equity and net
income included in the accompanying consolidated financial statements:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Millions)
<S> <C> <C>
Statutory surplus $ 815.2 $ 723.2
Deferred policy acquisition costs 542.0 411.9
Unrealized gain on available for sale securi-
ties, net 379.2 482.0
Asset valuation reserve 209.4 191.4
Deferred income tax 174.6 129.2
Subsidiary equity 60.7 66.0
Non-admitted assets 22.8 22.5
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (340.4) (249.1)
Other (16.7) 5.9
------------------
Equity as reported herein $1,697.2 $1,633.4
------------------
</TABLE>
61
<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 securi-
ties (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.
62
<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>
63
<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.
64
<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 securi-
ties:
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.
65
<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.
66
<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.
67
<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.
68
<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.
69
<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>
70
<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.
71
<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 invest-
ment
income 192.5 176.6 151.0
Ceded reinsurance netted against interest
credited 155.2 140.0 119.9
Ceded reinsurance netted against policy ben-
efits 56.7 51.4 45.4
Assumed reinsurance included in policy bene-
fits 9.9 14.5 16.8
</TABLE>
72
<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
73
<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 serv-
ice 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
74
<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.
75
<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.
76
<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.
--------------------------------------------------------------------------
77
<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>
78
<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 a single premium that is 100% of the
Guideline Single Premium and hypothetical rates of return equivalent to
constant gross annual rates of 0%, 6% and 12%.
The policies illustrated include the following:
1. Age 60, Male Nonsmoker, $40,000 initial premium, Current Cost of
Insurance Rates.
2. Age 60, Male Nonsmoker, $40,000 initial premium, Guaranteed Cost of
Insurance Rates.
3. Age 60, Female Nonsmoker, $40,000 initial premium, Current Cost of
Insurance Rates.
4. Age 60, Female Nonsmoker, $40,000 initial premium, Guaranteed Cost of
Insurance Rates.
5. Age 60, Male/Female Nonsmoker, $40,000 initial premium, Current Cost
of Insurance Rates.
6. Age 60, Male/Female Nonsmoker, $40,000 initial 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 "Premium Paid Plus Interest at 5%,"
shows the amount which would accumulate if an amount equal to the initial
premium (after taxes) were invested to earn interest at 5% compounded
annually. The premium payment is illustrated as if 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 any administration charges, and Net Cash Surrender Value takes
into account any Surrender Charge. The Fund's 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. On those illustrations assuming current
rates, the amount 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, which amounts to 0.80%
of the average daily net assets of a Portfolio including the investment
advisory fees, 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.
79
<PAGE>
We will furnish upon request a comparable illustration reflecting the
proposed Insured's Age, 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.
80
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender
Values
Based on Current Cost of Insurance Rates
SINGLE LIFE OPTION
ISSUE AGE: 60 FACE AMOUNT: $80,044
CLASS: MALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT -----------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $80,042 $ 80,042 $ 80,042
2 $ 44,100 $80,042 $ 80,042 $ 80,042
3 $ 46,305 $80,042 $ 80,042 $ 80,042
4 $ 48,620 $80,042 $ 80,042 $ 80,042
5 $ 51,051 $80,042 $ 80,042 $ 80,042
6 $ 53,604 $80,042 $ 80,042 $ 80,042
7 $ 56,284 $80,042 $ 80,042 $ 85,715
8 $ 59,098 $80,042 $ 80,042 $ 92,469
9 $ 62,053 $80,042 $ 80,042 $ 99,747
10 $ 65,156 $80,042 $ 80,042 $107,591
15 $ 83,157 $80,042 $ 80,042 $157,439
20 $106,132 $80,042 $ 81,118 $245,090
25 $135,454 $80,042 $ 97,716 $388,808
30 $172,878 $80,042 $117,709 $616,801
35 $220,641 $80,042 $136,426 $941,450
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED
VALUE
ASSUMING HYPOTHETICAL END OF YEAR NET CASH SURRENDER VALUE
GROSS ANNUAL ASSUMING 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 $38,855 $ 41,186 $ 43,517 $34,969 $ 37,186 $ 39,517
2 $37,703 $ 42,366 $ 47,300 $33,933 $ 38,366 $ 43,300
3 $36,585 $ 43,581 $ 51,416 $33,292 $ 39,981 $ 47,816
4 $35,498 $ 44,832 $ 55,937 $32,658 $ 41,632 $ 52,737
5 $34,443 $ 46,120 $ 60,856 $32,032 $ 43,320 $ 58,056
6 $33,418 $ 47,446 $ 66,208 $31,413 $ 45,046 $ 63,808
7 $32,422 $ 48,812 $ 72,029 $30,801 $ 46,812 $ 70,029
8 $31,455 $ 50,218 $ 78,363 $30,197 $ 48,618 $ 76,763
9 $30,515 $ 51,707 $ 85,254 $29,600 $ 50,507 $ 84,054
10 $29,603 $ 53,240 $ 92,751 $29,603 $ 53,240 $ 92,571
15 $26,459 $ 64,133 $147,139 $26,459 $ 64,133 $147,139
20 $23,629 $ 77,255 $233,419 $23,629 $ 77,255 $233,419
25 $21,081 $ 93,062 $370,294 $21,081 $ 93,062 $370,294
30 $18,788 $112,104 $587,429 $18,788 $112,104 $587,429
35 $16,724 $135,076 $932,128 $16,724 $135,076 $932,128
</TABLE>
- -------
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 AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
81
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values, and Net Cash Surrender
Values
Based on Guaranteed Cost of Insurance Rates
SINGLE LIFE OPTION
ISSUE AGE: 60 FACE AMOUNT: $80,042
CLASS: MALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $80,042 $80,042 $ 80,042
2 $ 44,100 $80,042 $80,042 $ 80,042
3 $ 46,305 $80,042 $80,042 $ 80,042
4 $ 48,620 $80,042 $80,042 $ 80,042
5 $ 51,051 $80,042 $80,042 $ 80,042
6 $ 53,604 $80,042 $80,042 $ 80,042
7 $ 56,284 $80,042 $80,042 $ 81,720
8 $ 59,098 $80,042 $80,042 $ 88,096
9 $ 62,053 $80,042 $80,042 $ 94,946
10 $ 65,156 $80,042 $80,042 $102,305
15 $ 83,157 * $80,042 $147,944
20 $106,132 * $80,042 $229,186
25 $135,454 * $80,042 $357,762
30 $172,878 * * $548,857
35 $220,641 * * $817,474
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED
VALUE
ASSUMING HYPOTHETICAL END OF YEAR NET CASH SURRENDER VALUE
GROSS ANNUAL ASSUMING 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 $38,370 $40,710 $ 43,051 $34,533 $36,710 $ 39,051
2 $36,646 $41,352 $ 46,339 $32,981 $37,352 $ 42,339
3 $34,852 $41,958 $ 49,942 $31,715 $38,358 $ 46,342
4 $32,973 $42,521 $ 53,901 $30,335 $39,321 $ 50,701
5 $30,991 $43,031 $ 58,316 $28,822 $40,231 $ 55,516
6 $28,888 $43,480 $ 63,214 $27,155 $41,080 $ 60,814
7 $26,645 $43,862 $ 68,672 $25,313 $41,862 $ 66,672
8 $24,241 $44,168 $ 74,658 $23,271 $42,568 $ 73,058
9 $21,648 $44,385 $ 81,151 $20,999 $43,185 $ 79,951
10 $18,831 $44,499 $ 88,194 $18,831 $44,499 $ 88,194
15 * $44,133 $138,266 * $44,133 $138,266
20 * $35,696 $218,273 * $35,696 $218,273
25 * $ 1,622 $340,725 * $ 1,622 $340,725
30 * * $522,721 * * $522,721
35 * * $809,380 * * $809,380
</TABLE>
- -------
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 AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE 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.
82
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender
Values
Based on Current Cost of Insurance Rates
SINGLE LIFE OPTION
ISSUE AGE: 60 FACE AMOUNT: $94,464
CLASS: FEMALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT -----------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $94,464 $ 94,464 $ 94,464
2 $ 44,100 $94,464 $ 94,464 $ 94,464
3 $ 46,305 $94,464 $ 94,464 $ 94,464
4 $ 48,620 $94,464 $ 94,464 $ 94,464
5 $ 51,051 $94,464 $ 94,464 $ 94,464
6 $ 53,604 $94,464 $ 94,464 $ 94,464
7 $ 56,284 $94,464 $ 94,464 $ 94,464
8 $ 59,098 $94,464 $ 94,464 $ 94,464
9 $ 62,053 $94,464 $ 94,464 $ 99,942
10 $ 65,156 $94,464 $ 94,464 $107,977
15 $ 83,157 $94,464 $ 94,464 $158,113
20 $106,132 $94,464 $ 94,464 $246,791
25 $135,454 $94,464 $ 97,716 $391,506
30 $172,878 $94,464 $117,709 $621,080
35 $220,641 $94,464 $136,448 $948,128
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED
VALUE
ASSUMING HYPOTHETICAL END OF YEAR NET CASH SURRENDER VALUE
GROSS ANNUAL ASSUMING 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 $38,855 $ 41,186 $ 43,517 $34,969 $ 37,186 $ 39,517
2 $37,703 $ 42,366 $ 47,300 $33,933 $ 38,366 $ 43,300
3 $38,585 $ 43,581 $ 51,416 $33,292 $ 39,981 $ 47,816
4 $35,498 $ 44,832 $ 55,937 $32,658 $ 41,632 $ 52,737
5 $34,443 $ 46,120 $ 60,856 $32,032 $ 43,320 $ 58,056
6 $33,418 $ 47,446 $ 66,208 $31,413 $ 45,046 $ 63,808
7 $32,422 $ 48,812 $ 72,029 $30,801 $ 46,812 $ 70,029
8 $31,455 $ 50,218 $ 78,394 $30,197 $ 48,618 $ 76,794
9 $30,515 $ 51,707 $ 85,420 $29,600 $ 50,507 $ 84,220
10 $29,603 $ 53,240 $ 93,083 $29,603 $ 53,240 $ 93,083
15 $26,459 $ 64,133 $147,769 $26,459 $ 64,133 $147,769
20 $23,629 $ 77,255 $235,039 $23,629 $ 77,255 $235,039
25 $21,081 $ 93,062 $372,863 $21,081 $ 93,062 $372,863
30 $18,788 $112,104 $591,505 $18,788 $112,104 $591,505
35 $16,724 $135,097 $938,740 $16,724 $135,097 $938,740
</TABLE>
- -------
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 AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE 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.
83
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender
Values
Based on Guaranteed Cost of Insurance Rates
SINGLE LIFE OPTION
ISSUE AGE: 60 FACE AMOUNT: $94,464
CLASS: FEMALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $94,464 $94,464 $ 94,464
2 $ 44,100 $94,464 $94,464 $ 94,464
3 $ 46,305 $94,464 $94,464 $ 94,464
4 $ 48,620 $94,464 $94,464 $ 94,464
5 $ 51,051 $94,464 $94,464 $ 94,464
6 $ 53,604 $94,464 $94,464 $ 94,464
7 $ 56,284 $94,464 $94,464 $ 94,464
8 $ 59,098 $94,464 $94,464 $ 94,464
9 $ 62,053 $94,464 $94,464 $ 96,336
10 $ 65,156 $94,464 $94,464 $104,081
15 $ 83,157 $94,464 $94,464 $152,283
20 $106,132 * $94,464 $237,677
25 $135,454 * $94,464 $374,453
30 $172,878 * * $580,141
35 $220,641 * * $867,898
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED
VALUE
ASSUMING HYPOTHETICAL END OF YEAR NET CASH SURRENDER VALUE
GROSS ANNUAL ASSUMING 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 $ 38,515 $40,852 $ 43,189 $34,664 $36,852 $ 39,189
2 $ 36,970 $41,660 $ 46,627 $33,273 $37,660 $ 42,627
3 $ 35,391 $42,454 $ 50,380 $32,206 $38,854 $ 46,780
4 $ 33,762 $43,224 $ 54,525 $31,061 $40,024 $ 51,325
5 $ 32,073 $43,963 $ 59,062 $29,828 $41,163 $ 56,262
6 $ 30,313 $44,667 $ 64,044 $28,494 $42,267 $ 61,644
7 $ 28,476 $45,335 $ 69,534 $27,052 $43,335 $ 67,534
8 $ 26,556 $45,965 $ 75,605 $25,493 $44,365 $ 74,005
9 $ 24,545 $46,555 $ 82,338 $23,809 $45,355 $ 81,138
10 $ 22,425 $47,097 $ 89,725 $22,425 $47,097 $ 89,725
15 $ 9,215 $50,007 $142,320 $ 9,215 $50,007 $142,320
20 * $48,047 $226,359 * $48,047 $226,359
25 * $31,778 $356,622 * $31,778 $356,622
30 * * $552,516 * * $552,516
35 * * $859,305 * * $859,305
</TABLE>
- -------
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 AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
84
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender
Values
Based on Current Cost of Insurance Rates
LAST SURVIVOR OPTION
ISSUE AGE: 60 FACE AMOUNT: $114,737
CLASS: MALE/FEMALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $114,737 $114,737 $ 114,737
2 $ 44,100 $114,737 $114,737 $ 114,737
3 $ 46,305 $114,737 $114,737 $ 114,737
4 $ 48,620 $114,737 $114,737 $ 114,737
5 $ 51,051 $114,737 $114,737 $ 114,737
6 $ 53,604 $114,737 $114,737 $ 114,737
7 $ 56,284 $114,737 $114,737 $ 114,737
8 $ 59,098 $114,737 $114,737 $ 114,737
9 $ 62,053 $114,737 $114,737 $ 114,737
10 $ 65,156 $114,737 $114,737 $ 114,737
15 $ 83,157 $114,737 $114,737 $ 164,043
20 $106,132 $114,737 $114,737 $ 257,015
25 $135,454 $114,737 $114,737 $ 409,772
30 $172,878 $114,737 $124,151 $ 653,319
35 $220,641 $114,737 $144,578 $1,001,937
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED
VALUE
ASSUMING HYPOTHETICAL END OF YEAR NET CASH SURRENDER VALUE
GROSS ANNUAL ASSUMING 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 $39,038 $ 41,380 $ 43,723 $35,134 $ 37,380 $ 39,723
2 $38,031 $ 42,740 $ 47,724 $34,227 $ 38,740 $ 43,724
3 $37,014 $ 44,114 $ 52,069 $33,683 $ 40,514 $ 48,469
4 $36,023 $ 45,517 $ 56,832 $33,141 $ 42,317 $ 53,632
5 $35,058 $ 46,966 $ 62,015 $32,604 $ 44,166 $ 59,215
6 $34,118 $ 48,463 $ 67,671 $32,071 $ 46,063 $ 65,271
7 $33,201 $ 50,009 $ 73,844 $31,541 $ 48,009 $ 71,844
8 $32,309 $ 51,605 $ 80,579 $31,016 $ 50,005 $ 78,979
9 $31,439 $ 53,295 $ 87,928 $30,496 $ 52,095 $ 85,728
10 $30,592 $ 55,041 $ 95,956 $30,592 $ 55,041 $ 95,956
15 $27,487 $ 66,635 $153,311 $27,487 $ 66,635 $153,311
20 $24,678 $ 80,672 $244,776 $24,678 $ 80,672 $244,776
25 $22,136 $ 97,666 $390,259 $22,136 $ 97,666 $390,259
30 $19,837 $118,239 $622,208 $19,837 $118,239 $622,208
35 $17,758 $143,147 $992,017 $17,758 $143,147 $992,017
</TABLE>
- -------
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 AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
85
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender
Values
Based on Guaranteed Cost of Insurance Rates
LAST SURVIVOR OPTION
ISSUE AGE: 60 FACE AMOUNT: $114,737
CLASS: MALE/FEMALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $114,737 $114,737 $114,737
2 $ 44,100 $114,737 $114,737 $114,737
3 $ 46,305 $114,737 $114,737 $114,737
4 $ 48,620 $114,737 $114,737 $114,737
5 $ 51,051 $114,737 $114,737 $114,737
6 $ 53,604 $114,737 $114,737 $114,737
7 $ 56,284 $114,737 $114,737 $114,737
8 $ 59,098 $114,737 $114,737 $114,737
9 $ 62,053 $114,737 $114,737 $114,737
10 $ 65,156 $114,737 $114,737 $114,737
15 $ 83,157 $114,737 $114,737 $163,642
20 $106,132 * $114,737 $256,244
25 $135,454 * $114,737 $404,660
30 $172,878 * * $627,437
35 $220,641 * * $938,551
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED
VALUE
ASSUMING HYPOTHETICAL END OF YEAR NET CASH SURRENDER VALUE
GROSS ANNUAL ASSUMING 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 $39,038 $41,380 $ 43,723 $35,134 $37,380 $ 39,723
2 $38,031 $42,740 $ 47,724 $34,227 $38,740 $ 43,724
3 $37,012 $44,114 $ 52,069 $33,681 $40,514 $ 48,469
4 $35,971 $45,496 $ 55,832 $33,094 $42,296 $ 53,632
5 $34,899 $46,879 $ 62,006 $32,456 $44,079 $ 59,206
6 $33,782 $48,255 $ 67,632 $31,755 $45,855 $ 65,232
7 $32,606 $49,615 $ 73,756 $30,976 $47,615 $ 71,756
8 $31,359 $50,952 $ 80,433 $30,104 $49,352 $ 78,833
9 $30,023 $52,299 $ 87,729 $29,122 $51,099 $ 86,529
10 $28,578 $53,603 $ 95,722 $28,578 $53,603 $ 95,722
15 $19,093 $60,704 $152,936 $19,093 $60,704 $152,936
20 * $63,278 $244,042 * $63,278 $244,042
25 * $52,480 $385,390 * $52,480 $385,390
30 * * $597,559 * * $597,559
35 * * $929,259 * * $929,259
</TABLE>
- -------
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 AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
86
<PAGE>
[LOGO OF PACIFIC SELECT ESTATE MAXIMIZER]
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 APPEARS HERE]
PACIFIC LIFE INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
Distributed by:
[LOGO OF PACIFIC MUTUAL DISTRIBUTORS, INC. APPEARS HERE]
Pacific Mutual Distributors, Inc.
Member NASD & SIPC
700 NEWPORT CENTER DRIVE, NB-3 NEWPORT BEACH, CA 92660 1-800-800-7681
FORM NO. 15-20632-01
