<PAGE>
As filed with the Securities and Exchange Commission on November 19, 1998
Registration No. 333-61135
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
PACIFIC SELECT EXEC SEPARATE ACCOUNT OF
PACIFIC LIFE INSURANCE COMPANY
(Exact Name of Registrant)
PACIFIC LIFE INSURANCE COMPANY
(Name of Depositor)
700 Newport Center Drive
P.O. Box 9000
Newport Beach, California 92660
(Address of Depositor's Principal Executive Office)
Diane N. Ledger
Vice President
Pacific Life Insurance Company
700 Newport Center Drive
P.O. Box 9000
Newport Beach, California 92660
(Name and Address of Agent for Service of Process)
Copies to:
Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
Approximate date of proposed public offering: As soon as practicable after the
effective date of the Registration Statement.
Title of securities being registered: interests in the Separate Account under
M's Versatile Product Flexible Premium Variable Life Insurance Policies.
Filing fee: None
The Registrant is registering an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24F-2 under the Investment Company Act
of 1940, and will file its Rule 24f-2 Notice for the fiscal year ending December
31, 1998, within the time period required by Section 24 of the Investment
Company ACt of 1940 and applicable regulations thereunder.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Pacific Select Exec Separate Account of Pacific
Life Insurance Company
CROSS-REFERENCE SHEET
Pursuant to Rule 404(c) of Regulation C
under the Securities Act of 1933
(Form N-8B-2 Items required by Instruction as
to the Prospectus in Form S-6)
Form N-8B-2 Form S-6
Item Number Heading in Prospectus
1.(a) Name of trust Prospectus front cover
(b) Title of securities issued Prospectus front cover
2. Name and address of each depositor Prospectus front cover
3. Name and address of trustee N/A
4. Name and address of each principal Pacific Life
underwriter Insurance Company
5. State of organization of trust Pacific Select Exec
Separate Account
6. Execution and termination of trust Pacific Select Exec
agreement Separate Account
7. Changes of name N/A
8. Fiscal year N/A
9. Litigation N/A
II. General Description of the Trust
and Securities of the Trust
10.(a) Registered or bearer
securities The Policy
(b) Cumulative or distributive
<PAGE>
securities The Policy
(c) Conversion, transfer, etc. Transfers, Surrenders,
Withdrawals and
Policy Loans;
Surrender
(d) Periodic payment plan N/A
(e) Voting rights Voting on Fund Shares
(f) Notice to security holders Confirmation Statements and Other
Reports to Owners
(g) Consents required Disregard of Voting
Instructions;
Substitution of
Investments
(h) Other provisions The Policy
11. Type of securities comprising
units The Policy
12. Certain information regarding
periodic payment plan
certificates N/A
13.(a) Load, fees, expenses, etc. Charges and Deductions
(b) Certain information regarding
periodic payment plan
certificates N/A
(c) Certain percentages Charges and Deductions
(d) Certain other fees, etc. Charges and Deductions
(e) Certain other profits or
benefits The Policy
(f) Ratio of annual charges to
income N/A
14. Issuance of trust's securities The Policy
<PAGE>
15. Receipt and handling of payments
from purchasers The Policy; Premiums
16. Acquisition and disposition of Introduction; Pacific
underlying securities Select Exec Separate
Account; The Policy
17. Withdrawal or redemption Transfers, Surrenders,
Withdrawals and
Policy Loans;
Surrender
18.(a) Receipt, custody and dis-
position of income The Policy
(b) Reinvestment of
distributions N/A
(c) Reserves or special funds N/A
(d) Schedule of distributions N/A
19. Records, accounts and reports Confirmation Statements and Other
Reports to Owners
20. Certain miscellaneous provisions
of trust agreement:
(a) Amendment N/A
(b) Termination N/A
(c) and (d) Trustees, removal and
successor N/A
(e) and (f) Depositors, removal
and successor N/A
21. Loans to security holders Policy Loans
22. Limitations on liability N/A
23. Bonding arrangements N/A
24. Other material provisions of
trust agreement N/A
<PAGE>
III. Organizations, Personnel and
Affiliated Persons of Depositor
25. Organization of depositor Pacific Life
Insurance Company
26. Fees received by depositor See Items 13(a) and
13(e)
27. Business of depositor Pacific Life
Insurance Company
28. Certain information as to officials
and affiliated persons of More about Pacific
depositor Life
29. Voting securities of depositor N/A
30. Persons controlling depositor N/A
31. Payments by depositor for certain services
rendered to trust N/A
32. Payments by depositor for certain
other services rendered to trust N/A
33. Remuneration of employees of
depositor for certain services
rendered to trust Charges and Deductions
34. Remuneration of other persons
for certain services rendered
to trust Charges and Deductions
IV. Distribution and Redemption of
Securities
35. Distribution of trust's securities
by states N/A
36. Suspension of sales of trust's
securities N/A
37. Revocation of authority to
distribute N/A
<PAGE>
38.(a) Method of distribution Distribution of the
Policy
(b) Underwriting agreements Distribution of the
Policy
(c) Selling agreements Distribution of the
Policy
39.(a) Organization of principal
underwriters See Item 25
(b) N.A.S.D. membership of
principal underwriters See Item 25
40. Certain fees received by principal See Items 13(a) and
underwriters 13(e)
41.(a) Business of each principal
underwriter See Item 27
(b) Branch offices of each
principal underwriter N/A
(c) Salesmen of each principal
underwriter N/A
42. Ownership of trust's securities
by certain persons N/A
43. Certain brokerage commissions
received by principal
underwriters N/A
44.(a) Method of valuation Determination of
Accumulated Value
(b) Schedule as to offering
price Charges and Deductions
(c) Variation in offering price
to certain persons Charges and Deductions
45. Suspension of redemption rights Surrender
<PAGE>
46.(a) Redemption valuation See Items 10(c) and (d)
(b) Schedule as to redemption
price Surrender
47. Maintenance of position in The Pacific Select Fund;
underlying securities M Fund, Inc.
V. Information Concerning the
Trustee or Custodian
48. Organization and regulation of
trustee N/A
49. Fees and expenses of trustees N/A
50. Trustee's lien N/A
VI. Information Concerning Insurance of
Holders of Securities
51. Insurance of holders of trust's Pacific Life
securities Insurance Company;
The Policy
52.(a) Provisions of trust agreement
with respect to selection or
elimination of under- Substitution of
lying securities Investments
(b) Transactions involving elimi-
nation of underlying Substitution of
securities Investments
(c) Policy regarding substitution
or elimination of under- See Items 13(a) and
lying securities 52(a)
(d) Fundamental policy not other-
wise covered N/A
53. Tax status of trust Federal Income Tax
Considerations
VIII. Financial and Statistical Information
<PAGE>
54. Trust's securities during last
ten years N/A
55. N/A
56. Certain information regarding peri-
odic payment plan certificates Premiums
57. N/A
58. N/A
59. Financial statements (Instruc-
tion 1(c) of "Instructions as
to the Prospectus" of Form
S-6) Financial Statements
<PAGE>
[LOGO OF M'S VERSATILE PRODUCT TO COME]
Flexible Premium
Variable Universal Life
PROSPECTUSES FOR
M'S VERSATILE PRODUCT
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNDERWRITTEN BY
PACIFIC LIFE INSURANCE COMPANY
DATED , 1998
--------------
PACIFIC SELECT FUND
DATED MAY 1, 1998
<PAGE>
M'S VERSATILE PRODUCT
FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY
[LOGO OF M'S VERSATILE
PRODUCT TO COME]
ISSUED BY PACIFIC LIFE INSURANCE
COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
1-800-800-7681
This prospectus describes M's Versatile Product ("MVP")--a Flexible Premium
Variable Life Insurance Policy (individually, the "Policy," and collectively,
the "Policies") offered by Pacific Life Insurance Company ("Pacific Life",
"we", "us", or "our"). The Policy, for so long as it remains in force,
provides lifetime insurance protection on the Insured named in the Policy. The
Policy is designed to provide maximum flexibility in connection with premium
payments and death benefits by permitting the Policyholder ("Policy Owner,"
"Owner," "you" or "your"), subject to certain restrictions, to vary the
frequency and amount of premium payments and to increase or decrease the death
benefit payable under the Policy. This flexibility allows you to provide for
changing insurance needs or financial objectives under a single insurance
policy. A Policy may also be surrendered for its Cash Surrender Value less
outstanding Policy Debt.
Net premium payments may be allocated at your discretion to one or more of
the Investment Options available to you. Each of the Variable Investment
Options ("Variable Account") is a subaccount of our separate account called
the Pacific Select Exec Separate Account (the "Separate Account"). Any portion
of a net premium allocated to one or more of the Variable Accounts invests in
the corresponding portfolios of the Pacific Select Fund (the "Fund") or M
Fund, Inc. ("M Fund"):
<TABLE>
<CAPTION>
PACIFIC SELECT FUND PORTFOLIOS M FUND PORTFOLIOS
------------------------------ -----------------
<S> <C> <C>
Money Market Portfolio Equity Income Portfolio Brandes International Equity Fund
High Yield Bond Portfolio Multi-Strategy Portfolio Turner Core Growth Fund
Managed Bond Portfolio Equity Portfolio Frontier Capital Appreciation Fund
Government Securities Port-
folio Bond and Income Portfolio Enhanced U.S. Equity Fund
Growth Portfolio Equity Index Portfolio
Aggressive Equity Portfolio International Portfolio
Growth LT Portfolio Emerging Markets Portfolio
</TABLE>
Two fixed options called the Fixed Account and the Fixed LT Account (the
"Fixed Options") are also available. Your Accumulated Value in the Fixed
Options 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 Options, see "The
General Account," page 36.
To the extent that all or a portion of net premium payments are allocated to
the Separate Account, the Accumulated Value under the Policy will vary based
upon the investment performance of the Variable Accounts to which the
Accumulated Value is allocated. No minimum amount of Accumulated Value is
guaranteed.
The death benefit, as of the date of death, is the larger of: (1) the
Guideline Minimum Death Benefit calculated under the Death Benefit
Qualification Test chosen; and (2) the death benefit calculated under the
Death Benefit Option in effect. You will choose between two Death Benefit
Qualification Methods--the Cash Accumulation Test and the Guideline Premium
Test. You also will choose from three Death Benefit Options: under Option A,
the death benefit remains fixed at the Face Amount you choose; under Option B,
the death benefit equals the Face Amount plus the Accumulated Value; and under
Option C, the death benefit equals the Face Amount plus the total premiums
paid minus the sum of any withdrawals taken and any other distribution of
Accumulated Value. For a discussion of these elections see "Death Benefit,"
page 19.
It may not be advantageous to replace existing insurance with the Policy.
The Policy may be returned according to the terms of its Free-Look Right (see
"Right to Examine a Policy--Free-Look Right," page 25).
Reports and other information about the Registrant are available on the
Securities and Exchange Commission's internet site at http://www.sec.gov.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
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: , 1998
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
IMPORTANT TERMS........................................................... 4
SUMMARY OF THE POLICY..................................................... 6
Purpose of the Policy................................................... 6
Policy Values........................................................... 6
The Death Benefit....................................................... 6
Premium Features........................................................ 6
Investment Options...................................................... 7
Transfer of Accumulated Value........................................... 7
Policy Loans............................................................ 7
Free-Look Right......................................................... 8
Surrender Right......................................................... 8
Withdrawals............................................................. 8
Charges and Deductions.................................................. 8
Fund Annual Expenses After Expense Limitation........................... 9
M Fund Annual Expenses After Expense Limitation......................... 10
Tax Treatment of Increases in Accumulated Value......................... 10
Tax Treatment of Death Benefit.......................................... 11
Contacting Pacific Life and Timing of Transactions...................... 11
INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT, THE FUND AND M FUND. 12
Pacific Life Insurance Company.......................................... 12
Pacific Select Exec Separate Account.................................... 12
The Pacific Select Fund................................................. 13
M Fund, Inc............................................................. 13
The Investment Advisers and Portfolio Managers.......................... 15
THE POLICY................................................................ 15
Application for a Policy................................................ 15
Premiums................................................................ 16
Allocation of Net Premiums.............................................. 17
Portfolio Rebalancing................................................... 17
Dollar Cost Averaging Option............................................ 18
Transfer of Accumulated Value........................................... 18
Death Benefit........................................................... 19
Death Benefit Qualification Test........................................ 19
Death Benefit Option.................................................... 20
Changes in Death Benefit Option......................................... 21
Changes in Face Amount.................................................. 22
Policy Values........................................................... 22
Determination of Accumulated Value...................................... 23
Policy Loans............................................................ 23
Surrender............................................................... 24
Withdrawals............................................................. 25
Right to Examine a Policy--Free-Look Right.............................. 25
Lapse................................................................... 26
Reinstatement........................................................... 26
CHARGES AND DEDUCTIONS.................................................... 27
Premium Load............................................................ 27
Deductions from Accumulated Value....................................... 27
Surrender Charge........................................................ 29
Withdrawal Charge....................................................... 29
Corporate and Other Purchasers.......................................... 29
Other Charges........................................................... 29
Guarantee of Certain Charges............................................ 30
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
OTHER INFORMATION.......................................................... 30
Federal Income Tax Considerations........................................ 30
Charge for Our Income Taxes.............................................. 33
Voting of Fund Shares.................................................... 33
Disregard of Voting Instructions......................................... 34
Confirmation Statements and Other Reports to Owners...................... 34
Substitution of Investments.............................................. 34
Replacement of Life Insurance or Annuities............................... 35
Changes to Comply with Law............................................... 35
PERFORMANCE INFORMATION.................................................... 35
THE GENERAL ACCOUNT........................................................ 36
General Description...................................................... 36
Death Benefit............................................................ 37
Policy Charges........................................................... 37
Transfers To and From the Fixed Options.................................. 37
Surrenders, Withdrawals, and Policy Loans................................ 38
MORE ABOUT THE POLICY...................................................... 38
Ownership................................................................ 38
Beneficiary.............................................................. 38
Substitution of Insured.................................................. 39
The Contract............................................................. 39
Payments................................................................. 39
Assignment............................................................... 39
Errors on the Application................................................ 40
Incontestability......................................................... 40
Payment in Case of Suicide............................................... 40
Non-Participating........................................................ 40
Policy Illustrations..................................................... 40
Payment Plan............................................................. 40
Optional Insurance Benefits and Other Policies........................... 40
Life Insurance Retirement Plans.......................................... 41
Risks of Life Insurance Retirement Plans................................. 41
Distribution of the Policy............................................... 42
MORE ABOUT PACIFIC LIFE.................................................... 43
Management............................................................... 43
State Regulation......................................................... 44
Telephone Transfer and Loan Privileges................................... 45
Legal Proceedings........................................................ 45
Legal Matters............................................................ 45
Registration Statement................................................... 45
Preparation for the Year 2000............................................ 45
Independent Auditors..................................................... 46
Financial Statements..................................................... 46
APPENDICES................................................................. 109
ILLUSTRATIONS.............................................................. 112
</TABLE>
3
<PAGE>
IMPORTANT TERMS
Accumulated Value--The total value of the amounts in the Investment Options
for the Policy as well as any amount set aside in the Loan Account, including
any accrued earned interest, as of any Valuation Date.
Age--The Insured's age as of his or her nearest birthday as of the Policy
Date, increased by the number of complete Policy Years elapsed.
Beneficiary--The person or persons named by you in the application or by
proper later designation to receive the death benefit proceeds upon the death
of the Insured.
Cash Surrender Value--The Accumulated Value less the surrender charge.
Face Amount--The amount shown as the Face Amount on the specification page of
your Policy, including any additional increases or decreases. The Face Amount
is generally the minimum death benefit while your Policy remains in force.
Fixed Account--An account that is part of our General Account to which all or
a portion of net premium payments may be allocated for accumulation at a fixed
rate of interest (which may not be less than 3.0%) declared by us.
Fixed LT Account--An account that is part of our General Account to which all
or a portion of net premium payments may be allocated for accumulation at a
fixed rate of interest (which may not be less than 3.0%).
General Account--All of our assets other than those allocated to the Separate
Account or to any of our other segregated separate accounts.
Home Office--The Client Services Department at our main office at 700 Newport
Center Drive, Newport Beach, California 92660.
Insured--The person upon whose life the Policy is issued and whose death is
the contingency upon which the death benefit proceeds are payable.
Investment Option--A Variable Account, the Fixed Account or the Fixed LT
Account.
Loan Account--An account to which amounts are transferred from the Investment
Options as collateral for Policy loans.
Monthly Payment Date--The day each month on which the monthly deduction is due
against the Accumulated Value. The first Monthly Payment Date is the Policy
Date.
Net Cash Surrender Value--The Cash Surrender Value less Policy Debt.
Planned Periodic Premium--The premium determined by you as a level amount
planned to be paid at fixed intervals over a specified period of time.
Policy Date--The date used to determine the Monthly Payment Date, Policy
Months, Policy Years, and Policy Monthly, Quarterly, Semi-annual and Annual
Anniversaries. It is usually the date the application is accepted by us,
although it will never be the 29th, 30th, or 31st of any month. The term
"Issue Date" is substituted for Policy Date with respect to Policies issued to
residents of the Commonwealth of Massachusetts.
Policy Debt--The unpaid Policy loan balance including accrued loan interest
charged.
Policyholder, Policy Owner, Owner, You, or Your--The person who owns the
Policy. The Policy Owner will be the Insured unless otherwise stated in the
application. If your Policy has been absolutely assigned, the assignee becomes
the Owner. A collateral assignee is not the Owner.
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 Home Office is open. The New York Stock Exchange is
closed on weekends and on: New Year's Day, Martin Luther King, Jr., Day,
Presidents' Day, Good Friday, Memorial Day, July Fourth, Labor Day,
Thanksgiving Day, and Christmas Day. Our Home Office is normally not open on
the following: the Monday before New Year's Day, July Fourth, or Christmas Day
if any of these holidays falls on a Tuesday; the Tuesday before Christmas Day
if that holiday falls on a Wednesday;
4
<PAGE>
the Friday after New Year's Day, July Fourth or Christmas Day if any of these
holidays falls on a Thursday; and the Friday after Thanksgiving. If any
transaction or event called for under a Policy is scheduled to occur on a day
that is not a Valuation Date, such transaction or event will be deemed to
occur on the next following Valuation Date unless otherwise specified.
Valuation Period--The period that starts at the close of a Valuation Date and
ends at the close of the next succeeding Valuation Date.
Variable Account--A separate account of ours or a subaccount of such a
separate account, which is used only to support the variable death benefits
and policy values of variable life insurance policies, and the assets of which
are segregated from our General Account and our other separate accounts. The
Pacific Select Exec Separate Account serves as the funding vehicle for the
Policies. The Money Market Variable Account, High Yield Bond Variable Account,
Managed Bond Variable Account, Government Securities Variable Account, Growth
Variable Account, Aggressive Equity Variable Account, Growth LT Variable
Account, Equity Income Variable Account, Multi-Strategy Variable Account,
Equity Variable Account, Bond and Income Variable Account, Equity Index
Variable Account, International Variable Account, Emerging Markets Variable
Account, Brandes International Equity Variable Account ("Variable Account I"),
Turner Core Growth Variable Account ("Variable Account II"), Frontier Capital
Appreciation Variable Account ("Variable Account III"), and Enhanced U.S.
Equity Variable Account ("Variable Account IV") are all subaccounts of the
Pacific Select Exec Separate Account.
5
<PAGE>
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 Options are briefly described under
"The General Account," on page 36 and in the Policy.
PURPOSE OF THE POLICY
The Policy offers you insurance protection on the life of the Insured for so
long as your Policy is in force. Like traditional fixed life insurance, your
Policy provides for a death benefit, accumulation of cash value, and surrender
and loan privileges. Unlike traditional fixed life insurance, your Policy
offers a choice of investment alternatives and an opportunity for your Policy's
Accumulated Value and, if elected by you and under certain circumstances, its
death benefit to grow based on investment results. The Policy is a flexible
premium policy, so that, unlike many other insurance policies and subject to
certain limitations, you may choose the amount and frequency of premium
payments.
POLICY VALUES
You may allocate net premium payments among the various Investment Options
available to you.
You bear the investment risk on that portion of your net premiums and
Accumulated Value allocated to the Variable Accounts. The death benefit may or
may not increase or decrease depending upon several factors, including the
death benefit option you select. 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, lapse, or a full surrender of your Policy.
THE DEATH BENEFIT
The death benefit, as of the date of death, is the larger of: (1) the
Guideline Minimum Death Benefit calculated under the Death Benefit
Qualification Test; and (2) the death benefit calculated under the Death
Benefit Option in effect. You will choose between two Death Benefit
Qualification Tests--the Cash Value Accumulation Test or the Guideline Premium
Test. You will also choose from three Death Benefit Options. Under Option A,
the death benefit will be equal to the Face Amount of your Policy. Under Option
B, the death benefit will be equal to the Face Amount of your Policy plus the
Accumulated Value (determined as of the end of the Valuation Period during
which the Insured dies). Under Option C, the death benefit will be equal to the
Face Amount of your Policy plus the total premiums paid minus the sum of any
withdrawals taken and any other distribution of Accumulated Value. For a
discussion of these elections see "Death Benefit," page 19. You may change the
death benefit option among Option A, Option B and Option C subject to certain
conditions. See "Death Benefit" and "Changes in Death Benefit Option," pages 19
and 21, respectively.
PREMIUM FEATURES
When applying for a Policy, you will determine a Planned Periodic Premium
that provides for the payment of level premiums over a specified period of
time. You will receive a premium reminder notice or listbill for multiple
policies on an annual, semi-annual, or quarterly basis, or if a listbill, a
monthly basis, at your option; however, you are not required to pay Planned
Periodic Premiums. Premiums may be paid monthly under the Uni-check electronic
funds transfer plan where you authorize us to withdraw premiums from your
checking account each month. The minimum initial premium required must be paid
before the Uni-check plan will be accepted by us.
6
<PAGE>
The amount, frequency, and period of time over which you pay premiums may
affect whether or not the Policy will be classified as a modified endowment
contract, which is a type of life insurance contract subject to different tax
treatment for certain pre-death distributions. For more information on the tax
treatment of life insurance contracts, including those classified as modified
endowment contracts, see "Federal Income Tax Considerations," page 30.
Payment of the Planned Periodic Premiums will not guarantee that a Policy
will remain in force. Instead, the duration of the Policy depends upon the
Policy's Accumulated Value. Even if Planned Periodic Premiums are paid, the
Policy will lapse any time Accumulated Value less Policy Debt is insufficient
to pay the current monthly deduction and a Grace Period expires without
sufficient payment. Any premium payment must be for at least $50. We also may
reject or limit any premium payment that would result in an immediate increase
in the net amount at risk under the Policy, although such a premium may be
accepted with satisfactory evidence of insurability.
INVESTMENT OPTIONS
You may choose to allocate net premium payments to one or more of the
Investment Options available to you.
The Variable Accounts available to you invest in portfolios of two mutual
funds which offer 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 or M Fund. Each of the Portfolios of the Fund and M Fund, shown in the
charts on pages 14 and 15, has a different investment objective or objectives.
See "The Pacific Select Fund," and "M Fund, Inc." page 13.
Subject to certain limitations, you may also allocate all or a portion of net
premium payments and transfer Accumulated Value to the Fixed Options. We
guarantee that the Accumulated Value allocated to the Fixed Options 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 General Account," page 36.
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
Options. Transfers may be made by telephone if an Authorization For Telephone
Requests has been properly completed, signed and filed at our Home Office. See
"Transfer of Accumulated Value," page 18.
POLICY LOANS
You may borrow from us an amount up to the greater of (1) 90% of your
Policy's Accumulated Value, less any Policy Debt, and less any surrender
charges that would have been imposed if your Policy were surrendered on the
date the loan is taken, or (2) 100% of the product of (a X b/c - d) where (a)
equals your Policy's Accumulated Value less any surrender charge that would be
imposed if your Policy were surrendered on the date the loan is taken and less
12 times the current monthly deduction; (b) equals 1 plus the annual loan
interest rate credited; (c) equals 1 plus the annual loan interest rate
currently charged; and (d) equals any existing Policy Debt. The minimum loan is
$200. Your Policy will be the only security required for a loan. See "Policy
Loans," page 23.
The amount of any Policy Debt is subtracted from the death benefit or from
your Cash Surrender Value upon surrender. See "Policy Loans," page 23. Your
Policy will lapse when Accumulated Value less Policy Debt is insufficient to
cover the current monthly deduction on a Monthly Payment Date, and a Grace
Period expires without a sufficient premium or repayment of Policy Debt.
7
<PAGE>
FREE-LOOK RIGHT
You may return the Policy within the Free-Look Period, which is usually 10
days after you receive it (15 days in Colorado, 20 days in North Dakota, and 30
days if you reside in California and are age 60 or older). In the event you
return your Policy within the Free-Look Period, except as indicated below, we
will refund any charges deducted from premiums received, any net premiums
received allocated to the Fixed Accounts, plus the sum of your Policy's
Accumulated Value allocated to the Variable Accounts as of the end of the
Valuation Period in which we receive your Policy, plus any Policy charges and
fees deducted from your Policy's Accumulated Value in the Variable Accounts. We
will allocate any net premiums received according to your allocation
instructions contained in the application, or more recent written instructions,
if any, when the application is approved and your Policy is issued.
If you reside in a state where applicable law so requires, we will refund
premiums received to you if you choose to exercise the Free-Look Right. We will
allocate any net premiums received before the Free-Look Transfer Date to the
Money Market Variable Account. See "Allocation of Net Premiums," page 17.
SURRENDER RIGHT
You can surrender the Policy during the life of the Insured and receive its
Net Cash Surrender Value, which is equal to the Accumulated Value less the
surrender charge and less any outstanding Policy Debt.
WITHDRAWALS
On and after the first Policy Anniversary and subject to certain
restrictions, you may make withdrawals of Net Cash Surrender Value. A
withdrawal might decrease the Face Amount on a Policy. A withdrawal fee of $25
will be deducted from Accumulated Value upon a withdrawal. See "Withdrawals",
page 25.
CHARGES AND DEDUCTIONS
Premium Load
A premium load is deducted from each premium payment under your Policy prior
to allocation of the net premium to your Accumulated Value. The premium load
consists of the following items:
--A sales load equal to 3.50% of each premium paid.
--A state and local premium tax charge equal to 2.35% of each premium paid.
--A federal tax charge equal to 1.50% of each premium paid.
Deductions from Accumulated Value
A charge called the monthly deduction is deducted from a Policy's Accumulated
Value on each Monthly Payment Date. The monthly deduction consists of the
following items:
--Cost of Insurance: This monthly charge compensates us for providing life
insurance coverage for the Insured. The amount of the charge is equal to a
current cost of insurance rate multiplied by the net amount at risk based on
the death benefit attributed to the Face Amount under a Policy at the
beginning of the Policy Month.
--Administrative Charge: A monthly administrative charge is deducted equal to
$7.50 per month until Age 100.
8
<PAGE>
--Mortality and Expense ("M&E") Risk Charge: The M&E Risk Charge consists of
two components:
(1) M&E Risk Face Amount Charge--The M&E Risk Face Amount Charge will be
assessed at a rate determined with reference to the Age of the Insured,
the initial Face Amount of the Policy, and the Death Benefit Option
selected. See Appendix A. If there have been increases in the Face
Amount, each increase will have a corresponding M&E Risk Face Amount
Charge related to the amount of the increase and the attained Age of
the Insured.
(2) M&E Risk Asset Charge--The M&E Risk Asset Charge is assessed at an
annual rate equal to .45% of the first $25,000 of unloaned Accumulated
Value, plus a charge of .05% of unloaned Accumulated Value above
$25,000 to the Insured's Age 100. Unloaned Accumulated Value is based
upon the value in the Investment Options at the beginning of the
Monthly Payment Date and after the allocation of any new net premium,
withdrawal and/or loan on that day, but before any monthly deductions.
--Optional Insurance Benefits Charges: The monthly deduction will include
charges for any optional insurance benefits added to the Policy by Rider. A
Rider may affect your charges under the Policy. For a description of the
Riders, see "Optional Insurance Benefits and Other Policies," page 40.
Surrender Charge
Pacific Life will assess a surrender charge against Accumulated Value upon
surrender of a Policy. The surrender charge is equal to a specified amount that
varies with the Age and risk classification of the Insured, and the Death
Benefit Option selected, for each $1,000 of a Policy's Face Amount in
accordance with the schedule in Appendix B. The charge remains level for the
first Policy Month, then decreases by 0.8403% per month to zero at the end of
the 120th month.
If there are increases in the Face Amount, each increase will have a
corresponding surrender charge related to the amount of the increase. These
charges will be specified in a supplemental schedule of benefits at the time of
the increase.
There is no reduction of surrender charge when the Face Amount of a Policy is
decreased.
The operating expenses of the Separate Account are paid by us. For a
description of these charges, see "Charges and Deductions," page 27.
FUND ANNUAL EXPENSES AFTER EXPENSE LIMITATION (as a percentage of each
Portfolio's average daily net assets)
Investment advisory fees and operating expenses for the Fund are paid by the
Fund. Fund expenses are not specified under the terms of the Policy, and they
may vary from year to year.
<TABLE>
<CAPTION>
ADVISORY OTHER TOTAL
FEE EXPENSES EXPENSES
-------- -------- --------
<S> <C> <C> <C>
Money Market Portfolio............................... .38% .06% .44%
High Yield Bond Portfolio............................ .60% .05% .65%
Managed Bond Portfolio............................... .60% .06% .66%
Government Securities Portfolio...................... .60% .06% .66%
Growth Portfolio..................................... .65% .05% .70%
Aggressive Equity Portfolio.......................... .80% .06% .86%
Growth LT Portfolio.................................. .75% .07% .82%
Equity Income Portfolio.............................. .65% .05% .70%
Multi-Strategy Portfolio............................. .65% .06% .71%
Equity Portfolio..................................... .65% .05% .70%
Bond and Income Portfolio............................ .60% .06% .66%
Equity Index Portfolio............................... .17% .06% .23%
International Portfolio.............................. .85% .19% 1.04%
Emerging Markets Portfolio........................... 1.10% .36% 1.46%
</TABLE>
9
<PAGE>
The expenses listed for the Fund Portfolios reflect current expenses for the
year ending December 31, 1997, except that the Advisory Fee for the
International Portfolio has been adjusted to reflect the Advisory Fee without
any waiver. The Actual Advisory Fee paid by the International Portfolio in 1997
was 0.83% of the Portfolio's average daily net assets. This reflects the
Advisory Fee waived by Pacific Life until such time as Shareholders approved a
change in the Portfolio Manager to Morgan Stanley which occurred in June, 1997,
and a change in the fee paid to the portfolio manager. In addition, Pacific
Life, as Investment Adviser to the Fund, adopted the policy to waive our fees
or otherwise reimburse expenses so that ordinary 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) for each Portfolio are not greater than 0.25% of
average daily net assets per year. We began the policy in 1989 and intend to
continue this policy until at least December 31, 1999. No reimbursement to the
Portfolios was necessary for the Fund's fiscal year 1997. There can be no
assurance that the expense reimbursement arrangement will continue after
December 31, 1999, and any unreimbursed expenses would be reflected in the
Policy Owner's Accumulated Value and in some instances, the death benefit.
The Fund's fees and 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.
M FUND ANNUAL EXPENSES AFTER EXPENSE LIMITATION (AS A PERCENTAGE OF EACH FUND'S
AVERAGE NET ASSETS).
<TABLE>
<CAPTION>
ADVISORY OTHER TOTAL
FEE EXPENSES EXPENSES
-------- -------- --------
<S> <C> <C> <C>
Brandes International Equity Fund.................... 1.05% .25% 1.30%
Turner Core Growth Fund.............................. .45% .25% .70%
Frontier Capital Appreciation Fund................... .90% .25% 1.15%
Enhanced U.S. Equity Fund............................ .55% .25% .80%
</TABLE>
The expenses listed for each of the M Fund Portfolios reflect current
expenses for the year ended December 31, 1997, and reflect the policy of M
Financial Investment Advisers, Inc. ("MFIA"), as Investment Adviser to M Fund,
to pay operating expenses of M Fund (not including brokerage or other portfolio
transaction expenses or expenses of litigation, indemnification, taxes or other
extraordinary expenses) to the extent such expenses, as accrued for each
Portfolio for the year ended December 31, 1997, exceed .25% of that Portfolio's
average daily net assets. In the absence of this policy, such expenses would
have exceeded the expense cap and total expenses for the year ended December
31, 1997, would have been 4.94% for the Brandes International Equity Fund
(formerly the Edinburgh Overseas Equity Fund), 6.20% for the Turner Core Growth
Fund, 2.86% for the Frontier Capital Appreciation Fund and 5.42% for the
Enhanced U.S. Equity Fund, respectively; MFIA has extended this policy through
December 31, 1998. There can be no assurance that MFIA will continue this
policy in the future.
M Fund's fees and 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 net asset value,
which in turn is used to compute the corresponding Variable Account's
Accumulation Unit Value. M Fund's investment advisory fees and operating
expenses are more fully described in M Fund's prospectus, which accompanies
this prospectus.
TAX TREATMENT OF INCREASES IN ACCUMULATED VALUE
We believe that the Accumulated Value under the Policy is currently subject
to the same federal income tax treatment as the cash value under traditional
fixed life insurance. Therefore, generally you will not be deemed to be in
constructive receipt of your Accumulated Value unless and until you are deemed
to be in receipt of a distribution from your Policy. For information on the tax
treatment of the Policy and on the tax treatment of a surrender, a withdrawal,
or a Policy loan, see "Federal Income Tax Considerations," page 30.
10
<PAGE>
TAX TREATMENT OF DEATH BENEFIT
We believe that the death benefit under the Policy is currently subject to
federal income tax treatment consistent with that of traditional fixed life
insurance. Therefore, generally the death benefit will be fully excludable from
the gross income of the Beneficiary under the Internal Revenue Code. See
"Federal Income Tax Considerations," page 30.
CONTACTING PACIFIC LIFE AND TIMING OF TRANSACTIONS
Unless otherwise specified in your Policy specification pages, all written
requests, notices, and forms required by the Policies, and any questions or
inquiries should be directed to our Client 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 will usually 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.
11
<PAGE>
INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT, THE FUND AND M 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 1997, we had $80.0 billion
of individual life insurance in force and total admitted assets of
approximately $31.8 billion. We have been ranked according to admitted assets
as the 20th largest life insurance carrier in the nation for 1997. The Pacific
Life family of companies has total assets and funds under management of over
$236 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.
We are a subsidiary of Pacific LifeCorp, a holding company which, in turn,
is a subsidiary of Pacific Mutual Holding Company, a mutual holding company.
Under their respective charters, Pacific Mutual Holding Company must always
hold at least 51% of the outstanding voting stock of Pacific LifeCorp, and
Pacific LifeCorp must always own 100% of the voting stock of Pacific Life.
Owners of Pacific Life's annuity contracts and life insurance policies have
certain membership interests in Pacific Mutual Holding Company, consisting
principally of the right to vote on the election of the Board of Directors of
the mutual holding company and on other matters, and certain rights upon
liquidation or dissolutions of the mutual holding company.
The principal underwriter for the Policies is Pacific Mutual Distributors,
Inc. ("PMD"), one of our wholly-owned subsidiaries. PMD is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC").
PACIFIC SELECT EXEC SEPARATE ACCOUNT
The Separate Account is a separate investment account of ours used only to
support the variable death benefits and policy values of variable life
insurance policies. The Separate Account supports the Policies as well as
other variable life insurance policies issued by us. The assets in the
Separate Account are kept separate from our General Account assets and our
other separate accounts.
We own the assets in the Separate Account and are required to maintain
sufficient assets in the Separate Account to meet anticipated obligations of
the insurance policies funded by the Account. The Separate Account is divided
into subaccounts called Variable Accounts. The income, gains, or losses,
realized or unrealized, of each Variable Account are credited to or charged
against the assets held in the Variable Account without regard to our other
income, gains, or losses. Assets in the Separate Account attributable to the
reserves and other liabilities under the variable life insurance policies
funded by the Separate Account are not chargeable with liabilities arising
from any other business that we conduct. However, we may transfer to our
General Account any assets which exceed anticipated obligations of the
Separate Account. All obligations arising under the Policy are our general
corporate obligations. We may accumulate in the Separate Account proceeds from
various Policy charges and investment results applicable to those assets.
The Separate Account was established on May 12, 1988 under California law
under the authority of our Board of Directors. The Separate Account is
registered as a unit investment trust with the SEC. Such registration 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 or the M Fund. We may in the future establish additional
Variable Accounts within the Separate Account, which may invest in other
Portfolios of the Fund, the M Fund or in other securities.
12
<PAGE>
THE PACIFIC SELECT FUND
The Fund is a diversified, open-end management investment company of the
series type. The Fund is registered with the SEC under the Investment Company
Act of 1940. Such registration does not involve supervision by the SEC of the
investments or investment policies of the Fund. The Fund currently offers
fourteen separate Portfolios that fund the Variable Investment Options
available to you. Each Portfolio pursues different investment objectives and
policies. We purchase shares of each Portfolio for the corresponding Variable
Account at net asset value, i.e., without sales load. All dividends and
capital gains distributions received from a Portfolio are automatically
reinvested in such Portfolio at net asset value, unless we, on behalf of the
Separate Account, elect otherwise. Fund shares will be redeemed by us at their
net asset value to the extent necessary to make payments under the Policies.
Shares of the Fund currently are offered only to separate accounts of ours
and our affiliates and/or subsidiaries to serve as an investment medium for
variable life insurance policies and for variable annuity contracts issued or
administered by us. 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.
M FUND, INC.
M Fund is a diversified, open-end management investment company registered
with the Securities and Exchange Commission ("SEC") under the Investment
Company Act of 1940. M Fund currently offers four separate Portfolios as
Investment Options under the Policies. Each Portfolio pursues different
investment objectives and policies. The shares of each Portfolio are purchased
by us 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. M Fund shares
may be redeemed by us at their net asset value to the extent necessary to make
payments under the Policies.
The following charts summarize some basic data about each Portfolio of the
Fund and M 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 prospectuses of the Fund and M Fund, including information on the
risks associated with the investments and investment techniques of each of the
Portfolios.
13
<PAGE>
THE FUND'S AND M FUND'S PROSPECTUSES ACCOMPANY THIS PROSPECTUS AND SHOULD BE
READ CAREFULLY BEFORE INVESTING.
PACIFIC SELECT FUND
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Current income Highest quality money Pacific Life
consistent with market instruments
preservation of capital
- --------------------------------------------------------------------------------------------
High Yield High level of current Intermediate and long- Pacific Life
Bond income term, high-yielding,
lower and medium quality
(high risk) fixed-income
securities
- --------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific Investment
consistent with prudent marketable debt Management Company
investment management securities. Will
normally maintain an
average portfolio
duration of 3-7 years
- --------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government Pacific Investment
Securities consistent with prudent securities including Management Company
investment management futures and options
thereon and high-grade
corporate debt
securities. Will
normally maintain an
average portfolio
duration of 3-7 years
- --------------------------------------------------------------------------------------------
Growth Growth of capital Common stock Capital Guardian
Trust Company
- --------------------------------------------------------------------------------------------
Aggressive Eq- Capital appreciation Common stock of small Alliance Capital
uity emerging growth and Management L.P.
medium capitalization
companies
- --------------------------------------------------------------------------------------------
Growth LT Long-term growth of Common stock Janus Capital
capital consistent with Corporation
the preservation of
capital
- --------------------------------------------------------------------------------------------
Equity Income Long-term growth of Dividend paying common J.P. Morgan
capital and income stock Investment Management
Inc.
- --------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed income J.P. Morgan
securities Investment Management
Inc.
- --------------------------------------------------------------------------------------------
Equity Capital appreciation Common stocks and Goldman Sachs
securities convertible Asset Management
into or exchangeable for
common stocks
- --------------------------------------------------------------------------------------------
Bond and In- Provide total return and Investment grade debt Goldman Sachs
come income consistent with securities. Asset Management
prudent investment Will normally maintain
management an average portfolio
duration within one-half
year of a long-term bond
index
- --------------------------------------------------------------------------------------------
Equity Index Provide investment Stocks included in the Bankers Trust Company
results that correspond S&P 500
to the total return
performance of common
stocks publicly traded
in the U.S.
- --------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Morgan Stanley Asset
appreciation corporations domiciled Management Inc.
outside the United
States
- --------------------------------------------------------------------------------------------
Emerging Mar- Long-term growth of Common stocks of Blairlogie Capital
kets capital companies domiciled in Management
emerging market
countries
</TABLE>
- -------------------------------------------------------------------------------
14
<PAGE>
M FUND
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Brandes Long-term capital Common stock and common Brandes Investment
International appreciation with stock equivalents of Partners, L.P.
Equity Fund reasonable investment foreign issuers,
risk through active including smaller
management and issuers and issuers
investment in common located in small,
stock and common stock emerging markets
equivalents of foreign
issuers
- ------------------------------------------------------------------------------------------
Turner Core Long-term capital Common stocks that show Turner Investment
Growth Fund appreciation through a strong earnings Partners, Inc.
diversified portfolio of potential with
common stocks that show reasonable market prices
strong earnings
potential with
reasonable market prices
- ------------------------------------------------------------------------------------------
Frontier Capi- Maximum capital Common stock of Frontier Capital
tal Apprecia- appreciation through companies of all sizes, Management Company,
tion Fund investment in common with emphasis on stocks Inc.
stock of companies of of small- to medium-
all sizes, with emphasis capitalization companies
on stocks of small- to (i.e., companies with
medium-capitalization market capitalization of
companies less than $3 billion)
- ------------------------------------------------------------------------------------------
Enhanced U.S. Above-market total Common stocks of Franklin Portfolio
Equity Fund return through companies perceived to Associates LLC
investment in common provide a return higher
stock of companies than that of the S&P 500
perceived to provide a at approximately the
return higher than that same level of investment
of the Standard & Poor's risk
500 Composite Stock
Price Index ("S&P 500")
at approximately the
same level of investment
risk as the S&P 500
</TABLE>
- -------------------------------------------------------------------------------
THE INVESTMENT ADVISERS AND PORTFOLIO MANAGERS
Pacific Select Fund
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.
M Fund
MFIA serves as Investment Adviser to each Portfolio of M Fund. MFIA has
engaged other firms, as shown in the chart above, to serve as Portfolio
Managers under the supervision of MFIA and M Fund's Board of Directors.
We assume no responsibility for the operation of M Fund or any Portfolio
thereof, or the compliance of M Fund or the Portfolio with any applicable law.
THE POLICY
The variable life insurance benefits provided by the Policies are funded
through the Policy Owner's Accumulated Value in the Separate Account and the
Fixed Options. The information included below describes the benefits,
features, charges, and other major provisions of the Policies.
APPLICATION FOR A POLICY
The Policy is designed to meet the needs of individuals and for corporations
who wish to provide coverage and benefits for key employees. Pacific Life
intends to issue the Policy in every state (except New York), and the District
of Columbia. Anyone wishing to purchase the Policy may submit an application
to us. A Policy can be issued on the life of an Insured for Ages up to and
including Age 85 with evidence of insurability
15
<PAGE>
satisfactory to us. The Insured's Age is calculated as of the Insured's
birthday nearest the Policy Date. Acceptance is subject to our underwriting
rules, and we reserve the right to request additional information and to
reject an application.
Each Policy is issued with a Policy Date. The Policy Date is usually the
date the application is accepted by us, although 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 your
Policy is issued, although we may waive the 20 day requirement at our
discretion. If the initial premium is not received or the application is
rejected by us, your Policy will be cancelled and any partial premium received
will be refunded.
Subject to our approval, your Policy may be backdated, but the Policy Date
may not be more than six months prior to the date of the application.
Backdating can be advantageous if the Insured's lower issue Age results in
lower cost of insurance rates. If your Policy is backdated, the minimum
initial premium required will include sufficient premium to cover the
backdating period and will be applied as of the later of the Policy Date or
the date the initial premium is received at our Home Office. Monthly
deductions will be made for the period the Policy Date is backdated.
Insureds are assigned to underwriting (insurance risk) classes which are
used in calculating the cost of insurance charges. In assigning Insureds to
underwriting classes, we will normally use the medical or paramedical
underwriting method, which may require a medical examination of a proposed
Insured, although other forms of underwriting may be used when deemed
appropriate by us.
PREMIUMS
The Policy is a flexible-premium policy, and it provides considerable
flexibility, subject to the limitations described below, to pay premiums at
your discretion. Subject to the limitations described below, you may choose
the amount and frequency of premium payments. The Policy, therefore, provides
you with the flexibility to vary premium payments to reflect varying financial
conditions.
When applying for a Policy, you will determine a Planned Periodic Premium
that provides for the payment of level premiums over a specified period of
time. You will receive a premium reminder notice, or a listbill for multiple
policies, on an annual, semiannual, or quarterly basis, or, if a listbill, a
monthly basis, at your option; however, you are not required to pay Planned
Periodic Premiums. Premiums may be paid monthly under the Uni-check electronic
funds transfer plan where you authorize us to withdraw premiums from your
checking account each month. The minimum initial premium required must be paid
before the Uni-check plan will be accepted by us. You may elect the day each
month on which premiums are paid under the Uni-check plan, provided the day
elected is between the 4th and the 28th day of the month. If you do not elect
a payment day, the day on which premiums are paid will be the Monthly
Anniversary.
Payment of the Planned Periodic Premium will not guarantee that your Policy
will remain in force. Instead, the continuation of your Policy depends upon
your Policy's Accumulated Value. Even if Planned Periodic Premiums are paid,
your Policy will lapse any time Accumulated Value less Policy Debt is
insufficient to pay the current monthly deduction and a Grace Period expires
without sufficient payment. See "Lapse".
Any premium payment must be for at least $50. We also may reject or limit
any premium payment that would result in an immediate increase in the net
amount at risk under the Policy, although such a premium may be accepted with
satisfactory evidence of insurability. See "Charges and Deductions: Cost of
Insurance". A premium payment would result in an immediate increase in the net
amount at risk if the death benefit under your Policy is, or upon acceptance
of the premium would be, equal to your Accumulated Value multiplied by a death
benefit percentage. See "Death Benefit". If satisfactory evidence of
insurability is not received, the payment, or portion thereof may be returned.
All or a portion of a premium payment will be rejected and returned to you if
it would exceed the maximum premium limitations prescribed by federal tax law.
16
<PAGE>
The amount, frequency and period of time over which you pay premiums may
affect whether the Policy will be classified as a modified endowment contract,
which is a type of life insurance contract subject to different tax treatment
for certain pre-death distributions than conventional life insurance
contracts. Accordingly, variations from the Planned Periodic Premiums on a
Policy that is not otherwise a modified endowment contract may result in the
Policy becoming a modified endowment contract for tax purposes.
In order for your Policy to avoid being treated as a modified endowment
contract, the sum of the premiums paid less a portion of any withdrawals may
not exceed the "seven pay premium" limit as defined in the Internal Revenue
Code ("IRC"). (See "Federal Income Tax Considerations".) If we receive any
premium payment that we believe, if applied to your Policy in that Policy
year, would cause your Policy to become a modified endowment contract, the
portion of the payment that we believe would cause your Policy to become a
modified endowment contract will not be applied to your Policy, but will be
returned to you, unless you had previously notified us that payments that
cause your Policy to become a modified endowment contract may be accepted by
us and applied to your Policy. However, for premium payments received by us at
our Home Office within 20 days before the upcoming Annual Anniversary of your
Policy, we may apply the portion of the premium payment that we believe would
cause your Policy to become a modified endowment contract to your Policy on
the upcoming Annual Anniversary.
Certain charges will be deducted from each premium payment. See "Charges and
Deductions". The remainder of the premium, known as the net premium, will be
allocated as described below under "Allocation of Net Premiums." Unless you
request otherwise, in writing, additional payments will first be treated as
repayments of Policy Debt. However, certain states may require your payments
to be considered premium payments in the absence of specific instructions from
you. Any portion of a payment that exceeds the amount of Policy Debt will be
applied as an additional premium payment.
ALLOCATION OF NET PREMIUMS
In your application for the Policy, you select the Investment Options to
which net premium payments will be allocated. When your application is
approved and your Policy is issued, your net premium will be automatically
allocated according to your instructions contained in your application, or
more recent written instructions, if any (except for amounts allocated to the
Loan Account to secure any Policy Debt). However, if your Policy is delivered
before all of our requirements necessary for the Policy to be considered in
force have been met, the net premium will be allocated to the Money Market
Account until the requirements are received by our Home Office.
For residents of states that require a refund of premium to an Owner who
returns the Policy during the Free-Look Period, net premiums received prior to
the Free-Look Transfer Date 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). The Free-Look
Transfer Date is 15 days after the Policy is issued or, if longer, when all
requirements are received by the Home Office for the Policy to be considered
in force. Net premiums received on and after the Free-Look Transfer Date will
be allocated upon receipt among the Investment Options according to your most
recent instructions. Allocations to the Fixed LT Account are subject to
certain restrictions. (See "The General Account".)
You may change the allocation of net premiums by submitting a proper written
request to our Home Office. Changes in net premium allocation instructions may
be made by telephone if a properly completed Authorization for Telephone
Requests has been filed at our Home Office. We reserve the right to suspend or
discontinue telephone net premium allocation instructions.
PORTFOLIO REBALANCING
You may direct us to automatically re-set the percentage of your Accumulated
Value allocated to each Variable Account at a predetermined level you choose.
You may change this predetermined level at any time. This process is called
portfolio rebalancing. (The Fixed Options are 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
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<PAGE>
among the Variable Accounts back to the preset percentages. Rebalancing can be
made quarterly, semi-annually or annually, measured from your Policy Date
("frequency period"). Rebalancing may result in transferring amounts from a
Variable Account with relatively higher investment performance to a Variable
Account with relatively lower investment performance.
You may initiate portfolio rebalancing by sending our Home Office a signed,
written request in good form or a properly completed Automatic Portfolio
Rebalancing form. You must specify the frequency for rebalancing and a
beginning date. The first rebalancing will usually occur on your Monthly
Payment Date that starts the frequency period you elected and that occurs on
or follows the beginning date you elected. If you stop portfolio rebalancing,
you must wait 30 days to begin again. Portfolio rebalancing cannot be used
with the Dollar Cost Averaging Option.
We may modify, terminate or suspend the portfolio rebalancing feature at any
time.
DOLLAR COST AVERAGING OPTION
We currently offer an option under which you may dollar cost average your
allocations in the Variable Accounts under your Policy by authorizing us to
make periodic allocations of Accumulated Value from any one Variable Account
to one or more of the other Variable Accounts. Dollar cost averaging is a
systematic method of investing in which securities are purchased at regular
intervals in fixed dollar amounts so that the cost of the securities gets
averaged over time and possibly over various market values. The option will
result in the allocation of Accumulated Value to one or more Variable
Accounts, and these amounts will be credited at the Accumulation Unit values
as of the end of the Valuation Dates on which the transfers are processed.
Since the value of Accumulation Units will vary, the amounts allocated to a
Variable Account will result in the crediting of a greater number of units
when the Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Similarly, the amounts transferred from a
Variable Account will result in a debiting of a greater number of units when
the Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Dollar cost averaging does not guarantee
profits, nor does it assure that you will not have losses.
A Dollar Cost Averaging Request form is available upon request. To elect the
Dollar Cost Averaging Option, your Accumulated Value in the Variable Account
from which the Dollar Cost averaging transfers will be made must be at least
$5,000. After we have received a Dollar Cost Averaging Request in proper form
at our Home Office, we will transfer Accumulated Value in amounts you
designate from the Variable Account from which transfers are to be made to the
Variable Account or Accounts you choose. The minimum amount that may be
transferred to any one Variable Account is $50. After your initial net premium
is allocated according to your instructions, the first transfer will be
effected on your Policy's Monthly, Quarterly, Semi-Annual, or Annual
Anniversary, whichever period you select, coincident with or next following
receipt at our Home Office of a Dollar Cost Averaging Request in proper form.
Subsequent transfers will be effected on the following Monthly, Quarterly,
Semi-Annual, or Annual Anniversary for so long as you designate, until the
total amount elected has been transferred, until Accumulated Value in the
Variable Account from which transfers are made has been depleted, or until
your Policy enters the Grace Period. Amounts periodically transferred under
this option will not be subject to any transfer charges that may be imposed by
us in the future, except as may be required by applicable law.
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 your initial net premium is allocated to the Investment Options you
choose and upon proper written request to our Home Office, you may transfer
Accumulated Value among the Variable Accounts. Transfers (other than transfers
in connection with the Dollar Cost Averaging Option) may be made by telephone
if a properly completed Authorization For Telephone Requests has been filed at
our Home Office. Currently, there are no limitations on the number of
transfers between Variable Accounts, no minimum amount required for a
transfer, nor any minimum amount required to be remaining in a given Variable
Account after a transfer (except as required under the Dollar Cost Averaging
Option). No transfer may be made if your Policy is in the Grace Period and a
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<PAGE>
payment required to avoid lapse is not paid. See "Lapse". No charges are
currently imposed upon such transfers. We reserve the right, however, at a
future date to limit the size of transfers and remaining balances, to assess
transfer charges, to limit the number and frequency of transfers, and to
suspend and discontinue telephone transfers.
Subject to certain restrictions, Accumulated Value may also be transferred
from the Variable Accounts to the Fixed Options after your initial net premium
is allocated to the Investment Options you choose; however, such a transfer
will only be permitted in the Policy Month preceding a Policy Anniversary,
except that if you reside in Connecticut, Georgia, Maryland, North Carolina,
North Dakota, or Pennsylvania, you may make such a transfer at any time during
the first 18 Policy Months. Transfers from the Fixed Options to the Variable
Accounts are restricted as described in "The General Account".
First Year Transfer Program. The Fixed Account provides a way for you to
transfer amounts monthly from the Fixed Account to the Variable Accounts or
the Fixed LT Account. On the date your initial net premium is allocated
according to your instructions, and for up to 12 months thereafter, transfers
will be made from the Fixed Account to the other Investment Options per your
instructions. This allows you to average the Accumulation Unit values in the
Variable Accounts over time, and may permit a "smoothing" of abrupt peaks and
drops in Accumulation Unit values over the first year. See "The General
Account" for a more detailed description of the First Year Transfer Program.
DEATH BENEFIT
When your Policy is issued, we will determine the initial amount of
insurance based on the instructions provided in your application. That amount
will be shown on the specifications page of your Policy and is called the
"Face Amount." The minimum Face Amount at issuance of a Policy is $50,000. We
may reduce the minimum Face Amount required at issuance under certain
circumstances, such as for group or sponsored arrangements.
At Policy issue, each Policy Owner must make two death benefit selections:
the Death Benefit Qualification Test and the Death Benefit Option. Generally,
an applicant designates the Death Benefit Qualification Test and the Death
Benefit Option for the Policy in the application. If no designations are made,
we will assume the Guideline Premium Test and Option A have been selected.
Upon the death of the Insured, the death benefit will be equal to the
Guideline Minimum Death Benefit determined by the Death Benefit Qualification
Test selected or, if greater, the Death Benefit Option selected. Under any
option, the death benefit will always be sufficient to meet the requirements
for life insurance contracts under IRC Section 7702.
DEATH BENEFIT QUALIFICATION TEST
Each Owner may select one of two Death Benefit Qualification Test methods
available under the Policy. Once elected, the Death Benefit Qualification Test
cannot be changed for the duration of your Policy. As described below, the
available Death Benefit Qualification Tests are the Cash Value Accumulation
Test and the Guideline Premium Test.
Cash Value Accumulation Test. The Guideline Minimum Death Benefit will be
the greater of the amount required for this policy to be deemed "life
insurance" according to the IRC or 101% of the Accumulated Value. Such
required amount will be determined based on the Accumulated Value and the Cash
Value Accumulation Test defined in IRC Section 7702(b). Generally, the Cash
Value Accumulation Test requires that under the terms of a life insurance
policy, the death benefit must be sufficient so that the cash surrender value,
as defined in IRC Section 7702, does not at any time exceed the net single
premium required to fund the future benefits under the policy. The net single
premiums under the Policy vary according to the Age, sex, and underwriting
classification of the Insured, and the resulting death benefit determined by
using the net single premium will be at least equal to the amount required for
the Policy to be deemed life insurance under IRC Section 7702. The net single
premium is calculated using a four percent interest rate or, if higher, the
contractually guaranteed interest rate and using the guaranteed mortality
charges as of the time the Policy is issued. The net single premium that would
purchase $1 of future benefits under the Policy for a male Insured, Age 45,
standard Nonsmoker, is $0.3475.
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<PAGE>
Guideline Premium Test. The Guideline Minimum Death Benefit at any time is
the Accumulated Value multiplied by the death benefit percentage shown in
Appendix C and in the Policy. The death benefit will be determined with
reference to the requirements for the Guideline Premium test for qualifying a
Policy as a life insurance contract under IRC Section 7702(a)(2). Under these
requirements, the sum of the premiums paid under a Policy may not exceed the
"guideline premium limitations," as defined in IRC Section 7702(a), and the
death benefit percentages, which vary according to the Age of the Insured,
will be at least equal to the applicable percentage (as defined in IRC Section
7702(d)) of the cash surrender value of the Policy. The death benefit
percentage is 250% for an Insured at Age 40 or under, and it declines for
older Insureds.
Choosing Between the Tests
The Cash Value Accumulation Test does not limit the amount of premium that
may be paid into a Policy. If you desire to pay premiums in excess of the
guideline premium test limitations you should elect the Cash Value
Accumulation Test. However, any premium that would increase the net amount at
risk is subject to evidence of insurability satisfactory to us. Required
increases in the minimum death benefit due to growth in Accumulated Value will
generally be greater under the Cash Value Accumulation Test than under the
Guideline Premium Test.
The Guideline Premium Test limits the amount of premium that may be paid
into a Policy. If you do not desire to pay premiums in excess of the Guideline
Premium Test limitations you should consider the Guideline Premium Test.
DEATH BENEFIT OPTION
Each Owner may select one of three Death Benefit Options available under the
Policy: Option A, Option B, or Option C.
Option A. Under Option A, the death benefit will be equal to the Face Amount
of your Policy. The death benefit will never be less than the Face Amount.
Option B. Under Option B, the death benefit will be equal to the Face Amount
of your Policy plus the Accumulated Value. The death benefit under Option B
will always vary as Accumulated Value varies. The death benefit will never be
less than the Face Amount.
Option C. Under Option C, the death benefit will be equal to the Face Amount
of your Policy plus the total premiums paid minus the sum of any withdrawals
taken and any other distribution of Accumulated Value.
Choosing Among the Options.
Option A is intended to provide flexibility in the amount of insurance
protection provided under a Policy. Option A provides for the smallest amount
of insurance protection in that the death benefit is equal to the Face Amount
(assuming that the Guideline Minimum Death Benefit is not greater than the
Face Amount). Under this option, favorable investment performance will be
reflected in increasing Accumulated Value rather than insurance protection.
Option B provides for a greater degree of insurance protection than
experienced under Option A, in that the death benefit under Option B includes
Accumulated Value. Option B will reflect the value of growth in Accumulated
Value due to performance, assuming that the Guideline Minimum Death Benefit is
not greater than the death benefit otherwise determined. The death benefit
will never be less than the Face Amount.
Option C provides for a greater degree of insurance protection than
experienced under Option A, in that the death benefit under Option C includes
the amount of premiums paid minus withdrawals and any other distributions of
Accumulated Value. However, to the extent the sum of the withdrawals and any
other distributions is greater than the sum of the premiums paid, and assuming
that the Guideline Minimum Death Benefit is not greater than the death benefit
otherwise determined, it is possible for the death benefit to be less than the
Face Amount.
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<PAGE>
Cash Value Accumulation Test Examples. The following examples demonstrate
the determination of death benefits under Options A, B and C under the Cash
Value Accumulation Test. The examples show two policies-- policies I and II --
with the same Face Amount and Premiums, but Accumulation Values that vary as
shown. All policies assume an Insured is Age 40 at issue that dies at the
beginning of his sixth Policy Year. All policies assume that there is no
outstanding Policy Debt or prior withdrawals. The net single premium is
calculated under the rules specified in the Code for a 45 year old male.
<TABLE>
<CAPTION>
POLICY
POLICY I II
-------- --------
<S> <C> <C>
Face Amount............................................ $100,000 $100,000
Premiums............................................... $ 30,000 $ 30,000
Accumulated Value on Date of Death..................... $ 25,000 $ 75,000
Death Benefit Under Option A........................... $100,000 $215,889
Death Benefit Under Option B........................... $125,000 $215,889
Death Benefit Under Option C........................... $130,000 $215,889
</TABLE>
For Policy I, the death benefit is equal to the amount provided under Death
Benefit Option A, B, or C which, in each instance, is greater than the death
benefit provided under the Guideline Minimum Death Benefit (as determined by
the Cash Value Accumulation Test).
For Policy II under Death Benefit Option A, B, or C, the death benefit is
equal to the Guideline Minimum Death Benefit (as determined by the Cash Value
Accumulation Test) which, in each instance, is greater than the death benefit
under Option A, B, or C.
Guideline Premium Test Examples. The following examples demonstrate the
determination of death benefits under Options A, B and C under the Guideline
Premium Test. The examples show two policies -- policies I and II -- with the
same Face Amount and Premiums, but Accumulation Values that vary as shown. All
policies assume an Insured is Age 40 at issue that dies at the beginning of
his sixth Policy Year. All policies assume that there is no outstanding Policy
Debt or prior withdrawals. The cash value corridor is calculated under the
rules specified in the Code for a 45 year old male.
<TABLE>
<CAPTION>
POLICY
POLICY I II
-------- --------
<S> <C> <C>
Face Amount............................................ $100,000 $100,000
Premiums............................................... $ 30,000 $ 30,000
Accumulated Value on Date of Death..................... $ 25,000 $ 75,000
Death Benefit Under Option A........................... $100,000 $161,250
Death Benefit Under Option B........................... $125,000 $175,000
Death Benefit Under Option C........................... $130,000 $161,250
</TABLE>
For Policy I, the death benefit is equal to the amount provided under Death
Benefit Option A, B, or C which, in each instance, is greater than the death
benefit provided under the Guideline Minimum Death Benefit (as determined by
the Guideline Premium Test).
For Policy II under Death Benefit Option A or C, the death benefit is equal
to the amount provided under the Guideline Minimum Death Benefit (as
determined by the Guideline Premium Test) which is greater than the Face
Amount provided under Option A, and the Face Amount plus total premium
provided under Option C. In contrast, under Death Benefit Option B, the death
benefit would be determined by the Death Benefit Option selected which, in
each case, is greater than the death benefit provided under the Guideline
Minimum Death Benefit (as determined by the Guideline Premium Test).
All calculations of death benefit will be made as of the end of the
Valuation Period during which the Insured dies. Death benefit proceeds may be
paid to your Beneficiary in a lump sum or under a payment plan offered under
the Policy. The Policy should be consulted for details.
CHANGES IN DEATH BENEFIT OPTION
You may request that the death benefit under your Policy be changed from
Option A or Option C to Option B, or from Option B or Option C to Option A.
Changes to Option C will not be available. Changes in the death
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<PAGE>
benefit option may be made only once per Policy Year and should be made in
writing to our Home Office. A change from Option B to Option A may be made
without evidence of insurability; a change from Option A to Option B will
require evidence of insurability satisfactory to us. The effective date of any
such change shall be the next Monthly Payment Date after the change is
accepted.
A change in the Death Benefit Option under a Policy will result in a change
in the Face Amount of the Policy so that the death benefit under the new Death
Benefit Option will equal the death benefit under the former option
immediately prior to the change. From that point on, the change in option will
affect the determination of the death benefit. In addition, a change in Death
Benefit Option may affect the monthly cost of insurance charges since these
charges vary with the net amount at risk, which generally is the amount by
which the death benefit exceeds Accumulated Value. See "Charges and Deduction:
Cost of Insurance".
Unless otherwise specified by you in writing, any request for a Death
Benefit Option change will not be accepted by us if the Option change would
cause your Policy to be treated as a modified endowment contract.
CHANGES IN FACE AMOUNT
You may request an increase or decrease in the Face Amount under your Policy
subject to our approval. A change in Face Amount may only be made once per
year. Increasing the Face Amount could increase the death benefit under your
Policy, and decreasing the Face Amount could decrease the death benefit. The
amount of change in the death benefit will depend, among other things, upon
the death benefit option chosen by you and whether, and the degree to which,
the death benefit under your Policy exceeds the Face Amount prior to the
change. Changing the Face Amount could affect the subsequent level of the
death benefit while your Policy is in force and the subsequent level of Policy
values. An increase in Face Amount may increase the net amount at risk under
your Policy, which will increase your cost of insurance charge. Conversely, a
decrease in Face Amount may decrease the net amount at risk, which will
decrease your cost of insurance charge.
Any request for an increase or decrease in Face Amount must be made by
written application to our Home Office. It will become effective on the
Monthly Payment Date on or next following our acceptance of the request. If
you are not the Insured, we will also require the consent of the Insured
before accepting a request.
Increases. Additional evidence of insurability satisfactory to us will be
required for an increase in Face Amount. An increase will not be given for
increments of Face Amount less than $25,000. We reserve the right to charge a
fee for each increase, not to exceed a maximum of $100, to cover the costs of
processing the request. This fee will be deducted on the effective date of the
increase in Face Amount from the Accumulated Value in the Investment Options
in the proportion that each bears to your Accumulated Value less Debt.
Decreases. Any decrease in Face Amount will first be applied to the most
recent increases, then the next most recent increases successively, and
finally to the original Face Amount. No charge will be deducted in connection
with a decrease. If you choose the Guideline Premium Test, and if a decrease
in the Face Amount would result in total premiums paid exceeding the premium
limitations prescribed under tax law to qualify your Policy as a life
insurance contract, we will refund to you the amount of such excess above the
premium limitations.
We reserve the right to disallow a requested decrease, and will not permit a
requested decrease, among other reasons, (1) if compliance with the guideline
premium limitations under tax law resulting from the requested decrease would
result in immediate termination of your Policy, (2) if, to effect the
requested decrease, payments to you would have to be made from Accumulated
Value for compliance with the guideline premium limitations, and the amount of
such payments would exceed the Net Cash Surrender Value under your Policy, or
(3) if the decrease would cause your Policy to be treated as a modified
endowment contract and you have not specified in writing that such treatment
is acceptable to you.
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.
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<PAGE>
On each Valuation Date, the portion of your Accumulated Value allocated to
any particular Variable Account will be adjusted to reflect the investment
experience of that Variable Account. On each Monthly Payment Date, the portion
of the Accumulated Value allocated to a particular Investment Option also will
be adjusted to reflect the assessment of the monthly deduction. See
"Determination of Accumulated Value". No minimum amount of Accumulated Value
is guaranteed. You bear the risk for the investment experience of Accumulated
Value allocated to the Variable Accounts.
Cash Surrender Value. The Cash Surrender Value of your Policy equals your
Accumulated Value less the surrender charge. Thus, your Accumulated Value will
exceed your Policy's Cash Surrender Value by the amount of the surrender
charge. Once the surrender charge has expired, your Accumulated Value will
equal the Cash Surrender Value.
Net Cash Surrender Value. The Net Cash Surrender Value of your Policy equals
your Cash Surrender Value less any outstanding Policy Debt. You can surrender
your Policy at any time while the Insured is living and receive your Net Cash
Surrender Value. See "Surrender".
DETERMINATION OF ACCUMULATED VALUE
The Accumulated Value will vary to a degree that depends upon several
factors, including investment performance of the Variable Accounts to which
Accumulated Value has been allocated, payment of premiums, the amount of any
outstanding Policy Debt, transfers, withdrawals, and the charges assessed in
connection with the Policy.
The amounts allocated to the Variable Accounts will be invested in shares of
the corresponding Portfolio of the Fund. The investment performance of each
Variable Account will reflect increases or decreases in the net asset value
per share of the corresponding Portfolio and any dividends or distributions
declared by a Portfolio. Any dividends or distributions from any Portfolio of
the Fund will be automatically reinvested in shares of the same Portfolio,
unless we, on behalf of the Separate Account, elect otherwise.
Assets in the Variable Accounts are divided into accumulation units, which
are a measure of value used for bookkeeping purposes. When you allocate net
premiums to a Variable Account, your Policy is credited with accumulation
units. In addition, other transactions including loans, a surrender,
withdrawals, transfers, and assessment of charges against your Policy affect
the number of accumulation units credited to your Policy. The number of units
credited or debited in connection with any such transaction is determined by
dividing the dollar amount of such transaction by the unit value of the
affected Variable Account. The unit value of each Variable Account is
determined on each Valuation Date at or about 4:00 p.m. Eastern time. The
number of units credited will not change because of subsequent changes in unit
value.
The accumulation unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated
by adjusting the unit value from the previous Valuation Date for (1) the
investment performance of the Variable Account, which is based upon the
investment performance of the corresponding Portfolio of the Fund and includes
expenses related to the Portfolio's management, (2) any dividends or
distributions paid by the corresponding Portfolio, and (3) the charges, if
any, we may assess for income taxes attributable to the operation of the
Variable Account.
POLICY LOANS
You may borrow money from us using your Policy as the only security for the
loan by submitting a proper written request to our Home Office. We may in our
discretion permit loans to be made by telephone if a properly completed
Authorization For Telephone Requests has been filed at our Home Office. A loan
may be taken any time your Policy is in force. The minimum loan that can be
taken at any time is $200. The maximum amount that can be borrowed at any time
is the greater of (1) 90% of the Accumulated Value, less any Policy Debt, and
less any surrender charges that would have been imposed if the Policy were
surrendered on the date the loan is taken or (2) 100% of the product of
(a X b/c - d) where (a) equals the Policy's Accumulated Value less any
surrender charge that would be imposed if the Policy were surrendered on the
date the loan is taken and less
23
<PAGE>
12 times the current monthly deduction; (b) equals 1 plus the annual loan
interest rate credited (1.03); (c) equals 1 plus the annual loan interest rate
currently charged (1.0325); and (d) equals any existing Policy Debt.
When you take a loan, an amount equal to the loan is transferred out of your
Accumulated Value in the Investment Options into the Loan Account to secure
the loan. Unless you request otherwise, loan amounts will be deducted from the
Investment Options in the proportion that each bears to your Accumulated Value
less Policy Debt.
The Policy loan annual effective interest rate maximum is 3.25%. We will
credit interest monthly on amounts held in the Loan Account to secure the loan
at an annual effective rate of 3.0%.
You may repay all or part of the loan at any time while your Policy is in
force. Interest on a loan is accrued daily and is due for the prior year on
each Policy Anniversary. If interest is not paid when due, it will be added to
the amount of the loan principal and interest will begin accruing thereon from
that date. An amount equal to the loan interest charged will be transferred to
the Loan Account from the Investment Options on a proportional basis.
Unless you request otherwise, any loan repayment will be transferred into
the Investment Options in accordance with your most recent premium allocation
instructions. However, we reserve the right to first transfer repayments from
the Loan Account to each Fixed Option up to the amount that was originally
borrowed. Any excess over such amount will be transferred to the Variable
Accounts relative to your most recent instructions. In addition, on each
Policy Anniversary, any interest earned on the loan balance held in the Loan
Account will be transferred to each of the Investment Options in accordance
with your most recent premium allocation instructions. Unless you request
otherwise, in writing, any payment we receive from you while you have a loan
outstanding will be first considered a loan repayment. However, certain states
may require your payments to be considered premium payments in the absence of
specific instructions from you.
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 Options on the loaned amount. Thus a loan, whether or not
repaid, will have a permanent effect on your Policy's values and may have an
effect on the amount and duration of the death benefit. If not repaid, your
Policy Debt will be deducted from the amount of death benefit paid upon the
death of the Insured, the Cash Surrender Value upon surrender or maturity, or
the refund of premium upon exercise of the Free-Look Right.
A loan may affect the length of time your Policy remains in force. Your
Policy will lapse when Accumulated Value minus Policy Debt is insufficient to
cover the monthly deduction against your Policy's Accumulated Value on any
Monthly Payment Date and the minimum payment required is not made during the
Grace Period. Moreover, your Policy may enter the Grace Period more quickly
when a loan is outstanding, because the loaned amount is not available to
cover the monthly deduction. Additional payments or repayment of a portion of
Policy Debt may be required to keep the Policy in force. See "Lapse".
A loan will not be treated as a distribution from your Policy and will not
result in taxable income to you unless your Policy is a modified endowment
contract, or unless the Policy is surrendered or upon maturity or lapse of the
Policy, in which case a loan will be treated as a distribution that may give
rise to taxable income.
For information on the tax treatment of loans, see "Federal Income Tax
Considerations".
SURRENDER
You may fully surrender your Policy at any time during the life of the
Insured. The amount received in the event of a full surrender is your Policy's
Net Cash Surrender Value, which is equal to your Accumulated Value less any
applicable surrender charge and less any outstanding Policy Debt.
You may surrender your Policy by sending a written request together with
your Policy to our Home Office. The proceeds will be determined as of the end
of the Valuation Period during which your request for a surrender
24
<PAGE>
is received. You may elect to have the proceeds paid in cash or applied under
a payment plan offered under the Policy. See "Payment Plan". For information
on the tax effects of a surrender of a Policy, see "Federal Income Tax
Considerations".
WITHDRAWALS
Upon written request on or after the first policy anniversary while the
insured is living, you may withdraw a portion of the Net Cash Surrender Value
of this policy. The portion of the first withdrawal in each of the first 15
Policy Years of up to 10% of the cumulative premiums paid will not reduce the
Face Amount under your Policy. The excess of any withdrawal over this amount
may cause a reduction in Face Amount if the Death Benefit Option is Option A,
as described below.
Withdrawals must be for at least $200, and your Policy's Net Cash Surrender
Value after the withdrawal must be at least $500. If there is any Policy Debt,
the maximum withdrawal is limited to the excess, if any, of the Cash Surrender
Value immediately prior to the withdrawal over the result of the Policy Debt
divided by 90%.
You may make a withdrawal by submitting a proper written request to our Home
Office. As of the effective date of any withdrawal, your Accumulated Value,
Cash Surrender Value, and Net Cash Surrender Value will be reduced by the
amount of the withdrawal. The amount of the withdrawal will be allocated
proportionately to your Accumulated Value in the Investment Options unless you
request otherwise. If the Insured dies after the request for a withdrawal is
sent to us and prior to the withdrawal being effected, the amount of the
withdrawal will be deducted from the death benefit proceeds, which will be
determined without taking into account the withdrawal. A withdrawal fee of
$25.00 will be deducted from your Accumulated Value for a withdrawal. (See
"Charges and Deductions.")
Unless otherwise specified by you, in writing, no withdrawal request will be
accepted by us if the withdrawal would cause your Policy to be treated as a
modified endowment contract.
Withdrawals and Face Amount
A withdrawal may reduce the Face Amount of a Policy for which the Owner has
selected Death Benefit Option A. A withdrawal will first reduce the excess of
the Guideline Minimum Death Benefit over the Face Amount, if any. A withdrawal
in excess of this amount will reduce the Face Amount by the excess amount
withdrawn.
A withdrawal will not affect the Face Amount of a Policy on which the Owner
has selected Death Benefit Option B or C.
Withdrawals and Death Benefit
If your Policy's death benefit is greater than the Guideline Minimum Death
Benefit, the withdrawal will reduce the death benefit by the amount of the
withdrawal. However, if your Policy's death benefit is equal to the Guideline
Minimum Death Benefit applicable to the Insured, a withdrawal may cause the
death benefit to decrease by an amount greater than the amount of the
withdrawal. See "Death Benefit".
For information on the tax treatment of withdrawals, see "Federal Income Tax
Considerations".
RIGHT TO EXAMINE A POLICY--FREE-LOOK RIGHT
You have a Free-Look Right, under which your Policy may be returned within
10 days after you receive it (15 days in Colorado; 20 days in North Dakota;
and 30 days if you are a resident of California and are age 60 or older).
Certain states require different Free-Look Rights if you purchase the Policy
in exchange for another policy, in which case we will notify you of your
Right. It can be mailed or delivered to us or our agent. The returned Policy
will be treated as if we never issued it and we will promptly refund any
charges deducted from premiums received, any net premiums received allocated
to the Fixed Options, plus the sum of your Policy's
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Accumulated Value allocated to the Variable Accounts as of the end of the
Valuation Period in which we receive your Policy, plus any Policy charges and
fees deducted from your Policy's Accumulated Value in the Variable Accounts.
If you have taken a loan during the Free-Look Period, your Policy Debt will be
deducted from the amount refunded.
If you reside in a state where applicable law so requires, we will refund
premiums received to you if you choose to exercise the Free-Look Right. Before
the Free-Look Transfer Date, net premiums will be allocated to the Money
Market Variable Account, which invests in the Money Market Portfolio of the
Fund (except for amounts allocated to the Loan Account to secure a Policy
loan). See "Allocation of Net Premiums".
LAPSE
Your Policy will lapse only when your Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction on a Monthly Payment Date,
and a Grace Period expires without you making a sufficient payment. If
Accumulated Value less Policy Debt is insufficient to cover the current
monthly deduction on a Monthly Payment Date, you must pay during the Grace
Period a minimum of three times the full monthly deduction due on the Monthly
Payment Date when the insufficiency occurred to avoid termination of your
Policy. We will not accept any payment if it would cause your total premium
payments to exceed the maximum permissible premium for your Policy's Face
Amount under the IRC. This is unlikely to occur unless you have outstanding
Policy Debt, in which case you could repay a sufficient portion of the Policy
Debt to avoid termination. In this instance, you may wish to repay a portion
of Policy Debt to avoid recurrence of the potential lapse. If premium payments
have not exceeded the maximum permissible premiums for your Policy's Face
Amount, you may wish to make larger or more frequent premium payments to avoid
recurrence of the potential lapse.
If your Accumulated Value less Policy Debt is insufficient to cover the
monthly deduction on a Monthly Payment Date, we will deduct the amount that is
available. We will notify you (and any assignee of record) of the payment
required to keep your Policy in force. You will then have a "Grace Period" of
61 days, measured from the date the notice is sent, to make the required
payment. Your Policy will remain in force through the Grace Period. Failure to
make the required payment within the Grace Period will result in termination
of coverage under your Policy, and your Policy will lapse with no value. If
the required payment is made during the Grace Period, any premium paid will be
allocated among the Investment Options in accordance with your current premium
allocation instructions. Any monthly deduction due will be charged to the
Investment Options on a proportionate basis. If the Insured dies during the
Grace Period, the death benefit proceeds will equal the amount of the death
benefit immediately prior to the commencement of the Grace Period, reduced by
any unpaid monthly deductions and any Policy Debt.
REINSTATEMENT
We will reinstate a lapsed Policy (but not a Policy which has been
surrendered for its Net Cash Surrender Value) at any time within five years
after the end of the Grace Period provided we receive the following: (1) your
written application, (2) evidence of insurability satisfactory to us, and (3)
payment of all monthly deductions that were due and unpaid during the Grace
Period, and payment of a premium at least sufficient to keep the Policy in
force for three months after the date of reinstatement.
When your Policy is reinstated, your Accumulated Value will be equal to your
Accumulated Value on the date of the lapse subject to the following: If your
Policy is reinstated after your first Monthly Payment Date following lapse,
your Accumulated Value will be reduced by the amount of Policy Debt on the
date of lapse and no Policy Debt will exist on the date of the reinstatement.
If your Policy is reinstated on your Monthly Payment Date next following
lapse, any Policy Debt on the date of lapse will also be reinstated. No
interest on amounts held in the Loan Account to secure Policy Debt will be
paid or credited between lapse and reinstatement. Reinstatement will be
effective as of your Monthly Payment Date on or next following the date of our
approval, and your Accumulated Value minus, if applicable, Policy Debt will be
allocated among the Investment Options in accordance with your most recent
premium allocation instructions.
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CHARGES AND DEDUCTIONS
PREMIUM LOAD
A premium load is deducted from each premium payment under your Policy prior
to allocation of the net premium to your Accumulated Value. The premium load
consists of the following items:
Sales Load. The sales load is equal to 3.50% of each premium paid.
The sales load is deducted to compensate us for the cost of distributing
the Policies. The amount we derive from the sales load is not expected to
be sufficient to cover the sales and distribution expenses in connection
with the Policies. If surrendered within 10 years after issuance, the
Policy will also be subject to a surrender charge. See "Surrender Charge,"
below. To the extent that sales and distribution expenses exceed sales
loads, such expenses may be recovered from other charges, including amounts
derived indirectly from the charge for mortality and expense risks and from
mortality gains.
We may reduce or waive the sales load on Policies sold to our directors
or employees, any of our affiliates or to trustees or any employees of the
Fund.
State and Local Premium Tax Charge. A charge equal to 2.35% is assessed
against each premium to pay certain applicable state and local premium
taxes. Premium taxes vary from state to state, and in some instances, among
municipalities. The 2.35% rate approximates the average tax rate expected
to be paid on premiums from all states. We reserve the right to change the
premium tax charge to reflect any changes in the law. We do not expect to
profit from this charge.
Federal Tax Charge. A charge equal to 1.50% is assessed against each
premium to pay certain applicable federal taxes. We reserve the right to
change the Federal Tax Charge to reflect any changes in the law.
DEDUCTIONS FROM ACCUMULATED VALUE
A charge called the monthly deduction is deducted from your Accumulated
Value in the Investment Options beginning on the Monthly Payment Date on or
next following the date we first become obligated under your Policy and on
each Monthly Payment Date thereafter. Unless you request otherwise, in
writing, the monthly deduction will be deducted from the Investment Options on
a pro rata basis. The monthly deduction consists of the following items:
Cost of Insurance. This monthly charge compensates us for providing life
insurance coverage for the Insured. We may use any profits derived from this
charge for any lawful purpose. The amount of the charge is equal to a current
cost of insurance rate multiplied by the net amount at risk based on the death
benefit attributed to the Face Amount under your Policy at the beginning of
the Policy Month. The net amount at risk for these purposes is equal to the
amount of total death benefit of the Policy payable at the beginning of the
Policy Month divided by 1.002466 (a discount factor to account for return
deemed to be earned during the month) less your Accumulated Value at the
beginning of your Policy Month before the monthly deduction is due, including
any interest credited to the Loan Account.
If there have been increases in Face Amount, then the net amount at risk
will be proportionately allocated to each increase according to the Face
Amount attributed to each increase that is in force as of your Monthly Payment
Date.
The Policy's cost of insurance rates will not exceed certain guaranteed
rates shown in the Policy's Specifications. The guaranteed rates are no
greater than certain of the 1980 Commissioners Standard Ordinary Mortality
Tables (and where unisex cost of insurance rates apply, the 1980 Commissioners
Ordinary Mortality Table B). These rates are based on the Age and underwriting
class of the Insured. They are also based on the sex of the Insured, except
that unisex rates are used where appropriate under applicable law, including
in the state of Montana and in Policies purchased by employers and employee
organizations in connection with employment-related insurance or benefit
programs. As of the date of this prospectus, we charge "current rates" that
are lower (i.e., less expensive) than the guaranteed rates, and we may also
charge current rates in the future. The current rates vary with, among other
things, the Age, gender, where permissable, and underwriting class of the
Insured. In addition, they also vary with the Insured's smoking status, and
the policy duration. The cost of insurance rate generally increases with the
Age of the Insured.
You have the option to elect a guaranteed period during which, we will
guarantee our current Cost of Insurance Rates as of the date the Policy is
issued. If the Insured is Issue Age 65 or under and is in our "standard" risk
classification, you may elect a 10 year guarantee period. If the Insured is
Issue Age 66 or older
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and a "standard" risk classification; or the Policy is issued with a
"substandard risk classification" at any Issue Age, you may elect a 5 year
guarantee period. If the 10 year or 5 year period, respectively, are not
elected, the Policy will be issued with a 0 year guarantee period. This
election must be made at time of application and cannot be changed once the
Policy has been issued.
If there are Face Amount increases, the Cost of Insurance Rates will have a
new guaranteed period applicable to the amount of the increase based on our
then-current Cost of Insurance Rates. If the Insured is Age 65 or under at the
time of increase and is in our "standard" risk classification, you may elect a
10 year guaranteed period; otherwise a 5 year guaranteed period will apply.
There is no cost for increasing the guaranteed period to 10 years.
If there have been increases in your Face Amount, then for purposes of
calculating the cost of insurance charge, your Accumulated Value will first be
applied to the initial Face Amount. If your Accumulated Value exceeds the
initial Face Amount divided by 1.002466, the excess will then be applied to
any increase in Face Amount in the order of the increases. If the death
benefit equals Accumulated Value multiplied by the applicable death benefit
percentage, any increase in Accumulated Value will cause an automatic increase
in the death benefit. The underwriting class and duration for such increase
will be the same as that used for the most recent increase in Face Amount
(that has not been eliminated through a subsequent decrease in Face Amount).
Administrative Charge. A monthly administrative charge is deducted equal to
$7.50 per month until Age 100. The administrative charge is assessed to
reimburse us for the expenses associated with administration and maintenance
of the Policies. We do not expect to profit from this charge.
M&E Risk Charge. The M&E Risk Charge is to compensate us for the risk we
assume that mortality expenses and other costs of providing your Policy will
be greater than estimated by us. The M&E Risk Charge is a monthly charge that
consists of two components: the M&E Risk Face Amount Charge and the M&E Risk
Asset Charge.
During the first ten Policy Years, the M&E Risk Face Amount Charge will be
assessed at a rate determined with reference to the initial Face Amount of the
Policy. The rate will be equal to a Face Amount Component Factor per $1,000 of
initial Face Amount. Face Amount Component Factors are shown in Appendix A,
and they are based upon the Age of the Insured at the Policy Date. This
component is not assessed on the initial Face Amount after the tenth Policy
Year.
If there have been increases in the Face Amount, each increase will have a
corresponding M&E Risk Face Amount Charge related to the amount of the
increase. These charges will be specified in a supplemental schedule of
benefits at the time of the increase, and will continue for 10 years from the
date of the increase. If your Policy's Face Amount decreases, your M&E Risk
Face Amount Charge will remain the same.
For example, for a Male Insured Age 45 who is a non-smoker and who purchases
a Policy with a Face Amount of $350,000, the monthly M&E Risk Face Amount
Charge, assuming standard underwriting risk, would be $126.00 under Death
Benefit Options A or C and $181.30 under Death Benefit Option B. If the same
Policy is issued with nonstandard underwriting risk, the amount of the M&E
Risk Face Amount Charges would be higher. Please refer to Appendix A for more
information.
In addition, a monthly M&E Risk Asset Charge is assessed at an annual rate
equal to .45% of the first $25,000 of unloaned Accumulated Value, plus a
charge of .05% of unloaned Accumulated Value above $25,000 to the Insured's
Age 100. Unloaned Accumulated Value is based upon the value in the Investment
Options at the beginning of the Monthly Payment Date and after the allocation
of new net premium, withdrawal and/or loan on that day, but before any monthly
deductions.
The M&E Risk Charge is assessed to compensate us for assuming certain
mortality and expense risks under the Policies. The mortality risk assumed is
that Insureds, as a group, may live for a shorter period of time than
estimated and, therefore, the cost of insurance charges specified in the
Policy will be insufficient to meet actual claims. The expense risk assumed is
that other expenses incurred in issuing and administering the Policies and
operating the Separate Account will be greater than the charges assessed for
such expenses. We will realize a gain from this charge to the extent it is not
needed to provide the mortality benefits and expenses under the
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Policies, and will realize a loss to the extent the charge is not sufficient.
We may use any profit derived from this charge for any lawful purpose,
including any distribution expenses not covered by the sales load or sales
surrender charge. See "Surrender Charge," below.
Optional Insurance Benefits Charges. The monthly deduction will include
charges for any optional insurance benefits added to the Policy by Rider. A
Rider may affect your charges under the Policy. See "Optional Insurance
Benefits and Other Policies".
SURRENDER CHARGE
A surrender charge may be deducted from your Accumulated Value upon
surrender of your Policy. The surrender charge is used to help pay for
underwriting, policy issues, and sales and distribution costs on the policies.
The initial surrender charge is equal to a specified amount that varies with
the Age and risk classification of the Insured, and the Death Benefit Option
selected, for each $1,000 of a Policy's initial Face Amount in accordance with
the schedule in Appendix B. The charge remains level for the first Policy
Month, and then will decrease by 0.8403% per month to zero at the end of the
120th month.
If there have been increases in the Face Amount, each increase will have a
corresponding surrender charge related to the amount of the increase. These
charges will be specified in a supplemental schedule of benefits at the time
of the increase.
There is no reduction of surrender charge when the Face Amount of a Policy
is decreased.
For example, if a Male Insured Age 45 who is a non-smoker purchases a Policy
with a Face Amount of $350,000, the surrender charge, assuming standard
underwriting risk, would be $724.50 under Death Benefit Options A or C, or
$1,029.00 under Death Benefit Option B if surrendered at the end of the first
Policy Month, $657.73 and $933.88, respectively, if surrendered at the end of
the first Policy Year, and $365.29 and $518.82, respectively, if surrendered
at the end of the fifth Policy Year. The surrender charge becomes $0 on the
10th Policy Anniversary.
The maximum surrender charge under a Policy, per $1,000 of original Face
Amount, is $5.71 for a standard classification and $6.00 for a nonstandard
classification.
WITHDRAWAL CHARGE
A withdrawal fee of $25 will be deducted proportionately from the
Accumulated Value in the Investment Options each time a Withdrawal occurs.
CORPORATE AND OTHER PURCHASERS
The Policy is available for individuals and for corporations and other
institutions. For corporate or other group or sponsored arrangements
purchasing one or more Policies, we may reduce the amount of the surrender
charge or other charges where the expenses associated with the sale of, or the
underwriting or other administrative costs associated with the Policy or
Policies are reduced. Sales, underwriting or other administrative expenses may
be reduced for reasons such as expected economies resulting from a corporate
purchase or a group or sponsored arrangement, from the amount of the initial
premium payment or payments, or the amount of projected premium payments.
OTHER CHARGES
We may charge the Variable Accounts for federal income taxes incurred by us
that are attributable to the Separate Account and its Variable Accounts or to
our operations with respect to the Policies. No such charge is currently
assessed. See "Charge for Our Income Taxes".
We will bear the direct operating expenses of the Separate Account. Each
Variable Account available to you purchases shares of the corresponding
Portfolio of the underlying Fund. The Fund and each of its Portfolios incur
certain charges including the investment advisory fee and certain operating
expenses. The Fund is governed by its Board of Trustees. The Fund's expenses
are not fixed or specified under the terms of the Policy, and these
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expenses may vary from year to year. The advisory fees and other expenses are
more fully described in "Summary of the Policy: Fund Annual Expenses After
Expense Limitation" and in the prospectus of the Fund.
M Fund and each of its Portfolios incur certain charges, including the
investment advisory fee, and certain operating expenses. M Fund is governed by
its Board of Directors. M Fund's expenses are not fixed or specified under the
terms of the Policy, and these expenses may vary from year to year. The
advisory fees and other expenses are more fully described in "Summary of the
Policy: M Fund Annual Expenses After Expense Limitation" and in the prospectus
of M Fund.
We may use the profits derived from any charge for any lawful purpose,
including any distribution expenses not covered by the sales load or surrender
charge.
GUARANTEE OF CERTAIN CHARGES
We guarantee that certain charges will not increase. This includes the
charge for mortality and expense risks, the administrative charge with respect
to the guaranteed rates described above, the sales load, the guaranteed cost
of insurance rates, and the surrender charge.
OTHER INFORMATION
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion provides a general description of the federal
income tax considerations relating to the Policy. This discussion is based
upon our understanding of the present federal income tax laws as they are
currently interpreted by the Internal Revenue Service ("IRS"). This discussion
is not intended as tax advice. Because of the inherent complexity of such laws
and the fact that tax results will vary according to the particular
circumstances of the individual involved, tax advice may be needed by a person
contemplating the purchase of the Policy. It should, therefore, be understood
that these comments concerning federal income tax consequences are not an
exhaustive discussion of all tax questions that might arise under the Policy
and that special rules which are not discussed herein may apply in certain
situations. Moreover, no representation is made as to the likelihood of
continuation of federal income tax or estate or gift tax laws or of the
current interpretations by the IRS or the courts. Future legislation may
adversely affect the tax treatment of life insurance policies or other tax
rules described in this discussion or that relate directly or indirectly to
life insurance policies. Finally, these comments do not take into account any
state or local income tax considerations which may be involved in the purchase
of the Policy.
While we believe that the Policy meets the statutory definition of life
insurance under Section 7702 of the Internal Revenue Code ("IRC") and hence
will receive federal income tax treatment consistent with that of traditional
fixed life insurance, the area of the tax law relating to the definition of
life insurance does not explicitly address all relevant issues (including, for
example, the treatment of substandard risk Policies and Policies with term
insurance on the Insured). We reserve the right to make changes to the Policy
if changes are deemed appropriate by us to attempt to assure qualification of
the Policy as a life insurance contract. If a Policy were determined not to
qualify as life insurance, the Policy would not provide the tax advantages
normally provided by life insurance. The discussion below summarizes the tax
treatment of life insurance contracts.
The death benefit under a Policy should be excludable from the gross income
of the Beneficiary (whether the Beneficiary is a corporation, individual or
other entity) under IRC Section 101(a)(1) for purposes of the regular federal
income tax and you generally should not be deemed to be in constructive
receipt of the cash values, including increments thereof, under the Policy
until a full surrender thereof, maturity of the Policy, or a withdrawal. In
addition, certain Policy loans may be taxable in the case of Policies that are
modified endowment contracts. PROSPECTIVE OWNERS THAT INTEND TO USE POLICIES
TO FUND DEFERRED COMPENSATION ARRANGEMENTS FOR THEIR EMPLOYEES ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES OF SUCH
ARRANGEMENTS. PROSPECTIVE CORPORATE OWNERS SHOULD CONSULT THEIR TAX ADVISORS
ABOUT THE TREATMENT OF LIFE INSURANCE IN THEIR PARTICULAR CIRCUMSTANCES FOR
PURPOSES OF THE ALTERNATIVE MINIMUM TAX APPLICABLE TO CORPORATIONS AND THE
ENVIRONMENTAL TAX UNDER IRC SECTION 59A. Changing the Policy Owner may also
have tax consequences. Exchanging a Policy for another involving the same
Insured generally will not result in the
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recognition of gain or loss according to IRC Section 1035(a). Changing the
Insured under a Policy will, however, not be treated as a tax-free exchange
under IRC Section 1035, but rather as a taxable exchange.
Diversification Requirements. To comply with regulations under Section
817(h) of the IRC, each Portfolio of the Fund is required to diversify its
investments. For details on these diversification requirements, see "What is
the Federal Income Tax Status of the Fund" in the Fund's prospectus.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income
and gains from the separate account assets would be includable in the variable
policy owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor [i.e. the Policy Owner], rather than the insurance company,
to be treated as the owner of the assets in the account." This announcement
also stated the guidance would be issued by way of regulations or rulings on
the "extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets." As of
the date of this prospectus, no such guidance has been issued.
The ownership rights under your Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, you have additional flexibility in allocating premium payments and
Policy values. These differences could result in your being treated as the
owner of your Policy's pro rata portion of the assets of the Separate Account.
In addition, we do not know what standards will be set forth, if any, in the
regulations or ruling which the Treasury Department has stated it expects to
issue. We therefore reserve the right to modify the Policy, as deemed
appropriate by us, to attempt to prevent you from being considered the owner
of your Policy's pro rata share of the assets of the Separate Account.
Moreover, in the event that regulations are adopted or rulings are issued,
there can be no assurance that the Portfolios will be able to operate as
currently described in the Prospectus, or that the Fund will not have to
change any Portfolio's investment objective or investment policies.
Tax Treatment of Policies. IRC Section 7702A defines a class of life
insurance contracts referred to as modified endowment contracts. Under this
provision, the Policies will be treated for tax purposes in one of two ways.
Policies that are not classified as modified endowment contracts will be taxed
as conventional life insurance contracts, as described below. Taxation of pre-
death distributions from Policies that are classified as modified endowment
contracts and that are entered into on or after June 21, 1988 is somewhat
different, as described below.
A life insurance contract becomes a "modified endowment contract" if, at any
time during the first seven contract years, the sum of actual premiums paid
exceeds the sum of the "seven-pay premium." Generally, the "seven-pay premium"
is the level annual premium, such that if paid for each of the first seven
years, will fully pay for all future death and endowment benefits under a
contract. For example, if the "seven-pay premiums" were $1,000, the maximum
premiums that could be paid during the first seven years to avoid "modified
endowment" treatment would be $1,000 in the first year; $2,000 through the
first two years and $3,000 through the first three years, etc. Under this
test, a Select Exec II Policy may or may not be a modified endowment contract,
depending on the amount of premiums paid during each of the Policy's first
seven contract years. Changes in the policy, including changes in death
benefits, may require "retesting" of a Policy to determine if it is to be
classified as a modified endowment contract.
Conventional Life Insurance Policies. If a Policy is not a modified
endowment contract, upon full surrender or maturity of a Policy for its Net
Cash Surrender Value, the excess, if any, of the Net Cash Surrender Value plus
any outstanding Policy Debt over the cost basis under a Policy will be treated
as ordinary income for federal income tax purposes. Such a Policy's cost basis
will usually equal the premiums paid less any premiums previously recovered in
withdrawals. Under IRC Section 7702, if a withdrawal occurring within 15 years
of the Policy Date is accompanied by a reduction in benefits under the Policy,
special rules apply to determine whether part or all of the cash received is
paid out of the income of the Policy and is taxable. Cash distributed to a
Policy Owner on withdrawals occurring more than 15 years after the Policy Date
will be taxable as ordinary income to the Policy Owner to the extent that it
exceeds the cost basis under a Policy.
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We also believe that loans received under Policies that are not modified
endowment contracts will be treated as indebtedness of the Owner for federal
income tax purposes, and that no part of any loan under the Policy will
constitute income to the Owner unless the Policy is surrendered or matures or
lapses. CONSULT WITH YOUR TAX ADVISOR ON WHETHER INTEREST PAID (OR ACCRUED BY
AN ACCRUAL BASIS TAXPAYER) ON A LOAN UNDER A POLICY THAT IS NOT A MODIFIED
ENDOWMENT CONTRACT MAY BE DEDUCTIBLE. Tax law provisions may limit the
deduction of interest payable on loan proceeds that are used to purchase or
carry certain life insurance policies. Also, new tax law has been proposed in
1998 which contains a provision that could adversely affect the owners of
certain "corporate-owned life insurance policies". (As of the date of this
Prospectus, this proposal has not been introduced as a bill and may or may not
ever become law as currently drafted.) Present law provides that a portion of
the interest deductions on indebtedness is reduced if the taxpayer is a direct
or indirect beneficiary of certain life insurance, endowment, or annuity
contracts (even interest on indebtedness that is completely unrelated to the
contract). This rule does not apply under present law if the contract was
issued on 20% owners, officers or employees. The proposal would repeal the
exception other than for 20% owners for taxable years beginning after the date
of enactment. The effect of the proposal would be to increase the after-tax
cost of such policies in most cases. If you have questions regarding the
proposal, please consult your tax advisor.
Modified Endowment Contracts. Pre-death distributions from modified
endowment contracts may give rise to taxable income. Upon full surrender or
maturity of the Policy, the Policy Owner would recognize ordinary income for
federal income tax purposes equal to the amount by which the Net Cash
Surrender Value plus Policy Debt exceeds the investment in the Policy (usually
the premiums paid plus certain pre-death distributions that were taxable less
any premiums previously recovered that were excludable from gross income).
Upon withdrawals and Policy loans, the Policy Owner would recognize ordinary
income to the extent allocable to income (which includes all previously non-
taxed gains) on the Policy. The amount allocated to income is the amount by
which the Accumulated Value of the Policy exceeds investment in the Policy
immediately before the distribution. Under a tax law provision, if two or more
policies which are classified as modified endowment contracts are purchased
from any one insurance company, including us, during any calendar year, all
such policies will be aggregated for purposes of determining the portion of
the pre-death distributions allocable to income on the policies and the
portion allocable to investment in the policies.
Amounts received under a modified endowment contract that are included in
gross income are subject to an additional tax equal to 10% of the amount
included in gross income, unless an exception applies. The 10% additional tax
does not apply to any amount received: (i) when the taxpayer is at least 59
1/2 years old; (ii) which is attributable to the taxpayer becoming disabled;
or (iii) which is part of a series of substantially equal periodic payments
(not less frequently than annually) made for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of the taxpayer
and his or her beneficiary.
If a Policy was not originally a modified endowment contract but becomes
one, under Treasury Department regulations which are yet to be prescribed,
pre-death distributions received in anticipation of a failure of a Policy to
meet the seven-pay premium test are to be treated as pre-death distributions
from a modified endowment contract (and, therefore, are to be taxable as
described above) even though, at the time of the distribution(s) the Policy
was not yet a modified endowment contract. For this purpose, pursuant to the
IRC, any distribution made within two years before the Policy is classified as
a modified endowment contract shall be treated as being made in anticipation
of the Policy's failing to meet the seven-pay premium test.
It is unclear whether interest paid (or accrued by an accrual basis
taxpayer) on Policy Debt with respect to a modified endowment contract
constitutes interest for federal income tax purposes. CONSULT YOUR TAX
ADVISOR. Tax law provisions may limit the deduction of interest payable on
loans and on loan proceeds that are used to purchase or carry certain life
insurance policies.
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 Internal Revenue Service has issued proposed
regulations and is expected to issue final regulations in the near future
under which accelerated living benefits that meet the 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 Code.
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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 ADVISER.
Reasonableness Requirement for Charges. Another provision of the tax law
deals with allowable charges for mortality costs and other expenses that are
used in making calculations to determine whether a contract qualifies as life
insurance for federal income tax purposes. For life insurance policies entered
into on or after October 21, 1988, these calculations must be based upon
reasonable mortality charges and other charges reasonably expected to be
actually paid. The Treasury Department has issued proposed regulations and is
expected to promulgate temporary or final regulations governing reasonableness
standards for mortality charges. While we believe under IRS pronouncements
currently in effect that the mortality costs and other expenses used in making
calculations to determine whether the Policy qualifies as life insurance meet
the current requirements, complete assurance cannot be given that the IRS
would necessarily agree. It is possible that future regulations will contain
standards that would require us to modify our mortality charges used for the
purposes of the calculations in order to retain the qualification of the
Policy as life insurance for federal income tax purposes, and we reserve the
right to make any such modifications.
Other. Federal estate and gift and state and local estate, inheritance, and
other tax consequences of ownership or receipt of Policy proceeds depend on
the jurisdiction and the circumstances of each Owner or Beneficiary.
FOR COMPLETE INFORMATION ON FEDERAL, STATE, LOCAL AND OTHER TAX
CONSIDERATIONS, A QUALIFIED TAX ADVISER SHOULD BE CONSULTED.
WE DO NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY POLICY.
CHARGE FOR OUR INCOME TAXES
For federal income tax purposes, variable life insurance generally is
treated in a manner consistent with traditional fixed life insurance. We will
review the question of a charge to the Separate Account or the Policy for our
federal income taxes periodically. A charge may be made for any federal income
taxes incurred by us that are attributable to the Separate Account or to our
operations with respect to the Policy. Charges might become necessary if our
tax treatment is ultimately determined to be other than what we currently
believe it to be, if there are changes made in the federal income tax
treatment of variable life insurance at the insurance company level, or if
there is a change in our tax status.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, we
reserve the right to charge the Account for such taxes, if any, attributable
to the Account.
VOTING OF FUND SHARES
In accordance with our view of present applicable law, we will exercise
voting rights attributable to the shares of each Portfolio of the Fund or M
Fund held in the Variable Accounts at any regular and special meetings of the
shareholders of the Fund or of M Fund on matters requiring shareholder voting
under the Investment Company Act of 1940 or by the Fund or M Fund. We will
exercise these voting rights based on instructions received from persons
having the voting interest in corresponding Variable Accounts of the Separate
Account. However, if the Investment Company Act of 1940 or any regulations
thereunder should be amended, or if the present interpretation thereof should
change, and as a result we determine that we are permitted to vote the shares
of the Fund or M Fund in its own right, we may elect to do so.
You are the person having the voting interest under a Policy. Unless
otherwise required by applicable law, the number of votes as to which a Policy
Owner will have the right to instruct will be determined by dividing your
Accumulated Value in a Variable Account by the net asset value per share of
the corresponding Portfolio of the Fund or M Fund. Fractional votes will be
counted. The number of votes as to which you will have the
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right to instruct will be determined as of the date coincident with the date
established by the Fund or M Fund for determining shareholders eligible to
vote at the meeting of the Fund or M 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 or M Fund based upon
the instructions received from Policy Owners. Voting instructions may be cast
in person or by proxy.
If there are shares of a Portfolio held by a Variable Account for which we
do not receive timely voting instructions, we will vote those shares in the
same proportion as the voting instructions for all other shares of that
Portfolio held by that Variable Account for which we have received timely
voting instructions. If we hold shares of a Portfolio in our General Account,
or hold unvoted shares in the Separate Account, and/or if any of our non-
insurance subsidiaries holds shares of a Portfolio, we will vote such shares
in the same proportion as other votes cast by all of our separate accounts, in
the aggregate.
DISREGARD OF VOTING INSTRUCTIONS
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that voting rights be
exercised so as to cause a change in the subclassification or investment
objective of a Portfolio or to approve or disapprove an investment advisory
contract. In addition, we may disregard voting instructions of changes
initiated by Policy Owners in the investment policy or the investment adviser
(or portfolio manager) of a Portfolio, provided that our disapproval of the
change is reasonable and is based on a good faith determination that the
change would be contrary to state law or otherwise inappropriate, considering
the Portfolio's objectives and purpose, and considering the effect the change
would have on us. In the event we do disregard voting instructions, a summary
of that action and the reasons for such action will be included in the next
report to Policy Owners.
CONFIRMATION STATEMENTS AND OTHER REPORTS TO OWNERS
A statement will be sent quarterly to you setting forth a summary of the
transactions which occurred during the quarter and indicating the death
benefit, Face Amount, Accumulated Value, Cash Surrender Value, and any Policy
Debt. In addition, the statement will indicate the allocation of Accumulated
Value among the Investment Options and any other information required by law.
Confirmations will be sent out upon premium payments, transfers, loans, loan
repayments, withdrawals, and surrenders. Confirmations of scheduled
transactions under dollar cost averaging, portfolio rebalancing and monthly
deductions will appear on your quarterly statements.
You will 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.
We will send to each Policy Owner any annual financial statements for M
Fund, which will include a list of the portfolio securities of M Fund, as
required by the Investment Company Act of 1940, and/or such other reports as
may be required by federal securities laws, that we receive from that fund.
SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to compliance with the law as then in effect,
to make additions to, deletions from, or substitutions for the securities that
are held by the Separate Account or any Variable Account or that the Separate
Account or any Variable Account may purchase. If shares of any or all of the
Portfolios of the Fund should no longer be available for investment, or if, in
the judgment of our management, further investment in shares of any or all
Portfolios of the Fund or M Fund should become inappropriate in view of the
purposes of the Policies, we may substitute shares of another Portfolio of the
Fund or M Fund or of a different fund for shares already purchased, or to be
purchased in the future under the Policies.
Where required, we will not substitute any shares attributable to your
interest in a Variable Account or the Separate Account without notice, your
approval, or prior approval of the Securities and Exchange Commission and
without following the filing or other procedures established by applicable
state insurance regulators.
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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 M Fund, or in shares of
another investment company, a portfolio thereof, or suitable investment
vehicle, with a specified investment objective. New Variable Accounts may be
established when, at our sole discretion, marketing needs or investment
conditions warrant, and any new Variable Accounts will be made available to
existing Policy Owners on a basis to be determined by us. We may also
eliminate one or more Variable Accounts if, in our sole discretion, marketing,
tax, or investment conditions so warrant. We may also terminate and liquidate
any Variable Account.
In the event of any such substitution or change, we may, by appropriate
endorsement, make such changes in this and other policies as may be necessary
or appropriate to reflect such substitution or change. If deemed by us to be
in the best interests of persons having voting rights under the Policies, the
Separate Account may be operated as a management investment company under the
Investment Company Act of 1940 or any other form permitted by law, it may be
deregistered under that Act in the event such registration is no longer
required, or it may be combined with other separate accounts of ours or an
affiliate of ours. Subject to compliance with applicable law, we also may
combine one or more Variable Accounts and may establish a committee, board, or
other group to manage one or more aspects of the operation of the Separate
Account.
REPLACEMENT OF LIFE INSURANCE OR ANNUITIES
The term "replacement" has a special meaning in the life insurance industry
and is described more fully below. Before you make your purchase decision,
Pacific Life wants you to understand how a replacement may impact your
existing plan of insurance.
A policy "replacement" occurs when a new policy or contract is purchased
and, in connection with the sale, an existing policy or contract is
surrendered, lapsed, forfeited, assigned to the replacing insurer, otherwise
terminated, or used in a financed purchase. A "financed purchase" occurs when
the purchase of a new life insurance policy or annuity contract involves the
use of funds obtained from the values of an existing life insurance policy or
annuity contract through withdrawal, surrender or loan.
There are circumstances in which replacing your existing life insurance
policy or annuity contract can benefit you. As a general rule, however,
replacement is not in your best interest. Accordingly, you should make a
careful comparison of the costs and benefits of your existing policy or
contract and the proposed policy or contract to determine whether replacement
is in your best interest.
CHANGES TO COMPLY WITH LAW
We reserve the right to make any change without your consent to the
provisions of the Policy to comply with, or give you the benefit of, any
federal or state statute, rule, or regulation, including but not limited to
requirements for life insurance contracts and modified endowment contracts
under the IRC, under regulations of the United States Treasury Department or
any state.
PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account
may appear in advertisements, sales literature, or reports to Policy Owners or
prospective purchasers. Performance information in advertisements or sales
literature may be expressed in any fashion permitted under applicable law,
which may include presentation of a change in a Policy Owner's Accumulated
Value attributable to the performance of one or more Variable Accounts, or as
a change in a Policy Owner's death benefit. Performance quotations may be
expressed as a change in a Policy Owner's Accumulated Value over time or in
terms of the average annual compounded rate of return on the Policy Owner's
Accumulated Value, based upon a hypothetical Policy in which premiums have
been allocated to a particular Variable Account over certain periods of time
that will include one year or from the commencement of operation of the
Variable Account. If a Portfolio has been in existence for a longer period of
time than its corresponding Variable Account, we may also present hypothetical
returns that the Variable Account would have achieved had it invested in its
corresponding Portfolio for periods through the commencement of operation of
the Portfolio. For the period that a particular Variable Account has been in
existence, the performance will be actual performance and not hypothetical in
nature. Any such quotation may
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reflect the deduction of all applicable charges to the Policy including
premium load, the cost of insurance, the administrative charge, and the
mortality and expense risk charge. The varying death benefit options will
result in different expenses for the cost of insurance, and the varying
expenses will result in different Accumulated Values. Since the Guideline
Minimum Death Benefit is related to the Accumulated Value, it will vary with
Accumulated Value. The cost of insurance charge varies according to the Ages
of the Insureds and therefore the cost of insurance charge reflected in the
performance for the hypothetical Policy is based on the hypothetical Insureds
and death benefit option assumed. The quotation may also reflect the deduction
of the surrender charge, if applicable, by assuming a surrender at the end of
the particular period, although other quotations may simultaneously be given
that do not assume a surrender and do not take into account deduction of the
surrender charge or other charges.
Performance information for a Variable Account may be compared, in
advertisements, sales literature, and reports to Policy Owners to: (i) other
variable life separate accounts, mutual funds, or investment products tracked
by research firms, ratings services, companies, publications, or persons who
rank separate accounts or investment products on overall performance or other
criteria; and (ii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from the purchase of a Policy. Reports and promotional
literature may also contain our rating or a rating of our claim-paying ability
as determined by firms that analyze and rate insurance companies and by
nationally recognized statistical rating organizations.
Performance information for any Variable Account of the Separate Account
reflects only the performance of a hypothetical Policy whose Accumulated Value
is allocated to the Variable Account during a particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives and policies, characteristics and quality
of the Portfolio of the Fund in which the Variable Account invests, and the
market conditions during the given period of time, and should not be
considered as a representation of what may be achieved in the future.
THE GENERAL ACCOUNT
You may allocate all or a portion of your net premium payments and transfer
Accumulated Value to the Fixed Account and/or the Fixed LT Account. All
amounts allocated to the Fixed Options become part of our General Account,
which consists of all assets owned by us other than those in the Separate
Account and our other separate accounts, and supports insurance and annuity
obligations. Subject to applicable law, we have sole discretion over the
investment of the assets of our General Account, and bear the associated
investment risk; you will not share in the investment experience of General
Account assets.
Because of exemptive and exclusionary provisions, interests in the Fixed
Options have not been registered under the Securities Act of 1933 and the
General Account has not been registered as an investment company under the
Investment Company Act of 1940. Accordingly, the Fixed Options or any
interests therein are generally not 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 Options. Disclosures regarding the Fixed
Options 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
Options, see the Policy itself.
GENERAL DESCRIPTION
You may elect to allocate net premium payments to the Fixed Account, the
Fixed LT Account, the Separate Account, or all three, subject to the
limitations described below. You may also transfer Accumulated Value from the
Variable Accounts to the Fixed Options, or from the Fixed Options to the
Variable Accounts, subject to the limitations described below. We guarantee
that the Accumulated Value in the Fixed Options will be credited on a daily
basis using a 365 day year at a rate not less than a minimum effective annual
rate of 3%. Such interest will be paid regardless of the actual investment
experience of the General Account. In addition, we may in our sole discretion
declare current interest in excess of the 3%, which will be guaranteed at
least until the end of the Policy Year and annually thereafter. (The portion
of your Accumulated Value that has been used to secure Policy Debt will be
credited with an interest rate equal to an effective annual rate of 3%.)
We bear the full investment risk for the Accumulated Value allocated to the
Fixed Options.
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DEATH BENEFIT
The death benefit under the Policy will be determined in the same fashion
for an Owner who has Accumulated Value in the Fixed Accounts as for an Owner
who has Accumulated Value in the Variable Accounts. See "Death Benefit".
POLICY CHARGES
Policy charges will be the same whether you allocate net premiums or
transfer Accumulated Value to the Fixed Options or allocate net premiums to
the Variable Accounts. These charges consist of the premium load, including
the sales load, state and local premium tax charge, and federal tax charge;
the deductions from Accumulated Value, including the charges for the cost of
insurance, administrative charge, M&E Risk Charge, the charge for any optional
insurance benefits added by rider, any death benefit change charge; and the
surrender charge. Any amounts that we pay for income taxes allocable to the
Variable Accounts will not be charged against the Fixed Options. In addition,
the operating expenses of the Variable Accounts, as well as the investment
advisory fee charged by the Fund, will not be paid directly or indirectly by
you to the extent the Accumulated Value is allocated to the Fixed Options;
however, to such extent you will not participate in the investment experience
of the Variable Accounts.
TRANSFERS TO AND FROM THE FIXED OPTIONS
Subject to the following limitations, amounts may be transferred on and
after the date your initial net premium is allocated to the Investment Options
you choose from the Variable Accounts to the Fixed Options, from the Fixed
Options to the Variable Accounts, and/or between the Fixed Options.
Transfers from the Variable Accounts to the Fixed Options may be made in the
Policy Month preceding a Policy Anniversary, except that if you reside in
Connecticut, Georgia, Maryland, North Carolina, North Dakota or Pennsylvania
you may make such a transfer at any time during the first 18 Policy Months.
Except as described below, you may not make more than one transfer from the
Fixed Options to the Variable Accounts in any 12-month period. No transfer may
be made if the Policy is in a Grace Period and the required premium has not
been paid.
Currently there is no charge imposed upon transfers; however, we reserve the
right to assess such a charge in the future and to impose limitations on the
number of transfers, the amount of transfers, and the amount remaining in a
Fixed Option or the Variable Accounts after a transfer other than those
described below.
Transfers payable from the Fixed Options, other than as described in the
First Year Transfer Program, may be delayed for up to six months.
The Fixed Account
Except for scheduled transfers under the Fixed Account's First Year Transfer
Program as described below, you may not make more than one transfer from the
Fixed Account to the Variable Accounts and/or the Fixed LT Account in any 12-
month period. Further, except during your First Year Transfer Program, you may
not transfer more than the greater of 25% of your Accumulated Value in the
Fixed Account or $5,000 in any year.
First Year Transfer Program. At Policy Issue, you may elect to use the First
Year Transfer Program to transfer amounts from the Fixed Account to the
Variable Accounts and/or the Fixed LT Account during the first Policy Year.
There is no charge to elect this feature. Transfers may begin on the date your
initial net premium is allocated to the Investment Options you choose, and a
fixed dollar amount will be transferred every month for up to 12 months. Each
transfer date thereafter will be the same day of the month. If the First Year
Transfer Program is elected, the greater of 25% of Accumulated Value or $5,000
limitation is waived during the first Policy Year. The last transfer may take
place in the second Policy Year, and would not be counted toward the Owner's
one transfer per year limitation described above.
If the Accumulated Value in the Fixed Account is less than the amount to be
transferred, the remaining balance is transferred, and the program is
terminated. However, if, at the end of the 12-transfer period, money remains
in the Fixed Account, this will remain invested in the Fixed Account at the
then-current interest rate and becomes subject to the one transfer per year
limitation.
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We stop crediting interest on any amount transferred or withdrawn from the
Fixed Account as of the day the transfer or withdrawal is effective.
The Fixed LT Account
We reserve the right to limit the amount allocated to the Fixed LT Account
to $1,000,000 during the most recent 12 months for all policies owned by you.
Allocations include net premium payments, transfers and loan repayments. Any
excess over $1,000,000 would be transferred to your other Investment Options
relative to your most recent instructions.
We may increase the $1,000,000 limit at any time at our sole discretion. You
may contact us to find out if a higher limit is in effect.
You may not make more than one transfer from the Fixed LT Account to the
Variable Accounts and/or the Fixed Account in any 12-month period. Further,
you may not transfer more than the greater of 10% of your Accumulated Value in
the Fixed LT Account or $5,000 in any year.
SURRENDERS, WITHDRAWALS, AND POLICY LOANS
You may also make withdrawals and full surrenders from the Fixed Options to
the same extent as an Owner who has invested in the Variable Accounts. See
"Surrender" and "Withdrawals". You may borrow up to the greater of (1) 90% of
your Accumulated Value, less any Policy Debt, and less any surrender charges
that would have been imposed if your Policy were surrendered on the date the
loan is taken or (2) 100% of the product of (a X b/c - d) where (a) equals
your Policy's Accumulated Value less any surrender charge that would be
imposed if your Policy were surrendered on the date the loan is taken and less
12 times the current monthly deduction; (b) equals 1 plus the annual loan
interest rate credited (1.03); (c) equals 1 plus the annual loan interest rate
currently charged (1.0325); and (d) equals any existing Policy Debt. We
reserve the right to first transfer repayments from the Loan Account to each
Fixed Option up to the amount that was originally borrowed. Any excess over
such amount will be transferred to the Variable Accounts relative to your most
recent instructions. See "Policy Loans".
Surrenders and withdrawals payable from the Fixed Options and the payment of
Policy loans allocated to the Fixed Options may be delayed for up to six
months.
MORE ABOUT THE POLICY
OWNERSHIP
The Policy Owner is the individual named as such in the application or in
any later change shown in our records. While the Insured is living, the Policy
Owner alone has the right to receive all benefits and exercise all rights that
the Policy grants or we allow.
Joint Owners. If more than one person is named as Policy Owner, they are
joint Owners. Any Policy transaction requires the signature of all persons
named jointly. Unless otherwise provided, if a joint Owner dies, ownership
passes to the surviving joint Owner(s). When the last joint Owner dies,
ownership passes through that person's estate, unless otherwise provided.
BENEFICIARY
The Beneficiary is the individual named as such in the application or any
later change shown in our records. You may change the Beneficiary at any time
during the life of the Insured by written request on forms provided by us,
which must be received by us at our Home Office. The change will be effective
as of the date this form is signed. Contingent and/or concurrent Beneficiaries
may be designated. You may designate a permanent Beneficiary, whose rights
under the Policy cannot be changed without his or her consent. Unless
otherwise provided, if no designated Beneficiary is living upon the death of
the Insured, you are the Beneficiary, if living; otherwise your estate is the
Beneficiary.
We will pay the death benefit proceeds to the Beneficiary. Unless otherwise
provided, in order to receive proceeds at the Insured's death, the Beneficiary
must be living at the time of the Insured's death.
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SUBSTITUTION OF INSURED
Subject to our approval, you may request a substitution of the Insured under
this Policy for a new Insured after the first Policy Year is completed. We
will require the following before we substitute the Insured:
. The new Insured must submit evidence of insurability satisfactory to us;
. You must submit a written application for the substitution;
We may adjust the Face Amount, Accumulated Value, surrender charge, and any
Policy fees and charges to reflect the new Insured. A revised schedule of
benefits will be sent to you outlining the benefits for the new Insured.
Riders on the new Insured will be added only with our consent and subject to
our requirements for those riders.
If approved, the substitution will become effective on the Monthly Payment
Date on or next following our approval.
We reserve the right to disallow a requested substitution of the named
Insured, and will not permit a requested substitution, among other reasons,
(1) if compliance with the guideline premium limitations under tax law
resulting from the substitution of Insured would result in the immediate
termination of the Policy, or (2) if, to effect the requested substitution of
Insured, payments to you would have to be made from Accumulated Value for
compliance with the guideline premium limitations, and the amount of such
payments would exceed the Net Cash Surrender Value under the Policy.
THE CONTRACT
This Policy is a contract between the Owner and Pacific Life. The entire
contract consists of the Policy, a copy of the initial application, all
subsequent applications to change the Policy, any endorsements, any Riders,
and all additional Policy information sections (specification pages) added to
the Policy.
PAYMENTS
We ordinarily will pay death benefit proceeds, Net Cash Surrender Value on
surrender, 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 a Fixed Option within seven days after we receive
all the information needed to process a payment or transfer or, if sooner, any
other period required by law.
However, we can postpone the calculation or payment of such a payment or
transfer of amounts based on investment performance of the Variable Accounts
if:
. The New York Stock Exchange is closed on other than customary weekend and
holiday closing or trading on the New York Stock Exchange is restricted
as determined by the SEC; or
. An emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of a Variable Account's net
assets; or
. The SEC by order permits postponement for the protection of Policy
Owners.
ASSIGNMENT
You may assign a Policy as collateral security for a loan or other
obligation. No assignment will bind us unless the original, or a copy, is
received and recorded by our Home Office. An assignment does not change the
ownership of the Policy. However, after an assignment, the rights of any Owner
or Beneficiary will be subject to the assignment. The entire Policy, including
any attached payment option, Endorsement or Rider, will be subject to the
assignment. We will not be responsible for the validity of any assignment.
Unless otherwise provided, the assignee may exercise all rights this Policy
grants except (a) the right to change the Policy Owner or Beneficiary; and (b)
the right to elect a payment option. Assignment of a Policy that is a modified
endowment contract may generate taxable income. (See "Federal Income Tax
Considerations".)
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ERRORS ON THE APPLICATION
If the Age or sex of the Insured has been misstated, the death benefit under
your Policy will be the greater of that which would be purchased by the most
recent cost of insurance charge at the correct Age and sex, or the death
benefit derived by multiplying Accumulated Value by the death benefit
percentage for the correct Age and sex. If the Insured's Age or sex is
misstated in the application, the Accumulated Value will be modified by
recalculating all prior cost of insurance charges and other monthly deductions
based on the correct Age and sex. If unisex cost of insurance rates apply, no
adjustment will be made for a misstatement of sex. See "Cost of Insurance".
INCONTESTABILITY
We may contest the validity of your Policy if any material misstatements are
made in the application. However, your Policy will be incontestable after the
expiration of the following: the initial Face Amount cannot be contested after
your Policy has been in force during the Insured's lifetime for two years from
the Policy Date; if the Insured is changed, your Policy cannot be contested
after it has been in force during the new Insured's lifetime for two years
from the effective date of the exchange; and an increase in the Face Amount
cannot be contested after the increase has been in force during an Insured's
lifetime for two years from its effective date.
PAYMENT IN CASE OF SUICIDE
If the Insured dies by suicide, while sane or insane, within two years from
the Policy Date, we will limit the death benefit proceeds to the premium
payments less any withdrawal amounts and less any Policy Debt. If the Insured
has been changed and the new Insured dies by suicide, while sane or insane,
within two years of the exchange date, the death benefit proceeds will be
limited to your Net Cash Surrender Value as of the exchange date, plus the
premiums paid since the exchange date, less the sum of any increases in Debt,
withdrawal amounts, and any dividends paid in cash since the exchange date. If
an Insured dies by suicide, while sane or insane, within two years of the
effective date of any increase in the Face Amount, we will refund the cost of
insurance charges made with respect to such increase.
NON-PARTICIPATING
This Policy will not share in any of our surplus earnings.
POLICY ILLUSTRATIONS
Upon request, we will send you an illustration of future benefits under your
Policy based on both guaranteed and current cost factor assumptions. However,
we reserve the right to charge a $25 fee for requests for illustrations in
excess of one per Policy Year.
PAYMENT PLAN
Surrender, or withdrawal benefits may be used to purchase a payment plan
providing monthly income for the lifetime of the Insured, and death benefit
proceeds may be used to purchase a payment plan providing monthly income for
the lifetime of the Beneficiary. The monthly payments consisting of proceeds
plus interest will be paid in equal installments for at least ten years. The
purchase rates for the payment plan are guaranteed not to exceed those shown
in your Policy, but current rates that are lower (i.e., providing greater
income) may be established by us from time to time. This benefit is not
available if the income would be less than $100 a month. Surrender, or
withdrawal benefits or death benefit proceeds may be used to purchase any
other payment plan that we make available at that time.
OPTIONAL INSURANCE BENEFITS AND OTHER POLICIES
At the time you complete the application for a Policy and subject to certain
requirements, you may elect to add one or more Riders to the Policy as
optional insurance benefits (subject to approval of state insurance
authorities). These optional benefits are: additional insurance coverage for
the accidental death of the Insured (Accidental Death Rider); term insurance
on the Insured's children (Children's Term Rider); annual renewal term
insurance on the Insured (Annual Renewable Term Rider); or any member of his
or her immediate family (Annual Renewable and Convertible Term Rider); added
protection benefit on the Insured (Accounting Benefit Rider); the right to
purchase additional insurance on the Insured's life on certain specified dates
without proof of insurability
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(Guaranteed Insurability Rider); additional protection in the event of a
disability (Waiver of Charges Rider); or early payment of coverage if the
Insured is diagnosed with a terminal illness (Accelerated Living Benefit
Rider). The cost of any additional insurance benefits will be deducted as part
of the monthly deduction against Accumulated Value. See "Charges and
Deductions". Certain restrictions may apply and are described in the
applicable Rider. Under certain circumstances, a Policy can be combined with
an Annual Renewable Term Rider (or Accounting Benefit Rider) to result in a
combined coverage amount equal to the same Face Amount that could be acquired
under a single Policy. Combining a Policy and an Annual Renewable Term Rider
will result in current charges that are less than for a single Policy with the
same Face Amount. However, your Policy has guaranteed maximums regarding
contract charges. Adding the Annual Renewable Term Rider will result in
guaranteed maximum charges that are higher than for a single Policy with the
same Face Amount. Combining a Policy with an Accounting Benefit Rider could
affect certain charges under the Policy that at times are lower and at times
are higher than under the Policy. The Accounting Benefit Rider may affect the
timing of some Policy charges for Policies held for certain periods. We offer
other variable life insurance policies that provide insurance protection on
the life of a single insured or on the lives of two insureds, whose loads and
charges may vary. A registered representative authorized to sell the Policy
can describe these extra benefits further. Samples of the provisions for the
extra optional benefits are available from us upon written request.
LIFE INSURANCE RETIREMENT PLANS
Any Policy Owners or applicants who wish to consider using the Policy as a
funding vehicle for (non-qualified) retirement purposes may obtain additional
information from us. An Owner could pay premiums under a Policy for a number
of years, and upon retirement, could utilize a Policy's loan and withdrawal
features to access Accumulated Value as a source of retirement income for a
period of time. This use of a Policy does not alter an Owner's rights or our
obligations under a Policy; the Policy would remain a life insurance contract
that, so long as it remains in force, provides for a death benefit payable
when the Insured dies.
Ledger illustrations are available upon request that portray how the Policy
can be used as a funding mechanism for (non-qualified) retirement plans,
referred to herein as "life insurance retirement plans," for individuals.
Ledger illustrations provided upon request show the effect on Accumulated
Value, Net Cash Surrender Value, and the net death benefit of premiums paid
under a Policy and withdrawals and loans taken for retirement income; or
reflecting allocation of premiums to specified Variable Accounts. This
information will be portrayed at hypothetical rates of return that are
requested. Charts and graphs presenting the results of the ledger
illustrations or a comparison of retirement strategies will also be furnished
upon request. Any graphic presentations and retirement strategy charts must be
accompanied by a corresponding ledger illustration; ledger illustrations must
always include or be accompanied by comparable information that is based on
guaranteed cost of insurance rates and that presents a hypothetical gross rate
of return of 0%. Retirement illustrations will not be furnished with a
hypothetical gross rate of return in excess of 12%.
The hypothetical rates of return in ledger illustrations are illustrative
only and should not be interpreted as a representation of past or future
investment results. Policy values and benefits shown in the ledger
illustrations would be different if the gross annual investment rates of
return were different from the hypothetical rates portrayed, if premiums were
not paid when due, and loan interest was paid when due. Withdrawals or loans
may have an adverse effect on Policy benefits.
RISKS OF LIFE INSURANCE RETIREMENT PLANS
Using your Policy as a funding vehicle for retirement income purposes
presents several risks, including the risk that if your Policy is
insufficiently funded in relation to the income stream from your Policy, your
Policy can lapse prematurely and result in significant income tax liability to
you in the year in which the lapse occurs. Other risks associated with
borrowing from your Policy also apply. Loans will be automatically repaid from
the gross death benefit at the death of the Insured, resulting in the
estimated payment to the Beneficiary of the net death benefit, which will be
less than the gross death benefit and may be less than the Face Amount. Upon
surrender, the loan will be automatically repaid, resulting in the payment to
you of the Net Surrender Value. Similarly, upon lapse, the loan will be
automatically repaid. The automatic repayment of the loan upon lapse or
surrender will cause the recognition of taxable income to the extent that Net
Surrender Value plus the amount of the repaid loan exceeds your basis in the
Policy. Thus, under certain circumstances, surrender or lapse of your Policy
could result in tax liability to you. In addition, to reinstate a lapsed
Policy, you would be required to
41
<PAGE>
make certain payments as described under "Reinstatement". Thus, you should be
careful to fashion a life insurance retirement plan so that your Policy will
not lapse prematurely under various market scenarios as a result of
withdrawals and loans taken from your Policy.
Your Policy will lapse if your Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction on any Monthly Payment
Date, and a Grace Period expires without you making a sufficient payment. To
avoid lapse of your policy, it is important to fashion a payment stream that
does not leave your Policy with insufficient Accumulated Value. Determinations
as to the amount to withdraw or borrow each year warrant careful
consideration. Careful consideration should also be given to any assumptions
respecting the hypothetical rate of return, to the duration of withdrawals and
loans, and to the amount of Accumulated Value that should remain in your
Policy upon its maturity. Poor investment performance can contribute to the
risk that your Policy may lapse. In addition, the cost of insurance generally
increases with the Age of the Insured, which can further erode existing
Accumulated Value and contribute to the risk of lapse.
Further, interest on a Policy loan is due to us for any Policy Year on the
Policy Anniversary. If this interest is not paid when due, it is added to the
amount of the outstanding Policy Debt, and interest will begin accruing
thereon from that date. This can have a compounding effect, and to the extent
that the outstanding loan balance exceeds your basis in the Policy, the
amounts attributable to interest due on the loans can add to your federal (and
possibly state) income tax liability.
You should consult with your financial adviser in designing a life insurance
retirement plan that is suitable. Further, you should continue to monitor the
Accumulated Value net of loans remaining in a Policy to assure that the Policy
is sufficiently funded to continue to support the desired income stream and so
that it will not lapse. In this regard, you should consult your periodic
statements to determine the amount of their remaining Accumulated Value minus
the outstanding loan balance. Illustrations showing the effect of charges
under the Policy upon existing Accumulated Value or the effect of future
withdrawals or loans upon the Policy's Accumulated Value and death benefit are
available from your agent. Consideration should be given periodically to
whether the Policy is sufficiently funded so that it will not lapse
prematurely.
Because of the potential risks associated with borrowing from a Policy, use
of the Policy in connection with a life insurance retirement plan may not be
suitable for all Policy Owners. These risks should be carefully considered
before borrowing from the Policy to provide an income stream.
DISTRIBUTION OF THE POLICY
Pacific Mutual Distributors, Inc. ("PMD") is principal underwriter
(distributor) of the Policies. PMD is registered as a broker-dealer with the
SEC and is a member of the National Association of Securities Dealers
("NASD"). We pay PMD for acting as principal underwriter under a Distribution
Agreement. PMD is a wholly-owned subsidiary of ours. PMD's principal business
address is 700 Newport Center Drive, Newport Beach, California 92660.
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. We pay compensation directly to
broker-dealers for promotion and sales of the Policy. The compensation payable
to a broker-dealer for sales of the Policy may vary with the Sales Agreement,
but is not expected to exceed 65% of the expected first year commissionable
premiums, 32% of the second year commissionable premiums, 12% of the
commissionable premiums from years 3 to 10 and 3% of premiums paid thereafter.
Broker-dealers may also receive annual compensation of up to 0.20% of
Accumulated Value less Policy Debt. The annual renewal compensation will be
computed monthly and payable at the end of each Policy Year. In addition, we
may also pay override payments, expense allowances, bonuses, wholesaler fees,
and training allowances. Registered representatives earn commissions from the
broker-dealers with whom they are affiliated for selling our Policies.
Compensation arrangements vary among broker-dealers. In addition, registered
representatives who meet specified production levels may qualify, under sales
incentive programs adopted by us, to receive non-cash compensation such as
expense-paid trips, expense-paid educational seminars and merchandise and may
elect to receive compensation on a deferred basis. We make no separate
deductions, other than as previously described, from premiums to pay sales
commissions or sales expenses.
42
<PAGE>
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 DURING THE LAST FIVE YEARS
----------------- -----------------------------------------------
<S> <C>
Thomas C. Sutton Director, Chairman of the Board and Chief Executive Officer
Director, Chairman of of Pacific Life; Director, Chairman of the Board and Chief
the Board and Executive Officer of Pacific LifeCorp, August 1997 to
Chief Executive Officer present; Director, Chairman of the Board and Chief
Executive Officer of Pacific Mutual Holding Company, August
1997 to present; Former Equity Board Member of PIMCO
Advisors L.P.; Former Director of Pacific Corinthian Life
Insurance Company; Director of: Newhall Land & Farming; The
Irvine Company; The Edison Company; PM Group Life Insurance
Company; and similar positions with other affiliated
companies of Pacific Life.
Glenn S. Schafer Director (since November 1994) and President (since January
Director and President 1995) of Pacific Life; Executive Vice President and Chief
Financial Officer of Pacific Life, April 1991 to January
1995; Director and President of Pacific LifeCorp, August
1997 to present; Director and President of Pacific Mutual
Holding Company, August 1997 to present; Former Equity
Board Member of PIMCO Advisors L.P.; Former Director of
Pacific Corinthian Life Insurance Company; Director of PM
Group Life Insurance Company; and similar positions with
other affiliated companies of Pacific Life.
Khanh T. Tran Director (since August 1997), Senior Vice President and
Director, Senior Vice Chief Financial Officer of Pacific Life, June 1996 to
President and Chief present; Vice President and Treasurer of Pacific Life,
Financial Officer November 1991 to June 1996; Senior Vice President and Chief
Financial Officer of Pacific LifeCorp, August 1997 to
present; Senior Vice President and Chief Financial Officer
of Pacific Mutual Holding Company, August 1997 to present;
Chief Financial Officer and Treasurer to other affiliated
companies of Pacific Life.
David R. Carmichael Director (since August 1997), Senior Vice President and
Director, Senior Vice General Counsel of Pacific Life; Senior Vice President and
President and General General Counsel of Pacific LifeCorp, August 1997 to
Counsel present; Senior Vice President and General Counsel of
Pacific Mutual Holding Company, August 1997 to present;
Director of: PM Group Life Insurance Company; Association
of California Health and Life Insurance Companies and
Association of Life Insurance Counsel.
Audrey L. Milfs Director (since August 1997), Vice President and Corporate
Director, Vice President Secretary of Pacific Life; Vice President and Secretary of
and Corporate Secretary Pacific LifeCorp, August 1997 to present; Vice President
and Secretary of Pacific Mutual Holding Company, August
1997 to present; similar positions with other affiliated
companies of Pacific Life.
Richard M. Ferry Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director and Chairman of
Korn/Ferry International; Director of: Avery Dennison
Corporation; Broco, Inc.; ConAm Management; First Business
Bank; Mullin Consulting, Inc.; Northwestern Restaurants,
Inc.; Dole Food Co.; Mrs. Fields' Original Cookies; Rainier
Bells, Inc. Address: 1800 Century Park East, Suite 900,
Los Angeles, California 90067.
Donald E. Guinn Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Chairman Emeritus and
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.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION DURING THE LAST FIVE YEARS
----------------- -----------------------------------------------
<S> <C>
Ignacio E. Lozano, Jr. Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director, Chairman and
Former Editor-In-Chief of La Opinion; Former Director of:
BankAmerica Corporation; Bank of America NT&SA; Director
of: The Walt Disney Company; Pacific Enterprises; Southern
California Gas Company; Lozano Communications, Inc.
Address: 411 West Fifth Street, 12th Floor, Los Angeles,
California 90013.
Charles D. Miller Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director, Chairman and
Chief Executive Officer of Avery Dennison Corporation;
Former Director of Great Western Financial Corporation;
Director of: Korn/Ferry International; Nationwide Health
Properties, Inc.; Edison International. Address: 150 North
Orange Grove Boulevard, Pasadena, California 91109.
Donn B. Miller Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director, President and
Chief Executive Officer of Pearson-Sibert Oil Co. of Texas;
Director of: The Irvine Company; Automobile Club of
Southern California; St. John's Hospital & Health Care
Foundation. Address: 136 El Camino, Suite 216, Beverly
Hills, California 90212.
Richard M. Rosenberg Director of Pacific Life (since October 1997 and previously
Director from November 1995 to August 1997); Director of Pacific
LifeCorp, August 1997 to present; Director of Pacific
Mutual Holding Company, October 1997 to present; Chairman
and Chief Executive Officer (Retired) of BankAmerica
Corporation; Director of: BankAmerica Corporation; Airborne
Express Corporation; Northrop Grumman Corporation; Potlatch
Corporation; SBC Communications; Chronicle Publishing;
Pollo Rey/Unamas; Former Director of K-2 Incorporated.
Address: 555 California Street, 11th Floor, Unit 3001B, San
Francisco, California 94104.
James R. Ukropina Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Partner with the law firm
of O'Melveny & Meyers; Director of Lockheed Martin
Corporation; Trustee of Stanford University. Address: 400
South Hope Street, 16th Floor, Los Angeles, California
90071-2899.
Raymond L. Watson Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Vice Chairman and Director
of The Irvine Company; Director of: The Walt Disney
Company; The Mitchell Energy and Development Company; The
Irvine Apartment Communities; and The Tejon Ranch. Address:
550 Newport Center Drive, 9th Floor, Newport Beach,
California 92660.
Lynn C. Miller Executive Vice President, Individual Insurance, of Pacific
Executive Vice President Life, January 1995 to present; Senior Vice President,
Individual Insurance, of Pacific Life, 1989 to 1995.
Edward R. Byrd Vice President and Controller of Pacific Life; Vice
Vice President and President and Controller of Pacific LifeCorp, August 1997
Controller to present; Vice President and Controller of Pacific Mutual
Holding Company, August 1997 to present; and similar
positions with other affiliated companies of Pacific Life.
</TABLE>
No officer or director listed above receives any compensation from the
Separate Account. No separately allocable compensation has been paid by us or
any of our affiliates to any person listed for services rendered to the
Account.
STATE REGULATION
We are subject to the laws of the state of California governing insurance
companies and to regulation by the Commissioner of Insurance of California. In
addition, we are subject to the insurance laws and regulations of the other
states and jurisdictions in which we are licensed or may become licensed to
operate. An annual statement in a prescribed form must be filed with the
Commissioner of Insurance of California and with regulatory authorities of
other states on or before March 1st in each year. This statement covers our
operations for the preceding year and our financial condition as of December
31st of that year. Our affairs are subject to review and examination at any
time by the Commissioner of Insurance or his agents, and subject to full
examination of our operations at periodic intervals.
44
<PAGE>
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 on any Valuation Date will be processed as of the end of that Valuation
Date in accordance with your instructions (presuming that the Free-Look Period
has expired). We reserve the right to deny any telephone transfer or loan
request. If all telephone lines are busy (which might occur, for example,
during periods of substantial market fluctuations), you might not be able to
request transfers and loans by telephone and would have to submit written
requests.
We have established procedures to confirm that instructions communicated by
telephone are genuine. Under the procedures, any person requesting a transfer
by telephone must provide certain personal identification as requested by us,
and we will send a written confirmation of all transfers requested by
telephone within 7 days of the transfer. Upon your submission of a Telephone
Authorization, you authorize us to accept and act upon telephone instructions
for transfers or loans involving your Policy, and agree that neither we, any
of our affiliates, Pacific Select Fund, nor any of our or their directors,
trustees, officers, employees or agents, will be liable for any loss, damages,
cost, or expense (including attorney's fees) arising out of any requests
effected in accordance 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.
PREPARATION FOR THE YEAR 2000
We rely significantly on computer systems and applications in our daily
operations. In 1995, we began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue. This issue involves the ability of computer systems to properly
recognize the year 2000. The inability to do so could result in major failures
or miscalculations.
We have a coordinated plan to remediate, or replace if necessary, any non-
compliant systems and to obtain assurances of the ability to be year 2000
compliant by our service providers, vendors and those with significant
relationships with us. Our plan is directed and overseen by an experienced
Vice President dedicated to year 2000 compliance. We completed the
identification of all critical systems and are in the process of remediating
systems.
45
<PAGE>
In addition, we have retained two internationally recognized consultants to
assist in reviewing and remediating our systems and interfaces with third
parties. Our plan calls for all remediation to be completed by the fourth
quarter of 1998 and testing to commence as remediation is completed and
throughout 1999. Some testing has already begun.
Remediation expenses to make our systems year 2000 compliant are currently
estimated to range from $15 to $20 million, which excludes the cost of our
personnel who support year 2000 compliance efforts. We do not anticipate any
other material future costs associated with the year 2000 compliance efforts.
We do not anticipate any other material future costs associated with the year
2000 compliance project, although there can be no assurance. We currently
expect to be year 2000 compliant; however, there can be no assurances that we
will succeed. In the event we or our significant service providers, vendors,
financial institutions or others with which we conduct business, fail to be
year 2000 compliant, there would be a materially adverse effect on us.
INDEPENDENT AUDITORS
The audited consolidated financial statements for Pacific Life as of
December 31, 1997 and 1996 and for the three years ended December 31, 1997 and
the audited financial statements for Pacific Select Exec Separate Account as
of December 31, 1997 and for the two years ended December 31, 1997 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein, and have been so
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
FINANCIAL STATEMENTS
The audited financial statements of Pacific Select Exec Separate Account as
of December 31, 1997 and for the two years then ended are set forth herein,
starting on page 47. The unaudited financial statements for the Pacific Select
Exec Separate Account as of September 30, 1998 and for the nine month period
ended September 30, 1998 are set forth herein starting on page 60. The audited
consolidated financial statements of Pacific Life as of December 31, 1997 and
1996 and for the three years ended December 31, 1997 are set forth herein
starting on page 70. The unaudited consolidated financial statements of
Pacific Life as of June 30, 1998 and for the six months in the period ended
June 30, 1998 and 1997 are set forth herein starting on page 100. The
unaudited financial statements of the Pacific Select Exec Separate Account and
Pacific Life include all adjustments, consisting only of normal recurring
adjustments, that, in the opinion of management, are necessary to present
fairly the financial position and results of operations of Pacific Select Exec
Separate Account and Pacific Life for the periods indicated.
The financial statements of Pacific Life should be distinguished from the
financial statements of the Pacific Select Exec Separate Account and should be
considered only as bearing upon our ability to meet our obligations under the
Policies. There has been no material adverse change in the financial position
of Pacific Life between June 30, 1998 and September 30, 1998.
46
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
AUDITED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND FOR THE
TWO YEARS ENDED DECEMBER 31, 1997
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific 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, Bond and Income, Equity
Index, International, Emerging Markets, Variable Account I, Variable Account
II, Variable Account III, and Variable Account IV Variable Accounts) as of
December 31, 1997 and the related statement of operations for the year then
ended (as to the Equity Variable Account and the Bond and Income Variable
Account, for the period from commencement of operations through December 31,
1997) and statement of changes in net assets for each of the two years in the
period then ended (as to the Aggressive Equity Variable Account, the Emerging
Markets Variable Account, Variable Accounts I, II, III and IV, for the year
ended December 31, 1997 and for the period from commencement of operations
through December 31, 1996). 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, such financial statements 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, 1997
and the results of their operations for the year then ended (as to the Equity
Variable Account and the Bond and Income Variable Account, for the period from
commencement of operations through December 31, 1997) and the changes in their
net assets for each of the two years in the period then ended (as to the
Aggressive Equity Variable Account, the Emerging Markets Variable Account,
Variable Accounts I, II, III and IV, for the year ended December 31, 1997 and
for the period from commencement of operations through December 31, 1996), in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 6, 1998
48
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH GOVERN-
MONEY YIELD MANAGED MENT AGGRESSIVE GROWTH EQUITY MULTI-
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME STRATEGY
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Money Market Portfolio
(5,180 shares; cost
$52,208).............. $ 52,084
High Yield Bond
Portfolio (3,379
shares; cost $33,305). $ 33,707
Managed Bond Portfolio
(6,511 shares; cost
$69,581).............. $ 72,512
Government Securities
Portfolio (967 shares;
cost $10,008)......... $ 10,421
Growth Portfolio (7,315
shares; cost
$143,503)............. $179,989
Aggressive Equity
Portfolio (847 shares;
cost $9,176).......... $ 9,473
Growth LT Portfolio
(6,382 shares; cost
$99,059).............. $110,438
Equity Income Portfolio
(5,373 shares; cost
$100,762)............. $131,486
Multi-Strategy
Portfolio (7,005
shares; cost
$97,141).............. $113,352
Receivables:
Due from Pacific Life
Insurance Company..... 135 114 51 240 39 162 246 51
Fund shares redeemed... 139
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Assets............ 52,223 33,842 72,626 10,472 180,229 9,512 110,600 131,732 113,403
-------- -------- -------- -------- -------- -------- -------- -------- --------
LIABILITIES
Payables:
Due to Pacific Life
Insurance Company..... 139
Fund shares purchased.. 135 114 51 240 39 162 246 51
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Liabilities....... 139 135 114 51 240 39 162 246 51
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSETS.............. $ 52,084 $ 33,707 $ 72,512 $ 10,421 $179,989 $ 9,473 $110,438 $131,486 $113,352
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements
49
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BOND AND EQUITY INTER- EMERGING
EQUITY INCOME INDEX NATIONAL MARKETS VARIABLE VARIABLE VARIABLE VARIABLE
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT I II III IV
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Equity Portfolio (175
shares; cost $4,174).. $ 4,190
Bond and Income
Portfolio (53 shares;
cost $666)............ $ 685
Equity Index Portfolio
(7,283 shares; cost
$140,325)............. $187,288
International Portfolio
(7,956 shares; cost
$115,000)............. $128,941
Emerging Markets
Portfolio (889 shares;
cost $9,098).......... $ 8,416
Edinburgh Overseas
Equity Portfolio (54
shares; cost $544).... $ 539
Turner Core Growth
Portfolio (58 shares;
cost $762)............ $ 783
Frontier Capital
Appreciation Portfolio
(208 shares; cost
$2,892)............... $ 3,109
Enhanced U.S. Equity
Portfolio (116 shares;
cost $1,571).......... $ 1,754
Receivables:
Due from Pacific Life
Insurance Company..... 86 15 217 81 35 1 1 1
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Assets............ 4,276 700 187,505 129,022 8,451 539 784 3,110 1,755
-------- -------- -------- -------- -------- -------- -------- -------- --------
LIABILITIES
Payables:
Fund shares purchased.. 86 15 217 81 35 1 1 1
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Liabilities....... 86 15 217 81 35 1 1 1
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSETS.............. $ 4,190 $ 685 $187,288 $128,941 $ 8,416 $ 539 $ 783 $ 3,109 $ 1,754
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements
50
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH GOVERN-
MONEY YIELD MANAGED MENT AGGRESSIVE GROWTH EQUITY MULTI-
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME STRATEGY
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- ---------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends.............. $ 2,072 $ 2,559 $ 3,893 $ 498 $14,427 $ 4,656 $ 7,127 $ 7,530
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income... 2,072 2,559 3,893 498 14,427 4,656 7,127 7,530
------- ------- ------- ------- ------- ------- ------- ------- -------
REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS
Net realized gain from
security transactions. 94 454 367 96 6,822 $ 101 3,899 3,288 695
Net unrealized
appreciation
(depreciation) on
investments........... (121) (335) 1,844 306 15,323 230 1,609 16,626 8,279
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Realized And
Unrealized Gain (Loss)
On Investments......... (27) 119 2,211 402 22,145 331 5,508 19,914 8,974
------- ------- ------- ------- ------- ------- ------- ------- -------
NET INCREASE IN NET
ASSETS
RESULTING FROM
OPERATIONS............. $ 2,045 $ 2,678 $ 6,104 $ 900 $36,572 $ 331 $10,164 $27,041 $16,504
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
See Notes to Financial Statements
51
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BOND AND EQUITY INTER- EMERGING
EQUITY INCOME INDEX NATIONAL MARKETS VARIABLE VARIABLE VARIABLE VARIABLE
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT
ACCOUNT(1) ACCOUNT(1) ACCOUNT ACCOUNT ACCOUNT I II III IV
---------- ---------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends.............. $ 30 $ 11 $ 7,400 $ 4,347 $ 41 $ 8 $ 71 $ 73 $ 63
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income... 30 11 7,400 4,347 41 8 71 73 63
------- ------- ------- ------- ------- ------- ------- ------- -------
REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS
Net realized gain from
security transactions. 13 5 12,511 4,938 187 2 7 42 7
Net unrealized
appreciation
(depreciation) on
investments........... 16 19 21,545 (62) (644) (4) 31 222 201
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Realized And
Unrealized Gain (Loss)
On Investments......... 29 24 34,056 4,876 (457) (2) 38 264 208
------- ------- ------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS............. $ 59 $ 35 $41,456 $ 9,223 $ (416) $ 6 $ 109 $ 337 $ 271
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) For the period from January 10, 1997 (commencement of operations) to
December 31, 1997.
See Notes to Financial Statements
52
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH GOVERN-
MONEY YIELD MANAGED MENT AGGRESSIVE GROWTH EQUITY MULTI-
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME STRATEGY
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
--------- -------- -------- ---------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $ 2,072 $ 2,559 $ 3,893 $ 498 $ 14,427 $ 4,656 $ 7,127 $ 7,530
Net realized gain from
security transactions. 94 454 367 96 6,822 $ 101 3,899 3,288 695
Net unrealized
appreciation
(depreciation) on
investments........... (121) (335) 1,844 306 15,323 230 1,609 16,626 8,279
--------- -------- -------- -------- -------- -------- -------- -------- --------
Net Increase In Net
Assets Resulting
From Operations........ 2,045 2,678 6,104 900 36,572 331 10,164 27,041 16,504
--------- -------- -------- -------- -------- -------- -------- -------- --------
INCREASE (DECREASE) IN
NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net
premiums.............. 114,902 6,516 11,008 2,026 28,003 2,091 27,890 20,805 20,699
Transfers - policy
charges and
deductions............ (4,303) (1,844) (2,926) (587) (9,059) (469) (6,771) (5,873) (4,507)
Transfers in (from
other variable
accounts)............. 133,629 17,591 15,603 5,190 61,551 12,131 34,622 27,826 9,864
Transfers out (to other
variable accounts).... (214,125) (15,732) (11,609) (4,376) (46,874) (7,838) (39,146) (18,793) (5,914)
Transfers - other...... (7,489) (1,439) (14,668) (562) (10,114) (104) (5,388) (5,380) (2,426)
--------- -------- -------- -------- -------- -------- -------- -------- --------
Net Increase (Decrease)
In Net Assets
Derived From Policy
Transactions........... 22,614 5,092 (2,592) 1,691 23,507 5,811 11,207 18,585 17,716
--------- -------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS................. 24,659 7,770 3,512 2,591 60,079 6,142 21,371 45,626 34,220
--------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSETS
Beginning of Year...... 27,425 25,937 69,000 7,830 119,910 3,331 89,067 85,860 79,132
--------- -------- -------- -------- -------- -------- -------- -------- --------
End of Year............ $ 52,084 $ 33,707 $ 72,512 $ 10,421 $179,989 $ 9,473 $110,438 $131,486 $113,352
========= ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Financial Statements
53
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BOND AND EQUITY INTER- EMERGING
EQUITY INCOME INDEX NATIONAL MARKETS VARIABLE VARIABLE VARIABLE VARIABLE
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT
ACCOUNT(1) ACCOUNT(1) ACCOUNT ACCOUNT ACCOUNT I II III IV
---------- ---------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income............ $ 30 $ 11 $ 7,400 $ 4,347 $ 41 $ 8 $ 71 $ 73 $ 63
Net realized gain from security
transactions.................... 13 5 12,511 4,938 187 2 7 42 7
Net unrealized appreciation
(depreciation) on investments... 16 19 21,545 (62) (644) (4) 31 222 201
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Increase (Decrease) In Net As-
sets Resulting
From Operations.................. 59 35 41,456 9,223 (416) 6 109 337 271
-------- -------- -------- -------- -------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET ASSETS
FROM
POLICY TRANSACTIONS
Transfer of net premiums......... 466 56 28,526 26,039 2,039 80 172 656 372
Transfers - policy charges and
deductions...................... (87) (13) (8,168) (7,142) (479) (25) (28) (149) (54)
Transfers in (from other variable
accounts)....................... 4,237 659 51,709 54,246 10,615 408 537 3,409 976
Transfers out (to other variable
accounts)....................... (438) (53) (25,760) (45,867) (6,460) (3) (163) (1,636) (217)
Transfers - other................ (47) 1 (25,672) (4,997) (162) (4) (17) (51) (9)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Increase In Net Assets
Derived From Policy Transactions. 4,131 650 20,635 22,279 5,553 456 501 2,229 1,068
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS........ 4,190 685 62,091 31,502 5,137 462 610 2,566 1,339
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSETS
Beginning of Year................ 125,197 97,439 3,279 77 173 543 415
-------- -------- -------- -------- -------- -------- -------- -------- --------
End of Year...................... $ 4,190 $ 685 $187,288 $128,941 $ 8,416 $ 539 $ 783 $ 3,109 $ 1,754
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) For the period from January 10, 1997 (commencement of operations) to
December 31, 1997.
See Notes to Financial Statements
54
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH GOVERN-
MONEY YIELD MANAGED MENT AGGRESSIVE EQUITY
MARKET BOND BOND SECURITIES GROWTH EQUITY GROWTH LT INCOME
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT(1) ACCOUNT ACCOUNT
--------- --------- --------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $ 1,359 $ 1,753 $ 4,145 $ 490 $ 6,582 $ 2 $ 608 $ 3,386
Net realized gain
(loss) from security
transactions.......... 13 300 (203) 62 2,826 (958) 4,372 667
Net unrealized
appreciation
(depreciation) on
investments........... 58 144 (914) (316) 12,466 67 5,509 8,024
--------- --------- --------- --------- --------- --------- --------- ---------
Net Increase (Decrease)
In Net Assets Resulting
From Operations........ 1,430 2,197 3,028 236 21,874 (889) 10,489 12,077
--------- --------- --------- --------- --------- --------- --------- ---------
INCREASE (DECREASE) IN
NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net
premiums.............. 59,965 6,552 21,068 2,042 29,298 911 24,407 21,368
Transfers - policy
charges and
deductions............ (3,056) (1,528) (2,686) (580) (7,697) (146) (5,343) (4,205)
Transfers in (from
other variable
accounts)............. 64,487 12,323 8,787 2,504 54,635 11,133 48,532 18,530
Transfers out (to other
variable accounts).... (115,717) (7,278) (8,044) (2,257) (62,175) (7,395) (39,922) (8,965)
Transfers - other...... (2,862) (920) (843) (379) (3,544) (283) (2,855) (2,661)
--------- --------- --------- --------- --------- --------- --------- ---------
Net Increase In Net
Assets
Derived From Policy
Transactions.......... 2,817 9,149 18,282 1,330 10,517 4,220 24,819 24,067
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCREASE IN NET
ASSETS................. 4,247 11,346 21,310 1,566 32,391 3,331 35,308 36,144
--------- --------- --------- --------- --------- --------- --------- ---------
NET ASSETS
Beginning of Year...... 23,178 14,591 47,690 6,264 87,519 53,759 49,716
--------- --------- --------- --------- --------- --------- --------- ---------
End of Year............ $ 27,425 $ 25,937 $ 69,000 $ 7,830 $ 119,910 $ 3,331 $ 89,067 $ 85,860
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
(1) For the period from April 8, 1996 (commencement of operations) to December
31, 1996.
See Notes to Financial Statements
55
<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
ACCOUNT ACCOUNT ACCOUNT ACCOUNT(1) I(1) II(1) III(1) 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 appreci-
ation (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 premi-
ums.................... 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 ac-
counts)................ 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 As-
sets
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>
(1) For the period from commencement of operations to December 31, 1996. The
Emerging Markets Variable Account 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 Account IV commenced operations on November 18, 1996.
See Notes to Financial Statements
56
<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, is currently comprised of eighteen 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 Variable Account, the Bond and
Income 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 fourteen 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 the 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 schedules of
investments, are either included elsewhere in this report or provided
separately and should be read in conjunction with the Separate Account's
financial statements.
During the year ended December 31, 1997, the Separate Account organized and
registered the Equity Variable Account and the Bond and Income Variable
Account with the Securities and Exchange Commission under the Investment
Company Act of 1940. Both Variable Accounts commenced operations on January
10, 1997.
The Separate Account was established by Pacific Life Insurance Company
(formerly named Pacific Mutual Life Insurance Company - see Note 1 to
Financial Statements of the Fund on A-66) 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 Life. The
assets of the Separate Account will not be charged with any liabilities
arising out of any other business conducted by Pacific Life, but the
obligations of the Separate Account, including benefits related to variable
life insurance, are obligations of Pacific Life.
The Separate Account held by Pacific Life represents funds from individual
flexible premium variable life policies. The assets of the Separate Account
are carried at market value.
The preparation of the accompanying financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
A. Valuation of Investments
Investments in shares of the Fund are valued at the reported net asset values
of the respective portfolios. Valuation of securities held by the 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 Life, 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 Life with respect to
the operations of the Separate Account.
2. DIVIDENDS
During 1997, the Funds have declared dividends for each portfolio except for
the Aggressive Equity 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.
3. CHARGES AND EXPENSES
With respect to variable life insurance policies funded by the Separate
Account, Pacific Life makes certain deductions from premiums for sales load
and state premium taxes before amounts are allocated to the Separate Account.
Pacific Life also makes certain deductions from the net assets of each
Variable Account for the mortality and expense risks Pacific Life 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 Life.
4. RELATED PARTY AGREEMENT
Pacific Mutual Distributors, Inc., a wholly-owned subsidiary of Pacific Life,
is the principal underwriter of variable life insurance policies funded by
interests in the Separate Account, and is compensated by Pacific Life.
57
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SEPARATE ACCOUNT'S COST OF INVESTMENTS 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). The cost and market
value of total Separate Account's investments in the Funds as of December 31,
1997 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
VARIABLE ACCOUNTS
--------------------------------------------------------------
GOVERN-
MONEY HIGH YIELD MANAGED MENT AGGRESSIVE
MARKET BOND BOND SECURITIES GROWTH EQUITY
-------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total cost of invest-
ments at beginning of
year $ 27,433 $ 25,201 $ 67,913 $ 7,723 $ 98,748 $ 3,264
Add: Total net proceeds
from policy transac-
tions 111,337 13,326 18,004 4,096 50,029 10,365
Reinvested distributions
from the Fund:
(a) Net investment in-
come 2,072 2,315 3,703 498 327
(b) Net realized gain 244 190 14,100
-------- -------- -------- -------- -------- --------
Sub-Total 140,842 41,086 89,810 12,317 163,204 13,629
Less: Cost of invest-
ments disposed during
the year 88,634 7,781 20,229 2,309 19,701 4,453
-------- -------- -------- -------- -------- --------
Total cost of invest-
ments at end of year 52,208 33,305 69,581 10,008 143,503 9,176
Add: Unrealized appreci-
ation (depreciation) (124) 402 2,931 413 36,486 297
-------- -------- -------- -------- -------- --------
Total market value of
investments at end of
year $ 52,084 $ 33,707 $ 72,512 $ 10,421 $179,989 $ 9,473
======== ======== ======== ======== ======== ========
<CAPTION>
GROWTH EQUITY MULTI- BOND AND EQUITY
LT INCOME STRATEGY EQUITY(1) INCOME(1) INDEX
-------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total cost of invest-
ments at beginning of
year $ 79,297 $ 71,762 $ 71,200 $ 99,779
Add: Total net proceeds
from policy transac-
tions 29,507 29,622 22,282 $ 4,587 $ 721 53,891
Reinvested distributions
from the Fund:
(a) Net investment in-
come 530 1,017 3,014 12 10 2,490
(b) Net realized gain 4,126 6,110 4,516 18 1 4,910
-------- -------- -------- -------- -------- --------
Sub-Total 113,460 108,511 101,012 4,617 732 161,070
Less: Cost of invest-
ments disposed during
the year 14,401 7,749 3,871 443 66 20,745
-------- -------- -------- -------- -------- --------
Total cost of invest-
ments at end of year 99,059 100,762 97,141 4,174 666 140,325
Add: Unrealized appreci-
ation 11,379 30,724 16,211 16 19 46,963
-------- -------- -------- -------- -------- --------
Total market value of
investments at end of
year $110,438 $131,486 $113,352 $ 4,190 $ 685 $187,288
======== ======== ======== ======== ======== ========
<CAPTION>
INTER- EMERGING
NATIONAL MARKETS I II III IV
-------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total cost of invest-
ments at beginning of
year $ 83,435 $ 3,318 $ 77 $ 177 $ 527 $ 416
Add: Total net proceeds
from policy transac-
tions 43,255 9,168 502 723 3,713 1,343
Reinvested distributions
from the Fund:
(a) Net investment in-
come 2,251 41 8 68 73 50
(b) Net realized gain 2,096 3 13
-------- -------- -------- -------- -------- --------
Sub-Total 131,037 12,527 587 971 4,313 1,822
Less: Cost of invest-
ments disposed during
the year 16,037 3,429 43 209 1,421 251
-------- -------- -------- -------- -------- --------
Total cost of invest-
ments at end of year 115,000 9,098 544 762 2,892 1,571
Add: Unrealized appreci-
ation (depreciation) 13,941 (682) (5) 21 217 183
-------- -------- -------- -------- -------- --------
Total market value of
investments at end of
year $128,941 $ 8,416 $ 539 $ 783 $ 3,109 $ 1,754
======== ======== ======== ======== ======== ========
</TABLE>
- ----------------------------
(1) For the period from January 10, 1997 (commencement of operations) to
December 31, 1997.
58
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. TRANSACTIONS IN SEPARATE ACCOUNT UNITS AND SELECTED ACCUMULATION UNIT **
INFORMATION
Transactions in Separate Account units for the year ended December 31, 1997
and the selected accumulation unit information as of December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
VARIABLE ACCOUNTS
---------------------------------------------------------------------
GOVERN-
MONEY HIGH YIELD MANAGED MENT AGGRESSIVE
MARKET BOND BOND SECURITIES GROWTH EQUITY
----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 1,797,662 1,071,818 3,332,577 394,531 4,060,628 306,793
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 7,332,882 256,430 517,251 99,445 812,716 189,799
(b) Transfers--policy
charges and deductions (274,716) (72,698) (136,476) (28,791) (260,869) (42,787)
(c) Transfers in (from
other variable ac-
counts) 8,912,985 744,710 758,585 240,788 3,420,209 1,117,526
(d) Transfers out (to
other variable ac-
counts) (14,035,300) (666,562) (568,112) (200,607) (2,758,765) (720,928)
(e) Transfers--other (490,883) (60,970) (717,810) (25,763) (595,259) (9,566)
----------- ---------- --------- -------- ---------- ----------
Sub-Total 1,444,968 200,910 (146,562) 85,072 618,032 534,044
----------- ---------- --------- -------- ---------- ----------
Total units outstanding
at end of year 3,242,630 1,272,728 3,186,015 479,603 4,678,660 840,837
=========== ========== ========= ======== ========== ==========
Accumulation Unit Value:
At beginning of year $15.26 $24.20 $20.70 $19.85 $29.53 $10.86
At end of year $16.06 $26.48 $22.76 $21.73 $38.47 $11.27
<CAPTION>
GROWTH EQUITY MULTI- BOND AND EQUITY
LT INCOME STRATEGY EQUITY(1) INCOME(1) INDEX
----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 4,879,333 3,031,251 3,255,044 5,062,679
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 1,453,920 639,734 756,562 40,729 4,994 972,808
(b) Transfers--policy
charges and deductions (351,905) (177,390) (168,112) (7,611) (1,147) (279,773)
(c) Transfers in (from
other variable ac-
counts) 2,392,868 2,011,731 815,061 375,727 57,435 3,558,114
(d) Transfers out (to
other variable ac-
counts) (2,568,247) (1,473,786) (539,476) (39,428) (3,737) (1,811,915)
(e) Transfers--other (353,490) (421,911) (221,300) (4,231) 71 (1,805,725)
----------- ---------- --------- -------- ---------- ----------
Sub-Total 573,146 578,378 642,735 365,186 57,616 633,509
----------- ---------- --------- -------- ---------- ----------
Total units outstanding
at end of year 5,452,479 3,609,629 3,897,779 365,186 57,616 5,696,188
=========== ========== ========= ======== ========== ==========
Accumulation Unit Value:
At beginning of year $18.25 $28.32 $24.31 $10.00 $10.00 $24.73
At end of year $20.25 $36.43 $29.08 $11.47 $11.89 $32.88
<CAPTION>
INTER- EMERGING
NATIONAL MARKETS I II III IV
----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 5,140,103 333,810 7,649 17,011 51,927 41,571
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 1,256,235 196,931 7,660 15,681 56,619 32,122
(b) Transfers--policy
charges and deductions (344,327) (46,049) (2,403) (2,375) (12,514) (4,516)
(c) Transfers in (from
other variable ac-
counts) 2,634,912 1,014,227 42,342 52,906 309,339 87,218
(d) Transfers out (to
other variable ac-
counts) (2,220,624) (612,170) (1,263) (21,044) (157,101) (22,938)
(e) Transfers--other (241,927) (15,352) (1,685) (2,195) (4,897) (951)
----------- ---------- --------- -------- ---------- ----------
Sub-Total 1,084,269 537,587 44,651 42,973 191,446 90,935
----------- ---------- --------- -------- ---------- ----------
Total units outstanding
at end of year 6,224,372 871,397 52,300 59,984 243,373 132,506
=========== ========== ========= ======== ========== ==========
Accumulation Unit Value:
At beginning of year $18.96 $9.82 $10.08 $10.18 $10.46 $ 9.97
At end of year $20.72 $9.66 $10.31 $13.06 $12.77 $13.23
</TABLE>
- ----------------------------
(1) For the period from January 10, 1997 (commencement of operations) to
December 31, 1997.
**Accumulation Unit: unit of measure used to calculate the value of a Policy
Owner's interest in a Variable Account during the accumulation period.
59
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
UNAUDITED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
60
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH GOVERN-
MONEY YIELD MANAGED MENT AGGRESSIVE GROWTH EQUITY MULTI-
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME STRATEGY
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:
Money Market Portfolio (10,028
shares; cost $101,026)............ $100,854
High Yield Bond Portfolio (4,094
shares; cost $40,294)............. $37,296
Managed Bond Portfolio (8,677
shares; cost $94,207)............. $100,414
Government Securities Portfolio
(1,313 shares; cost $13,865)...... $14,638
Growth Portfolio (8,380 shares;
$180,790)......................... $147,508
Aggressive Equity Portfolio (1,258
shares; cost $14,732)............. $13,481
Growth LT Portfolio (7,565 shares;
cost $128,432).................... $152,955
Equity Income Portfolio (6,333
shares; cost $131,076)............ $140,120
Multi-Strategy Portfolio (7,445
shares; cost $107,233)............ $115,883
Receivables:
Due from Pacific Life Insurance
Company 2,389 9 14 78 16
Fund shares redeemed.............. 2 11 332 452
------------------------------------------------------------------------------------
Total Assets....................... 103,243 37,298 100,423 14,652 147,519 13,813 153,407 140,198 115,899
------------------------------------------------------------------------------------
<CAPTION>
LIABILITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payables:
Due to Pacific Life Insurance
Company........................... 2 16 332 461
Fund shares purchased............. 2,366 4 14 91 16
------------------------------------------------------------------------------------
Total Liabilities.................. 2,366 2 4 14 16 332 461 91 16
------------------------------------------------------------------------------------
NET ASSETS......................... $100,877 $37,296 $100,419 $14,638 $147,503 $13,481 $152,946 $140,107 $115,883
====================================================================================
</TABLE>
See Notes to Financial Statements
61
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BOND AND EQUITY INTER- EMERGING
EQUITY INCOME INDEX NATIONAL MARKETS VARIABLE VARIABLE VARIABLE VARIABLE
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT I II III IV
--------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:
Equity Portfolio (468 shares; cost
$12,219).............................. $11,014
Bond and Income Portfolio (239 shares;
cost $3,136).......................... $3,256
Equity Index Portfolio (8,457 shares;
cost $184,645)........................ $226,245
International Portfolio (9,432 shares;
cost $144,669)........................ $135,707
Emerging Markets Portfolio (1,286
shares; cost $11,206)................. $7,925
Brandes International Equity Portfolio
(117 shares; cost $1,202)............. $1,117
Turner Core Growth Portfolio (119
shares; cost $1,697).................. $1,741
Frontier Capital Appreciation Portfo-
lio (269 shares; cost $3,810)......... $3,221
Enhanced U.S. Equity Portfolio (223
shares; cost $3,411).................. $3,440
Receivables:
Due from Pacific Life Insurance Compa-
ny.................................... 3 132
Fund shares redeemed.................. 583 660 141
--------------------------------------------------------------------------------
Total Assets........................... 11,597 3,259 226,377 136,367 8,066 1,117 1,741 3,221 3,440
--------------------------------------------------------------------------------
<CAPTION>
LIABILITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payables:
Due to Pacific Life Insurance Company. 583 660 141
Fund shares purchased................. 3 142
--------------------------------------------------------------------------------
Total Liabilities...................... 583 3 142 660 141
--------------------------------------------------------------------------------
NET ASSETS............................. $11,014 $3,256 $226,235 $135,707 $7,925 $1,117 $1,741 $3,221 $3,440
================================================================================
</TABLE>
See Notes to Financial Statements
62
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH GOVERN-
MONEY YIELD MANAGED MENT AGGRESSIVE GROWTH EQUITY MULTI-
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME STRATEGY
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends.............. $2,377 $2,566 $4,265 $690 $20,018 $6,250 $18,523 $11,113
--------------------------------------------------------------------------------------
Net Investment Income... 2,377 2,566 4,265 690 20,018 6,250 18,523 11,113
--------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS
Net realized gain from
security transactions.. 24 121 359 119 10,212 $659 4,893 5,212 2,639
Net unrealized appreci-
ation (depreciation) on
investments............ (48) (3,400) 3,277 360 (69,768) (1,548) 13,143 (21,680) (7,562)
--------------------------------------------------------------------------------------
Net Realized And
Unrealized Gain (Loss)
On Investments.......... (24) (3,279) 3,636 479 (59,556) (889) 18,036 (16,468) (4,923)
--------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS.............. $2,353 $(713) $7,901 $1,169 $(39,538) $(889) $24,286 $2,055 $6,190
======================================================================================
</TABLE>
See Notes to Financial Statements
63
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (CONTINUED)
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BOND AND EQUITY INTER- EMERGING
EQUITY INCOME INDEX NATIONAL MARKETS VARIABLE VARIABLE VARIABLE VARIABLE
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT I II (1) III IV
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends............................. $480 $87 $4,025 $11,321 $16 $21 $8
---------------------------------------------------------------------------------
Net Investment Income.................. 480 87 4,025 11,321 16 21 8
---------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) from security
transactions......................... 350 19 10,796 4,450 (1,273) $3 $25 (24) 47
Net unrealized appreciation
(depreciation) on investments........ (1,221) 101 (5,363) (22,904) (2,598) (81) 24 (806) (154)
---------------------------------------------------------------------------------
Net Realized And Unrealized Gain (Loss)
On Investments........................ (871) 120 5,433 (18,454) (3,871) (78) 49 (830) (107)
---------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS............. $(391) $207 $9,458 $(7,133) $(3,855) $(78) $49 $(809) $(99)
---------------------------------------------------------------------------------
</TABLE>
(1) Total dividends received in full for the nine-month period ended September
30, 1998 was less than $500.
See Notes to Financial Statements
64
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH GOVERN-
MONEY YIELD MANAGED MENT AGGRESSIVE GROWTH EQUITY MULTI-
MARKET BOND BOND SECURITIES GROWTH EQUITY LT INCOME STRATEGY
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $2,377 $2,566 $4,265 $690 $20,018 $6,250 $18,523 $11,113
Net realized gain from
security transactions.. 24 121 359 119 10,212 $659 4,893 5,212 2,639
Net unrealized
appreciation
(depreciation) on
investments............ (48) (3,400) 3,277 360 (69,768) (1,548) 13,143 (21,680) (7,562)
------------------------------------------------------------------------------------------
Net Increase (Decrease)
In Net Assets Resulting
From Operations......... 2,353 (713) 7,901 1,169 (39,538) (889) 24,286 2,055 6,190
------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net
premiums............... 111,151 5,515 10,598 1,287 23,823 2,964 21,093 18,726 9,547
Transfers--policy
charges and deductions. (4,347) (1,643) (2,773) (477) (8,003) (677) (6,459) (5,765) (3,880)
Transfers in (from
other variable
accounts).............. 219,388 24,342 44,868 5,778 69,800 15,166 51,100 27,978 9,317
Transfers out (to other
variable accounts)..... (272,931) (22,145) (29,715) (3,018) (70,581) (12,096) (42,396) (30,209) (15,152)
Transfers--other....... (6,821) (1,767) (2,972) (522) (7,987) (460) (5,116) (4,164) (3,491)
------------------------------------------------------------------------------------------
Net Increase (Decrease)
In Net Assets
Derived From Policy
Transactions........... 46,440 4,302 20,006 3,048 7,052 4,897 18,222 6,566 (3,659)
------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS........... 48,793 3,589 27,907 4,217 (32,486) 4,008 42,508 8,621 2,531
------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period.... 52,084 33,707 72,512 10,421 179,989 9,473 110,438 131,486 113,352
------------------------------------------------------------------------------------------
End of Period.......... $100,877 $37,296 $100,419 $14,638 $147,503 $13,481 $152,946 $140,107 $115,883
==========================================================================================
</TABLE>
See Notes to Financial Statements
65
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BOND AND EQUITY INTER- EMERGING
EQUITY INCOME INDEX NATIONAL MARKETS VARIABLE VARIABLE VARIABLE VARIABLE
VARIABLE VARIABLE VARIABLE VARIABLE VARIABLE ACCOUNT ACCOUNT ACCOUNT ACCOUNT
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT I II III IV
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $480 $87 $4,025 $11,321 $16 $21 $8
Net realized gain
(loss) from security
transactions........... 350 19 10,796 4,450 (1,273) $3 $25 (24) 47
Net unrealized
appreciation
(depreciation) on
investments............ (1,221) 101 (5,363) (22,904) (2,598) (81) 24 (806) (154)
------------------------------------------------------------------------------------
Net Increase (Decrease)
In Net Assets Resulting
From Operations......... (391) 207 9,458 (7,133) (3,855) (78) 49 (809) (99)
------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS FROM
POLICY TRANSACTIONS
Transfer of net
premiums............... 1,777 552 31,565 21,469 2,360 169 265 1,040 1,171
Transfers--policy
charges and deductions. (398) (112) (9,221) (6,241) (490) (34) (53) (185) (110)
Transfers in (from
other variable
accounts).............. 11,317 4,292 74,058 55,294 17,922 592 813 920 1,107
Transfers out (to other
variable accounts)..... (5,058) (2,263) (59,122) (51,668) (16,171) (65) (99) (845) (377)
Transfers--other....... (423) (105) (7,791) (4,955) (257) (6) (17) (9) (6)
------------------------------------------------------------------------------------
Net Increase In Net
Assets
Derived From Policy
Transactions............ 7,215 2,364 29,489 13,899 3,364 656 909 921 1,785
------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS........... 6,824 2,571 38,947 6,766 (491) 578 958 112 1,686
------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period.... 4,190 685 187,288 128,941 8,416 539 783 3,109 1,754
------------------------------------------------------------------------------------
End of Period.......... $11,014 $3,256 $226,235 $135,707 $7,925 $1,117 $1,741 $3,221 $3,440
====================================================================================
</TABLE>
See Notes to Financial Statements
66
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 is currently comprised of eighteen 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 Variable Account, the Bond and
Income 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 fourteen 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 the corresponding portfolios of M Fund, Inc. (collectively, the
"Funds"). Each Variable Account pursues different investment objectives and
policies.
The Separate Account was established by Pacific Life Insurance Company
(formerly named Pacific Mutual Life Insurance) 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 Life. The
assets of the Separate Account will not be charged with any liabilities
arising out of any other business conducted by Pacific Life, but the
obligations of the Separate Account, including benefits related to variable
life insurance, are obligations of Pacific Life.
The Separate Account held by Pacific Life represents funds from individual
flexible premium variable life policies. The assets of the Separate Account
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.
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 Life, 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 Life with respect to
the operations of the Separate Account.
2. DIVIDENDS
During the nine months period ended September 30, 1998, the Funds have
declared dividends for each portfolio except for the Aggressive Equity
Portfolio and the Brandes International Equity Portfolio (formerly Edinburgh
Overseas Equity 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.
3. CHARGES AND EXPENSES
With respect to variable life insurance policies funded by the Separate
Account, Pacific Life makes certain deductions from premiums for sales load
and state premium taxes before amounts are allocated to the Separate Account.
Pacific Life also makes certain deductions from the net assets of each
Variable Account for the mortality and expense risks Pacific Life 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 Life.
4. RELATED PARTY AGREEMENT
Pacific Mutual Distributors, Inc., a wholly-owned subsidiary of Pacific Life,
serves as principal underwriter of variable life insurance policies funded by
interests in the Separate Account, without remuneration from the Separate
Account.
67
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. SEPARATE ACCOUNT'S COST OF INVESTMENTS 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). The cost and market
value of total Separate Account's investments in the Funds as of September 30,
1998 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
VARIABLE ACCOUNTS
--------------------------------------------------------------
GOVERN-
MONEY HIGH YIELD MANAGED MENT AGGRESSIVE
MARKET BOND BOND SECURITIES GROWTH EQUITY
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of period $52,208 $33,305 $69,581 $10,008 $143,503 $9,176
Add: Total net
proceeds from policy
transactions 146,401 16,268 26,533 5,421 44,435 10,551
Reinvested
distributions from
the Funds:
(a) Net investment
income 2,377 2,245 3,235 473
(b) Net realized
gain 321 1,030 217 20,018
--------------------------------------------------------------
Sub-Total 200,986 52,139 100,379 16,119 207,956 19,727
Less: Cost of
investments disposed
during the period 99,960 11,845 6,172 2,254 27,166 4,995
--------------------------------------------------------------
Total cost of
investments at end of
period 101,026 40,294 94,207 13,865 180,790 14,732
Add:Unrealized
appreciation
(depreciation) (172) (2,998) 6,207 773 (33,282) (1,251)
--------------------------------------------------------------
Total market value of
investments at end of
period $100,854 $37,296 $100,414 $14,638 $147,508 $13,481
--------------------------------------------------------------
<CAPTION>
GROWTH EQUITY MULTI- BOND AND EQUITY
LT INCOME STRATEGY EQUITY INCOME INDEX
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of period $99,059 $100,762 $97,141 $4,174 $666 $140,325
Add:Total net proceeds
from policy
transactions 35,955 23,997 10,272 11,289 3,275 56,247
Reinvested
distributions from
the Funds:
(a) Net investment
income 327 922 2,488 13 84 2,305
(b) Net realized
gain 5,923 17,601 8,625 467 3 1,720
--------------------------------------------------------------
Sub-Total 141,264 143,282 118,526 15,943 4,028 200,597
Less: Cost of
investments disposed
during the period 12,832 12,206 11,293 3,724 892 15,952
--------------------------------------------------------------
Total cost of
investments at end of
period 128,432 131,076 107,233 12,219 3,136 184,645
Add:Unrealized
appreciation
(depreciation) 24,523 9,044 8,650 (1,205) 120 41,600
--------------------------------------------------------------
Total market value of
investments at end of
period $152,955 $140,120 $115,883 $11,014 $3,256 $226,245
--------------------------------------------------------------
<CAPTION>
INTER- EMERGING
NATIONAL MARKETS I II III IV
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of period $115,000 $9,098 $544 $762 $2,892 $1,571
Add: Total net
proceeds from policy
transactions 33,984 7,561 703 1,016 1,570 1,973
Reinvested
distributions from
the Funds:
(a) Net investment
income 821 16
(b) Net realized
gain 10,500 21 8
--------------------------------------------------------------
Sub-Total 160,305 16,675 1,247 1,778 4,483 3,552
Less: Cost of
investments disposed
during the period 15,636 5,469 45 81 673 141
--------------------------------------------------------------
Total cost of
investments at end of
period 144,669 11,206 1,202 1,697 3,810 3,411
Add:Unrealized
appreciation
(depreciation) (8,962) (3,281) (85) 44 (589) 29
--------------------------------------------------------------
Total market value of
investments at end of
period $135,707 $7,925 $1,117 $1,741 $3,221 $3,440
--------------------------------------------------------------
</TABLE>
68
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. TRANSACTIONS IN SEPARATE ACCOUNT UNITS AND SELECTED ACCUMULATION UNIT **
INFORMATION
Transactions in Separate Account units for the period ended September 30,
1998 and the selected accumulation unit information as of September 30, 1998
and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
VARIABLE ACCOUNTS
----------------------------------------------------------------------
GOVERN-
MONEY HIGH YIELD MANAGED MENT AGGRESSIVE
MARKET BOND BOND SECURITIES GROWTH EQUITY
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of period 3,242,630 1,272,728 3,186,015 479,603 4,678,660 840,837
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 6,798,641 201,074 452,137 57,559 616,017 247,236
(b) Transfers--policy
charges and deductions (265,513) (61,231) (117,987) (21,302) (205,867) (56,232)
(c) Transfers in (from
other variable
accounts) 13,240,830 923,461 1,858,708 311,291 2,939,106 1,258,202
(d) Transfers out (to
other variable
accounts) (16,564,224) (832,059) (1,228,023) (181,367) (2,838,767) (1,003,443)
(e) Transfers--other (412,506) (66,431) (122,580) (31,338) (321,494) (38,095)
----------------------------------------------------------------------
Sub-Total 2,797,228 164,814 842,255 134,843 188,995 407,668
----------------------------------------------------------------------
Total units outstanding
at end of period 6,039,858 1,437,542 4,028,270 614,446 4,867,655 1,248,505
----------------------------------------------------------------------
Accumulation Unit
Value: At beginning
of period $16.06 $26.48 $22.76 $21.73 $38.47 $11.27
At end of period $16.70 $25.94 $24.93 $23.82 $30.30 $10.80
<CAPTION>
GROWTH EQUITY MULTI- BOND AND EQUITY
LT INCOME STRATEGY EQUITY INCOME INDEX
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of period 5,452,479 3,609,629 3,897,779 365,186 57,616 5,696,188
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 881,869 469,183 307,802 137,553 44,913 869,451
(b) Transfers--policy
charges and deductions (269,157) (144,682) (125,430) (30,259) (9,075) (252,995)
(c) Transfers in (from
other variable
accounts) 2,142,851 1,722,785 613,967 851,689 345,630 2,392,866
(d) Transfers out (to
other variable
accounts) (1,807,337) (1,655,606) (743,412) (375,327) (182,100) (1,950,175)
(e) Transfers--other (218,497) (228,584) (171,225) (31,482) (8,522) (257,302)
----------------------------------------------------------------------
Sub-Total 729,729 163,096 (118,298) 552,174 190,846 801,845
----------------------------------------------------------------------
Total units outstanding
at end of period 6,182,208 3,772,725 3,779,481 917,360 248,462 6,498,033
----------------------------------------------------------------------
Accumulation Unit
Value: At beginning
of period $20.25 $36.43 $29.08 $11.47 $11.89 $32.88
At end of period $24.74 $37.14 $30.66 $12.01 $13.10 $34.82
<CAPTION>
INTER- EMERGING
NATIONAL MARKETS I II III IV
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of period 6,224,372 871,397 52,300 59,984 243,373 132,506
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 945,718 271,511 15,062 18,252 84,471 80,069
(b) Transfers--policy
charges and deductions (275,830) (56,743) (3,090) (3,662) (14,855) (7,527)
(c) Transfers in (from
other variable
accounts) 2,291,653 2,272,816 56,217 57,466 75,405 77,138
(d) Transfers out (to
other variable
accounts) (2,138,109) (2,067,766) (7,097) (7,682) (74,680) (28,541)
(e) Transfers--other (205,062) (32,891) (669) (1,255) (776) (491)
----------------------------------------------------------------------
Sub-Total 618,370 386,927 60,423 63,119 69,565 120,648
----------------------------------------------------------------------
Total units outstanding
at end of period 6,842,742 1,258,324 112,723 123,103 312,938 253,154
----------------------------------------------------------------------
Accumulation Unit
Value: At beginning of
period $20.72 $9.66 $10.31 $13.06 $12.77 $13.23
At end of period $19.83 $6.30 $9.91 $14.14 $10.29 $13.59
</TABLE>
- ---------------------------
**Accumulation Unit: unit of measure used to calculate the value of a Policy
Owner's interest in a Variable Account during the accumulation period.
69
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996 AND FOR EACH OF
THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
70
<PAGE>
INDEPENDENT AUDITORS' REPORT
Pacific Life Insurance Company and
Subsidiaries:
We have audited the accompanying consolidated statements of financial
condition of Pacific Life Insurance Company (formerly Pacific Mutual Life
Insurance Company) and subsidiaries (the "Company") as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholder's equity and cash flows for each of the three years in the
period ended December 31, 1997. These 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 Life Insurance
Company and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 19, 1998
71
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1997 1996
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $13,990.7 $12,193.8
Equity securities 346.4 260.8
Mortgage loans 1,922.1 1,477.3
Real estate 192.1 280.0
Policy loans 3,769.2 3,131.8
Short-term investments 83.8 66.1
Other investments 380.2 208.0
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS 20,684.5 17,617.8
Cash and cash equivalents 110.4 109.0
Deferred policy acquisition costs 716.9 531.5
Accrued investment income 255.4 202.5
Other assets 636.5 462.4
Separate account assets 11,605.1 8,142.1
- -------------------------------------------------------------------------------
TOTAL ASSETS $34,008.8 $27,065.3
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life, annuity and other investment contract de-
posits $16,644.5 $13,877.4
Future policy benefits 2,133.8 2,506.5
Short-term and long-term debt 253.6 270.1
Other liabilities 1,224.5 572.0
Separate account liabilities 11,605.1 8,142.1
- -------------------------------------------------------------------------------
Total Liabilities 31,861.5 25,368.1
- -------------------------------------------------------------------------------
Commitments and contingencies
Stockholder's Equity:
Common stock - $50 par value; 600,000 shares authorized,
issued and outstanding 30.0
Paid-in capital 120.1
Retained earnings 1,422.0 1,318.0
Unrealized gain on securities available for sale, net 575.2 379.2
- -------------------------------------------------------------------------------
Total Stockholder's Equity 2,147.3 1,697.2
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $34,008.8 $27,065.3
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
72
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Insurance premiums $ 504.3 $ 465.4 $ 458.5
Policy fees from universal life, annuity and other
investment contract deposits 431.2 348.6 309.0
Net investment income 1,225.3 1,087.3 1,038.4
Net realized capital gains 85.3 44.0 61.5
Commission revenue 146.6 79.6 62.0
Other income 181.7 123.1 90.3
- ------------------------------------------------------------------------------
TOTAL REVENUES 2,574.4 2,148.0 2,019.7
- ------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 797.8 665.0 675.2
Policy benefits paid or provided 675.7 652.9 647.5
Commission expenses 303.7 233.6 197.5
Operating expenses 507.7 316.2 278.6
- ------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,284.9 1,867.7 1,798.8
- ------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 289.5 280.3 220.9
Provision for income taxes 113.5 113.7 86.1
- ------------------------------------------------------------------------------
NET INCOME $ 176.0 $ 166.6 $ 134.8
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
73
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Common Stock on Securities
------------- Paid-in Retained Available
Shares Amount Capital Earnings for Sale, net Total
- ---------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1995 $1,016.6 $(207.3) $ 809.3
Net income 134.8 134.8
Change in unrealized
gain (loss) on
securities available
for sale, net 689.3 689.3
- ---------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1995 1,151.4 482.0 1,633.4
Net income 166.6 166.6
Change in unrealized
gain on securities
available for sale, net (102.8) (102.8)
- ---------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1996 1,318.0 379.2 1,697.2
Net income 176.0 176.0
Change in unrealized
gain on securities
available for sale, net 196.0 196.0
Issuance of partnership
units by affiliate $ 85.1 85.1
Initial member
capitalization of
Pacific Mutual Holding
Company (2.0) (2.0)
Issuance of common stock 0.6 $30.0 35.0 (65.0) --
Dividend paid to parent (5.0) (5.0)
- ---------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1997 0.6 $30.0 $120.1 $1,422.0 $ 575.2 $2,147.3
- ---------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
74
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 176.0 $ 166.6 $ 134.8
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization on fixed maturities (26.6) (45.2) (67.2)
Depreciation and other amortization 38.3 43.8 36.8
Deferred income taxes (14.4) (49.8) (30.3)
Net realized capital gains (85.3) (44.0) (61.5)
Net change in deferred policy acquisition
costs (185.4) (140.4) 48.8
Interest credited to universal life, annuity
and other investment contract deposits 797.8 665.0 675.2
Change in accrued investment income (52.9) (3.7) (16.1)
Change in future policy benefits (372.7) 62.3 88.8
Change in other assets and liabilities 577.4 158.1 151.9
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 852.2 812.7 961.2
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (6,343.2) (4,525.0) (3,001.3)
Sales 2,247.5 2,511.0 1,940.3
Maturities and repayments 2,406.8 1,184.7 926.9
Held to maturity securities:
Purchases (181.9)
Sales 62.3
Maturities and repayments 111.0
Repayments of mortgage loans 179.3 220.4 267.7
Proceeds from sales of mortgage loans and real
estate 104.4 14.5 27.4
Purchases of mortgage loans and real estate (643.7) (414.3) (244.7)
Distributions from partnerships 91.6 78.8 49.0
Change in policy loans (637.4) (338.5) (389.8)
Change in short-term investments (17.7) 37.2 (66.7)
Other investing activity, net 78.8 (144.5) (137.2)
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,533.6) (1,375.7) (637.0)
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
75
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1997 1996 1995
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,373.6 $ 2,105.0 $ 1,437.9
Withdrawals (2,667.3) (1,756.6) (1,774.2)
Net change in short-term debt 8.5 42.5 (38.8)
Repayment of long-term debt (25.0) (5.0) (5.0)
Initial capitalization of Pacific Mutual
Holding Company (2.0)
Dividend paid to parent (5.0)
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING AC-
TIVITIES 1,682.8 385.9 (380.1)
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents 1.4 (177.1) (55.9)
Cash and cash equivalents, beginning of year 109.0 286.1 342.0
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 110.4 $ 109.0 $ 286.1
==============================================================================
</TABLE>
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of an insurance block of business as
discussed in Note 5, the following assets and liabilities were assumed:
<TABLE>
<S> <C>
Cash $ 1,215.9
Policy loans 440.3
Other assets 43.4
---------
Total assets assumed $ 1,699.6
---------
Policyholder account values $ 1,693.8
Other liabilities 5.8
---------
Total liabilities assumed $ 1,699.6
=========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion as discussed in Note 1, $65 million of retained
earnings was allocated for the issuance of 600,000 shares of common stock with
a par value totaling $30 million and $35 million was allocated to paid-in
capital.
================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<S> <C> <C> <C>
Income taxes paid $ 144.5 $ 185.9 $ 96.9
Interest paid $ 26.1 $ 27.2 $ 23.3
================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
76
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
CONVERSION TO MUTUAL HOLDING COMPANY STRUCTURE
Pursuant to consent received from the Insurance Department of the State of
California, Pacific Mutual Life Insurance Company ("Pacific Mutual")
implemented a plan of conversion to form a mutual holding company
structure (the "Conversion") on September 1, 1997. The Conversion created
Pacific LifeCorp, an intermediate stock holding company and Pacific Mutual
Holding Company ("PMHC"), a mutual holding company. Pacific Mutual was
converted to a stock life insurance company and renamed Pacific Life
Insurance Company ("Pacific Life"). Under their respective charters, PMHC
must always own 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 PMHC, consisting
principally of the right to vote on the election of the Board of Directors
of PMHC and on other matters, and certain rights upon liquidation or
dissolution of PMHC.
As a result of the Conversion, $65 million of retained earnings was
allocated for the issuance of 600,000 shares of common stock with a par
value totaling $30 million and $35 million was allocated to paid-in
capital.
DESCRIPTION OF BUSINESS
Pacific Life was established in 1868 and is organized under the laws of
the State of California as a stock life insurance company. Pacific Life
conducts business in every state except New York.
Pacific 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,
asset 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 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 Life
Insurance Company and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Life and its wholly-owned insurance
subsidiaries, PM Group Life Insurance Company ("PM Group") and World-Wide
Holdings Limited, and its noninsurance subsidiaries, Pacific Asset
Management LLC ("PAM"), Pacific Mutual Distributors, Inc. ("PMD"), Pacific
Mutual Realty Finance, Inc. and Pacific Mezzanine Associates, L.L.C. All
significant intercompany transactions and balances have been eliminated.
Pacific 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).
PAM was initially capitalized on December 31, 1997, when Pacific Life
completed a subsidiary restructuring in which all the assets and
liabilities of Pacific Financial Asset Management Corporation ("PFAMCo")
were contributed into this newly formed limited liability company. PFAMCo
was then merged into Pacific Life. On October 30, 1997, Pacific Corinthian
Life Insurance Company ("PCL"-Note 4), a wholly-owned insurance
subsidiary, was merged into Pacific Life, with Pacific Life as the
surviving entity.
ACCOUNTING PRONOUNCEMENTS ADOPTED
In 1996, the Company 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
77
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Principles to Mutual Life Insurance and Other Enterprises" (the
"Interpretation") issued by the Financial Accounting Standards Board
("FASB"). SFAS No. 120 and the Interpretation permit mutual life insurance
companies and their insurance subsidiaries to adopt all applicable
authoritative GAAP pronouncements in any general purpose financial
statements that they may issue. This differs from prior years when the
Company issued its regulatory financial statements as general purpose
financial statements. The accompanying consolidated financial statements
for 1997, 1996 and 1995 reflect the effects of implementing SFAS No. 120
and the Interpretation.
On January 1, 1997, the Company adopted 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 condition, and determines when related revenues and
expenses should be recognized. Adoption of this accounting standard did
not have a significant impact on the consolidated financial position or
results of operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general
purpose financial statements. The Company currently plans to adopt SFAS
No. 130 on January 1, 1998.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132 revises
current note disclosure requirements for employers' pensions and other
retiree benefits. It does not address recognition or measurement issues.
The Company plans to adopt SFAS No. 132 during 1998.
INVESTMENTS
Available for sale fixed maturity and equity securities are reported at
estimated fair value, with unrealized gains and losses, net of deferred
income tax and adjustments related to deferred policy acquisition costs,
included as a separate component of equity on the accompanying
consolidated statements of financial condition. Trading securities, which
are included in short-term investments, are reported at estimated fair
value with unrealized gains and losses included in net realized capital
gains 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 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 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
78
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the securities at the date of transfer. The estimated 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 determined that the reclassification of these
securities as available for sale was appropriate.
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 estimated fair value and include all
trading securities.
Derivative financial instruments are carried at estimated 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, certain of the Company's investment management and
advisory subsidiaries 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"). In December 1997, PIMCO Advisors
completed a transaction in which it acquired the assets of Oppenheimer
Capital, L.P., including its interest in Oppenheimer Capital, by issuing
approximately 33 million PIMCO Advisors General and Limited Partner units.
In connection with this transaction, the Company increased its investment
in PIMCO Advisors to reflect the excess of the Company's pro rata share of
PIMCO Advisors partners' capital subsequent to this transaction over the
carrying value of the Company's investment in PIMCO Advisors. The net
result of this transaction was to directly increase stockholder's equity
by $85.1 million. The Company's beneficial ownership in PIMCO Advisors was
approximately 42% prior to this transaction and 31% subsequent to the
transaction. Deferred taxes as a result of this transaction have been
established on the accompanying consolidated financial statements. This
investment, which is included in other investments on the accompanying
consolidated statements of financial condition, is accounted for using 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
79
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized, using assumptions consistent with those used in computing
policy reserves. For the years ended December 31, 1997, 1996 and 1995, net
amortization of deferred policy acquisition costs included in commission
expenses amounted to $50.2 million, $42.6 million and $39.4 million,
respectively, and included in operating expenses amounted to $29.4
million, $27.4 million and $20.8 million, respectively, on the
accompanying consolidated statements of operations.
PRESENT VALUE OF FUTURE PROFITS
Included in other assets on the accompanying consolidated statement of
financial condition as of December 31, 1996 was $16.1 million which
represented the present value of estimated future profits of acquired
business in connection with the rehabilitation of First Capital Life
Insurance Company ("FCL"-Note 4). The aforementioned future profits were
discounted to provide an appropriate rate of return and were being
amortized over the rehabilitation plan period. Amortization for the years
ended December 31, 1997, 1996 and 1995 amounted to $16.1 million, $24.2
million and $17.1 million, respectively, and is included in commission
expenses in the accompanying consolidated statements of operations. 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 primarily ranged from 4.0% to 8.4% during 1997,
1996 and 1995.
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 1997, 1996 and 1995.
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
are dividends to policyholders.
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,
1997 and 1996, 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, 1997, has accrued in other liabilities on
the accompanying consolidated statements of financial condition 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.
80
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Commission revenue from Pacific Life's broker dealer subsidiaries is
generally recorded on a settlement basis, generally the third business day
following the trade date. The difference between the settlement date and
trade date is not considered material.
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. Depreciation and
amortization of other assets is included in operating expenses on the
accompanying consolidated statements of operations.
INCOME TAXES
Pacific Life is taxed as a life insurance company for income tax purposes
and is included in the consolidated income tax returns of PMHC. The amount
of 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
contract owners.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 6 and
7 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.
BUSINESS RISKS
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include interest
rate risk, credit risk and legal and regulatory changes.
Interest rate risk is the potential for interest rates to change, which
can cause fluctuations in the value of investments. To the extent that
fluctuations in interest rates cause the duration of assets and
liabilities to differ, the Company may have to sell assets prior to their
maturity and realize losses. The Company controls its exposure to this
risk by, among other things, asset/liability matching techniques which
attempt to match the duration of assets and liabilities and utilization of
derivative instruments.
81
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Credit risk is the risk that issuers of investments owned by the Company
may default or that other parties may not be able to pay amounts due to
the Company. 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 also 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.
The Company is subject to various state and Federal regulatory
authorities. The potential exists for changes in regulatory initiatives
which can result in additional, unanticipated expense to the Company.
Existing Federal laws and regulations affect the taxation of life
insurance or annuity products and insurance companies. There can be no
assurance as to what, if any, future legislation might be enacted, or if
enacted, whether such legislation would contain provisions with possible
negative effects on the Company's life insurance or annuity products.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
financial statement presentation.
2. STATUTORY RESULTS
The following are reconciliations of statutory capital and surplus and
statutory net income for Pacific 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 stockholder's
equity and net income included in the accompanying consolidated financial
statements:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------
(In Millions)
<S> <C> <C>
Statutory capital and surplus $ 944.8 $ 815.2
Deferred policy acquisition costs 730.7 542.0
Unrealized gain on securities available for
sale, net 575.2 379.2
Asset valuation reserve 252.4 209.5
Deferred income tax 240.9 174.6
Subsidiary equity 108.7 60.7
Non-admitted assets 25.2 22.8
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (511.5) (340.4)
Other (69.5) (16.8)
------------------
Stockholder's equity as reported herein $2,147.3 $1,697.2
------------------
</TABLE>
82
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---------------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 121.5 $ 113.1 $ 85.1
Deferred policy acquisition costs 160.4 111.2 76.4
Deferred income tax 41.2 70.9 31.5
Interest maintenance reserve 7.6 3.8 12.2
Net realized gain (loss) on trading se-
curities (5.8) (11.6) 13.2
Earnings of subsidiaries (40.6) (33.0) 5.9
Insurance and annuity reserves (107.0) (91.3) (95.5)
Other (1.3) 3.5 6.0
--------------------------
Net income as reported herein $ 176.0 $ 166.6 $ 134.8
--------------------------
</TABLE>
RISK-BASED CAPITAL
Risk-based capital is a method developed by the National Association of
Insurance Commissioners ("NAIC") to measure the minimum amount of capital
appropriate for an insurance company to support its overall business
operations in consideration of its size and risk profile. 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. The adequacy of a
company's actual capital is measured by comparing it to the risk-based
capital as determined by the formulas. Companies below minimum risk-based
capital requirements are classified within certain levels, each of which
requires specified corrective action. As of December 31, 1997 and 1996,
Pacific Life and PM Group exceeded the minimum risk-based capital
requirements.
DIVIDEND RESTRICTIONS
Dividend payments by Pacific Life to its parent cannot exceed the greater
of 10% of statutory capital and surplus as of the preceding year end or
the statutory net gain from operations for the previous calendar year,
without prior approval from the Insurance Department of the State of
California. Based on this limitation and 1997 statutory results, Pacific
Life could pay approximately $76.5 million in dividends in 1998 without
prior approval.
Extraordinary dividends to Pacific Life from PM Group are subject to
regulatory restrictions and approvals by the Insurance Department of the
State of Arizona, PM Group's state of domicile. The maximum amount of
ordinary dividends that can be paid by PM Group without restriction cannot
exceed the lesser of 10% of surplus as regards policyholders, or the
statutory net gain from operations. During 1997, 1996 and 1995, PM Group
received approval to pay dividends of $14 million, $25 million and $25
million for the years ended December 31, 1997, 1996 and 1995 of which $8
million, $18 million and $17.2 million, respectively, were considered
extraordinary.
In accordance with the terms of the rehabilitation agreement (Note 4), PCL
was 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 were paid.
83
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK
In connection with the Conversion, an arrangement known as a closed block
(the "Closed Block"), was established, for dividend purposes only, for the
exclusive benefit of certain individual life insurance policies that have
an experience based dividend scale for 1997. The Closed Block is designed
to give reasonable assurance to holders of Closed Block policies that
policy dividends will not change solely as a result of the Conversion.
Assets of Pacific Life have been allocated to the Closed Block in an
amount that produces cash flows, which, together with anticipated
revenues, are expected to be sufficient to support the policies. Pacific
Life is not required to support the payment of dividends on these policies
from its general funds. The Closed Block will continue in effect until
either the last policy is no longer in force, or the dissolution of the
Closed Block. Total assets of $316.2 million and total liabilities of
$356.0 million for the Closed Block are included in other assets and other
liabilities, respectively, in the accompanying consolidated statements of
financial condition as of December 31, 1997. The contribution to income
from the Closed Block of $5.7 million, consisting of net revenues and
expenses generated by the Closed Block is included in other income in the
accompanying consolidated statements of operations for the year ended
December 31, 1997.
4. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
On September 30, 1997, PCL completed the rehabilitation of FCL pursuant to
a five-year rehabilitation plan approved by the California Superior Court
and the Insurance Department of the State of California (the
"Rehabilitation Plan"). Under the terms of the Rehabilitation Plan, FCL's
insurance policies in force, primarily individual annuities and universal
life insurance, were restructured and assumed by PCL on December 31, 1992,
pursuant to an assumption reinsurance agreement and asset purchase
agreement. On October 30, 1997, PCL was merged into Pacific Life, with
Pacific Life as the surviving entity.
5. ACQUISITION OF INSURANCE BLOCK OF BUSINESS
On June 1, 1997, Pacific Life acquired a block of corporate-owned life
insurance ("COLI") policies from Confederation Life Insurance Company
(U.S.) in Rehabilitation, which is currently under rehabilitation, which
consisted of approximately 38,000 policies having a face amount of
insurance of $8.6 billion and reserves of approximately $1.7 billion. The
assets received as part of this acquisition amounted to approximately $1.2
billion in cash and approximately $0.4 billion in policy loans. This block
is primarily non-leveraged COLI.
As part of this transaction, an amount equal to the excess of the
estimated fair value of the reserves assumed over the estimated fair value
of the assets acquired which represents the cost of acquiring the
business, amounting to $43.4 million at December 31, 1997, is included in
deferred policy acquisition costs in the accompanying consolidated
statements of financial condition. Amortization of this asset for the year
ended December 31, 1997 was $0.9 million and is included in commission
expenses in the accompanying consolidated statements of operations.
84
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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
Amortized ----------------- Estimated
Cost Gains Losses Fair Value
--------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Securities Available for Sale:
As of December 31, 1997:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 85.4 $ 17.5 $ 102.9
Obligations of states, political
subdivisions and foreign govern-
ments 730.2 89.4 $ 3.0 816.6
Corporate securities 7,704.8 594.3 72.7 8,226.4
Mortgage-backed and asset-backed
securities 4,597.7 147.1 15.5 4,729.3
Redeemable preferred stock 107.8 10.3 2.6 115.5
--------------------------------------
Total fixed maturity securities $13,225.9 $ 858.6 $ 93.8 $13,990.7
======================================
Total equity securities $ 231.7 $ 123.6 $ 8.9 $ 346.4
======================================
Securities Available for Sale:
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 govern-
ments 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
======================================
Total equity securities $ 229.6 $ 40.8 $ 9.6 $ 260.8
======================================
</TABLE>
85
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
The amortized cost and estimated fair values of fixed maturity securities
as of December 31, 1997, 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>
Securities Available for Sale:
Due in one year or less $ 969.9 $ 1,075.2
Due after one year through five years 2,678.4 2,823.1
Due after five years through ten years 2,810.1 2,939.3
Due after ten years 2,169.8 2,423.8
----------------------
8,628.2 9,261.4
Mortgage-backed and asset-backed securities 4,597.7 4,729.3
----------------------
Total $13,225.9 $13,990.7
----------------------
</TABLE>
Proceeds from sales of all securities available for sale during 1997, 1996
and 1995 were $2.2 billion, $2.5 billion and $1.9 billion, respectively.
Gross gains of $69.1 million, $89.3 million and $58.0 million and gross
losses of $32.9 million, $29.9 million and $32.3 million were realized on
those sales during 1997, 1996 and 1995, respectively.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 935.1 $ 831.6 $ 808.1
Equity securities 12.8 17.8 7.3
Mortgage loans 129.5 109.4 112.9
Real estate 53.6 51.3 43.2
Policy loans 137.1 113.0 105.2
Other 65.8 71.7 63.2
--------------------------
Gross investment income 1,333.9 1,194.8 1,139.9
Investment expense 108.6 107.5 101.5
--------------------------
Net investment income $1,225.3 $1,087.3 $1,038.4
--------------------------
</TABLE>
86
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
The change in gross unrealized gain (loss) on investments in available for
sale and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale and trading securities:
Fixed maturity $222.4 $(169.1) $1,039.3
Equity 85.7 6.5 17.2
------------------------
Total $308.1 $(162.6) $1,056.5
========================
</TABLE>
As of December 31, 1997 and 1996, investments in fixed maturity securities
with a carrying value of $14.4 million and $19.6 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, 1997. The Company has no non-income producing fixed maturity
securities, mortgage loans, real estate or other long-term investments as
of December 31, 1997.
7. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity se-
curities (Note 6) $14,337.1 $14,337.1 $12,454.6 $12,454.6
Mortgage loans 1,922.1 1,990.9 1,477.3 1,533.9
Policy loans 3,769.2 3,769.2 3,131.8 3,131.8
Cash and cash equivalents 110.4 110.4 109.0 109.0
Derivative financial instru-
ments:
Interest rate floors and
caps, options and swaptions 22.9 22.9 59.3
Interest rate swap contracts 0.5 0.5 1.0 1.0
Credit and total return
swaps 1.1 1.1
Foreign currency derivatives 4.1 4.1
Liabilities:
Guaranteed interest contracts 3,982.0 4,035.7 2,948.3 3,056.1
Deposit liabilities 733.5 737.4 799.6 800.6
Annuity liabilities 1,883.5 1,872.6 2,459.4 2,459.4
Surplus notes 149.6 164.7 149.6 157.5
Derivative financial instru-
ments:
Options written 1.6 1.6 1.5 1.5
Asset swap contracts 12.6 12.6 12.5 12.5
Credit and total return
swaps 4.0 4.0
Foreign currency derivatives 4.3 4.3
</TABLE>
87
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of these financial instruments as of December 31, 1997 and 1996:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, 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.
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.
88
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
A reconciliation of the notional or contract amounts and discussion of the
various derivative instruments is as follows:
<TABLE>
<CAPTION>
Balance Terminations Balance
Beginning and End
of Year Acquisitions Maturities of Year
--------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1997:
Interest rate floors and
caps, options and
swaptions $4,538.2 $1,644.2 $3,452.4 $2,730.0
Interest rate swap con-
tracts 988.3 1,356.0 318.2 2,026.1
Asset swap contracts 30.0 47.4 10.0 67.4
Credit and total return
swaps 356.5 98.9 166.9 288.5
Financial futures contracts 609.2 3,930.6 4,325.7 214.1
Foreign currency deriva-
tives 41.4 217.0 51.4 207.0
December 31, 1996:
Interest rate floors and
caps, options and
swaptions 1,834.6 3,075.0 371.4 4,538.2
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 contracts 310.1 3,358.9 3,059.8 609.2
Foreign currency deriva-
tives 15.4 43.1 17.1 41.4
</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 condition. 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 1998 through 2007.
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 through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. The interest rate swap contracts mature during fiscal
years 1998 through 2021.
89
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
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 through an adjustment to net
investment income in the accompanying consolidated statements of
operations over the life of the agreements. The asset swap contracts
mature during fiscal years 1998 through 2003.
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 through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. Credit and total return swaps mature during fiscal years
1998 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 through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. Foreign currency derivatives expire during fiscal years
1998 through 2011.
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.
ANNUITY LIABILITIES
The estimated fair value of annuity liabilities approximates carrying
value and primarily includes policyholder deposits and accumulated
credited interest.
90
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Life has issued certain contracts to plan sponsors totaling $1.6
billion as of December 31, 1997, pursuant to the terms of which the plan
sponsor retains direct ownership and control of the assets related to
these contracts. Pacific Life agrees to provide benefit responsiveness in
the event that plan benefit requests exceed plan cash flows. In return for
this guarantee, Pacific Life receives a fee which varies by contract.
Pacific Life sets the investment guidelines to provide for appropriate
credit quality and cash flow matching.
8. UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Detail of universal life, annuity and other investment contract deposit
liabilities follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------
(In Millions)
<S> <C> <C>
Universal life $10,012.0 $ 7,562.5
Annuity 1,817.4 2,459.3
Other investment contract deposits 4,815.1 3,855.6
-------------------
$16,644.5 $13,877.4
===================
</TABLE>
Detail of universal life, annuity and other investment contract deposits
policy fees and interest credited net of reinsurance ceded follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees
Universal life $ 377.5 $ 318.4 $ 292.6
Annuity 50.3 26.6 12.8
Other investment contract de-
posits 3.4 3.6 3.6
--------------------------
Total policy fees $ 431.2 $ 348.6 $ 309.0
==========================
Interest credited
Universal life $ 368.2 $ 284.3 $ 267.3
Annuity 116.8 138.7 137.5
Other investment contract de-
posits 312.8 242.0 270.4
--------------------------
Total interest credited $ 797.8 $ 665.0 $ 675.2
==========================
</TABLE>
91
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHORT-TERM AND LONG-TERM DEBT
Pacific Life borrows for short-term needs by issuing commercial paper.
There was no commercial paper debt outstanding as of December 31, 1997 and
1996. Pacific Life had a revolving credit facility available of $350
million and $250 million as of December 31, 1997 and 1996, respectively.
There was no debt outstanding under the revolving credit facility as of
December 31, 1997 and 1996.
The borrowing limit for PAM as of December 31, 1997 and 1996 was $200
million and $150 million, respectively. The interest rate averaged 5.8%,
5.6% and 6.1% for the years ended December 31, 1997, 1996 and 1995,
respectively. The balance outstanding as of December 31, 1997 and 1996
totaled $104 million and $95.5 million, respectively. Outstanding debt is
due and payable in 1998 and subject to renewal.
During 1992, a wholly-owned subsidiary of Pacific Life 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 4). On December 31, 1996, the
applicable interest rate was 6.2%. The outstanding balance of $25 million
was prepaid per the terms of the agreement on January 27, 1997.
Pacific Life has $150 million of long-term debt which consists 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 Life or any
holder of the surplus notes. The surplus notes are unsecured and
subordinated to all present and future senior indebtedness and policy
claims of Pacific 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 each of the years ended December 31, 1997,
1996 and 1995 and is included in net investment income in the accompanying
consolidated statements of operations.
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,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Current $ 127.9 $ 163.5 $ 116.4
Deferred (14.4) (49.8) (30.3)
----------------------------
$ 113.5 $ 113.7 $ 86.1
----------------------------
</TABLE>
92
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Reserves $ 20.1 $(28.5) $(28.7)
Investment valuation 3.9 (7.3) 8.1
Deferred policy acquisition costs (18.0) 2.1 (6.0)
Other (20.4) (16.1) (3.7)
----------------------------
$(14.4) $(49.8) $(30.3)
----------------------------
</TABLE>
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,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $ 101.3 $ 98.1 $ 77.3
Equity tax 5.0 16.3
Amortization of intangibles on equity
method investments 7.6 6.5 6.5
Non-taxable investment income (2.6) (2.1) (2.1)
Other 2.2 (5.1) 4.4
---------------------------
$ 113.5 $ 113.7 $ 86.1
---------------------------
</TABLE>
The net deferred tax asset (liability) included in other assets on the
accompanying consolidated statements of financial condition was comprised
of the tax effects of the following temporary differences:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------
(In Millions)
<S> <C> <C>
Reserves $ 224.8 $ 244.9
Deferred compensation 25.9 27.6
Investment valuation 20.1 24.0
Postretirement benefits 9.3 9.8
Dividends 7.7 9.6
Depreciation (2.5) (9.8)
Deferred policy acquisition costs (25.9) (43.9)
Other 41.0 23.8
----------------
Deferred taxes from operations 300.4 286.0
Issuance of partnership units by affiliate (47.9)
Unrealized gain on securities available for sale (307.8) (204.5)
----------------
Net deferred tax asset (liability) $ (55.3) $ 81.5
----------------
</TABLE>
93
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 condition.
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 a 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,
1997 1996
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(39.6) $(35.9)
Future policy benefits 92.2 90.0
Unpaid claims 14.0 4.6
Paid claims 10.2 8.4
</TABLE>
As of December 31, 1997, 72% 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,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance
premiums $ 70.7 $ 44.3 $ 29.2
Assumed reinsurance included in insurance
premiums 18.1 17.8 15.6
Ceded reinsurance netted against policy fees 77.5 71.0 66.5
Ceded reinsurance netted against net invest-
ment income 204.9 192.5 176.6
Ceded reinsurance netted against interest
credited 165.8 155.2 140.0
Ceded reinsurance netted against policy bene-
fits 93.4 56.7 51.4
Assumed reinsurance included in policy bene-
fits 12.7 9.9 14.5
</TABLE>
94
<PAGE>
Pacific 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,
1997 1996 1995
---------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Individual Life Insurance and Annuities $1,137.7 $ 964.0 $ 927.0
Pensions 584.0 507.3 513.9
Group Employee Benefits 507.5 456.0 419.3
Corporate and Other 345.2 220.7 159.5
---------------------------
Total $2,574.4 $2,148.0 $2,019.7
---------------------------
Income before provision for income taxes:
Individual Life Insurance and Annuities $ 164.0 $ 93.9 $ 102.3
Pensions 98.3 80.7 53.3
Group Employee Benefits 28.8 26.5 25.2
Corporate and Other (1.6) 79.2 40.1
---------------------------
Total $ 289.5 $ 280.3 $ 220.9
---------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------
(In Millions)
<S> <C> <C>
Assets:
Individual Life Insurance and Annuities $19,969.2 $15,484.4
Pensions 12,653.6 10,514.8
Group Employee Benefits 368.6 344.4
Corporate and Other 1,017.4 721.7
-------------------
Total $34,008.8 $27,065.3
-------------------
</TABLE>
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLANS
Pacific Life has defined benefit pension plans which cover 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 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
95
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
not only for benefits attributed to employment to date but also for those
expected to be earned in the future. All such contributions are made to a
tax-exempt trust. Plan assets consist primarily of group annuity contracts
issued by Pacific Life, as well as participating units of a real estate
trust and mutual funds managed by an indirect subsidiary of Pacific Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned during
the year $ 3.6 $ 3.7 $ 2.8
Interest cost on projected benefit obli-
gation 10.4 9.8 9.3
Actual return on plan assets (33.1) (21.7) (25.0)
Amortization of net obligations and
prior service cost 18.9 9.1 14.0
----------------------------
Net periodic pension cost $ (0.2) $ 0.9 $ 1.1
----------------------------
</TABLE>
The following table sets forth the pension plan's funded status and
amounts recognized on Pacific Life's consolidated statements of financial
condition:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------
(In Millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 137.1 $ 121.2
Nonvested benefits 1.2 1.2
----------------
Accumulated benefit obligation 138.3 122.4
Effect of projected future compensation increases 19.6 18.5
----------------
Projected benefit obligation 157.9 140.9
Plan assets at fair value (180.3) (154.2)
----------------
Plan assets in excess of projected benefit obliga-
tion (22.4) (13.3)
Unrecognized net gain 14.7 3.6
Unrecognized transition asset 4.8 6.0
Unrecognized prior service cost 1.2 2.2
----------------
Prepaid pension cost $ (1.7) $ (1.5)
----------------
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1997 and 1996, the weighted average discount
rate used was 7.0% and 7.5%, respectively, and the rate of increase in
future compensation levels was 5.5% and 6.0%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1997 and 1996.
In connection with the merger of PCL into Pacific Life as discussed in
Note 4, Pacific Life assumed sponsorship of PCL's defined benefit pension
plan. This pension plan provides for retirement income benefits at age 65
with reduced benefits for early retirement. Effective December 31, 1997,
PCL's defined benefit plan merged into Pacific Life's plan. All benefits
associated with PCL's plan remain unchanged subsequent to the merger.
96
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE PLANS
Pacific 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 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
Life's commitment to qualified employees who retire after April 1, 1994 is
limited to specific dollar amounts. Pacific 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 1997, 1996 and 1995 was
approximately $1.5 million, $1.6 million and $1.7 million, respectively.
Components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost $ 0.1 $ 0.2 $ 0.2
Interest cost 1.4 1.5 1.9
Amortization (0.7) (0.3) (0.3)
----------------------------
Net periodic postretirement benefit cost $ 0.8 $ 1.4 $ 1.8
----------------------------
</TABLE>
The following table sets forth the Plans' funded status and amounts
recorded in other liabilities on the accompanying consolidated statements
of financial condition:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------
(In Millions)
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $17.6 $17.3
Fully eligible active Plan participants 1.4 2.0
Other active Plan participants 1.1 2.5
-------------
Total accumulated postretirement obligation 20.1 21.8
Fair value of Plan assets -- --
-------------
Unfunded accumulated postretirement obligation 20.1 21.8
Unrecognized net gain 3.2 3.7
Prior service cost 2.7 1.3
-------------
Accrued postretirement benefit liability $26.0 $26.8
-------------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 9% for 1997 and 1996 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, 1997 and 1996 would be increased by 8.5% and 11.5%, respectively. The
effect of this change would increase the
97
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
aggregate of the service and interest cost components of the net periodic
benefit cost by 7.7%, 12.3% and 11.4% for 1997, 1996 and 1995,
respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7.0% and 7.5% for 1997 and 1996, respectively.
OTHER PLANS
Pacific Life provides a voluntary Retirement Incentive Savings Plan
("RISP") pursuant to Section 401(k) of the Internal Revenue Code covering
all eligible employees of the Company. Effective October 1, 1997, Pacific
Life's RISP changed the matching percentage of each employee's
contributions from 50% to 75%, up to a maximum of six percent of eligible
employee compensation and restricted the matched investment to an Employee
Stock Ownership Plan ("ESOP") sponsored by Pacific LifeCorp. The ESOP was
formed at the time of the Conversion and is currently only available to
the participants of the RISP in the form of matching contributions.
Pacific 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 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 Life charges fees based upon the
net asset value of the portfolios of the Pacific Select Fund, which
amounted to $27.5 million, $14.3 million and $6.5 million for the years
ended December 31, 1997, 1996 and 1995, respectively. In addition, Pacific
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 $165,000, $108,000 and $28,550 for the years ended December
31, 1997, 1996 and 1995, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $11.4 million, $6.2 million and $5.0 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in equity securities on the accompanying consolidated statements
of financial condition are investments in mutual funds and other
investments managed by PIMCO Advisors which amounted to $46.5 million and
$90.8 million as of December 31, 1997 and 1996, respectively.
Pacific Life provides certain support services to PIMCO Advisors. Charges
for these services are based on an allocation of actual costs and amounted
to $1.2 million, $1.4 million and $1.9 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
15. TERMINATION AND NON-COMPETITION AGREEMENTS
Effective November 15, 1994, in connection with the PIMCO Advisors
transaction (Note 1), termination and non-competition agreements were
entered into with certain former key employees of PAM's subsidiaries.
These agreements provide terms and conditions for the allocation of future
proceeds received from distributions and sales of certain PIMCO Advisors
units and other noncompete payments. When the amount of future obligations
to be made to a key employee is determinable, a liability for such amount
is established.
98
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. TERMINATION AND NON-COMPETITION AGREEMENTS (CONTINUED)
For the years ended December 31, 1997, 1996 and 1995, approximately $85.8
million, $35.3 million and $28.6 million, respectively, is included in
operating expenses in the consolidated statements of operations related to
the termination and non-competition agreements. This includes payments of
$43.1 million in 1997 to former key employees who elected to sell to PAM's
subsidiaries their rights to the future proceeds from the PIMCO Advisors
units.
16. INVESTMENT COMMITMENTS
The Company has outstanding commitments to make investments primarily in
mortgage loans, limited partnerships and other investments as follows (In
Millions):
<TABLE>
<S> <C>
Years Ending December 31:
-------------------------
1998 $245.4
1999-2002 131.8
2003 and thereafter 16.6
------
Total $393.8
------
</TABLE>
17. LITIGATION
The Company has been named in civil litigation proceedings which appear to
be substantially similar to other litigation brought against many life
insurers alleging misconduct in the sale of products. These matters are
sometimes referred to as market conduct litigation. The litigation against
the Company purports to include all persons in the United States who
purchased life insurance and annuity products from the Company during the
period from 1982 to present. The Company has retained national and local
counsel experienced in the handling of similar matters for other life
insurers. Informal discovery has commenced in these matters. At this time,
it is not feasible to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome in such actions.
Further, the Company is a respondent in a number of other legal
proceedings, some of which involve allegations for extra-contractual
damages.
In the opinion of management, the outcome of the foregoing proceedings is
not likely to have a material adverse effect on the consolidated financial
position or results of operations of the Company.
---------------------------------------------------------------------------
99
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
100
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30,
1998 December 31,
(Unaudited) 1997
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at fair value:
Fixed maturity securities $13,790.4 $13,990.7
Equity securities 359.6 346.4
Mortgage loans 2,594.3 1,922.1
Real estate 184.5 192.1
Policy loans 3,709.9 3,769.2
Short-term investments 134.9 83.8
Other investments 462.5 380.2
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS 21,236.1 20,684.5
Cash and cash equivalents 101.1 110.4
Deferred policy acquisition costs 781.4 716.9
Accrued investment income 266.4 255.4
Other assets 638.9 636.5
Separate account assets 13,814.0 11,605.1
- ------------------------------------------------------------------------------
TOTAL ASSETS $36,837.9 $34,008.8
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life, annuity and other investment con-
tract deposits $17,076.5 $16,644.5
Future policy benefits 2,163.2 2,133.8
Short-term and long-term debt 447.6 253.6
Other liabilities 1,043.7 1,224.5
Separate account liabilities 13,814.0 11,605.1
- ------------------------------------------------------------------------------
Total Liabilities 34,545.0 31,861.5
- ------------------------------------------------------------------------------
Commitments and contingencies
Stockholder's Equity:
Common Stock - $50 par value; 600,000 shares autho-
rized, issued and outstanding 30.0 30.0
Paid-in capital 120.1 120.1
Retained earnings 1,566.4 1,422.0
Accumulated other comprehensive income:
Unrealized gain on securities available for sale,
net 576.4 575.2
- ------------------------------------------------------------------------------
Total Stockholder's Equity 2,292.9 2,147.3
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $36,837.9 $34,008.8
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
101
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
- -----------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
REVENUES
Insurance premiums $ 261.6 $ 255.6
Policy fees from universal life, annuity and other invest-
ment contract deposits 262.1 200.1
Net investment income 641.2 587.5
Net realized capital gains 73.5 51.9
Commission revenue 110.3 59.7
Other income 95.1 73.6
- -----------------------------------------------------------------------------
TOTAL REVENUES 1,443.8 1,228.4
- -----------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and other in-
vestment contract deposits 426.9 371.5
Policy benefits paid or provided 352.8 351.4
Commission expenses 196.6 144.3
Operating expenses 234.1 173.3
- -----------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 1,210.4 1,040.5
- -----------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 233.4 187.9
Provision for income taxes 89.0 82.4
- -----------------------------------------------------------------------------
NET INCOME $ 144.4 $ 105.5
- -----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
102
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
- --------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1997 $1,318.0 $379.2 $1,697.2
Comprehensive income:
Net income 176.0 176.0
Change in unrealized
gain on securities
available for sale,
net 196.0 196.0
--------
Total comprehensive
income 372.0
Issuance of partnership
units by affiliate $ 85.1 85.1
Initial member
capitalization of
Pacific Mutual Holding
Company (2.0) (2.0)
Issuance of common
stock 0.6 $30.0 35.0 (65.0) --
Dividend paid to parent (5.0) (5.0)
- --------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1997 0.6 30.0 120.1 1,422.0 575.2 2,147.3
Comprehensive income:
Net income 144.4 144.4
Change in unrealized
gain on securities
available for sale,
net 1.2 1.2
--------
Total comprehensive
income 145.6
- --------------------------------------------------------------------------------
BALANCES (UNAUDITED),
JUNE 30, 1998 0.6 $30.0 $120.1 $1,566.4 $576.4 $2,292.9
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
103
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 144.4 $ 105.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of fixed maturities (21.8) (6.0)
Depreciation and other amortization 4.5 20.0
Deferred income taxes (18.3) (17.4)
Net realized capital gains (73.5) (51.9)
Net change in deferred policy acquisition costs (64.5) (68.7)
Interest credited to universal life, annuity and other
investment contract deposits 426.9 371.5
Change in accrued investment income (11.0) (70.7)
Change in future policy benefits 29.4 84.9
Change in other assets and liabilities (79.6) 5.3
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 336.5 372.5
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (2,602.9) (4,054.3)
Sales 1,539.0 1,256.4
Maturities and repayments 1,366.1 1,002.1
Repayments of mortgage loans 106.6 96.7
Proceeds from sales of mortgage loans and real estate 31.3 33.1
Purchases of mortgage loans and real estate (815.6) (301.1)
Distributions from partnerships 53.2 41.5
Change in policy loans 59.3 (469.6)
Change in short-term investments (51.1) (101.9)
Other investing activity, net (149.5) (20.2)
- -------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (463.6) (2,517.3)
- -------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
104
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(Continued) 1998 1997
- ----------------------------------------------------------------------
(In Millions)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 1,991.7 $2,942.9
Withdrawals (2,067.9) (718.8)
Net change in short-term debt 194.0 226.3
Repayment of long-term debt (25.0)
- ----------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 117.8 2,425.4
- ----------------------------------------------------------------------
Net change in cash and cash equivalents (9.3) 280.6
Cash and cash equivalents, beginning of period 110.4 109.0
- ----------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 101.1 $ 389.6
- ----------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 55.8 $ 85.7
Interest paid $ 13.2 $ 10.9
- ----------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
105
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONVERSION TO MUTUAL HOLDING COMPANY STRUCTURE
Pursuant to consent received from the Insurance Department of the State of
California, Pacific Mutual Life Insurance Company ("Pacific Mutual")
implemented a plan of conversion to form a mutual holding company
structure (the "Conversion") on September 1, 1997. The Conversion created
Pacific LifeCorp, an intermediate stock holding company and Pacific Mutual
Holding Company ("PMHC"), a mutual holding company. Pacific Mutual was
converted to a stock life insurance company and renamed Pacific Life
Insurance Company ("Pacific Life"). Under their respective charters, PMHC
must always own 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. PMHC's members, as defined in the PMHC Bylaws, have certain
membership interests in PMHC, consisting principally of the right to vote
on the election of the Board of Directors of PMHC and on other matters,
and certain rights upon liquidation or dissolution of PMHC.
As a result of the Conversion, $65 million of retained earnings was
allocated for the issuance of 600,000 shares of common stock with a par
value totaling $30 million and $35 million was allocated to paid-in
capital.
2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The information set forth in the consolidated statements of financial
condition and stockholder's equity as of June 30, 1998 and the
consolidated statements of operations and cash flows for the six months
ended June 30, 1998 and 1997 is unaudited. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. The information reflects all adjustments, consisting
only of normal recurring adjustments, that, in the opinion of management,
are necessary to present fairly the financial position and results of
operations of Pacific Life Insurance Company and subsidiaries (the
"Company") for the periods indicated. Results of operations for the
interim periods are not necessarily indicative of the results of
operations for the full year. It is suggested that these unaudited
financial statements be read in conjunction with the audited financial
statements for the years ended December 31, 1997 and 1996.
The accompanying consolidated financial statements of the Company include
the accounts of Pacific Life and its wholly-owned insurance subsidiaries,
PM Group Life Insurance Company and World-Wide Holdings Limited, and its
noninsurance subsidiaries, Pacific Asset Management LLC ("PAM"), Pacific
Mutual Distributors, Inc., Pacific Mutual Realty Finance, Inc. and Pacific
Mezzanine Associates, L.L.C. All significant intercompany transactions and
balances have been eliminated.
PAM was initially capitalized on December 31, 1997, when Pacific Life
completed a subsidiary restructuring in which all the assets and
liabilities of Pacific Financial Asset Management Corporation ("PFAMCo")
were contributed into this newly formed limited liability company. PFAMCo
was then merged into Pacific Life. On October 30, 1997, Pacific Corinthian
Life Insurance Company ("PCL"--Note 4), a wholly-owned insurance
subsidiary, was merged into Pacific Life, with Pacific Life as the
surviving entity.
In December 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), an investment
management and advisory affiliate, completed a transaction in which it
acquired the assets of Oppenheimer Capital, L.P., including its interest
in Oppenheimer Capital, by issuing approximately 33 million PIMCO Advisors
General and Limited Partner units. In connection with this transaction,
the Company increased its investment in PIMCO Advisors to reflect the
excess of the Company's pro rata share of PIMCO Advisors partners' capital
subsequent to this transaction over the carrying value of the Company's
investment in PIMCO Advisors. The net result of this transaction was to
directly increase stockholder's equity by $85.1 million. The Company's
beneficial ownership in PIMCO Advisors was approximately 42% prior to this
transaction and is approximately 30% as of June 30, 1998. Deferred taxes
as a result of this transaction have been established on the accompanying
consolidated
106
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION (CONTINUED)
financial statements. This investment, which is included in other
investments on the accompanying consolidated statements of financial
condition, is accounted for using the equity method.
ACCOUNTING PRONOUNCEMENT ADOPTED
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" issued by the
Financial Accounting Standards Board. SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Adoption of this
accounting standard involved a change in presentation and had no impact on
the financial position or results of operations of the Company.
3. CLOSED BLOCK
In connection with the Conversion, an arrangement known as a closed block
(the "Closed Block"), was established, for dividend purposes only, for the
exclusive benefit of certain individual life insurance policies that had
an experience based dividend scale for 1997. The Closed Block is designed
to give reasonable assurance to holders of Closed Block policies that
policy dividends will not change solely as a result of the Conversion.
Assets of Pacific Life have been allocated to the Closed Block in an
amount that produces cash flows, which, together with anticipated
revenues, are expected to be sufficient to support the policies. Pacific
Life is not required to support the payment of dividends on these policies
from its general funds. The Closed Block will continue in effect until
either the last policy is no longer in force, or the dissolution of the
Closed Block. Total assets of $319.2 million and $316.2 million as of June
30, 1998 and December 31, 1997, respectively, and total liabilities of
$360.8 million and $356.0 million as of June 30, 1998 and December 31,
1997, respectively, for the Closed Block, are included in other assets and
other liabilities, respectively, in the accompanying consolidated
statements of financial condition. The contribution to income from the
Closed Block of $3.1 million, consisting of net revenues and expenses
generated by the Closed Block is included in other income in the
accompanying consolidated statements of operations for the six months
ended June 30, 1998.
4. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
On September 30, 1997, PCL completed the rehabilitation of First Capital
Life Insurance Company ("FCL") pursuant to a five-year rehabilitation plan
approved by the California Superior Court and the Insurance Department of
the State of California (the "Rehabilitation Plan"). Under the terms of
the Rehabilitation Plan, FCL's insurance policies in force, primarily
individual annuities and universal life insurance, were restructured and
assumed by PCL on December 31, 1992, pursuant to an assumption reinsurance
agreement and asset purchase agreement. On October 30, 1997, PCL was
merged into Pacific Life, with Pacific Life as the surviving entity.
5. ACQUISITION OF INSURANCE BLOCK OF BUSINESS
On June 1, 1997, Pacific Life acquired a block of corporate-owned life
insurance ("COLI") policies from Confederation Life Insurance Company
(U.S.) in Rehabilitation, which is currently under rehabilitation, which
consisted of approximately 38,000 policies having a face amount of
insurance of $8.6 billion and reserves of approximately $1.7 billion. The
assets received as part of this acquisition amounted to approximately $1.2
billion in cash and approximately $0.4 billion in policy loans. This block
is primarily non-leveraged COLI.
107
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION
The Company has been named in civil litigation proceedings which appear to
be substantially similar to other litigation brought against many life
insurers alleging misconduct in the sale of products. These matters are
sometimes referred to as market conduct litigation. The class of
plaintiffs includes, with some exceptions, all persons who owned, as of
December 31, 1997 (or as of the date of policy termination, if earlier),
individual whole life, universal life or variable life insurance policies
sold by the Company on or after January 1, 1982. The Company has retained
national and local counsel experienced in the handling of similar matters
for other life insurers. At this time, it is not feasible to make a
meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome in such actions.
Further, the Company is a respondent in a number of other legal
proceedings, some of which involve allegations for extra-contractual
damages.
In the opinion of management, the outcome of the foregoing proceedings is
not likely to have a material adverse effect on the consolidated financial
position or results of operations of the Company.
108
<PAGE>
APPENDIX A
MORTALITY AND EXPENSE RISK FACE AMOUNT CHARGE
MONTHLY RATES PER $1,000 OF ORIGINAL FACE AMOUNT
<TABLE>
<CAPTION>
DEATH BENEFIT OPTION A OR C DEATH BENEFIT OPTION B
--------------------------------------- ---------------------------------------
NONSMOKER SMOKER NONSMOKER SMOKER
ISSUE ------------------- ------------------- ------------------- -------------------
AGE MALE FEMALE UNISEX MALE FEMALE UNISEX MALE FEMALE UNISEX MALE FEMALE UNISEX
- ----- ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5 0.062 0.051 0.060 0.062 0.051 0.060 0.149 0.124 0.124 0.149 0.124 0.144
10 0.062 0.051 0.060 0.062 0.051 0.060 0.149 0.124 0.124 0.149 0.124 0.144
15 0.062 0.051 0.060 0.062 0.051 0.060 0.149 0.124 0.124 0.149 0.124 0.144
20 0.115 0.092 0.110 0.146 0.112 0.140 0.256 0.223 0.250 0.267 0.234 0.262
25 0.140 0.115 0.136 0.180 0.140 0.173 0.291 0.256 0.284 0.301 0.265 0.295
30 0.163 0.135 0.158 0.207 0.165 0.199 0.328 0.290 0.290 0.337 0.298 0.330
35 0.191 0.159 0.187 0.238 0.192 0.231 0.376 0.330 0.330 0.384 0.337 0.375
40 0.260 0.217 0.254 0.324 0.262 0.314 0.440 0.383 0.383 0.448 0.389 0.436
45 0.360 0.300 0.350 0.448 0.360 0.433 0.518 0.444 0.444 0.527 0.449 0.511
50 0.458 0.379 0.444 0.564 0.451 0.544 0.613 0.518 0.518 0.625 0.522 0.603
55 0.548 0.456 0.532 0.669 0.535 0.647 0.729 0.610 0.610 0.743 0.616 0.722
60 0.718 0.597 0.696 0.866 0.691 0.834 0.796 0.731 0.731 0.866 0.741 0.834
65 0.917 0.760 0.888 0.947 0.867 0.959 0.917 0.760 0.760 0.947 0.867 0.959
70 0.926 0.763 0.892 0.930 0.860 0.933 0.926 0.763 0.763 0.930 0.860 0.933
75 0.920 0.764 0.889 0.920 0.852 0.925 0.920 0.764 0.764 0.920 0.852 0.925
80 0.910 0.786 0.883 0.910 0.845 0.942 0.910 0.786 0.786 0.910 0.845 0.942
85 1.060 1.026 1.051 1.067 1.051 1.076 1.060 1.026 1.026 1.067 1.051 1.076
</TABLE>
If the Insured is assigned a risk classification other than standard, a factor
is applied to the M&E Risk Face Amount Charge according to the nonstandard
table rating assigned to that Insured. For Insureds assigned a nonstandard
rating reflected in the table below, the rates above are multiplied by the
applicable nonstandard table factor below for that Insured.
NONSTANDARD TABLE FACTORS
<TABLE>
<CAPTION>
NONSTANDARD TABLE NUMBER
ISSUE -------------------------------------------------------------------------------
AGE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-45 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.70 1.75 1.80
50 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.65 1.65 1.65
55 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35
60 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05
65-85 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
</TABLE>
Representative figures shown. For Issue Ages not listed, please ask your
registered representative.
109
<PAGE>
APPENDIX B
SURRENDER CHARGE
RATES PER $1,000 OF ORIGINAL FACE AMOUNT
<TABLE>
<CAPTION>
DEATH BENEFIT OPTION A OR C DEATH BENEFIT OPTION B
--------------------------------------- ---------------------------------------
NONSMOKER SMOKER NONSMOKER SMOKER
ISSUE ------------------- ------------------- ------------------- -------------------
AGE MALE FEMALE UNISEX MALE FEMALE UNISEX MALE FEMALE UNISEX MALE FEMALE UNISEX
- ----- ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5 $0.33 $0.26 $0.32 $0.33 $0.26 $0.32 $0.89 $0.74 $0.87 $0.89 $0.74 $0.87
10 $0.33 $0.26 $0.32 $0.33 $0.26 $0.32 $0.89 $0.74 $0.87 $0.89 $0.74 $0.87
15 $0.33 $0.26 $0.32 $0.33 $0.26 $0.32 $0.89 $0.74 $0.87 $0.89 $0.74 $0.87
20 $0.66 $0.53 $0.64 $0.84 $0.64 $0.80 $1.51 $1.33 $1.49 $1.58 $1.39 $1.54
25 $0.82 $0.67 $0.79 $1.04 $0.80 $0.99 $1.71 $1.50 $1.66 $1.77 $1.55 $1.71
30 $0.96 $0.79 $0.93 $1.20 $0.95 $1.16 $1.93 $1.70 $1.89 $1.97 $1.75 $1.94
35 $1.11 $0.93 $1.08 $1.38 $1.11 $1.33 $2.18 $1.92 $2.13 $2.21 $1.96 $2.16
40 $1.51 $1.26 $1.47 $1.87 $1.50 $1.80 $2.53 $2.20 $2.47 $2.56 $2.23 $2.49
45 $2.07 $1.73 $2.01 $2.55 $2.05 $2.46 $2.94 $2.53 $2.85 $2.96 $2.55 $2.88
50 $2.67 $2.23 $2.59 $3.27 $2.62 $3.15 $3.54 $3.00 $3.42 $3.58 $3.01 $3.45
55 $3.25 $2.72 $3.16 $3.93 $3.16 $3.80 $4.27 $3.60 $4.16 $4.30 $3.60 $4.19
60 $4.25 $3.54 $4.12 $5.07 $4.07 $4.88 $4.70 $4.28 $4.76 $5.07 $4.31 $4.88
63 $4.95 $4.13 $4.80 $5.69 $4.69 $5.63 $4.95 $4.45 $4.80 $5.69 $4.69 $5.63
64 $5.22 $4.35 $5.06 $5.54 $4.93 $5.71 $5.22 $4.47 $5.06 $5.54 $4.93 $5.71
65 $5.37 $4.48 $5.20 $5.45 $5.06 $5.54 $5.37 $4.48 $5.20 $5.45 $5.06 $5.54
66 $5.47 $4.56 $5.30 $5.38 $5.14 $5.41 $5.47 $4.56 $5.30 $5.38 $5.14 $5.41
70 $5.31 $4.43 $5.15 $5.19 $4.94 $5.24 $5.31 $4.43 $5.15 $5.19 $4.94 $5.24
75 $5.09 $4.26 $4.94 $4.90 $4.69 $4.97 $5.09 $4.26 $4.94 $4.90 $4.69 $4.97
80 $4.61 $3.88 $4.47 $4.45 $4.21 $4.66 $4.61 $3.88 $4.47 $4.45 $4.21 $4.66
85 $3.79 $3.21 $3.67 $3.79 $3.38 $3.79 $3.79 $3.21 $3.67 $3.79 $3.38 $3.79
</TABLE>
If the Insured is assigned a risk classification other than standard, a factor
is applied to the surrender charge rate according to the nonstandard table
rating assigned to that Insured. For Insureds assigned a nonstandard rating
reflected in the table setting forth the nonstandard table factors at the
bottom of Appendix A on the previous page, the rates above are multiplied by
the applicable nonstandard table factor found in that table for that Insured.
Representative figures shown. For Issue Ages not listed, please ask your
registered representative.
110
<PAGE>
APPENDIX C
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>
111
<PAGE>
ILLUSTRATIONS
The following tables illustrate how the death benefits, Accumulated Values
and Net Cash Surrender Values of a hypothetical policy may vary over an
extended period of time assuming hypothetical rates of return equivalent to
constant gross annual rates of 0%, 6% and 12%.
The policies illustrated include the following:
1. Age 45, Guideline Premium Test, Death Benefit Option A, $10,000 annual
premium, Current Cost of Insurance Rates.
2. Age 45, Guideline Premium Test, Death Benefit Option A, $10,000 annual
premium, Guaranteed Cost of Insurance Rates.
3. Age 45, Guideline Premium Test, Death Benefit Option B, $10,000 annual
premium, Current Cost of Insurance Rates.
4. Age 45, Guideline Premium Test, Death Benefit Option B, $10,000 annual
premium, Guaranteed Cost of Insurance Rates.
5. Age 45, Guideline Premium Test, Death Benefit Option C, $10,000 annual
premium, Current Cost of Insurance Rates.
6. Age 45, Guideline Premium Test, Death Benefit Option C, $10,000 annual
premium, Guaranteed Cost of Insurance Rates.
7. Age 45, Cash Value Accumulation Test, Death Benefit Option A, $10,000
annual premium, Current Cost of Insurance Rates.
8. Age 45, Cash Value Accumulation Test, Death Benefit Option A, $10,000
annual premium, Guaranteed Cost of Insurance Rates.
9. Age 45, Cash Value Accumulation Test, Death Benefit Option B, $10,000
annual premium, Current Cost of Insurance Rates.
10. Age 45, Cash Value Accumulation Test, Death Benefit Option B, $10,000
annual premium, Guaranteed Cost of Insurance Rates.
11. Age 45, Cash Value Accumulation Test, Death Benefit Option C, $10,000
annual premium, Current Cost of Insurance Rates.
12. Age 45, Cash Value Accumulation Test, Death Benefit Option C, $10,000
annual premium, Guaranteed Cost of Insurance Rates.
The values would be different from those shown if the gross annual
investment rates of return averaged 0%, 6% or 12% over a period of years, but
also fluctuated above or below those averages for individual policy years.
The second column of each table, labeled "Total Premiums Paid Plus Interest
at 5%," shows the amount which would accumulate if an amount equal to the
annual premium (after taxes) were invested to earn interest at 5% compounded
annually. All premium payments are illustrated as if they were made at the
beginning of the year. These illustrations assume that no Policy loans have
been made.
The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values reflect the fact that the net investment return on the
Variable Accounts is lower than the gross investment return on the assets as a
result of charges levied against the Variable Accounts. These values also take
into account the premium loads, the administrative charges, the cost of
insurance charges, the M&E Risk Charges and surrender charges. The daily
investment advisory fee is assumed to be equivalent to an annual weighted rate
of 0.60% of the aggregate average daily net assets of the Fund and M Fund.
This hypothetical rate is representative of the weighted average investment
advisory fee applicable to the Portfolios of the Fund and M Fund available as
options under the Policy. The amounts shown would differ if unisex rates were
used or if the Insureds were females and female rates were used. On those
illustrations assuming current rates, the amounts would also differ if either
Insured were a smoker and smoker rates were used.
112
<PAGE>
The tables also reflect other expenses of the Fund and M Fund at the
weighted average rate of 0.08% of the average daily net assets of a Portfolio,
which amounts to 0.68% of the average daily net assets of a Portfolio
including the investment advisory fee, operating expenses, and exclusive of
any foreign taxes. Foreign taxes for the year ended December 31, 1997 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; 0.25%
for the International Portfolio; 0.02% for the Growth LT Portfolio; 0.01% for
the Equity Portfolio; 0.01% for the Equity Index Portfolio; 0.19% for the
Emerging Markets Portfolio; 0.23% for Variable Account I; and 0.01% for
Variable Account IV. For more information regarding fees and expenses of the
Fund and the MFund, see "SUMMARY OF THE POLICY: Fund Annual Expenses After
Expense Limitation and MFund Annual Expenses After Expense Limitation."
After deduction of the charges and expenses for the Fund and M Fund as
described above, the illustrated gross annual investment rates of return of
0%, 6%, and 12% correspond to approximate net annual rates of return of -
0.68%, 5.28%, and 11.24%. The hypothetical values shown in the tables do not
reflect any charges against the Variable Accounts for income taxes that may be
attributable to the Variable Accounts in the future, since we are not
currently making these charges.
We will furnish upon request a comparable illustration reflecting the
proposed Insured's Age, underwriting class, Face Amount, death benefit and
premium amounts requested. In addition, upon request, illustrations will be
furnished reflecting allocation of premiums to specified Variable Accounts.
Such illustrations will reflect the expenses of the Portfolio of the Fund in
which the Variable Account invests. Illustrations that use a hypothetical
gross rate of return in excess of 12% are available to certain large
institutional investors upon request.
113
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON CURRENT COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $412,368
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: A
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $412,368 $412,368 $ 412,368
2 $ 21,525 $412,368 $412,368 $ 412,368
3 $ 33,101 $412,368 $412,368 $ 412,368
4 $ 45,256 $412,368 $412,368 $ 412,368
5 $ 58,019 $412,368 $412,368 $ 412,368
6 $ 71,420 $412,368 $412,368 $ 412,368
7 $ 85,491 $412,368 $412,368 $ 412,368
8 $100,266 $412,368 $412,368 $ 412,368
9 $115,779 $412,368 $412,368 $ 412,368
10 $132,068 $412,368 $412,368 $ 412,368
15 $226,575 $412,368 $412,368 $ 412,368
20 $347,193 $412,368 $412,368 $ 656,767
25 $501,135 $412,368 $449,497 $1,125,129
30 $697,608 $412,368 $587,163 $1,816,561
35 $948,363 $412,368 $794,428 $3,076,783
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL 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 $ 7,043 $ 7,525 $ 8,007 $ 6,268 $ 6,750 $ 7,233
2 $ 13,932 $ 15,334 $ 16,797 $ 13,243 $ 14,646 $ 16,108
3 $ 20,674 $ 23,449 $ 26,464 $ 20,071 $ 22,847 $ 25,862
4 $ 27,305 $ 31,936 $ 37,165 $ 26,788 $ 31,419 $ 36,648
5 $ 33,851 $ 40,830 $ 49,030 $ 33,420 $ 40,400 $ 48,600
6 $ 40,316 $ 50,161 $ 62,198 $ 39,972 $ 49,817 $ 61,854
7 $ 46,701 $ 59,950 $ 76,817 $ 46,442 $ 59,692 $ 76,559
8 $ 53,019 $ 70,238 $ 93,067 $ 52,847 $ 70,065 $ 92,895
9 $ 59,262 $ 81,042 $ 111,128 $ 59,176 $ 80,956 $ 111,042
10 $ 65,409 $ 92,373 $ 131,189 $ 65,409 $ 92,373 $ 131,189
15 $ 102,564 $ 167,404 $ 281,947 $ 102,564 $ 167,404 $ 281,947
20 $ 135,337 $ 262,881 $ 538,334 $ 135,337 $ 262,881 $ 538,334
25 $ 163,104 $ 387,497 $ 969,939 $ 163,104 $ 387,497 $ 969,939
30 $ 184,220 $ 548,751 $ 1,697,721 $ 184,220 $ 548,751 $ 1,697,721
35 $ 195,679 $ 756,598 $ 2,930,269 $ 195,679 $ 756,598 $ 2,930,269
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
114
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $412,368
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: A
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT -------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $412,368 $412,368 $ 412,368
2 $ 21,525 $412,368 $412,368 $ 412,368
3 $ 33,101 $412,368 $412,368 $ 412,368
4 $ 45,256 $412,368 $412,368 $ 412,368
5 $ 58,019 $412,368 $412,368 $ 412,368
6 $ 71,420 $412,368 $412,368 $ 412,368
7 $ 85,491 $412,368 $412,368 $ 412,368
8 $100,266 $412,368 $412,368 $ 412,368
9 $115,779 $412,368 $412,368 $ 412,368
10 $132,068 $412,368 $412,368 $ 412,368
15 $226,575 $412,368 $412,368 $ 412,368
20 $347,193 $412,368 $412,368 $ 488,613
25 $501,135 $412,368 $412,368 $ 840,035
30 $697,608 $412,368 $412,368 $1,349,798
35 $948,363 $ 0* $492,951 $2,273,384
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL 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 $ 5,469 $ 5,901 $ 6,335 $ 4,695 $ 5,127 $ 5,561
2 $ 10,754 $ 11,963 $ 13,227 $ 10,065 $ 11,274 $ 12,538
3 $ 15,848 $ 18,185 $ 20,730 $ 15,245 $ 17,582 $ 20,128
4 $ 20,748 $ 24,578 $ 28,932 $ 20,231 $ 24,062 $ 28,416
5 $ 25,451 $ 31,160 $ 37,916 $ 25,021 $ 30,730 $ 37,486
6 $ 29,960 $ 37,937 $ 47,773 $ 29,615 $ 37,592 $ 47,429
7 $ 34,243 $ 44,892 $ 58,583 $ 33,985 $ 44,634 $ 58,324
8 $ 38,280 $ 52,018 $ 70,448 $ 38,108 $ 51,846 $ 70,275
9 $ 42,044 $ 59,304 $ 83,480 $ 41,958 $ 59,218 $ 83,394
10 $ 45,501 $ 66,734 $ 97,808 $ 45,501 $ 66,734 $ 97,808
15 $ 66,593 $ 116,621 $ 207,936 $ 66,593 $ 116,621 $ 207,936
20 $ 76,511 $ 174,593 $ 400,502 $ 76,511 $ 174,593 $ 400,502
25 $ 67,357 $ 243,489 $ 724,168 $ 67,357 $ 243,489 $ 724,168
30 $ 22,246 $ 333,895 $ 1,261,493 $ 22,246 $ 333,895 $ 1,261,493
35 $ 0* $ 469,477 $ 2,165,128 $ 0* $ 469,477 $ 2,165,128
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
*Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
115
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON CURRENT COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $136,106
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: B
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $144,249 $144,766 $ 145,284
2 $ 21,525 $152,274 $153,815 $ 155,418
3 $ 33,101 $160,183 $163,280 $ 166,632
4 $ 45,256 $168,012 $173,219 $ 179,079
5 $ 58,019 $175,768 $183,661 $ 192,901
6 $ 71,420 $183,453 $194,633 $ 208,252
7 $ 85,491 $191,065 $206,162 $ 225,302
8 $100,266 $198,611 $218,282 $ 244,248
9 $115,779 $206,087 $231,020 $ 265,296
10 $132,068 $213,484 $244,399 $ 288,673
15 $226,575 $253,021 $326,486 $ 455,753
20 $347,193 $289,449 $430,440 $ 737,382
25 $501,135 $322,100 $561,730 $1,248,029
30 $697,608 $349,622 $726,597 $2,012,175
35 $948,363 $369,790 $932,075 $3,390,425
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL 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 $ 8,143 $ 8,660 $ 9,178 $ 7,780 $ 8,297 $ 8,815
2 $ 16,168 $ 17,709 $ 19,312 $ 15,845 $ 17,386 $ 18,990
3 $ 24,077 $ 27,174 $ 30,526 $ 23,794 $ 26,892 $ 30,244
4 $ 31,906 $ 37,113 $ 42,973 $ 31,664 $ 36,871 $ 42,731
5 $ 39,662 $ 47,555 $ 56,795 $ 39,461 $ 47,353 $ 56,593
6 $ 47,347 $ 58,527 $ 72,146 $ 47,186 $ 58,366 $ 71,984
7 $ 54,959 $ 70,056 $ 89,196 $ 54,838 $ 69,935 $ 89,075
8 $ 62,505 $ 82,176 $ 108,142 $ 62,425 $ 82,095 $ 108,061
9 $ 69,981 $ 94,914 $ 129,190 $ 69,941 $ 94,874 $ 129,150
10 $ 77,378 $ 108,293 $ 152,567 $ 77,378 $ 108,293 $ 152,567
15 $ 116,915 $ 190,380 $ 319,647 $ 116,915 $ 190,380 $ 319,647
20 $ 153,343 $ 294,334 $ 601,276 $ 153,343 $ 294,334 $ 601,276
25 $ 185,994 $ 425,624 $ 1,075,887 $ 185,994 $ 425,624 $ 1,075,887
30 $ 213,516 $ 590,491 $ 1,876,069 $ 213,516 $ 590,491 $ 1,876,069
35 $ 233,684 $ 795,969 $ 3,228,976 $ 233,684 $ 795,969 $ 3,228,976
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
116
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $136,106
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: B
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $143,721 $144,221 $ 144,721
2 $ 21,525 $151,199 $152,673 $ 154,209
3 $ 33,101 $158,540 $161,479 $ 164,669
4 $ 45,256 $165,764 $170,687 $ 176,240
5 $ 58,019 $172,871 $180,309 $ 189,036
6 $ 71,420 $179,859 $190,365 $ 203,191
7 $ 85,491 $186,715 $200,864 $ 218,844
8 $100,266 $193,432 $211,819 $ 236,152
9 $115,779 $199,997 $223,241 $ 255,287
10 $132,068 $206,400 $235,141 $ 276,440
15 $226,575 $239,846 $307,225 $ 426,548
20 $347,193 $267,466 $394,927 $ 675,544
25 $501,135 $286,460 $499,328 $1,104,507
30 $697,608 $292,579 $620,144 $1,772,691
35 $948,363 $277,912 $752,567 $2,914,306
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL 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 $ 7,615 $ 8,115 $ 8,615 $ 7,251 $ 7,751 $ 8,252
2 $ 15,093 $ 16,567 $ 18,103 $ 14,771 $ 16,245 $ 17,780
3 $ 22,434 $ 25,373 $ 28,563 $ 22,151 $ 25,091 $ 28,281
4 $ 29,658 $ 34,581 $ 40,134 $ 29,416 $ 34,339 $ 39,891
5 $ 36,765 $ 44,203 $ 52,930 $ 36,563 $ 44,002 $ 52,728
6 $ 43,753 $ 54,259 $ 67,085 $ 43,591 $ 54,098 $ 66,923
7 $ 50,609 $ 64,758 $ 82,738 $ 50,488 $ 64,637 $ 82,617
8 $ 57,326 $ 75,713 $ 100,046 $ 57,245 $ 75,632 $ 99,965
9 $ 63,891 $ 87,135 $ 119,181 $ 63,851 $ 87,095 $ 119,141
10 $ 70,294 $ 99,035 $ 140,334 $ 70,294 $ 99,035 $ 140,334
15 $ 103,740 $ 171,119 $ 290,442 $ 103,740 $ 171,119 $ 290,442
20 $ 131,360 $ 258,821 $ 539,438 $ 131,360 $ 258,821 $ 539,438
25 $ 150,354 $ 363,222 $ 952,161 $ 150,354 $ 363,222 $ 952,161
30 $ 156,473 $ 484,038 $ 1,636,585 $ 156,473 $ 484,038 $ 1,636,585
35 $ 141,806 $ 616,461 $ 2,775,529 $ 141,806 $ 616,461 $ 2,775,529
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
117
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON CURRENT COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $403,280
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: C
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $413,280 $413,280 $ 413,280
2 $ 21,525 $423,280 $423,280 $ 423,280
3 $ 33,101 $433,280 $433,280 $ 433,280
4 $ 45,256 $443,280 $443,280 $ 443,280
5 $ 58,019 $453,280 $453,280 $ 453,280
6 $ 71,420 $463,280 $463,280 $ 463,280
7 $ 85,491 $473,280 $473,280 $ 473,280
8 $100,266 $483,280 $483,280 $ 483,280
9 $115,779 $493,280 $493,280 $ 493,280
10 $132,068 $503,280 $503,280 $ 503,280
15 $226,575 $553,280 $553,280 $ 553,280
20 $347,193 $603,280 $603,280 $ 646,930
25 $501,135 $653,280 $653,280 $1,109,367
30 $697,608 $703,280 $703,280 $1,792,054
35 $948,363 $753,280 $753,280 $3,036,165
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL 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 $ 7,081 $ 7,564 $ 8,048 $ 6,324 $ 6,807 $ 7,291
2 $ 14,000 $ 15,407 $ 16,874 $ 13,326 $ 14,733 $ 16,200
3 $ 20,759 $ 23,544 $ 26,569 $ 20,169 $ 22,954 $ 25,980
4 $ 27,392 $ 32,038 $ 37,284 $ 26,887 $ 31,532 $ 36,779
5 $ 33,923 $ 40,924 $ 49,148 $ 33,503 $ 40,503 $ 48,728
6 $ 40,356 $ 50,266 $ 62,295 $ 40,019 $ 49,889 $ 61,958
7 $ 46,686 $ 59,963 $ 76,867 $ 46,434 $ 59,710 $ 76,615
8 $ 52,930 $ 70,174 $ 93,044 $ 52,761 $ 70,005 $ 92,876
9 $ 59,074 $ 80,872 $ 110,996 $ 58,989 $ 80,787 $ 110,911
10 $ 65,088 $ 92,055 $ 130,899 $ 65,088 $ 92,055 $ 130,899
15 $ 100,346 $ 164,834 $ 279,012 $ 100,346 $ 164,834 $ 279,012
20 $ 128,287 $ 253,931 $ 530,270 $ 128,287 $ 253,931 $ 530,270
25 $ 145,527 $ 363,743 $ 956,351 $ 145,527 $ 363,743 $ 956,351
30 $ 144,684 $ 500,967 $ 1,674,817 $ 144,684 $ 500,967 $ 1,674,817
35 $ 110,673 $ 679,682 $ 2,891,586 $ 110,673 $ 679,682 $ 2,891,586
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
118
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $403,280
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: C
GUIDELINE PREMIUM TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT --------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $413,280 $413,280 $ 413,280
2 $ 21,525 $423,280 $423,280 $ 423,280
3 $ 33,101 $433,280 $433,280 $ 433,280
4 $ 45,256 $443,280 $443,280 $ 443,280
5 $ 58,019 $453,280 $453,280 $ 453,280
6 $ 71,420 $463,280 $463,280 $ 463,280
7 $ 85,491 $473,280 $473,280 $ 473,280
8 $100,266 $483,280 $483,280 $ 483,280
9 $115,779 $493,280 $493,280 $ 493,280
10 $132,068 $503,280 $503,280 $ 503,280
15 $226,575 $553,280 $553,280 $ 553,280
20 $347,193 $603,280 $603,280 $ 603,280
25 $501,135 $ 0* $653,280 $ 714,710
30 $697,608 $ 0* $703,280 $1,158,343
35 $948,363 $ 0* $ 0* $1,960,211
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL 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 $ 5,504 $ 5,937 $ 6,373 $ 4,747 $ 5,180 $ 5,615
2 $ 10,775 $ 11,986 $ 13,253 $ 10,101 $ 11,312 $ 12,580
3 $ 15,796 $ 18,135 $ 20,683 $ 15,207 $ 17,546 $ 20,094
4 $ 20,559 $ 24,383 $ 28,732 $ 20,054 $ 23,878 $ 28,227
5 $ 25,048 $ 30,732 $ 37,464 $ 24,627 $ 30,312 $ 37,044
6 $ 29,254 $ 37,171 $ 46,946 $ 28,917 $ 36,835 $ 46,609
7 $ 33,132 $ 43,662 $ 57,225 $ 32,879 $ 43,409 $ 56,972
8 $ 36,643 $ 50,171 $ 68,366 $ 36,475 $ 50,003 $ 68,198
9 $ 39,737 $ 56,655 $ 80,436 $ 39,653 $ 56,571 $ 80,352
10 $ 42,358 $ 63,061 $ 93,506 $ 42,358 $ 63,061 $ 93,506
15 $ 55,540 $ 102,637 $ 189,957 $ 55,540 $ 102,637 $ 189,957
20 $ 47,383 $ 134,798 $ 345,458 $ 47,383 $ 134,798 $ 345,458
25 $ 0* $ 141,556 $ 616,130 $ 0* $ 141,556 $ 616,130
30 $ 0* $ 79,892 $ 1,082,564 $ 0* $ 79,892 $ 1,082,564
35 $ 0* $ 0* $ 1,866,867 $ 0* $ 0* $ 1,866,867
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
*Additional payment will be required to prevent termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
119
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON CURRENT COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $412,368
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: A
CASH VALUE ACCUMULATION TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $412,368 $412,368 $ 412,368
2 $ 21,525 $412,368 $412,368 $ 412,368
3 $ 33,101 $412,368 $412,368 $ 412,368
4 $ 45,256 $412,368 $412,368 $ 412,368
5 $ 58,019 $412,368 $412,368 $ 412,368
6 $ 71,420 $412,368 $412,368 $ 412,368
7 $ 85,491 $412,368 $412,368 $ 412,368
8 $100,266 $412,368 $412,368 $ 412,368
9 $115,779 $412,368 $412,368 $ 412,368
10 $132,068 $412,368 $412,368 $ 412,368
15 $226,575 $412,368 $412,368 $ 541,069
20 $347,193 $412,368 $446,058 $ 899,709
25 $501,135 $412,368 $580,483 $1,425,764
30 $697,608 $412,368 $729,425 $2,212,931
35 $948,363 $412,368 $903,300 $3,423,867
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL 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 $ 7,043 $ 7,525 $ 8,007 $ 6,268 $ 6,750 $ 7,233
2 $ 13,932 $ 15,334 $ 16,797 $ 13,243 $ 14,646 $ 16,108
3 $ 20,674 $ 23,449 $ 26,464 $ 20,071 $ 22,847 $ 25,862
4 $ 27,305 $ 31,936 $ 37,165 $ 26,788 $ 31,419 $ 36,648
5 $ 33,851 $ 40,830 $ 49,030 $ 33,420 $ 40,400 $ 48,600
6 $ 40,316 $ 50,161 $ 62,198 $ 39,972 $ 49,817 $ 61,854
7 $ 46,701 $ 59,950 $ 76,817 $ 46,442 $ 59,692 $ 76,559
8 $ 53,019 $ 70,238 $ 93,067 $ 52,847 $ 70,065 $ 92,895
9 $ 59,262 $ 81,042 $ 111,128 $ 59,176 $ 80,956 $ 111,042
10 $ 65,409 $ 92,373 $ 131,189 $ 65,409 $ 92,373 $ 131,189
15 $ 102,564 $ 167,404 $ 281,316 $ 102,564 $ 167,404 $ 281,316
20 $ 135,337 $ 262,712 $ 529,895 $ 135,337 $ 262,712 $ 529,895
25 $ 163,104 $ 382,031 $ 938,333 $ 163,104 $ 382,031 $ 938,333
30 $ 184,220 $ 529,097 $ 1,605,175 $ 184,220 $ 529,097 $ 1,605,175
35 $ 195,679 $ 708,806 $ 2,686,657 $ 195,679 $ 708,806 $ 2,686,657
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
120
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $412,368
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: A
CASH VALUE ACCUMULATION TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT -------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $412,368 $412,368 $ 412,368
2 $ 21,525 $412,368 $412,368 $ 412,368
3 $ 33,101 $412,368 $412,368 $ 412,368
4 $ 45,256 $412,368 $412,368 $ 412,368
5 $ 58,019 $412,368 $412,368 $ 412,368
6 $ 71,420 $412,368 $412,368 $ 412,368
7 $ 85,491 $412,368 $412,368 $ 412,368
8 $100,266 $412,368 $412,368 $ 412,368
9 $115,779 $412,368 $412,368 $ 412,368
10 $132,068 $412,368 $412,368 $ 412,368
15 $226,575 $412,368 $412,368 $ 412,368
20 $347,193 $412,368 $412,368 $ 658,138
25 $501,135 $412,368 $412,368 $1,005,224
30 $697,608 $412,368 $455,356 $1,476,989
35 $948,363 $ 0* $542,617 $2,124,908
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL 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 $ 5,469 $ 5,901 $ 6,335 $ 4,695 $ 5,127 $ 5,561
2 $ 10,754 $ 11,963 $ 13,227 $ 10,065 $ 11,274 $ 12,538
3 $ 15,848 $ 18,185 $ 20,730 $ 15,245 $ 17,582 $ 20,128
4 $ 20,748 $ 24,578 $ 28,932 $ 20,231 $ 24,062 $ 28,416
5 $ 25,451 $ 31,160 $ 37,916 $ 25,021 $ 30,730 $ 37,486
6 $ 29,960 $ 37,937 $ 47,773 $ 29,615 $ 37,592 $ 47,429
7 $ 34,243 $ 44,892 $ 58,583 $ 33,985 $ 44,634 $ 58,324
8 $ 38,280 $ 52,018 $ 70,448 $ 38,108 $ 51,846 $ 70,275
9 $ 42,044 $ 59,304 $ 83,480 $ 41,958 $ 59,218 $ 83,394
10 $ 45,501 $ 66,734 $ 97,808 $ 45,501 $ 66,734 $ 97,808
15 $ 66,593 $ 116,621 $ 207,936 $ 66,593 $ 116,621 $ 207,936
20 $ 76,511 $ 174,593 $ 387,618 $ 76,511 $ 174,593 $ 387,618
25 $ 67,357 $ 243,489 $ 661,565 $ 67,357 $ 243,489 $ 661,565
30 $ 22,246 $ 330,297 $ 1,071,351 $ 22,246 $ 330,297 $ 1,071,351
35 $ 0* $ 425,783 $ 1,667,383 $ 0* $ 425,783 $ 1,667,383
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
* Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
121
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON CURRENT COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $136,106
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: B
CASH VALUE ACCUMULATION TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $144,249 $144,766 $ 145,284
2 $ 21,525 $152,274 $153,815 $ 155,418
3 $ 33,101 $160,183 $163,280 $ 166,632
4 $ 45,256 $168,012 $173,219 $ 179,079
5 $ 58,019 $175,768 $183,661 $ 192,901
6 $ 71,420 $183,453 $194,633 $ 208,252
7 $ 85,491 $191,065 $206,162 $ 225,302
8 $100,266 $198,611 $218,282 $ 252,184
9 $115,779 $206,087 $231,020 $ 292,625
10 $132,068 $213,484 $244,399 $ 335,727
15 $226,575 $253,021 $365,481 $ 610,552
20 $347,193 $289,449 $496,082 $1,001,679
25 $501,135 $322,100 $636,700 $1,576,675
30 $697,608 $349,622 $793,130 $2,438,144
35 $948,363 $369,790 $976,430 $3,764,333
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED
VALUE
ASSUMING HYPOTHETICAL GROSS END OF YEAR NET CASH SURRENDER VALUE
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 $ 8,143 $ 8,660 $ 9,178 $ 7,780 $ 8,297 $ 8,815
2 $ 16,168 $ 17,709 $ 19,312 $ 15,845 $ 17,386 $ 18,990
3 $ 24,077 $ 27,174 $ 30,526 $ 23,794 $ 26,892 $ 30,244
4 $ 31,906 $ 37,113 $ 42,973 $ 31,664 $ 36,871 $ 42,731
5 $ 39,662 $ 47,555 $ 56,795 $ 39,461 $ 47,353 $ 56,593
6 $ 47,347 $ 58,527 $ 72,146 $ 47,186 $ 58,366 $ 71,984
7 $ 54,959 $ 70,056 $ 89,196 $ 54,838 $ 69,935 $ 89,075
8 $ 62,505 $ 82,176 $ 108,138 $ 62,425 $ 82,095 $ 108,058
9 $ 69,981 $ 94,914 $ 129,152 $ 69,941 $ 94,874 $ 129,111
10 $ 77,378 $108,293 $ 152,448 $ 77,378 $ 108,293 $ 152,448
15 $116,915 $190,023 $ 317,442 $ 116,915 $ 190,023 $ 317,442
20 $153,343 $292,174 $ 589,951 $ 153,343 $ 292,174 $ 589,951
25 $185,994 $419,029 $1,037,652 $ 185,994 $ 419,029 $ 1,037,652
30 $213,516 $575,306 $1,768,535 $ 213,516 $ 575,306 $ 1,768,535
35 $233,684 $766,189 $2,953,815 $ 233,684 $ 766,189 $ 2,953,815
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
122
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $136,106
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: B
CASH VALUE ACCUMULATION TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $143,721 $144,221 $ 144,721
2 $ 21,525 $151,199 $152,673 $ 154,209
3 $ 33,101 $158,540 $161,479 $ 164,669
4 $ 45,256 $165,764 $170,687 $ 176,240
5 $ 58,019 $172,871 $180,309 $ 189,036
6 $ 71,420 $179,859 $190,365 $ 203,191
7 $ 85,491 $186,715 $200,864 $ 218,844
8 $100,266 $193,432 $211,819 $ 236,152
9 $115,779 $199,997 $223,241 $ 269,873
10 $132,068 $206,400 $235,141 $ 308,330
15 $226,575 $239,846 $328,089 $ 545,484
20 $347,193 $267,466 $432,277 $ 860,568
25 $501,135 $286,460 $532,379 $1,286,585
30 $697,608 $292,579 $629,725 $1,867,645
35 $948,363 $277,912 $726,448 $2,667,294
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL 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 $ 7,615 $ 8,115 $ 8,615 $ 7,251 $ 7,751 $ 8,252
2 $ 15,093 $ 16,567 $ 18,103 $ 14,771 $ 16,245 $ 17,780
3 $ 22,434 $ 25,373 $ 28,563 $ 22,151 $ 25,091 $ 28,281
4 $ 29,658 $ 34,581 $ 40,134 $ 29,416 $ 34,339 $ 39,891
5 $ 36,765 $ 44,203 $ 52,930 $ 36,563 $ 44,002 $ 52,728
6 $ 43,753 $ 54,259 $ 67,085 $ 43,591 $ 54,098 $ 66,923
7 $ 50,609 $ 64,758 $ 82,738 $ 50,488 $ 64,637 $ 82,617
8 $ 57,326 $ 75,713 $ 100,046 $ 57,245 $ 75,632 $ 99,965
9 $ 63,891 $ 87,135 $ 119,110 $ 63,851 $ 87,095 $ 119,070
10 $ 70,294 $ 99,035 $ 140,007 $ 70,294 $ 99,035 $ 140,007
15 $ 103,740 $ 170,582 $ 283,611 $ 103,740 $ 170,582 $ 283,611
20 $ 131,360 $ 254,595 $ 506,842 $ 131,360 $ 254,595 $ 506,842
25 $ 150,354 $ 350,373 $ 846,736 $ 150,354 $ 350,373 $ 846,736
30 $ 156,473 $ 456,778 $ 1,354,718 $ 156,473 $ 456,778 $ 1,354,718
35 $ 141,806 $ 570,033 $ 2,092,985 $ 141,806 $ 570,033 $ 2,092,985
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
123
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON CURRENT COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $403,280
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: C
CASH VALUE ACCUMULATION TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT
PREMIUMS ASSUMING HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $413,280 $413,280 $ 413,280
2 $ 21,525 $423,280 $423,280 $ 423,280
3 $ 33,101 $433,280 $433,280 $ 433,280
4 $ 45,256 $443,280 $443,280 $ 443,280
5 $ 58,019 $453,280 $453,280 $ 453,280
6 $ 71,420 $463,280 $463,280 $ 463,280
7 $ 85,491 $473,280 $473,280 $ 473,280
8 $100,266 $483,280 $483,280 $ 483,280
9 $115,779 $493,280 $493,280 $ 493,280
10 $132,068 $503,280 $503,280 $ 503,280
15 $226,575 $553,280 $553,280 $ 553,280
20 $347,193 $603,280 $603,280 $ 893,133
25 $501,135 $653,280 $653,280 $1,416,032
30 $697,608 $703,280 $703,280 $2,198,409
35 $948,363 $753,280 $858,497 $3,401,913
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL 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 $ 7,081 $ 7,564 $ 8,048 $ 6,324 $ 6,807 $ 7,291
2 $ 14,000 $ 15,407 $ 16,874 $ 13,326 $ 14,733 $ 16,200
3 $ 20,759 $ 23,544 $ 26,569 $ 20,169 $ 22,954 $ 25,980
4 $ 27,392 $ 32,038 $ 37,284 $ 26,887 $ 31,532 $ 36,779
5 $ 33,923 $ 40,924 $ 49,148 $ 33,503 $ 40,503 $ 48,728
6 $ 40,356 $ 50,226 $ 62,295 $ 40,019 $ 49,889 $ 61,958
7 $ 46,686 $ 59,963 $ 76,867 $ 46,434 $ 59,710 $ 76,615
8 $ 52,930 $ 70,174 $ 93,044 $ 52,761 $ 70,005 $ 92,876
9 $ 59,074 $ 80,872 $ 110,996 $ 58,989 $ 80,787 $ 110,911
10 $ 65,088 $ 92,055 $ 130,899 $ 65,088 $ 92,055 $ 130,899
15 $ 100,346 $ 164,834 $ 279,012 $ 100,346 $ 164,834 $ 279,012
20 $ 128,287 $ 253,931 $ 526,022 $ 128,287 $ 253,931 $ 526,022
25 $ 145,527 $ 363,743 $ 931,929 $ 145,527 $ 363,743 $ 931,929
30 $ 144,684 $ 500,967 $ 1,594,641 $ 144,684 $ 500,967 $ 1,594,641
35 $ 110,673 $ 673,650 $ 2,669,429 $ 110,673 $ 673,650 $ 2,669,429
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
124
<PAGE>
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND NET CASH SURRENDER
VALUES BASED ON GUARANTEED COST OF INSURANCE RATES
ISSUE AGE: 45 FACE AMOUNT: $403,280
CLASS: MALE NONSMOKER DEATH BENEFIT OPTION: C
CASH VALUE ACCUMULATION TEST ANNUAL PREMIUM: $10,000
<TABLE>
<CAPTION>
TOTAL END OF YEAR DEATH BENEFIT ASSUMING
PREMIUMS HYPOTHETICAL GROSS ANNUAL
END OF PAID PLUS INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------- -------- ----------
<S> <C> <C> <C> <C>
1 $ 10,500 $413,280 $413,280 $ 413,280
2 $ 21,525 $423,280 $423,280 $ 423,280
3 $ 33,101 $433,280 $433,280 $ 433,280
4 $ 45,256 $443,280 $443,280 $ 443,280
5 $ 58,019 $453,280 $453,280 $ 453,280
6 $ 71,420 $463,280 $463,280 $ 463,280
7 $ 85,491 $473,280 $473,280 $ 473,280
8 $100,266 $483,280 $483,280 $ 483,280
9 $115,779 $493,280 $493,280 $ 493,280
10 $132,068 $503,280 $503,280 $ 503,280
15 $226,575 $553,280 $553,280 $ 553,280
20 $347,193 $603,280 $603,280 $ 603,280
25 $501,135 $653,280 $653,280 $ 905,307
30 $697,608 $703,280 $703,280 $1,338,258
35 $948,363 $753,280 $753,280 $1,932,295
</TABLE>
<TABLE>
<CAPTION>
END OF YEAR ACCUMULATED VALUE END OF YEAR NET CASH SURRENDER VALUE
ASSUMING HYPOTHETICAL 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 $ 5,504 $ 5,937 $ 6,373 $ 4,747 $ 5,180 $ 5,615
2 $ 10,775 $ 11,986 $ 13,253 $ 10,101 $ 11,312 $ 12,580
3 $ 15,796 $ 18,135 $ 20,683 $ 15,207 $ 17,546 $ 20,094
4 $ 20,559 $ 24,383 $ 28,732 $ 20,054 $ 23,878 $ 28,227
5 $ 25,048 $ 30,732 $ 37,464 $ 24,627 $ 30,312 $ 37,044
6 $ 29,254 $ 37,171 $ 46,946 $ 28,917 $ 36,835 $ 46,609
7 $ 33,132 $ 43,662 $ 57,225 $ 32,879 $ 43,409 $ 56,972
8 $ 36,643 $ 50,171 $ 68,366 $ 36,475 $ 50,003 $ 68,198
9 $ 39,737 $ 56,655 $ 80,436 $ 39,653 $ 56,571 $ 80,352
10 $ 42,358 $ 63,061 $ 93,506 $ 42,358 $ 63,061 $ 93,506
15 $ 55,540 $ 102,637 $ 189,957 $ 55,540 $ 102,637 $ 189,957
20 $ 47,383 $ 134,798 $ 345,458 $ 47,383 $ 134,798 $ 345,458
25 $ 0* $ 141,556 $ 595,807 $ 0* $ 141,556 $ 595,807
30 $ 0* $ 79,892 $ 970,721 $ 0* $ 79,892 $ 970,721
35 $ 0* $ 0* $ 1,516,243 $ 0* $ 0* $ 1,516,243
</TABLE>
- --------
All premium payments are illustrated as if made at the beginning of the policy
year.
This illustration assumes no policy loans or partial withdrawals have been
made.
*Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE
EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE MADE BY US, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
125
<PAGE>
[LOGO OF M'S VERSATILE PRODUCT]
Underwritten By
Pacific Life Insurance Company
700 Newport Center Drive
P.O. Box 9000
Newport Beach, California 92660
<PAGE>
Underwritten by:
[LOGO OF PACIFIC LIFE]
PACIFIC LIFE INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
(800) 800-7681
VISIT US AT OUR WEBSITE: www.pacificlife.com
[LOGO OF IMSA]
*Membership promotes ethical market conduct
for individual life insurance and annuities
FORM NO.
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
PART II. ADDITIONAL INFORMATION NOT REQUIRED IN PROSPECTUS
Contents of Registration Statement
This Registration Statement on Form S-6 comprises the following papers and
documents:
The facing sheet.
The cross-reference sheet.
The Prospectus consisting of 128 pages (including illustrations).
The undertaking to file reports.
Representation pursuant to Section 26(e) of the Investment Company Act of 1940.
The Signatures.
Written consent of the following person (included in the exhibits shown below):
Deloitte & Touche LLP, Independent Auditors
Dechest Price & Rhoads, Outside Counsel
The following exhibits:
1. (1) (a) Resolution of the Board of Directors of the Depositor dated
November 22, 1989 and copies of the Memoranda concerning Pacific
Select Exec Separate Account dated May 12, 1988 and January 26,
1993. /1/
(b) Resolution of the Board of Directors of Pacific Life Insurance
Company authorizing conformity to the terms of the current
Bylaws. /1/
(2) Inapplicable
(3) (a) Distribution Agreement Between Pacific Life Insurance Company and
Pacific Mutual Distributors, Inc. (formerly known as Pacific Equities
Network) /1/
(b) Form of Selling Agreement Between Pacific Mutual Distributors, Inc.
and Various Broker-Dealers
(4) Inapplicable
(5) (a) Flexible Premium Variable Life Insurance Policy /1/
(b) Annual Renewable Term Rider (form R98-ART) /1/
(c) Accounting Benefit Rider (form R98-ABR) /1/
(d) Accelerated Living Benefit Rider (form R92-ABR) /1/
(e) Spouse Term Rider (form R98-SPT) /1/
(f) Children's Term Rider (form R84-CT) /1/
(g) Waiver of Charges (form R98-WC)
(h) Accidental Death Benefit (form R84-AD) /1/
(i) Guaranteed Insurability Rider (form R84-GI) /1/
(j) Disability Benefit Rider (form R84-DB) /1/
(6) (a) Bylaws of Pacific Life Insurance Company /1/
(b) Articles of Incorporation of Pacific Life Insurance Company /1/
<PAGE>
(7) Inapplicable
(8) Inapplicable
(9) (a) Participation Agreement between Pacific Life Insurance Company and
Pacific Select Fund /1/
(b) M Fund, Inc. Participation Agreement with Pacific Life Insurance
Company
(10) Application for Flexible Premium Variable Life Insurance Policy &
General Questionnaire /1/
2. Form of Opinion and consent of legal officer of Pacific Life as to
legality of Policies being registered /1/
3. Inapplicable
4. Inapplicable
5. Inapplicable
6. (a) Consent of Deloitte & Touche LLP
(b) Consent of Dechert Price & Rhoads /1/
7. Opinion of Actuary
8. Memorandum Describing Issuance, Transfer and Redemption Procedures /1/
9. Power of Attorney /1/
10. Inapplicable
11. Inapplicable
12. Inapplicable
13. Inapplicable
14. Inapplicable
15. Inapplicable
16. Inapplicable
17. Inapplicable
/1/ Filed as part of Registration Statement on Form S-6 via EDGAR on August 10,
1998, File No. 333-61135, Accession Number 0001017062-98-001706.
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as maybe prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
REPRESENTATION PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF 1940
Pacific Life Insurance Company and Registrant represent that the fees and
charges to be deducted under the variable Life Insurance Policy ("Policy")
described in the prospectus contained in this registration statement are, in the
aggregate, reasonable in relation to the services rendered, the expenses to be
incurred, and the risks assumed in connection with the Policy.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Pacific Select Exec Separate Account of Pacific Life Insurance Company, has duly
caused this Pre-Effective Amendment No. 1 to the Registration Statement on Form
S-6 to be signed on its behalf by the undersigned thereunto duly authorized in
the City of Newport Beach, and State of California, on this 19th day of November
1998.
PACIFIC SELECT EXEC SEPARATE ACCOUNT
(Registrant)
BY: PACIFIC LIFE INSURANCE COMPANY
(Depositor)
BY: _________________________________
Thomas C. Sutton*
Chief Executive Officer
*BY: /s/ DAVID R. CARMICHAEL
David R. Carmichael
as attorney-in-fact
(Power of Attorney is contained in the Registration Statement on Form S-6 for
the Pacific Select Exec Separate Account, File No. 333-61135, Accession Number
0001017062-98-001706 as Exhibit 9.)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Pacific Life
Insurance Company has duly caused this Pre-Effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized all in the City of Newport Beach, and State of California, on
this 19th day of November, 1998.
BY: PACIFIC LIFE INSURANCE COMPANY
(Registrant)
BY: _________________________________
Thomas C. Sutton*
Chief Executive Officer
*BY: /s/ DAVID R. CARMICHAEL
David R. Carmichael
as attorney-in-fact
(Power of Attorney is contained in this Registration Statement on Form S-6 for
the Pacific Select Exec Separate Account, File No. 333-61135, Accession Number
0001017062-98-001706 as Exhibit 9.)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<C> <S> <C>
Signature Title Date
____________________ Director, Chairman of the Board __________ , 1998
Thomas C. Sutton* and Chief Executive Officer
____________________ Director and President __________ , 1998
Glenn S. Schafer*
____________________ Director, Senior Vice President and __________ , 1998
Khanh T. Tran* Chief Financial Officer
____________________ Director, Senior Vice President and __________ , 1998
David R. Carmichael* General Counsel
____________________ Director, Vice President and __________ , 1998
Audrey L. Milfs* Corporate Secretary
____________________ Director __________ , 1998
Richard M. Ferry*
____________________ Director __________ , 1998
Donald E. Guinn*
____________________ Director __________ , 1998
Ignacio E. Lozano, Jr.*
____________________ Director __________ , 1998
Charles D. Miller*
____________________ Director __________ , 1998
Donn B. Miller*
____________________ Director __________ , 1998
Richard M. Rosenberg*
____________________ Director __________ , 1998
James R. Ukropina*
____________________ Director __________ , 1998
Raymond L. Watson*
____________________ Vice President and Controller __________ , 1998
Edward R. Byrd*
*BY: /s/ DAVID R. CARMICHAEL November 19, 1998
David R. Carmichael
as attorney-in-fact
</TABLE>
(Powers of Attorney are contained as Exhibit 9 in the Registration Statement on
Form S-6 of Pacific Select Exec Separate Account, File No. 333-61135, Accession
Number 0001017062-98-001706.)
<PAGE>
EXHIBIT 99.1(3)(b)
Form of Selling Agreement between Pacific Life,
PMD and Various Broker-Dealers
<PAGE>
PACIFIC LIFE INSURANCE COMPANY
VARIABLE CONTRACT SELLING AGREEMENT
This Agreement ("Agreement") is made as of _______________________, 19__ by
and among PACIFIC LIFE INSURANCE COMPANY ("Pacific Life"), PACIFIC MUTUAL
DISTRIBUTORS, INC. ("Distributor"), a broker/dealer registered with the
Securities and Exchange Commission ("SEC") pursuant to the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and a member of the National
Association of Securities Dealers, Inc. ("NASD"),
___________________________________________________________ ("Broker/Dealer"),
and each undersigned agency (jointly and severally referred to herein as
"Agency"); Broker/Dealer and Agency jointly and severally hereinafter referred
to collectively as "Selling Entities".
This Agreement is for the purpose of providing for the distribution of
certain variable life insurance policies and/or annuity contracts set forth in
Schedule A hereto and of any successor additional SEC registered insurance
products (as discussed in Paragraph [3] of this Agreement) issued by Pacific
Life and distributed by Distributor through representatives who are both (a)
state insurance licensed and appointed agents of Pacific Life and associated
with the Agency and (b) NASD registered representatives of Broker/Dealer who are
appropriately licensed both with the NASD and with the relevant states. The
variable life insurance and/or annuity contracts set forth in Schedule A hereto,
as such Schedule may be amended and/or restated from time to time to include any
successor or additional SEC registered insurance products, and together with any
riders to such contracts, are referred to collectively herein as the
"Contracts".
1. APPOINTMENT
In consideration of the mutual promises and covenants contained in this
Agreement, Pacific Life and Distributor appoint Broker/Dealer and those persons
associated with Agency who are NASD registered representatives of Broker/Dealer
and state insurance licensed agents of Pacific Life to solicit and procure
applications for the Contracts.
These appointments are not deemed to be exclusive in any manner and extend
only to those jurisdictions, set forth in Schedule B hereto as such Schedule B
may be amended from time to time by Pacific Life in its sole discretion, where
the Contracts specified in such Schedule B have been approved for sale.
From time to time, Pacific Life will provide Selling Entities with
information regarding the jurisdictions in which Pacific Life is authorized to
solicit applications for the Contracts and any limitations on the availability
of such Contracts in any jurisdiction.
2. RESPONSIBILITIES
Broker/Dealer is authorized to collect the premium on the Contracts and
must remit such premiums to Pacific Life in the manner set forth in the
applicable Compensation Schedule set forth in one of the Schedule Ds. Contract
applications shall be taken only on preprinted, state-appropriate application
forms supplied by Pacific Life. All completed applications, supporting
documents and payments are the sole property of Pacific Life and must be
promptly delivered to Pacific Life. All applications are subject to acceptance
by Pacific Life at its sole discretion.
3. NEW PRODUCTS
Distributor may propose and Pacific Life may issue additional or successor
products, in which event Broker/Dealer will be informed of the new product and
its related Compensation Schedule. If Broker/Dealer does not agree to
distribute such new product(s), it must notify Pacific Life in writing within 30
days of receipt of the Compensation Schedule for such new product(s). If
Broker/Dealer does not indicate disapproval of the new product(s) or the terms
contained in its related Compensation Schedule, Broker/Dealer will be deemed to
have thereby agreed (a) to distribute such new product(s) and agreed to its
related Compensation Schedule, which shall be attached to and made a part of
this Agreement as an amendment or addendum to the applicable Schedule D, or as a
new Schedule D hereto, and (b) to the amendment of Schedules A and B to this
Agreement to name such new product(s) and to identify where their offer and sale
has been approved.
1
<PAGE>
4. SUBAGENTS
Agency is authorized to appoint Subagents to solicit sales of the Contracts
("Subagents"); provided, however, that Pacific Life shall have the right in its
sole discretion to terminate the appointment of any Subagent upon notice from
Pacific Life to Agency. Agency warrants that no Subagent shall commence
solicitation nor aid, directly or indirectly, in the solicitation of any
application for any Contract unless, at the time of such solicitation or aid,
such Subagent is appropriately licensed for such product under applicable
insurance laws and is an NASD registered representative of Broker/Dealer.
Selling Entities each represent that they have, for each Subagent,
fulfilled all requirements set forth in the form of general letter of
recommendation set forth in Schedule C hereto; and agree, upon reasonable
request by Pacific Life, to furnish proof of such fulfillment as Pacific Life
may require.
5. SALES MATERIAL
Neither Selling Entities nor any of their respective Subagents, officers,
directors, employees, affiliates, representatives or agents shall utilize in
their marketing efforts for the Contracts any written brochure, prospectus,
descriptive literature, printed and published material, audio-visual material or
standard letters; provided, however, that they may: (a) use material that has
been provided preprinted by Pacific Life or Distributor, and (b) use material,
the use of which Pacific Life or Distributor has specifically approved, in
writing, prior to such use. In order for Pacific Life or Distributor to review
and approve materials not produced by Pacific Life in accordance with clause (b)
above, Broker/Dealer must provide Pacific Life and Distributor with evidence
that any material proposed to be used was filed with the NASD in accordance with
applicable rules and copies of correspondence with the NASD relating to the
proposed material.
6. RECORDS
In accordance with the requirements of federal and state laws and rules of
applicable self-regulatory organizations as defined in the Exchange Act ("SROs")
including but limited to the Rules of Fair Practice of the NASD ("NASD Rules"),
Selling Entities shall maintain complete records concerning the sale of the
Contracts, information regarding the customs relating to the sale and/or
servicing of the Contracts, including the manner and extent of distribution of
any sales, marketing or other solicitation material, shall make such records and
files available to staff of Pacific Life or Distributor at such times as Pacific
Life or Distributor may reasonably request and shall make such material
available to personnel of state insurance departments, the NASD or other
regulatory agency, including the SEC, that have regulatory authority over
Pacific Life or Distributor.
7. DELIVERY OF PROSPECTUSES
Selling Entities warrant that each solicitation, specifically including any
solicitation effected by any Subagent, will be made by use of a currently
effective prospectus, that a prospectus will be delivered concurrently with each
sales presentation and that no statements shall be made to a client superseding
or controverting any statement made in the prospectus. Pacific Life and
Distributor shall furnish Selling Entities, at no cost to Selling Entities,
reasonable quantities of prospectuses and such other material as Pacific Life
and Distributor deem necessary to aid in the solicitation of Contracts.
8. BROKER/DEALER REPRESENTATIONS
The representations, warranties and covenants of Broker/Dealer set forth in
this Agreement are continuous during the term of this Agreement and
Broker/Dealer agrees to notify each of Pacific Life and Distributor immediately,
in writing, if, at any time during the course of this Agreement, any of the
representations, warranties or covenants set forth herein become inaccurate or
untrue of the facts related thereto.
Broker/Dealer represents, warrants and covenants that:
(a) Broker/Dealer is affiliated with Agency which is an entity properly
licensed under the insurance laws of the jurisdiction(s) in which Broker/Dealer
will act under this Agreement;
(b) Broker/Dealer is registered with the SEC as a broker/dealer under the
Exchange Act, a member of the NASD and will, throughout the duration of this
Agreement, remain in compliance with the requirements of
2
<PAGE>
the NASD and of the Exchange Act, including but not limited to laws requiring
that the Broker/Dealer and each of its Subagents/registered representatives be
appropriately securities registered, insurance licensed and appointed by Pacific
Life, and such other applicable federal or state laws;
(c) Broker/Dealer has established rules, procedures, and supervisory and
inspection techniques necessary to train and to supervise diligently the
activities of its NASD registered representatives who are state insurance
licensed and appointed agents of Pacific Life;
(d) Broker/Dealer shall ensure that no registered representative of
Broker/Dealer, including any Subagent, shall sell or recommend for sale any
Contract to any person without reasonable grounds for believing, after
appropriate inquiry, that the purchase of that Contract is suitable for that
person;
(e) Upon request by Pacific Life and Distributor, Broker/Dealer will
furnish such appropriate records as are necessary to document the training,
licensing and diligent supervision required by subparagraph (b) above, and
client suitability determinations required by subparagraph (c) above.
9. AGENCY REPRESENTATIONS
The representations, warranties and covenants of Agency set forth in this
Agreement are continuous during the term of this Agreement and Agency agrees to
notify each of Pacific Life and Distributor immediately, in writing, if, at any
time during the course of this Agreement, any of the representations, warranties
or covenants set forth herein become inaccurate or untrue of the facts related
thereto.
Agency represents, warrants and covenants that it will, and will cause each
Subagent to, comply fully with the requirements of state insurance law and
applicable federal laws, including but not limited to assuring appropriate state
insurance licensing and appointment by Pacific Life, and will establish rules
and procedures necessary to supervise diligently the activities of licensed and
appointed agents of Pacific Life associated with Agency. Upon request by
Pacific Life or Distributor, Agency will furnish such appropriate records as are
necessary to document such diligent supervision.
10. PACIFIC LIFE REPRESENTATIONS
Pacific Life represents that the prospectus(es) and registration
statement(s) relating to the Contracts that are and shall be in effect from time
to time contain no untrue statements of material fact and do not omit to state
material facts, the omission of which makes any statement contained in such
prospectus(es) and registration statement(s) misleading.
11. COMPENSATION
11.1 Pacific Life, through Distributor, will remit to Broker/Dealer or
Agency compensation as set forth in the applicable Schedule D hereto, which
payments or termination thereof shall be governed by the administrative rules
established by Pacific Life in its sole discretion. Selling Entities shall pay
all Subagents. Pacific Life reserves the right not to pay compensation on a
Contract, the premium for which is paid in whole or in part by the loan or
surrender value of any other life insurance policy or annuity contract issued by
Pacific Life.
11.2 Pacific Life may offset, against any claim for commission and any
other compensation payable to Broker/Dealer or Agency under this Agreement, any
existing or future indebtedness of, respectively, Broker/Dealer or Agency,
whether fixed or contingent, whether such indebtedness arises under this
Agreement or otherwise. Such indebtedness shall constitute a first lien against
any such compensation. Neither Broker/Dealer nor Agency may offset, against any
such indebtedness, any compensation accruing under this Agreement.
12. COMPLAINTS AND INVESTIGATIONS
Pacific Life, Distributor, Broker/Dealer and Agency agree to cooperate
fully in any insurance or securities regulatory investigation or proceeding or
judicial proceeding with respect to Pacific Life, Distributor, Broker/Dealer
and/or Agency, their affiliates and their agents or representatives to the
extent that such
3
<PAGE>
investigation or proceeding is in connection with the Contracts distributed
under this Agreement. Without limiting the foregoing:
(a) Selling Entities shall promptly notify Pacific Life and Distributor of
any complaint or comment regarding the Contracts and/or any allegation that
Selling Entities or any of its Subagents/representatives violated any law,
regulation or rule in soliciting applications for or servicing the Contracts.
Selling Entities shall promptly investigate such complaint or allegation, take
appropriate remedial measures and notify Pacific Life and Distributor of same.
Selling Entities shall provide Pacific Life and Distributor with full details of
and correspondence relating to any of the foregoing, including copies of all
legal documents pertaining thereto.
(b) Selling Entities shall cooperate fully with Pacific Life and
Distributor in any regulatory proceeding or judicial proceeding involving the
solicitation of applications for or the servicing of Contracts by the Selling
Entities or any of their representatives.
13. INDEMNIFICATION
13.1 Pacific Life and Distributor agree to indemnify and hold harmless
Selling Entities, their officers, directors, agents and employees, against any
and all losses, claims, damages, or liabilities to which they may become subject
under the Securities Act, the Exchange Act, the Investment Company Act of 1940,
or other federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact or any omission or alleged omission to state
a material fact required to be stated or necessary to make the statements made
not misleading in the registration statement for the Contracts or for the shares
of Pacific Select Fund (the "Fund") filed pursuant to the Securities Act, or any
prospectus included as a part thereof, as from time to time amended and
supplemented, or in any advertisement or sales literature provided by Pacific
Life and Distributor.
13.2 Selling Entities agree to, jointly and severally, hold harmless and
indemnify Pacific Life and Distributor and any of their respective affiliates,
employees, officers, agents and directors (collectively, "Indemnified Persons")
against any and all claims, liabilities and expenses (including, without
limitation, losses occasioned by any rescission of any Contract pursuant to a
"free look" provision or by any return of initial purchase payment in connection
with an incomplete application), including, without limitation, reasonable
attorneys' fees and expenses and any loss attributable to the investment
experience under a Contract, that any Indemnified Person may incur from
liabilities resulting or arising out of or based upon (a) any untrue or alleged
untrue statement other than statements contained in the registration statement
or prospectus relating to any Contract, (b) (i) any inaccurate or misleading, or
allegedly inaccurate or misleading sales material used in connection with any
marketing or solicitation relating to any Contract, other than sales material
provided preprinted by Pacific Life or Distributor, and (ii) any use of any
sales material that either has not been specifically approved in writing by
Pacific Life or Distributor or that, although previously approved in writing by
Pacific Life or Distributor, has been disapproved, in writing by either of them,
for further use, or (c) any act or omission of a Subagent, director, officer or
employee of Selling Entities, including, without limitation, any failure of
Selling Entities or any Subagent to be registered as required as a broker/dealer
under the 1934 Act, or licensed in accordance with the rules of any applicable
SRO or insurance regulator.
14. FIDELITY BOND
Selling Entities each represent and covenant that all directors, officers,
employees and Subagents of Selling Entities licensed pursuant to this Agreement
or who have access to funds of Pacific Life are and will continue to be covered
by a blanket fidelity bond including coverage for larceny, embezzlement and
other defalcation, issued by a bonding company rated A- or better from A.M. Best
or equivalent rating from another nationally recognized statistical rating
organization. This bond shall be maintained at Broker/Dealer's and/or Agency's
expense. Such bond shall be at least equivalent to the minimal coverage
required under the NASD Rules, and endorsed to extend coverage to life insurance
and annuity transactions. Selling Entities acknowledge that Pacific Life may
require evidence that such coverage is in force, and Broker/Dealer or Agency
shall promptly give notice to Pacific Life of any notice of cancellation or
change of coverage.
4
<PAGE>
Selling Entities each assign any proceeds received from the fidelity bond
company, error and omissions or other liability coverage, to Pacific Life to the
extent of Pacific Life's loss due to activities covered by the bond. If there
is any deficiency, Selling Entities will promptly pay Pacific Life the amount of
such deficiency on demand. Selling Entities each shall indemnify and hold
harmless Pacific Life from any such deficiency and from the cost of collection.
15. LIMITATIONS OF AUTHORITY
The Contract forms are the sole property of Pacific Life. No person other
than Pacific Life has the right or authority to: (i) make, alter or discharge
any policy, Contract, certificate, supplemental contract or form issued by
Pacific Life; (ii) make, alter, modify or discharge any Contract; (iii) waive or
modify any provision with respect to any Contract or policy; (iv) incur
indebtedness or liability, or expend or contract for expenditure of any funds on
behalf of Pacific Life or the Contracts; (v) extend the time for payment of any
premiums, bind Pacific Life to reinstate any terminated Contracts, or accept
notes for payment of premiums; (vi) enter into any proceeding in a court of law
or before a regulatory agency in the name of or on behalf of Pacific Life; or
(vii) institute or file any response to any legal proceeding in connection with
any matter pertaining to the Contracts on behalf of Pacific Life without the
prior written consent of Pacific Life (except that if Selling Entities
themselves are named as a party or parties in such proceedings each named party
may enter into legal proceedings on its own behalf without the written consent
of Pacific Life).
16. GENERAL PROVISIONS
16.1 Waiver
Failure of any of the parties to insist promptly upon strict compliance
with any of the obligations of any other party under this Agreement will not be
deemed to constitute a waiver of the right to enforce strict compliance.
16.2 Independent Contractors
Selling Entities are each an independent contractor and not an employee or
subsidiary of Pacific Life or Distributor. Nothing contained in this Agreement
or otherwise shall be deemed to make any registered representative of
Broker/Dealer or any Subagent appointed by Agency an employee or agent of
Pacific Life or Distributor for tax or any other purposes. Neither Pacific Life
nor Distributor shall have any responsibility for training or supervision of any
such Subagent or registered representative or of any other employee or affiliate
of any Selling Entities.
16.3 Independent Assignment
No assignment of this Agreement or of commissions or other payments under
this Agreement shall be valid without prior written consent of Pacific Life.
Any purported assignment in violation of this Paragraph 16.3 is void.
16.4 Notice
Any notice required or otherwise given pursuant to this Agreement may be
given electronically by facsimile or electronic mail (but not orally by
telephone) or by mail, postage paid, (including any express mail service),
transmitted to the last address communicated by the receiving party to the other
parties to this Agreement. The current address for mailing purposes of this
Agreement shall be set forth on the signature page.
16.5 Severability
To the extent this Agreement may be in conflict with any applicable law or
regulation, this Agreement shall be construed in a manner consistent with such
law or regulation. The invalidity or illegality of any provisions of this
Agreement shall not be deemed to affect the validity or legality of any other
provision of this Agreement.
16.6 Amendment
Except as expressly provided herein, this Agreement may be amended only by
a writing signed by all parties. The Schedules hereto may be amended by Pacific
Life or Distributor upon 10 days' written notice to Broker/Dealer and Agency
which shall be deemed received the earlier of actual receipt or 10 days after
mailing or
5
<PAGE>
transmission. The submission of an application for the Contracts by
Broker/Dealer or Agency after the date of any such amendment shall constitute
such party's agreement to such amendment. No amendment will impair the right to
receive commissions as accrued with respect to Contracts issued and applications
procured prior to the amendment.
16.7 Termination
This Agreement may be terminated by any party for any reason upon 10 days'
prior written notice. It may be terminated, for cause, by any party
immediately. Termination of this Agreement shall not impair the right to
receive commissions accrued with respect to applications procured prior to the
termination except as otherwise specifically provided in the applicable Schedule
D hereto.
16.8 Survival
All representations and warranties made in or pursuant to this Agreement
and the provisions of Paragraphs 11, 12 and 14.10 of this Agreement shall
survive the termination of this Agreement.
16.9 Governing Law
This Agreement shall be construed in accordance with the laws of the State
of California, without giving effect to the conflict of law provisions thereof.
Broker/Dealer and Agency consent to the jurisdiction of the courts of the State
of California and to the jurisdiction of federal courts located within
California.
16.10 Proprietary Information
Selling Entities acknowledge that information pertaining to any Distributor
program or service, including names of Contract owners, is proprietary in nature
and belongs exclusively to Distributor. Selling Entities agree that they will
not disclose any information concerning Distributor programs or services to any
person, for consideration or otherwise, unless (a) Pacific Life or Distributor
has authorized such disclosure in writing or (b) if such disclosure is expressly
required by state or federal regulatory authorities and Pacific Life and
Distributor have received notice, in writing, of such disclosure. Selling
Entities agree further that, following termination of this Agreement for any
reason, they will not solicit or otherwise contact any Contract owner for any
reason except as expressly agreed in writing by Distributor or Pacific Life.
16.11 Entire Agreement
This Agreement shall constitute the entire agreement among the parties and
supersedes all prior agreements and understandings, whether written or verbal.
By signing below, each of the undersigned agrees to have read and be bound
by the terms and conditions of this Agreement. Each of the undersigned
acknowledges receipt of a copy of this Agreement.
PACIFIC LIFE INSURANCE COMPANY
700 Newport Center Drive
Newport Beach, CA 92660
By:
---------------------------------
Title:
------------------------------
PACIFIC MUTUAL DISTRIBUTORS, INC.
700 Newport Center Drive
Newport Beach, CA 92660
By:
---------------------------------
Title:
------------------------------
6
<PAGE>
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10
<PAGE>
SCHEDULE A
PACIFIC LIFE INSURANCE COMPANY
CONTRACTS COVERED BY THIS AGREEMENT
<TABLE>
<CAPTION>
Contract Name Contract Number
- ------------- ---------------
<S> <C>
Pacific Select Variable Annuity 90-53
Pacific One 95-01
Pacific Select Exec 88-52
Pacific Select Choice 93-55
M's Versatile Product 98-52M
</TABLE>
Date:______________________
11
<PAGE>
SCHEDULE B
JURISDICTIONS IN WHICH
PACIFIC LIFE INSURANCE COMPANY
IS APPROVED FOR SALE OF CONTRACTS
COVERED BY THIS AGREEMENT
<TABLE>
<CAPTION>
CONTRACT JURISDICTIONS
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<S> <C>
All States except:
Pacific Select Variable Annuity New York
Pacific One New Jersey, New York, Oregon, Texas, Washington
Pacific Select Exec New York
Pacific Select Choice New York
M's Versatile Product New York
</TABLE>
Date:
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12
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SCHEDULE C
GENERAL LETTER OF RECOMMENDATION
Selling Entities hereby certify to Pacific Life that all of the following
requirements will be fulfilled in conjunction with the submission of
licensing/appointment papers for all applicants as Subagents ("Applicant")
submitted by Agency. Agency will, upon request, forward proof of compliance
with same to Pacific Life in a timely manner, including but not limited to
general background check information, NASD background information/reports,
fingerprint reports, etc.
1. We have made a thorough and diligent inquiry and investigation relative to
each applicant's identity, residence and business reputation and declare that
each applicant is personally known to us, has been examined by us, is known to
be of good moral character, has a good business reputation, is reliable, is
financially responsible and is worthy of a license. Our inquiries and
investigations were sufficient to meet the requirements of requisite state
insurance regulation, federal securities regulation and NASD requirements. Each
individual is trustworthy, competent, and qualified to act as an agent for
Pacific Life, and to hold himself out in good faith to the general public. We
vouch for each applicant.
2. We have on file a B-300, B-301 or U-4 form which was completed by each
applicant. We have fulfilled all the necessary investigative requirements for
the registration of each applicant as a registered representative through our
NASD member firm, and each applicant is presently registered as an NASD
registered representative.
The above information in our files indicates no fact or condition which
would disqualify the applicant from receiving a license, and all the findings of
all investigative information is favorable.
3. We certify that all educational requirements have been met for the specific
state in which each applicant is requesting a license, and that all such persons
have fulfilled the appropriate examination, education and training requirements.
4. If the applicant is required to submit his or her picture, signature, and
securities registration in the state in which he or she is applying for a
license, we certify that those items forwarded to Pacific Life are those of the
applicant and that the securities registration and any insurance licenses are
true copies of the original.
5. We hereby warrant that the applicant is not applying for a license with
Pacific Life in order to place insurance chiefly or solely on his or her life or
property, lives or property of his or her relatives, or property or liability of
his or her associates.
6. We certify that each applicant will receive close and adequate supervision,
and that we will make inspection when needed of any or all risks written by
these applicants, to the end that the insurance interest of the public will be
properly protected.
7. We will not permit any applicant to transact insurance as an agent until
duly licensed therefor. No applicants have been given a contract or furnished
supplies, nor have any applicants been permitted to write, solicit business or
act as an agent in any capacity, and they will not be so permitted until the
certificate of authority or license applied for is received.
8. We certify that Selling Entities and applicant shall have entered into a
written agreement pursuant to which: (i) applicant is appointed a Subagent of
Agency and a registered representative of Broker/Dealer; (ii) applicant agrees
that his/her selling activities relating to securities-regulated Contracts shall
be under the supervision and control of Broker/Dealer and his/her selling
activities relating to all other Contracts shall be under the supervision and
control of Agency; and (iii) applicant's right to continue to sell such
Contracts is subject to his/her continued compliance with such agreement and any
procedures, rules or regulations implemented by Selling Entities.
13
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SCHEDULE D-1
COMPENSATION SCHEDULE FOR
M'S VERSATILE PRODUCT - FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE POLICY
(FORM 98-52)
[TO BE FILED BY POST-EFFECTIVE AMENDMENT]
14
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EXHIBIT 99.1(5)(g)
Waiver of Charges Rider
<PAGE>
WAIVER OF CHARGES RIDER
Benefit - Subject to this rider's terms, we will waive any monthly Cost of
Insurance Charges, any monthly Administrative Charges and any monthly cost of
any rider benefits for this policy which fall due while the Insured is totally
disabled.
We will not waive any charges, which fall due more than one year before we
receive proof of total disability. We will not waive any charges, which fall
due before the Insured's age 5. If total disability begins during the grace
period for an unpaid premium, that premium must be paid in order to establish a
valid claim under this rider.
Total Disability - Total disability means a condition which:
. results from bodily injury accidentally sustained or disease which first
manifests itself while this rider is in effect;
. occurs before the Insured's age 60;
. lasts continuously for at least 3 months; and, either
. stops the Insured from performing the substantial and material duties of the
job; or
. includes the Insured's total and irrecoverable loss of sight of both eyes or
use of two hands, two feet or one hand and one foot.
During the first 24 months of disability, "the job" means the Insured's
occupation for pay or profit at the time total disability began. After that,
"the job" means any job for which the Insured is or becomes reasonably filled by
education, training or experience. If the Insured is a student when disability
begins, "the job" means attending school.
If the Insured becomes totally disabled, any monthly charges that were deducted
during the three-month waiting period will be credited back to the policy.
Notice of Disability Claim - We must receive notice of the Insured's total
disability, at our home office, on forms we provide during the Insured's
lifetime and while the Insured is disabled. If it is not reasonably possible
for you to give us notice within the time limits, you must give us notice within
one year from the time total disability ends.
Proof of Disability - Before we pay a benefit, we must receive proof of total
disability. From time to time after the Insured is disabled, we may require
proof of continuing disability. This proof may include a medical exam by a
physician we select and pay. After two years of disability, we will not require
such proof more than once a year. We will not require proof after the Insured's
age 70.
War Service Not Covered - Disability occurring in a period during which the
Insured is in the armed forces of any country at war (declared or not) is not
covered under this rider. No insurance charges for this rider will be made for
such a period. If any such charges are made, we will reverse them.
Insurance Charges - The monthly Insurance Charge for this rider is the result of
multiplying the applicable monthly Waiver of Charges Rate as shown in the Policy
Specifications pages by the sum of the Net Amount at Risk as calculated under
the policy plus the Benefit Amount for any Annual Renewable and Convertible Term
Rider present.
Effective Date - This rider is effective on the Policy Date unless otherwise
stated. This rider will terminate (without affecting any claim for disability
occurring before such termination) on the earliest of:
. your Written Request; or
. lapse or termination of the policy; or
. when the Insured becomes age 60.
Incontestability - This rider will be incontestable after 2 years from its issue
date, excluding any period the insured is disabled.
General Conditions - This rider is part of the policy to which it is attached.
All terms of the policy that do not conflict with this rider's terms apply to
this rider.
Signed for Pacific Life Insurance Company at our Home Office, 700 Newport Center
Drive, Newport Beach, California 92660.
Chairman and Chief Executive Officer Secretary
<PAGE>
EXHIBIT 99.1(9)(b)
M Fund Inc. Participation Agreement
with Pacific Life Insurance Company.
<PAGE>
M FUND, INC.
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PARTICIPATION AGREEMENT
WITH
PACIFIC MUTUAL LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into this 1st day of October 1996, by
and among M FUND, INC., a corporation organized and existing under the laws of
the State of Maryland (the "Fund"), M FINANCIAL INVESTMENT ADVISERS, INC., a
corporation organized and existing under the laws of the State of Colorado (the
"Adviser"), M LIFE INSURANCE COMPANY, a life insurance company organized and
existing under the laws of the State of California and PACIFIC MUTUAL LIFE
INSURANCE COMPANY, a life insurance company organized and existing under the
laws of the State of California (the "Company"), on its own behalf and on behalf
of each separate account of the Company identified herein.
WHEREAS, the Fund is a series-type mutual fund offering shares of
beneficial interest (the "Fund shares") consisting of one or more series
("Series") of shares ("Series shares"), each such Series share representing an
interest in a particular managed portfolio of securities and other assets; and
WHEREAS, the Fund was established for the purpose of serving as an
investment vehicle for insurance company separate accounts supporting variable
annuity contracts and variable life insurance policies to be offered by
insurance companies; and
WHEREAS, the Company desires that the Fund serve as an investment
vehicle for certain separate account(s) of the Company;
WHEREAS, the Adviser is duly registered as an investment adviser
pursuant to the Investment Advisers Act of 1940.
NOW, THEREFORE, in consideration of their mutual promises, the Fund, the
Adviser, and the Company agree as follows:
ARTICLE I. Additional Definitions
----------------------
1.1. "Account" -- each separate account of the Company described
more specifically in Schedule 1 to this Agreement (as may be amended from time
to time).
1.2. "Business Day" -- each day that the Fund is open for business
as provided in the Fund Prospectus.
1.3. "Code" -- the Internal Revenue Code of 1986, as amended.
<PAGE>
1.4. "Contracts" -- the class or classes of variable annuity contracts
and variable life insurance policies issued by the Company and described more
specifically on Schedule 2 to this Agreement (as may be amended from time to
time).
1.5. "Contract Owners" -- the owners of the Contracts, as distinguished
from all Product Owners.
1.6. "NASD" -- National Association of Securities Dealers, Inc.
1.7. "Participating Account" -- a separate account investing all or a
portion of its assets in the Fund, including the Account.
1.8. "Participating Insurance Company" -- any insurance company
investing in the Fund on its behalf or on behalf of a Participating Account,
including the Company.
1.9. "Products" -- variable annuity contracts and variable life
insurance policies supported by Participating Accounts investing assets
attributable thereto in the Fund, including the Contracts.
1.10. "Product Owners" -- owners of Products, including Contract Owners.
1.11. "Prospectus" -- with respect to the Fund shares or a class of
Contracts or interests in the Contracts or Accounts, each version of the
definitive prospectus therefor or supplement thereto filed with the SEC pursuant
to Rule 497 under the 1933 Act. With respect to any provision of this Agreement
requiring a party to take action in accordance with a Prospectus, such reference
thereto shall be deemed to be to the version last so filed prior to the taking
of such action. For purposes of Section 4.6 and Article VIII, the term
"Prospectus" shall include any statement of additional information incorporated
therein.
1.12. "Registration Statement" -- with respect to the Fund shares or a
class of Contracts or interests in the Contracts or Accounts, the registration
statement filed with the SEC to register the securities issued thereby under the
1933 Act, or the most recently filed amendment thereto, in either case in the
form in which it was declared or became effective. The Contracts Registration
Statement (if any) is described more specifically on Schedule 2 to this
Agreement. The Fund Registration Statement was filed on Form N-1A (File No. 33-
95472).
1.13. "1940 Act Registration Statement" -- with respect to the Fund or
the Account, the registration statement filed with the SEC to register such
person as an investment company under the 1940 Act, or the most recently filed
amendment thereto. The Account 1940 Act Registration Statement (if any) is
described more specifically on Schedule 2 to this Agreement. The Fund 1940 Act
Registration Statement was filed on Form N-1A (File No. 811-9082).
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1.14. "Statement of Additional Information" -- with respect to the
Fund or a class of Contracts, each version of the definitive statement of
additional information or supplement thereto filed with the SEC pursuant to Rule
497 under the 1933 Act.
1.15. "SEC" -- the Securities and Exchange Commission.
1.16. "1933 Act" -- the Securities Act of 1933, as amended.
1.17. "1940 Act" -- the Investment Company Act of 1940, as amended.
ARTICLE II. Sale of Fund Shares
-------------------
2.1. The Fund shall make shares of those Series listed on Schedule
3 to this Agreement available for purchase by the Company on its own behalf or
on behalf of the Account, such purchases to be effected at net asset value in
accordance with Section 2.3 of this Agreement. Notwithstanding the foregoing,
(i) Fund Series in existence now or that may be established in the future and
not listed on Schedule 3 will be made available to the Company only as the
Adviser may so provide, and (ii) the Board of Directors of the Fund (the "Fund
Board") may suspend or terminate the offering of Fund shares of any Series or
class thereof, if such action is required by law or by regulatory authorities
having jurisdiction or if, in the sole discretion of the Fund Board acting in
good faith and in light of its fiduciary duties under federal and any applicable
state laws, suspension or termination is necessary or in the best interests of
the shareholders of any Series (it being understood that "shareholders" for this
purpose shall mean Product Owners).
2.2. The Fund shall redeem, at the Company's request, any full or
fractional shares of the Fund held by the Company on behalf of the Account, such
redemptions to be effected at net asset value in accordance with Section 2.3 of
this Agreement. Notwithstanding the foregoing, the Fund may delay redemption of
Fund shares of any Series to the extent permitted by the 1940 Act or any rules,
regulations or orders thereunder.
2.3. Purchase and Redemption Procedures
----------------------------------
(a) The Fund hereby appoints the Company as an agent of
the Fund for the limited purpose of receiving purchase and redemption
requests for shares of the Fund based on allocations of amounts to the
Account or subaccounts thereof under the Contracts and other transactions
arising out of the Contracts. Receipt of any such request (or relevant
transactional information therefor) on any Business Day by the Company as
such limited agent of the Fund prior to the Fund's close of business as
defined from time to time in the Fund Prospectus (which as of the date of
execution of this Agreement is 4 p.m. Eastern Time) shall constitute
receipt by the Fund on that same Business Day,
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provided that the Fund receives notice of such request by 10:00 a.m.
Eastern Time on the next following Business Day.
(b) The Company shall pay for shares of each Series on the
same day that it notifies the Fund of a purchase request for such shares.
Payment for Series shares shall be made in federal funds transmitted to the
Fund by wire to be received by the Fund by 11:00 a.m. Eastern Time on the
day the Fund is notified of the purchase request for Series shares (unless
the Fund determines and so advises the Company that sufficient proceeds are
available from redemption of shares of other Series effected pursuant to
redemption requests tendered by the Company on behalf of the Account). If
federal funds are not received on time, such funds will be invested, and
Series shares purchased thereby will be issued, as soon as practicable.
(c) Payment for Series shares redeemed by the Account or
the Company shall be made in federal funds transmitted by wire to the
Company or any other designated person on the next Business Day after the
Fund is properly notified of the redemption order of Series shares (unless
redemption proceeds are to be applied to the purchase of Fund shares of
other Series in accordance with Section 2.3(b) of this Agreement), except
that the Fund reserves the right to delay payment of redemption proceeds to
the extent permitted under Section 22(e) of the 1940 Act. The Fund shall
not bear any responsibility whatsoever for the proper disbursement or
crediting of redemption proceeds; the Company alone shall be responsible
for such action.
(d) Any purchase or redemption requests for Fund shares
that do not result directly from transactions relating to the Contracts or
the Account shall be effected at the net asset value per share next
determined after the Fund's receipt of such request, provided that, in the
case of a purchase request, payment for Fund shares so requested is
received by the Fund in federal funds prior to close of business for
determination of such value, as defined from time to time in the Fund
Prospectus.
2.4. The Fund shall use its best efforts to calculate and make the
net asset value per share for each Series available to the Company by 6:00 p.m.
Eastern Time each Business Day, and in any event, as soon as reasonably
practicable after the net asset value per share for such Series is calculated,
and shall calculate such net asset value in accordance with the Fund Prospectus.
Neither the Fund, any Series, the Adviser, nor any of their affiliates shall be
liable for any information provided to the Company pursuant to this Agreement to
the extent such information is based on incorrect information supplied by the
Company or any other Participating Insurance Company or Qualified Person (as
defined in Section 2.8 of this Agreement) to the Fund or the Adviser.
2.5. The Fund shall furnish notice to the Company (by fax, or
telephone followed by written confirmation) as soon as reasonably practicable,
and no later than the same day, of any income dividends or capital gain
distributions payable on any Series shares. The Company, on
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its behalf and on behalf of the Account, hereby elects to receive all such
dividends and distributions as are payable on any Series shares in the form of
additional shares of that Series. The Company reserves the right, on its behalf
and on behalf of the Account, to revoke this election and to receive all such
dividends and distributions in cash. The Fund shall notify the Company promptly
of the number of Series shares so issued as payment of such dividends and
distributions.
2.6. Issuance and transfer of Fund shares shall be by book entry
only. Stock certificates will not be issued to the Company or the Account.
Purchase and redemption orders for Fund shares shall be recorded in an
appropriate ledger for the Account or the appropriate subaccount of the Account.
2.7. (a) The Company may withdraw the Account's investment
in the Fund or a Series of the Fund only: (i) as necessary to facilitate
Contract Owner requests; (ii) upon a determination by a majority of the
Fund Board, or a majority of disinterested Fund Board members, that an
irreconcilable material conflict exists among (x) the interests of all
Product Owners or (y) the interests of the Participating Insurance
Companies investing in the Fund; (iii) upon requisite vote of the Contract
Owners having an interest in the affected Series; (iv) as required by state
and/or federal laws or regulations or judicial or other legal precedent of
general implication; (v) upon sixty (60) days advance written notice; (vi)
from a Series, upon a change in the Portfolio Manager for that Series; or
(vii) as permitted by an order of the SEC pursuant to Section 26(b) of the
1940 Act.
(b) The Company shall not, without the prior written consent
of the Adviser (unless otherwise required by applicable law), solicit,
induce or encourage Contract Owners to change or modify the Fund or change
the Fund's investment adviser.
2.8. The Fund shall sell Fund shares only to Participating
Insurance Companies and their separate accounts and to persons or plans
("Qualified Persons") that qualify to purchase and hold shares of the Fund under
Section 817(h) of the Code. The Fund shall not sell Fund shares to any insurance
company, separate account or Qualified Person unless an agreement containing
provisions substantially similar to Articles II, V, and VII of this Agreement is
in effect to govern such sales (to the extent required in order to comply with
the "Exemptive Order" referred to in Section 7.1 below).
ARTICLE III. Representations and Warranties
------------------------------
3.1. The Company represents and warrants that: (i) the Company is
an insurance company duly organized, duly existing and in good standing under
California insurance law; (ii) the Account is (or will be prior to the purchase
by the Company of Fund shares for the Account) a validly existing separate
account, duly established and maintained in accordance with applicable law;
(iii) the Contracts will be issued in compliance in all material respects with
all
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applicable federal and state laws; (iv) the Contracts currently are and at
the time of issuance will be treated as annuity contracts or life insurance
policies (including modified endowment contracts), whichever is appropriate,
under applicable provisions of the Code; and (v) the Company and the Account
qualify (or will qualify prior to the purchase by the Company of Fund shares for
the Account) to purchase and hold shares of the Fund under Section 817(h) of the
Code.
3.2. The Fund represents and warrants that: (i) the Fund is a
corporation duly organized, validly existing and in good standing under Maryland
law; (ii) the Fund's 1940 Act Registration Statement has been filed with the SEC
in accordance with the provisions of the 1940 Act and the Fund is and shall
remain duly registered as an open-end management investment company thereunder;
(iii) the Fund Registration Statement has been declared effective by the SEC (or
will be declared effective before the sale by the Fund of its shares pursuant to
this Agreement); (iv) Fund shares sold pursuant to this Agreement have been duly
authorized for issuance in accordance with applicable law; (v) the Fund
currently qualifies as a "regulated investment company" under Subchapter M of
the Code and is and shall remain in compliance with Section 817(h) of the Code;
(vi) the Fund's investment policies are in material compliance with any
investment restrictions set forth on Schedule 4 to this Agreement; and (vii) the
Fund does and will comply in all material respects with the 1940 Act. The Fund,
however, makes no representation as to whether any aspect of its operations
(including, but not limited to, fees and expenses and investment policies)
otherwise complies with the insurance laws or regulations of any state.
3.3. The Adviser represents and warrants that it is and will remain
registered in all material respects as an investment adviser under federal and
all applicable state securities laws, and shall perform its obligations
hereunder in compliance in all material respects with any such applicable state
and federal laws. The Adviser represents that it will manage the Fund consistent
with the Fund's investment objectives, policies, and restrictions.
3.4. Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate or trust action, as applicable, by
such party, and, when so executed and delivered, this Agreement will be the
valid and binding obligation of such party enforceable in accordance with its
terms.
3.5. The Fund represents and warrants that all of its directors,
officers, and employees dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-1 of the 1940 Act or related
provisions as may be promulgated from time to time. The aforesaid Bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
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3.6. The Company represents and warrants that all of its directors,
officers, and employees dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage. The aforesaid Bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
ARTICLE IV. Filings, Information and Expenses
----------------------------------
4.1. The Fund shall amend the Fund Registration Statement and the
Fund's 1940 Act Registration Statement from time to time as required in order to
effect the continuous offering of Fund shares and to maintain the Fund's
registration under the 1940 Act for so long as Fund shares are sold. The Fund
shall file, register, qualify and obtain approval of the Fund shares for sale
under state securities laws to the extent deemed advisable by the Adviser.
4.2. Unless other arrangements are made, the Fund shall provide the
Company with: (i) a copy, in camera-ready form or otherwise suitable for
printing or duplication, of each Fund Prospectus and any supplement thereto and
each Fund Statement of Additional Information and any supplement thereto; and
(ii) copies of the Fund's proxy materials, reports to shareholders, and other
communications to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract Owners.
4.3. The Company shall amend the Contracts Registration Statement
(if any) and the Account's 1940 Act Registration Statement (if any) from time to
time as required in order to effect the continuous offering of the Contracts or
as may otherwise be required by applicable law. The Company shall file,
register, qualify and obtain approval of the Contracts for sale to the extent
required by applicable insurance and securities laws of the various states.
4.4. The Company shall inform the Fund of any investment
restrictions imposed by state insurance law that may become applicable to the
Fund from time to time as a result of the Account's investment therein
(including, but not limited to, restrictions with respect to fees and expenses
and investment policies), other than those set forth on Schedule 4 to this
Agreement. Upon receipt of such information from the Company, the Fund shall
determine whether it is in the best interests of shareholders to comply with any
such restrictions. If the Fund determines that it is not in the best interests
of shareholders (it being understood that "shareholders" for this purpose shall
mean Product Owners), the Fund shall so inform the Company, and the Fund and the
Company shall discuss alternative accommodations in the circumstances. If the
Fund determines that it is in the best interests of shareholders to comply with
such restrictions, the Fund and the Company shall amend Schedule 4 to this
Agreement to reflect such restrictions.
4.5. The Company shall provide Contracts, Contracts and Fund
Prospectuses, Contracts and Fund Statements of Additional Information, reports,
solicitations for voting
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instructions including any related Fund proxy solicitation materials, and all
amendments or supplements to any of the foregoing, to Contract Owners and
prospective Contract Owners, all in accordance with the federal and any
applicable state securities laws.
4.6. All expenses incident to each party's performance under this
Agreement (including expenses expressly assumed by such party pursuant to this
Agreement) shall be paid by such party to the extent permitted by law.
(a) Expenses assumed by the Fund include, but are not limited
to, the costs of: (i) registration and qualification of the Fund shares
under the federal securities laws; (ii) preparation and filing with the SEC
of the Fund Prospectus, Fund Statement of Additional Information ("SAI"),
Fund Registration Statement, Fund proxy materials and shareholder reports,
and supplements thereto, and preparation of a camera-ready copy thereof;
(iii) preparation of all statements and notices required by any federal or
state securities law; (iv) printing and mailing to Contract Owners of all
Prospectuses, SAI's, proxy materials and reports, and supplements thereto,
required to be provided by the Fund to its shareholders; (v) all taxes on
the issuance or transfer of Fund shares; and (vi) any expenses permitted to
be paid or assumed by the Fund pursuant to a plan, if any, under Rule 12b-1
under the 1940 Act. The Fund otherwise shall pay no fee or other
compensation to the Company under this Agreement, unless the parties
otherwise agree, except that if the Fund or any Series adopts and
implements a plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses, then payments may be made to the Company in
accordance with such plan. The Fund currently does not intend to make any
payments to finance distribution expenses pursuant to Rule 12b-1 under the
1940 Act or in contravention of such rule, although it may make payments
pursuant to Rule 12b-1 in the future. To the extent that it decides to
finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes
to have a Board of Directors, a majority of whom are not interested persons
of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
(b) Expenses assumed by the Company include, but are not
limited to, the costs of: (i) registration and qualification of the
Contracts under the federal and any applicable state securities laws; (ii)
preparation and filing with the SEC of the Contracts Prospectus and
Contracts Registration Statement; and (iii) preparation and dissemination
of all statements and notices to Contract Owners required by any federal or
state insurance law other than those paid for by the Fund.
(c) Expenses assumed by the Adviser include, but are not
limited to the costs of printing the Fund Prospectuses and SAI's for use in
connection with the sale of the Contracts to prospective Contract owners.
4.7. Any piece of advertising or sales literature or other
promotional material prepared by the company in which the Fund is named and
which will be used by the Company
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shall be furnished by the Company to the Fund not less than 15 days prior to its
use. No such material shall be used if the Fund or its designee objects to such
use within fifteen days after receipt of such material, provided that it may be
used earlier than the end of such 15 day period if the Fund or its designee
consents in writing to its use. The Fund may delegate its rights and
responsibilities under this provision to the Adviser.
4.8. Any piece of advertising or sales literature or other
promotional material in which the Company or the Account is named and which will
be used by the Fund or the Adviser shall be furnished by the Fund or the
Adviser, as applicable, to the Company not less than 15 days prior to its use.
No such material shall be used if the Company or its designee objects to such
use within 15 days after receipt of such material, provided that it may be used
earlier than the end of such 15 day period if the Company or its designee
consents in writing to its use.
4.9. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund to
the public (including current and prospective Contract owners) in connection
with the sale of the Contracts other than the information or representations
contained in the Fund Registration Statement or Fund Prospectus (as such
Registration Statement or Prospectus may be amended or supplemented from time to
time) or in reports or proxy statements for the Fund, or in sales literature or
other promotional material approved in accordance with Section 4.7 of this
Agreement, except with the prior written consent of the Fund.
4.10. The Fund and the Adviser shall not give any information or
make any representations on behalf of the Company or concerning the Company, the
Account or the Contracts other than the information or representations contained
in the Contracts Registration Statement or Contracts Prospectus (as such
Registration Statement or Prospectus may be amended or supplemented from time to
time) or in published reports of the Account which are in the public domain or
approved in writing by the Company for distribution to Contract Owners, or in
sales literature or other promotional material approved in accordance with
Section 4.8 of this Agreement except with the prior written consent of the
Company.
4.11. The Fund and the Company shall provide to the other upon
request at least one complete copy of all Registration Statements, Prospectuses,
Statements of Additional Information, periodic and other shareholder or Contract
Owner reports, proxy statements, solicitations of voting instructions, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments or supplements to any of the
above, that relate to the Fund, the Contracts or the Account, as the case may
be, promptly after the filing by or on behalf of such party of such document
with the SEC or other regulatory authorities.
4.12. Each party shall provide to the other upon request copies of
draft versions of any Registration Statements, Prospectuses, Statements of
Additional Information, periodic and other shareholder or Contract Owner
reports, proxy statements, solicitations for voting
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<PAGE>
instructions, sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments or supplements to
any of the above, to the extent that the other party reasonably needs such
information for purposes of preparing a report or other filing to be filed with
or submitted to a regulatory agency. If a party requests any such information
before it has been filed, the other party will provide the requested information
if then available and in the version then available at the time of such request.
4.13. Each party hereto shall cooperate with the other party and
all appropriate governmental authorities (including without limitation the SEC,
the NASD and state insurance regulators) and shall permit each other and such
authorities reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby. However, such access shall not extend to attorney-client
privileged information.
4.14. The Company reserves the right to modify any of the Contracts
in any respect whatsoever. The Company reserves the right in its sole discretion
to suspend the sale of any of the Contracts, in whole or in part, or to accept
or reject any application for the sale of a Contract. The Company agrees to
notify the Fund and the Adviser promptly upon the occurrence of any event the
Company believes might necessitate a material modification or suspension.
4.15. For purposes of this Article IV, the phrase "sales literature
or other promotional material" includes, but is not limited to, any material
constituting sales literature or advertising under the NASD rules, the 1940 Act
or the 1933 Act.
ARTICLE V. Voting of Fund Shares
---------------------
5.1. With respect to any matter put to vote by the holders of Fund
shares or Series shares ("Voting Shares"), to the extent required by law
(including the Exemptive Order referred to in Section 7.1 below) the Company
shall:
(a) solicit voting instructions from Contract Owners to which
Voting Shares are attributable;
(b) vote Voting Shares of each Series attributable to Contract
Owners participating in an account in accordance with instructions or
proxies timely received from such Contract Owners;
(c) vote Voting Shares of each Series attributable to Contract
Owners participating in an account for which no instructions have been
received in the same proportion as Voting Shares of such Series from
Contract Owners participating in an account for which instructions have
been timely received; and
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<PAGE>
(d) vote Voting Shares of each Series held by the Company on
behalf of the Account that are not attributable to Contract Owners in the
same proportion as Voting Shares of such Series from Contract Owners
participating in an account for which instructions have been timely
received;
(e) vote Voting Shares of each series held by the Company on
its behalf that are not attributable to Contract Owners in the same
proportions as Voting shares of such Series held by the Company's Accounts
in the aggregate.
provided, however, that if the SEC changes its interpretations of voting
privileges for variable contracts the Company may vote such shares in its own
right. The Company shall be responsible for assuring that voting privileges for
the Account are calculated in a manner consistent with the provisions set forth
above.
5.2. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the Securities and Exchange Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with respect
thereto.
ARTICLE VI. Compliance with Code
--------------------
6.1. The Fund shall comply with Section 817(h) of the Code, and all
regulations issued thereunder and shall notify the Company immediately upon
having a reasonable basis for believing that it has ceased to so qualify or that
it might not so qualify in the future.
6.2. The Fund shall maintain its qualification as a regulated
investment company (under Subchapter M of the Code or any successor or similar
provision), and shall notify the Company immediately upon having a reasonable
basis for believing that it has ceased to so qualify or that it might not so
qualify in the future.
6.3. The Company shall maintain the treatment of the Contracts as
annuity contracts or life insurance policies, whichever is appropriate, under
applicable provisions of the Code and shall notify the Fund and the Adviser
immediately upon having a reasonable basis for believing that the Contracts have
ceased to be so treated or that they might not be so treated in the future.
ARTICLE VII. Potential Conflicts
-------------------
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<PAGE>
7.1. The parties to this Agreement acknowledge that the Fund has
obtained (or will obtain) an order of exemption from the SEC (the "Exemptive
Order," File No. 812-9674) granting relief from various provisions of the 1940
Act and the rules thereunder to the extent necessary to permit Fund shares to be
sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated Participating Insurance Companies
and other Qualified Persons (as defined in Section 2.8). The Fund hereby
notifies the Company that Contracts Prospectus disclosure regarding potential
risks of such mixed and shared funding may be appropriate.
7.2. The Fund Board shall monitor the existence of any material
irreconcilable conflict between the interests of Product Owners. The Fund Board
shall promptly inform the Company if it determines that a material
irreconcilable conflict exists and the implications thereof.
7.3. (a) The Company shall report any potential or existing
conflicts promptly to the Fund Board, and in particular whenever Contract
Owner voting instructions are disregarded, and recognizes that it shall be
responsible for assisting the Fund Board in carrying out its
responsibilities in connection with the Exemptive Order. The Company
agrees to carry out such responsibilities with a view only to the interests
of Contract Owners.
(b) The Company shall at least annually submit to the Fund
Board such reports, materials or data as the Fund Board may reasonably
request so that the Fund Board and the Fund may fully carry out the
obligations imposed upon them by the conditions of the Exemptive Order, and
such reports, material and data shall be submitted more frequently if
deemed appropriate by the Fund Board.
7.4. If a majority of the Fund Board, or a majority of its
directors who are not "interested persons" as defined in the 1940 Act
("Disinterested Directors"), determines that a material irreconcilable conflict
exists with regard to Contract Owner investments in the Fund, the Fund Board
shall give prompt notice to all Participating Insurance Companies. If the Fund
Board determines that the Company is responsible in full or in part for causing
or creating said conflict, the Company (and other responsible Participating
Insurance Companies) shall at no cost and expense to the Fund, and to the extent
reasonably practicable (as determined by a majority of the Disinterested
Directors), take such action as is necessary to remedy or eliminate the
irreconcilable material conflict. Such necessary action may include, but shall
not be limited to:
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<PAGE>
(a) Withdrawing the assets allocable to the Account from the
Fund or any Series thereof and reinvesting such assets in a different
investment medium, or submitting the question of whether such segregation
should be implemented to a vote of all affected Contract Owners and, as
appropriate, segregating the assets of any appropriate group (i.e., annuity
Contract Owners, life insurance Contract Owners, or other Product Owners)
that votes in favor of such segregation or offering to the affected
Contract Owners the option of making such a change; and
(b) Establishing a new registered management investment
company.
7.5. If a material irreconcilable conflict arises as a result of a
decision by the Company to disregard Contract Owner voting instructions and said
decision represents a minority position or would preclude a majority vote by all
Contract Owners having an interest in the Fund, the Company may be required, at
the Fund Board's election, to withdraw the Account's investment in the Fund and
terminate this Agreement with respect to such Account; provided, however, that
such withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
Disinterested Directors. Any such withdrawal and termination must take place
within six (6) months after the Fund gives written notice that this provision is
being implemented, and until the end of that six month period the Adviser and
Fund shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Fund (subject to Section 2.1 above).
No charge or penalty will be imposed as a result of such withdrawal.
7.6. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Fund and terminate this
Agreement with respect to such Account within six months after the Board informs
the Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the Disinterested
Directors. Until the end of the foregoing six month period, the Adviser and Fund
shall continue to accept and implement orders by the Company for the purchase
(and redemption) of shares of the Fund (subject to Section 2.1 above).
7.7. For purposes of this Article, a majority of the Disinterested
Directors shall determine whether or not any proposed action adequately remedies
any irreconcilable material conflict, but in no event shall the Fund be required
to bear the expense of establishing a new funding medium for any Contract. The
Company shall not be required by this Article to establish a new funding medium
for any Contract if an offer to do so has been declined by vote of a majority of
the Contract Owners materially adversely affected by the irreconcilable material
conflict. In the event that the Board determines that any proposed action does
not adequately remedy any irreconcilable material conflict, then the Company
will withdraw the Account's investment in the Fund and terminate this Agreement
within six (6) months after the Board
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<PAGE>
informs the Company in writing of the foregoing determination, provided,
however, that such withdrawal and termination shall be limited to the extent
required by any such material irreconcilable conflict as determined by a
majority of the Disinterested Directors.
7.8. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any
provisions of the 1940 Act or the rules promulgated thereunder with respect to
mixed and shared funding on terms and conditions materially different from those
contained in the Exemptive Order, then (a) the Fund and/or the Company, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3(T), as amended, or Rule 6e-3, as adopted, as applicable, to the extent
such rules are applicable, and (b) Sections 7.2 through 7.7 of this Agreement
shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in such Rule(s) as so
amended or adopted.
ARTICLE VIII. Indemnification
---------------
8.1. Indemnification by the Company. The Company shall indemnify
------------------------------
and hold harmless the Fund, the Adviser and each person who controls the Fund or
the Adviser within the meaning of such terms under the 1933 Act (but not any
Participating Insurance Companies or Qualified Plans) and any officer, trustee,
director, employee or agent of the foregoing, against any and all losses,
claims, damages or liabilities, joint or several (including any investigative,
legal and other expenses reasonably incurred in connection with, and any amounts
paid with the written consent of the Company in settlement of, any action, suit
or proceeding or any claim asserted), to which they or any of them may become
subject under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Contracts
Registration Statement, Contracts Prospectus, sales literature or other
promotional material for the Contracts or the Contracts themselves (or any
amendment or supplement to any of the foregoing), or the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances in which they were made; provided that this obligation
to indemnify shall not apply if such statement or omission or such alleged
statement or alleged omission was made in reliance upon and in conformity
with information furnished in writing to the Company by or on behalf of the
Fund or Adviser for use in the Contracts Registration Statement, Contracts
Prospectus or in the Contracts or sales literature or promotional material
for the Contracts (or any amendment or supplement to any of the foregoing)
or otherwise for use in connection with the sale of the Contracts or Fund
shares; or
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<PAGE>
(b) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the Fund Registration Statement,
Fund Prospectus or sales literature or other promotional material of the
Fund (or any amendment or supplement to any of the foregoing), or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made, if such
statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Fund or the Adviser by or on behalf
of the Company; or
(c) arise out of or are based upon any wrongful conduct of
the Company or persons under its control (or subject to its authorization)
with respect to the sale or distribution of the Contracts or Fund shares;
or
(d) arise as a result of any failure by the Company to
provide the services and furnish the materials or to make any payments as
required under this Agreement; or
(e) arise out of any material breach by the Company of this
Agreement.
This indemnification will be in addition to any liability that the Company
may otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the wilful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
8.2. Indemnification by the Fund. The Fund shall indemnify and hold
---------------------------
harmless the Company and each person who controls the Company within the meaning
of such terms under the 1933 Act and any officer, director, employee or agent of
the foregoing, against any and all losses, claims, damages or liabilities, joint
or several (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid with the written consent of
the Fund in settlement of, any action, suit or proceeding or any claim
asserted), to which they or any of them may become subject under any statute or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities are related to the sale or acquisition of the Fund's shares or
the Contracts and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Fund Registration
Statement, Fund Prospectus or sales literature or other promotional
material of the Fund (or any amendment or supplement to any of the
foregoing), or the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances in which
they were made; provided that this obligation to indemnify shall not apply
if such statement or omission or alleged statement or alleged omission was
made in reliance upon and in conformity with information furnished in
writing to the Fund by or on behalf of the Company for use in the Fund
Registration Statement, Fund Prospectus or sales literature
-15-
<PAGE>
or promotional material for the Fund (or any amendment or supplement to any
of the foregoing); or
(b) arise out of any untrue statement or alleged untrue statement of
a material fact contained in the Contracts Registration Statement,
Contracts Prospectus or sales literature or other promotional material for
the Contracts (or any amendment or supplement to any of the foregoing), or
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made, if such
statement or omission was made in reliance upon information furnished in
writing by or on behalf of the Fund to the Company; or
(c) arise out of or are based upon wrongful conduct of the Fund or
persons under its control (or subject to its authorization) with respect to
the sale of Fund shares; or
(d) arise as a result of any failure by the Fund to provide the
services and furnish the materials required under the terms of this
Agreement; or
(e) arise out of any material breach by the Fund of this Agreement
(including any breach of Article VI of this Agreement).
This indemnification will be in addition to any liability that the Fund may
otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
8.3. Indemnification by the Adviser. The Adviser shall indemnify
------------------------------
and hold harmless the Company and each person who controls the Company within
the meaning of such term under the 1933 Act and any officer, director, employee
or agent of the foregoing, against any and all losses, claims, damages or
liabilities, joint or several (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amounts paid with the
written consent of the Adviser in settlement of, any action, suit or proceeding
or any claim asserted), to which they or any of them may become subject under
any statute or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities are related to the sale or acquisition of the
Fund's shares or the Contract and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Fund
Registration Statement, Fund Prospectus or sales literature or other
promotional material of the Fund (or any amendment or supplement to any of
the foregoing), or the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances in which
they were
-16-
<PAGE>
made; provided that this obligation to indemnify shall not apply
if such statement or omission or alleged statement or alleged omission was
made in reliance upon and in conformity with information furnished in
writing by or on behalf of the Company to the Fund or the Adviser for use
in the Fund Registration Statement, Fund Prospectus or sales literature or
promotional material for the Fund (or any amendment or supplement to any of
the foregoing); or
(b) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the Contracts Registration
Statement, Contracts Prospectus or sales literature or other promotional
material for the Contracts (or any amendment or supplement to any of the
foregoing), or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances in which they were
made, if such statement or omission was made in reliance upon information
furnished in writing by or on behalf of the Adviser to the Company; or
(c) arise out of or are based upon wrongful conduct of the
Fund or the Adviser with respect to the sale of Fund shares; or
(d) arise as a result of any failure by the Fund or the
Adviser to provide the services and furnish the materials required under
the terms of this Agreement; or
(e) arise out of any material breach by the Fund or the
Adviser of this Agreement (including any breach of Article VI of this
Agreement).
This indemnification will be in addition to any liability that the Adviser may
otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
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<PAGE>
8.4. Indemnification Procedures. After receipt by a party entitled
--------------------------
to indemnification ("indemnified party") under this Article VIII of notice of
the commencement of any action, if a claim in respect thereof is to be made by
the indemnified party against any person obligated to provide indemnification
under this Article VIII ("indemnifying party"), such indemnified party will
notify the indemnifying party in writing of the commencement thereof as soon as
practicable thereafter, provided that the omission to so notify the indemnifying
party will not relieve it from any liability under this Article VIII, except to
the extent that the omission results in a failure of actual notice to the
indemnifying party and such indemnifying party is damaged solely as a result of
the failure to give such notice. The indemnifying party, upon the request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
and to participate in the defense of such proceeding, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
The indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment against the indemnified party, the indemnifying party
agrees to indemnify the indemnified party from and against any loss or liability
by reason of such settlement or judgment.
The amount of any indemnification due the Company by the Adviser
that is not satisfied by the Adviser shall be satisfied by making adjustments to
one or more of the reinsurance treaties that exist between Pacific Mutual Life
Insurance Company and M Life Insurance Company. The manner in which such
adjustments are made shall be reasonably agreed to by Pacific Mutual Life
Insurance Company and M Life Insurance Company.
A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this Article VIII.
The indemnification provisions contained in this Article VIII shall survive any
termination of this Agreement.
ARTICLE IX. Applicable Law
--------------
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Maryland,
without giving effect to the principles of conflicts of law.
9.2. This Agreement shall be subject to the provisions of the 1933
Act, 1940 Act and Securities Exchange Act of 1934, as amended, and the rules and
regulations and rulings
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thereunder, including such exemptions from those statutes, rules and regulations
as the SEC may grant, and the terms hereof shall be limited, interpreted and
construed in accordance therewith.
ARTICLE X. Termination
-----------
10.1. This Agreement shall not terminate until the Fund is
dissolved, liquidated, or merged into another entity, or, as to any Series of
the Fund, the Account no longer invests in that Series. However, certain
obligations of, or restrictions on, the parties to this Agreement may terminate
as provided in Sections 10.2 and 10.3, and the Company may be required to redeem
shares pursuant to Section 10.4 or in the circumstances contemplated by Article
VII.
10.2. Termination of the Fund's Obligation to Sell. The obligation
--------------------------------------------
of the Fund to sell shares to the Company pursuant to Article II of this
Agreement shall terminate at the option of the Fund upon notice to the Company
as provided below:
(a) the Fund Board has terminated the offering of Fund shares
or Series shares pursuant to Section 2.1 of this Agreement; or
(b) upon institution of formal proceedings against the Company
by the NASD, the SEC, the insurance commission of any state or any other
regulatory body regarding the Company's duties under this Agreement or
related to the sale of the Contracts, the operation of the Account, the
administration of the Contracts or the purchase of Fund shares, or an
expected or anticipated ruling, judgment or outcome which would, in the
Fund's reasonable judgment, materially impair the Company's ability to meet
and perform the Company's obligations and duties hereunder; or
(c) in the event any of the Contracts or interests in the
Contracts or Account, as applicable, are not registered, issued or sold in
accordance with applicable federal and/or state law; or
(d) if the Fund or the Adviser, respectively, shall determine,
in their sole judgment exercised in good faith, that either (1) the Company
shall have suffered a material adverse change in its business or financial
condition since the date of this Agreement or (2) the Company shall have
been the subject of material adverse publicity which is likely to have a
material adverse impact upon the business and operations of either the Fund
or the Adviser; or
(e) upon the Company's assignment of this Agreement
(including, without limitation, any transfer of any Contract or the Account
to another insurance company pursuant to an assumption reinsurance
agreement) unless the Fund consents thereto; or
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<PAGE>
(f) upon termination pursuant to Section 10.1 or notice from
the Company pursuant to Section 10.3.
Termination of the Fund's obligation shall take effect immediately upon the
giving of such notice upon the occurrence of an event described in clauses (b)
or (c) above, and 10 (ten) days after the giving of such notice in all other
cases. In exercising its option to terminate its obligation to sell shares to
the Company, the Fund will continue to make Fund shares available to the extent
necessary to permit owners of Contracts in effect on the effective date of such
termination (hereinafter referred to as "Existing Contracts") to reallocate
investments in the Fund, redeem investments in the Fund and/or invest in the
Fund upon the making of additional purchase payments under the Existing
Contracts, unless the Existing Contracts are the basis for the termination. In
that case, the Fund may nonetheless elect to continue to make Fund shares
available for Existing Contracts and if it so elects, shall promptly notify the
Company whether the Fund is electing to make Fund shares available after
termination.
10.3. As to the Company. The restrictions on the Company under
-----------------
Section 2.7(a) of this Agreement shall terminate at the option of the Company
upon 10 days' notice to the Fund:
(a) if shares of any Series are not reasonably available to
meet the requirements of the Contracts as determined by the Company, and
the Fund, after receiving written notice from the Company of such non-
availability, fails to make available a sufficient number of Fund shares to
meet the requirements of the Contracts within 10 days after receipt
thereof; or
(b) upon institution of formal proceedings against the Fund
by the NASD, the SEC or any state securities or insurance commission or any
other regulatory body; or
(c) if the Fund ceases to qualify as a regulated investment
company under Subchapter M of the Code, or under any successor or similar
provision, or if the Company reasonably believes the Fund may fail to so
qualify, and the Fund, upon written request, fails to provide reasonable
assurance that it will take action to cure or correct such failure; or
(d) if the Fund fails to meet the diversification
requirements specified in Section 817(h) of the Code and any regulations
thereunder, and the Fund, upon written request, fails to provide reasonable
assurance that it will take action to cure or correct such failure; or
(e) if the Fund informs the Company pursuant to Section 4.4
that the Fund will not comply with investment restrictions as requested by
the Company, and the Fund and the Company are unable to agree upon any
reasonable alternative accommodations; or
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<PAGE>
(f) upon receipt by the Company of any necessary regulatory
approvals and any necessary vote of the Contract Owners having an interest
in the Account (or any subaccount) to substitute the shares of another
investment company for the corresponding Series shares of the Fund in
accordance with the terms of the Contracts for which those Series shares
had been selected to serve as the underlying investment media. The Company
will give 30 days' prior written notice to the Fund of the date of any
proposed vote or other action taken to replace the Fund's shares; or
(g) upon a material breach of any provision of this Agreement
by either the Fund or the Adviser; or
(h) if the Company determines in its sole judgment exercised
in good faith, that either the Fund or the Adviser has suffered a material
adverse change in its business, operations, or financial conditions since
the date of this Agreement or is the subject of material adverse publicity
which is likely to have a material adverse impact upon the business and
operations of the Company.
10.4. Company Required to Redeem. The parties understand and
--------------------------
acknowledge that it is essential for compliance with Section 817(h) of the Code
that the Contracts qualify as annuity contracts or life insurance policies, as
applicable, under the Code. Accordingly, if any of the Contracts cease to
qualify as annuity contracts or life insurance policies, as applicable, under
the Code, or if the Fund reasonably believes that any such Contracts may fail to
so qualify, the Fund shall have the right to require the Company to redeem
Shares attributable to such Contracts upon ten (10) days written notice to the
Company and the Company shall so redeem such Shares in order to ensure that the
Fund complies with the provisions of Section 817(h) of the Code applicable to
ownership of Fund Shares. Notice to the Company shall specify the period of time
the Company has to redeem the Shares or to make other arrangements satisfactory
to the Fund and its counsel, such period of time to be determined with reference
to the requirements of Section 817(h) of the Code. In addition, the Company may
be required to redeem Shares pursuant to action taken or request made by the
Fund Board in accordance with an order of the SEC as described in Article VII,
or other SEC rule, regulation or order that may be adopted after the date
hereof. The Company agrees to redeem Shares in such circumstances and to comply
with applicable terms and provisions.
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ARTICLE XI. Applicability to New Accounts and New Contracts
-----------------------------------------------
The parties to this Agreement may amend the schedules to this
Agreement from time to time to reflect, as appropriate, changes in or relating
to the Contracts, or Series or funding vehicles thereof, additions of new
classes of Contracts to be issued by the Company and separate accounts therefor
investing in the Fund. The provisions of this Agreement shall be equally
applicable to each such class of Contracts, Series and Accounts, effective as of
the date of amendment of such Schedule, unless the context otherwise requires.
ARTICLE XII. Notice, Request or Consent
--------------------------
Any notice, request or consent to be provided pursuant to this
Agreement is to be made in writing and shall be given:
If to the Fund:
M Fund, Inc.
River Park Center
205 S.E. Spokane Street
Portland, Oregon 97202
Attn: President
If to the Adviser:
M Financial Investment Advisers, Inc.
River Park Center
205 S.E. Spokane Street
Portland, Oregon 97202
Attn: President
If to the Company:
Pacific Mutual Life Insurance Company
700 Newport Center Drive
Newport Beach, California 92660
Attn: Variable Regulatory Compliance
or at such other address as such party may from time to time specify in writing
to the other party. Each such notice, request or consent to a party shall be
sent by registered or certified United States mail with return receipt
requested, by overnight delivery with a nationally recognized courier or by
electronically transmitted facsimile, and shall be effective upon receipt or
three days after mailing.
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<PAGE>
ARTICLE XIII. Miscellaneous
-------------
13.1. The captions in this Agreement are included for convenience
of reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
13.2. This Agreement may be executed simultaneously in two or
more counterparts, each of which together shall constitute one and the same
instrument.
13.3. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
13.4. Subject to the requirement of legal process and regulatory
authority, each party hereto shall treat as if confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except as
permitted by this Agreement shall not disclose, disseminate, or utilize such
names and addresses and other confidential information until such time as it may
come into the public domain without the express written consent of the affected
party.
13.5. The rights, remedies, and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies,
and obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
-23-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and behalf by its duly authorized officer on the date
specified below.
PACIFIC MUTUAL LIFE INSURANCE COMPANY
(Company)
By: /s/ GLENN S SCHAFER
Name: Glenn S. Schafer
Title: President
By: /s/ LYNN C. MILLER
Name: Lynn C. Miller
Title: Executive Vice President
M FUND, INC.
(Fund)
By: /s/ DANIEL F BYRNE
Name: Daniel F. Byrne
Title: President
M FINANCIAL INVESTMENT ADVISERS, INC.
(Adviser)
By: /s/ DANIEL F BYRNE
Name: Daniel F. Byrne
Title: President
M LIFE INSURANCE COMPANY
By: /s/ DANIEL F BYRNE
Name: Daniel F. Byrne
Title: Senior VP
-24-
<PAGE>
SCHEDULE 1
----------
Accounts of the Company
Investing in the Fund
Effective as of the date the Agreement was executed, the following separate
accounts of the Company are subject to the Agreement:
<TABLE>
<CAPTION>
Name of Account and Date Established by SEC 1940 Act Type of Product
Subaccounts Board of Directors of the Registration Number Supported by Account
Company (if applicable)
==============================================================================================================
<S> <C> <C> <C>
Pacific Select Exec May 12, 1988 811-05563 Variable Life Policies
- --------------------------------------------------------------------------------------------------------------
Edinburgh Overseas
Equity Variable
Account
- --------------------------------------------------------------------------------------------------------------
Turner Core Growth
Variable Account
- --------------------------------------------------------------------------------------------------------------
Frontier Capital
Appreciation Variable
Account
- --------------------------------------------------------------------------------------------------------------
Enhanced U.S. Equity
Variable Account
- --------------------------------------------------------------------------------------------------------------
Pacific COLI
- --------------------------------------------------------------------------------------------------------------
Edinburgh Overseas
Equity Variable
Account
- --------------------------------------------------------------------------------------------------------------
Turner Core Growth
Variable Account
- --------------------------------------------------------------------------------------------------------------
Frontier Capital
Appreciation Variable
Account
- --------------------------------------------------------------------------------------------------------------
Enhanced U.S. Equity
Variable Account
==============================================================================================================
</TABLE>
<PAGE>
Schedule 2
----------
Classes of Contracts
Supported by Separate Accounts
Listed on Schedule 1
Effective as of the date the Agreement was executed, the following classes of
Contracts are subject to the Agreement:
<TABLE>
<CAPTION>
Policy Marketing Name SEC 1933 Act Name of Supporting Annuity or Life
Registration Number Account
(if applicable)
======================================================================================================
<S> <C> <C> <C>
Pacific Select Exec 33-21754 Pacific Select Exec Life
- ------------------------------------------------------------------------------------------------------
Pacific Select Choice 33-57908 Pacific Select Exec Life
- ------------------------------------------------------------------------------------------------------
Custom COLI Pacific COLI Life
=======================================================================================================
</TABLE>
<PAGE>
Effective as of the dates indicated below, the following classes of Contracts
are hereby added to this Schedule 2 and made subject to the Agreement:
<TABLE>
<CAPTION>
Policy Marketing Name SEC 1933 Act Name of Supporting Annuity or Life
Registration Number Account
(if applicable)
=================================================================================================
<S> <C> <C> <C>
Custom COLI Rider Eff. 33-N/A Pacific COLI Life
December 16, 1996
- -------------------------------------------------------------------------------------------------
Pacific Select Estate 333-01717 Pacific Select EXEC Life
Preserver
- -------------------------------------------------------------------------------------------------
Eff. February 10, 1997 33-
=================================================================================================
</TABLE>
IN WITNESS WHEREOF, the Fund, the Adviser, and the Company hereby amend this
Schedule 2 in accordance with Article XI of the Agreement.
<TABLE>
<S> <C>
M FUND, INC. PACIFIC MUTUAL LIFE INSURANCE COMPANY
By: /s/ TC SUTTON
Name: Thomas C. Sutton
Title: Chairman & Chief Executive Officer
By: /s/ DANIEL F BYRNE By: /s/ GLENN S SCHAFER
Name: Daniel F. Byrne Name: Glenn S. Schafer
Title: President Title: President
M FINANCIAL INVESTMENT ADVISERS, INC. M LIFE INSURANCE COMPANY
By: /s/ DANIEL F BYRNE By: /s/ DANIEL F BYRNE
Name: Daniel F. Byrne Name: Daniel F. Byrne
Title: President Title: Senior VP
</TABLE>
<PAGE>
Schedule 3
----------
Fund Series and Other Funding
Vehicles Available Under
Each Class of Contracts
Effective as of the date the Agreement was executed, the following Fund Series
and other Funding Vehicles are available under the Contracts:
<TABLE>
<CAPTION>
Contract Marketing Name Fund Series Other Funding Vehicles
==========================================================================================================
<S> <C> <C>
M Fund Edinburgh Overseas Equity Fund Pacific Select Fund, except Equity and
Bond and Income Portfolios
- ----------------------------------------------------------------------------------------------------------
M Fund Turner Core Growth Fund Pacific Select Fund, except Equity and
Bond and Income Portfolios
- -----------------------------------------------------------------------------------------------------------
M Fund Frontier Capital Appreciation Pacific Select Fund, except Equity and
Fund Bond and Income Portfolios
- ----------------------------------------------------------------------------------------------------------
M Fund Enhanced U.S. Equity Fund Pacific Select Fund, except Equity and
Bond and Income Portfolios
==========================================================================================================
</TABLE>
<PAGE>
SCHEDULE 4
----------
Investment Restrictions
Applicable to the Fund
Effective as of the date the Agreement was executed, the following investment
restrictions are applicable to the Fund:
FOREIGN COUNTRY DIVERSIFICATION GUIDELINES to be followed by each portfolio of a
Separate Account are as follows:
A Portfolio will invest in the securities of issuers domiciled or primarily
traded in at least five foreign countries if the Portfolio has invested at least
80% of its net assets in foreign issuers. If the Portfolio has less than 20% of
its net assets in foreign issuers, then all of such investment may be in issuers
domiciled or primarily traded in one country. If the Portfolio has at least 20%
but less than 40% of its net assets in foreign issuers, then such investment
must be allocated to issuers domiciled or primarily traded in at least two
foreign countries. Similarly, if the Portfolio has at least 40% but less than
60% of its net assets invested in foreign issuers, such investment must be
allocated to at least three foreign countries. Foreign investments must be
allocated to at least four foreign countries if such investments comprise at
least 60% but less than 80% of the Portfolio's net assets. The Portfolio will
not invest more than 20% of its net assets in securities of issuers domiciled or
primarily traded in any one country, except that the Portfolio may invest up to
35% of its net assets in issuers domiciled or primarily traded in any one of the
following countries: Australia, Canada, France, Japan, the United Kingdom, or
Germany. The Portfolio is not subject to any limit upon investment in issuers
domiciled or primarily traded in the United States.
BORROWING GUIDELINES to be followed by each portfolio of a separate account are
as follows:
A Portfolio may leverage its assets by borrowing amounts equivalent to no more
than 10% of its total assets, except that a Portfolio may temporarily borrow up
to 25% of its total assets when such borrowing is necessary to meet fund
redemptions. For purposes of this limitation, entering into a reverse
repurchase agreement shall be considered a "borrowing".
<PAGE>
DRAFT
AMENDMENT DATED MAY 1, 1997 TO
SCHEDULE 4 OF THE M FUND, INC. PARTICIPATION AGREEMENT WITH
PACIFIC MUTUAL LIFE INSURANCE COMPANY
Effective as of the date of this Amendment, pursuant to Bulletin 97-2 dated
March 7, 1997, ("Bulletin"), issued by the California Department of Insurance
("Department"), the M Fund Portfolios are exempt from the investment guidelines
and restrictions set forth in Section V, Hazardous Operations, of the Bulletin
in accordance with the exemptive provisions of Section VI, Non-Hazardous
Operations, of the Bulletin, so long as all Portfolios are registered under the
Investment Company Act of 1940. The Department has determined that a hazardous
condition shall not exist if such registration is maintained.
Should any Portfolio not maintain an effective registration, the Fund and the
Adviser agree to comply with such investment guidelines and restrictions as the
Commissioner of the Department may require under Bulletin Section V, in order to
deem the Portfolio's investment practices to be non-hazardous.
Notwithstanding the above, pursuant to Section VI of the Bulletin, in the event
the Commissioner determines that a hazardous condition exists as the result of
the Fund's investment practices, then Section 4.4 of this Agreement shall apply.
<TABLE>
<S> <C>
PACIFIC MUTUAL LIFE INSURANCE COMPANY
(Company)
By:______________________________ Date: _____________________
Name:
Title:
By:______________________________ Date: _____________________
Name:
Title:
M FUND, INC.
(Fund)
By:______________________________ Date: _____________________
Name:
Title:
By:______________________________ Date: _____________________
Name: Daniel F. Byrne
Title: President
M FINANCIAL INVESTMENT ADVISER
(Adviser)
By:______________________________ Date: ____________________
Name: Daniel F. Byrne
Title: President
M LIFE
By:______________________________ Date: ____________________
Name: Daniel F. Byrne
Title: Senior Vice President
</TABLE>
<PAGE>
Effective as of *, the following classes of Contracts are hereby added to this
Schedule 2 and made subject to the Agreement:
<TABLE>
<CAPTION>
Policy Marketing Name SEC 1933 Act Name of Supporting Annuity or Life
Registration Account
Number (if
applicable)
----------------------------------------------------------------------------
<S> <C> <C> <C>
Pacific Select Estate 333-01713 Pacific Select Exec Life
Preserver
----------------------------------------------------------------------------
Pacific Select Estate 333-20355 Pacific Select Exec Life
Preserver II
----------------------------------------------------------------------------
Pacific Select Estate 333-14005 Pacific Select Exec Life
Maximizer
----------------------------------------------------------------------------
</TABLE>
IN WITNESS WHEREOF, the Fund, the Adviser, and the Company hereby amend this
Schedule 2 in accordance with Article XI of the Agreement.
M FUND, INC. PACIFIC LIFE INSURANCE COMPANY
(formerly known as Pacific Mutual Life
Insurance Company)
By: /s/ DANIEL F. BYRNE By: /s/ LYNN C. MILLER
Name: Daniel F. Byrne Name: Lynn C. Miller
Title: President Title: Executive Vice President
M FINANCIAL INVESTMENT M LIFE INSURANCE COMPANY
ADVISERS, INC.
By: /s/ DANIEL F. BYRNE By: /s/ DANIEL F. BYRNE
Name: Daniel F. Byrne Name: Daniel F. Byrne
Title: President Title: Senior VP
*
Pacific Select Estate Preserver effective as of: March 3, 1997
Pacific Select Estate Preserver II effective as of: July 17, 1997
Pacific Select Estate Maximizer effective as of: June 5, 1997
<PAGE>
Effective as of *, the following classes of Contracts are hereby added to this
Schedule 2 and made subject to the Agreement:
<TABLE>
<CAPTION>
Policy Marketing Name SEC 1933 Act Name of Supporting Annuity or Life
Registration Account
Number (if
applicable)
----------------------------------------------------------------------------
<S> <C> <C> <C>
M's Versatile Product 333-61135 Pacific Select Exec Life
----------------------------------------------------------------------------
Custom Coli II N/A Pacific Coli II Life
----------------------------------------------------------------------------
Custom Coli III N/A Pacific Coli III Life
----------------------------------------------------------------------------
</TABLE>
IN WITNESS WHEREOF, the Fund, the Adviser, and the Company hereby amend this
Schedule 2 in accordance with Article XI of the Agreement.
M FUND, INC. PACIFIC LIFE INSURANCE COMPANY
(formerly known as Pacific Mutual Life
Insurance Company)
By: By:
Name: Daniel F. Byrne Name: Lynn C. Miller
Title: President Title: Executive Vice President
M FINANCIAL INVESTMENT M LIFE INSURANCE COMPANY
ADVISERS, INC.
By: By:
Name: Daniel F. Byrne Name: Daniel F. Byrne
Title: President Title: Senior VP
*
M's Versatile Product effective as of:
Custom Coli II effective as of:
Custom Coli III effective as of:
<PAGE>
EXHIBIT 99.6(a)
Independent Auditors' Consent
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. 1 to the Registration
Statement No. 333-61135 on Form S-6 of our report dated February 6, 1998 related
to the financial statements of Pacific Select Exec Separate Account as of
December 31, 1997 and for each of the two years in the period then ended and of
our report dated February 19, 1998 related to the consolidated financial
statements of Pacific Life Insurance Company and subsidiaries as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997, appearing in the Prospectus of M's Versatile Product ("MVP") Flexible
Premium Variable Life Insurance Policy, which is a part of such Registration
Statement.
We also consent to the reference to us under the heading "Independent Auditors"
appearing in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
November 19, 1998
<PAGE>
EXHIBIT 99.7
Opinion of Actuary
<PAGE>
[Letterhead of Pacific Life Insurance Company]
November 11, 1998
PACIFIC LIFE INSURANCE COMPANY
700 Newport Center Drive
Newport Beach, CA 92660
RE: M's Versatile Product Flexible Premium Variable Life Insurance Policy
To whom it may concern:
In my capacity as Assistant Vice President of the Product Design Department of
Pacific Life Insurance Company, I have provided actuarial advice concerning:
The preparation of the Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-6 filed by Pacific Life Insurance Company with the
Securities and Exchange Commission under the Securities Act of 1933 with respect
to variable life insurance policies (the "Registration Statement") and the
preparation of the policy forms for the variable life insurance policies
described in the Registration Statement (the "Policies").
It is my professional opinion that:
The illustration of death benefits, cash values and accumulated premiums shown
in the Appendix to the prospectus, based on the assumptions stated in the
illustrations and on the pages immediately preceding the illustrations, are
consistent with the provisions of the Policies. The rate structure of the
Policies has not been designed so as to make the relationship between premiums
and benefits, as shown in the illustrations, appear to be correspondingly more
favorable to the prospective purchaser of the policies at age 45 in the
underwriting classes illustrated than to prospective purchasers of Policies at
other ages or underwriting classes.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ LAWRENCE M. HERSH
Lawrence M. Hersh, FSA, MAAA
Assistant Vice President
