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[LOGO OF PACIFIC SELECT ESTATE MAXIMIZER]
VARIABLE UNIVERSAL LIFE
PROSPECTUSES FOR
PACIFIC SELECT ESTATE MAXIMIZER
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNDERWRITTEN BY
PACIFIC LIFE INSURANCE COMPANY
DATED MAY 1, 1998
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PACIFIC SELECT FUND
DATED MAY 1, 1998
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PACIFIC SELECT ESTATE MAXIMIZER
[LOGO OF PACIFIC SELECT ESTATE MAXIMIZER]
MODIFIED SINGLE PREMIUM VARIABLE LIFE
INSURANCE POLICY
ISSUED BY PACIFIC INSURANCE COMPANY
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
1-800-800-7681
This prospectus describes Pacific Select Estate Maximizer--a Modified Single
Premium Variable Life Insurance Policy (individually, the "Policy," and
collectively, the "Policies") offered by Pacific Life Insurance Company
("Pacific Life," "we," "us," or "our", formerly known as Pacific Mutual Life
Insurance Company). The Policy provides lifetime insurance protection on the
Insured or Joint Insureds (the "Insureds") named in the Policy so long as the
Policy is in force. A Policy may be surrendered for its Cash Surrender Value
less any outstanding Policy Debt during the lifetime of the Insured(s). The
Policy can be purchased for a minimum initial premium of $10,000; however, if
the Insured (Younger Insured if this is a last survivor Policy) is age 70 or
over, the minimum initial premium is $50,000. The Policy provides limited
flexibility to pay additional premiums. This Policy is designed to provide for
the Insureds changing insurance needs or financial objectives.
Policies can provide insurance protection on the life of one Insured or, as
a last survivor Policy, on the lives of two Insureds. A last survivor Policy,
for so long as it remains in force, provides a death benefit the proceeds of
which are payable when the last surviving Insured dies while the Policy is in
force. The death benefit will be the Face Amount of insurance stated in the
Policy or, under certain circumstances, a higher amount. After the death of
the Insured(s), we will pay the Beneficiary the death benefit minus any Debt
under the Policy.
Premium payments may be allocated at the Policyholder's ("Policy Owner,"
"Owner," "you" or "your") discretion to one or more of the Investment Options
currently available. Each of the Variable Investment Options ("Variable
Account") is a subaccount of our separate account called the Pacific Select
Exec Separate Account (the "Separate Account"). Any portion of the premium
payments allocated to one of more of the Variable Accounts available to you is
invested in one or more of the corresponding Portfolios of the Pacific Select
Fund (the "Fund"):
<TABLE>
<S> <C>
Money Market Portfolio Equity Income Portfolio
High Yield Bond Portfolio Multi-Strategy Portfolio
Managed Bond Portfolio Equity Portfolio
Government Securities Portfolio Bond and Income Portfolio
Growth Portfolio Equity Index Portfolio
Aggressive Equity Portfolio International Portfolio
Growth LT Portfolio Emerging Markets Portfolio.
</TABLE>
Accumulated Value allocated to the Variable Accounts will vary based upon
the investment performance of the Variable Accounts. No minimum amount of
Accumulated Value is guaranteed. A fixed option called the Fixed Account is
also available. Accumulated Value in the Fixed Account will accrue interest at
an interest rate that is guaranteed by us. This prospectus generally describes
only the portion of the Policy involving the Separate Account. For a brief
summary of the Fixed Account, see "The Fixed Account," page 30.
The Policies usually will be a type of life insurance policy classified as a
modified endowment contract. For information on the tax treatment of modified
endowment contracts, see "Federal Income Tax Considerations," on page 24.
It may not be advantageous to replace existing insurance with the Policy. A
Policy may be returned according to the terms of its Free-Look Right (see
"Right to Examine a Policy--Free-Look Right," page 20), during which time
premium payments allocated to the Separate Account will be invested in the
Money Market Variable Account.
The Contract is titled a "Flexible Premium Variable Life Insurance Policy"
in Texas.
Reports and other information about the Registrant are available on the
Securities and Exchange Commission's internet site at http://www.sec.gov.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE PACIFIC
SELECT FUND. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
DATE: MAY 1, 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.
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TABLE OF CONTENTS
<TABLE>
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IMPORTANT TERMS............................................................ 4
SUMMARY OF THE POLICY...................................................... 5
Purpose of the Policy.................................................... 5
Policy Values............................................................ 5
The Death Benefit........................................................ 5
Premium Features......................................................... 5
Investment Options....................................................... 5
Transfer of Accumulated Value............................................ 6
Free-Look Right.......................................................... 6
Surrender and Partial Withdrawal Rights.................................. 6
Policy Loans............................................................. 6
Policy Charges and Deductions............................................ 7
Fund Annual Expenses After Expense Limitation............................ 8
Tax Treatment of Increases in Accumulated Value.......................... 9
Tax Treatment of Death Benefit........................................... 9
Contacting Pacific Life and Timing of Transactions....................... 9
INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT, AND THE FUND......... 10
Pacific Life Insurance Company........................................... 10
Pacific Select Exec Separate Account..................................... 10
The Pacific Select Fund.................................................. 11
The Investment Adviser and Portfolio Managers............................ 12
THE POLICY................................................................. 13
Application for a Policy................................................. 13
Premiums................................................................. 13
Additional Premium Payments.............................................. 13
Allocation of Premiums................................................... 14
Portfolio Rebalancing.................................................... 14
Dollar Cost Averaging Option............................................. 14
Transfer of Accumulated Value............................................ 15
Death Benefit............................................................ 15
Policy Values............................................................ 17
Determination of Accumulated Value....................................... 17
Policy Loans............................................................. 18
Duration of Contract..................................................... 19
Surrender................................................................ 19
Partial Withdrawals...................................................... 19
Right to Examine a Policy--Free-Look Right............................... 20
Lapse.................................................................... 20
Reinstatement............................................................ 20
Last Survivor Policies................................................... 21
CHARGES AND DEDUCTIONS..................................................... 21
Load from Premiums....................................................... 21
Surrender Charge......................................................... 21
Deductions from Accumulated Value........................................ 22
Other Charges............................................................ 23
Guarantee of Certain Charges............................................. 23
Variations in Charges.................................................... 23
</TABLE>
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<TABLE>
<CAPTION>
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OTHER INFORMATION.......................................................... 24
Federal Income Tax Considerations........................................ 24
Charge for Our Income Taxes.............................................. 27
Voting of Fund Shares.................................................... 27
Disregard of Voting Instructions......................................... 28
Confirmation Statements and Other Reports to Owners...................... 28
Substitution of Investments.............................................. 28
Replacement of Life Insurance or Annuities............................... 29
Changes to Comply with Law............................................... 29
PERFORMANCE INFORMATION.................................................... 29
THE FIXED ACCOUNT.......................................................... 30
General Description...................................................... 30
Transfers, Surrenders, Withdrawals, and Policy Loans..................... 31
MORE ABOUT THE POLICY...................................................... 31
Ownership................................................................ 31
Beneficiary.............................................................. 31
The Contract............................................................. 32
Payments................................................................. 32
Assignment............................................................... 32
Errors on the Application................................................ 32
Incontestability......................................................... 32
Payment in Case of Suicide............................................... 32
Dividends................................................................ 33
Policy Illustrations..................................................... 33
Payment Plan............................................................. 33
Optional Insurance Benefits and Other Policies........................... 33
Life Insurance Retirement Plans.......................................... 33
Risks of Life Insurance Retirement Plans................................. 34
Distribution of the Policy............................................... 34
MORE ABOUT PACIFIC LIFE.................................................... 35
Management............................................................... 35
State Regulation......................................................... 37
Telephone Transfer and Loan Privileges................................... 37
Legal Proceedings........................................................ 37
Legal Matters............................................................ 37
Registration Statement................................................... 37
Preparation for the Year 2000............................................ 38
Independent Auditors..................................................... 38
Financial Statements..................................................... 38
APPENDIX................................................................... 80
ILLUSTRATIONS.............................................................. 81
</TABLE>
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IMPORTANT TERMS
Accumulated Value--The total value of the amounts in the Investment Options
for the Policy as well as any amount set aside in the Loan Account, including
any accrued earned interest, as of any Valuation Date.
Age--An Insured's age as of his or her last birthday as of the Policy Date,
increased by the number of complete Policy Years elapsed.
Beneficiary--The person or persons you name in the application or by proper
later designation to receive the death benefit proceeds upon the death of the
Insured(s).
Cash Surrender Value--The Accumulated Value, less any applicable surrender
charge.
Death Benefit--The greater of the Face Amount under a Policy or Accumulated
Value multiplied by a specified percentage shown in the Appendix.
Debt--The unpaid loan balance including accrued loan interest.
Face Amount--The minimum death benefit for so long as the Policy remains in
force.
Fixed Account--An account that is part of our General Account to which all or
a portion of premium payments may be allocated for accumulation at a fixed
rate of interest (which may not be less than 3.0%) declared periodically by
us.
Free Withdrawal Amount--The lesser of contract earnings under the Policy or
10% of the initial premium. For purposes of determining this amount, earnings
under the Policy are Accumulated Value less total premiums paid, plus all
prior partial withdrawals deemed to be withdrawals of premium for surrender
charge purposes.
General Account--All of our assets other than those allocated to the Separate
Account or to any of our other segregated separate accounts.
Guideline Single Premium or Guideline Level Premiums--The maximum amount of
premium or premiums that can be paid to qualify a Policy as life insurance for
tax purposes as specified in Section 7702 of the Internal Revenue Code.
Home Office--The Client Services Department at our main office at 700 Newport
Center Drive, Newport Beach, California 92660.
Insured or Insured(s)--The person or persons upon whose life the Policy is
issued and whose death is the contingency upon which the death benefit
proceeds are payable.
Investment Option--A Variable Account or the Fixed Account.
Loan Account--An account to which amounts are transferred from the Variable
Accounts and the Fixed Account as collateral for Policy loans.
Monthly Payment Date--The day each month on which certain deductions and
charges are assessed against the Accumulated Value. The first Monthly Payment
Date is the Policy Date.
Net Cash Surrender Value--The Cash Surrender Value less Policy Debt.
Policy Date--The date used to determine the Monthly Payment Date, Policy
Years, and Policy Monthly, Quarterly, Semi-Annual, and Annual Anniversaries.
It is usually the date the application is accepted by us. The term "Issue
Date" is substituted for Policy Date with respect to Policies issued to
residents of the Commonwealth of Massachusetts.
Policyholder Policy Owner, Owner, You, or Your--The person or persons who own
the Policy. The Policy Owner will be the Insured(s) unless otherwise stated in
the application. If your Policy has been absolutely assigned, the assignee
becomes the Owner. A collateral assignee is not the Owner.
Survivor--In a last survivor Policy, the Insured remaining alive after the
first death of the two Insureds that occurs while the last survivor Policy is
in force.
Valuation Date--Each date on which the Separate Account is valued, which
currently includes each day that the New York Stock Exchange is open for
trading and on which our administrative offices are open. The New York Stock
Exchange is closed on weekends and on: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving Day, and Christmas
Day. Our administrative offices are normally not open on the following: the
Monday before New Year's Day, July Fourth, or Christmas Day if any of those
holidays falls on a Tuesday; the Tuesday before Christmas Day if that holiday
falls on a Wednesday; the Friday after New Year's Day, July Fourth or
Christmas Day if any of these holidays falls on a Thursday; and the Friday
after Thanksgiving. If any transaction or event called for under a Policy is
scheduled to occur on a day that is not a Valuation Date, such transaction or
event will be deemed to occur at the end of the next following Valuation Date
unless otherwise specified.
Valuation Period--The period that starts at the close of a Valuation Date and
ends at the close of the next succeeding Valuation Date.
Variable Account--A separate account of ours or a subaccount of such a
separate account, which is used only to support the variable death benefits
and policy values of variable life insurance policies, and the assets of which
are segregated from our General Account and our other separate accounts. The
Pacific Select Exec Separate Account serves as the funding vehicle for the
Policies. The Money Market Variable Account, High-Yield Bond Variable Account,
Managed Bond Variable Account, Government Securities Variable Account, Growth
Variable Account, Aggressive Equity Variable Account, Growth LT Variable
Account, Equity Income Variable Account, Multi-Strategy Variable Account,
Equity Variable Account, Bond and Income Variable Account, Equity Index
Variable Account, International Variable Account, and Emerging Markets
Variable Account are all subaccounts of the Pacific Select Exec Separate
Account.
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SUMMARY OF THE POLICY
This summary is intended to provide a brief overview of the more significant
aspects of the Policy. Further detail is provided in this prospectus and in the
Policy. Unless the context indicates otherwise, the discussion in this summary
and the remainder of the prospectus relates to the portion of the Policy
involving the Separate Account. The Fixed Account is briefly described under
"The Fixed Account," on page 30 and in the Policy.
PURPOSE OF THE POLICY
The Policy offers you insurance protection on the life of the Insured(s) so
long as your Policy is not surrendered or in default beyond the Grace Period.
Like traditional fixed life insurance, your Policy provides for a death benefit
equal to its Face Amount, accumulation of cash values, and surrender and loan
privileges. Unlike traditional fixed life insurance, your Policy offers a
choice of investment alternatives and an opportunity for the Policy's
Accumulated Value and, under certain circumstances, its death benefit to grow
based on investment results.
POLICY VALUES
You may allocate premium payments among the various Investment Options
available to you. Depending on the investment experience of the selected
Variable Accounts, the Accumulated Value may increase or decrease on any day.
You bear the investment risk on that portion of the Accumulated Value
allocated to the Variable Accounts. The death benefit may or may not increase
or decrease depending upon several factors, although the death benefit will
never decrease below the Face Amount provided your Policy is in force. There is
no guarantee that your Policy's Accumulated Value and death benefit will
increase.
Your Policy will remain in force until the earliest of the death of the
Insured(s) or a full surrender of your Policy, or unless the Net Cash Surrender
Value is insufficient to pay certain charges deducted on each Monthly Payment
Date, and a Grace Period expires without sufficient additional premium payments
or loan repayments by you.
THE DEATH BENEFIT
Upon the death of the Insured, or, for a last survivor Policy, upon the death
of the Survivor, we will pay to the named Beneficiary death benefit proceeds,
which will be the death benefit under your Policy reduced by any Policy Debt.
The death benefit will be the greater of the Face Amount under your Policy or
the Accumulated Value multiplied by a specified percentage. See "Death
Benefit," page 15.
PREMIUM FEATURES
The Policy can be purchased for a minimum initial premium payment of $10,000,
or $50,000 if the Insured's Age (or Younger Insured's Age if this is a last
survivor Policy) is 70 or over. In determining the Face Amount, you may elect
that the initial premium be equal to 80%, 90% or 100% of the Guideline Single
Premium. The Guideline Single Premium is the maximum premium that can be paid
for any given Face Amount in order for an insurance policy to qualify as a life
insurance contract for tax purposes. The Face Amount in the state of West
Virginia may not be less than $25,000. Additional premiums may be paid under
certain circumstances. See "Additional Premium Payments," page 13.
INVESTMENT OPTIONS
You may choose to allocate net premium payments to one or more of the
Investment Options available to you.
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The Variable Accounts available to you invest in portfolios of a mutual fund
which offers you the opportunity to direct us to invest in diversified
portfolios of stocks, bonds, money market instruments, or a combination of
these securities, or in securities of foreign issuers. Each of the available
Variable Accounts invests exclusively in shares of a designated Portfolio of
the Fund. Each of the Portfolios of the Fund, which are shown in the chart on
page 12, has a different investment objective or objectives. See "The Pacific
Select Fund," page 11.
You may also allocate all or a portion of net premium payments and transfer
Accumulated Value to the Fixed Account. We guarantee that the Accumulated Value
allocated to the Fixed Account will be credited interest monthly at a rate
equivalent to an effective annual rate of 3%, and may in our sole discretion
pay interest in excess of the guaranteed amount. See "The Fixed Account," page
30.
TRANSFER OF ACCUMULATED VALUE
You may transfer Accumulated Value among the Variable Accounts, and, subject
to certain other limitations, between the Variable Accounts and the Fixed
Account. Transfers may be made by telephone if a properly completed
Authorization For Telephone Requests has been filed at our Home Office. See
"Transfer of Accumulated Value," page 15.
FREE-LOOK RIGHT
You may obtain a full refund of the premium paid if your Policy is returned
within 10 days after you receive it (15 days in Colorado, 20 days in North
Dakota, and 30 days if you reside in California and are age 60 or older), 10
days after we mail or deliver this notice of right of withdrawal included in
this prospectus, or 45 days after the application for your Policy is signed,
whichever is later. However, in Pennsylvania, you have a different Free-Look
Right, under which your Policy may be returned only within 10 days after you
receive it. Until the Free-Look Transfer Date, premiums will be allocated to
the Money Market Variable Account which invests in the Money Market Portfolio
of the Fund. See "Allocation of Premiums," page 14.
SURRENDER AND PARTIAL WITHDRAWAL RIGHTS
You can surrender the Policy during the life of the Insured and receive its
Net Cash Surrender Value, which is equal to the Accumulated Value less any
outstanding Policy Debt and less any applicable surrender charge.
Partial withdrawals may be taken beginning on the first Policy Anniversary.
The minimum partial withdrawal is $1,000. The amount that can be withdrawn (1)
can be no greater than the excess of Cash Surrender Value immediately prior to
the withdrawal over Policy Debt divided by 90% and (2) is limited so that after
the withdrawal, the Net Cash Surrender Value is at least $10,000. Partial
withdrawals will reduce the death benefit under a Policy by an amount
proportionate to the reduction in Accumulated Value caused by the partial
withdrawal and may reduce the Face Amount. However, decreases in the Face
Amount and death benefit will be limited so that the policy complies with the
definition of life insurance in the Internal Revenue Code ("IRC"). Upon
surrender of a Policy or a partial withdrawal during the first nine Policy
Years a surrender charge may be assessed. No surrender charge is imposed on the
amount of the first withdrawal in any Policy Year (including a surrender) that
does not exceed the Free Withdrawal Amount. Surrender or partial withdrawals
may give rise to taxable income to you. See "Federal Income Tax
Considerations," page 24.
POLICY LOANS
You may borrow from us using your Policy as security for the loan. You may
borrow up to 50% of Accumulated Value during the first Policy Year, and up to
the greater of (1) 100% of your Accumulated Value in the Fixed Account and 90%
in the Variable Accounts, and (2) 98% of the excess of the Accumulated Value
over twelve times the current monthly deduction thereafter. The maximum amount
is reduced by the amount of any existing Debt and any surrender charge that
would be imposed if you surrendered your Policy on the date the loan is taken.
The minimum loan that can be taken at any time is $500 ($200 in Connecticut,
$250 in
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Oregon). See "Policy Loans," page 18. The amount of any Policy Debt will be
subtracted from the death benefit under the Policy, and from your Cash
Surrender Value upon surrender. You will pay interest to us on Policy Debt at
an annual rate of 6.00% in the first ten Policy Years and 5.00% thereafter. A
portion of your Policy Debt may qualify as a Preferred Loan, and will bear
interest at 5.25% in the first ten Policy Years, and 4.75% thereafter. Such
portion will be redetermined on each policy anniversary.
When you take a loan, an amount equal to the loan is transferred from your
Accumulated Value in the Investment Options to the Loan Account to secure the
loans. We will pay interest on amounts in the Loan Account at an annual rate of
4.5%.
A Policy loan is treated as a distribution from a Policy that is a modified
endowment contract and therefore may result in taxable income to you. See
"Federal Income Tax Considerations," page 24.
POLICY CHARGES AND DEDUCTIONS
Load from Premiums
We do not make any deductions from any premium payment before allocating it
to your Accumulated Value.
Surrender Charge
As discussed above under "Surrender and Partial Withdrawal Rights," if you
surrender your policy or take a partial withdrawal within the first nine Policy
Years, a surrender charge may be deducted from Accumulated Value. Approximately
twenty-five percent of the Surrender Charge is assessed to compensate us for
premium taxes paid. Approximately seventy-five percent of the Surrender Charge
is assessed to compensate us for sales expenses. The Surrender Charge will not
exceed 10% of the initial premium payment.
Monthly Deductions
An amount called the monthly deduction is deducted from your Accumulated
Value in the Variable Accounts and the Fixed Account beginning on the Policy
Date and on each Monthly Payment Date thereafter. The monthly deduction will be
assessed to each account in proportion to the Policy's Accumulated Value in
each Variable Account and the Fixed Account, unless you specify otherwise in
writing. The monthly deduction consists of the following charges:
--Cost of Insurance Charge: A cost of insurance charge is deducted to
compensate us for the cost of providing life insurance coverage for the
Insured(s); and
--Administrative Charge: An administrative charge equal to 0.00025 (0.30%
annually) of Accumulated Value in the Variable Accounts and the Fixed
Account is assessed. In addition, if Accumulated Value is below $50,000 on
any Policy Anniversary Date, a $40 fee is charged on that Monthly Payment
Date; and
--Tax Expense Charge: A charge equal to 0.000333333 (0.40% annually) of the
Accumulated Value is assessed to pay applicable state and local premium
taxes and federal taxes imposed under Section 848 of the Internal Revenue
Code of 1986, as amended (the "Code"). This charge is eliminated after 10
Policy Years; and
--Mortality and Expense Risk Charge: A charge is assessed to compensate us
for mortality and expense risks assumed. This charge is equal to 0.00075
(0.90% annually) of Accumulated Value in the Variable Accounts and the
Fixed Account. After 10 Policy Years this charge is reduced to 0.000583333
(0.70% annually).
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The operating expenses of the Separate Account are paid by us. The Policy's
charges and deductions shown above are specified under the terms of the Policy.
For a more complete description of these charges, see "Charges and Deductions,"
page 21.
FUND ANNUAL EXPENSES AFTER EXPENSE LIMITATION (as a percentage of each
Portfolio's average daily net assets)
Investment advisory fees and operating expenses of the Fund are paid by the
Fund. Fund expenses are not specified under the terms of the Policy, and they
may vary from year to year.
<TABLE>
<CAPTION>
ADVISORY OTHER TOTAL
FEE EXPENSES EXPENSES
-------- -------- --------
<S> <C> <C> <C>
Money Market Portfolio............................... .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>
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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 in connection with the change in the
Portfolio Manager to Morgan Stanley that occurred in June, 1997. Pacific Life,
as Investment Adviser to the Fund, adopted the policy to waive our fees or
otherwise reimburse expenses so that operating expenses (exclusive of advisory
fees, additional custodial fees associated with holding foreign securities,
foreign taxes on dividends, interest or capital gains, and extraordinary
expenses) are not greater than 0.25% of average daily net assets per year. We
began the policy in 1989 and intend to continue this policy until at least
December 31, 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 expenses are assessed at the Fund level and are not direct charges
against the Variable Accounts or the Policy's Accumulated Value. These expenses
are taken into account in computing each Portfolio's per share net asset value,
which in turn is used to compute the corresponding Variable Account's
Accumulation Unit Value. The Fund's investment advisory fees and operating
expenses are more fully described in the Fund's prospectus, which accompanies
this Prospectus.
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TAX TREATMENT OF INCREASES IN ACCUMULATED VALUE
We believe that the Accumulated Value under the Policy is currently subject
to the same federal income tax treatment as the cash value under traditional
fixed life insurance. Therefore, generally, you will not be deemed to be in
constructive receipt of your Accumulated Value unless and until actual
surrender of a Policy or upon making a partial withdrawal or a Policy Loan. Any
such distribution may give rise to taxable income to you and may, under certain
circumstances, subject you to an additional income tax of 10% of the amount
includable in taxable income. For more information on the tax treatment of the
Policy and the tax treatment of distributions see "Federal Income Tax
Considerations," page 24.
TAX TREATMENT OF DEATH BENEFIT
We believe that the death benefit under the Policy is currently subject to
federal income tax treatment consistent with that of traditional fixed life
insurance. Therefore, generally the death benefit will be fully excludable from
the gross income of the Beneficiary under the IRC. See "Federal Income Tax
Considerations," page 24.
CONTACTING PACIFIC LIFE AND TIMING OF TRANSACTIONS
All written requests, notices, and forms required by the Policies, and any
questions or inquiries should be directed to our 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 normally be effective as
of the end of the Valuation Date that we receive them "properly completed,"
unless the transaction or event is scheduled to occur on another day.
Transactions are effected as of the end of the Valuation Date on which they are
effective. "Properly completed" may require, among other things, a signature
guarantee or other verification of authenticity. We do not generally require a
signature guarantee unless it appears that your signature may have changed over
time or due to other circumstances. Requests regarding death benefits must be
accompanied by both proof of death and instructions regarding payment
satisfactory to us. You should call your registered representative or us if you
have questions regarding the required form of a request.
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INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT, AND THE FUND
PACIFIC LIFE INSURANCE COMPANY
We are a life insurance company that is domiciled in California. Our
operations include both life insurance and annuity products as well as
financial and retirement services. As of the end of 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 in addition to the
Policies. The assets in the Separate Account are kept separate from our
General Account assets and our other separate accounts.
We own the assets in the Separate Account and are required to maintain
sufficient assets in the Separate Account to meet anticipated obligations of
the insurance policies funded by the Account. The Separate Account is divided
into subaccounts called Variable Accounts. The income, gains, or losses,
realized or unrealized, of each Variable Account are credited to or charged
against the assets held in the Variable Account without regard to our other
income, gains, or losses. Assets in the Separate Account attributable to the
reserves and other liabilities under the variable life insurance policies
funded by the Separate Account are not chargeable with liabilities arising
from any other business that we conduct. However, we may transfer to our
General Account assets which exceed anticipated obligations of the Separate
Account. All obligations arising under the Policy are our general corporate
obligations. We may accumulate in the Separate Account proceeds from various
Policy charges and investment results applicable to those assets.
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<PAGE>
The Separate Account was established on May 12, 1988 under California law
under the authority of our Board of Directors. The Separate Account is
registered as a unit investment trust with the SEC. Such registration does not
involve any supervision by the SEC of the administration or investment
practices or policies of the Account.
Each Variable Account invests exclusively in shares of a designated
Portfolio of the Fund. We may in the future establish additional Variable
Accounts within the Separate Account, which may invest in other Portfolios of
the Fund or in other securities.
THE PACIFIC SELECT FUND
The Fund is a diversified, open-end management investment company of the
series type. The Fund is registered with the SEC under the Investment Company
Act of 1940. Such registration does not involve supervision by the SEC of the
investments or investment policies of the Fund. The Fund currently offers
fourteen separate Portfolios to the Separate Account that fund the Variable
Investment Options available to you. Each Portfolio pursues different
investment objectives and policies. We purchase the shares of each Portfolio
for the corresponding Variable Account at net asset value, i.e., without sales
load. All dividends and capital gains distributions received from a Portfolio
are automatically reinvested in such Portfolio at net asset value, unless we,
on behalf of the Separate Account, elect otherwise. Fund shares will be
redeemed by us at their net asset value to the extent necessary to make
payments under the Policies.
Shares of the Fund currently are offered for purchase only to separate
accounts of ours 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.
The following chart summarizes some basic data about each Portfolio of the
Fund offered to the Separate Account. There can be no assurance that any
Portfolio will achieve its objective. This chart is only a summary. You should
read the more detailed information which is contained in the accompanying
prospectus of the Fund, including information on the risks associated with the
investments and investment techniques of each of the Portfolios.
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<PAGE>
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
(UNDER NORMAL
PORTFOLIO OBJECTIVE CIRCUMSTANCES) PORTFOLIO MANAGER
<C> <C> <S> <C>
- -------------------------------------------------------------------------------------------------------
Money Market Current income consistent with Highest quality money Pacific Life
preservation of capital market
instruments
- -------------------------------------------------------------------------------------------------------
High Yield High level of current income Intermediate and long- Pacific Life
Bond term,
high-yielding, lower and
medium quality (high
risk)
fixed-income securities
- -------------------------------------------------------------------------------------------------------
Managed Bond Maximize total return consistent Investment grade Pacific Investment
with prudent investment marketable Management Company
management debt securities. Will
normally maintain an
average portfolio
duration of 3-7 years
- -------------------------------------------------------------------------------------------------------
Government Maximize total return consistent U.S. Government Pacific Investment
Securities with prudent investment securities Management Company
management including 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 capital Common stock Janus Capital Corporation
consistent with the preservation
of capital
- -------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Dividend paying common J.P. Morgan Investment
and income stock Management Inc.
- -------------------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed income J.P. Morgan Investment
securities Management Inc.
- -------------------------------------------------------------------------------------------------------
Equity Capital appreciation Common stocks and Goldman Sachs
securities Asset Management
convertible into or
exchangeable
for common stocks
- -------------------------------------------------------------------------------------------------------
Bond and In- Provide total return and income Investment grade debt Goldman Sachs
come consistent with prudent securities. Asset Management
investment management Will normally maintain
an
average portfolio
duration within
one-half year of a long-
term
bond index
- -------------------------------------------------------------------------------------------------------
Equity Index Provide investment results that Stocks included in the Bankers Trust Company
correspond to the total return S&P 500
performance of common stocks
publicly traded in the U.S.
- -------------------------------------------------------------------------------------------------------
International Long-term capital appreciation Equity securities of Morgan Stanley Asset
corporations Management Inc.
domiciled outside the
United
States
- -------------------------------------------------------------------------------------------------------
Emerging Mar- Long-term growth of capital Common stocks of Blairlogie Capital
kets companies Management
domiciled in emerging
market
countries
- -------------------------------------------------------------------------------------------------------
</TABLE>
THE INVESTMENT ADVISER AND PORTFOLIO MANAGERS
We serve as Investment Adviser to each Portfolio of the Fund. We are
registered with the SEC as an Investment Adviser. For twelve of the
Portfolios, we and the Fund have engaged other firms to serve as Portfolio
Managers which are shown in the chart above.
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<PAGE>
THE POLICY
The variable life insurance benefits provided by your Policy are funded
through your Accumulated Value in the Separate Account and the Fixed Account.
The information included below describes the benefits, features, charges, and
other major provisions of the Policy.
APPLICATION FOR A POLICY
Any person or persons wishing to purchase the Policy may submit an
application to us. A Policy can be issued on the life of a single Insured for
issue Ages up to and including age 85 and Insureds under a last survivor
Policy for issue Ages between 20 and 85, and, in both cases, with evidence of
insurability satisfactory to us. The Insured's Age is calculated as of the
Insured's last birthday. Acceptance is subject to our underwriting rules, and
we reserve the right to request additional information and to reject an
application.
After your Policy is issued, insurance coverage under the Policy will be
deemed to have begun as of the Policy Date. Your Policy Date is usually the
date the application is accepted by us. Your Policy Date is the date used to
determine Policy Years, Policy Months, and Policy Monthly, Quarterly, Semi-
Annual and Annual Anniversaries. For purposes of determining the Monthly
Payment Date for all Policies issued, the Policy Date will never be the 29th,
30th, or 31st of any month. We first become obligated under the Policy on the
date the total initial premium is received or on the date the application is
accepted, whichever is later. Any monthly deductions due will be taken on the
Monthly Payment Date on or next following the date we become obligated. The
initial premium must be received within 20 days after the Policy is issued,
although we may waive the 20 day requirement at our discretion. If the initial
premium is not received or the application is rejected by us, the Policy will
be cancelled and any premium received will be refunded.
Subject to our approval, your Policy may be backdated, but the Policy Date
may not be earlier than the date the initial premium is received at our Home
Office. 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 the date the initial premium is received
or the Policy Date, if later. 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 rates. In assigning Insureds to
underwriting classes, we will usually use either simplified or medical
underwriting, although other forms of underwriting may be used when deemed
appropriate by us.
PREMIUMS
The minimum initial premium to purchase a Policy is $10,000 if the Insured's
issue Age is less than 70 and $50,000 if the Insured's issue Age is greater
than 69. If this is a last survivor Policy, the minimum initial premium is
based upon the issue Age of the younger Insured. You may elect the initial
premium to be 80%, 90% or 100% of the Guideline Single Premium. The Guideline
Single Premium is the maximum premium that can be paid for a given Face Amount
in order for an insurance policy to qualify as a life insurance contract for
tax purposes. If you reside in the state of West Virginia the Face Amount of
the Policy must be at least $25,000. We may reduce the minimum initial premium
required under certain circumstances, such as for group or sponsored
arrangements.
ADDITIONAL PREMIUM PAYMENTS
You have limited ability to make additional premium payments. Subsequent
premium payments of at least $1,000 are permitted under the following
circumstances:
1. an additional premium payment is required to keep the Policy in force
(see "Lapse"); or
2. the premium payment would not cause total premiums to exceed the premium
limits prescribed by the Internal Revenue Service ("IRS") to qualify the
Policy as a life insurance contract.
We reserve the right to require satisfactory evidence of insurability before
accepting any additional premium payment that results in an immediate increase
in the death benefit. A premium payment would result in an immediate increase
in the death benefit if the death benefit under your Policy is, or upon
acceptance of the premium would be, greater than the Face Amount. See "Death
Benefit." If satisfactory evidence of insurability is not received, the
payment, or a portion thereof, may be returned. The Company may require that
existing Policy Debt be repaid prior to accepting any additional premium
payments.
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<PAGE>
All or a portion of a premium payment will be rejected and returned to you
if it would exceed the maximum premium limitations prescribed by federal tax
law. We also reserve the right to make distributions from your Policy to the
extent we deem it necessary to continue to qualify your Policy as life
insurance under the IRC.
If your Policy is issued in exchange for a policy that is not a modified
endowment contract, then in order for your Policy to continue to avoid being
treated as a modified endowment contract, the sum of the premiums less a
portion of any Partial Withdrawals may not exceed the "seven pay premium"
limit as defined in the IRC. See "Federal Income Tax Considerations". If we
receive any premium payment that we believe, if applied to your Policy in that
Policy Year, would cause your Policy to become a modified endowment contract,
the portion of the payment that we believe would cause your Policy to become a
modified endowment contract will not be applied to your Policy but will be
returned to you, unless you have previously notified us that payments that
cause your Policy to become a modified endowment contract may be accepted by
us and applied to your Policy. However, for premium payments received by us at
our Home Office within 20 days before the upcoming Policy Anniversary, we may
apply the portion of the premium payment that we believe would cause your
Policy to become a modified endowment contract to your Policy on the upcoming
Policy Anniversary.
ALLOCATION OF PREMIUMS
In the application for your Policy, you select the Investment Options to
which premium payments will be allocated after the Free-Look Transfer Date.
Until the Free-Look Transfer Date, premium payments will be allocated to the
Money Market Variable Account, which invests in the Money Market Portfolio of
the Fund (except for amounts allocated to the Loan Account to secure a Policy
loan). Your Accumulated Value will be automatically allocated according to
your instructions contained in the application (or if received more recently,
in written instructions) the later of 15 days after the Policy is issued or 45
days after the application is completed (the "Free-Look Transfer Date").
Additional premium payments will be allocated among the Variable Accounts
and the Fixed Account according to your most recent instructions. You may
change the allocation of payments by submitting a proper written request to
our Home Office, or by telephone if an Authorization for Telephone Requests
for changes in premium allocation instruction has been completed, signed and
filed at our Home Office.
PORTFOLIO REBALANCING
You may direct us to automatically re-set the percentage of your Accumulated
Value allocated to each Variable Account at a predetermined level. This
process is called portfolio rebalancing. (The Fixed Account is not available
for portfolio rebalancing.) Over time, the variations in each Variable
Account's investment results will shift the percentage allocations of your
Accumulated Value. The portfolio rebalancing feature will automatically
transfer your Accumulated Value among the Variable Accounts back to the preset
percentages. Rebalancing can be made quarterly, semi-annually or annually,
measured from your Policy Date ("frequency period"). Rebalancing may result in
transferring amounts from a Variable Account with relatively higher investment
performance to a Variable Account with relatively lower investment
performance.
You may initiate portfolio rebalancing by sending our Home Office a signed,
written request in good form or a properly completed Automatic Portfolio
Rebalancing form. You must specify the frequency for rebalancing and a
beginning date. The first rebalancing will usually occur on your Monthly
Payment Date that starts the frequency period you elected and that occurs on
or follows the beginning date you elected. If you stop portfolio rebalancing,
you must wait 30 days to begin again. Portfolio rebalancing cannot be used
with the Dollar Cost Averaging Option.
We may modify, terminate or suspend the portfolio rebalancing feature at any
time.
DOLLAR COST AVERAGING OPTION
We currently offer an option under which you may dollar cost average your
allocations in the Variable Accounts under your Policy by authorizing us to
make periodic allocations of Accumulated Value from any one Variable Account
to one or more of the other Variable Accounts. Dollar cost averaging is a
systematic method
14
<PAGE>
of investing in which securities are purchased at regular intervals in fixed
dollar amounts so that the cost of the securities gets averaged over time and
possibly over various market cycles. The option will result in the allocation
of Accumulated Value to one or more Variable Accounts, and these amounts will
be credited at the Accumulation Unit values as of the end of the Valuation
Dates on which the transfers are processed. Since the value of Accumulation
Units will vary, the amounts allocated to a Variable Account will result in
the crediting of a greater number of units when the Accumulation Unit value is
low and a lesser number of units when the Accumulation Unit value is high.
Similarly, the amounts transferred from a Variable Account will result in a
debiting of a greater number of units when the Accumulation Unit value is low
and a lesser number of units when the Accumulation Unit value is high. Dollar
cost averaging does not guarantee profits, nor does it assure that you will
not have losses.
A Dollar Cost Averaging Request form is available upon request. To elect the
Dollar Cost Averaging Option, your Accumulated Value in the Variable Account
from which the Dollar Cost Averaging transfers will be made must be at least
$5,000. After we have received a Dollar Cost Averaging Request in proper form
at our Home Office, we will transfer Accumulated Value in amounts you
designate from the Variable Account from which transfers are to be made to the
Variable Account or Accounts you choose. The minimum amount that may be
transferred to any one Variable Account is $50. After the Free-Look Period,
the first transfer will be effected on your Policy's Monthly, Quarterly, Semi-
Annual, or Annual Anniversary, whichever corresponds to the period you select,
coincident with or next following receipt at our Home Office of a Dollar Cost
Averaging Request in proper form. Subsequent transfers will be processed on
the following Monthly, Quarterly, Semi-Annual, or Annual Anniversary for so
long as you designate, until the total amount elected has been transferred,
until Accumulated Value in the Variable Account from which transfers are made
has been depleted, or until your Policy enters the Grace Period. Amounts
periodically transferred under this option will not be subject to any transfer
charges that may be imposed by us in the future, except as may be required by
applicable law.
You may instruct us at any time to terminate this option by written request
to our Home Office. We may discontinue, modify, or suspend the Dollar Cost
Averaging Option at any time.
TRANSFER OF ACCUMULATED VALUE
After the Free-Look Transfer Date, you may transfer Accumulated Value among
the Variable Accounts upon proper written request to our Home Office.
Transfers (other than transfers in connection with the Dollar Cost Averaging
Option) may be made by telephone if a properly completed, Authorization for
Telephone Requests is on file at our Home Office. Currently, there are no
limitations on the number of transfers between Variable Accounts, no minimum
amount required for a transfer, nor any minimum amount required to be
remaining in a given Variable Account after a transfer (except as required
under the Dollar Cost Averaging Option). No transfers are allowed during the
Grace Period if the required premium has not been paid. No charges are
currently imposed upon such transfers. We reserve the right, however, at a
future date to limit the size of transfers and remaining balances, to assess
transfer charges, to limit the number and frequency of transfers, and to
modify, suspend and/or discontinue telephone transfers.
Accumulated Value may also be transferred from the Variable Accounts to the
Fixed Account; however, such a transfer will only be permitted in the Policy
Month preceding a Policy Anniversary, except that you may make such a transfer
at any time during the first 18 Policy Months. Transfers from the Fixed
Account to the Variable Accounts are restricted as described in "The Fixed
Account."
DEATH BENEFIT
When your Policy is issued, we will determine the initial amount of
insurance for the initial premium payment based on the instructions provided
in your application. That amount will be shown on the specifications page of
the Policy and is called the "Face Amount."
Upon due proof of the death of the Insured(s), we will pay to your named
Beneficiary death benefit proceeds, which will be the death benefit under your
Policy reduced by any outstanding Policy Debt (and if in the Grace Period, any
overdue charges). The death benefit will be the greater of the Face Amount
under your
15
<PAGE>
Policy or Accumulated Value multiplied by a specified percentage. (which is
referred to as the Guideline Minimum Death Benefit.) The specified percentages
vary according to the Age of the Insured, or, in the case of a last survivor
Policy, the Youngest Insured, and will be at least equal to the cash value
corridor in Section 7702 of the IRC, which addresses the definition of a life
insurance policy for tax purposes. A table showing the specified percentages
is in the Appendix and in the Policy. Because the specified percentage is
applied to your Accumulated Value, an increase in Accumulated Value may
increase the death benefit. However, because the death benefit will never be
less than the Face Amount, a decrease in Accumulated Value may decrease the
death benefit but never below the Face Amount. The following examples
illustrate how the death benefit will be determined:
EXAMPLES
<TABLE>
<CAPTION>
POLICY A POLICY B
-------- --------
<S> <C> <C>
Face Amount........................................... $100,000 $100,000
Insured's Age......................................... 40 40
Accumulated Value on Date of Death.................... $ 46,500 $ 34,000
Specified Percentage.................................. 250% 250%
</TABLE>
In Policy A, the death benefit equals $116,250, i.e., the greater of
$100,000 (the Face Amount) or $116,250 (the Accumulated Value at the date of
death of $46,500 multiplied by the specified percentage of 250%). Assuming
that there is no outstanding Policy Debt, this amount constitutes the death
benefit proceeds that would be paid to the Beneficiary.
In Policy B, the death benefit is $100,000, i.e., the greater of $100,000
(the Face Amount) or $85,000 (the Accumulated Value of $34,000 multiplied by
the specified percentage of 250%).
If the death benefit is equal to the Guideline Minimum Death Benefit, we
reserve the right to reduce the death benefit by requiring Partial Withdrawals
be made in order to maintain the net amount at risk at a level that will not
exceed three times the death benefit on the Policy Date.
The Policy is intended to qualify as a life insurance contract under the
Internal Revenue Code for Federal tax purposes, and the death benefit under
the Policy is intended to qualify for the income tax exclusion under the
Internal Revenue Code. If your Policy is issued in exchange for another life
insurance policy that was not a modified endowment contract, then unless
otherwise specified by you in writing, it is intended that the Policy will not
be treated as a modified endowment contract under the Internal Revenue Code.
To these ends, the provisions of the Policy, including any other Rider,
Benefit, or endorsement, are to be interpreted to ensure such tax
qualification and to prevent the Policy from being treated as a modified
endowment contract, notwithstanding any other provisions to the contrary.
If at any time the premiums paid under your policy exceed the amount
allowable for such tax qualification, such excess amount shall be removed from
the Policy as of the date of its payment, and any appropriate adjustment in
the death benefit shall be made as of such date. The excess amount shall be
refunded to you no later than 60 days after the end of the applicable Policy
Year. The excess amount removed from the Policy and refunded to you may be
adjusted for interest or for changes in Accumulated Value attributable to the
excess amount. If for some reason this excess amount is not refunded by then,
the death benefit under this Policy shall be increased retroactively and
prospectively so that at no time is the death benefit ever less than the
amount needed to ensure such tax qualification. To the extent that the death
benefit as of any time is increased by this provision, appropriate adjustments
shall be made retroactively in any cost of insurance charge or supplemental
benefits as of that time that are consistent with such an increase.
If your Policy is issued in exchange for another life insurance policy that
was not a modified endowment contract, then at any time the premiums or other
amounts paid under the Policy exceed the limit for avoiding modified endowment
contract treatment, and you have not specified in writing that such treatment
is acceptable to you, such excess amount shall be removed from the Policy as
of the date of its payment, and any appropriate adjustment in the Policy's
death benefit shall be made as of such date. This excess amount shall be
refunded to
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<PAGE>
you no later than 60 days after the end of the applicable Policy Year. The
excess amount removed from the Policy and refunded to you may be adjusted for
interest or for changes in Accumulated Value attributable to the excess
amount. If this excess amount is not refunded by then, the death benefit under
your Policy shall be increased retroactively and prospectively to the minimum
amount necessary so that at no time is the death benefit ever less than the
amount needed to avoid modified endowment contract treatment. To the extent
the death benefit as of any time is increased by this provision, appropriate
adjustments shall be made, retroactively or otherwise, in any cost of
insurance or supplemental benefits as of that time that are consistent with
such an increase.
All calculations of death benefit will be made as of the end of the
Valuation Period during which the Insured (or for a last survivor Policy, the
Survivor) dies. Death benefit proceeds may be paid to your Beneficiary in a
lump sum or under a payment plan offered by us under the Policy. The plan
offers monthly income for the lifetime of the Beneficiary with a minimum
period of ten years. The Policy should be consulted for details.
POLICY VALUES
Accumulated Value
Your Accumulated Value is the sum of the amounts under your Policy held in
each Investment Option, as well as the amount set aside in the Loan Account,
including any accrued earned interest to secure any Policy Debt.
On each Valuation Date, the portion of your Accumulated Value allocated to
any particular Variable Account will be adjusted to reflect the investment
experience of that Variable Account. On each Monthly Payment Date, a portion
of your Accumulated Value allocated to a particular Investment Option also
will be adjusted to reflect the assessment of the Monthly Deduction. See
"Determination of Accumulated Value". No minimum amount of Accumulated Value
is guaranteed. You bear the risk for the investment experience of Accumulated
Value allocated to the Variable Accounts.
Cash Surrender Value. The Cash Surrender Value of your Policy equals your
Accumulated Value less any Surrender Charge. Once the duration of the
surrender charge has expired, your Cash Surrender Value will equal your
Accumulated Value.
Net Cash Surrender Value. The Net Cash Surrender Value is the Cash Surrender
Value minus any outstanding Policy Debt. You can surrender your Policy at any
time while the Insured (either Insured if this is a last survivor Policy) is
living and receive your Net Cash Surrender Value.
DETERMINATION OF ACCUMULATED VALUE
Although your Policy's death benefit can never be less than the Face Amount
for as long as your Policy is in force, your Accumulated Value in the Separate
Account will vary to a degree that depends upon several factors, including
investment performance of the Variable Accounts to which Accumulated Value has
been allocated, payment of additional premiums, the amount of any outstanding
Policy Debt, any Partial Withdrawals, and the charges assessed in connection
with your Policy.
The amounts allocated to the Variable Accounts will be invested in shares of
the corresponding Portfolios of the Fund. The investment performance of each
Variable Account will reflect increases or decreases in the net asset value
per share of the corresponding Portfolio and any dividends or distributions
declared by a Portfolio.
Assets in the Variable Accounts are divided into accumulation units, which
are a measure of value used for bookkeeping purposes. When you allocate
premiums to a Variable Account, your Policy is credited with accumulation
units. In addition, other transactions including loans, surrender, partial
withdrawals, transfers, and assessment of charges against your Policy affect
the number of accumulation units credited to your Policy. The
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<PAGE>
number of units credited or debited in connection with any such transaction is
determined by dividing the dollar amount of such transaction by the unit value
of the affected Variable Account. The unit value of each Variable Account is
determined on each Valuation Date at or about 4:00 p.m. Eastern time. The
number of units credited will not change because of subsequent changes in unit
value.
The accumulation unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated
by adjusting the unit value from the previous Valuation Date for (1) the
investment performance of the Variable Account, which is based upon the
investment performance of the corresponding Portfolio of the Fund, (2) any
dividends or distributions paid by the corresponding Portfolio, and (3) any
charges that may be assessed by us for income taxes attributable to the
operation of the Variable Account (which are currently not anticipated).
POLICY LOANS
You may borrow money from us using your Policy as the only security for the
loan by submitting a proper written request to our Home Office. We may in our
discretion permit loans to be made by telephone if a properly completed
Authorization for Telephone Requests has been filed at our Home Office. A loan
may be taken any time your Policy is in force. The minimum loan that can be
taken at any time is $500, ($200 in Connecticut, $250 in Oregon). The maximum
amount that can be borrowed in the first Policy Year is 50% of your
Accumulated Value, and thereafter the maximum at any time is the greater of
(1) 100% of your Accumulated Value in the Fixed Account and 90% in the
Variable Accounts, and (2) 98% of the excess of the Accumulated Value over
twelve times the current monthly deduction. The maximum amount is reduced by
any existing Debt and the amount of any Surrender Charge that would be imposed
if you surrendered your Policy on the date the loan is taken.
When you take a loan, an amount equal to the loan is transferred out of your
Accumulated Value in the Investment Options into the Loan Account to secure
the loan. Unless you request otherwise, loan amounts will be deducted from the
Investment Options proportionately.
The interest rate we charge on loans is 6.00% a year on Policy Debt in the
first ten Policy Years and 5.00% thereafter.
A portion of your Policy Debt may qualify as a Preferred Loan. We charge a
lower rate of interest on Preferred Loans. Subject to the limitations
described above, the maximum amount available as Preferred Loans is the excess
of the Accumulated Value over the premiums paid. We will determine the amount
of a loan that is Preferred on the date of the loan, and we will redetermine
the total amount of Preferred Loans on each Policy Anniversary. Loan
repayments will be considered repayment of Preferred Loans last. We will
charge interest on Preferred Loans at an annual rate of 5.25% in the first ten
Policy Years, and 4.75% thereafter.
We will credit interest monthly on amounts held in the Loan Account to
secure the loan at an annual rate of 4.5%.
You may repay all or part of the loan at any time while your Policy is in
force. Interest on a loan is accrued daily and is due on each Policy
Anniversary for the prior year, or on termination of the Policy. If interest
is not paid when due, it will be added to the amount of the loan principal and
interest will begin accruing thereon from that date. An amount equal to the
loan interest charged will be transferred to the Loan Account from the
Investment Options on a proportional basis.
Unless you request otherwise, any loan repayment will cause an equal amount
to be transferred from the Loan Account into the Investment Options in
accordance with your current premium allocation instructions. In addition, any
interest earned on the amount held in the Loan Account will be transferred to
each of the Investment Options in accordance with your current premium
allocation instructions on each Policy Anniversary and on full repayment of
your Policy Debt.
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<PAGE>
While the amount to secure the loan is held in the Loan Account, you forgo
the investment experience of the Variable Accounts and the current interest
rates of the Fixed Account. Thus, a loan, whether or not repaid, will have a
permanent effect on the Policy's values and may have an effect on the amount
and duration of the death benefit. If not repaid, your Policy Debt will be
deducted from the amount of the death benefit payable upon the death of the
Insured (or the Survivor Insured for a last survivor Policy), the Cash
Surrender Value paid upon surrender, or the refund of premium upon exercise of
the Free-Look Right.
A loan may affect the length of time your Policy remains in force. Your
Policy will lapse when Debt equals or exceeds your Cash Surrender Value and
the minimum payment required is not made during the Grace Period. Moreover,
your Policy may enter the Grace Period more quickly when a loan is
outstanding, because the loaned amount is not available to cover monthly
deductions. Additional payments or repayment of a portion of Debt may be
required to keep the Policy in force. See "Lapse".
A loan is treated as a distribution from a Policy that is a modified
endowment contract, and therefore may give rise to taxable income to you. For
information on the tax treatment of loans, see "Federal Income Tax
Considerations."
DURATION OF CONTRACT
The Policy does not mature. Coverage under a Policy will remain in effect
until the Policy is surrendered; until the death of a single Insured or, for a
last survivor Policy, the Survivor; or until the Policy lapses.
SURRENDER
You may surrender your Policy at any time during the life of the Insured(s).
The amount received in the event of a full surrender is your Policy's Net Cash
Surrender Value, which is equal to your Accumulated Value less outstanding
Policy Debt, and applicable surrender charges. Surrender could give rise to
taxable income.
PARTIAL WITHDRAWALS
Partial withdrawals may be taken beginning on the first Policy Anniversary
and thereafter. Under this Benefit, you may withdraw a portion of your Net
Cash Surrender Value.
A partial withdrawal must be for at least $1,000. The amount that can be
withdrawn (1) can be no greater than the excess of the Cash Surrender Value
prior to the withdrawal over the Policy Debt divided by 90% and (2) is limited
so that after the withdrawal, your Net Cash Surrender Value is at least
$10,000.
You may make a partial withdrawal by submitting a proper written request to
us. As of the effective date of any withdrawal, your Accumulated Value will be
reduced by the amount of the withdrawal and any applicable Surrender Charge.
The reduction in Accumulated Value will be allocated proportionately to your
Accumulated Value in the Investment Options unless you request otherwise. If
the Insured(s) dies after the request for a withdrawal is sent to us and prior
to the withdrawal being effected, the amount of the withdrawal will be
deducted from the death benefit proceeds, which will be determined without
taking into account the withdrawal.
Preferred Withdrawal. A Preferred Withdrawal is a portion of the first
withdrawal in any Policy Year. This portion is the lesser of the withdrawal
and the Free Withdrawal Amount. No Surrender Charge is imposed on Preferred
Withdrawals. Amounts in excess of the Free Withdrawal Amount and any
subsequent withdrawals in the same Policy Year may be subject to the Surrender
Charge. See "Surrender Charge". If there is no Free Withdrawal Amount at the
time of the first withdrawal in a Policy Year, the next withdrawal in the same
Policy Year will be considered the first.
When a partial withdrawal is made, the death benefit under the Policy is
decreased by an amount proportionate to the reduction in Accumulated Value
caused by the partial withdrawal, and the Face Amount may also be reduced. For
example, if you withdraw one-half of your Accumulated Value, the death benefit
after the withdrawal will be one-half of the death benefit prior to the
withdrawal. If the death benefit prior to a partial
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withdrawal is the Face Amount, the Face Amount will be reduced by the entire
amount of the reduction in death benefit. If the death benefit prior to a
partial withdrawal is equal to a Policy's Accumulated Value multiplied by the
applicable specified percentage, the Face Amount after the withdrawal will be
equal to the new death benefit if the new death benefit is less than the Face
Amount prior to the withdrawal, and to the prior Face Amount otherwise.
However decreases in the Face Amount and death benefit will be limited so that
the Policy complies with the definition of life insurance in the IRC without
any additional distribution from the Policy at the time of the withdrawal.
A partial withdrawal is treated as a distribution from the Policy that may
give rise to taxable income to you. See "Federal Income Tax Considerations."
RIGHT TO EXAMINE A POLICY--FREE-LOOK RIGHT
You have a Free-Look Right, under which your Policy may be returned within
10 days after you receive it (15 days in Colorado, 20 days in North Dakota,
and 30 days if you are a resident of California and age 60 or older), 10 days
after we mail or deliver this notice of right of withdrawal included in this
prospectus, or within 45 days after you sign the application for insurance,
whichever is later. However, in Pennsylvania, you have a different Free-Look
Right, under which your Policy may be returned only within 10 days after you
receive it. It can be mailed or delivered to us or our agent. The returned
Policy will be treated as if we never issued it and we will promptly refund
the full amount of the premium paid. If you have taken a loan during the Free-
Look Period, your Policy Debt will be deducted from the amount refunded. Until
the Free-Look Transfer Date, premiums will be allocated to the Money Market
Variable Account which invests in the Money Market Portfolio of the Fund
(except for amounts allocated to the Loan Account to secure a Policy loan).
See "Allocation of Premiums."
LAPSE
Your Policy will lapse only when your Net Cash Surrender Value is
insufficient to cover Policy charges on a Monthly Payment Date, and a Grace
Period expires without you making a sufficient payment. You must pay during
the Grace Period an amount equal to the amount by which your Cash Surrender
Value less Policy Debt is less than zero plus a minimum of three times the
full charges and deductions due on the Monthly Payment Date when the
insufficiency occurred to avoid termination.
To avoid potential lapse, you may wish to repay a portion of any Policy
Debt. If premium payments have not exceeded the maximum permissible premiums,
you may wish to make a premium payment.
If your Net Cash Surrender Value is insufficient to cover the deductions and
charges on a Monthly Payment Date, we will deduct the amount available to pay
for any portion of the monthly deductions and charges due. Any remaining
Accumulated Value in the Variable Accounts will be transferred to the Money
Market Variable Account. We will notify you (and any assignee of record) of
the payment required to keep the Policy in force. You will then have a "Grace
Period" of 61 days, measured from the date the notice is sent, to make the
required payment. Your Policy will remain in force through the Grace Period.
Failure to make the required payment will result in termination of coverage
under your Policy upon expiration of the Grace Period, and your Policy will
lapse with no value. If the required payment is made during the Grace Period,
any premium paid and any Accumulated Value in the Money Market Variable
Account will be allocated among the Investment Options in accordance with your
current premium allocation instructions. Any monthly deductions and charges
due will be charged to the Investment Options on a proportionate basis. If the
Insured (or Survivor if this is a last survivor Policy) dies during the Grace
Period, the death benefit proceeds will equal the amount of the death benefit
immediately prior to the commencement of the Grace Period, reduced by any
unpaid monthly deductions and charges due and any Policy Debt.
REINSTATEMENT
We will reinstate a lapsed Policy (but not a Policy which has been
surrendered for its Net Cash Surrender Value) at any time within three years
after the end of the Grace Period provided we receive the following: (1) your
written application; (2) evidence of insurability satisfactory to us; and (3)
payment of all monthly
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charges and deductions that were due and unpaid during the Grace Period,
payment of the amount by which Net Cash Surrender Value was less than zero at
the beginning of the Grace Period, and payment of a premium at least equal to
three times the most recent monthly deduction.
When your Policy is reinstated, your Accumulated Value will be equal to your
Accumulated Value on the date of the lapse, plus any additional premium
subject to the following: If your Policy is reinstated after your first
Monthly Payment Date following lapse, your Accumulated Value will be reduced
by the amount of Policy Debt on the date of lapse and no Policy Debt will
exist on the date of the reinstatement. If your Policy is reinstated on or
before your Monthly Payment Date next following lapse, any Policy Debt on the
date of lapse will also be reinstated. No interest on amounts held in the Loan
Account to secure Policy Debt will be paid or credited between lapse and
reinstatement. Reinstatement will be effective as of your Monthly Payment Date
on or next following the date of our approval, and your Accumulated Value
minus Policy Debt will be allocated among the Investment Options in accordance
with your current premium allocation instructions.
LAST SURVIVOR POLICIES
Policies are offered that provide insurance protection, either on the life
of one Insured or--as a last survivor Policy--on the lives of two Insureds. A
last survivor Policy provides a death benefit the proceeds of which are paid
on the death of the Survivor Insured. The other significant differences
between single Insured and last survivor Policies are listed below:
1. The cost of insurance charges under last survivor Policies are different
in that they are determined in a manner that reflects the anticipated
mortality of the two Insureds. See "Charges and Deductions" and the last
survivor illustrations in the "Appendix".
2. In an application for a last survivor Policy, we require evidence of
insurability satisfactory to us for both Insureds.
3. For a last survivor Policy to be reinstated, both Insureds must be alive
on the date of reinstatement.
4. The Policy provisions regarding misstatement of age or sex, suicide and
incontestability apply to both Insureds.
CHARGES AND DEDUCTIONS
LOAD FROM PREMIUMS
We do not make any deductions from the premium payment before allocating it
to your Accumulated Value.
SURRENDER CHARGE
A Surrender Charge may be assessed upon a surrender or a partial withdrawal
within the first nine Policy Years. The Surrender Charge is assessed against
the portion of the resulting reduction in Accumulated Value considered to be a
return of initial premium. For the purpose of determining the Surrender Charge
only, a reduction in Accumulated Value upon a surrender or withdrawal will be
deemed to be a distribution of earnings from the available Free Withdrawal
Amount, if any, first, a return of initial premium next, then a return of
additional premium, and a distribution from remaining earnings last. The
available Free Withdrawal Amount is the amount available as a Preferred
Withdrawal, if any. The Surrender Charge varies with the Policy Year according
to the following schedule:
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<TABLE>
<CAPTION>
SURRENDER
TIME OF WITHDRAWAL CHARGE
------------------ ---------
<S> <C>
Policy Year 1-2 10%
Policy Year 3 9%
Policy Year 4 8%
Policy Year 5 7%
Policy Year 6 6%
Policy Year 7 5%
Policy Year 8 4%
Policy Year 9 3%
Policy Year 10 and thereafter 0%
</TABLE>
In no event will the Surrender Charges imposed exceed the maximum prescribed
by state nonforfeiture laws for life insurance.
Approximately twenty-five percent of the Surrender Charge is assessed to
compensate us for premium taxes. Approximately seventy-five percent is
assessed to compensate us for sales expenses. The Surrender Charge is not
assessed against premiums other than the initial premium.
DEDUCTIONS FROM ACCUMULATED VALUE
The charges described below are deducted from Accumulated Value on the
Policy Date, and on each Monthly Payment date thereafter. Each charge will be
assessed to the Fixed Account and to each Variable Account in proportion to
the Policy's Accumulated Value in that account, unless you specify otherwise
in writing.
Cost of Insurance. A cost of insurance charge is deducted to compensate us
for the anticipated cost of paying death benefits under the Policies. We may
use any profit derived from this charge for any lawful purpose including the
cost of claims processing and investigation.
The guaranteed maximum cost of insurance charge will be the net amount at
risk under the Policy multiplied by the guaranteed maximum cost of insurance
rates shown in your Policy. The net amount at risk is the death benefit less
the Accumulated Value. For the purpose of this charge, the death benefit is
divided by 1.002466 (a discount factor to account for interest deemed to be
earned during the month). Guaranteed maximum cost of insurance rates are based
on the Age, sex (where permissible), and underwriting classification of the
Insured(s). The cost of insurance rates generally increase with the Age of the
Insured(s). If your initial premium was 100% of the Guideline Single Premium
we may charge less than the guaranteed maximum cost of insurance charge.
Administrative Charge. We assess an administrative charge of 0.00025 (0.30%
annually) of the Accumulated Value in the Variable Accounts and the Fixed
Account for administrative expenses. In addition, if the Accumulated Value is
less than $50,000 on any Policy Anniversary Date a $40 fee is charged on that
Monthly Payment Date.
The administrative charge is to cover administrative expenses in connection
with the Policies, including expenses of underwriting and issuing the Policy,
recordkeeping, determining Policy values and benefits, processing death
benefit claims, processing withdrawals and transfers, preparing reports to
Policy Owners, and overhead costs. We do not expect to profit from this
charge.
Tax Expense Charge. A charge equal to 0.000333333 (0.40% annually) of the
Accumulated Value is assessed to pay applicable state and local premium taxes
and federal taxes under Section 848 of the Code. This charge is eliminated
after 10 Policy Years. The deduction over 10 Policy Years approximates our
average expenses for taxes on premiums. Premium taxes vary from state to
state, and in some instances, among municipalities. We do not expect to profit
from this charge.
Mortality and Expense Risk Charges. A charge equal to 0.00075 (0.90%
annually) of Accumulated Value in the Variable Accounts and the Fixed Account
will be assessed to compensate us for mortality and expense risks assumed.
After 10 Policy Years, this charge is reduced to 0.000583333% (0.70%
annually).
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This charge is made to compensate us for assuming certain mortality and
expense risks under the Policies. The mortality risk assumed is that Insureds,
as a group, may live for a shorter period of time than estimated and,
therefore, the cost of insurance charges specified in the Policy will be
insufficient to meet actual claims. The expense risk assumed is that other
expenses incurred in issuing and administering the Policies and operating the
Separate Account will be greater than the charges assessed for such expenses.
We will realize a gain from this charge to the extent it is not needed to
provide the mortality benefits and expenses under the Policies, and will
realize a loss to the extent the charge is not sufficient. We may use any
profit derived from this charge for any lawful purpose, including any
distribution expenses not covered by the Surrender Charge.
OTHER CHARGES
We may charge the Variable Accounts for the federal income taxes incurred by
us that are attributable to the Separate Account and its Variable Accounts or
to our operations with respect to the Policies. No such charge is currently
assessed. See "Charge for Our Income Taxes".
We will bear the operating expenses of the Separate Account. Each Variable
Account available to you purchases shares of the corresponding Portfolio of
the underlying Fund. The Fund and each of its Portfolios incur certain
charges, including the investment advisory fee, and certain operating
expenses. The Fund is governed by its Board of Trustees. The Fund's expenses
are not fixed or specified under the terms of the Policy, and they may vary
from year to year. The advisory fees and other expenses are more fully
described in "Summary of the Policy: Fund Annual Expenses After Expense
Limitation" and in the prospectus of the Fund.
GUARANTEE OF CERTAIN CHARGES
We guarantee that certain charges will not increase, including the
guaranteed rates for the cost of insurance, the administrative charge, the tax
charge, and the charge for mortality and expense risk.
VARIATIONS IN CHARGES
We may agree to reduce or waive the Surrender Charge or administrative
charges, or other charges, or credit additional amounts under our Policies, in
situations where selling and/or maintenance costs associated with the Policies
are reduced, such as the sale of several Policies to the same Policyowner(s),
sales of large Policies, sales of Policies in connection with a group or
sponsored arrangement or mass transactions over multiple Policies.
In addition, we may agree to reduce or waive some or all of such charges
and/or credit additional amounts under our Policies, for those Policies sold
to persons who meet criteria established by us, who may include registered
representatives and employees of broker/dealers with a current selling
agreement with us and immediate family members of such persons ("Eligible
Persons"). We will credit additional amounts to Policies owned by Eligible
Persons if such Policies are purchased directly through Pacific Mutual
Distributors, Inc. Under such circumstances, Eligible Persons will not be
afforded the benefit of services of any other broker/dealer nor will
commissions be payable to any broker/dealer in connection with such purchases.
Eligible Persons must contact us directly with servicing questions, contract
changes and other matters relating to their Policies. The amount credited to
Policies owned by Eligible Persons will equal the reduction in expenses we
enjoy by not incurring brokerage commissions in selling such Policies, with
the determination of the expense reduction and of such crediting being made in
accordance with our administrative procedures.
We will only reduce or waive such charges or credit additional amounts on
any Policy where expenses associated with the sale of the Policy and/or costs
associated with administering and maintaining the Policy are reduced. We
reserve the right to terminate waiver, reduced charge and crediting programs
at any time, including for issued Policies.
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OTHER INFORMATION
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion provides a general description of the federal
income tax considerations relating to the Policy. This discussion is based
upon our understanding of the present federal income tax laws as they are
currently interpreted by the IRS. This discussion is not intended as tax
advice. Because of the inherent complexity of such laws and the fact that tax
results will vary according to the particular circumstances of the individual
involved, tax advice may be needed by a person contemplating the purchase of
the Policy. These comments concerning federal income tax consequences are not
an exhaustive discussion of all tax questions that might arise under the
Policy. Special rules which are not discussed herein may apply in certain
situations. Moreover, no representation is made as to the likelihood of
continuation of federal income tax or estate or gift tax laws or of the
current interpretations by the IRS or the courts. Future legislation may
adversely affect the tax treatment of life insurance policies or other tax
rules described in this discussion or that relate directly or indirectly to
life insurance policies. Finally, these comments do not take into account any
state or local income or other tax considerations which may be involved in the
purchase or ownership of the Policy.
While we believe that the Policy meets the statutory definition of life
insurance under Section 7702 of the Internal Revenue Code ("IRC") and hence
will receive federal income tax treatment consistent with that of traditional
fixed life insurance, the area of the tax law relating to the definition of
life insurance does not explicitly address all relevant issues (including, for
example, the treatment of substandard risk Policies). We reserve the right to
make changes to the Policy if changes are deemed appropriate by us to attempt
to assure qualification of the Policy as a life insurance contract. If a
Policy were determined not to qualify as life insurance, the Policy would not
provide the tax advantages normally provided by life insurance. The discussion
below summarizes the tax treatment of life insurance contracts.
The death benefit under a Policy should be excludable from the gross income
of the Beneficiary (whether the Beneficiary is a corporation, individual or
other entity) under IRC Section 101(a)(1) for purposes of the regular federal
income tax and you generally should not be deemed to be in constructive
receipt of the cash values, including increments thereof, under your Policy
until a full or partial surrender thereof, or lapse of your Policy, or until
receipt of deemed distributions (including, in the case of a modified
endowment contract, policy loans). PROSPECTIVE OWNERS THAT INTEND TO USE
POLICIES TO FUND DEFERRED COMPENSATION ARRANGEMENTS FOR THEIR EMPLOYEES ARE
URGED TO CONSULT THEIR TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES OF
SUCH ARRANGEMENTS. PROSPECTIVE CORPORATE OWNERS SHOULD CONSULT THEIR TAX
ADVISERS ABOUT THE TREATMENT OF LIFE INSURANCE IN THEIR PARTICULAR
CIRCUMSTANCES FOR PURPOSES OF THE ALTERNATIVE MINIMUM TAX APPLICABLE TO
CORPORATIONS AND THE ENVIRONMENTAL TAX UNDER IRC SECTION 59A. Changing the
Policy Owner may also have tax consequences. Exchanging a Policy for another
involving the same Insured generally will not result in the recognition of
gain or loss according to IRC Section 1035(a). Changing the Insured under a
Policy will, however, not be treated as a tax-free exchange under IRC Section
1035, but rather as a taxable exchange.
Diversification Requirements. To comply with regulations under Section
817(h) of the IRC, each Portfolio of the Fund will be required to diversify
its investments. For details on these diversification requirements, see "What
is the Federal Income Tax Status of the Fund" in the Fund's prospectus.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income
and gains from the separate account assets would be includable in the variable
policy owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor [i.e., the Policy Owner], rather than the insurance
company, to be treated as the owner of the assets in the account." This
announcement also stated that guidance would be issued by way of regulations
or rulings on the "extent to which policyholders may direct their investments
to particular subaccounts without being treated as owners of the underlying
assets." As of the date of this prospectus, no such guidance has been issued.
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<PAGE>
The ownership rights under your Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, you have additional flexibility in allocating premium payments and
Policy Values. These differences could result in you being treated as the
owner of your Policy's pro rata portion of the assets of the Separate Account.
In addition, we do not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. We therefore reserve the right to modify the Policy, as deemed
appropriate by us, to attempt to prevent you from being considered the owner
of your Policy's pro rata share of the assets of the Separate Account.
Moreover, in the event that regulations are adopted or rulings are issued,
there can be no assurance that the Portfolios will be able to operate as
currently described in the Prospectus, or that the Fund will not have to
change any Portfolio's investment objective or investment policies.
Modified Endowment Contracts. IRC Section 7702A defines a class of insurance
contracts referred to as modified endowment contracts. Under this provision,
the Policies will be treated for federal tax purposes in one of two ways. It
is expected that most of the Policies will be modified endowment contracts.
A life insurance contract becomes a "modified endowment contract" if, at any
time during the first seven contract years, the sum of actual premiums paid
exceeds the sum of the "seven-pay premium." Generally, the "seven-pay premium"
is the level annual premium, such that if paid for each of the first seven
years, will fully pay for all future death and endowment benefits under a
contract. For example, if the "seven-pay premium" were $1,000, the maximum
premiums that could be paid during the first seven years to avoid "modified
endowment" treatment would be $1,000 in the first year; $2,000 through the
first two years; and $3,000 through the first three years, etc.
Pre-death distributions from modified endowment contracts may give rise to
taxable income. Upon full surrender of your Policy, you would recognize
ordinary income for federal income tax purposes equal to the amount by which
the Net Cash Surrender Value plus Debt exceeds the investment in your Policy
(usually the premiums paid plus pre-death distributions that were taxable less
any premiums previously recovered that were excludable from gross income).
Upon partial withdrawals and Policy loans, you would recognize ordinary income
to the extent allocable to income (which includes all previously non-taxed
gains) on your Policy. The amount allocated to income is the amount by which
the Accumulated Value of your Policy exceeds investment in the Policy
immediately before the distribution. Under a tax law provision, if two or more
policies which are classified as modified endowment contracts are purchased
from any one insurance company, including Pacific Life, during any calendar
year, all such policies will be aggregated for purposes of determining the
portion of the pre-death distributions allocable to income on the policies and
the portion allocable to investment in the policies.
If you assign or pledge (or agree to assign or pledge) any portion of the
value of a modified endowment contract, such amount or portion generally will
be treated as a pre-death distribution.
The portion of pre-death distributions that are treated as taxable income
will also be subject to an additional income tax of 10%, except where the
distribution (1) occurs on or after the date on which the taxpayer attains age
59 1/2, (2) is attributable to the taxpayer becoming disabled, or (3) occurs
as part of a series of substantially equal (annual or more frequent) periodic
payments made for the life (or life expectancy) of the taxpayer or the joint
lives (or joint life expectancies) of the taxpayer and his or her beneficiary.
With respect to Policy loans, it is unclear whether interest paid (or
accrued by an accrual basis taxpayer) constitutes interest for federal income
tax purposes. CONSULT YOUR TAX ADVISOR. Tax law provisions may limit the
deduction of interest payable on loan proceeds that are used to purchase or
carry certain life insurance policies.
Policies That Are Not Modified Endowment Contracts. Policies entered into
before June 21, 1988, may not be subject to treatment as modified endowment
contracts even though they fail to meet the seven-pay premium test provided
that such Policies do not experience a "material change." The definition of
"material change" is complex, but, in general, if you do not pay any further
premium or institute any changes to the death benefits, there will be no
material change. In this connection, an additional premium payment necessary
to keep your
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Policy in force should not constitute a material change so long as the death
benefit under the Policy does not increase. If a Policy that was not a
modified endowment contract becomes one, under Treasury Department regulations
which may be prescribed, pre-death distributions received in anticipation of a
failure of a Policy to meet the seven-pay premium test will be treated as pre-
death distributions from a modified endowment contract (and, therefore, will
be taxable as described above) even though, at the time of the
distribution(s), the Policy was not yet a modified endowment contract. For
this purpose, pursuant to the IRC, any distribution made within two years
before the Policy is classified as a modified endowment contract shall be
treated as being made in anticipation of the Policy's failing to meet the
seven-pay premium test.
Pre-death distributions from Policies that are not modified endowment
contracts may also give rise to taxable income. Upon full surrender or
maturity of your Policy for its Net Cash Surrender Value, the excess, if any,
of the Net Cash Surrender Value plus any outstanding Policy Debt over the cost
basis under your Policy will be treated as ordinary income for federal income
tax purposes. Your Policy's cost basis will usually equal the premiums paid
less any premiums previously recovered in partial withdrawals. Under IRC
Section 7702 , if a partial withdrawal is accompanied by a reduction in
benefits under a life insurance contract, special rules apply to determine
whether part or all of the cash received is paid out of the income of the
contract and is taxable. Cash distributed to you on partial withdrawals
occurring more than 15 years after the Policy Date will be taxable as ordinary
income to you to the extent that it exceeds the cost basis under your Policy.
We also believe that loans received under Policies that are not modified
endowment contracts will be treated as Debt of the Owner, and that no part of
any loan under the Policy will constitute income to you unless your Policy is
surrendered or lapses. However, interest on Policy Debt paid (or accrued by an
accrual basis taxpayer) may be deductible. Tax law provisions may limit the
deduction of interest payable on loan proceeds that are used to purchase or
carry certain life insurance policies. 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.
Last Survivor Policies. While we believe that last survivor Policies meet
the statutory definition of life insurance under IRC Section 7702 and hence
will receive federal income tax treatment consistent with that of traditional
fixed life insurance, the area of the tax law relating to the definition of
life insurance does not explicitly address all relevant issues relating to
last survivor life insurance policies. We reserve the right to make changes to
the last survivor Policy if changes are deemed appropriate by us to attempt to
assure qualification of the last survivor Policy as a life insurance contract.
If a last survivor Policy were determined not to qualify as life insurance,
the Policy would not provide the tax advantages normally provided by life
insurance, including the excludability of the death benefit from the gross
income of the Beneficiary.
Other. Another provision of the tax law deals with allowable charges for
mortality costs and other expenses that are used in making calculations to
determine whether a contract qualifies as life insurance for federal income
tax purposes. These calculations must be based upon reasonable mortality
charges and other charges reasonably expected to be actually paid. The
Treasury Department has issued proposed regulations and is expected to
promulgate temporary or final regulations governing reasonableness standards
for mortality charges. While we believe under IRS pronouncements currently in
effect, that the mortality costs and other expenses used in making
calculations to determine whether the Policy qualifies as life insurance meet
the current requirements, complete assurance cannot be given that the IRS
would necessarily agree. It is possible that future regulations will contain
standards that would require us to modify our mortality charges used for the
purpose of the calculations in order to retain the qualification of the Policy
as life insurance for federal income tax purposes, and we reserve the right to
make any such modifications.
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Federal estate and gift and state and local estate, inheritance, and other
tax consequences of ownership or receipt of Policy proceeds depend on the
jurisdiction and the circumstances of each Owner or Beneficiary.
FOR COMPLETE INFORMATION ON FEDERAL, STATE, LOCAL AND OTHER TAX
CONSIDERATIONS, A QUALIFIED TAX ADVISER SHOULD BE CONSULTED.
Accelerated Living Benefits. An Accelerated Living Benefit Rider is
available in connection with the Policy. Benefits under the Accelerated Living
Benefit Rider may be taxable. The IRS has issued proposed regulations and is
expected to issue final regulations in the near future under which accelerated
living benefits that meet the requirements set forth in the regulations can be
received without incurring a federal income tax. The precise requirements
which will be incorporated in the final regulations are not known.
In some cases, there may be a question as to whether a life insurance policy
that has an accelerated living benefit rider can meet certain technical
aspects of the definition of "life insurance contract" under the IRC. The IRS
regulations mentioned above are expected to set forth the requirements under
which a policy with an accelerated living benefits rider will be deemed to
meet the definitional requirements of a life insurance contract. We reserve
the right to (but are not obligated to) modify the Rider to conform with
requirements under the final regulations. OWNERS CONSIDERING ADDING AN
ACCELERATED LIVING BENEFIT RIDER OR EXERCISING RIGHTS UNDER THE RIDER SHOULD
FIRST CONSULT A QUALIFIED TAX ADVISOR.
WE DO NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY POLICY.
CHARGE FOR OUR INCOME TAXES
For federal income tax purposes, variable life insurance generally is
treated in a manner consistent with traditional fixed life insurance. We will
review the question of a charge to the Separate Account or the Policy for our
federal income taxes periodically . A charge may be made for any federal
income taxes incurred by us that are attributable to the Separate Account or
to our operations with respect to the Policy. Charges might become necessary
if our tax treatment is ultimately determined to be other than what we
currently believe it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the insurance company level, or if
there is a change in our tax status.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, we
reserve the right to charge the Account for such taxes, if any, attributable
to the Account.
VOTING OF FUND SHARES
In accordance with our view of present applicable law, we will exercise
voting rights attributable to the shares of each Portfolio of the Fund held in
the Variable Accounts at any regular and special meetings of the shareholders
of the Fund on matters requiring shareholder voting under the Investment
Company Act of 1940 or by the fund. We will exercise these voting rights based
on instructions received from persons having the voting interest in
corresponding Variable Accounts of the Separate Account. However, if the
Investment Company Act of 1940 or any regulations thereunder should be
amended, or if the present interpretation thereof should change, and as a
result we determine that it is permitted to vote the shares of the Fund in its
own right, we may elect to do so.
You are the person having the voting interest under a Policy. Unless
otherwise required by applicable law, the number of votes as to which you will
have the right to instruct will be determined by dividing your Accumulated
Value in a Variable Account by the net asset value per share of the
corresponding Portfolio of the Fund. Fractional votes will be counted. The
number of votes as to which you will have the right to instruct will be
determined as of the date coincident with the date established by the Fund for
determining shareholders eligible to vote at the meeting of the Fund. If
required by the Securities and Exchange Commission, we reserve the right to
determine in a different fashion the voting rights attributable to the shares
of the Fund based upon instructions received from Policy Owners. Voting
instructions may be cast in person or by proxy.
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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, such shares will be voted
in the same proportion as other votes cast by all of our separate accounts in
the aggregate.
DISREGARD OF VOTING INSTRUCTIONS
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that voting rights be
exercised so as to cause a change in the subclassification or investment
objective of a Portfolio or to approve or disapprove an investment advisory
contract. In addition, we may disregard voting instructions of changes
initiated by Policy Owners in the investment policy or the investment adviser
(or portfolio manager) of a Portfolio, provided that our disapproval of the
change is reasonable and is based on a good faith determination that the
change would be contrary to state law or otherwise inappropriate, considering
the Portfolio's objectives and purpose, and considering the effect the change
would have on us. In the event we do disregard voting instructions, a summary
of that action and the reasons for such action will be included in the next
report to Owners.
CONFIRMATION STATEMENTS AND OTHER REPORTS TO OWNERS
We will send you confirmations for premium payments and transfers, loans,
loan repayments, loan interest transfers, partial withdrawals, a surrender,
and on payment of any death benefit proceeds. Confirmation of scheduled
transactions under Dollar Cost Averaging, portfolio rebalancing, and monthly
deductions will appear on your quarterly statement.
A statement will be sent quarterly to you setting forth a summary of the
transactions which occurred during the quarter, indicating the death benefit,
Accumulated Value, Cash Surrender Value, and any Policy Debt. In addition, the
statement will indicate the allocation of Accumulated Value among the
Investment Options and any other information required by law.
You will also be sent annual financial statements for the Separate Account
and the Fund, the latter of which will include a list of the portfolio
securities of the Fund, as required by the Investment Company Act of 1940,
and/or such other reports as may be required by federal securities laws.
SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to compliance with the laws as then in effect,
to make additions to, deletions from, or substitutions for the securities that
are held by the Separate Account or any Variable Account or that the Separate
Account or any Variable Account may purchase. If shares of any or all of the
Portfolios of the Fund should no longer be available for investment, or if, in
the judgment of our management, further investment in shares of any or all
Portfolios of the Fund should become inappropriate in view of the purposes of
the Policies, we may substitute shares of another Portfolio of the Fund or of
a different fund for shares already purchased, or to be purchased in the
future, under the Policies.
Where required, we will not substitute any shares attributable to your
interest in a Variable Account or the Separate Account without notice, your
approval, or prior approval of the SEC and without following the filing or
other procedures established by applicable state insurance regulators.
We also reserve the right to establish additional Variable Accounts which
may include additional subaccounts of the Separate Account to serve as
investment options under the Policies which may be managed separate accounts
or may invest in a new Portfolio of the Fund, or in shares of another
investment company, a portfolio thereof, or suitable investment vehicle with a
specified investment objective. New Variable Accounts may be established when,
at our sole discretion, marketing needs or investment conditions warrant, and
any new Variable Accounts will be made available to existing Policy Owners on
a basis to be determined by us. We may
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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 changes without your consent to the
provisions of the Policy to comply with, or give you the benefit of, any
federal or state statute, rule, or regulation, including but not limited to,
requirements for life insurance contracts and modified endowment contracts
under the IRC, under regulations of the United States Treasury Department or
any state.
PERFORMANCE INFORMATION
Performance information for the Variable Accounts or the Fund may appear in
advertisements, sales literature, or reports to Policy Owners or prospective
purchasers. Performance information in advertisements or sales literature may
be expressed in any fashion permitted under applicable law, which may include
presentation of a change in a Policy Owner's Accumulated Value attributable to
the performance of one or more Variable Accounts, or as a change in a Policy
Owner's death benefit. Performance quotations may be expressed as a change in
a Policy Owner's Accumulated Value over time or in terms of the average annual
compounded rate of return on the Policy Owner's Accumulated Value, based upon
a hypothetical Policy in which premiums have been allocated to a particular
Variable Account over certain periods of time that will include one year or
from the commencement of operation of the Variable Account. If a Portfolio has
been in existence for a longer period of time than its corresponding Variable
Account, we may also present hypothetical returns that the Variable Account
would have achieved had it invested in its corresponding Portfolio for periods
through the commencement of operation of the Portfolio. For the period that a
particular Variable Account has been in existence, the performance will be
actual performance and not hypothetical in nature. Any such quotation may
reflect the deduction of all applicable charges to the Policy including
premium load, the cost of insurance, the administrative charge, and the
mortality and expense risk charge. The cost of insurance charge varies
according to the Insured (or joint Insureds if a last survivor Policy), and
therefore the cost of insurance charge reflected in
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performance for the hypothetical Policy is based on the hypothetical Insured
(or joint Insureds) assumed. The quotation may also reflect the deduction of
the surrender charge, if applicable, by assuming a surrender at the end of the
particular period, although other quotations may simultaneously be given that
do no assume a surrender and do not take into account deduction of the
surrender charge or other charges.
Performance information for a Variable Account may be compared, in
advertisements, sales literature, and reports to Policy Owners to: (i) other
variable life separate accounts, mutual funds, or investment products tracked
by research firms, ratings services, companies, publications, or persons who
rank separate accounts or investment products on overall performance or other
criteria; and (ii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from the purchase of a Policy. Reports and promotional
literature may also contain our rating or a rating of our claim-paying ability
as determined by firms that analyze and rate insurance companies and by
nationally recognized statistical rating organizations.
Performance information for any Variable Account reflects only the
performance of a hypothetical Policy whose Accumulated Value is allocated to
the Variable Account during a particular time period on which the calculations
are based. Performance information should be considered in light of the
investment objectives and policies, characteristics and quality of the
Portfolio of the Fund in which the Variable Account invests, and the market
conditions during the given period of time, and should not be considered as a
representation of what may be achieved in the future.
THE FIXED ACCOUNT
You may allocate all or a portion of your premium payments and transfer
Accumulated Value to our Fixed Account. Amounts allocated to the Fixed Account
become part of our General Account, which supports insurance and annuity
obligations. Because of exemptive and exclusionary provisions, interests in
the Fixed Account have not been registered under the Securities Act of 1933,
and the Fixed Account has not been registered as an investment company under
the Investment Company Act of 1940. Accordingly, neither the Fixed Account nor
any interest therein is generally subject to the provisions of these Acts and,
as a result, the staff of the SEC has not reviewed the disclosure in this
prospectus relating to the Fixed Account. Disclosures regarding the Fixed
Account may, however, be subject to certain generally applicable provisions of
the federal securities laws relating to the accuracy and completeness of
statements made in the prospectus. For more details regarding the Fixed
Account, see the Policy itself.
GENERAL DESCRIPTION
Amounts allocated to the Fixed Account become part of our General Account,
which consists of all assets owned by us other than those in the Separate
Account and other separate accounts of ours. Subject to applicable law, we
have sole discretion over the investment of the assets of our General Account.
You may elect to allocate premium payments to the Fixed Account, the
Variable Account, or both. You may also transfer Accumulated Value from the
Variable Accounts to the Fixed Account, or from the Fixed Account to the
Variable Accounts, subject to the limitations described below. We guarantee
that the Accumulated Value in the Fixed Account will be credited with interest
at a rate of 0.24663% per month, compounded monthly, for an effective annual
rate of 3%. Such interest will be paid regardless of the actual investment
experience for the Fixed Account. In addition, we may in our sole discretion
pay current interest in excess of the 3% guarantee. The initial rate of
interest, or 6% if less, will be guaranteed until the first Policy
Anniversary. Current interest rates will be effected thereafter on each Policy
Anniversary. Once declared for a Policy on a Policy's Anniversary, the current
rates are guaranteed for one year until the next Policy Anniversary. The
portion of your Accumulated Value in the Loan Account that is used to secure
Policy Debt will be credited with interest at a rate of 0.36748% per month,
compounded monthly, for an effective annual rate of 4.5%.
We bear the full investment risk for the Accumulated Value allocated to the
Fixed Account.
The death benefit under the Policy will be determined in the same fashion
for an Owner who has Accumulated Value in the Fixed Account as for an Owner
who has Accumulated Value in the Variable Accounts.
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The Surrender Charge and the Policy charges, cost of insurance,
administrative, tax, and mortality and expense risk, will be the same whether
you transfer Accumulated Value to the Fixed Account or to the Variable
Accounts. The administrative charges and mortality and expense risk charges
will not be assessed against the Loan Account, and any amounts that we pay for
income taxes allocable to the Variable Accounts will not be charged against
the Fixed Account. In addition, the investment advisory fees and operating
expenses paid by the Fund will not be paid directly or indirectly by you to
the extent the Accumulated Value is allocated to the Fixed Account; however,
to such extent, you will not participate in the investment experience of the
Variable Accounts.
TRANSFERS, SURRENDERS, WITHDRAWALS, AND POLICY LOANS
Amounts may be transferred from the Variable Accounts to the Fixed Account
and from the Fixed Account to the Variable Accounts, subject to the following
limitations. No transfer may be made if the Policy is in the grace period and
the required premium has not been paid. You may not make more than one
transfer from the Fixed Account to the Variable Accounts in any twelve month
period. Further, you may not transfer more than the greater of 25% of your
Accumulated Value in the Fixed Account or $5,000 in any year. Currently there
is no charge imposed upon transfers; however, we reserve the right to assess
such a charge in the future and to impose other limitations on the number of
transfers, the amount of transfers, and the amount remaining in the Fixed
Account or Variable Accounts after a transfer. Transfers from the Variable
Accounts to the Fixed Account may only be made in the Policy Month preceding a
Policy Anniversary, except that you may make such a transfer at any time
during the first 18 Policy Months.
You may also make full surrenders and partial withdrawals from the Fixed
Account to the same extent as an Owner who has invested in the Variable
Accounts. See "Surrender"and "Partial Withdrawals". In addition, to the same
extent as Policy Owners with Accumulated Value in the Variable Accounts, you
may obtain a Policy Loan and borrow up to 100% of your Accumulated Value in
the Fixed Account (50% in the first Policy Year) less Policy Debt. See "Policy
Loans". Transfers, surrenders, and withdrawals payable from the Fixed Account,
and the payment of Policy loans allocated to the Fixed Account may be delayed
for up to six months.
MORE ABOUT THE POLICY
OWNERSHIP
The Policy Owner is the individual named as such in the application or in
any later change shown in our records. While the Insured is living, the Policy
Owner alone has the right to receive all benefits and exercise all rights that
the Policy grants or we allow.
Joint Owners. If more than one person is named as Policy Owner, they are
joint Owners. Any Policy transaction requires the signature of all persons
named jointly. Unless otherwise provided, if a joint Owner dies, ownership
passes to the surviving joint Owner(s). When the last joint Owner dies,
ownership passes through that person's estate, unless otherwise provided.
BENEFICIARY
The Beneficiary is the individual named as such in the application or any
later change shown in our records. You may change the Beneficiary at any time
during the life of the Insured (or either Insured, if this is a last survivor
Policy) by written request on forms provided by us, which must be received by
us at our Home Office. The change will be effective as of the date this form
is signed. Contingent and/or concurrent Beneficiaries may be designated. You
may designate a permanent Beneficiary, whose rights under the Policy cannot be
changed without his or her consent. Unless otherwise provided, if no
designated Beneficiary is living upon the death of the Insured (or Survivor,
if this is a last survivor Policy), you are the Beneficiary, if living;
otherwise your estate is the Beneficiary.
We will pay the death benefit proceeds to the Beneficiary. Unless otherwise
provided, in order to receive proceeds at the Insured's (or Survivor's, if
this is a last survivor Policy) death, the Beneficiary must be living at the
time of the Insured's (or Survivor's) death.
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THE CONTRACT
The Policy is a contract between you and us. The entire contract consists of
the Policy, a copy of the initial application, all subsequent applications to
change the Policy, any endorsements, any Riders and Benefits and all
additional Policy information sections (specification pages) added to the
Policy.
PAYMENTS
We ordinarily will pay death benefit proceeds, Net Cash Surrender Value on
surrender, partial withdrawals, and loan proceeds based on allocations made to
the Variable Accounts, and will effect a transfer between Variable Accounts or
from a Variable Account to the Fixed Account within seven days after we
receive all the information needed to process a payment or transfer or, if
sooner, other period required by law.
However, we can postpone the calculation or payment of such a payment or
transfer of amounts based on investment performance of the Variable Accounts
if:
. The New York Stock Exchange is closed on other than customary weekend
and holiday closing or trading on the New York Stock Exchange is
restricted as determined by the SEC; or
. An emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of a Variable Account's
net assets; or
. The SEC by order permits postponement for the protection of Policy
Owners.
ASSIGNMENT
You may assign a Policy as collateral security for a loan or other
obligation. No assignment will bind us unless the original, or a copy, is
received and recorded by our Home Office. An assignment does not change the
ownership of the Policy. However, after an assignment, the rights of any Owner
or Beneficiary will be subject to the assignment. The entire Policy, including
any attached payment option or Rider, Benefit, and Endorsement, will be
subject to the assignment. We will rely solely on the assignee's statement as
to the amount of the assignee's interest. We will not be responsible for the
validity of any assignment. Unless otherwise provided, the assignee may
exercise all rights this Policy grants except (a) the right to change the
Owner or Beneficiary; and (b) the right to elect a payment option. Assignment
of a Policy that is a modified endowment contract may generate taxable income.
See "Federal Income Tax Considerations".
ERRORS ON THE APPLICATION
If the Age of an Insured has been misstated, the death benefit under this
Policy will be the greater of that which would be purchased by the original
initial premium, using the Guideline Single Premium at issue for the correct
Age and the original elected percent of the Guideline Single Premium, or the
death benefit derived by multiplying Accumulated Value by the specified
percentage for the correct Age.
INCONTESTABILITY
We may contest the validity of this Policy if any material misstatements are
made in the application. However, your Policy will be incontestable after the
expiration of the following: the initial Face Amount cannot be contested with
respect to an Insured after the Policy has been in force during that Insured's
lifetime for two years from the Policy Date; and reinstatement cannot be
contested after it has been in force during an Insured's lifetime for two
years from the date of reinstatement.
PAYMENT IN CASE OF SUICIDE
If the Insured (or either Insured, if this is a last survivor Policy) dies
by suicide, while sane or insane, within two years from the Policy Date, we
will limit the death benefit proceeds to the premium payments less any Policy
Debt and less the amount of any partial withdrawals.
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DIVIDENDS
The current dividend scale is zero and we do not anticipate that dividends
will be paid. Any dividends that do become payable will be paid in cash.
POLICY ILLUSTRATIONS
Upon request, we will send you an illustration of estimated future benefits
under your Policy based on both guaranteed and current cost factor
assumptions. However, we reserve the right to charge a $25 fee for requests
for illustrations in excess of one per Policy Year.
PAYMENT PLAN
Surrender or withdrawal benefits may be used to purchase a payment plan
providing monthly income for the lifetime of the Insured, and death benefit
proceeds may be used to purchase a payment plan providing monthly income for
the lifetime of the Beneficiary. The monthly payments consisting of proceeds
plus interest will be paid in equal installments for at least ten years. The
purchase rates for the payment plan are guaranteed not to exceed those shown
in the Policy, but current rates that are lower (i.e., providing greater
income) may be established by us from time to time. This benefit is not
available if the income would be less than $100 a month. Surrender,
withdrawal, or death benefit proceeds may be used to purchase any other
Payment Plan that we make available at that time.
OPTIONAL INSURANCE BENEFITS AND OTHER POLICIES
Subject to certain requirements, you may elect to add an Accelerated Living
Benefit Rider at any time while this Policy is in force. This Rider provides
Policy Owner access to a portion of the Policy's proceeds if the Insured (or
the Survivor Insured in the case of a last survivor Policy) has been diagnosed
with a terminal illness resulting in a life expectancy of six months or less
(or such other period that may be required by state insurance authorities). We
offer other variable life insurance policies that provide insurance protection
on the lives of two insureds or on the life of a single insured, whose loads
and charges may vary. An insurance agent authorized to sell the Policy can
describe other policies further.
LIFE INSURANCE RETIREMENT PLANS
Any Policy Owners or applicants who wish to consider using the Policy as a
funding vehicle for (non-qualified) retirement purposes may obtain additional
information from us. An Owner could pay premiums under a Policy for a number
of years, and upon retirement could utilize a Policy's loan and partial
withdrawal features to access Accumulated Value as a source of retirement
income for a period of time. This use of a Policy does not alter an Owner's
rights or our obligations under a Policy; the Policy would remain a life
insurance contract that, so long as it remains in force, provides for a death
benefit payable when the Survivor dies.
Ledger illustrations are available upon request that portray how the Policy
can be used as a funding mechanism for (non-qualified) retirement plans,
referred to herein as "life insurance retirement plans," for individuals.
Ledger illustrations provided upon request show the effect on Accumulated
Value, Net Cash Surrender Value, and the net death benefit of premiums paid
under a Policy and Partial Withdrawals and loans taken for retirement income;
or reflecting allocation of premiums to specified Variable Accounts. This
information will be portrayed at hypothetical rates of return that are
requested. Charts and graphs presenting the results of the ledger comparisons
or a comparison of retirement strategies will also be furnished upon request.
Any graphic presentations and retirement strategy charts must be accompanied
by a corresponding ledger illustration; ledger illustrations must always
include or be accompanied by comparable information that is based on
guaranteed cost of insurance rates and that presents a hypothetical gross rate
of return of 0%. Retirement illustrations will not be furnished with a
hypothetical gross rate of return in excess of 12%.
The hypothetical rates of return in ledger illustrations are illustrative
only and should not be interpreted as a representation of past or future
investment results. Policy values and benefits shown in the ledger
illustrations
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would be different if the gross annual investment rates of return were
different from the hypothetical rates portrayed, if premiums were not paid
when due, and loan interest was paid when due. Withdrawals or loans may have
an adverse effect on Policy benefits.
RISKS OF LIFE INSURANCE RETIREMENT PLANS
Using the Policy as a funding vehicle for retirement income purposes
presents several risks, including the risk that if the Policy is
insufficiently funded in relation to the income stream from the Policy, the
Policy can lapse prematurely and result in significant income tax liability to
the Owner in the year in which the lapse occurs. Other risks associated with
borrowing from the Policy also apply. Loans will be automatically repaid from
the gross death benefit at the death of the Survivor, resulting in the
estimated payment to the Beneficiary of the net death benefit, which will be
less than the gross death benefit and may be less than the Face Amount. Upon
surrender, the loan will be automatically repaid, resulting in the payment to
you of the Net Cash Surrender Value. Similarly, upon lapse, the loan will be
automatically repaid. The automatic repayment of the loan upon lapse or
surrender will cause the recognition of taxable income to the extent that Net
Cash Surrender Value plus the amount of the repaid loan exceeds your basis in
the Policy. Thus, under certain circumstances, surrender or lapse of the
Policy could result in tax liability to you. In addition, to reinstate a
lapsed Policy, you would be required to make certain payments as described
under "Reinstatement". Thus, you should be careful to fashion a life insurance
plan so that the Policy will not lapse prematurely under various market
scenarios as a result of withdrawals and loans taken from your Policy.
The Policy will lapse if your Net Cash Surrender Value less Policy Debt is
insufficient to cover the current monthly deduction on any Monthly Payment
Date, and a grace period expires without your making a sufficient payment. To
avoid lapse of your Policy, it is important to fashion a payment stream that
does not leave your Policy with insufficient Accumulated Value. Determinations
as to the amount to withdraw or borrow each year warrant careful
consideration. Careful consideration should also be given to any assumptions
respecting the hypothetical rate of return, to the duration of withdrawals and
loans, and to the amount of Accumulated Value that should remain in your
Policy upon its maturity. Poor investment performance can contribute to the
risk that your Policy may lapse. In addition, the cost of insurance generally
increases with the Age of the Insured, which can further erode existing
Accumulated Value and contribute to the risk of lapse.
Further, interest on a Policy loan is due to us for any Policy Year on the
Policy Anniversary. If this interest is not paid when due, it is added to the
amount of the outstanding Policy Debt, and interest will begin accruing
thereon from that date. This can have a compounding effect, and to the extent
that the outstanding loan balance exceeds your basis in the Policy, the
amounts attributable to interest due on the loans can add to your federal (and
possibly state) income tax liability.
You should consult with your attorney and financial advisers in designing a
life insurance retirement plan that is suitable. Further, you should continue
to monitor the Accumulated Value net of loans remaining in a Policy to assure
that the Policy is sufficiently funded to continue to support the desired
income stream and so that it will not lapse. In this regard, you should
consult your periodic statements to determine the amount of their remaining
Accumulated Value minus the outstanding loan balance. Illustrations showing
the effect of charges under the Policy upon existing Accumulated Value or the
effect of future withdrawals or loans upon the Policy's Accumulated Value and
death benefit are available from your agent. Consideration should be given
periodically to whether the Policy is sufficiently funded so that it will not
lapse prematurely.
Because of the potential risks associated with borrowing from a Policy, use
of the Policy in connection with a life insurance retirement plan may not be
suitable for all Policy Owners. These risks should be carefully considered
before borrowing from the Policy to provide an income stream.
DISTRIBUTION OF THE POLICY
PMD is principal underwriter (distributor) of the Policies. PMD is
registered as a broker-dealer with the SEC and is a member of the National
Association of Securities Dealers ("NASD"). We pay PMD for acting as principal
underwriter under a Distribution Agreement. PMD is a wholly-owned subsidiary
of ours. PMD's principal business address is 700 Newport Center Drive, Newport
Beach, California 92660.
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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 by Pacific Life and PMD for sales of the product may vary
with the Sales Agreement, but is not expected to exceed 6.75% of the initial
premium payment. Broker-dealers may also receive an annual renewal
compensation of approximately 0.25% of Accumulated Value less Policy Debt. In
addition, we may also pay override payments, expense allowances, bonuses,
wholesaler fees and training allowances. Registered representatives earn
commissions from the broker-dealers with whom they are affiliated for selling
our Policies. Compensation arrangements vary among broker-dealers. In
addition, registered representatives who meet specified production levels may
qualify, under sales incentive programs adopted by us, to receive non-cash
compensation such as expense-paid trips, expense-paid educational seminars and
merchandise and may elect to receive compensation on a deferred basis. We make
no separate deductions, other than as previously described, from premiums to
pay sales commissions or sales expenses.
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.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION DURING THE LAST FIVE YEARS
----------------- -----------------------------------------------
<S> <C>
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.
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 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>
36
<PAGE>
No officer or director listed above receives any compensation from the
Separate Account. No separately allocable compensation has been paid by us or
any of our affiliates to any person listed for services rendered to the
Separate Account.
STATE REGULATION
We are subject to the laws of the state of California governing insurance
companies and to regulation by the Commissioner of Insurance of California. In
addition, we are subject to the insurance laws and regulations of the other
states and jurisdictions in which we are licensed or may become licensed to
operate. An annual statement in a prescribed form must be filed with the
Commissioner of Insurance of California and with regulatory authorities of
other states on or before March 1st in each year. This statement covers our
operations for the preceding year and our financial condition as of December
31st of that year. Our affairs are subject to review and examination at any
time by the Commissioner of Insurance or his agents, and subject to full
examination of our operations at periodic intervals.
TELEPHONE TRANSFER AND LOAN PRIVILEGES
You may request a transfer of Accumulated Value or a Policy Loan by
telephone if a properly completed Authorization for Telephone Requests
("Telephone Authorization") has been filed at our Home Office. All or part of
any telephone conversation with respect to transfer or loan instructions may
be recorded by us. Telephone instructions received by us by 1:00 P.M. Pacific
time on any Valuation Date will be effected as of the end of that Valuation
Date in accordance with your instructions (presuming that the Free-Look Period
has expired). We reserve the right to deny any telephone transfer or loan
request. If all telephone lines are busy (which might occur, for example,
during periods of substantial market fluctuations), you might not be able to
request transfers and loans by telephone and would have to submit written
requests.
We have established procedures to confirm that instructions communicated by
telephone are genuine. Under the procedures, any person requesting a transfer
by telephone must provide certain personal identification as requested by us,
and we will send a written confirmation of all transfers requested by
telephone within 7 days of the transfer. Upon your submission of a Telephone
Authorization, you authorize us to accept and act upon telephonic instructions
for transfers or loans involving your Policy, and agree that neither we, any
of our affiliates, Pacific Select Fund, nor any of our or their directors,
trustees, officers, employees or agents, will be liable for any loss, damages,
cost, or expense (including attorneys fees) arising out of any requests
effected in accordance with the Telephone Authorization and believed by us to
be genuine, provided that we have complied with our procedures. As a result of
this policy on telephonic requests, you will bear the risk of loss arising
from the telephone transfer and loan privileges.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a
party, or which would materially affect the Separate Account.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Policies
described in this Prospectus and our organization, our authority to issue the
Policies under California law, and the validity of the forms of the Policies
under California law have been passed on by our General Counsel.
Legal matters relating to the federal securities and federal income tax laws
have been passed upon by Dechert Price & Rhoads.
REGISTRATION STATEMENT
A registration statement under the Securities Act of 1933 has been filed
with the SEC relating to the offering described in this prospectus. This
prospectus does not include all of the information set forth in the
registration
37
<PAGE>
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. 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 indicated in their reports appearing herein, and have been so
included in reliance upon their authority as experts in accounting and
auditing.
FINANCIAL STATEMENTS
The audited financial statements of Pacific Select Exec Separate Account as
of December 31, 1997 and for the two years then ended are set forth herein,
starting on page 39. 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 51.
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.
38
<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
39
<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
40
<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
41
<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
42
<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
43
<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
44
<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 Assets 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
45
<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 appreci-
ation (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 premi-
ums................... 59,965 6,552 21,068 2,042 29,298 911 24,407 21,368
Transfers - policy
charges and deduc-
tions................. (3,056) (1,528) (2,686) (580) (7,697) (146) (5,343) (4,205)
Transfers in (from
other variable ac-
counts)............... 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 As-
sets Derived From Pol-
icy Transactions....... 2,817 9,149 18,282 1,330 10,517 4,220 24,819 24,067
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCREASE IN NET AS-
SETS................... 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
46
<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
47
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Pacific Select Exec Separate Account (the "Separate Account") is
registered as a unit investment trust under the Investment Company Act of
1940, as amended, 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.
48
<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 investments
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 apprecia-
tion (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 investments
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 apprecia-
tion 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 investments
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 apprecia-
tion (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.
49
<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) Transfer - 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.
50
<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
51
<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
52
<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
53
<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
54
<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
55
<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
56
<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
57
<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
58
<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
59
<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.
60
<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.
61
<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>
62
<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.
63
<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.
64
<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>
65
<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>
66
<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>
67
<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.
68
<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.
69
<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.
70
<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 depos-
its 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>
71
<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>
72
<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>
73
<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>
74
<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
75
<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.
76
<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
77
<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.
78
<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>
<CAPTION>
Years Ending December 31:
-------------------------
<S> <C>
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.
---------------------------------------------------------------------------
79
<PAGE>
APPENDIX
DEATH BENEFIT PERCENTAGES
<TABLE>
<CAPTION>
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
---- ---------- --- ---------- --- ---------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250% 50 185% 60 130% 70 115%
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 94+ 101
</TABLE>
80
<PAGE>
ILLUSTRATIONS
The following tables illustrate how the death benefits, Accumulated Values
and Net Cash Surrender Values of a hypothetical policy may vary over an
extended period of time assuming a single premium that is 100% of the
Guideline Single Premium and hypothetical rates of return equivalent to
constant gross annual rates of 0%, 6% and 12%.
The policies illustrated include the following:
1. Age 60, Male Nonsmoker, $40,000 initial premium, Current Cost of
Insurance Rates.
2. Age 60, Male Nonsmoker, $40,000 initial premium, Guaranteed Cost of
Insurance Rates.
3. Age 60, Female Nonsmoker, $40,000 initial premium, Current Cost of
Insurance Rates.
4. Age 60, Female Nonsmoker, $40,000 initial premium, Guaranteed Cost of
Insurance Rates.
5. Age 60, Male/Female Nonsmoker, $40,000 initial premium, Current Cost
of Insurance Rates.
6. Age 60, Male/Female Nonsmoker, $40,000 initial premium, Guaranteed
Cost of Insurance Rates.
The values would be different from those shown if the gross annual
investment rates of return averaged 0%, 6% or 12% over a period of years, but
also fluctuated above or below those averages for individual Policy Years.
The second column of each table, labeled "Premium Paid Plus Interest at 5%,"
shows the amount which would accumulate if an amount equal to the initial
premium (after taxes) were invested to earn interest at 5% compounded
annually. The premium payment is illustrated as if made at the beginning of
the year. These illustrations assume that no Policy loans have been made.
The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values, reflect the fact that the net investment return on the
Variable Accounts is lower than the gross investment return on the assets as a
result of charges levied against the Variable Accounts. These values also take
into account any administration charges, and Net Cash Surrender Value takes
into account any Surrender Charge. The Fund's daily investment advisory fee is
assumed to be equivalent to an annual weighted rate of 0.60% of the aggregate
average daily net assets of the Fund. This hypothetical rate is representative
of the weighted average investment advisory fee applicable to the Portfolios
of the Fund available as options under the Policy. The amounts shown would
differ if unisex rates were used. On those illustrations assuming current
rates, the amount would also differ if either Insured were a smoker and smoker
rates were used.
The tables also reflect other expenses of the Fund at the weighted rate of
0.08% 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 fees, 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; and 0.19% for the Emerging Markets
Portfolio.
After deduction of the charges and Fund expenses described above, the
illustrated gross annual investment rates of return of 0%, 6%, and 12%
correspond to approximate net annual rates of return of -0.68%, 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.
81
<PAGE>
We will furnish upon request a comparable illustration reflecting the
proposed Insured's Age, Face Amount, death benefit and premium amounts
requested. In addition, upon request, illustrations will be furnished
reflecting allocation of premiums to specified Variable Accounts. Such
illustrations will reflect the expenses of the Portfolio of the Fund in which
the Variable Account invests. Illustrations that use a hypothetical gross rate
of return in excess of 12% are available to certain large institutional
investors upon request.
82
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender
Values
Based on Current Cost of Insurance Rates
SINGLE LIFE OPTION
ISSUE AGE: 60 FACE AMOUNT: $80,044
CLASS: MALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT -----------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $80,042 $ 80,042 $ 80,042
2 $ 44,100 $80,042 $ 80,042 $ 80,042
3 $ 46,305 $80,042 $ 80,042 $ 80,042
4 $ 48,620 $80,042 $ 80,042 $ 80,042
5 $ 51,051 $80,042 $ 80,042 $ 80,042
6 $ 53,604 $80,042 $ 80,042 $ 80,042
7 $ 56,284 $80,042 $ 80,042 $ 86,443
8 $ 59,098 $80,042 $ 80,042 $ 93,367
9 $ 62,053 $80,042 $ 80,042 $100,838
10 $ 65,156 $80,042 $ 80,042 $108,899
15 $ 83,157 $80,042 $ 80,042 $160,317
20 $106,132 $80,042 $ 83,105 $251,083
25 $135,454 $80,042 $100,716 $400,728
30 $172,877 $80,042 $122,059 $639,560
35 $220,640 $80,042 $142,325 $982,101
</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 $38,902 $ 41,236 $ 43,570 $35,012 $ 37,236 $ 39,570
2 $37,795 $ 42,469 $ 47,415 $34,015 $ 38,469 $ 43,415
3 $36,718 $ 43,739 $ 51,603 $33,413 $ 40,139 $ 48,003
4 $35,671 $ 45,049 $ 56,208 $32,817 $ 41,849 $ 53,008
5 $34,652 $ 46,400 $ 61,225 $32,227 $ 43,600 $ 58,425
6 $33,662 $ 47,792 $ 66,689 $31,642 $ 45,392 $ 64,289
7 $32,699 $ 49,227 $ 72,641 $31,064 $ 47,227 $ 70,641
8 $31,762 $ 50,707 $ 79,124 $30,491 $ 49,107 $ 77,524
9 $30,851 $ 52,274 $ 86,186 $29,925 $ 51,074 $ 84,986
10 $29,965 $ 53,889 $ 93,878 $29,965 $ 53,889 $ 93,878
15 $26,947 $ 65,308 $149,829 $26,947 $ 65,308 $149,829
20 $24,215 $ 79,148 $239,127 $24,215 $ 79,148 $239,127
25 $21,741 $ 95,920 $381,645 $21,741 $ 95,920 $381,645
30 $19,500 $116,247 $609,105 $19,500 $116,247 $609,105
35 $17,470 $140,916 $972,377 $17,470 $140,916 $972,377
</TABLE>
- -------
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
83
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values, and Net Cash Surrender
Values
Based on Guaranteed Cost of Insurance Rates
SINGLE LIFE OPTION
ISSUE AGE: 60 FACE AMOUNT: $80,042
CLASS: MALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $80,042 $80,042 $ 80,042
2 $ 44,100 $80,042 $80,042 $ 80,042
3 $ 46,305 $80,042 $80,042 $ 80,042
4 $ 48,620 $80,042 $80,042 $ 80,042
5 $ 51,051 $80,042 $80,042 $ 80,042
6 $ 53,604 $80,042 $80,042 $ 80,042
7 $ 56,284 $80,042 $80,042 $ 82,574
8 $ 59,098 $80,042 $80,042 $ 89,124
9 $ 62,053 $80,042 $80,042 $ 96,170
10 $ 65,156 $80,042 $80,042 $103,749
15 $ 83,157 * $80,042 $150,941
20 $106,132 * $80,042 $235,245
25 $135,454 * $80,042 $369,443
30 $172,877 * * $570,211
35 $220,640 * * $854,424
</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 $38,418 $40,760 $ 43,103 $34,576 $36,760 $ 39,103
2 $36,738 $41,456 $ 46,455 $33,064 $37,456 $ 42,455
3 $34,987 $42,120 $ 50,132 $31,838 $38,520 $ 46,532
4 $33,149 $42,744 $ 54,225 $30,497 $39,544 $ 51,025
5 $31,206 $43,321 $ 58,752 $29,021 $40,521 $ 55,952
6 $29,140 $43,843 $ 63,781 $27,391 $41,443 $ 61,381
7 $26,932 $44,304 $ 69,390 $25,585 $42,304 $ 67,390
8 $24,561 $44,695 $ 75,529 $23,578 $43,095 $ 73,929
9 $22,000 $45,006 $ 82,196 $21,340 $43,806 $ 80,996
10 $19,213 $45,223 $ 89,439 $19,213 $45,223 $ 89,439
15 * $45,633 $141,066 * $45,633 $141,066
20 * $38,851 $224,043 * $38,851 $224,043
25 * $ 9,318 $351,851 * $ 9,318 $351,851
30 * * $543,058 * * $543,058
35 * * $845,964 * * $845,964
</TABLE>
- -------
This illustration assumes no policy loans or partial withdrawals have been
made.
*Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN
CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
84
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender
Values
Based on Current Cost of Insurance Rates
SINGLE LIFE OPTION
ISSUE AGE: 60 FACE AMOUNT: $94,464
CLASS: FEMALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT -----------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $94,464 $ 94,464 $ 94,464
2 $ 44,100 $94,464 $ 94,464 $ 94,464
3 $ 46,305 $94,464 $ 94,464 $ 94,464
4 $ 48,620 $94,464 $ 94,464 $ 94,464
5 $ 51,051 $94,464 $ 94,464 $ 94,464
6 $ 53,604 $94,464 $ 94,464 $ 94,464
7 $ 56,284 $94,464 $ 94,464 $ 94,464
8 $ 59,098 $94,464 $ 94,464 $ 94,464
9 $ 62,053 $94,464 $ 94,464 $101,057
10 $ 65,156 $94,464 $ 94,464 $109,313
15 $ 83,157 $94,464 $ 94,464 $161,040
20 $106,132 $94,464 $ 94,464 $252,881
25 $135,454 $94,464 $100,716 $403,598
30 $172,877 $94,464 $122,059 $644,140
35 $220,640 $94,464 $142,347 $989,287
</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 $38,902 $ 41,236 $ 43,570 $35,012 $ 37,236 $ 39,570
2 $37,795 $ 42,469 $ 47,415 $34,015 $ 38,469 $ 43,415
3 $36,718 $ 43,739 $ 51,603 $33,413 $ 40,139 $ 48,003
4 $35,671 $ 45,049 $ 56,208 $32,817 $ 41,849 $ 53,008
5 $34,652 $ 46,400 $ 61,225 $32,227 $ 43,600 $ 58,425
6 $33,662 $ 47,792 $ 66,689 $31,642 $ 45,392 $ 64,289
7 $32,699 $ 49,227 $ 72,641 $31,064 $ 47,227 $ 70,641
8 $31,762 $ 50,707 $ 79,167 $30,491 $ 49,107 $ 77,567
9 $30,851 $ 52,274 $ 86,373 $29,925 $ 51,074 $ 85,173
10 $29,965 $ 53,889 $ 94,236 $29,965 $ 53,889 $ 94,236
15 $26,947 $ 65,308 $150,504 $26,947 $ 65,308 $150,504
20 $24,215 $ 79,148 $240,839 $24,215 $ 79,148 $240,839
25 $21,741 $ 95,920 $384,379 $21,741 $ 95,920 $384,379
30 $19,500 $116,247 $613,467 $19,500 $116,247 $613,467
35 $17,470 $140,938 $979,492 $17,470 $140,938 $979,492
</TABLE>
- -------
This illustration assumes no policy loans or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN
CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
85
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender
Values
Based on Guaranteed Cost of Insurance Rates
SINGLE LIFE OPTION
ISSUE AGE: 60 FACE AMOUNT: $94,464
CLASS: FEMALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $94,464 $94,464 $ 94,464
2 $ 44,100 $94,464 $94,464 $ 94,464
3 $ 46,305 $94,464 $94,464 $ 94,464
4 $ 48,620 $94,464 $94,464 $ 94,464
5 $ 51,051 $94,464 $94,464 $ 94,464
6 $ 53,604 $94,464 $94,464 $ 94,464
7 $ 56,284 $94,464 $94,464 $ 94,464
8 $ 59,098 $94,464 $94,464 $ 94,464
9 $ 62,053 $94,464 $94,464 $ 97,501
10 $ 65,156 $94,464 $94,464 $105,467
15 $ 83,157 $94,464 $94,464 $155,245
20 $106,132 * $94,464 $243,768
25 $135,454 * $94,464 $386,376
30 $172,877 * * $602,239
35 $220,640 * * $906,414
</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 $38,563 $40,902 $ 43,242 $34,706 $36,902 $ 39,242
2 $37,062 $41,763 $ 46,743 $33,356 $37,763 $ 42,743
3 $35,525 $42,614 $ 50,569 $32,328 $39,014 $ 46,969
4 $33,937 $43,445 $ 54,801 $31,222 $40,245 $ 51,601
5 $32,285 $44,249 $ 59,440 $30,025 $41,449 $ 56,640
6 $30,561 $45,023 $ 64,543 $28,728 $42,623 $ 62,143
7 $28,758 $45,765 $ 70,175 $27,320 $43,765 $ 68,175
8 $26,869 $46,476 $ 76,412 $25,795 $44,876 $ 74,812
9 $24,888 $47,153 $ 83,334 $24,142 $45,953 $ 82,134
10 $22,796 $47,788 $ 90,920 $22,796 $47,788 $ 90,920
15 $ 9,713 $51,435 $145,089 $ 9,713 $51,435 $145,089
20 * $50,984 $232,160 * $50,984 $232,160
25 * $37,955 $367,977 * $37,955 $367,977
30 * * $573,561 * * $573,561
35 * * $897,439 * * $897,439
</TABLE>
- -------
This illustration assumes no policy loans or partial withdrawals have been
made.
*Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
86
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender
Values
Based on Current Cost of Insurance Rates
LAST SURVIVOR OPTION
ISSUE AGE: 60 FACE AMOUNT: $114,737
CLASS: MALE/FEMALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ----------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $114,737 $114,737 $ 114,737
2 $ 44,100 $114,737 $114,737 $ 114,737
3 $ 46,305 $114,737 $114,737 $ 114,737
4 $ 48,620 $114,737 $114,737 $ 114,737
5 $ 51,051 $114,737 $114,737 $ 114,737
6 $ 53,604 $114,737 $114,737 $ 114,737
7 $ 56,284 $114,737 $114,737 $ 114,737
8 $ 59,098 $114,737 $114,737 $ 114,737
9 $ 62,053 $114,737 $114,737 $ 114,737
10 $ 65,156 $114,737 $114,737 $ 114,737
15 $ 83,157 $114,737 $114,737 $ 167,067
20 $106,132 $114,737 $114,737 $ 263,338
25 $135,454 $114,737 $114,737 $ 422,395
30 $172,877 $114,737 $128,843 $ 677,524
35 $220,640 $114,737 $150,951 $1,045,352
</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 $39,085 $ 41,430 $ 43,776 $35,176 $ 37,430 $ 39,776
2 $38,123 $ 42,843 $ 47,839 $34,310 $ 38,843 $ 43,839
3 $37,148 $ 44,275 $ 52,258 $33,805 $ 40,675 $ 48,658
4 $36,198 $ 45,738 $ 57,108 $33,302 $ 42,538 $ 53,908
5 $35,271 $ 47,252 $ 62,393 $32,802 $ 44,452 $ 59,593
6 $34,367 $ 48,817 $ 68,166 $32,305 $ 46,417 $ 65,766
7 $33,485 $ 50,435 $ 74,473 $31,810 $ 48,435 $ 72,473
8 $32,624 $ 52,150 $ 81,364 $31,319 $ 50,550 $ 79,764
9 $31,785 $ 53,923 $ 88,892 $30,831 $ 52,723 $ 87,692
10 $30,966 $ 55,756 $ 97,131 $30,966 $ 55,756 $ 97,131
15 $27,994 $ 67,911 $ 156,137 $27,994 $ 67,911 $ 156,137
20 $25,290 $ 82,715 $ 250,798 $25,290 $ 82,715 $ 250,798
25 $22,828 $100,746 $ 402,281 $22,828 $100,746 $ 402,281
30 $20,588 $122,707 $ 645,261 $20,588 $122,707 $ 645,261
35 $18,549 $149,456 $1,035,002 $18,549 $149,456 $1,035,002
</TABLE>
- -------
This illustration assumes no policy loan s or partial withdrawals have been
made.
THE DEATH BENEFITS, ACCUMULATED VALUES A ND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNT S OR AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
87
<PAGE>
MODIFIED SINGLE PREMIUM VARIABLE UNIVERSAL LIFE
Illustration of Death Benefits, Accumulated Values and Net Cash Surrender
Values
Based on Guaranteed Cost of Insurance Rates
LAST SURVIVOR OPTION
ISSUE AGE: 60 FACE AMOUNT: $114,737
CLASS: MALE/FEMALE NONSMOKER INITIAL PREMIUM: $40,000
GUIDELINE SINGLE PREMIUM %: 100%
<TABLE>
<CAPTION>
PREMIUM END OF YEAR DEATH BENEFIT ASSUMING
END OF PAID PLUS HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF
POLICY INTEREST AT ------------------------------------------------
YEAR 5% 0% 6% 12%
------ ----------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
1 $ 42,000 $114,737 $114,737 $114,737
2 $ 44,100 $114,737 $114,737 $114,737
3 $ 46,305 $114,737 $114,737 $114,737
4 $ 48,620 $114,737 $114,737 $114,737
5 $ 51,051 $114,737 $114,737 $114,737
6 $ 53,604 $114,737 $114,737 $114,737
7 $ 56,284 $114,737 $114,737 $114,737
8 $ 59,098 $114,737 $114,737 $114,737
9 $ 62,053 $114,737 $114,737 $114,737
10 $ 65,156 $114,737 $114,737 $114,737
15 $ 83,157 $114,737 $114,737 $166,715
20 $106,132 * $114,737 $262,638
25 $135,454 * $114,737 $417,269
30 $172,877 * $114,737 $650,907
35 $220,640 * * $979,557
</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 $39,085 $41,430 $ 43,776 $35,176 $37,430 $ 39,776
2 $38,123 $42,843 $ 47,839 $34,310 $38,843 $ 43,839
3 $37,147 $44,275 $ 52,258 $33,803 $40,675 $ 48,658
4 $36,147 $45,718 $ 57,108 $33,255 $42,518 $ 53,908
5 $35,113 $47,166 $ 62,385 $32,656 $44,366 $ 59,585
6 $34,033 $48,612 $ 68,130 $31,991 $46,212 $ 65,730
7 $32,893 $50,047 $ 74,392 $31,248 $48,047 $ 72,392
8 $31,679 $51,464 $ 81,231 $30,411 $49,864 $ 79,631
9 $30,374 $52,897 $ 88,716 $29,463 $51,697 $ 87,516
10 $28,960 $54,293 $ 96,927 $28,960 $54,293 $ 96,927
15 $19,619 $62,023 $155,808 $19,619 $62,023 $155,808
20 * $65,714 $250,131 * $65,714 $250,131
25 * $57,513 $397,399 * $57,513 $397,399
30 * $ 1,420 $619,911 * $ 1,420 $619,911
35 * * $969,858 * * $969,858
</TABLE>
- -------
This illustration assumes no policy loans or partial withdrawals have been
made.
*Additional payment will be required to prevent policy termination.
THE DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES WILL DIFFER
IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR AT DIFFERENT TIMES.
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED TO REPRESENT PAST OR FUTURE
INVESTMENT RESULTS. ACTUAL RATES MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE TO
VARIABLE ACCOUNTS AND THE EXPERIENCE OF THE ACCOUNTS. NO REPRESENTATION CAN BE
MADE BY US, THE SEPARATE ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THIS IS AN ILLUSTRATION ONLY. AN ILLUSTRATION IS NOT INTENDED TO PREDICT
ACTUAL PERFORMANCE. INTEREST RATES, DIVIDENDS, AND VALUES SET FORTH IN THE
ILLUSTRATION ARE NOT GUARANTEED.
88
<PAGE>
[LOGO OF PACIFIC SELECT ESTATE MAXIMIZER]
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 INSURANCE MARKETPLACE STANDARDS ASSOCIATION]*
*Membership promotes ethical market conduct
for individual life insurance and annuities
FORM NO. 15-20632-02
<PAGE>
Supplement to Prospectus Dated May 1, 1998 for
Pacific Select Exec, Pacific Select Choice, Pacific Select Estate
Preserver Last Survivor and Pacific Select Estate Preserver II Last Survivor
Flexible Premium Variable Life Insurance Policies
and Pacific Select Estate Maximizer
Modified Single Premium Variable Life Insurance Policies
Each Issued by Pacific Life Insurance Company
Capitalized terms used in this supplement are defined in the prospectuses
referred to above or the prospectus for M Fund, Inc. ("M Fund").
Introduction
A Policy Owner may choose to allocate net premium payments to four
additional options available under the Policy (the "Investment Options") that
are funded through the Variable Accounts of the Separate Account: The Edinburgh
Overseas Equity Variable Account ("Variable Account I"), Turner Core Growth
Variable Account ("Variable Account II"), the Frontier Capital Appreciation
Variable Account ("Variable Account III"), and the Enhanced U.S. Equity Variable
Account ("Variable Account IV"). A Policy Owner also may transfer Accumulated
Value to the Variable Accounts funding these additional Variable Investment
Options. The Variable Accounts funding the additional Variable Investment
Options invest in the following corresponding portfolios ("Portfolios") of M
Fund:
Variable Account I: Edinburgh Overseas Equity Fund
Variable Account II: Turner Core Growth Fund
Variable Account III: Frontier Capital Appreciation Fund
Variable Account IV: Enhanced U.S. Equity Fund
In addition to these Investment Options, a Policy Owner may allocate all or
a portion of net premium payments and transfer Accumulated Value to the Variable
Accounts or the Fixed Account of Pacific Life Insurance Company ("Pacific Life",
"we" "us", or "our", formerly known as Pacific Mutual Life Insurance Company)
described in the accompanying prospectus for the Policy.
Except as described below in relation to the four additional Variable
Investment Options, all features of the Policy and all operational procedures
regarding the Policy remain in effect as described in the Policy's prospectus.
INFORMATION ABOUT M 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.
<PAGE>
The chart below summarizes some basic information about each Portfolio of M
Fund offered to the Separate Account. There can be no assurance that any
Portfolio will achieve its objective. More detailed information is contained in
the accompanying prospectus of M Fund, including information on the risks
associated with the investments and investment techniques of each Portfolio of M
Fund.
M FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS SUPPLEMENT AND SHOULD BE
READ CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
Primary Investments Investment
(under normal Adviser/Portfolio
Portfolio Objective circumstances) Manager
- ----------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C>
Edinburgh Overseas Long-term capital Common stock and M Financial Invest-
Equity Fund appreciation with common stock equi- ment Advisers, Inc.
reasonable invest- valents of foreign ("MFIA")/Edinburgh
ment risk through issuers, including Fund Managers plc.
active management smaller issuers and
and investment in issuers located in
common stock and small, emerging
common stock equi- markets
valents of foreign
issuers
Turner Core Growth Long-term capital Common stocks that MFIA/Turner
Fund appreciation through show strong earnings Investment Partners,
a diversified port- potential with Inc.
folio of common reasonable market
stocks that show prices
strong earnings
potential with
reasonable market
prices
Frontier Capital Maximum capital Common stock of com- MFIA/Frontier
Appreciation Fund appreciation through panies of all sizes, Capital Management
investment in common with emphasis on Company, Inc.
stock of companies stocks of small- to
of all sizes, with medium-capitaliza-
emphasis on stocks tion companies
of small- to medium- (i.e., companies
----
capitalization with market capi-
companies talization of less
than $3 billion)
Enhanced U.S. Equity Above-market total Common stocks of MFIA/Franklin
Fund return through in- companies perceived Portfolio Associates
vestment in common to provide a return LLC
stock of companies higher than that of
perceived to provide the S&P 500 at
a return higher than approximately the
that of the same level of
Standard & Poor's investment risk
500 Composite Stock
Price Index ("S&P
500") at approximately
the same level of
investment risk as the
S&P 500
</TABLE>
-2-
<PAGE>
The Investment Adviser and Portfolio Managers
M Financial Investment Advisers, Inc. ("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.
SUMMARY OF THE POLICY
The following supplements the discussion included in the Policy's
prospectus under "SUMMARY OF THE POLICY: Charges and Deductions".
M Fund 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>
Edinburgh Overseas 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 MFIA 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 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 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.
THE POLICY
All features of the Policy described in its prospectus remain intact.
-3-
<PAGE>
The following discussion supplements the one included in the Policy's
prospectus under "CHARGES AND DEDUCTIONS - Other Charges."
Other Charges
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 the prospectus of M Fund.
We will exercise voting rights attributable to shares of M Fund consistent
with the discussion in the prospectus on "Voting of Fund Shares." The rights we
have as described in the prospectus under "Disregard of Voting Instructions" and
"Substitution of Investments" also apply to M Fund and its Portfolios.
Report to Owners
We will send to each Policy Owner any annual and semiannual reports
containing financial statements for M Fund that we receive from that fund.
ILLUSTRATIONS
Upon request, we will furnish individualized illustrations reflecting allocation
of net premiums to one or more of the Variable Accounts that each invest in a
corresponding Portfolio of M Fund, which will reflect the expenses (after
payment of certain operating expenses by MFIA and exclusive of foreign taxes) of
the Portfolio(s), described above, and under "SUMMARY OF THE POLICY: Charges and
Deductions". Foreign taxes were equal to 0.23% and 0.01% of the average daily
net assets of the Edinburgh Overseas Equity Fund, and the Enhanced U.S. Equity
Fund, respectively.
Supplement Dated May 1, 1998
Form No. 15-20535-03
-4-
