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PACIFIC SELECT
ESTATE MAXIMIZER PROSPECTUS MAY 1, 1999
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Pacific Select Estate Maximizer is a modified single premium variable life insurance
policy issued by Pacific Life Insurance Company. In Texas, this Policy is called a
flexible premium variable life insurance policy.
This Policy is not available in This prospectus provides information that you should know before buying a Policy. It's
all states. This prospectus is accompanied by a current prospectus for the Pacific Select Fund, a Fund that provides the
not an offer in any state or underlying Portfolios for the Variable Investment Options offered under the Policy.
jurisdiction where we're not Please read these prospectuses carefully and keep them for future reference.
legally permitted to offer the
Policy. Here's a list of all the Investment Options available under your Policy:
The Policy is described in detail VARIABLE INVESTMENT OPTIONS
in this prospectus. The Pacific
Select Fund is described in its Money Market Large-Cap Value
prospectus and in its Statement High Yield Bond Mid-Cap Value
of Additional Information (SAI). Managed Bond Equity
No one has the right to describe Government Securities Bond and Income
the Policy or the Pacific Select Growth Equity Index
Fund any differently than they Aggressive Equity Small-Cap Index
have been described in these Growth LT REIT
documents. Equity Income International
Multi-Strategy Emerging Markets
You should be aware that the
Securities and Exchange FIXED OPTION
Commission (SEC) has not reviewed
the Policy for its investment Fixed Account
merit, and does not guarantee
that the information in this
prospectus is accurate or
complete. It's a criminal offense
to say otherwise.
This policy will usually be a
modified endowment contract. Any
loan, surrender or withdrawal may
be subject to income tax and a 10%
penalty tax.
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YOUR GUIDE TO THIS PROSPECTUS
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Terms Used in This Prospectus 3 Performance Information 30
- ----------------------------------------------------------------------- --------------------------------------------------------
An Overview of Pacific Select Estate Maximizer 4 The Fixed Account 31
- ----------------------------------------------------------------------- General Description 31
Information about Pacific Life, the Separate Account, and the Fund 11 Transfers, Surrenders, Withdrawals, and Policy Loans 32
Pacific Life Insurance Company 11 --------------------------------------------------------
Pacific Select Exec Separate Account 11 More about the Policy 32
The Pacific Select Fund 12 Ownership 32
The Investment Adviser and Portfolio Managers 14 Beneficiary 32
- ----------------------------------------------------------------------- The Contract 32
The Policy 14 Payments 33
Application for a Policy 14 Assignment 33
Premiums 14 Errors on the Application 33
Additional Premium Payments 14 Incontestability 33
Allocation of Premiums 15 Payment in Case of Suicide 33
Portfolio Rebalancing 15 Dividends 33
Dollar Cost Averaging Option 16 Policy Illustrations 33
Transfer of Accumulated Value 16 Payment Plan 34
Death Benefit 17 Optional Insurance Benefits and Other Policies 34
Policy Values 18 Retirement Income Strategy Using Life Insurance 34
Determination of Accumulated Value 19 Risks Regarding Retirement Income Strategy
Policy Loans 19 Using Life Insurance 34
Duration of Contract 20 Distribution of the Policy 35
Surrender 20 --------------------------------------------------------
Partial Withdrawals 20 More about Pacific Life 36
Right to Examine a Policy--Free-Look Right 21 Management 36
Lapse 21 State Regulation 38
Reinstatement 22 Telephone Transfer and Loan Privileges 38
Last Survivor Policies 22 Legal Proceedings 38
- ----------------------------------------------------------------------- Legal Matters 38
Charges and Deductions 22 Registration Statement 38
Load from Premiums 22 Preparation for the Year 2000 39
Surrender Charge 22 Independent Auditors 39
Deductions from Accumulated Value 23 Financial Statements 39
Other Charges 24 --------------------------------------------------------
Guarantee of Certain Charges 24 Illustrations 85
Variations in Charges 24 --------------------------------------------------------
Usage 25 Appendix 95
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Other Information 25 Where to Go for More Information Back Cover
Federal Income Tax Considerations 25
Charge for our Income Taxes 28
Voting of Fund Shares 28
Disregard of Voting Instructions 29
Confirmation Statements and Other Reports to Owners 29
Substitution of Investments 29
Replacement of Life Insurance or Annuities 30
Changes to Comply with Law 30
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TERMS USED IN THIS PROSPECTUS
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Some of the terms we've used in Monthly Payment Date - The day each month
this prospectus may be new to you. on which monthly deductions and charges
We've identified them in this are assessed against the Accumulated Value.
prospectus by capitalizing the first The first Monthly Payment Date is the
letter of each word. You'll find an Policy Date.
explanation of what they mean below.
Net Cash Surrender Value - The Cash
In this prospectus, Owner, you and Surrender Value less Policy Debt.
your mean the Policyholder or Policy
Owner. Pacific Life, we, us and our refer Policy Date - The date used to determine
to Pacific Life Insurance Company. The the Monthly Payment Date, Policy Years,
Fund refers to Pacific Select Fund. Policy and Policy Monthly, Quarterly, Semi-Annual,
means a Pacific Select Estate Maximizer and Annual Anniversaries. It is usually the
variable life insurance policy, unless we later of the date the application is accepted
state otherwise. by us or the date we receive the first premium
payment. The term "Issue Date" is substituted
If you have any questions, please ask for Policy Date with respect to Policies
your registered representative or call issued to residents of the Commonwealth of
us at 1-800-800-7681. Massachusetts.
Accumulated Value - The total value of Policyholder, Policy Owner, Owner, you, or
the amounts in the Investment Options your - The person or persons who own the Policy.
for the Policy as well as any amount set The Policy Owner will be the Insured(s) unless
aside in the Loan Account, including any otherwise stated in the application. If your
accrued earned interest, as of any Policy has been absolutely assigned, the assignee
Valuation Date. becomes the Owner. A collateral assignee is not
the Owner.
Age - An Insured's age as of his or her
last birthday as of the Policy Date, Preferred Withdrawal - The amount of the first
increased by the number of complete withdrawal in any Policy Year (including a
Policy Years elapsed. surrender) that does not exceed the Free Withdrawal
Amount. If there is no Free Withdrawal Amount at
Beneficiary - The person or persons you the time of the first withdrawal in a Policy Year,
name in the application or by proper the next withdrawal in the same Policy Year will be
later designation to receive the death considered the first.
benefit proceeds upon the death of the
Insured(s). Separate Account - The Pacific Select Exec Separate
Account, a separate account of ours registered as a
Cash Surrender Value - The Accumulated unit investment trust under the Investment Company
Value, less any applicable surrender Act of 1940.
charge.
Survivor - In a last survivor Policy, the last
Debt - The unpaid loan balance including Insured alive while the Policy is in force.
accrued loan interest.
Valuation Date - Each date on which the Separate
Face Amount - You'll find your Policy's Account is valued, which currently includes each day
Face Amount, which includes any that the New York Stock Exchange is open for trading
increases or decreases, in the and on which our client services offices are open.
specification pages in your Policy. The New York Stock Exchange is closed on weekends
and on: New Year's Day, Martin Luther King, Jr.
Fixed Account - An account that is part Day, Presidents' Day, Good Friday, Memorial Day,
of our General Account. All or a portion July Fourth, Labor Day, Thanksgiving Day, and
of premium payments may be allocated to Christmas Day. Our administrative offices are
the Fixed Account for accumulation at a normally closed on the following: the Monday before
fixed rate of interest (which may not be New Year's Day, July Fourth, or Christmas Day if any
less than 3.0%) declared periodically of those holidays falls on a Tuesday; the Tuesday
by us. before Christmas Day if that holiday falls on a
Wednesday; the Friday after New Year's Day, July
Free Withdrawal Amount - The lesser of Fourth or Christmas Day if any of these holidays
contract earnings under the Policy or falls on a Thursday; the Friday after Thanksgiving.
10% of the initial premium. If there are no
earnings at the time of the withdrawal, If any transaction or event called for under a
the Free Withdrawal Amount is zero. For Policy is scheduled to occur on a day that is not a
purposes of determining this amount, earnings Valuation Date, such transaction or event will be
under the Policy are Accumulated Value deemed to occur at the end of the next following
less total premiums paid, plus all prior Valuation Date unless otherwise specified.
partial withdrawals deemed to be
withdrawals of premium for surrender Valuation Period - The period that starts at the
charge purposes. close of a Valuation Date and ends at the close of
the next succeeding Valuation Date.
General Account - All of our assets other
than those allocated to the Separate Variable Account - A subaccount of our Separate
Account or to any of our other segregated Account, which is used only to support the variable
separate accounts. death benefits and policy values of variable life
insurance policies, and the assets of which are
Guideline Single Premium or Guideline segregated from our General Account and our other
Level Premiums - The maximum amount of separate accounts. The Pacific Select Exec Separate
premium or premiums that can be paid for Account serves as the funding vehicle for the
any given Face Amount in order to qualify Policies. The Money Market Variable Account,
this Policy as life insurance for tax High-Yield Bond Variable Account, Managed Bond
purposes as specified in Section 7702 of Variable Account, Government Securities Variable
the Internal Revenue Code. Account, Growth Variable Account, Aggressive Equity
Variable Account, Growth LT Variable Account,
Home Office - The Client Services Equity Income Variable Account, Multi-Strategy
Department at our main office. The Variable Account, Large-Cap Value Variable
address is shown on the back cover. Account, Mid-Cap Value Variable Account, Equity
Variable Account, Bond and Income Variable Account,
Insured or Insured(s) - The person or Equity Index Variable Account, Small-Cap Index
persons whose death is the contingency Variable Account, REIT Variable Account,
upon which the death benefit proceeds are International Variable Account, and Emerging
payable. Markets Variable Account are currently all
subaccounts of the Separate Account.
Investment Option - The Fixed Account or
one of the Variable Accounts.
Loan Account - An account that holds
Accumulated Value set aside to secure
Policy loans.
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AN OVERVIEW OF PACIFIC SELECT ESTATE MAXIMIZER
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This overview tells you some key things you should know about your Policy.
It's designed as a summary only - please read the entire prospectus and
your Policy for more detailed information.
Some states have different rules about how life insurance policies
are described or administered. The terms of your Policy, or of any
endorsement or rider, prevails over what's in this prospectus.
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Pacific Select Pacific Select Estate Maximizer is a modified single premium variable life
Estate Maximizer Basics insurance policy.
Modified single premium life . Modified single premium means you pay an initial premium and have limited
insurance policies are usually ability to make additional premium payments.
classified for tax purposes as
modified endowment contracts, . Variable means the Policy's value depends on the performance of the
which means that withdrawals, Investment Options you choose.
loans, pledges, assignments, and
surrenders are all considered . Life insurance means the Policy provides a death benefit to the Beneficiary
distributions and may be subject you choose.
to income tax and a 10% penalty
tax. Pacific Select Estate Maximizer can insure the lives of one person or two
people. If it insures the life of one person, it's called a single life policy,
This Policy may be appropriate and provides a death benefit after that person dies. If it insures the lives of
if you want to provide a death two people, it's called a last survivor policy, and provides a death benefit
benefit or to help meet other after both people have died. Last survivor life insurance may be appropriate
long-term financial objectives. for two spouses who want to provide a death benefit for their children. A
It may not be the right kind of single life policy may be more appropriate for someone who wants to provide a
Policy if you plan to withdraw death benefit for his or her spouse.
money for short-term needs.
In addition to providing a death benefit that is generally free of federal
Please discuss your insurance income tax, any growth in your Policy's Accumulated Value is tax-deferred. You
needs and financial objectives can choose from 18 Variable Investment Options, each of which invests in a
with your registered corresponding Portfolio of the Pacific Select Fund, and a Fixed Option that
representative. provides a guaranteed minimum rate of interest.
You'll find more about the basics of Please take some time to read the information in this prospectus before you
Pacific Select starting on page 14. decide if this Policy meets your insurance needs and financial objectives.
Your Right to Examine a Policy - Free-Look Right
During the Free-Look Period, you have the right to cancel your Policy and
return it to us or your registered representative for a refund of the premiums
you've paid. We'll hold your premium in the Money Market Investment Option
until the Free-Look Transfer Date.
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The Death Benefit The death benefit is the greater of your Policy's Face Amount or its
Accumulated Value multiplied by a specified percentage (called the Guideline
Your Policy provides a death benefit for Minimum Death Benefit).
your Beneficiary after the people
insured by the Policy have died, as long We'll pay death benefit proceeds to your Beneficiary when we receive proof of
as your Policy is in force. death, along with payment instructions.
You'll find more about the death benefit
starting on page 17.
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How Premiums Work Generally, your first premium payment must be at least $10,000. If the person
insured by the Policy is 70 years of age or older, your first premium payment
Your first premium must be 80%, 90% must be at least $50,000. If the Policy insures two people, the minimum amount
or 100% of your Policy's Guideline Single of the first premium payment is based on the age of the younger of the two
Premium. people.
In West Virginia the Face Amount of You have limited ability to make additional premium payments, and each
your Policy must be at least $25,000. additional premium payment must be at least $1,000.
You'll find more about premiums on page 14. We do not deduct any charges from your premium payments.
For information about the "seven pay Limits on the Premium Payments You Can Make
premium" test and modified endowment Federal tax law puts limits on the premium payments you can make in relation to
contracts, see Federal Income Tax your Policy's death benefit. We may refuse all or part of a premium payment you
Considerations, starting on page 25. make, or remove all or part of a premium from your Policy and return it to you
under certain circumstances.
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Your Policy's Accumulated Value Accumulated Value is the value of your Policy on any Valuation Date. It is not
guaranteed--it depends on the performance of the Investment Options you've
Accumulated Value is used as the basis chosen, the premium payments you've made, Policy charges, and how much you've
for determining Policy benefits and borrowed or withdrawn from the Policy.
charges. If there is not enough Accumulated
Value to cover the monthly charges, Monthly Deductions
your Policy could lapse. We deduct four monthly charges from your Policy's Accumulated Value on each
Monthly Payment Date: a cost of insurance charge, an administrative charge, a
You'll find more about Accumulated tax expense charge and a mortality and expense risk charge.
Value on page 18.
Lapsing and Reinstatement
You'll find more about the monthly charges If there is not enough Accumulated Value to cover the monthly charges on the day
on page 23. we make the deduction, your Policy may lapse--which means you'll no longer have
any insurance coverage. If your Policy is in danger of lapsing, we'll give you
You'll find more about lapsing a Grace Period of 61 days to pay the required premium. If your Policy lapses,
and reinstatement starting on page 21. you have three years from the end of the Grace Period to apply for a
reinstatement.
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AN OVERVIEW OF PACIFIC SELECT ESTATE MAXIMIZER
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Your Investment Options You can choose from 18 Variable Investment Options, each of which invests in a
corresponding portfolio of the Pacific Select Fund. We're the Investment
The Investment Options you choose Adviser for the Pacific Select Fund. We oversee the management of all the
will affect your Policy's Fund's Portfolios and manage two of the Portfolios directly. We've retained other
Accumulated Value, and may affect portfolio managers to manage the other portfolios. The value of each Portfolio
the death benefit. will fluctuate with the value of the investments it holds, and returns are not
guaranteed.
Please review the Investment
Options carefully and ask your You can also choose a Fixed Option, called the Fixed Account, that provides a
registered representative to help guaranteed minimum annual interest rate of 3%. We may offer a higher interest
you choose the right ones for rate. If we do, we'll guarantee that rate for one year. In the first year,
your goals and risk tolerance. however, we do not guarantee a rate higher than 6%.
You'll find more about the We allocate your premium payments and Accumulated Value to the Investment
Variable Investment Options on Options you choose. Your Policy's Accumulated Value will fluctuate depending on
page 13 and The Fixed Account on the Investment Options you've chosen. You bear the investment risk of any
page 31. Variable Investment Options you choose.
We'll hold your premium payments Transferring Among Investment Options
in the Money Market Investment You can transfer among the Investment Options during the life of your Policy
Option until the Free Look Transfer without paying any current income tax. There is currently no charge for
Date. Please turn to Right to transfers.
Examine a Policy - Free Look Right
for details. You can make as many transfers as you like between Variable Investment Options.
You can also make automatic transfers from one Variable Investment Option to
another by using our dollar cost averaging or portfolio rebalancing programs.
These programs are not available for the Fixed Account.
You can only make one transfer from the Fixed Account to the Variable
You'll find more about transfers Investment Options in any 12-month period, and each transfer may be no more
on pages 16 and 32. than $5,000 or 25% of the Accumulated Value in the Fixed Account, whichever is
greater. You can only transfer to the Fixed Account in the Policy Month right
before each Policy Anniversary.
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Withdrawals, Surrenders and You can take out all or part of your Policy's Accumulated Value while your
Loans Policy is in force by making withdrawals or surrendering your Policy. You can
take out a loan from us using your Policy as security.
Making a withdrawal, taking out a
loan or surrendering your Policy Making Withdrawals
can generate taxable income, You can withdraw part of your Policy's Net Cash Surrender Value starting on
change your Policy's tax status, your first Policy Anniversary. This reduces your Policy's Accumulated Value and
or make your Policy more could reduce the Face Amount and death benefit. We may deduct a Surrender
susceptible to lapsing. Be sure Charge if you make a withdrawal during the first nine Policy Years. You can
to plan carefully before using make one Preferred Withdrawal every Policy Year. There is no Surrender Charge
these Policy benefits. on Preferred Withdrawals.
You'll find more about making Taking Out a Loan
withdrawals on pages 20 and 32. You can take out a loan from us using your Policy's Accumulated Value as
security. You pay interest on the amount you borrow at an annual rate of 6%
. The Accumulated Value used during the first 10 Policy Years and 5% thereafter. The Accumulated Value
You'll find more about taking used to secure your loan is set aside in a Loan Account, where it earns
out loans on pages 19 and 32. interest at 4.5% a year. A portion of the amount you borrow may qualify as a
Preferred Loan. On Preferred Loans, we charge interest at an annual rate of
5.25% in the first 10 Policy years and 4.75% thereafter.
The amount in the Loan Account is not available to help pay for any Policy
charges. Taking out a loan affects the Accumulated Value of your Policy because
the amount set aside in the Loan Account misses out on the potential earnings
available through the Investment Options.
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You'll find out more about surrendering Surrendering Your Policy
your Policy on pages 20 and 32. You can surrender or cash in your Policy for its Net Cash
Surrender Value while the person insured or either of the
two people insured, by the Policy is still living. If you
surrender your Policy during the first nine Policy Years,
we'll apply a Surrender Charge.
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Variable Life Insurance and Your Taxes Your Beneficiary generally will not have to pay federal
income tax on death benefit proceeds. You'll also
There are tax issues to consider when generally not be taxed on any or all of the growth in
you own a life insurance policy. These are your Policy's Accumulated Value unless you receive a cash
described in detail starting on page 25. distribution.
Pacific Select Estate Maximizer is a modified single
premium variable life insurance policy. It will probably
be classified for tax purposes as a type of life
insurance policy called a modified endowment contract.
Distributions you receive from a modified endowment
contract are taxed differently than under conventional
life insurance policies. Withdrawals, loans, pledges,
assignments, and surrenders are all considered
distributions and may be subject to income tax and,
if you are under age 59 1/2, may be subject to a 10%
penalty tax.
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About Pacific Life Pacific Life is a life insurance company based in
California. We issue the Policies. Pacific Mutual
When you buy a life insurance policy, Distributors, Inc., our subsidiary, is the distributor
you're relying on the insurance company of the Policies.
that issues it to be able to meet its
financial obligations to you. How Our Accounts Work
We put your premium payments in our General and Separate
You'll find more about Pacific Life, and Accounts. We own the assets in our Accounts and make the
our strength as a company, starting on allocations to the Investment Options you've chosen.
page 11.
Amounts allocated to the Fixed Account are held in our
General Account. Our General Account includes all of our
assets, except for those held in our separate accounts.
Our ability to meet our obligations under the Policy is
backed by our strength as an insurance company.
Amounts allocated to the Variable Investment Options are
held in our Separate Account. The assets in this Account
are kept separate from the assets in our General Account
and our other separate accounts, and are protected from
our general creditors.
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Processing Payments, Forms and Effective Date
Requests The effective date of payments, forms and requests you
send us is usually determined by the day and time we
Call us or contact your registered receive the item in proper form at the mailing address
representative if you have any questions that appears on the back cover of this prospectus.
about the proper form required for a
request. Planned periodic premium payments, loan requests,
transfer requests, loan payments or withdrawal requests
To request payment of death benefit that we receive in proper form before 4:00 p.m. Eastern time
proceeds, send us proof of death and on a Valuation Date will normally be effective as of the
payment instructions. end of that day, unless the transaction is scheduled to
occur on another Valuation Date. If we receive your
payment or request on or after 4:00 p.m. Eastern time on a
Valuation Date, your payment or request will be effective
as of the end of the next Valuation Date. If a
transaction is scheduled to occur on a day that is not a
Valuation Date, we'll process it as of the end of the
next Valuation Date.
Proper Form
We'll process your requests once we receive all letters,
forms or other necessary documents, completed to our
satisfaction. Proper form may require, among other things,
a signature guarantee or some other proof of authenticity.
We do not generally require a signature guarantee unless
it appears that your signature has changed, if it appears
the signature is not yours, if we have not received a
properly completed application or confirmation of an
application, or for other reasons to protect you and us.
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AN OVERVIEW OF PACIFIC SELECT ESTATE MAXIMIZER
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This section of the overview explains the fees and expenses associated with
your Pacific Select Estate Maximizer Policy.
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Understanding Policy Expenses
and Cash Flow Your Premium
You make a We do not deduct any
The chart to the right illustrates how cash premium payment charges from your
normally flows through a Pacific Select and we allocate premium payments
Estate Maximizer Policy. it to the
Investment
The dark shaded boxes show the fees and Options you choose
expenses you pay directly or indirectly
under your Policy. These are explained
in the pages that follow.
Fixed Option Variable Pacific Select The Fund
We hold your premium payment in the Money We hold Investment Fund deducts
Market Investment Option until the Free amounts you Options The Variable advisory fees
Look Transfer Date. Please turn to Right allocate to this We hold amounts Investment Options and other Fund
to Examine a Policy - Free-Look Right for Option in our you allocate to invest in expenses from
details. General Account these Options in the Fund's the Portfolios
our Separate Portfolios
Account
We deduct:
. cost of
insurance
charge
We make monthly . administrative
deductions charge
. tax expense
charge
Loan Account Accumulated . mortality and
Accumulated Value expense risk
Value set aside The total charge
to secure a value of
Policy loan your Policy
If you make a withdrawal We deduct a
or surrender your Policy Surrender
during the first nine Charge from your
Policy Years Accumulated Value
unless it's a
Preferred
Withdrawal
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Deductions from Your Premiums We do not deduct any charges from your premium payments before allocating them
to your Investment Options.
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Deductions from Your We deduct four monthly charges from your Policy's Accumulated Value in the
Policy's Accumulated Value Investment Options on each Monthly Payment Date:
The monthly charges are explained Cost of Insurance Charge - We calculate this charge by multiplying the current
in more detail starting on page 23. cost of insurance rate by a discounted net amount at risk at the beginning of
each Policy Month.
An example
For a Policy in its second Policy Administrative Charge - We deduct this charge at an annual rate of 0.30%
Year: (0.025% monthly) of your Policy's Accumulated Value. If the Accumulated Value
. that insures the life of a male is less than $50,000 on any Policy Anniversary Date, there will be an
age 60 when the Policy was issued additional charge of $40.
. with a Face Amount of $80,000
. with Accumulated Value of Tax Expense Charge - We deduct this charge at an annual rate of 0.40%
$40,000. (0.0333333% monthly) of your Policy's Accumulated Value during the first
10 Policy Years. You no longer pay a tax expense charge starting in Policy
The monthly cost of insurance Year 11.
charge is $61.42.
(0.00154303 x (($80,000/1.002466)- Mortality and Expense Risk Charge - We deduct this charge at an annual rate of
$40,000)). 0.90% (0.075% monthly) of your Policy's Accumulated Value during the first 10
Policy Years. During Policy Year 11 and thereafter, we reduce the annual rate
to 0.70% (0.0583333% monthly).
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Withdrawal and Surrender Charges A Preferred Withdrawal is usually the amount of the first withdrawal in any
Policy Year that does not exceed the Free Withdrawal Amount.
The Surrender Charge is We may deduct a Surrender Charge if you make a withdrawal or surrender your
explained in more detail on page 22. Policy during the first nine Policy Years. The rate we charge is shown in the
table below. There is no Surrender Charge on Preferred Withdrawals.
An example
If your first premium is $50,000 The Surrender Charge rate is applied to the lesser of the amount of the
and you have not made any withdrawal (less any Preferred Withdrawal) or the amount of the first premium
previous withdrawals, the maximum payment considered withdrawn. Total cumulative Surrender Charges will never be
Surrender Charge we could deduct more than 10% of the first premium payment.
would be:
. $5,000 in Policy Year 2 if We deduct the charge from your Investment Options in proportion to the
Accumulated Value is $50,000 or Accumulated Value you have in each Option unless you tell us otherwise.
more (10% x $50,000)
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. $3,150 in Policy Year 5 if Policy
Accumulated Value is $45,000 Year Surrender Charge Rate
(7% x $45,000) ----------------------------------------------------
1-2 10%
3 9%
4 8%
5 7%
6 6%
7 5%
8 4%
9 3%
10 or more 0%
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AN OVERVIEW OF PACIFIC SELECT ESTATE MAXIMIZER
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Fees and Expenses Paid by the The Pacific Select Fund pays advisory fees and other expenses. These are
Pacific Select Fund deducted from the assets of the Fund's Portfolios and may vary from year to
year. They are not fixed and are not part of the terms of your Policy. If you
You'll find more about the Pacific choose a Variable Investment Option, these fees and expenses affect you
Select Fund starting on page 12, and in the indirectly because they reduce Portfolio returns.
Fund's prospectus, which accompanies this
prospectus. Advisory Fee
Pacific Life is the Investment Adviser to the Fund. The Fund pays an advisory
fee to us for these services. The table below shows the advisory fee as an
annual percentage of each Portfolio's average daily net assets.
Other Expenses
The table also shows expenses the Fund paid in 1998 as an annual percentage of
each Portfolio's average daily net assets. To help limit Fund expenses, we've
agreed to waive all or part of our investment advisory fees or otherwise reimburse
each Portfolio for expenses (not including advisory fees, additional costs
associated with foreign investing and extraordinary expenses) that exceed 0.25% of
its average daily net assets. We do this voluntarily but do not guarantee we'll
continue to do so after December 31, 2000. No reimbursement was necessary for 1998.
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Portfolio Advisory Fee Other Expenses Total Expenses
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Money Market/1/ 0.37% 0.06% 0.43%
High Yield Bond/1/ 0.60% 0.06% 0.66%
Managed Bond 0.60% 0.06% 0.66%
Government Securities 0.60% 0.06% 0.66%
Growth 0.65% 0.05% 0.70%
Aggressive Equity 0.80% 0.09% 0.89%
Growth LT 0.75% 0.05% 0.80%
Equity Income/1/ 0.65% 0.05% 0.70%
Multi-Strategy/1/ 0.65% 0.06% 0.71%
Large-Cap Value/2/ 0.85% 0.06% 0.91%
Mid-Cap Value/2/ 0.85% 0.06% 0.91%
Equity 0.65% 0.06% 0.71%
Bond and Income 0.60% 0.10% 0.70%
Equity Index 0.16% 0.05% 0.21%
Small-Cap Index/2/ 0.50% 0.06% 0.56%
REIT/2/ 1.10% 0.06% 1.16%
International 0.85% 0.15% 1.00%
Emerging Markets 1.10% 0.36% 1.46%
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/1/ Total net expenses for these Portfolios in 1998, after deduction of an offset
for custodian credits, was: 0.42% for Money Market Portfolio, 0.65% for High Yield
Bond Portfolio, 0.69% for Equity Income Portfolio, and 0.70% for Multi-Strategy
Portfolio.
/2/ Expenses are estimated. There were no actual advisory fees or other expenses for
these Portfolios in 1998 because the Portfolios started on January 4, 1999.
</TABLE>
10
<PAGE>
INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT, AND THE FUND
Pacific Life Insurance Company
We are a life insurance company that is based in California. Along with our
subsidiaries and affiliates, our operations include life insurance, annuities,
pension and institutional products, group employee benefits, broker-dealer
operations and investment advisory services. As of the end of 1998, we had
$89.6 billion of individual life insurance in force and total admitted assets
of approximately $37.6 billion. We have been ranked according to admitted
assets as the 18th largest life insurance carrier in the nation based on
December 31, 1998 assets. The Pacific Life family of companies has total assets
and funds under management of $290 billion as of December 31, 1998. We are
authorized to conduct life insurance and annuity business in the District of
Columbia and all states except New York. Our principal office is 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 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.
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.
11
<PAGE>
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
eighteen separate Portfolios to the Separate Account that fund the Variable
Investment Options available to you. Each Portfolio pursues different
investment objectives and policies. We purchase the shares of each Portfolio
for the corresponding Variable Account at net asset value, i.e., without sales
load. All dividends and capital gains distributions received from a Portfolio
are automatically reinvested in such Portfolio at net asset value, unless we,
on behalf of the Separate Account, elect otherwise. Fund shares will be
redeemed by us at their net asset value to the extent necessary to make
payments under the Policies.
Shares of the Fund currently are offered for purchase only to separate
accounts of ours and our affiliates and/or subsidiaries to serve as an
investment medium for variable life insurance policies and for variable annuity
contracts issued or administered by us. Shares of the Fund may also be sold in
the future to separate accounts of other insurance companies, either affiliated
or not affiliated with us. Investment in the Fund by other separate accounts in
connection with variable annuity and variable life insurance contracts may
potentially create conflicts. See "Information for investors" in the
accompanying prospectus of the Fund.
The following chart summarizes some basic data about each Portfolio of the
Fund offered to the Separate Account. There can be no assurance that any
Portfolio will achieve its objective. This chart is only a summary. You should
read the more detailed information which is contained in the accompanying
prospectus of the Fund, including information on the risks associated with the
investments and investment techniques of each of the Portfolios.
12
<PAGE>
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
Primary Investments
Portfolio Objective (under normal circumstances) Portfolio Manager
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Current income consistent Highest quality money Pacific Life
with preservation of market instruments
capital. believed to have limited
credit risk.
- ----------------------------------------------------------------------------------------------
High Yield High level of current Fixed income securities Pacific Life
Bond income. with lower and medium-
quality credit ratings and
intermediate to long terms
to maturity.
- ----------------------------------------------------------------------------------------------
Managed Bond Maximize total return Medium and high-quality Pacific Investment
consistent with prudent fixed income securities Management Company
investment management. with varying terms to
maturity.
- ----------------------------------------------------------------------------------------------
Government Maximize total return Fixed income securities Pacific Investment
Securities consistent with prudent that are issued or Management Company
investment management. guaranteed by the U.S.
government, its agencies
or government-sponsored
enterprises.
- ----------------------------------------------------------------------------------------------
Growth Growth of capital. Equity securities of Capital Guardian
smaller and medium-sized Trust Company
companies.
- ----------------------------------------------------------------------------------------------
Aggressive Capital appreciation. Equity securities of small Alliance Capital
Equity emerging-growth companies Management L.P.
and medium-sized
companies.
- ----------------------------------------------------------------------------------------------
Growth LT Long-term growth of Equity securities of a Janus Capital
capital consistent with large number of companies Corporation
the preservation of of any size.
capital.
- ----------------------------------------------------------------------------------------------
Equity Income Long-term growth of Equity securities of large J.P. Morgan
capital and income. and medium-sized dividend- Investment Management
paying U.S. companies. Inc.
- ----------------------------------------------------------------------------------------------
Multi-Strategy High total return. A mix of equity and fixed J.P. Morgan
income securities. Investment Management
Inc.
- ----------------------------------------------------------------------------------------------
Large-Cap Long-term growth of Equity securities of large Salomon Brothers
Value capital. Current income is U.S. companies. Asset Management Inc
of secondary importance.
- ----------------------------------------------------------------------------------------------
Mid-Cap Value Capital appreciation. Equity securities of Lazard Asset
medium-sized U.S. Management
companies believed to be
undervalued.
- ----------------------------------------------------------------------------------------------
Equity Capital appreciation. Equity securities of large Goldman Sachs
Current income is of U.S. growth-oriented Asset Management
secondary importance. companies.
- ----------------------------------------------------------------------------------------------
Bond and Total return and income A wide range of fixed Goldman Sachs
Income consistent with prudent income securities with Asset Management
investment management. varying terms to maturity,
with an emphasis on long-
term bonds.
- ----------------------------------------------------------------------------------------------
Equity Index Investment results that Equity securities of Bankers Trust
correspond to the total companies that are Company
return of common stocks included in the Standard &
publicly traded in the Poor's 500 Composite Stock
U.S. Price Index.
- ----------------------------------------------------------------------------------------------
Small-Cap Investment results that Equity securities of Bankers Trust
Index correspond to the total companies that are Company
return of an index of included in the Russell
small capitalization 2000 Small Stock Index.
companies.
- ----------------------------------------------------------------------------------------------
REIT Current income and long- Equity securities of real Morgan Stanley Asset
term capital appreciation. estate investment trusts. Management
- ----------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Morgan Stanley Asset
appreciation. companies of any size Management
located in developed
countries outside of the
U.S.
- ----------------------------------------------------------------------------------------------
Emerging Long-term growth of Equity securities of Blairlogie Capital
Markets capital. companies that are located Management
in countries generally
regarded as "emerging
market" countries.
- ----------------------------------------------------------------------------------------------
13
</TABLE>
<PAGE>
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 sixteen of the
Portfolios, we and the Fund have engaged other firms to serve as Portfolio
Managers which are shown in the chart above.
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:
14
<PAGE>
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.
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. Your Accumulated Value will be
automatically allocated according to your instructions contained in the
application (or if received more recently, in written instructions) the later
of 15 days after the Policy is issued or 45 days after the application is
completed or, if longer, when all requirements are received by the Home Office
for the Policy to be considered in force (the "Free-Look Transfer Date"). Prior
to 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).
On and after 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
15
<PAGE>
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 do not currently charge for the Portfolio Rebalancing program or for
transfers made under this program.
We may modify, terminate or suspend the portfolio rebalancing feature at any
time.
Dollar Cost Averaging Option
We currently offer an option under which you may dollar cost average your
allocations in the Variable Accounts under your Policy by authorizing us to
make periodic allocations of Accumulated Value from any one Variable Account to
one or more of the other Variable Accounts. Dollar cost averaging is a
systematic method of investing in which securities are purchased at regular
intervals in fixed dollar amounts so that the cost of the securities gets
averaged over time and possibly over various market cycles. The option will
result in the allocation of Accumulated Value to one or more Variable Accounts,
and these amounts will be credited at the Accumulation Unit values as of the
end of the Valuation Dates on which the transfers are processed. Since the
value of Accumulation Units will vary, the amounts allocated to a Variable
Account will result in the crediting of a greater number of units when the
Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Similarly, the amounts transferred from a
Variable Account will result in a debiting of a greater number of units when
the Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Dollar cost averaging does not guarantee
profits, nor does it assure that you will not have losses.
A Dollar Cost Averaging Request form is available upon request. 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.
We do not currently charge you for the Dollar Cost Averaging Option, and will
not charge you for transfers made under this Option, even if we decide to
charge you in the future for transfers outside the Option, except if we have to
by 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
16
<PAGE>
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 after the Free-Look Transfer Date; 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 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
17
<PAGE>
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
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.
18
<PAGE>
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 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%.
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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.
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.
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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.
An Example: Your initial premium is $50,000, your Accumulated Value is
$54,000 at the time you make a withdrawal of $6,000, which is the first
withdrawal in a Policy Year, and you have made no prior withdrawals. Your Free
Withdrawal Amount is $4,000 (the lesser of $4,000 earnings ($54,000-$50,000) or
$5,000 ($50,000 X 10%)). The portion of your withdrawal that is a Preferred
Withdrawal Amount is $4,000 (that portion of the first withdrawal that does not
exceed the Free Withdrawal Amount).
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 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.
Certain states require different Free-Look Rights if you purchase the Policy in
exchange for another policy, in which case we will notify you of your right. It
can be mailed or delivered to us or our agent. The returned Policy will be
treated as if we never issued it and we will promptly refund the full amount of
the premium paid. If you have taken a loan during the Free-Look Period, your
Policy Debt will be deducted from the amount refunded. Prior to 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
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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 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.
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
We may assess a surrender charge if you surrender your Policy or make a
partial withdrawal during the first nine Policy Years. We will assess the
Surrender Charge against the portion of the withdrawal we consider to be a
return of initial premium.
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No charge is imposed on a Preferred Withdrawal. A Preferred Withdrawal is
usually the portion of your first withdrawal in each Policy Year that qualifies
as a Free Withdrawal Amount. If you have made any withdrawals in a Policy Year,
and none was a Preferred Withdrawal, the Free Withdrawal Amount is available
for the next withdrawal in that Policy Year.
For purposes of calculating the Surrender Charge only, any surrender or
withdrawal in a Policy Year:
.First, will be considered a distribution of earnings from the available Free
Withdrawal Amount, if any,
. Next, any excess will be considered a return of any remaining initial
premium not previously considered withdrawn,
. Next, any excess will be considered a return of any remaining additional
premiums not previously considered withdrawn,
. Last, any excess will be considered a distribution of remaining earnings
not previously considered withdrawn.
The Surrender Charge varies with the Policy Year according to the following
schedule:
<TABLE>
<CAPTION>
Time of Withdrawal Surrender 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>
Total cumulative Surrender Charges imposed will never exceed 10% of your
initial premium payment or 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 providing life insurance coverage for the Insured.
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.
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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 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. Taxes on premiums vary from state to state, and
in some instances, among municipalities and currently range from 2.00% to
14.00%. 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).
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.
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 "AN OVERVIEW
OF PACIFIC SELECT ESTATE MAXIMIZER: Fees and Expenses Paid by the Pacific
Select Fund" 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
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<PAGE>
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.
Usage
We may use any profit derived from charges imposed under the Policies for any
lawful purpose, including our sales and distribution expenses not covered by
the sales load.
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 "Taxation"
in the Fund's SAI.
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<PAGE>
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.
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.
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<PAGE>
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 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
1999 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
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expected to promulgate temporary or final regulations governing reasonableness
standards for mortality charges. While we believe under IRS pronouncements
currently in effect, that the mortality costs and other expenses used in making
calculations to determine whether the Policy qualifies as life insurance meet
the current requirements, complete assurance cannot be given that the IRS would
necessarily agree. It is possible that future regulations will contain
standards that would require us to modify our mortality charges used for the
purpose of the calculations in order to retain the qualification of the Policy
as life insurance for federal income tax purposes, and we reserve the right to
make any such modifications.
Federal estate and gift and state and local estate, inheritance, and other
tax consequences of ownership or receipt of Policy proceeds depend on the
jurisdiction and the circumstances of each Owner or Beneficiary.
For complete information on federal, state, local and other tax
considerations, a qualified tax adviser should be consulted.
Accelerated Living Benefits Rider. Amounts received under the Rider should be
generally excluded from taxable income under Section 101(g) of the tax code.
Benefits under the Rider will be taxed, however, if they are paid to someone
other than an Insured, and an Insured is a director, officer or employee of the
person receiving the benefit, or has a financial interest in a business of the
person receiving the benefit.
WE DO NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY POLICY.
Charge for Our Income Taxes
For federal income tax purposes, variable life insurance generally is treated
in a manner consistent with traditional fixed life insurance. We will review
the question of a charge to the Separate Account or the Policy for our federal
income taxes periodically . A charge may be made for any federal income taxes
incurred by us that are attributable to the Separate Account or to our
operations with respect to the Policy. Charges might become necessary if our
tax treatment is ultimately determined to be other than what we currently
believe it to be, if there are changes made in the federal income tax treatment
of variable life insurance at the insurance company level, or if there is a
change in our tax status.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, we reserve
the right to charge the Account for such taxes, if any, attributable to the
Account.
Voting of Fund Shares
In accordance with our view of present applicable law, we will exercise
voting rights attributable to the shares of each Portfolio of the Fund held in
the Variable Accounts at any regular and special meetings of the shareholders
of the Fund on matters requiring shareholder voting under the Investment
Company Act of 1940 or by the fund. We will exercise these voting rights based
on instructions received from persons having the voting interest in
corresponding Variable Accounts of the Separate Account. However, if the
Investment Company Act of 1940 or any regulations thereunder should be amended,
or if the present interpretation thereof should change, and as a result we
determine that it is permitted to vote the shares of the Fund in its own right,
we may elect to do so.
You are the person having the voting interest under a Policy. Unless
otherwise required by applicable law, the number of votes as to which you will
have the right to instruct will be determined by dividing your Accumulated
Value in a Variable Account by the net asset value per share of the
corresponding Portfolio of the Fund. Fractional votes will be counted. The
number of votes as to which you will have the right to instruct will be
determined as of the date coincident with the date established by the Fund for
determining shareholders eligible to vote at the meeting of the Fund. If
required by the Securities and Exchange Commission, we reserve the right to
determine in a different fashion the voting rights attributable to the shares
of the Fund based upon instructions received from Policy Owners. Voting
instructions may be cast in person or by proxy.
If there are shares of a Portfolio held by a Variable Account for which we do
not receive timely voting instructions, we will vote those shares in the same
proportion as the voting instructions for all other shares of
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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,
such shares will be voted in the same proportion as the total votes cast for
all of our separate accounts, including this separate account. We'll vote
shares of any Portfolio held by our non-insurance affiliates in the same
proportion as the total votes for all separate accounts of ours and our
insurance affiliates.
Disregard of Voting Instructions
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that voting rights be exercised
so as to cause a change in the subclassification or investment objective of a
Portfolio or to approve or disapprove an investment advisory contract. In
addition, we may disregard voting instructions of changes initiated by Policy
Owners in the investment policy or the investment adviser (or portfolio
manager) of a Portfolio, provided that our disapproval of the change is
reasonable and is based on a good faith determination that the change would be
contrary to state law or otherwise inappropriate, considering the Portfolio's
objectives and purpose, and considering the effect the change would have on us.
In the event we do disregard voting instructions, a summary of that action and
the reasons for such action will be included in the next report to Owners.
Confirmation Statements and Other Reports to Owners
We will send you confirmations for premium payments and transfers, loans,
loan repayments, loan interest transfers, partial withdrawals, a surrender, and
on payment of any death benefit proceeds. Confirmation of scheduled
transactions under Dollar Cost Averaging, portfolio rebalancing, and monthly
deductions will appear on your quarterly statement.
A statement will be sent quarterly to you setting forth a summary of the
transactions which occurred during the quarter, indicating the death benefit,
Accumulated Value, Cash Surrender Value, and any Policy Debt. In addition, the
statement will indicate the allocation of Accumulated Value among the
Investment Options and any other information required by law.
You will also be sent annual financial statements for the Separate Account
and the Fund, the latter of which will include a list of the portfolio
securities of the Fund, as required by the Investment Company Act of 1940,
and/or such other reports as may be required by federal securities laws.
Substitution of Investments
We reserve the right, subject to compliance with the laws as then in effect,
to make additions to, deletions from, or substitutions for the securities that
are held by the Separate Account or any Variable Account or that the Separate
Account or any Variable Account may purchase. If shares of any or all of the
Portfolios of the Fund should no longer be available for investment, or if, in
the judgment of our management, further investment in shares of any or all
Portfolios of the Fund should become inappropriate in view of the purposes of
the Policies, we may substitute shares of another Portfolio of the Fund or of a
different fund for shares already purchased, or to be purchased in the future,
under the Policies.
Where required, we will not substitute any shares attributable to your
interest in a Variable Account or the Separate Account without notice, your
approval, or prior approval of the SEC and without following the filing or
other procedures established by applicable state insurance regulators.
We also reserve the right to establish additional Variable Accounts which may
include additional subaccounts of the Separate Account to serve as investment
options under the Policies which may be managed separate accounts or may invest
in a new Portfolio of the Fund, or in shares of another investment company, a
portfolio thereof, or suitable investment vehicle with a specified investment
objective. New Variable Accounts may be established when, at our sole
discretion, marketing needs or investment conditions warrant, and any new
Variable Accounts will be made available to existing Policy Owners on a basis
to be determined by us. We may also eliminate one or more Variable Accounts if,
in our sole discretion, marketing, tax, or investment conditions so warrant. We
may also terminate and liquidate any Variable Account.
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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 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.
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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.
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
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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.
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.
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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.
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.
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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. A registered representative authorized to sell the Policy
can describe other policies further.
Retirement Income Strategy Using Life Insurance
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) supplemental retirement
income for individuals. Ledger illustrations are illustrations that show the
effect on Accumulated Value, Net Cash Surrender Value, and the net death
benefit of premiums paid under a Policy and Partial Withdrawals and loans taken
for retirement income; or reflecting allocation of premiums to specified
Variable Accounts. This information will be portrayed at hypothetical rates of
return that are requested. Charts and graphs presenting the results of the
ledger comparisons or a comparison of retirement strategies will also be
furnished upon request. Any graphic presentations and retirement strategy
charts must be accompanied by a corresponding ledger illustration; ledger
illustrations must always include or be accompanied by comparable information
that is based on guaranteed cost of insurance rates and that presents a
hypothetical gross rate of return of 0%. Retirement illustrations will not be
furnished with a hypothetical gross rate of return in excess of 12%.
The hypothetical rates of return in ledger illustrations are illustrative
only and should not be interpreted as a representation of past or future
investment results. Policy values and benefits shown in the ledger
illustrations would be different if the gross annual investment rates of return
were different from the hypothetical rates portrayed, if premiums were not paid
when due, and loan interest was paid when due. Withdrawals or loans may have an
adverse effect on Policy benefits.
Risks Regarding Retirement Income Strategy Using Life Insurance
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
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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 strategy 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's Accumulated Value as a source for retirement income 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 subsidiary of ours. PMD's principal
business address is 700 Newport Center Drive, Newport Beach, California 92660.
We and PMD have sales agreements with various broker-dealers under which the
Policy will be sold by registered representatives of the broker-dealers. The
registered representatives are required to be authorized under applicable state
regulations to sell variable life insurance. The broker-dealers are required to
be registered with the SEC. We pay compensation directly to broker-dealers for
promotion and sales of the Policy. The compensation payable to a broker-dealer
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.
35
<PAGE>
MORE ABOUT PACIFIC LIFE
Management
Our directors and officers are listed below together with information as to
their principal occupations during the past five years and certain other
current affiliations. Unless otherwise indicated, the business address of each
director and officer is c/o Pacific Life Insurance Company, 700 Newport Center
Drive, Newport Beach, California 92660.
<TABLE>
<CAPTION>
Name and Position Principal Occupation During the Last Five Years
----------------- -----------------------------------------------
<S> <C>
Thomas C. Sutton Director, Chairman of the Board and Chief Executive Officer
Director, Chairman of of Pacific Life; Director, Chairman of the Board and Chief
the Board and Executive Officer of Pacific LifeCorp, August 1997 to
Chief Executive Officer present; Director, Chairman of the Board and Chief
Executive Officer of Pacific Mutual Holding Company, August
1997 to present; Trustee and Chairman of the Board and
Former President of Pacific Select Fund; Director and
Chairman of the Board of Pacific Life & Annuity Company
(formerly known as PM Group Life Insurance Company);
Management Board Member of PIMCO Advisors L.P.,
December 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; Edison International; 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; President (since
February 1999) and Former Trustee of Pacific Select Fund;
Management Board Member of PIMCO Advisors L.P., December
1997 to present; Former Equity Board Member of PIMCO
Advisors L.P.; Former Director of Pacific Corinthian Life
Insurance Company; Director of Pacific Life & Annuity
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 Pacific Life & Annuity Company; Association of
California Life and Health 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; Secretary of Pacific Select Fund; similar
positions with other affiliated companies of Pacific Life.
Richard M. Ferry Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director and Chairman of
Korn/Ferry International; Director of: Avery Dennison
Corporation; Broco, Inc.; ConAm Management; Mullin
Consulting, Inc.; Northwestern Restaurants, Inc.; Dole Food
Co.; Mrs. Fields' Original Cookies Inc.; Rainier Bells,
Inc; Mellon West Coast Advisory Board; Former Director of
First Business Bank. Address: 1800 Century Park East,
Suite 900, Los Angeles, California 90067.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Name and Position Principal Occupation During the Last Five Years
----------------- -----------------------------------------------
<S> <C>
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
Former Director of Pacific Telesis Group; Director of: The
Dial Corp.; BankAmerica Corporation; Former Director of
Bank of America NT&SA. 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; and Pacific
Enterprises; Director of: The Walt Disney Company; Southern
California Gas Company; Lozano Communications, Inc.; Sempra
Energy and San Diego Gas and Electric Company 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
Former Chief Executive Officer of Avery Dennison
Corporation; Former Director of Great Western Financial
Corporation; Advisory Board Member of: Korn/Ferry
International; Mellon Bank; Director of: Nationwide Health
Properties, Inc.; Edison International. Address: 150 North
Orange Grove Boulevard, Pasadena, California 91103.
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; Former Director of 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; Age Wave; 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 LLP; 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; Former Director of The Tejon
Ranch. Address: 550 Newport Center Drive, 3rd 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;
Executive Vice President of Pacific Life & Annuity Company.
Edward R. Byrd Vice President and Controller of Pacific Life; Vice
Vice President and President and Controller of Pacific LifeCorp, August 1997
Controller to present; Vice President and Controller of Pacific Mutual
Holding Company, August 1997 to present; and similar
positions with other affiliated companies of Pacific Life.
Brian D. Klemens Vice President and Treasurer of Pacific Life, December 1998
Vice President and to present; Assistant Vice President Accounting and
Treasurer Assistant Controller of Pacific Life, April 1994 to
December 1998.
</TABLE>
37
<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
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.
38
<PAGE>
Preparation for the Year 2000
Pacific Life long ago recognized the challenges associated with the Year 2000
date change. This change 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 began prior to 1995 to assess and plan for the potential
impact of the Year 2000. More recently, Pacific Life has been executing a
company-wide plan adopted during 1998 which called for correction or
replacement of remaining non-compliant systems by December 31, 1998.
We have successfully executed this project plan to date. Virtually all
affected systems were remediated and tested in time for use during 1998 year-
end processing cycles. Although it is not possible to certify that any system
will be completely free of Year 2000 problems, we have performed extensive
testing to identify and deal with such potential problems. Additionally, most
of the company's critical systems were subject to an independent third-party
review process which used sophisticated automated tools to identify Year 2000
related bugs. The results have been very positive and we feel the company's
internal systems are positioned well for the date change in the century.
We plan to continue to test and re-test throughout 1999 and we will respond
promptly should any problems arise at any time thereafter.
We are continuing to work on contingency plans for critical business
processes. When appropriate, alternative methods and procedures are being
developed to work around unanticipated problems.
In addition to the above, we will continue to carefully evaluate responses
from vendors and significant business partners regarding the compliance of
their critical business processes and products. Although ultimately Pacific
Life cannot be responsible for the Year 2000 compliance efforts of these
outside entities, we will take appropriate steps wherever possible to develop
contingency plans to address vendors and partners deemed non-compliant.
Expenses to make our systems Year 2000 compliant are currently estimated to
range from $12 million to $15 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 projects,
although there can be no assurance.
These Year 2000 related statements are designated as "Year 2000 Readiness
Disclosure" pursuant to the Year 2000 Information Readiness Disclosure Act,
enacted October 19, 1998.
Independent Auditors
The audited consolidated financial statements for Pacific Life as of
December 31, 1998 and 1997 and for the three years ended December 31, 1998 and
the audited financial statements for Pacific Select Exec Separate Account as of
December 31, 1998 and for the two years ended December 31, 1998 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, 1998 and for the two years then ended are set forth herein,
starting on page 40. The audited consolidated financial statements of Pacific
Life as of December 31, 1998 and 1997 and for the three years ended December
31, 1998 are set forth herein starting on page 52.
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.
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Life Insurance Company
We have audited the accompanying statement of assets and liabilities of
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, 1998 and the related statement of operations for the year then ended and
statement of changes in net assets for each of the two years in the period then
ended (as to the Equity Variable Account and the Bond and Income Variable
Account, for the year ended December 31, 1998 and for the period from
commencement of operations through December 31, 1997). 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 Pacific Select Exec Separate Account as of December 31, 1998 and
the results of their operations for the year then ended and the changes in
their net assets for each of the two years in the period then ended (as to the
Equity Variable Account and the Bond and Income Variable Account, for the year
ended December 31, 1998 and for the period from commencement of operations
through December 31, 1997), in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 5, 1999
40
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
(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
(6,873 shares; cost
$69,218)............... $69,107
High Yield Bond
Portfolio (4,645
shares; cost $45,134).. $43,370
Managed Bond Portfolio
(8,941 shares; cost
$97,525)............... $101,864
Government Securities
Portfolio (1,562
shares; cost $16,677).. $17,149
Growth Portfolio (8,711
shares; cost
$187,167).............. $199,670
Aggressive Equity
Portfolio (1,404
shares; cost $16,338).. $17,766
Growth LT Portfolio
(8,674 shares; cost
$152,516).............. $227,277
Equity Income Portfolio
(6,986 shares; cost
$147,393).............. $187,867
Multi-Strategy
Portfolio (7,736
shares; cost
$112,643).............. $133,998
Receivables:
Due from Pacific Life
Insurance Company...... 89 72 174 209 321 153 92 54
Fund shares redeemed... 100
------------------------------------------------------------------------------------
Total Assets............ 69,207 43,459 101,936 17,323 199,879 18,087 227,430 187,959 134,052
------------------------------------------------------------------------------------
LIABILITIES
Payables:
Due to Pacific Life
Insurance Company...... 100
Fund shares purchased.. 89 72 174 209 321 153 92 54
------------------------------------------------------------------------------------
Total Liabilities....... 100 89 72 174 209 321 153 92 54
------------------------------------------------------------------------------------
NET ASSETS.............. $69,107 $43,370 $101,864 $17,149 $199,670 $17,766 $227,277 $187,867 $133,998
------------------------------------------------------------------------------------
See Notes to Financial Statements
41
</TABLE>
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (Continued)
DECEMBER 31, 1998
(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 (617
shares; cost $16,061).. $18,066
Bond and Income
Portfolio (397 shares;
cost $5,250)........... $5,282
Equity Index Portfolio
(9,370 shares; cost
$212,820).............. $303,187
International Portfolio
(9,944 shares; cost
$153,283).............. $157,140
Emerging Markets
Portfolio (1,471
shares; cost $11,689).. $10,072
Brandes International
Equity Portfolio (1)
(140 shares;
cost $1,454)........... $1,522
Turner Core Growth
Portfolio (165 shares;
cost $2,467)........... $2,948
Frontier Capital
Appreciation Portfolio
(295 shares;
cost $4,191)........... $4,452
Enhanced U.S. Equity
Portfolio (276 shares;
cost $4,437)........... $4,986
Receivables:
Due from Pacific Life
Insurance Company...... 11 13 161 81 11
Fund shares redeemed... 23 9 19 32
--------------------------------------------------------------------------------
Total Assets............ 18,077 5,295 303,348 157,221 10,083 1,545 2,957 4,471 5,018
--------------------------------------------------------------------------------
LIABILITIES
Payables:
Due to Pacific Life
Insurance Company...... 23 9 19 32
Fund shares purchased.. 11 13 161 81 11
--------------------------------------------------------------------------------
Total Liabilities....... 11 13 161 81 11 23 9 19 32
--------------------------------------------------------------------------------
NET ASSETS.............. $18,066 $5,282 $303,187 $157,140 $10,072 $1,522 $2,948 $4,452 $4,986
--------------------------------------------------------------------------------
</TABLE>
(1) Formerly named Edinburgh Overseas Equity Portfolio
See Notes to Financial Statements
42
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(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.............. $3,392 $3,403 $5,533 $881 $20,232 $5 $6,250 $18,901 $12,030
------------------------------------------------------------------------------------
Net Investment Income... 3,392 3,403 5,533 881 20,232 5 6,250 18,901 12,030
------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain
(loss) from security
transactions........... (3) (87) 663 164 10,581 653 5,163 5,470 3,108
Net unrealized
appreciation
(depreciation) on
investments............ 14 (2,165) 1,408 59 (23,983) 1,132 63,381 9,750 5,144
------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain
(Loss) on Investments... 11 (2,252) 2,071 223 (13,402) 1,785 68,544 15,220 8,252
------------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS
RESULTING FROM
OPERATIONS.............. $3,403 $1,151 $7,604 $1,104 $6,830 $1,790 $74,794 $34,121 $20,282
------------------------------------------------------------------------------------
See Notes to Financial Statements
43
</TABLE>
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1998
(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>
INVESTMENT INCOME
Dividends.............. $507 $147 $4,853 $11,985 $117 $87 $52 $21 $154
--------------------------------------------------------------------------------
Net Investment Income... 507 147 4,853 11,985 117 87 52 21 154
--------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain
(loss) from security
transactions........... 369 19 11,629 5,435 (1,951) 8 96 (64) 183
Net unrealized
appreciation
(depreciation) on
investments............ 1,989 13 43,404 (10,085) (935) 72 460 44 366
--------------------------------------------------------------------------------
Net Realized and
Unrealized Gain
(Loss) on Investments... 2,358 32 55,033 (4,650) (2,886) 80 556 (20) 549
--------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS.............. $2,865 $179 $59,886 $7,335 $(2,769) $167 $608 $1 $703
--------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
44
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
(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.. $3,392 $3,403 $5,533 $881 $20,232 $5 $6,250 $18,901 $12,030
Net realized gain
(loss) from security
transactions........... (3) (87) 663 164 10,581 653 5,163 5,470 3,108
Net unrealized
appreciation
(depreciation) on
investments............ 14 (2,165) 1,408 59 (23,983) 1,132 63,381 9,750 5,144
------------------------------------------------------------------------------------------
Net Increase in Net
Assets
Resulting from
Operations.............. 3,403 1,151 7,604 1,104 6,830 1,790 74,794 34,121 20,282
------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY TRANSACTIONS
Transfer of net
premiums............... 164,872 7,612 13,456 2,186 31,972 4,086 29,295 24,939 14,554
Transfers--policy
charges and
deductions............. (6,168) (2,255) (3,939) (699) (10,609) (969) (9,146) (7,949) (5,260)
Transfers in (from
other variable
accounts).............. 268,634 34,691 52,698 10,097 89,840 20,958 82,877 46,109 13,875
Transfers out (to other
variable accounts)..... (399,943) (29,075) (36,135) (5,218) (87,886) (16,962) (53,981) (35,074) (17,159)
Transfers--other....... (13,775) (2,461) (4,332) (742) (10,466) (610) (7,000) (5,765) (5,646)
------------------------------------------------------------------------------------------
Net Increase in Net
Assets Derived
from Policy
Transactions............ 13,620 8,512 21,748 5,624 12,851 6,503 42,045 22,260 364
------------------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS.................. 17,023 9,663 29,352 6,728 19,681 8,293 116,839 56,381 20,646
------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year....... 52,084 33,707 72,512 10,421 179,989 9,473 110,438 131,486 113,352
------------------------------------------------------------------------------------------
End of Year............. $69,107 $43,370 $101,864 $17,149 $199,670 $17,766 $227,277 $187,867 $133,998
------------------------------------------------------------------------------------------
See Notes to Financial Statements
45
</TABLE>
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Bond and Equity Inter- Emerging
Equity Income Index national Markets Variable Variable Variable Variable
Variable Variable Variable Variable Variable Account Account Account Account
Account Account Account Account Account I II III IV
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $507 $147 $4,853 $11,985 $117 $87 $52 $21 $154
Net realized gain
(loss) from security
transactions........... 369 19 11,629 5,435 (1,951) 8 96 (64) 183
Net unrealized
appreciation
(depreciation) on
investments............ 1,989 13 43,404 (10,085) (935) 72 460 44 366
-----------------------------------------------------------------------------------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations.............. 2,865 179 59,886 7,335 (2,769) 167 608 1 703
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY TRANSACTIONS
Transfer of net
premiums............... 2,976 1,056 44,705 28,077 3,183 238 408 1,305 1,358
Transfers--policy
charges and
deductions............. (633) (197) (12,955) (8,359) (663) (62) (93) (245) (156)
Transfers in (from
other variable
accounts).............. 17,627 6,550 108,028 71,891 27,300 749 2,159 1,700 1,697
Transfers out (to other
variable accounts)..... (8,527) (2,820) (73,002) (64,225) (25,040) (97) (880) (1,374) (481)
Transfers--other....... (432) (171) (10,763) (6,520) (355) (12) (37) (44) 111
-----------------------------------------------------------------------------------
Net Increase in Net
Assets Derived
from Policy
Transactions............ 11,011 4,418 56,013 20,864 4,425 816 1,557 1,342 2,529
-----------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS.................. 13,876 4,597 115,899 28,199 1,656 983 2,165 1,343 3,232
-----------------------------------------------------------------------------------
NET ASSETS
Beginning of Year....... 4,190 685 187,288 128,941 8,416 539 783 3,109 1,754
-----------------------------------------------------------------------------------
End of Year............. $18,066 $5,282 $303,187 $157,140 $10,072 $1,522 $2,948 $4,452 $4,986
-----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
46
<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
------------------------------------------------------------------------------------------
See Notes to Financial Statements
47
</TABLE>
<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
48
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
1. SIGNIFICANT ACCOUNTING POLICIES and liabilities at the date of the financial
statements and the reported amounts of
The Pacific Select Exec Separate Account income and expenses during the reporting
(the "Separate Account") is registered as period. Actual results could differ from
a unit investment trust under the Investment those estimates.
Company Act of 1940, as amended, and during
1998 was comprised of eighteen subaccounts A. Valuation of Investments
called Variable Accounts: the Money Market
Variable Account, the High Yield Bond Investments in shares of the Funds are
Variable Account, the Managed Bond Variable valued at the reported net asset values of
Account, the Government Securities the respective portfolios. Valuation of
Variable Account, the Growth Variable securities held by the Funds is discussed
Account, the Aggressive Equity Variable in the notes to their financial statements.
Account, the Growth LT Variable Account,
the Equity Income Variable Account, the B. Security Transactions
Multi-Strategy Variable Account, the
Equity Variable Account, the Bond and Transactions are recorded on the trade
Income Variable Account, the Equity Index date. Realized gains and losses on sales of
Variable Account, the International Variable investments are determined on the basis of
Account, the Emerging Markets Variable identified cost.
Account, and the Variable Accounts I through
IV. The assets in each of the first fourteen C. Federal Income Taxes
Variable Accounts are invested in shares of
the corresponding portfolios of Pacific The operations of the Separate Account
Select Fund and the assets of the last four will be reported on the Federal income tax
Variable Accounts are invested in shares of return of Pacific Life, which is taxed as a
the corresponding portfolios of M Fund, Inc. life insurance company under the provisions
(collectively, the "Funds"). Each Variable of the Tax Reform Act of 1986. Under current
Account pursues different investment tax law, no Federal income taxes are
objectives and policies. The financial expected to be paid by Pacific Life with
statements of the Funds, including the respect to the operations of the Separate
schedules of investments, are either Account.
included in Section B of this report or
provided separately and should be read in 2. DIVIDENDS
conjunction with the Separate Account's
financial statements. During 1998, the Funds declared dividends
for each portfolio. The amounts accrued by
The Separate Account was established by the Separate Account for its share of the
Pacific Life Insurance Company (formerly dividends were reinvested in additional full
named Pacific Mutual Life Insurance and fractional shares of the related
Company--see Note 1 to Financial Statements portfolio.
of the Fund on B-58) on May 12, 1988 and
commenced operations on November 22, 1988. 3. CHARGES AND EXPENSES
Under applicable insurance law, the assets
and liabilities of the Separate Account With respect to variable life insurance
are clearly identified and distinguished policies funded by the Separate Account,
from the other assets and liabilities of Pacific Life makes certain deductions from
Pacific Life. The assets of the Separate premiums for sales load and state premium
Account will not be charged with any taxes before amounts are allocated to the
liabilities arising out of any other Separate Account. Pacific Life also makes
business conducted by Pacific Life, but the certain deductions from the net assets of
obligations of the Separate Account, each Variable Account for the mortality and
including benefits related to variable life expense risks Pacific Life assumes,
insurance, are obligations of Pacific Life. administrative expenses, cost of insurance,
charges for optional benefits and any sales
The Separate Account held by Pacific Life and underwriting surrender charges. The
represents funds from individual flexible operating expenses of the Separate Account
premium variable life policies. The assets are paid by Pacific Life.
of the Separate Account are carried at
market value. 4. RELATED PARTY AGREEMENT
The preparation of the accompanying Pacific Mutual Distributors, Inc., a
financial statements requires management to wholly-owned subsidiary of Pacific Life,
make estimates and assumptions that affect serves as principal underwriter of variable
the reported amounts of assets life insurance policies funded by interests
in the Separate Account, without
remuneration from the Separate Account.
49
</TABLE>
<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,
1998 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Variable Accounts
---------------------------------------------------------------
Govern-
Money High Yield Managed ment Aggressive
Market Bond Bond Securities Growth Equity
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of year $52,208 $33,305 $69,581 $10,008 $143,503 $9,176
Add: Total net proceeds
from policy
transactions 180,669 23,481 32,416 8,675 56,862 15,473
Reinvested
distributions from
the Funds:
(a) Net investment
income 3,392 3,082 4,503 663 214 5
(b) Net realized gain 321 1,030 218 20,018
---------------------------------------------------------------
Sub-Total 236,269 60,189 107,530 19,564 220,597 24,654
Less: Cost of
investments disposed
during the year 167,051 15,055 10,005 2,887 33,430 8,316
---------------------------------------------------------------
Total cost of
investments at end of
year 69,218 45,134 97,525 16,677 187,167 16,338
Add: Unrealized
appreciation
(depreciation) (111) (1,764) 4,339 472 12,503 1,428
---------------------------------------------------------------
Total market value of
investments at end of
year $69,107 $43,370 $101,864 $17,149 $199,670 $17,766
---------------------------------------------------------------
<CAPTION>
Growth Equity Multi- Bond and Equity
LT Income Strategy Equity Income Index
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of year $ 99,059 $100,762 $97,141 $4,174 $666 $140,325
Add: Total net proceeds
from policy
transactions 60,881 40,603 16,738 15,633 5,455 84,675
Reinvested
distributions from
the Funds:
(a) Net investment
income 327 1,300 3,405 40 145 3,133
(b) Net realized gain 5,923 17,601 8,625 467 2 1,720
---------------------------------------------------------------
Sub-Total 166,190 160,266 125,909 20,314 6,268 229,853
Less: Cost of
investments disposed
during the year 13,674 12,873 13,266 4,253 1,018 17,033
----------------------------------------------------------------
Total cost of
investments at end of
year 152,516 147,393 112,643 16,061 5,250 212,820
Add: Unrealized
appreciation 74,761 40,474 21,355 2,005 32 90,367
----------------------------------------------------------------
Total market value of
investments at end of
year $227,277 $187,867 $133,998 $18,066 $5,282 $303,187
----------------------------------------------------------------
<CAPTION>
Inter- Emerging
national Markets I II III IV
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of year $115,000 $9,098 $544 $762 $2,892 $1,571
Add: Total net proceeds
from policy
transactions 47,705 9,932 1,047 1,994 2,546 3,239
Reinvested
distributions from
the Funds:
(a) Net investment
income 1,485 117 87 52 146
(b) Net realized gain 10,500 21 8
----------------------------------------------------------------
Sub-Total 174,690 19,147 1,678 2,808 5,459 4,964
Less: Cost of
investments disposed
during the year 21,407 7,458 224 341 1,268 527
----------------------------------------------------------------
Total cost of
investments at end of
year 153,283 11,689 1,454 2,467 4,191 4,437
Add: Unrealized
appreciation
(depreciation) 3,857 (1,617) 68 481 261 549
----------------------------------------------------------------
Total market value of
investments at end of
year $157,140 $10,072 $1,522 $2,948 $4,452 $4,986
----------------------------------------------------------------
</TABLE>
50
<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, 1998
and the selected accumulation unit information as of December 31, 1998 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 3,242,630 1,272,728 3,186,015 479,603 4,678,660 840,837
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 9,998,490 280,788 567,458 95,603 858,593 345,960
(b) Transfers--policy
charges and deductions (373,932) (84,466) (165,049) (30,660) (283,438) (82,024)
(c) Transfers in (from
other variable
accounts) 16,112,581 1,251,759 2,162,298 411,892 2,206,806 1,764,520
(d) Transfers out (to
other variable
accounts) (24,064,758) (1,034,962) (1,475,354) (204,814) (2,150,435) (1,425,259)
(e) Transfers--other (828,850) (87,604) (176,871) (29,124) (256,086) (51,258)
-----------------------------------------------------------------------
Sub-Total 843,531 325,515 912,482 242,897 375,440 551,939
-----------------------------------------------------------------------
Total units outstanding
at end of year 4,086,161 1,598,243 4,098,497 722,500 5,054,100 1,392,776
-----------------------------------------------------------------------
Accumulation Unit
Value: At beginning of -----------------------------------------------------------------------
year $16.06 $26.48 $22.76 $21.73 $38.47 $11.27
At end of year $16.91 $27.14 $24.85 $23.74 $39.51 $12.76
-----------------------------------------------------------------------
<CAPTION>
Growth Equity Multi- Bond and Equity
LT Income Strategy Equity Income Index
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 5,452,479 3,609,629 3,897,779 365,186 57,616 5,696,188
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 1,193,031 621,209 459,357 229,214 83,678 1,213,083
(b) Transfers--policy
charges and deductions (371,549) (198,432) (168,061) (48,132) (15,662) (350,651)
(c) Transfers in (from
other variable
accounts) 3,139,545 984,220 372,455 1,338,126 518,911 2,722,051
(d) Transfers out (to
other variable
accounts) (2,057,690) (741,626) (498,426) (643,218) (223,441) (1,831,867)
(e) Transfers--other (266,828) (121,899) (164,002) (32,588) (13,550) (270,080)
-----------------------------------------------------------------------
Sub-Total 1,636,509 543,472 1,323 843,402 349,936 1,482,536
-----------------------------------------------------------------------
Total units outstanding
at end of year 7,088,988 4,153,101 3,899,102 1,208,588 407,552 7,178,724
-----------------------------------------------------------------------
Accumulation Unit
Value:At beginning of -----------------------------------------------------------------------
year $20.25 $36.43 $29.08 $11.47 $11.89 $32.88
At end of year $32.06 $45.24 $34.37 $14.95 $12.96 $42.23
<CAPTION> -----------------------------------------------------------------------
Inter- Emerging
national Markets I II III IV
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 6,224,372 871,397 52,300 59,984 243,373 132,506
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 1,264,542 393,994 21,062 27,463 107,709 92,938
(b) Transfers--policy
charges and deductions (378,357) (82,543) (5,624) (6,243) (20,099) (10,607)
(c) Transfers in (from
other variable
accounts) 3,056,270 3,699,775 70,147 145,602 141,760 118,099
(d) Transfers out (to
other variable
accounts) (2,708,392) (3,409,238) (8,799) (56,670) (125,903) (23,033)
(e) Transfers--other (274,952) (48,335) (1,088) (2,384) (4,033) (5,315)
-----------------------------------------------------------------------
Sub-Total 959,111 553,653 75,698 107,768 99,434 172,082
-----------------------------------------------------------------------
Total units outstanding
at end of year 7,183,483 1,425,050 127,998 167,752 342,807 304,588
-----------------------------------------------------------------------
Accumulation Unit -----------------------------------------------------------------------
Value:At beginning of $20.72 $9.66 $10.31 $13.06 $12.77 $13.23
At end of year $21.88 $7.07 $11.89 $17.57 $12.99 $16.37
-----------------------------------------------------------------------
</TABLE>
- ------
** Accumulation Unit: unit of measure used to calculate the value of a Policy
Owner's interest in a Variable Account during the accumulation period.
51
<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 and Subsidiaries (the
"Company") as of December 31, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 1999
52
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1998 1997
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $13,617.0 $13,938.5
Equity securities 547.5 346.4
Mortgage loans 2,788.7 1,922.1
Real estate 172.7 192.1
Policy loans 3,901.2 3,769.2
Short-term investments 99.9 83.8
Other investments 948.0 432.4
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS 22,075.0 20,684.5
Cash and cash equivalents 150.1 110.4
Deferred policy acquisition costs 889.7 716.9
Accrued investment income 252.3 255.4
Other assets 672.8 636.5
Separate account assets 15,844.0 11,605.1
- ------------------------------------------------------------------------------
TOTAL ASSETS $39,883.9 $34,008.8
- ------------------------------------------------------------------------------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life, annuity and other investment contract
deposits $17,973.0 $16,644.5
Future policy benefits 2,131.6 2,133.8
Short-term and long-term debt 445.1 253.6
Other liabilities 1,162.2 1,224.5
Separate account liabilities 15,844.0 11,605.1
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 37,555.9 31,861.5
- ------------------------------------------------------------------------------
Commitments and contingencies
Stockholder's Equity:
Common stock - $50 par value; 600,000 shares authorized,
issued and outstanding 30.0 30.0
Paid-in capital 126.2 120.1
Retained earnings 1,663.5 1,422.0
Accumulated other comprehensive income -
Unrealized gain on securities available for sale, net 508.3 575.2
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 2,328.0 2,147.3
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $39,883.9 $34,008.8
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
53
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Policy fees from universal life, annuity and other
investment contract deposits $ 525.3 $ 431.2 $ 348.6
Insurance premiums 514.7 504.3 465.4
Net investment income 1,293.8 1,225.3 1,087.3
Net realized capital gains 38.7 85.3 44.0
Commission revenue 220.1 146.6 79.6
Other income 216.6 181.7 123.1
- ------------------------------------------------------------------------------
TOTAL REVENUES 2,809.2 2,574.4 2,148.0
- ------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 880.8 797.8 665.0
Policy benefits paid or provided 719.5 675.7 652.9
Commission expenses 386.1 303.7 233.6
Operating expenses 467.8 507.7 316.2
- ------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,454.2 2,284.9 1,867.7
- ------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 355.0 289.5 280.3
Provision for income taxes 113.5 113.5 113.7
- ------------------------------------------------------------------------------
NET INCOME $ 241.5 $ 176.0 $ 166.6
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
54
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
- ------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1996 $1,151.4 $ 482.0 $1,633.4
Comprehensive income:
Net income 166.6 166.6
Change in unrealized gain on
securities available for sale,
net (102.8) (102.8)
--------
Total comprehensive income 63.8
- ------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1996 1,318.0 379.2 1,697.2
Comprehensive income:
Net income 176.0 176.0
Change in unrealized gain on
securities available for sale,
net 196.0 196.0
--------
Total comprehensive income 372.0
Issuance of partnership units by
affiliate $ 85.1 85.1
Initial member capitalization
of Pacific Mutual Holding Company (2.0) (2.0)
Issuance of common stock 0.6 $30.0 35.0 (65.0)
Dividend paid to parent (5.0) (5.0)
- ------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1997 0.6 30.0 120.1 1,422.0 575.2 2,147.3
Comprehensive income:
Net income 241.5 241.5
Change in unrealized gain on
securities available for sale,
net (66.9) (66.9)
--------
Total comprehensive income 174.6
Issuance of partnership units by
affiliate 6.1 6.1
- ------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1998 0.6 $30.0 $126.2 $1,663.5 $ 508.3 $2,328.0
- ------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
55
</TABLE>
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 241.5 $ 176.0 $ 166.6
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization on fixed maturities (39.4) (26.6) (45.2)
Depreciation and other amortization 26.0 38.3 43.8
Deferred income taxes (20.6) (14.4) (49.8)
Net realized capital gains (38.7) (85.3) (44.0)
Net change in deferred policy acquisition
costs (172.8) (185.4) (140.4)
Interest credited to universal life, annuity
and other investment contract deposits 880.8 797.8 665.0
Change in accrued investment income 3.1 (52.9) (3.7)
Change in future policy benefits (2.2) (372.7) 62.3
Change in other assets and liabilities 99.4 577.4 158.1
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 977.1 852.2 812.7
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (4,302.3) (6,272.3) (4,525.0)
Sales 2,201.9 2,224.1 2,511.0
Maturities and repayments 2,196.1 2,394.6 1,184.7
Repayments of mortgage loans 334.9 179.3 220.4
Proceeds from sales of mortgage loans and real
estate 43.3 104.4 14.5
Purchases of mortgage loans and real estate (1,246.3) (643.7) (414.3)
Distributions from partnerships 119.5 91.6 78.8
Change in policy loans (132.0) (637.4) (338.5)
Change in short-term investments (16.1) (17.7) 37.2
Other investing activity, net (564.2) 43.5 (144.5)
- -------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,365.2) (2,533.6) (1,375.7)
- -------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
56
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1998 1997 1996
- -----------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,007.0 $ 4,373.6 $ 2,105.0
Withdrawals (3,770.7) (2,667.3) (1,756.6)
Net change in short-term debt 191.5 8.5 42.5
Repayment of long-term debt (25.0) (5.0)
Initial capitalization of Pacific Mutual
Holding Company (2.0)
Dividend paid to parent (5.0)
- -----------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 427.8 1,682.8 385.9
- -----------------------------------------------------------------------------
Net change in cash and cash equivalents 39.7 1.4 (177.1)
Cash and cash equivalents, beginning of year 110.4 109.0 286.1
- -----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 150.1 $ 110.4 $ 109.0
- -----------------------------------------------------------------------------
<CAPTION>
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of an insurance block of business in 1997,
as discussed in Note 5, the following assets and liabilities were assumed:
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
--------
<CAPTION>
- -----------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion in 1997, 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 to paid-in
capital.
- -----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $127.9 $153.0 $189.6
Interest paid $ 24.0 $ 26.1 $ 27.3
- -----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
57
<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 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 and
institutional products, group employee benefits, broker-dealer operations
and investment management and advisory services. Pacific Life's 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, broker-dealer operations and
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 wholly-owned noninsurance subsidiaries, Pacific
Asset Management LLC ("PAM"), Pacific Mutual Distributors, Inc. ("PMD"),
Pacific Mutual Realty Finance, Inc. and Pacific Mezzanine Associates,
L.L.C. (50% owned). 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.
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," and
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits."
58
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued60
SFAS No. 130 established standards for the reporting and display of
comprehensive income and its components in financial statements (Note 11).
SFAS No. 131 established standards for the way information about operating
segments is reported in financial statements. It also established standards
for related disclosures about products and services, geographic areas and
major customers (Note 13). SFAS No. 132 standardized disclosure
requirements for employers' pensions and other retiree benefits (Note 14).
Adoption of these accounting standards did not have a significant impact on
the consolidated financial position or results of operations of the
Company.
On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance on when a liability should be
recognized for guaranty fund and other assessments and how to measure the
liability. Adoption of this accounting standard did not have a significant
impact on the consolidated financial position or results of operations of
the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. SFAS No.
133 establishes accounting and reporting standards for derivative
instruments and hedging activities. The Company currently plans to adopt
SFAS No. 133 on January 1, 2000. The impact on the consolidated financial
position or results of operations of the Company due to the adoption of
this statement has not yet been determined.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires that certain costs incurred in developing internal use computer
software be capitalized. The Company currently plans to adopt SOP 98-1 on
January 1, 1999. The adoption is not expected to have a significant impact
on the consolidated financial position or results of operations of the
Company.
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 on
the accompanying consolidated statements of operations.
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in net realized capital
gains on the accompanying consolidated statements of operations.
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 on the accompanying consolidated statements of financial condition,
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 included in net
realized capital gains on the accompanying consolidated statements of
operations.
Mortgage loans and policy loans are stated at unpaid principal balances.
59
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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% as of December 31,
1997. During 1998, the Company increased its investment in PIMCO Advisors
to reflect its pro rata share of the increase to PIMCO Advisors partners'
capital due to the issuance of additional partnership units. For the year
ended December 31, 1998, there was a direct increase to the Company's
stockholder's equity of $6.1 million. During 1998, the Company also
acquired the beneficial ownership of additional partnership units which
increased its ownership to 33% as of December 31, 1998. Deferred taxes
resulting from these transactions have been included in the accompanying
consolidated financial statements. The Company's investment in PIMCO
Advisors, 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 recognized, using assumptions consistent
with those used in computing policy reserves. For the years ended December
31, 1998, 1997 and 1996, net amortization of deferred policy acquisition
costs included in commission expenses amounted to $73.0 million,
$50.2 million and $42.6 million, respectively, and included in operating
expenses amounted to $33.5 million, $29.4 million and $27.4 million,
respectively, on the accompanying consolidated statements of operations.
PRESENT VALUE OF FUTURE PROFITS
In connection with the rehabilitation of First Capital Life Insurance
Company ("FCL"-Note 4), an asset was established which represented the
present value of estimated future profits of the acquired business. The
future profits were discounted to provide an appropriate rate of return and
were amortized over the rehabilitation plan period. Amortization for the
years ended December 31, 1997 and 1996 amounted to $16.1 million and
$24.2 million, respectively, and is included in commission expenses on 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.
60
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 1998,
1997 and 1996.
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions ranged from 4.5% to 9.3% for 1998, 1997 and 1996.
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. Dividends to policyholders are
included in policy benefits paid or provided on the accompanying
consolidated statements of operations.
Dividends are accrued 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, 1998
and 1997, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized when
incurred.
Generally, receipts for universal life, annuities and other investment
contracts are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Commission revenue from Pacific Life's broker-dealer subsidiaries is
generally recorded on the trade date.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 5 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over 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. Prior to
1998, Pacific Life was subject to an equity tax calculated by a prescribed
formula that incorporated a differential earnings rate between stock and
mutual life insurance companies. In December 1998, the Internal Revenue
Service released Revenue Ruling 99-3 which exempts Pacific Life from this
tax for taxable years beginning in 1998. 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.
61
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 6 and
7 has 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 that is subject to various
risks and uncertainties. Such risks and uncertainties include, but are not
limited to, 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. Additionally, the Company includes contractual provisions
limiting withdrawal rights for certain of its products. A substantial
portion of the Company's liabilities are not subject to surrender or can be
surrendered only after deduction of a surrender charge or a market value
adjustment.
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 approval procedures, limits and ongoing monitoring. Real estate and
mortgage loan investment risks are limited by diversification of geographic
location and property type. Management does not believe that significant
concentrations of credit risk 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. The Company manages this risk through credit approvals and
limits on exposure to any specific counterparty. 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 that 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,
cases might be decided or future legislation might be enacted, or if
decided or enacted, whether such cases or 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 1998
financial statement presentation.
62
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 on the accompanying consolidated financial
statements:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------
(In Millions)
<S> <C> <C>
Statutory capital and surplus $1,157.4 $ 944.8
Deferred policy acquisition costs 908.0 730.7
Unrealized gain on securities available for
sale, net 508.3 575.2
Deferred income tax 307.1 289.2
Asset valuation reserve 298.7 252.4
Non admitted assets 40.4 25.2
Subsidiary equity 26.5 60.4
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (654.4) (511.5)
Other (114.4) (69.5)
------------------
Stockholder's equity as reported herein $2,328.0 $2,147.3
------------------
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------------------
(In Millions)
Statutory net income $ 187.6 $ 121.5 $113.1
Deferred policy acquisition costs 177.3 160.4 111.2
Interest maintenance reserve 24.1 7.6 3.8
Deferred income tax 17.9 41.2 70.9
Net realized gain (loss) on trading
securities 9.2 (5.8) (11.6)
Earnings of subsidiaries (32.8) (40.6) (33.0)
Insurance and annuity reserves (145.1) (107.0) (91.3)
Other 3.3 (1.3) 3.5
------------------------
Net income as reported herein $ 241.5 $ 176.0 $166.6
------------------------
</TABLE>
63
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (Continued)
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, 1998 and 1997, Pacific Life
and PM Group exceeded the minimum risk-based capital requirements.
CODIFICATION
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). The Codification, which is intended to
standardize regulatory accounting and reporting for the insurance industry,
is proposed to be effective January 1, 2001. However, statutory accounting
principles will continue to be established by individual state laws and
permitted practices and it is uncertain when, or if, the states of
California and Arizona will require adoption of Codification for the
preparation of statutory financial statements. The Company has not
finalized the quantification of the effects of Codification on its
statutory financial statements.
DIVIDEND RESTRICTIONS
Dividend payments by Pacific Life to its parent in any 12-month period
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 1998
statutory results, Pacific Life could pay approximately $240.9 million in
dividends in 1999 without prior approval. No dividends were paid during
1998.
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. PM Group received approval to pay
dividends of $14 million and $25 million for the years ended December 31,
1997 and 1996 of which $8 million and $18 million, respectively, were
considered extraordinary. No dividends were paid during 1998.
PERMITTED PRACTICE
As discussed in Note 1, the Company beneficially owns approximately 33% of
the outstanding General and Limited Partner units in PIMCO Advisors L.P. as
of December 31, 1998. Net cash distributions received on these units are
recorded as income as permitted by the Insurance Department of the State of
California for statutory accounting purposes.
3. CLOSED BLOCK
In connection with the Conversion, an arrangement known as a closed block
(the "Closed Block"), was established, for dividend purposes only, for the
exclusive benefit of certain individual life insurance policies that had an
experience based dividend scale for 1997. The Closed Block was 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
64
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK (Continued)
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 $311.6 million and $316.2 million and total liabilities of
$352.8 million and $356.0 million for the Closed Block are included in
other assets and other liabilities, respectively, on the accompanying
consolidated statements of financial condition as of December 31, 1998 and
1997, respectively. The contribution to income from the Closed Block of
$5.1 million and $5.7 million, consisting of net revenues and expenses
generated by the Closed Block, is included in other income on the
accompanying consolidated statements of operations for the years ended
December 31, 1998 and 1997, respectively.
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 BLOCKS 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
("Confederation Life"), 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.
The remaining cost of acquiring this business, representing the amount
equal to the excess of the estimated fair value of the reserves assumed
over the estimated fair value of the assets acquired, amounted to $36.5
million and $43.4 million as of December 31, 1998 and 1997, respectively,
and is included in deferred policy acquisition costs on the accompanying
consolidated statements of financial condition. Amortization of this asset
for the years ended December 31, 1998 and 1997 was $7.7 million and $0.9
million, respectively, and is included in commission expenses on the
accompanying consolidated statements of operations.
In January 1999, Pacific Life signed a definitive agreement to acquire a
payout annuity block of business from Confederation Life. This block of
business consists of approximately 18,000 policies, having reserves
amounting to approximately $2.0 billion. The transaction is subject to
various regulatory and Court approvals and is anticipated to close during
1999.
65
<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, 1998:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 94.0 $ 24.9 $ 118.9
Obligations of states, political
subdivisions and foreign govern-
ments 726.0 118.0 $ 16.1 827.9
Corporate securities 7,766.0 438.0 122.4 8,081.6
Mortgage-backed and asset-backed
securities 4,391.7 139.6 52.9 4,478.4
Redeemable preferred stock 104.0 11.3 5.1 110.2
--------------------------------------
Total fixed maturity securities $13,081.7 $ 731.8 $ 196.5 $13,617.0
--------------------------------------
Total equity securities $ 364.4 $ 202.6 $ 19.5 $ 547.5
--------------------------------------
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 7,658.6 594.3 72.7 8,180.2
Mortgage-backed and asset-backed
securities 4,597.2 147.1 15.5 4,728.8
Redeemable preferred stock 102.3 10.3 2.6 110.0
--------------------------------------
Total fixed maturity securities $13,173.7 $ 858.6 $ 93.8 $13,938.5
--------------------------------------
Total equity securities $ 226.4 $ 122.5 $ 2.5 $ 346.4
--------------------------------------
</TABLE>
66
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6.INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (Continued)
The amortized cost and estimated fair value of fixed maturity securities as
of December 31, 1998, 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 $ 479.8 $ 482.6
Due after one year through five years 3,131.7 3,236.6
Due after five years through ten years 2,923.1 3,033.4
Due after ten years 2,155.4 2,386.0
--------------------
8,690.0 9,138.6
Mortgage-backed and asset-backed
securities 4,391.7 4,478.4
--------------------
Total $13,081.7 $13,617.0
--------------------
</TABLE>
Gross gains of $110.6 million, $69.1 million and $89.3 million and gross
losses of $35.9 million, $32.9 million and $29.9 million on securities
available for sale were realized during 1998, 1997 and 1996, respectively.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------8
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 915.9 $ 925.4 $ 820.7
Equity securities 17.5 12.8 17.8
Mortgage loans 174.6 129.5 109.4
Real estate 38.1 53.6 51.3
Policy loans 154.5 137.1 113.0
Other 100.2 75.5 82.6
--------------------------
Gross investment income 1,400.8 1,333.9 1,194.8
Investment expense 107.0 108.6 107.5
--------------------------
Net investment income $1,293.8 $1,225.3 $1,087.3
--------------------------
</TABLE>
67
<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 on investments in available for sale
and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale securities:
Fixed maturity $(229.5) $223.5 $(168.6)
Equity 63.1 85.7 6.3
------------------------
Total $(166.4) $309.2 $(162.3)
------------------------
Trading securities:
Fixed maturity $ (2.5) $ (1.1) $ (0.5)
Equity 0.2
------------------------
Total $ (2.5) $ (1.1) $ (0.3)
------------------------
</TABLE>
As of December 31, 1998 and 1997, investments in fixed maturity securities
with a carrying value of $13.0 million and $14.4 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements.
No investment, aggregated by issuer, exceeded 10% of total stockholder's
equity as of December 31, 1998.
7. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities (Note 6) $14,164.5 $14,164.5 $14,284.9 $14,284.9
Mortgage loans 2,788.7 2,911.2 1,922.1 1,990.9
Policy loans 3,901.2 3,901.2 3,769.2 3,769.2
Cash and cash equivalents 150.1 150.1 110.4 110.4
Derivative financial
instruments:
Interest rate floors, caps,
options and swaptions 67.9 67.9 22.9 22.9
Interest rate swap contracts 0.5 0.5
Foreign currency derivatives 108.2 108.2 4.1 4.1
Liabilities:
Guaranteed interest contracts 5,665.3 5,751.0 3,982.0 4,035.7
Deposit liabilities 599.9 626.7 733.5 737.4
Annuity liabilities 1,448.0 1,430.1 1,883.5 1,872.6
Short-term debt 295.5 295.5 104.0 104.0
Surplus notes 149.6 176.0 149.6 164.7
Derivative financial
instruments:
Options written 1.6 1.6
Interest rate swap contracts 23.3 23.3
Asset swap contracts 3.6 3.6 12.6 12.6
Credit default and total
return swaps 9.1 9.1 4.0 4.0
</TABLE>
68
<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, 1998 and 1997:
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 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 at that time. 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.
69
<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, 1998:
-----------------
Interest rate floors, caps,
options and swaptions $2,730.0 $ 160.6 $ 237.6 $2,653.0
Interest rate swap
contracts 2,026.1 960.8 378.3 2,608.6
Asset swap contracts 67.4 30.3 34.5 63.2
Credit default and total
return swaps 288.5 771.5 410.4 649.6
Financial futures contracts 214.1 4,108.4 3,713.6 608.9
Foreign currency
derivatives 207.0 959.4 35.2 1,131.2
December 31, 1997:
-----------------
Interest rate floors, caps,
options and swaptions 4,538.2 1,644.2 3,452.4 2,730.0
Interest rate swap
contracts 988.3 1,356.0 318.2 2,026.1
Asset swap contracts 30.0 47.4 10.0 67.4
Credit default 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
derivatives 41.4 217.0 51.4 207.0
</TABLE>
Interest Rate Floors, Caps, Options and Swaptions
-------------------------------------------------
The Company uses interest rate floors, caps, options and swaptions to hedge
against fluctuations in interest rates and to take positions in its total
return portfolios. Interest rate floor agreements entitle the Company to
receive the difference when the current rate of the underlying index is
below the strike rate. Interest rate cap agreements entitle the Company to
receive the difference when the current rate of the underlying index is
above the strike rate. 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. Floors, caps and options are
reported as assets and options written are reported as liabilities in the
accompanying 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 in the accompanying consolidated
statements of operations over the term of the agreement. Interest rate
floors and caps, options and swaptions mature during the years 1999 through
2017.
Interest Rate Swap Contracts
----------------------------
The Company uses interest rate swaps to manage interest rate risk and to
take positions in its total return portfolios. 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 the years 1999 through 2021.
70
<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 fixed income
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 the years 2000
through 2005.
Credit Default and Total Return Swaps
-------------------------------------
The Company uses credit default and total return swaps to take advantage of
market opportunities. Credit default swaps involve the receipt of fixed
rate payments in exchange for assuming potential credit exposure 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 default and total return swaps mature during the years
1999 through 2028.
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 by delivery of the financial instrument.
Price changes on futures are settled daily through the required 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 losses and gains, respectively, on the related
foreign currency denominated 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 the years 1999 through 2013.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair value of fixed maturity guaranteed interest contracts is
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.
71
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (Continued)
SHORT-TERM DEBT
The carrying amount of short-term debt is a reasonable estimate of its fair
value because the interest rates are variable and based on current market
values.
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 401(k) plans totaling $1.6
billion as of December 31, 1998, pursuant to the terms of which the 401(k)
plan 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
The detail of universal life, annuity and other investment contract deposit
liabilities is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------------
(In Millions)
<S> <C> <C>
Universal life $10,218.0 $10,012.0
Annuity 1,429.0 1,817.4
Other investment contract
deposits 6,326.0 4,815.1
-------------------
$17,973.0 $16,644.5
-------------------
</TABLE>
The detail of universal life, annuity and other investment contract
deposits policy fees and interest credited net of reinsurance ceded is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees:
Universal life $ 439.9 $ 377.5 $ 318.4
Annuity 82.1 50.3 26.6
Other investment contract
deposits 3.3 3.4 3.6
--------------------------
Total policy fees $ 525.3 $ 431.2 $ 348.6
--------------------------
Interest credited:
Universal life $ 440.8 $ 368.2 $ 284.3
Annuity 79.8 116.8 138.7
Other investment contract
deposits 360.2 312.8 242.0
--------------------------
Total interest credited $ 880.8 $ 797.8 $ 665.0
--------------------------
</TABLE>
72
<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.
Principal of $234.9 million and interest payable of $0.6 million was
outstanding as of December 31, 1998, bearing an average interest rate of
5.22%, and was repaid in January 1999. There was no commercial paper debt
outstanding as of December 31, 1997. Pacific Life has a revolving credit
facility available of $350 million as of December 31, 1998 and 1997. There
was no debt outstanding under the revolving credit facility as of December
31, 1998 and 1997.
PAM had bank borrowings outstanding of $60 million and $104 million as of
December 31, 1998 and 1997, respectively. The interest rate averaged 5.8%,
5.8% and 5.6% for the years ended December 31, 1998, 1997 and 1996,
respectively. Outstanding debt is due and payable in 1999 and subject to
renewal. The borrowing limit for PAM as of December 31, 1998 and 1997 was
$200 million.
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, 1998,
1997 and 1996 and is included in net investment income on the accompanying
consolidated statements of operations.
10. INCOME TAXES
The Company accounts for income taxes using the liability method. 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 tax law is enacted. Recording the effects of a 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,
1998 1997 1996
---------------------------
(In Millions)
<S> <C> <C> <C>
Current $134.1 $127.9 $163.5
Deferred (20.6) (14.4) (49.8)
---------------------------
$113.5 $113.5 $113.7
---------------------------
</TABLE>
73
<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>
Years Ended December 31,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
Non deductible reserves $ 28.2 $ (27.6) $ (6.4)
Duration hedging 20.8 (2.6) (14.9)
Partnership income 20.8
Deferred policy acquisition costs (12.6) (18.0) 2.1
Investment valuation (24.5) 3.9 (7.3)
Policyholder reserves (29.5) 20.1 (28.5)
Other (2.6) 9.8 5.2
----------------------------
Deferred taxes from operations 0.6 (14.4) (49.8)
Release of subsidiary deferred taxes (21.2)
----------------------------
Deferred tax provision $ (20.6) $ (14.4) $ (49.8)
----------------------------
</TABLE>
The Company's acquisition of a controlling interest in a subsidiary allowed
such subsidiary to be included in PMHC's consolidated income tax return.
That inclusion resulted in the release of certain deferred taxes.
A reconciliation of the provision for income taxes based on the prevailing
corporate statutory tax rate to the provision reflected in the consolidated
financial statements is as follows:
<TABLE>
Years Ended December 31,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $ 124.2 $ 101.3 $ 98.1
Equity tax (5.0) 5.0 16.3
Amortization of intangibles on equity
method investments 4.3 7.6 6.5
Non-taxable investment income (3.6) (2.6) (2.1)
Other (6.4) 2.2 (5.1)
----------------------------
Provision for income taxes $ 113.5 $ 113.5 $ 113.7
----------------------------
</TABLE>
74
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The net deferred tax liability is comprised of the following tax effected
temporary differences:
<TABLE>
December 31,
1998 1997
----------------
(In Millions)
<S> <C> <C>
Policyholder reserves $ 254.3 $ 224.8
Investment valuation 44.7 20.2
Deferred compensation 33.7 25.9
Dividends 7.6 7.7
Non deductible reserves 5.9 34.1
Depreciation (2.4) (2.5)
Duration hedging (8.5) 12.3
Deferred policy acquisition costs (13.3) (25.9)
Partnership income (20.8)
Other (1.4) 3.8
----------------
Deferred taxes from operations 299.8 300.4
Deferred taxes assumed in acquisition of
subsidiary 4.8
Issuance of partnership units by affiliate (74.9) (47.9)
Unrealized gain on securities available for
sale (272.3) (307.8)
----------------
Net deferred tax liability $ (42.6) $ (55.3)
----------------
</TABLE>
75
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMPREHENSIVE INCOME
The Company displays comprehensive income and its components in the
accompanying consolidated statements of stockholder's equity and the note
herein. The Company's only component of other comprehensive income,
unrealized gain (loss) on securities available for sale, is shown net of
reclassification adjustments, as defined by SFAS No. 130, and net of income
tax in the accompanying consolidated statements of stockholder's equity.
The disclosure of the gross components of other comprehensive income is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-------------------------
<S> <C> <C> <C>
(In Millions)
Calculation of Holding Gain (Loss):
-----------------------------------
Gross holding gain (loss) on
securities available for sale $(13.4) $ 338.2 $ (75.7)
Tax (expense) benefit 4.5 (117.1) 26.5
------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (8.9) $ 221.1 $ (49.2)
------------------------
Calculation of Reclassification Adjustment:
-------------------------------------------
Realized gain on sale of securities
available for sale $ 89.3 $ 38.9 $ 82.6
Tax expense (31.3) (13.8) (29.0)
------------------------
Reclassification adjustment, net of
tax $ 58.0 $ 25.1 $ 53.6
------------------------
Amounts Reported in Other Comprehensive Income:
-----------------------------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (8.9) $ 221.1 $ (49.2)
Less reclassification adjustment, net
of tax 58.0 25.1 53.6
------------------------
Net unrealized gain (loss) recognized
in other comprehensive income $(66.9) $ 196.0 $(102.8)
------------------------
</TABLE>
76
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. REINSURANCE
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. 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. 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,
1998 1997
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(46.0) $(39.6)
Future policy benefits 108.9 92.2
Unpaid claims 12.5 14.0
Paid claims 24.3 10.2
</TABLE>
As of December 31, 1998, 79% 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,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance premi-
ums $ 82.7 $ 70.7 $ 44.3
Assumed reinsurance included in insurance premiums 17.2 18.1 17.8
Ceded reinsurance netted against policy fees 65.0 77.5 71.0
Ceded reinsurance netted against net investment
income 203.3 204.9 192.5
Ceded reinsurance netted against interest credited 162.8 165.8 155.2
Ceded reinsurance netted against policy benefits 121.3 93.4 56.7
Assumed reinsurance included in policy benefits 17.7 12.7 9.9
</TABLE>
77
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION
The Company's six operating segments are Individual Insurance, Institutional
Products Group, Annuities, Group Employee Benefits, Broker-Dealers and
Investment Management. These segments have been identified based on
differences in products and services offered. All other activity is included
in Corporate and Other.
The Individual Insurance segment offers universal life, variable universal
life and other life insurance products to individuals, small businesses and
corporations through a network of distribution channels that include branch
offices, marketing organizations, national accounts and a national producer
group. The Institutional Products Group segment offers investment and
annuity products to pension fund sponsors and other institutional investors
primarily through its home office marketing team. The Annuities segment
offers variable and fixed annuities to individuals, small businesses and
qualified plans through financial institutions, National Association of
Securities Dealers ("NASD") firms, and regional and national wirehouses.
The Group Employee Benefits segment offers group life, health and dental
insurance, and stop loss insurance products to corporate, government and
labor-management-negotiated plans. The group life, health and dental
insurance is distributed through a network of sales offices and the stop
loss insurance is distributed through a network of third party
administrators. The Broker-Dealers segment includes five NASD registered
firms that provide securities and affiliated insurance brokerage services
and investment advisory services through more than 3,100 registered
representatives. The Investment Management segment is primarily comprised of
the Company's investment in PIMCO Advisors (Note 1). PIMCO Advisors offers a
diversified range of investment products through separately managed
accounts, and institutional, retail and offshore funds.
Corporate and Other primarily includes investment income, expenses and
assets not attributable to the major segments and the operations of the
Company's reinsurance subsidiary located in the United Kingdom. Corporate
and Other also includes the elimination of intersegment revenues, expenses
and assets.
The Company uses the same accounting policies and procedures to measure
segment income and assets as it uses to measure its consolidated net income
and assets. Net investment income and capital gains are allocated based on
invested assets purchased and held as is required for transacting the
business of that segment. Overhead expenses are allocated based on services
provided. Interest expense is allocated based on the short-term borrowing
needs of the segment and is included in net investment income. The income
tax provision is allocated based on each segment's actual tax liability.
Intersegment revenues include commissions paid by the Individual Insurance
segment and the Annuities segment for variable product sales to the Broker-
Dealers segment. Investment Management segment assets have been reduced by
an intersegment note payable of $110 million as of December 31, 1998. The
related intersegment note receivable is included in Corporate and Other
segment assets.
The Company generates substantially all of its revenues and income from
customers located in the United States. Additionally, substantially all of
the Company's assets are located in the United States.
Depreciation expense and capital expenditures are not material and have not
been reported herein. The Company's significant non cash item is interest
credited to universal life, annuity and other investment contract deposits
and is disclosed herein.
78
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION (Continued)
Financial information for each of the business segments is as follows:
<TABLE>
<CAPTION>
Institutional Group
Individual Products Employee Broker- Investment Corporate
Insurance Group Annuities Benefits Dealers Management and Other Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External customers and (In Millions)
other revenue
December 31, 1998 $ 414.6 $ 43.3 $ 124.0 $521.2 $236.1 $ 17.1 $ 17.4 $ 1,373.7
December 31, 1997 379.2 61.6 83.3 480.6 154.0 21.8 3.2 1,183.7
December 31, 1996 335.4 36.8 41.4 431.7 82.2 22.2 5.7 955.4
Intersegment revenues
December 31, 1998 185.3 (185.3) -
December 31, 1997 143.3 (143.3) -
December 31, 1996 98.0 (98.0) -
Net investment income
December 31, 1998 565.7 565.5 88.6 23.1 0.9 8.0 42.0 1,293.8
December 31, 1997 485.2 509.6 149.4 24.9 0.8 6.2 49.2 1,225.3
December 31, 1996 404.1 465.5 149.6 21.9 0.8 4.8 40.6 1,087.3
Net realized capital
gains (losses)
December 31, 1998 3.4 (13.6) 4.6 1.7 4.0 38.6 38.7
December 31, 1997 9.8 12.8 0.6 2.0 20.8 39.3 85.3
December 31, 1996 5.7 5.0 (4.5) 2.3 1.1 34.4 44.0
Net income of equity
method investees
December 31, 1998 103.0 103.0
December 31, 1997 80.1 80.1
December 31, 1996 61.3 61.3
Total revenues
December 31, 1998 983.7 595.2 217.2 546.0 422.3 132.1 (87.3) 2,809.2
December 31, 1997 874.2 584.0 233.3 507.5 298.1 128.9 (51.6) 2,574.4
December 31, 1996 745.2 507.3 186.5 455.9 181.0 89.4 (17.3) 2,148.0
Segment profit (loss)
before income tax
provision
December 31, 1998 151.1 74.6 34.1 10.3 9.9 60.1 14.9 355.0
December 31, 1997 132.4 98.3 23.5 28.8 6.4 24.6 (24.5) 289.5
December 31, 1996 109.3 80.7 (16.5) 26.3 4.3 34.1 42.1 280.3
Income tax provision
(benefit)
December 31, 1998 52.6 21.2 11.3 2.9 4.5 2.1 18.9 113.5
December 31, 1997 55.8 33.9 9.4 9.1 2.7 10.1 (7.5) 113.5
December 31, 1996 44.8 27.5 (0.4) 6.2 1.8 21.5 12.3 113.7
Segment net income
(loss)
December 31, 1998 98.5 53.4 22.8 7.4 5.4 58.0 (4.0) 241.5
December 31, 1997 76.6 64.4 14.1 19.7 3.7 14.5 (17.0) 176.0
December 31, 1996 64.5 53.2 (16.1) 20.1 2.5 12.6 29.8 166.6
Interest credited on
universal life, annuity
and other investment
contract deposits
December 31, 1998 449.6 354.1 71.0 6.1 880.8
December 31, 1997 378.8 299.8 106.2 13.0 797.8
December 31, 1996 290.3 232.9 132.8 9.0 665.0
Segment assets
As of December 31, 1998 14,578.2 15,221.0 8,384.2 361.1 55.8 267.3 1,016.3 39,883.9
As of December 31, 1997 13,426.7 12,241.7 6,310.8 368.6 52.4 305.4 1,303.2 34,008.8
79
</TABLE>
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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 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 mutual funds managed by an
affiliate of Pacific Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned during
the year $ 4.0 $ 3.6 $ 3.7
Interest cost on projected benefit
obligation 10.9 10.4 9.8
Expected return on plan assets (15.0) (12.8) (11.2)
Amortization of net obligations and
prior service cost (1.4) (1.4) (1.4)
----------------------------
Net periodic pension cost (benefit) $ (1.5) $ (0.2) $ 0.9
----------------------------
</TABLE>
80
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
The following tables set forth the pension plans' reconciliation of benefit
obligation, plan assets and funded status for the years ended:
<TABLE>
December 31,
1998 1997
--------------
(In Millions)
<S> <C> <C>
Change in Benefit Obligation:
-----------------------------
Benefit obligation, beginning of year $157.9 $140.9
Service cost 4.0 3.6
Interest cost 10.9 10.4
Plan expense (0.3) (0.2)
Actuarial loss 11.9 10.1
Benefits paid (6.6) (6.9)
Benefit obligation, end of year $177.8 $157.9
--------------
Change in Plan Assets:
----------------------
Fair value of plan assets, beginning of year $180.3 $154.2
Actual return on plan assets 21.9 33.2
Plan expense (0.3) (0.2)
Benefits paid (6.6) (6.9)
--------------
Fair value of plan assets, end of year $195.3 $180.3
--------------
Funded Status Reconciliation:
-----------------------------
Funded status $ 17.5 $ 22.4
Unrecognized transition asset (3.6) (4.8)
Unrecognized prior service cost (1.0) (1.2)
Unrecognized actuarial gain (9.7) (14.7)
--------------
Prepaid pension cost $ 3.2 $ 1.7
--------------
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1998 and 1997, the weighted average discount
rate used was 6.5% and 7.0%, respectively, and the rate of increase in
future compensation levels was 5.0% and 5.5%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1998 and 1997.
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.
POSTRETIREMENT BENEFITS
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
81
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
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 net periodic postretirement benefit cost for the years ended December
31, 1998, 1997 and 1996 is $0.7 million, $0.8 million and $1.4 million,
respectively. As of December 31, 1998 and 1997, the accumulated benefit
obligation is $19.3 million and $20.0 million, respectively. The fair value
of the plan assets as of December 31, 1998 and 1997 is zero. The amount of
accrued benefit cost included in other liabilities on the accompanying
consolidated statements of financial condition is $25.3 million and $26.0
million as of December 31, 1998 and 1997, respectively.
The Plans include both indemnity and HMO coverage. The assumed health care
cost trend rate used in measuring the accumulated benefit obligation for
indemnity coverage was 8% and 9% for 1998 and 1997, respectively, and is
assumed to decrease gradually to 3.5% in 2003 and remain at that level
thereafter. The assumed health care cost trend rate used in measuring the
accumulated benefit obligation for HMO coverage was 7% and 8% for 1998 and
1997, respectively, and is assumed to decrease gradually to 3% 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, 1998 would be increased by 8.0%, and the aggregate of the
service and interest cost components of the net periodic benefit cost would
increase by 7.5%. If the health care cost trend rate assumptions were
decreased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1998 would be decreased by 6.8%, and the aggregate of the
service and interest cost components of the net periodic benefit cost would
decrease by 6.5%.
The discount rate used in determining the accumulated postretirement
benefit obligation is 6.5% and 7.0% for 1998 and 1997, 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 6% 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.
15. 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 $42.1
million, $27.5 million and $14.3 million for the years ended December 31,
1998, 1997 and 1996, respectively. In addition, Pacific Life provides
certain support services to the Pacific Select Fund for an administration
fee which is based on an
82
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. TRANSACTIONS WITH AFFILIATES (Continued)
allocation of actual costs. Such administration fees amounted to $232,000,
$165,000 and $108,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $16.9 million, $11.4 million and $6.2 million
for the years ended December 31, 1998, 1997 and 1996, 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 $40.3 million and
$46.5 million as of December 31, 1998 and 1997, 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, $1.2 million and $1.4 million for the years ended December
31, 1998, 1997 and 1996, respectively.
16. 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.
For the years ended December 31, 1998, 1997 and 1996, approximately $49.4
million, $85.8 million and $35.3 million, respectively, is included in
operating expenses on the accompanying 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.
17. COMMITMENTS
The Company has outstanding commitments to make investments primarily in
fixed maturities, mortgage loans, limited partnerships and other
investments as follows (In Millions):
<TABLE>
<S> <C>
Years Ending December 31:
-------------------------
1999 $172.7
2000-2003 202.1
2004 and thereafter 55.9
------
Total $430.7
------
</TABLE>
The Company leases office facilities under various non-cancelable operating
leases. Aggregate minimum future commitments as of December 31, 1998
through the term of the leases are approximately $37.5 million.
83
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. LITIGATION
The Company was named in civil litigation proceedings similar to other
litigation brought against many life insurers alleging misconduct in the
sale of products, sometimes referred to as market conduct litigation. The
class of plaintiffs included, with some exceptions, all persons who owned,
as of December 31, 1997 (or as of the date of policy termination, if
earlier), individual whole life, universal life or variable life insurance
policies sold by the Company on or after January 1, 1982. The Company has
settled this litigation pursuant to a finalsettlement agreement approved by
the Court in November 1998. The settlement agreement is currently being
implemented. The cost of the settlement has been included in the
accompanying consolidated statements of operations during the three years
ended December 31, 1998.
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.
----------------------------------------------------------------------------
84
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
---------------------------------------------------------
Illustrations 1 through 8, which appear on the following
pages, illustrate how the death benefit, Accumulated
If you ask us, we'll provide Value and Net Cash Surrender Value of a hypothetical
you with different kinds of Policy may vary over an extended period of time, based
illustrations: on certain hypothetical rates of return.
.Illustrations similar to the These illustrations are based on a hypothetical Policy
ones in this prospectus, but with the following characteristics:
based on information you give
us about the Ages of the person .the Face Amount for Illustrations 1, 2, 7 and 8 is $80,042
or the two people to be insured
by the Policy, their risk classes, .The Face Amount for Illustrations 3 and 4 is $94,464
the Face Amount, the death
benefit and premium payments. .The Face Amount for Illustrations 5 and 6 is $114,737
.Illustrations that show the .the guideline single premium for the Illustrations is $40,000
allocation of premium payments to
specified Variable Accounts. These .on the Policy Date, the person insured by the Policy in
will reflect the expenses of the Illustrations 1, 2, 7 and 8 is:
Portfolio of the Fund in which the
Variable Account invests. - a 60-year old male non-smoker
.Illustrations that use a .on the Policy Date, the person insured by the Policy in
hypothetical gross rate of return Illustrations 3 and 4 is:
that's greater than 12%. These are
available only to certain large - a 60-year old female non-smoker
institutional investors.
.on the policy date, the people insured by the Policy in
Illustrations 5 and 6 are:
- a 60-year old male non-smoker
- a 60-year old female non-smoker
The Policy option and the cost of insurance rates vary
by illustration, as follows:
------------------------------------------------------------
Policy option Cost of insurance rate
------------------------------------------------------------
<S> <C> <C>
Illustration 1 Single Life Option Current
Illustration 2 Single Life Option Guaranteed
Illustration 3 Single Life Option Current
Illustration 4 Single Life Option Guaranteed
Illustration 5 Last Survivor Option Current
Illustration 6 Last Survivor Option Guaranteed
Illustration 7 Single Life Option Current
Illustration 8 Single Life Option Guaranteed
------------------------------------------------------------
Assumptions
The illustrations are based on the guideline premium test.
Here are the assumptions we're using:
.The hypothetical rates of return are equal to constant
gross annual rates of 0%, 6% and 12%.
.An amount equal to the annual premium, after taxes, is
invested to earn interest at 5% compounded annually for the
second column of each table, Total premiums paid plus
interest at 5%, which shows the amount that would
accumulate.
.No Policy loans have been taken out.
</TABLE>
85
<PAGE>
<TABLE>
<S> <C>
. The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values reflect charges deducted from the Variable Accounts. This
means that the net investment return on the Variable Accounts is lower than the
gross investment return on the assets.
. The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values also reflect premium loads, administrative charges and
mortality and expense risk charges.
The Fund's investment advisory fees and . llustrations 1 to 6 assume total annual advisory fees and expenses of .77% of
expenses are shown in An Overview of total average daily net assets of the Fund. This reflects average advisory fees
Pacific Select Estate Maximizer. of .69% and average expenses of .08% based upon fees and expenses of Portfolios
available as Investment Options under the Policy.
. llustrations 7 and 8 assume total annual advisory fees and expenses of .72%
of total average daily net assets of the Fund. This reflects weighted average
advisory fees of .65% and weighted average expenses of .08% based upon fees and
expenses of Portfolios available as Investment Options under the Policy.
. There are no charges against the Variable Accounts for income taxes but we
reserve the right to impose charges in the future.
Things to keep in mind
Here are a few things to keep in mind when reviewing the illustrations:
. The values shown would be different if, although the gross annual investment
rates of return averaged 0%, 6% or 12% over a period of years, they also rose
above or fell below those averages for individual Policy years.
. After we've deducted the charges and Fund expenses described in the
assumptions above, the illustrated gross annual investment rates of return of
0%, 6% and 12% correspond to approximate net annual rates of return of
-.77%, 5.18%, and 11.14% for illustrations 1 to 6 and -.72%, 5.24% and 11.19%
for illustrations 7 and 8.
. The amounts shown would be different if unisex insurance rates were used or if
the people insured by the last survivor Policy were females and insurance rates
for females were used.
. For the illustrations that assume current cost of insurance rates, the amounts
shown would be different if either person insured by the Policy was a smoker
and rates for smokers were used.
. The Fund expenses used in the illustrations do not include foreign taxes.
Here's what foreign taxes were for the year ended December 31, 1998:
----------------------------------------
Percentage of average
Portfolio daily net assets
----------------------------------------
Aggressive Equity 0.01%
Growth LT 0.01%
Equity Income 0.01%
Equity Index 0.01%
International 0.23%
Emerging Markets 0.26%
----------------------------------------
</TABLE>
86
<PAGE>
ILLUSTRATIONS
<TABLE>
<S> <C>
---------------------------------------------------------------------------------
Illustration 1
Single Life Option at current cost of insurance rates
Based on average annual advisory fees and expenses of the Portfolios
SINGLE LIFE OPTION
FACE AMOUNT:$80,042
MALE NONSMOKER ISSUE AGE 60
GUIDELINE SINGLE PREMIUM:$40,000
Modified single premium ---------------------------------------------------------------------------------
variable universal life Total
Illustration of death benefits, premiums
Accumulated Values and Net Cash End of paid plus End of year DEATH BENEFIT assuming
Surrender Values. Policy interest at hypothetical gross annual investment return of
Year 5% 0% 6% 12%
This illustration assumes no ---------------------------------------------------------------------------------
Policy loans or partial <S> <C> <C> <C> <C>
withdrawals have been made. 1 $42,000 $80,042 $80,042 $80,042
2 $44,100 $80,042 $80,042 $80,042
The net death benefits, Accumulated 3 $46,305 $80,042 $80,042 $80,042
Values and Net Cash Surrender 4 $48,620 $80,042 $80,042 $80,042
Values will differ if premiums 5 $51,051 $80,042 $80,042 $80,042
are paid in different amounts or 6 $53,604 $80,042 $80,042 $80,042
frequencies. 7 $56,284 $80,042 $80,042 $85,896
8 $59,098 $80,042 $80,042 $92,692
The hypothetical investment rates 9 $62,053 $80,042 $80,042 $100,019
shown above and elsewhere in this 10 $65,156 $80,042 $80,042 $107,916
prospectus are illustrative only 15 $83,157 $80,042 $80,042 $158,153
and should not be interpreted as 20 $106,132 $80,042 $81,611 $246,574
a representation of past or 25 $135,454 $80,042 $98,459 $391,753
future investment results. Actual 30 $172,877 $80,042 $118,784 $622,410
rates of return may be more or 35 $220,640 $80,042 $137,880 $951,445
less than those shown and will ---------------------------------------------------------------------------------
depend on a number of factors, End of year End of year
including the investment ACCUMULATED VALUE NET CASH SURRENDER VALUE
allocations made to Variable End of assuming hypothetical gross assuming hypothetical gross
Accounts by the Owner and the Policy annual investment return of annual investment return of
experience of the Accounts. No Year 0% 6% 12% 0% 6% 12%
representation can be made by us, ---------------------------------------------------------------------------------
the Separate Account or the Fund <S> <C> <C> <C> <C> <C> <C>
that these hypothetical rates of 1 $38,866 $41,199 $43,531 $34,980 $37,199 $39,531
return can be achieved for any 2 $37,726 $42,392 $47,329 $33,953 $38,392 $43,329
one year or sustained over any 3 $36,618 $43,621 $51,463 $33,322 $40,021 $47,863
period of time. 4 $35,541 $44,886 $56,005 $32,698 $41,686 $52,805
5 $34,495 $46,190 $60,948 $32,081 $43,390 $58,148
This is an illustration only. An 6 $33,479 $47,533 $66,328 $31,470 $45,133 $63,928
illustration is not intended to 7 $32,491 $48,915 $72,182 $30,866 $46,915 $70,182
predict actual performance. 8 $31,531 $50,340 $78,553 $30,270 $48,740 $76,953
Interest rates, dividends, and 9 $30,599 $51,848 $85,486 $29,681 $50,648 $84,286
values set forth in the 10 $29,693 $53,402 $93,031 $29,693 $53,402 $93,031
illustration are not guaranteed. 15 $26,580 $64,425 $147,806 $26,580 $64,425 $147,806
20 $23,774 $77,725 $234,832 $23,774 $77,725 $234,832
25 $21,244 $93,770 $373,098 $21,244 $93,770 $373,098
30 $18,964 $113,127 $592,771 $18,964 $113,127 $592,771
35 $16,908 $136,515 $942,025 $16,908 $136,515 $942,025
---------------------------------------------------------------------------------
87
</TABLE>
<PAGE>
<TABLE>
<S> <C>
------------------------------------------------------------------------
Illustration 2
Single Life Option at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the Portfolios
SINGLE LIFE OPTION
FACE AMOUNT:$80,042
MALE NONSMOKER ISSUE AGE 60
GUIDELINE SINGLE PREMIUM:$40,000
Modified single premium ------------------------------------------------------------------------
variable universal life Total
Illustration of death benefits, premiums
Accumulated Values and Net Cash End of paid plus End of year DEATH BENEFIT assuming
Surrender Values. Policy interest at hypothetical gross annual investment return of
Year 5% 0% 6% 12%
This illustration assumes no Policy loans ------------------------------------------------------------------------
or partial withdrawals have been made. 1 $42,000 $80,042 $80,042 $80,042
2 $44,100 $80,042 $80,042 $80,042
*Additional payment will be required to 3 $46,305 $80,042 $80,042 $80,042
prevent Policy termination. 4 $48,620 $80,042 $80,042 $80,042
5 $51,051 $80,042 $80,042 $80,042
The death benefits, Accumulated Values and Net 6 $53,604 $80,042 $80,042 $80,042
Cash Surrender Values will differ if premiums 7 $56,284 $80,042 $80,042 $81,914
are paid in different amounts or frequencies. 8 $59,098 $80,042 $80,042 $88,332
9 $62,053 $80,042 $80,042 $95,229
The hypothetical investment rates shown above 10 $65,156 $80,042 $80,042 $102,641
and elsewhere in this prospectus are illustrative 15 $83,157 $0* $80,042 $148,654
only and should not be interpreted as a 20 $106,132 $0* $80,042 $230,633
representation of past or future investment results. 25 $135,454 $0* $80,042 $360,564
Actual rates of return may be more or less than 30 $172,877 $0* $0* $553,990
those shown and will depend on a number of factors, 35 $220,640 $0* $0* $826,365
including the investment allocations made to Variable ------------------------------------------------------------------------
Accounts by the Owner and the experience of the
Accounts. No representation can be made by us, the
Separate Account or the Fund that these hypothetical End of year End of year
rates of return can be achieved for any one year or ACCUMULATED VALUE NET CASH SURRENDER VALUE
sustained over any period of time. End of assuming hypothetical gross assuming hypothetical gross
Policy annual investment return of annual investment return of
This is an illustration only. An illustration is not Year 0% 6% 12% 0% 6% 12%
intended to predict actual performance. Interest rates, -------------------------------------------------------------------------
dividends, and values set forth in the illustration 1 $38,382 $40,723 $ 43,064 $34,544 $36,723 $ 39,064
are not guaranteed. 2 $36,669 $41,378 $ 46,368 $33,002 $37,378 $ 42,368
3 $34,886 $41,999 $ 49,989 $31,746 $38,399 $ 46,389
4 $33,017 $42,577 $ 53,971 $30,376 $39,377 $ 50,771
5 $31,045 $43,103 $ 58,412 $28,871 $40,303 $ 55,612
6 $28,951 $43,571 $ 63,341 $27,214 $41,171 $ 60,941
7 $26,716 $43,972 $ 68,835 $25,381 $41,972 $ 66,835
8 $24,320 $44,299 $ 74,857 $23,347 $42,699 $ 73,257
9 $21,736 $44,540 $ 81,392 $21,084 $43,340 $ 80,192
10 $18,926 $44,679 $ 88,483 $18,926 $44,679 $ 88,483
15 $0* $44,506 $138,929 $0* $44,506 $138,929
20 $0* $36,477 $219,651 $0* $36,477 $219,651
25 $0* $ 3,520 $343,394 $0* $ 3,520 $343,394
30 $0* $0* $527,610 $0* $0* $527,610
35 $0* $0* $818,184 $0* $0* $818,184
-------------------------------------------------------------------------
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88
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ILLUSTRATIONS
<TABLE>
<S> <C>
-------------------------------------------------------------------
Illustration 3
Single Life Option at current cost of insurance rates
Based on average annual advisory fees and expenses of the Portfolios
SINGLE LIFE OPTION
FACE AMOUNT:$94,464
FEMALE NONSMOKER ISSUE AGE 60
GUIDELINE SINGLE PREMIUM:$40,000
Modified single premium -------------------------------------------------------------------
variable universal life Total
Illustration of death benefits, Accumulated premiums End of year DEATH BENEFIT assuming
Values and Net Cash Surrender Values. End of paid plus hypothetical gross annual investment
Policy interest at return of
This illustration assumes no Policy loans Year 5% 0% 6% 12%
or partial withdrawals have been made. -------------------------------------------------------------------
1 $42,000 $94,464 $94,464 $94,464
The death benefits, Accumulated Values and Net 2 $44,100 $94,464 $94,464 $94,464
Cash Surrender Values will differ if premiums 3 $46,305 $94,464 $94,464 $94,464
are paid in different amounts or frequencies. 4 $48,620 $94,464 $94,464 $94,464
5 $51,051 $94,464 $94,464 $94,464
The hypothetical investment rates shown above 6 $53,604 $94,464 $94,464 $94,464
and elsewhere in this prospectus are illustrative 7 $56,284 $94,464 $94,464 $94,464
only and should not be interpreted as a 8 $59,098 $94,464 $94,464 $94,464
representation of past or future investment results. 9 $62,053 $94,464 $94,464 $100,219
Actual rates of return may be more or less than 10 $65,156 $94,464 $94,464 $108,309
those shown and will depend on a number of factors, 15 $83,157 $94,464 $94,464 $158,839
including the investment allocations made to Variable 20 $106,132 $94,464 $94,464 $248,299
Accounts by the Owner and the experience of the 25 $135,454 $94,464 $98,459 $394,492
Accounts. No representation can be made by us, 30 $172,877 $94,464 $118,784 $626,763
the Separate Account or the Fund that these hypothetical 35 $220,640 $94,464 $137,902 $958,246
rates of return can be achieved for any one year or -------------------------------------------------------------------
sustained over any period of time. End of year End of year
ACCUMULATED VALUE NET CASH SURRENDER VALUE
This is an illustration only. An illustration is End of assuming hypothetical gross assuming hypothetical gross
not intended to predict actual performance. Policy annual investment return of annual investment return of
Interest rates, dividends, and values set forth in the Year 0% 6% 12% 0% 6% 12%
illustration are not guaranteed. -------------------------------------------------------------------
1 $38,866 $41,199 $43,531 $34,980 $37,199 $39,531
2 $37,726 $42,392 $47,329 $33,953 $38,392 $43,329
3 $36,618 $43,621 $51,463 $33,322 $40,021 $47,863
4 $35,541 $44,886 $56,005 $32,698 $41,686 $52,805
5 $34,495 $46,190 $60,948 $32,081 $43,390 $58,148
6 $33,479 $47,533 $66,328 $31,470 $45,133 $63,928
7 $32,491 $48,915 $72,182 $30,866 $46,915 $70,182
8 $31,531 $50,340 $78,587 $30,270 $48,740 $76,987
9 $30,599 $51,848 $85,657 $29,681 $50,648 $84,457
10 $29,693 $53,402 $93,370 $29,693 $53,402 $93,370
15 $26,580 $64,425 $148,448 $26,580 $64,425 $148,448
20 $23,774 $77,725 $236,475 $23,774 $77,725 $236,475
25 $21,244 $93,770 $375,707 $21,244 $93,770 $375,707
30 $18,964 $113,127 $596,917 $18,964 $113,127 $596,917
35 $16,908 $136,536 $948,759 $16,908 $136,536 $948,759
-------------------------------------------------------------------
</TABLE>
89
<PAGE>
<TABLE>
<S> <C>
-------------------------------------------------------------------------------------------
Illustration 4
Single Life Option at guaranteed cost of insurance rates
Based on average annual fees and expenses of the Portfolios
SINGLE LIFE OPTION
FACE AMOUNT:$94,464
FEMALE NONSMOKER ISSUE AGE 60
GUIDELINE SINGLE PREMIUM:$40,000
Modified single premium ------------------------------------------------------------------------------------------
variable universal life Total
Illustration of death benefits, premiums
Accumulated Values and Net Cash End of paid plus End of year DEATH BENEFIT assuming
Surrender Values. Policy interest at hypothetical gross annual investment return of
Year 5% 0% 6% 12%
This illustration assumes no ------------------------------------------------------------------------------------------
Policy loans or partial withdrawals 1 $42,000 $94,464 $94,464 $94,464
have been made. 2 $44,100 $94,464 $94,464 $94,464
3 $46,305 $94,464 $94,464 $94,464
*Additional payment will be required 4 $48,620 $94,464 $94,464 $94,464
to prevent Policy termination. 5 $51,051 $94,464 $94,464 $94,464
6 $53,604 $94,464 $94,464 $94,464
The death benefits, Accumulated 7 $56,284 $94,464 $94,464 $94,464
Values and Net Cash Surrender Values 8 $59,098 $94,464 $94,464 $94,464
will differ if premiums are paid in 9 $62,053 $94,464 $94,464 $96,626
different amounts or frequencies. 10 $65,156 $94,464 $94,464 $104,426
15 $83,157 $94,464 $94,464 $153,018
The hypothetical investment rates 20 $106,132 $0* $94,464 $239,185
shown above and elsewhere in this 25 $135,454 $0* $94,464 $377,398
prospectus are illustrative only 30 $172,877 $0* $0* $585,587
and should not be interpreted as a 35 $220,640 $0* $0* $877,367
representation of past or future ------------------------------------------------------------------------------------------
investment results. Actual rates of End of year End of year
return may be more or less than ACCUMULATED VALUE NET CASH SURRENDER VALUE
those shown and will depend on a End of assuming hypothetical gross assuming hypothetical gross
number of factors, including the Policy annual investment return of annual investment return of
investment allocations made to Year 0% 6% 12% 0% 6% 12%
Variable Accounts by the Owner and ------------------------------------------------------------------------------------------
the experience of the Accounts. No 1 $38,527 $40,865 $43,202 $34,674 $36,865 $39,202
representation can be made by us, 2 $36,993 $41,686 $46,656 $33,294 $37,686 $42,656
the Separate Account or the Fund 3 $35,424 $42,494 $50,428 $32,236 $38,894 $46,828
that these hypothetical rates of 4 $33,806 $43,279 $54,593 $31,101 $40,079 $51,393
return can be achieved for any one 5 $32,126 $44,034 $59,156 $29,877 $41,234 $56,356
year or sustained over any period 6 $30,375 $44,756 $64,169 $28,553 $42,356 $61,769
of time. 7 $28,546 $45,442 $69,694 $27,119 $43,442 $67,694
8 $26,634 $46,092 $75,806 $25,568 $44,492 $74,206
This is an illustration only. An 9 $24,630 $46,704 $82,586 $23,891 $45,504 $81,386
illustration is not intended to 10 $22,517 $47,269 $90,023 $22,517 $47,269 $90,023
predict actual performance. 15 $9,338 $50,340 $143,008 $9,338 $50,340 $143,008
Interest rates, dividends, and 20 $0* $48,897 $227,796 $0* $48,897 $227,796
values set forth in the 25 $0* $33,521 $359,427 $0* $33,521 $359,427
illustration are not guaranteed. 30 $0* $0* $557,702 $0* $0* $557,702
35 $0* $0* $868,681 $0* $0* $868,681
------------------------------------------------------------------------------------------
</TABLE>
90
<PAGE>
ILLUSTRATIONS
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Illustration 5
Last Survivor Option at current cost of insurance rates
Based on average annual fees and expenses of the Portfolios
LAST SURVIVOR OPTION
FACE AMOUNT:$114,737
MALE NONSMOKER ISSUE AGE 60
FEMALE NONSMOKER ISSUE AGE 60
GUIDELINE SINGLE PREMIUM:$40,000
Modified single premium --------------------------------------------------------------------------------------
variable universal life Total
Illustration of death benefits, premiums
Accumulated Values and Net Cash End of paid plus End of year DEATH BENEFIT assuming
Surrender Values. Policy interest at hypothetical gross annual investment return of
Year 5% 0% 6% 12%
This illustration assumes no -------------------------------------------------------------------------------------
Policy loans or partial 1 $42,000 $114,737 $114,737 $114,737
withdrawals have been made. 2 $44,100 $114,737 $114,737 $114,737
3 $46,305 $114,737 $114,737 $114,737
The death benefits, Accumulated 4 $48,620 $114,737 $114,737 $114,737
Values and Net Cash Surrender Values 5 $51,051 $114,737 $114,737 $114,737
will differ if premiums are paid 6 $53,604 $114,737 $114,737 $114,737
in different amounts or 7 $56,284 $114,737 $114,737 $114,737
frequencies. 8 $59,098 $114,737 $114,737 $114,737
9 $62,053 $114,737 $114,737 $114,737
The hypothetical investment rates 10 $65,156 $114,737 $114,737 $114,737
shown above and elsewhere in this 15 $83,157 $114,737 $114,737 $164,793
prospectus are illustrative only 20 $106,132 $114,737 $114,737 $258,580
and should not be interpreted as 25 $135,454 $114,737 $114,737 $412,888
a representation of past or 30 $172,877 $114,737 $125,385 $659,281
future investment results. Actual 35 $220,640 $114,737 $146,236 $1,012,608
rates of return may be more or -------------------------------------------------------------------------------------
less than those shown and will End of year End of year
depend on a number of factors, ACCUMULATED VALUE NET CASH SURRENDER VALUE
including the investment End of assuming hypothetical gross assuming hypothetical gross
allocations made to Variable Policy annual investment return of annual investment return of
Accounts by the Owner and the Year 0% 6% 12% 0% 6% 12%
experience of the Accounts. No -------------------------------------------------------------------------------------
representation can be made by us, 1 $39,049 $41,393 $43,736 $35,144 $37,393 $39,736
the Separate Account or the Fund 2 $38,054 $42,766 $47,753 $34,248 $38,766 $43,753
that these hypothetical rates of 3 $37,047 $44,154 $52,116 $33,713 $40,554 $48,516
return can be achieved for any 4 $36,067 $45,572 $56,901 $33,181 $42,372 $53,701
one year or sustained over any 5 $35,111 $47,038 $62,109 $32,653 $44,238 $59,309
period of time. 6 $34,180 $48,551 $67,795 $32,129 $46,151 $65,395
7 $33,272 $50,115 $74,000 $31,608 $48,115 $72,000
This is an illustration only. An 8 $32,387 $51,772 $80,774 $31,092 $50,172 $79,174
illustration is not intended to 9 $31,525 $53,484 $88,168 $30,579 $52,284 $86,968
predict actual performance. 10 $30,685 $55,252 $96,248 $30,685 $55,252 $96,248
Interest rates, dividends, and 15 $27,613 $66,992 $154,012 $27,613 $66,992 $154,012
values set forth in the 20 $24,829 $81,227 $246,266 $24,829 $81,227 $246,266
illustration are not guaranteed. 25 $22,307 $98,487 $393,227 $22,307 $98,487 $393,227
30 $20,022 $119,415 $627,887 $20,022 $119,415 $627,887
35 $17,952 $144,789 $1,002,582 $17,952 $144,789 $1,002,582
-------------------------------------------------------------------------------------
91
</TABLE>
<PAGE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Illustration 6
Last Survivor Option at guaranteed cost of insurance rates
Based on average annual fees and expenses of the Portfolios
LAST SURVIVOR OPTION
FACE AMOUNT:$114,737
MALE NONSMOKER ISSUE AGE 60
FEMALE NONSMOKER ISSUE AGE 60
GUIDELINE SINGLE PREMIUM:$40,000
Modified single premium ---------------------------------------------------------------------------------
variable universal life Total
Illustration of death benefits, premiums
Accumulated Values and Net Cash End of paid plus End of year DEATH BENEFIT assuming
Surrender Values. Policy interest at hypothetical gross annual investment return of
Year 5% 0% 6% 12%
This illustration assumes no ---------------------------------------------------------------------------------
Policy loans or partial withdrawals 1 $42,000 $114,737 $114,737 $114,737
have been made. 2 $44,100 $114,737 $114,737 $114,737
3 $46,305 $114,737 $114,737 $114,737
* Additional payment will be 4 $48,620 $114,737 $114,737 $114,737
required to prevent Policy 5 $51,051 $114,737 $114,737 $114,737
termination. 6 $53,604 $114,737 $114,737 $114,737
7 $56,284 $114,737 $114,737 $114,737
The death benefits, Accumulated 8 $59,098 $114,737 $114,737 $114,737
Values and Net Cash Surrender Values 9 $62,053 $114,737 $114,737 $114,737
will differ if premiums are paid 10 $65,156 $114,737 $114,737 $114,737
in different amounts or frequencies. 15 $83,157 $114,737 $114,737 $164,404
20 $106,132 $0* $114,737 $257,827
The hypothetical investment rates 25 $135,454 $0* $114,737 $407,775
shown above and elsewhere in this 30 $172,877 $0* $0* $633,221
prospectus are illustrative only 35 $220,640 $0* $0* $948,634
and should not be interpreted as a ---------------------------------------------------------------------------------
representation of past or future End of year End of year
investment results. Actual rates of ACCUMULATED VALUE NET CASH SURRENDER VALUE
return may be more or less than End of assuming hypothetical gross assuming hypothetical gross
those shown and will depend on a Policy annual investment return of annual investment return of
number of factors, including the Year 0% 6% 12% 0% 6% 12%
investment allocations made to -----------------------------------------------------------------------------
Variable Accounts by the Owner and 1 $39,049 $41,393 $43,736 $35,144 $37,393 $39,736
the experience of the accounts. No 2 $38,054 $42,766 $47,753 $34,248 $38,766 $43,753
representation can be made by us, 3 $37,045 $44,154 $52,116 $33,711 $40,554 $48,516
the Separate Account or the Fund 4 $36,015 $45,551 $56,901 $33,134 $42,351 $53,701
that these hypothetical rates of 5 $34,952 $46,951 $62,100 $32,506 $44,151 $59,300
return can be achieved for any one 6 $33,844 $48,344 $67,756 $31,814 $45,944 $65,356
year or sustained over any period 7 $32,678 $49,723 $73,914 $31,044 $47,723 $71,914
of time. 8 $31,438 $51,080 $80,632 $30,181 $49,480 $79,032
9 $30,110 $52,448 $87,975 $29,207 $51,248 $86,775
This is an illustration only. 10 $28,673 $53,775 $96,022 $28,673 $53,775 $96,022
An illustration is not intended to 15 $19,223 $61,032 $153,649 $19,223 $61,032 $153,649
predict actual performance. 20 $0* $63,882 $245,550 $0* $63,882 $245,550
Interest rates, dividends, and 25 $0* $53,724 $388,357 $0* $53,724 $388,357
values set forth in the illustration 30 $0* $0* $603,068 $0* $0* $603,068
are not guaranteed. 35 $0* $0* $939,242 $0* $0* $939,242
-----------------------------------------------------------------------------
</TABLE>
92
<PAGE>
ILLUSTRATIONS
<TABLE>
<S> <C>
----------------------------------------------------------------------------------------
Illustration 7
Single Life Option at current cost of insurance rates
Based on a weighted average of annual advisory fees and expenses of the Portfolios
SINGLE LIFE OPTION
FACE AMOUNT:$80,042
MALE NONSMOKER ISSUE AGE 60
GUIDELINE SINGLE PREMIUM:$40,000
----------------------------------------------------------------------------------------
Modified single premium Total
variable universal life premiums
Illustration of death benefits, End of paid plus End of year DEATH BENEFIT assuming
Accumulated Values and Net Cash Policy interest at hypothetical gross annual investment return of
Surrender Values. Year 5% 0% 6% 12%
----------------------------------------------------------------------------------------
This illustration assumes no 1 $ 42,000 $ 80,042 $ 80,042 $80,042
Policy loans or partial 2 $ 44,100 $ 80,042 $ 80,042 $80,042
withdrawals have been made. 3 $ 46,305 $ 80,042 $ 80,042 $80,042
4 $ 48,620 $ 80,042 $ 80,042 $80,042
The death benefits, Accumulated 5 $ 51,051 $ 80,042 $ 80,042 $80,042
Values and Net Cash Surrender Values 6 $ 53,604 $ 80,042 $ 80,042 $80,042
will differ if premiums are paid 7 $ 56,284 $ 80,042 $ 80,042 $86,201
in different amounts or 8 $ 59,098 $ 80,042 $ 80,042 $93,067
frequencies. 9 $ 62,053 $ 80,042 $ 80,042 $100,474
10 $ 65,156 $ 80,042 $ 80,042 $108,462
The hypothetical investment rates 15 $ 83,157 $ 80,042 $ 80,042 $159,355
shown above and elsewhere in this 20 $106,132 $ 80,042 $ 82,437 $249,076
prospectus are illustrative only 25 $135,454 $ 80,042 $ 99,705 $396,728
and should not be interpreted as 30 $172,877 $ 80,042 $120,591 $631,907
a representation of past or 35 $220,640 $ 80,042 $140,330 $968,404
future investment results. Actual ----------------------------------------------------------------------------------------
rates of return may be more or End of year End of year
less than those shown and will ACCUMULATED VALUE NET CASH SURRENDER VALUE
depend on a number of factors, End of assuming hypothetical gross assuming hypothetical gross
including the investment Policy annual investment return of annual investment return of
allocations made to Variable Year 0% 6% 12% 0% 6% 12%
Accounts by the Owner and the ----------------------------------------------------------------------------------------
experience of the Accounts. No 1 $38,886 $41,219 $43,552 $34,997 $37,219 $39,552
representation can be made by us, 2 $37,764 $42,434 $47,377 $33,988 $38,434 $43,377
the Separate Account or the Fund 3 $36,673 $43,686 $51,541 $33,373 $40,086 $47,941
that these hypothetical rates of 4 $35,613 $44,977 $56,118 $32,764 $41,777 $52,918
return can be achieved for any 5 $34,582 $46,306 $61,102 $32,162 $43,506 $58,302
one year or sustained over any 6 $33,580 $47,676 $66,529 $31,566 $45,276 $64,129
period of time. 7 $32,606 $49,088 $72,437 $30,976 $47,088 $70,437
8 $31,659 $50,543 $78,871 $30,393 $48,943 $77,271
This is an illustration only. An 9 $30,739 $52,084 $85,875 $29,816 $50,884 $84,675
illustration is not intended to 10 $29,844 $53,671 $93,502 $29,844 $53,671 $93,502
predict actual performance. 15 $26,784 $64,914 $148,930 $26,784 $64,914 $148,930
Interest rates, dividends, and 20 $24,018 $78,512 $237,215 $24,018 $78,512 $237,215
values set forth in the 25 $21,519 $94,957 $377,836 $21,519 $94,957 $377,836
illustration are not guaranteed. 30 $19,260 $114,848 $601,816 $19,260 $114,848 $601,816
35 $17,218 $138,941 $958,816 $17,218 $138,941 $958,816
----------------------------------------------------------------------------------------
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93
<PAGE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Illustration 8
Single Life Option at guaranteed cost of insurance rates
Based on weighted average of annual advisory fees and expenses of the Portfolios
SINGLE LIFE OPTION
FACE AMOUNT:$80,042
MALE NONSMOKER ISSUE AGE 60
GUIDELINE SINGLE PREMIUM:$40,000
----------------------------------------------------------------------------------------
Modified single premium Total
variable universal life premiums
Illustration of death benefits, End of paid plus End of year DEATH BENEFIT assuming
Accumulated Values and Net Cash Policy interest at hypothetical gross annual investment return of
Surrender Values. Year 5% 0% 6% 12%
----------------------------------------------------------------------------------------
This illustration assumes no 1 $42,000 $80,042 $80,042 $80,042
Policy loans or partial 2 $44,100 $80,042 $80,042 $80,042
withdrawals have been made. 3 $46,305 $80,042 $80,042 $80,042
4 $48,620 $80,042 $80,042 $80,042
* Additional payment will be 5 $51,051 $80,042 $80,042 $80,042
required to prevent Policy 6 $53,604 $80,042 $80,042 $80,042
termination. 7 $56,284 $80,042 $80,042 $82,240
8 $59,098 $80,042 $80,042 $88,728
The death benefits, Accumulated 9 $62,053 $80,042 $80,042 $95,704
Values and Net Cash Surrender Values 10 $65,156 $80,042 $80,042 $103,205
will differ if premiums are paid 15 $83,157 $0* $80,042 $149,849
in different amounts or 20 $106,132 $0* $80,042 $233,074
frequencies. 25 $135,454 $0* $80,042 $365,301
30 $172,877 $0* $0* $562,688
The hypothetical investment rates 35 $220,640 $0* $0* $841,460
shown above and elsewhere in this ----------------------------------------------------------------------------------------
prospectus are illustrative only End of year End of year
and should not be interpreted as ACCUMULATED VALUE NET CASH SURRENDER VALUE
a representation of past or End of assuming hypothetical gross assuming hypothetical gross
future investment results. Actual Policy annual investment return of annual investment return of
rates of return may be more or Year 0% 6% 12% 0% 6% 12%
less than those shown and will ----------------------------------------------------------------------------------------
depend on a number of factors, 1 $38,402 $40,743 $43,086 $34,562 $36,743 $39,086
including the investment 2 $36,707 $41,421 $46,417 $33,036 $37,421 $42,417
allocations made to Variable 3 $34,942 $42,066 $50,069 $31,797 $38,466 $46,469
Accounts by the Owner and the 4 $33,090 $42,669 $54,088 $30,443 $39,469 $50,888
experience of the Accounts. No 5 $31,134 $43,224 $58,573 $28,955 $40,424 $55,773
representation can be made by us, 6 $29,056 $43,722 $63,555 $27,312 $41,322 $61,155
the Separate Account or the Fund 7 $26,836 $44,156 $69,109 $25,494 $42,156 $67,109
that these hypothetical rates of 8 $24,454 $44,518 $75,193 $23,476 $42,918 $73,593
return can be achieved for any 9 $21,882 $44,799 $81,798 $21,226 $43,599 $80,598
one year or sustained over any 10 $19,086 $44,980 $88,970 $19,086 $44,980 $88,970
period of time. 15 $0* $45,129 $140,045 $0* $45,129 $140,045
20 $0* $37,788 $221,976 $0* $37,788 $221,976
This is an illustration only. An 25 $0* $6,716 $347,906 $0* $6,716 $347,906
illustration is not intended to 30 $0* $0* $535,893 $0* $0* $535,893
predict actual performance. 35 $0* $0* $833,129 $0* $0* $833,129
Interest rates, dividends, and ----------------------------------------------------------------------------------------
values set forth in the
illustration are not guaranteed.
</TABLE>
94
<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>
95
<PAGE>
<TABLE>
<CAPTION>
PACIFIC SELECT
ESTATE MAXIMIZER WHERE TO GO FOR MORE INFORMATION
<S> <C>
The Pacific Select Estate Maximizer For more information about Pacific Select Estate Maximizer, please call or
variable life insurance policy is write to us at the address below. You should also use this address to send us
underwritten by Pacific Life Insurance any notices, forms or requests about your Policy.
Company.
--------------------------------------------------------------------------------
How to Contact Us Pacific Life Insurance Company
Client Services Department
700 Newport Center Drive
P.O. Box 7500
Newport Beach, California 92658-7500
1-800-800-7681
7 a.m. through 5 p.m. Pacific time
--------------------------------------------------------------------------------
How to Contact the SEC You can also find reports and other information about the Policy and Separate
Account from the SEC. The SEC may charge you a fee for this information.
Public Reference Section of the SEC
Washington, D.C. 20549-6009
1-800-SEC-0330
Internet: www.sec.gov
</TABLE>
<PAGE>
Supplement to Prospectus Dated May 1, 1999 for
Pacific Select Estate Maximizer
Modified Single Premium Variable Life Insurance Policies
Issued by Pacific Life Insurance Company
<TABLE>
<S> <C>
In this supplement, you and your mean the This supplement provides information about four additional Variable Investment
Policyholder or Owner. Pacific Life, we, Options offered under this Policy. Each of these Investment Options is set up
us, and our refer to Pacific Life Insurance as a Variable Account under our Separate Account and invests in a corresponding
Company. M Fund refers to M Fund, Inc. Portfolio of the M Fund.
You'll find an explanation of what
capitalized terms mean in the accompanying Variable Account I: Brandes International Equity Fund
variable life insurance prospectus or the Variable Account II: Turner Core Growth Fund
M Fund prospectus. Variable Account III: Frontier Capital Appreciation Fund
Variable Account IV: Enhanced U.S. Equity Fund
The M Fund is described in detail in its
prospectus and in its Statement of You can allocate premium payments and transfer Accumulated Value to these
Additional Information (SAI). Variable Investment Options, as well as to the other Investment Options
described in the accompanying Pacific Select Estate Maximizer prospectus.
Pacific Select Estate Maximizer is
described in detail in the accompanying INFORMATION ABOUT M FUND
variable life insurance prospectus. Except
as described below, all features and M Fund, Inc.
procedures of the Policy described in its M Fund is a diversified, open-end management investment company registered with
prospectus remain intact. 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.
Supplement dated May 1, 1999
1
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Your Policy's Accumulated Value will The following chart is a summary of the M Fund Portfolios. You'll find detailed
fluctuate depending on the Investment descriptions of the Portfolios, including the risks associated with investing
Options you've chosen. in the Portfolios, in the M Fund prospectus. There's no guarantee that a
Portfolio will achieve its investment objective. You should read the M Fund
prospectus carefully before investing.
The Portfolio's The Portfolio's Main
Portfolio Investment Goal Investments Portfolio Manager
Brandes Long-term capital Equity securities of foreign Brandes Investment
International appreciation. issuers, including common stocks, Partners, L.P.
Equity preferred stocks and securities
that are convertible into common
stocks. Focuses on stocks with
capitalizations of $1 billion
or more.
Turner Core Long-term capital Common stocks that show strong Turner Investment
Growth Fund appreciation. earnings potential and also have Partners, Inc.
reasonable valuations.
Frontier Capital Maximum capital Common stock of companies of all Frontier Capital
Appreciation appreciation. sizes with emphasis on stocks Management
companies with capitalizations of Company, Inc.
less than $3 billion.
Enhanced U.S. Above-market Common stocks of U.S. companies Franklin Portfolio
Equity total return. which the portfolio manager Associates LLC
believes have the potential for
higher rates of return than the
Standard & Poor's 500 Composite
Stock Price Index while having
risks similar to those of the
index.
We are not responsible for the M Financial Investment Advisers, Inc. (MFIA) is the investment adviser for each
operation of the M Fund or any of Portfolio of the M Fund, and has retained other firms to manage the Portfolios.
its Portfolios. We also are not MFIA and the M Fund's Board of Directors oversee the management of all of the M
responsible for ensuring that the Fund's Portfolios.
M Fund and its Portfolios comply
with any laws that apply.
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You'll find more information about Policy Fees and Expenses Paid by the M Fund
charges in An Overview of Pacific Select The M Fund pays advisory fees and other expenses. These are deducted from the
Estate Maximizer in the accompanying assets of each Portfolio and may vary from year to year. They are not fixed and
variable life insurance prospectus. are not part of the terms of your Policy. If you choose a Variable Investment
Option, these fees and expenses affect you indirectly because they reduce
You'll find more about M Fund fees Portfolio returns.
and expenses in the accompanying M Fund
prospectus. 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. We in
turn use each Portfolio's net asset value to compute the corresponding Variable
Account's Accumulation Unit Value.
. Advisory fee
MFIA is the investment adviser to the M Fund. The M Fund pays an advisory fee
to MFIA for these services. The table below shows the advisory fee as an annual
percentage of each Portfolio's average daily net assets.
. Other expenses
The table also shows expenses the M Fund paid in 1998 as an annual percentage
of each Portfolio's average daily net assets. MFIA has agreed to pay operating
expenses of the M Fund (not including brokerage or other Portfolio transaction
expenses, expenses for litigation, indemnification, taxes, or other
extraordinary expenses) that exceed 0.25% of each Portfolio's average daily net
assets. MFIA does this voluntarily, but does not guarantee that it will
continue to do so after December 31, 1999.
M Fund Expenses after Expense Limitation/1/
Advisory Other Total
fee expenses expenses
-------- -------- --------
Brandes International Equity 1.05% 0.25% 1.30%
Turner Core Growth 0.45% 0.25% 0.70%
Frontier Capital Appreciation 0.90% 0.25% 1.15%
Enhanced U.S. Equity 0.55% 0.25% 0.80%
/1/ Actual expenses for 1998 were 3.57% for Brandes International Equity
Portfolio, 3.42% for Turner Core Growth Portfolio, 1.75% for Frontier Capital
Appreciation Portfolio, and 2.34% for Enhanced U.S. Equity Portfolio. MFIA paid
the difference.
Statements and reports we'll send you
We'll send you financial statements that we receive from M Fund.
The rights we describe in the accompanying Voting rights
variable life insurance prospectus under We're the legal owner of the shares of the M Fund that are held by the Variable
Disregard of Voting Instructions and Accounts. The voting rights we describe in the Voting of Fund Shares section of
Substitution of Investments also apply to the accompanying variable life insurance prospectus and how we'll exercise them
the M Fund. also apply to the M Fund.
3
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ILLUSTRATIONS
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If you ask us, we'll provide you with Illustrations 1 and 2, which appear on the following pages, illustrate how the
different kinds of illustrations: death benefit, Accumulated Value and Net Cash Surrender Value of a hypothetical
Policy may vary over an extended period of time, based on certain hypothetical
. Illustrations similar to the ones in the rates of return.
prospectus and this supplement, but
based on information you give us about These illustrations are based on a hypothetical Policy with the following
the Ages of the person or the two characteristics:
people to be insured by the Policy, their
risk classes, the Face Amount, the death . the Face Amount is $80,042
benefit and premium payments.
. the guideline single premium is $40,000
. Illustrations that show the allocation
of premium payments to specified Variable . on the Policy Date, the person insured by the Policy is a 60-year old male
Accounts. These will reflect the non-smoker
expenses of the Portfolio in which the
Variable Account invests. The cost of insurance rates vary by illustration, as follows:
-------------------------------------------------
. Illustrations that use a hypothetical gross Cost of insurance rate
rate of return that's greater than 12%. -------------------------------------------------
These are available only to certain large Illustration 1 Current
institutional investors. Illustration 2 Guaranteed
-------------------------------------------------
Assumptions
The illustrations are based on the guideline premium test. Here are the
assumptions we're using:
. The hypothetical rates of return are equal to constant gross annual rates of
0%, 6% and 12%.
. An amount equal to the annual premium, after taxes, is invested to earn
interest at 5% compounded annually for the second column of each table, Total
premiums paid plus interest at 5%, which shows the amount that would
accumulate.
. No Policy loans have been taken out.
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. The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values reflect charges deducted from the Variable Accounts. This
means that the net investment return on the Variable Accounts is lower than
the gross investment return on the assets.
. The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values also reflect premium loads, administrative charges and
mortality and expense risk charges.
The Pacific Select Fund's investment . The Illustrations assume total annual advisory fees and expenses of .80% of
advisory fees and expenses are shown total average daily net assets of the Fund. This reflects average advisory
in An Overview of Pacific Select Estate fees of .69% and average expenses of .11% based upon fees and expenses of
Maximizer. Portfolios available as Investment Options under the Policy.
The M Fund's investment advisory fees . There are no charges against the Variable Accounts for income taxes but we
and expenses are shown on page 3 of reserve the right to impose charges in the future.
this supplement.
Things to keep in mind
Here are a few things to keep in mind when reviewing the illustrations:
. The values shown would be different if, although the gross annual investment
rates of return averaged 0%, 6% or 12% over a period of years, they also
rose above or fell below those averages for individual Policy years.
. After we've deducted the charges and fund expenses described in the
assumptions above, the illustrated gross annual investment rates of return of
0%, 6% and 12% correspond to approximate net annual rates of return of -.80%,
5.15%, and 11.10%.
. The amounts shown would be different if unisex insurance rates were used or if
two people were insured by a last survivor Policy.
. For the illustration that assumes current cost of insurance rates, the amounts
shown would be different if the person insured by the Policy was a smoker and
rates for smokers were used.
. The Portfolio expenses used in the illustrations do not include foreign taxes.
Here's what foreign taxes were for the year ended December 31, 1998:
-------------------------------------------------------
Percentage of average
Portfolio daily net assets
-------------------------------------------------------
Pacific Select Fund:
Aggressive Equity 0.01%
Growth LT 0.01%
Equity Income 0.01%
Equity Index 0.01%
International 0.23%
Emerging Markets 0.26%
M Fund:
Brandes International Equity 0.18%
-------------------------------------------------------
5
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Illustration 1
Single Life Option at current cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
SINGLE LIFE OPTION
FACE AMOUNT:$80,042
MALE NONSMOKER ISSUE AGE 60
GUIDELINE SINGLE PREMIUM:$40,000
-------------------------------------------------------------------------------
Modified single premium Total
variable universal life premiums End of year DEATH BENEFIT assuming
Illustration of death benefits, Accumulated End of paid plus hypothetical gross annual investment
Values and Net Cash Surrender Values. Policy interest at return of
Year 5% 0% 6% 12%
This illustration assumes no Policy loans or -------------------------------------------------------------------------------
partial withdrawals have been made. 1 $42,000 $80,042 $80,042 $80,042
2 $44,100 $80,042 $80,042 $80,042
The death benefits, Accumulated Values 3 $46,305 $80,042 $80,042 $80,042
and Net Cash Surrender Values will differ 4 $48,620 $80,042 $80,042 $80,042
if premiums are paid in different amounts 5 $51,051 $80,042 $80,042 $80,042
or frequencies. 6 $53,604 $80,042 $80,042 $80,042
7 $56,284 $80,042 $80,042 $85,715
The hypothetical investment rates shown 8 $59,098 $80,042 $80,042 $92,468
above and elsewhere in this prospectus 9 $62,053 $80,042 $80,042 $99,747
are illustrative only and should not be 10 $65,156 $80,042 $80,042 $107,591
interpreted as a representation of past or 15 $83,157 $80,042 $80,042 $157,438
future investment results. Actual rates of 20 $106,132 $80,042 $81,119 $245,088
return may be more or less than those 25 $135,454 $80,042 $97,717 $388,805
shown and will depend on a number of 30 $172,877 $80,042 $117,712 $616,794
factors, including the investment 35 $220,640 $80,042 $136,430 $941,437
allocations made to Variable Accounts by -------------------------------------------------------------------------------
the Owner and the experience of the End of year End of year
Accounts. No representation can be ACCUMULATED VALUE NET CASH SURRENDER VALUE
made by us, the Separate Account or the End of assuming hypothetical gross assuming hypothetical gross
underlying funds that these hypothetical Policy annual investment return of annual investment return of
rates of return can be achieved for any one Year 0% 6% 12% 0% 6% 12%
year or sustained over any period of time. -------------------------------------------------------------------------------
1 $38,855 $41,186 $43,517 $34,969 $37,186 $39,517
This is an illustration only. An 2 $37,703 $42,366 $47,300 $33,933 $38,366 $43,300
illustration is not intended to predict 3 $36,585 $43,581 $51,416 $33,292 $39,981 $47,816
actual performance. Interest rates, 4 $35,498 $44,832 $55,937 $32,658 $41,632 $52,737
dividends, and values set forth in the 5 $34,443 $46,120 $60,856 $32,032 $43,320 $58,056
illustration are not guaranteed. 6 $33,418 $47,446 $66,207 $31,413 $45,046 $63,807
7 $32,422 $48,812 $72,029 $30,801 $46,812 $70,029
8 $31,455 $50,218 $78,363 $30,197 $48,618 $76,763
9 $30,515 $51,707 $85,254 $29,600 $50,507 $84,054
10 $29,603 $53,240 $92,751 $29,603 $53,240 $92,751
15 $26,459 $64,134 $147,138 $26,459 $64,134 $147,138
20 $23,629 $77,256 $233,418 $23,629 $77,256 $233,418
25 $21,081 $93,064 $370,290 $21,081 $93,064 $370,290
30 $18,788 $112,106 $587,423 $18,788 $112,106 $587,423
35 $16,724 $135,079 $932,116 $16,724 $135,079 $932,116
-------------------------------------------------------------------------------
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Illustration 2
Single Life Option at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
SINGLE LIFE OPTION
FACE AMOUNT:$80,042
MALE NONSMOKER ISSUE AGE 60
GUIDELINE SINGLE PREMIUM:$40,000
-------------------------------------------------------------------------------
Modified single premium Total
variable universal life premiums
Illustration of death benefits, Accumulated End of paid plus End of year DEATH BENEFIT assuming
Values and Net Cash Surrender Values. Policy interest at hypothetical gross annual investment return of
Year 5% 0% 6% 12%
This illustration assumes no Policy loans or -------------------------------------------------------------------------------
partial withdrawals have been made. 1 $42,000 $80,042 $80,042 $80,042
2 $44,100 $80,042 $80,042 $80,042
*Additional payment will be required to 3 $46,305 $80,042 $80,042 $80,042
prevent Policy termination. 4 $48,620 $80,042 $80,042 $80,042
5 $51,051 $80,042 $80,042 $80,042
The death benefits, Accumulated Values 6 $53,604 $80,042 $80,042 $80,042
and Net Cash Surrender Values will differ 7 $56,284 $80,042 $80,042 $81,720
if premiums are paid in different amounts 8 $59,098 $80,042 $80,042 $88,096
or frequencies. 9 $62,053 $80,042 $80,042 $94,946
10 $65,156 $80,042 $80,042 $102,304
The hypothetical investment rates shown 15 $83,157 $0* $80,042 $147,943
above and elsewhere in this prospectus 20 $106,132 $0* $80,042 $229,185
are illustrative only and should not be 25 $135,454 $0* $80,042 $357,758
interpreted as a representation of past or 30 $172,877 $0* $0* $548,851
future investment results. Actual rates of 35 $220,640 $0* $0* $817,464
return may be more or less than those -------------------------------------------------------------------------------
shown and will depend on a number of End of year End of year
factors, including the investment ACCUMULATED VALUE NET CASH SURRENDER VALUE
allocations made to Variable Accounts by End of assuming hypothetical gross assuming hypothetical gross
the Owner and the experience of the Policy annual investment return of annual investment return of
Accounts. No representation can be Year 0% 6% 12% 0% 6% 12%
made by us, the Separate Account or the -------------------------------------------------------------------------------
underlying funds that these hypothetical 1 $38,370 $40,710 $43,051 $34,533 $36,710 $39,051
rates of return can be achieved for 2 $36,646 $41,352 $46,339 $32,981 $37,352 $42,339
any one year or sustained over any period of 3 $34,852 $41,958 $49,942 $31,715 $38,358 $46,342
time. 4 $32,973 $42,521 $53,901 $30,335 $39,321 $50,701
5 $30,991 $43,031 $58,316 $28,822 $40,231 $55,516
This is an illustration only. An illustration 6 $28,888 $43,481 $63,214 $27,155 $41,081 $60,814
is not intended to predict actual performance. 7 $26,645 $43,862 $68,672 $25,313 $41,862 $66,672
Interest rates, dividends, and values set 8 $24,241 $44,168 $74,657 $23,271 $42,568 $73,057
forth in the illustration are not guaranteed. 9 $21,648 $44,386 $81,150 $20,999 $43,186 $79,950
10 $18,831 $44,499 $88,194 $18,831 $44,499 $88,194
15 $0* $44,133 $138,265 $0* $44,133 $138,265
20 $0* $35,697 $218,271 $0* $35,697 $218,271
25 $0* $1,627 $340,722 $0* $1,627 $340,722
30 $0* $0* $522,715 $0* $0* $522,715
35 $0* $0* $809,370 $0* $0* $809,370
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7
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Form No. 15-21534-00
