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PACIFIC SELECT EXEC PROSPECTUS MAY 1, 1999
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Pacific Select Exec is a flexible premium variable life insurance policy issued
by Pacific Life Insurance Company.
This prospectus provides information that you should know before buying
a Policy. It's accompanied by a current prospectus for the Pacific
Select Fund, a Fund that provides the underlying Portfolios for the
This Policy is not available in all states. Variable Investment Options offered under the Policy. Please read
This prospectus is not an offer in any state these prospectuses carefully and keep them for future reference.
or jurisdiction where we're not 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 in this VARIABLE INVESTMENT OPTIONS
prospectus. The Pacific Select Fund is Money Market Large-Cap Value
described in its prospectus and in its High Yield Bond Mid-Cap Value
Statement of Additional Information (SAI). No Managed Bond Equity
one has the right to describe the Policy or Government Securities Bond and Income
the Pacific Select Fund any differently than Growth Equity Index
they have been described in these documents. Aggressive Equity Small-Cap Index
Growth LT REIT
You should be aware that the Securities and Equity Income International
Exchange Commission (SEC) has not reviewed Multi-Strategy Emerging Markets
the Policy for its investment merit, and does
not guarantee that the information in this FIXED OPTION
prospectus is accurate or complete. It's a Fixed Account
criminal offense to say otherwise.
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YOUR GUIDE TO THIS PROSPECTUS
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Terms Used in This Prospectus 4 Performance Information 35
- --------------------------------------------------------------- ------------------------------------------------------------
An Overview of Pacific Select Exec 5 The Fixed Account 36
- --------------------------------------------------------------- General Description 36
Information about Pacific Life, the Separate Account, Death Benefit 37
and the Fund 14 Policy Charges 37
Pacific Life Insurance Company 14 Transfers, Surrenders, Withdrawals, and Policy Loans 37
Pacific Select Exec Separate Account 14 ------------------------------------------------------------
The Pacific Select Fund 15 More about the Policy 38
The Investment Adviser and Portfolio Managers 17 Ownership 38
- --------------------------------------------------------------- Beneficiary 38
The Policy 17 Substitution of Insured 38
Application for a Policy 17 The Contract 38
Premiums 17 Payments 38
Allocation of Net Premiums 18 Assignment 39
Portfolio Rebalancing 19 Errors on the Application 39
Dollar Cost Averaging Option 19 Incontestability 39
Transfer of Accumulated Value 20 Payment in Case of Suicide 39
Death Benefit 20 Participating 40
Changes in Death Benefit Option 21 Policy Illustrations 40
Changes in Face Amount 22 Payment Plan 40
Policy Values 23 Optional Insurance Benefits and Other Policies 40
Determination of Accumulated Value 23 Retirement Income Strategy Using Life Insurance 40
Policy Loans 24 Risks Regarding Retirement Income Strategy Using
Benefits at Maturity 25 Life Insurance 41
Surrender 25 Distribution of the Policy 42
Preferred and Partial Withdrawal Benefits 25 ------------------------------------------------------------
Right to Examine a Policy - Free-Look Right 26 More about Pacific Life 42
Lapse 26 Management 42
Reinstatement 27 State Regulation 44
- --------------------------------------------------------------- Telephone Transfer and Loan Privileges 44
Charges and Deductions 27 Legal Proceedings 45
Premium Load 27 Legal Matters 45
Deductions from Accumulated Value 27 Registration Statement 45
Surrender Charge 29 Preparation for the Year 2000 45
Corporate and Other Purchasers 29 Independent Auditors 46
Other Charges 30 Financial Statements 46
Guarantee of Certain Charges 30 ------------------------------------------------------------
Usage 30 Illustrations 92
- --------------------------------------------------------------- ------------------------------------------------------------
Other Information 30 Appendix 100
Federal Income Tax Considerations 30 ------------------------------------------------------------
Charge for Our Income Taxes 33 Where to Go for More Information Back Cover
Voting of Fund Shares 33
Disregard of Voting Instructions 34
Confirmation Statements and Other Reports to Owners 34
Substitution of Investments 34
Replacement of Life Insurance or Annuities 35
Changes to Comply with Law 35
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TERMS USED IN THIS PROSPECTUS
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Some of the terms we've used in this Planned Periodic Premium - The premium
prospectus may be new to you. We've determined by you as a level amount
identified them in this prospectus by planned to be paid at fixed intervals
capitalizing the first letter of each over a specified period of time.
word. You'll find an explanation of
what they mean below. Policy Date - The date used to
determine the Monthly Payment Date,
In this prospectus, Owner, you and your Policy Years, and Policy Monthly,
mean the Policyholder or Policy Owner. Quarterly, Semi-Annual, and Annual
Pacific Life, we, us and our refer to Anniversaries. It is usually the date
Pacific Life Insurance Company. The the application is accepted by us. The
Fund refers to Pacific Select Fund. term "Issue Date" is substituted for
Policy means a Pacific Select Exec Policy Date with respect to Policies
variable life insurance policy, unless issued to residents of the Commonwealth
we state otherwise. of Massachusetts.
If you have any questions, please ask Policy Debt - The unpaid Policy loan
your registered representative or call balance including accrued loan
us at 1-800-800-7681. interest.
Accumulated Value - The total value of Policyholder, Policy Owner, Owner, You,
the amounts in the Investment Options or Your - The person who owns the
for the Policy as well as any amount Policy. The Policy Owner will be the
set aside in the Loan Account, Insured unless otherwise stated in the
including any accrued earned interest, application. If your Policy has been
as of any Valuation Date. absolutely assigned, the assignee
becomes the Owner. A collateral
Age - The Insured's age as of his or assignee is not the Owner.
her nearest birthday as of the Policy
Date, increased by the number of Sales Surrender Target - The maximum
complete Policy Years elapsed. amount of premiums paid against which
the sales surrender charge may be
Beneficiary - The person or persons you applied. The Sales Surrender Target is
name in the application or by proper equal to the premium that would be
later designation to receive the death payable under a Policy for one year if
benefit proceeds upon the death of the a Policy Owner were to pay level annual
Insured. premiums for the life of the Policy,
taking into account certain Policy
Cash Surrender Value - The Accumulated charges including the premium load, the
Value less the surrender charge. guaranteed cost of insurance rates, and
the mortality and expense risk charge,
Face Amount - The minimum death benefit and assuming net investment earnings at
for so long as the Policy remains in an annual rate of 5%.
force. The Face Amount may be increased
or decreased under certain Separate Account - The Pacific Select
circumstances. Exec Separate Account, a separate
account of ours registered as a unit
Fixed Account - An account that is part investment trust under the Investment
of our General Account. All or a Company Act of 1940.
portion of premium payments may be
allocated to the Fixed Account for Valuation Date - Each date on which the
accumulation at a fixed rate of Separate Account is valued, which
interest (which may not be less than currently includes each day that the
4.0%) declared periodically by us. New York Stock Exchange is open for
trading and on which our client
General Account - All of our assets services offices are open. The New York
other than those allocated to the Stock Exchange is closed on weekends
Separate Account or to any of our other and on: New Year's Day, Martin Luther
segregated separate accounts. King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, July Fourth,
Home Office - The Client Services Labor Day, Thanksgiving Day, and
Department at our main office. The Christmas Day. Our client services
address is shown on the back cover. offices are normally closed on the
following: the Monday before New Year's
Insured - The person whose death is the Day, July Fourth, or Christmas Day if
contingency upon which the death any of those holidays falls on a
benefit proceeds are payable. Tuesday; the Tuesday before Christmas
Day if that holiday falls on a
Investment Option - The Fixed Account Wednesday; the Friday after New Year's
or one of the Variable Accounts. Day, July Fourth or Christmas Day if
any of these holidays falls on a
Loan Account - An account that holds Thursday; the Friday after
Accumulated Value set aside to secure Thanksgiving. If any transaction or
Policy loans. event called for under a Policy is
scheduled to occur on a day that is not
Maturity Date - The Policy Anniversary a Valuation Date, such transaction or
on which the Insured is Age 95. event will be deemed to occur on the
next following Valuation Date unless
Monthly Payment Date - The day each otherwise specified.
month on which the monthly deduction is
due against the Accumulated Value. The Valuation Period - The period that
first Monthly Payment Date is the starts at the close of a Valuation Date
Policy Date. and ends at the close of the next
succeeding Valuation Date.
Net Cash Surrender Value - The Cash
Surrender Value less Policy Debt. Variable Account - A separate account
of ours or a subaccount of such a
separate account, which is used only to
support the variable death benefits and
policy values of variable life
insurance policies, and the assets of
which are segregated from our General
Account and our other separate
accounts. The Pacific Select Exec
Separate Account serves as the funding
vehicle for the Policies. The Money
Market Variable Account, High-Yield
Bond Variable Account, Managed Bond
Variable Account, Government Securities
Variable Account, Growth Variable
Account, Aggressive Equity Variable
Account, Growth LT Variable Account,
Equity Income Variable Account, Multi-
Strategy Variable Account, Large-Cap
Value Variable Account, Mid-Cap Value
Variable Account, Equity Variable
Account, Bond and Income Variable
Account, Equity Index Variable Account,
Small-Cap Index Variable Account, REIT
Variable Account, International
Variable Account, and Emerging Markets
Variable Account are all subaccounts of
the Separate Account.
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AN OVERVIEW OF PACIFIC SELECT EXEC
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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, prevail over what's in this prospectus.
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Pacific Select Exec Basics Pacific Select Exec is a flexible premium variable life insurance policy.
This Policy may be appropriate if . Flexible premium means you can vary the amount and frequency of your premium
you want to provide a death payments.
benefit for family members or
others or to help meet other . Variable means the Policy's value depends on the performance of the
long-term financial objectives. Investment Options you choose.
This may not be the right kind of . Life insurance means the Policy provides a death benefit to the Beneficiary
Policy if you plan to withdraw you choose.
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 When the person insured by this Policy reaches Age 95, the Policy will mature.
of Pacific Select Exec starting We'll pay you the Policy's Net Cash Surrender Value on the Maturity Date if the
on page 17. person insured by the Policy is still living.
Pacific Select Exec is designed for long-term financial planning. Please take
some time to read the information in this prospectus before you 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. The amount of
your refund may be more or less than the premium payments you've made,
depending on the state where you signed your application. If you signed your
application in a state that requires us to refund premium payments, we'll hold
the net premiums in the Money Market Investment Option until the Free-Look
Transfer Date.
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AN OVERVIEW OF PACIFIC SELECT EXEC
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The Death Benefit You can choose one of two death benefit options, depending on what is
more important to you: a larger death benefit or building the Accumulated
Your Policy provides a death benefit for your Value of your Policy.
Beneficiary after the person insured by the
Policy has died, as long as your Policy is in force. You can change your death benefit option and increase or decrease your
Policy's Face Amount (with certain restrictions) while your Policy is in
Your Policy will be in force until one of the force. There may be a charge for making these changes.
following happens:
. the person insured by the Policy dies We'll pay death benefit proceeds to your Beneficiary when we receive
proof of death, along with payment instructions.
. your Policy matures
Optional Riders
. the Grace Period expires and your Policy lapses, or There are seven optional riders that provide extra benefits, some at
additional cost. Not all riders are available in every state, and some
. you surrender your Policy. riders may only be added when you apply for your Policy.
You'll find more about the death benefit starting
on page 20.
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How Premiums Work Your first premium must be equal to at least 25% of the sum of your
premium load and your Policy's monthly charges for the first year. Your
Your Policy gives you the flexibility to choose Planned Periodic Premium must be for at least $50.
the amount and frequency of your premium payments,
within certain limits. Deductions From Your Premiums
We deduct a premium load from each premium payment you make.
You'll find more about how premiums work The premium load is made up of a sales load and a state and local
starting on page 17. tax charge.
Limits on the Premium Payments You Can Make Federal tax law puts limits
on the premium payments you can make in relation to your Policy's death
benefit. We may refuse all or part of a premium payment you 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
Accumulated Value is used as the basis for determining Options you've chosen, the premium payments you've made, Policy charges,
Policy benefits and charges. If there is not enough and how much you've borrowed or withdrawn from the Policy.
Accumulated Value to cover Policy charges, your
Policy could lapse. Monthly Deductions
We deduct a monthly charge from your Policy's Accumulated Value on each
You'll find more about Accumulated Value starting Monthly Payment Date. The charge is made up of cost of insurance, an
on page 23. administrative charge, and a mortality and expense risk charge. If you
add any riders, we'll add any charges for them to your monthly charge.
You'll find more about the monthly charge on page 27.
Lapsing and Reinstatement
You'll find more about lapsing and reinstatement If there is not enough Accumulated Value to cover the monthly charge on
starting on page 26. the day 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 a Grace Period of 61 days to pay the required
premium.
If your Policy lapses, you have five years from the end of the Grace
Period to apply for a reinstatement. You cannot reinstate your Policy
after its Maturity Date.
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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
Accumulated Value, and may affect other portfolio managers to manage the other portfolios. The value of each
the death benefit. Portfolio 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 4%. We may offer a higher rate of
you choose the right ones for interest. If we do, we'll guarantee that rate for one year.
your goals and risk tolerance.
We allocate your premium payments and Accumulated Value to the Investment
You'll find more about the Options you choose. The Accumulated Value will fluctuate depending on the
Variable Investment Options on Investment Options you've chosen. You bear the investment risk of any Variable
page 16 and the Fixed Account on Investment Options you choose.
page 36.
In some states we'll hold your premium payments in the Money Market Investment
Option until the Free-Look Transfer Date. Please turn to Right to Cancel --
Free-Look Right for more details.
You'll find more information Transferring Among Investment Options
about transfers on page 20. You can transfer among the Investment Options during the Accumulation Period
without paying any current tax. There is currently no charge for transfers.
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 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
Investment Options in any 12-month period, and each transfer may be no more
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. You can also use your
Making a withdrawal, taking out a Policy's loan and withdrawal features to supplement your income, for example,
loan or surrendering your Policy during retirement.
can change your Policy's tax
status, generate taxable income, Making Withdrawals
or make your Policy more You can withdraw part of your Policy's Net Cash Surrender Value starting on
susceptible to lapsing. Be sure your first Policy Anniversary. This reduces your Policy's Accumulated Value and
to plan carefully before using could reduce the Face Amount and death benefit. You can make one Preferred
these Policy benefits. Withdrawal every year during the first 15 Policy years. The portion of a
Preferred Withdrawal that does not exceed 10% of your premium payments will not
You'll find more about making reduce the Face Amount of your Policy. Any excess
withdrawals on page 25.
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AN OVERVIEW OF PACIFIC SELECT EXEC
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withdrawal amount will affect the Face Amount the same as a Partial Withdrawal may.
Starting on the fifteenth Policy Anniversary, you may make Partial Withdrawals. There is
no limit to the number of Partial Withdrawals you can make. A Partial Withdrawal may
reduce the Face Amount of your Policy, depending on the death benefit option you choose,
and will reduce the death benefit. There is no charge for making withdrawals.
You'll find more about taking out Taking Out a Loan
loans on page 24. 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 4.75%
during the first 10 Policy Years and 4.25% thereafter. The Accumulated Value
used to secure your loan is set aside in a Loan Account, where it earns
interest at an annual rate of 4%.
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.
You'll find out more about Surrendering Your Policy
surrendering your Policy on You can surrender or cash in your Policy for its Net Cash Surrender Value while
page 25. the person insured by the Policy is still living. If you surrender your Policy
during the first 10 Policy Years, we'll apply a Surrender Charge.
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Variable Life Insurance and Your Your Beneficiary generally will not have to pay federal income tax on death
Taxes benefit proceeds. You'll also generally not be taxed on any or all of your
Policy's Accumulated Value unless you receive a cash distribution by making a
There are tax issues to consider withdrawal or surrendering your Policy.
when you own a life insurance
policy. These are described in If your Policy is a modified endowment contract, all distributions you receive
detail starting on page 30. during the life of the Policy may be subject to tax and a 10% penalty.
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About Pacific Life Pacific Life is a life insurance company based in California. We issue the
Policies. Pacific Mutual Distributors, Inc., our subsidiary, is the distributor
When you buy a life insurance of the Policies.
policy, you're relying on the
insurance company that issues it How Our Accounts Work
to be able to meet its financial We put your premium payments in our General and Separate Accounts. We own the
obligations to you. assets in our Accounts and make the allocations to the Investment Options
you've chosen.
You'll find more about Pacific
Life, and our strength as a Amounts allocated to the Fixed Account are held in our General Account. Our
company, starting on page 14. 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 receive the item in proper form at the
To request payment of death mailing address that appears on the back cover of this prospectus.
benefit proceeds, send us proof
of death and payment Planned Periodic Premium payments, loan requests, transfer requests, loan
instructions. payments or withdrawal requests that we receive in proper form before 4:00 p.m.
Eastern time on a Valuation Date will normally be effective as of the 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.
Call us or contact your Proper Form
registered representative if you We'll process your requests once we receive all letters, forms or other
have any questions about the necessary documents, completed to our satisfaction. Proper form may require,
proper form required for a among other things, a signature guarantee or some other proof of authenticity.
request. 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 EXEC
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This section of the overview explains the fees and expenses associated
with your Pacific Select Exec Policy.
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Understanding policy expenses Your Premium
and cash flow You make a
premium
The chart to the right illustrates payment
how cash normally flows through a
Pacific Select Exec Policy.
We deduct a
The dark shaded boxes show the fees premium load
and expenses you pay directly or
indirectly under your Policy. These
are explained in the pages that
follow. Net Premium
We allocate the
In some states we'll hold your net net premium to
premium payments in the Money the Investment
Market Investment Option until the Options you
Free-Look Transfer Date. Please choose
turn to Your Right to Examine a
Policy - Free-Look Right for
details.
Fixed Option Variable Pacific Select The Fund
We hold Investment Fund deducts
amounts you Options The Variable advisory fees
allocate to this We hold Investment and other Fund
Option in our amounts you Options invest in expenses from
general account allocate to these the Fund's the Portfolios
Options in our Portfolios
Separate Account
We deduct:
. cost of
insurance
. administrative
We make monthly deductions charge
. mortality and
. expense risk
charge
. rider charges
Loan Account Accumulated If you surrender your We deduct a
Accumulated Value Policy during the first surrender charge
Value set aside The total value of 10 Policy Years
to secure a your Policy
Policy Loan
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Deductions from Your Premiums We deduct a premium load from each premium payment you make. The load is made
up of two charges:
The premium load is explained
in more detail on page 27. Sales Load - 4% of each premium payment during the first 10 Policy Years and 2%
after the 10th Policy Year
State and Local Tax Charge - 2.35% of each premium payment.
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Deductions from Your Policy's We deduct a monthly charge from your Policy's Accumulated Value in the
Accumulated Value Investment Options on each Monthly Payment Date. This charge is made up of
three charges:
The monthly charge is explained
in more detail starting on Cost of Insurance Charge - We deduct a cost of insurance charge for your
page 27. Policy's initial Face Amount and on each increase you make to the Face Amount.
We calculate this charge by multiplying the current cost of insurance rate by a
An example discounted net amount at risk at the beginning of each Policy Month.
For a Policy with Accumulated
Value of $30,000 after deducting Administrative Charge - We deduct a charge of $25 a month during the first
cost of insurance, and any Policy Policy Year. After the first Policy Year, we deduct a charge of $7.50 a month
Debt and rider charges. for Policies with initial Face Amounts of less than $100,000 and $5 a month for
initial Face Amounts of $100,000 or more.
The monthly mortality and expense
risk charge is: Mortality and Expense Risk Charge - We deduct a charge every month during the
first 10 Policy Years at an annual rate of 0.75% (0.0625 % monthly) of your
. $18.75 if the deduction is made Policy's Accumulated Value in the Investment Options after we've deducted the
in Policy Years 1-10 ($30,000 X cost of insurance and any rider charges. During Policy Years 11 and thereafter,
.0625%) we reduce the annual rate to 0.25% (0.0208333% monthly) of the Accumulated
Value.
. $6.25 if the deduction is made
in Policy Year 11 or later Riders - If you add any riders to your Policy, we add any charges for them to
($30,000 X .020833%). your monthly charge.
If you increase your policy's Face Amount or change the death benefit option
from Option A to Option B, we'll deduct a charge of $100 on the effective date
of the increase or option change. This charge is to cover our processing costs.
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Withdrawal and Surrender Charges You can withdraw part of your Policy's Net Cash Surrender Value at any time
starting on your Policy's first anniversary. There is no charge for
The underwriting surrender charge withdrawals.
is explained in more detail on
page 29. If you surrender, or cash in, your Policy during the first 10 Policy Years,
we'll deduct a surrender charge. The surrender charge is made up of two
An example components:
For a Policy:
. that insures the life of a male . The underwriting surrender charge, which is based on your Policy's initial
Age 45 when the Policy was Face Amount and the Age of the person insured by the Policy on the Policy Date.
issued Here's how we calculate it:
. with an initial Face Amount of --------------------------------------------------------------------------------
$350,000. Age of Person Insured Charge per $1,000
by Policy on Policy Date of Initial Face Amount
The underwriting surrender --------------------------------------------------------------------------------
charge is: 0-30 $2.50
31-40 3.50
. $1,575 during the first five 41-50 4.50
Policy Years (($350,000/1,000) 51-60 5.50
X $4.50) 61-80 6.50
. $945.25 at the end of the --------------------------------------------------------------------------------
seventh Policy Year ($1,575 -
($1,575 X 1.666% X 24 months)). The amount of the charge does not change during the first five Policy Years.
Starting on the fifth Policy Anniversary, we reduce the charge by 1.666% a
The Sales Surrender Target is month until it reaches zero at the end of 10 Policy Years.
$6,951.
. The sales surrender charge, which equals the smaller of the following
The maximum sales surrender amounts:
charge is: . 26% of the premium payments you make, or
. 26% of the Sales Surrender Target, which is an estimated annual premium,
. $1,807.26 during the first based on the Age of the person insured by the Policy on the Policy Date and
five Policy Years ($6,951 X 26%) your Policy's initial Face Amount.
. $1,084.65 at the end of the
seventh Policy Year ($1,807.26 During the first five Policy Years, the sales surrender charge will never be
- ($1,807.26 X 1.666% X greater than 26% of the Sales Surrender Target. Starting on the fifth Policy
24 months)). Anniversary, we reduce the maximum charge by 1.666% a month until it reaches
zero at the end of 10 Policy Years.
If you make level annual premium payments, the sales surrender charge during
the first Policy Year will normally be 26% of your premium payments.
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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 Select choose a Variable Investment Option, these fees and expenses affect you
Fund starting on page 15, 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%
-----------------------------------------------------------------------------
/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.
13
</TABLE>
<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. The assets in the Separate
Account are kept separate from our General Account assets and our other
separate accounts.
We own the assets in the Separate Account and are required to maintain
sufficient assets in the Separate Account to meet anticipated obligations of
the insurance policies funded by the Account. The Separate Account is divided
into subaccounts called Variable Accounts. The income, gains, or losses,
realized or unrealized, of each Variable Account are credited to or charged
against the assets held in the Variable Account without regard to our other
income, gains, or losses. Assets in the Separate Account attributable to the
reserves and other liabilities under the variable life insurance policies
funded by the Separate Account are not chargeable with liabilities arising from
any other business that we conduct. However, we may transfer to our General
Account any assets which exceed anticipated obligations of the Separate
Account. All obligations arising under the Policy are our general corporate
obligations. We may accumulate in the Separate Account proceeds from various
Policy charges and investment results applicable to those assets.
The Separate Account was established on May 12, 1988 under California law
under the authority of our Board of Directors. The Separate Account is
registered as a unit investment trust with the SEC. Such registration does not
involve any supervision by the SEC of the administration or investment
practices or policies of the Account.
14
<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 that fund the Variable Investment Options
available to you. Each Portfolio pursues different investment objectives and
policies. We purchase shares of each Portfolio for the corresponding Variable
Account at net asset value, i.e., without sales load. All dividends and capital
gains distributions received from a Portfolio are automatically reinvested in
such Portfolio at net asset value, unless we, on behalf of the Separate
Account, elect otherwise. Fund shares will be redeemed by us at their net asset
value to the extent necessary to make payments under the Policies.
Shares of the Fund currently are offered only to separate accounts of ours
and our affiliates and/or subsidiaries to serve as an investment medium for
variable life insurance policies and for variable annuity contracts issued or
administered by us. Shares of the Fund may also be sold in the future to
separate accounts of other insurance companies, either affiliated or not
affiliated with us. Investment in the Fund by other separate accounts in
connection with variable annuity and variable life insurance contracts may
potentially create conflicts. See "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.
15
<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.
- ----------------------------------------------------------------------------------------------
</TABLE>
16
<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 the Policies are funded
through the Policy Owner's Accumulated Value in the Separate Account and the
Fixed Account. The information included below describes the benefits, features,
charges, and other major provisions of the Policies.
Application for a Policy
The Policy is designed to meet the needs of individuals and for corporations
who wish to provide coverage and benefits for key employees. Anyone wishing to
purchase the Policy may submit an application to us. A Policy can be issued on
the life of an Insured for Ages up to and including Age 80 with evidence of
insurability satisfactory to us. The Insured's Age is calculated as of the
Insured's birthday nearest the Policy Date. Acceptance is subject to our
underwriting rules, and we reserve the right to request additional information
and to reject an application.
Each Policy is issued with a Policy Date. The Policy Date is usually the date
the application is accepted by us, although the Policy Date will never be the
29th, 30th, or 31st of any month. We first become obligated under the Policy on
the date the total initial premium is received or on the date the application
is accepted, whichever is later. Any monthly deductions due will be taken on
the Monthly Payment Date on or next following the date we become obligated. The
initial premium must be received within 20 days after your Policy is issued,
although we may waive the 20 day requirement at our discretion. If the initial
premium is not received or the application is rejected by us, your Policy will
be cancelled and any partial premium received will be refunded.
Subject to our approval, your Policy may be backdated, but the Policy Date
may not be more than six months prior to the date of the application.
Backdating can be advantageous if the Insured's lower issue Age results in
lower cost of insurance rates. If your Policy is backdated, the minimum initial
premium required will include sufficient premium to cover the backdating period
and will be applied as of the later of the Policy Date or the date the initial
premium is received at our Home Office. Monthly deductions will be made for the
period the Policy Date is backdated.
Insureds are assigned to underwriting (insurance risk) classes which are used
in calculating the cost of insurance charges. In assigning Insureds to
underwriting classes, we will normally use the medical or paramedical
underwriting method, which may require a medical examination of a proposed
Insured, although other forms of underwriting may be used when deemed
appropriate by us.
Premiums
The Policy is a flexible-premium policy, and it provides considerable
flexibility, subject to the limitations described below, to pay premiums at
your discretion. We usually require you to pay a minimum initial premium equal
to at least 25% of the sum of your Policy's monthly deductions plus premium
load for the first year, which will be based upon your Policy's Face Amount and
the Age, smoking status, gender (unless unisex cost of insurance rates apply,
see "Charges and Deductions: Cost of Insurance"), and underwriting class of the
Insured. Thereafter, subject to the limitations described below, you may choose
the amount and frequency of premium payments. The Policy, therefore, provides
you with the flexibility to vary premium payments to reflect varying financial
conditions.
When applying for a Policy, you will determine a Planned Periodic Premium
that provides for the payment of level premiums over a specified period of
time. You will receive a premium reminder notice, or a listbill for
17
<PAGE>
multiple policies, on an annual, semiannual, or quarterly basis, or, if a
listbill, a monthly basis, at your option; however, you are not required to pay
Planned Periodic Premiums. Premiums may be paid monthly under the Uni-check
electronic funds transfer plan where you authorize us to withdraw premiums from
your checking account each month. The minimum initial premium required must be
paid before the Uni-check plan will be accepted by us. You may elect the day
each month on which premiums are paid under the Uni-check plan, provided the
day elected is between the 4th and the 28th day of the month. If you do not
elect a payment day, the day on which premiums are paid will be the Monthly
Anniversary.
Payment of the Planned Periodic Premium will not guarantee that your Policy
will remain in force. Instead, the continuation of your Policy depends upon
your Policy's Accumulated Value. Even if Planned Periodic Premiums are paid,
your Policy will lapse any time Accumulated Value less Policy Debt is
insufficient to pay the current monthly deduction and a Grace Period expires
without sufficient payment. See "Lapse".
Any premium payment must be for at least $50. We also may reject or limit any
premium payment that would result in an immediate increase in the net amount at
risk under the Policy, although such a premium may be accepted with
satisfactory evidence of insurability. See "Charges and Deductions: Cost of
Insurance". A premium payment would result in an immediate increase in the net
amount at risk if the death benefit under your Policy is, or upon acceptance of
the premium would be, equal to your Accumulated Value multiplied by a death
benefit percentage. See "Death Benefit". If satisfactory evidence of
insurability is not received, the payment, or portion thereof may be returned.
All or a portion of a premium payment will be rejected and returned to you if
it would exceed the maximum premium limitations prescribed by federal tax law.
The amount, frequency and period of time over which you pay premiums may
affect whether the Policy will be classified as a modified endowment contract,
which is a type of life insurance contract subject to different tax treatment
for certain pre-death distributions than conventional life insurance contracts.
Accordingly, variations from the Planned Periodic Premiums on a Policy that is
not otherwise a modified endowment contract may result in the Policy becoming a
modified endowment contract for tax purposes.
In order for your Policy to avoid being treated as a modified endowment
contract, the sum of the premiums paid less a portion of any Partial
Withdrawals may not exceed the "seven pay premium" limit as defined in the
Internal Revenue Code ("IRC"). (See "Federal Income Tax Considerations"). If we
receive any premium payment that we believe, if applied to your Policy in that
Policy year, would cause your Policy to become a modified endowment contract,
the portion of the payment that we believe would cause your Policy to become a
modified endowment contract will not be applied to your Policy, but will be
returned to you, unless you had previously notified us that payments that cause
your Policy to become a modified endowment contract may be accepted by us and
applied to your Policy. However, for premium payments received by us at our
Home Office within 20 days before the upcoming Annual Anniversary of your
Policy, we may apply the portion of the premium payment that we believe would
cause your Policy to become a modified endowment contract to your Policy on the
upcoming Annual Anniversary.
Certain charges will be deducted from each premium payment. See "Charges and
Deductions". The remainder of the premium, known as the net premium, will be
allocated as described below under "Allocation of Net Premiums." Except in
Texas, additional payments will first be treated as repayments of Policy Debt
unless you request otherwise. Any portion of a payment that exceeds the amount
of Policy Debt will be applied as an additional premium payment.
Allocation of Net Premiums
In your application for the Policy, you select the Investment Options to
which net premium payments will be allocated. Your Accumulated Value will be
automatically allocated according to your instructions contained in the
application, or more recent written instructions, if any, 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, net premiums will be allocated to the Money Market Variable
Account, which invests in the Money Market Portfolio of the Fund (except for
amounts allocated to the Loan Account to secure a Policy loan). Net premiums
received on and after the Free-Look Transfer Date will be allocated upon
receipt among the Investment Options according to your most recent
instructions.
18
<PAGE>
You may change the allocation of net premiums by submitting a proper written
request to our Home Office. Changes in net premium allocation instructions may
be made by telephone if a properly completed Authorization for Telephone
Requests has been filed at our Home Office. We reserve the right to discontinue
telephone net premium allocation instructions.
Portfolio Rebalancing
You may direct us to automatically re-set the percentage of your Accumulated
Value allocated to each Variable Account at a predetermined level. This process
is called portfolio rebalancing. (The Fixed Account is not available for
portfolio rebalancing.) Over time, the variations in each Variable Account's
investment results will shift the percentage allocations of your Accumulated
Value. The portfolio rebalancing feature will automatically transfer your
Accumulated Value among the Variable Accounts back to the preset percentages.
Rebalancing can be made quarterly, semi-annually or annually, measured from
your Policy Date ("frequency period"). Rebalancing may result in transferring
amounts from a Variable Account with relatively higher investment performance
to a Variable Account with relatively lower investment performance.
You may initiate portfolio rebalancing by sending our Home Office a signed,
written request in good form or a properly completed Automatic Portfolio
Rebalancing form. You must specify the frequency for rebalancing and a
beginning date. The first rebalancing will usually occur on your Monthly
Payment Date that starts the frequency period you elected and that occurs on or
follows the beginning date you elected. If you stop portfolio rebalancing, you
must wait 30 days to begin again. Portfolio rebalancing cannot be used with the
Dollar Cost Averaging Option.
We 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 values. The option will
result in the allocation of Accumulated Value to one or more Variable Accounts,
and these amounts will be credited at the Accumulation Unit values as of the
end of the Valuation Dates on which the transfers are processed. Since the
value of Accumulation Units will vary, the amounts allocated to a Variable
Account will result in the crediting of a greater number of units when the
Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Similarly, the amounts transferred from a
Variable Account will result in a debiting of a greater number of units when
the Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Dollar cost averaging does not guarantee
profits, nor does it assure that you will not have losses.
A Dollar Cost Averaging Request form is available upon request. To elect the
Dollar Cost Averaging Option, your Accumulated Value in the Variable Account
from which the Dollar Cost averaging transfers will be made must be at least
$5,000. After we have received a Dollar Cost Averaging Request in proper form
at our Home Office, we will transfer Accumulated Value in amounts you designate
from the Variable Account from which transfers are to be made to the Variable
Account or Accounts you choose. The minimum amount that may be transferred to
any one Variable Account is $50. After the Free-Look Period, the first transfer
will be effected on your Policy's Monthly, Quarterly, Semi-Annual, or Annual
Anniversary, whichever period you select, coincident with or next following
receipt at our Home Office of a Dollar Cost Averaging Request in proper form.
Subsequent transfers will be effected on the following Monthly, Quarterly,
Semi-Annual, or Annual Anniversary for so long as you designate, until the
total amount elected has been transferred, until Accumulated Value in the
Variable Account from which transfers are made has been depleted, or until your
Policy enters the Grace Period. Amounts periodically transferred under this
option will not be subject to any transfer charges that may be imposed by us in
the future, except as may be required by applicable law.
19
<PAGE>
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
You may transfer Accumulated Value among the Variable Accounts after the
Free-Look Transfer Date upon proper written request to our Home Office.
Transfers (other than transfers in connection with the Dollar Cost Averaging
Option) may be made by telephone if a properly completed Authorization For
Telephone Requests has been filed at our Home Office. Currently, there are no
limitations on the number of transfers between Variable Accounts, no minimum
amount required for a transfer, nor any minimum amount required to be remaining
in a given Variable Account after a transfer (except as required under the
Dollar Cost Averaging Option). No transfer may be made if your Policy is in the
Grace Period and a payment required to avoid lapse is not paid. See "Lapse". No
charges are currently imposed upon such transfers. We reserve the right,
however, at a future date to limit the size of transfers and remaining
balances, to assess transfer charges, to limit the number and frequency of
transfers, and to suspend and discontinue telephone transfers.
Accumulated Value may also be transferred after the Free-Look Transfer Date
from the Variable Accounts to the Fixed Account; however, such a transfer will
only be permitted in the Policy Month preceding a Policy Anniversary, except
that if you reside in Connecticut, Georgia, Maryland, North Carolina, North
Dakota, or Pennsylvania, you may make such a transfer at any time during the
first 18 Policy Months. Transfers from the Fixed Account to the Variable
Accounts are restricted as described in "The Fixed Account".
Death Benefit
When your Policy is issued, we will determine the initial amount of insurance
based on the instructions provided in your application. That amount will be
shown on the specifications page of your Policy and is called the "Face
Amount." The minimum Face Amount at issuance of a Policy is $50,000. We may
reduce the minimum Face Amount required at issuance under certain
circumstances, such as for group or sponsored arrangements.
For so long as your Policy remains in force, we will, upon proof of the death
of an Insured, pay death benefit proceeds to a named Beneficiary. Death benefit
proceeds will consist of the death benefit under the Policy, plus any insurance
proceeds provided by rider, reduced by any outstanding Policy Debt (and, if in
the Grace Period, any overdue charges).
You may select one of two death benefit options: Option A or Option B.
Generally, an applicant designates the death benefit option in the application.
If no option is designated, Option A will be assumed by us to have been
selected. Subject to certain restrictions, you can change the death benefit
option selected. So long as the Policy remains in force, the death benefit
under either option will never be less than the Face Amount of the Policy.
Option A. Under Option A, the death benefit will be equal to the Face Amount
of the Policy or, if greater, Accumulated Value (determined as of the end of
the Valuation Period during which the Insured dies) multiplied by a death
benefit percentage. The death benefit percentages vary according to the Age of
the Insured and will be at least equal to the cash value corridor in Section
7702 of the Internal Revenue Code, which addresses the definition of a life
insurance policy for tax purposes. The death benefit percentage is 250% for an
Insured at Age 40 or under, and it declines for older Insureds. A table showing
the death benefit percentages is in the Appendix to this Prospectus and in the
Policy. Policy Owners who are seeking to have favorable investment performance
reflected in increasing Accumulated Value, and not in increasing insurance
coverage, should choose Option A.
Option B. Under Option B, the death benefit will be equal to the Face Amount
of the Policy plus the Accumulated Value (determined as of the end of the
Valuation Period during which the Insured dies) or, if
20
<PAGE>
greater, Accumulated Value multiplied by a death benefit percentage. The
specified percentage is the same as that used in connection with Option A and
as stated in the Appendix. The death benefit under Option B will always vary as
Accumulated Value varies. Therefore, Policy Owners who seek to have favorable
investment performance reflected in increased insurance coverage should choose
Option B.
Examples of Options A and B. The following examples demonstrate the
determination of death benefits under Options A and B. The examples show three
Policies--Policies I, II, and III--with the same Face Amount, but Accumulated
Values that vary as shown, and which assume an Insured is Age 40 at the time of
death and that there is no outstanding Policy Debt.
<TABLE>
<CAPTION>
Policy Policy
Policy I II III
-------- -------- --------
<S> <C> <C> <C>
Face Amount............................. $100,000 $100,000 $100,000
Accumulated Value on Date of Death...... $ 25,000 $ 50,000 $ 75,000
Death Benefit Percentage................ 250% 250% 250%
Death Benefit Under Option A............ $100,000 $125,000 $187,500
Death Benefit Under Option B............ $125,000 $150,000 $187,500
</TABLE>
Under Option A, the death benefit for Policy I is equal to $100,000 since the
death benefit is the greater of the Face Amount ($100,000) or the Accumulated
Value at the date of death multiplied by the death benefit percentage ($25,000
x 250% = $62,500). In contrast, for both Policies II and III under Option A,
the Accumulated Value multiplied by the death benefit percentage ($50,000 x
250% = $125,000 for Policy II; $75,000 x 250% =$187,500 for Policy III) is
greater than the Face Amount ($100,000), so the death benefit is equal to the
higher value. Under Option B, the death benefit for Policy I is equal to
$125,000 since the death benefit is the greater of Face Amount plus Accumulated
Value ($100,000 + $25,000 = $125,000) or the Accumulated Value multiplied by
the death benefit percentage ($25,000 x 250% = $62,500). Similarly, in
Policy II, Face Amount plus Accumulated Value ($100,000 + $50,000 = $150,000)
is greater than Accumulated Value multiplied by the death benefit percentage
($50,000 x 250% = $125,000). In contrast, in Policy III, the Accumulated Value
multiplied by the death benefit percentage ($75,000 x 250% = $187,500) is
greater than the Face Amount plus Accumulated Value ($100,000 + $75,000 =
$175,000), so the death benefit is equal to the higher value.
All calculations of death benefit will be made as of the end of the Valuation
Period during which the Insured dies. Death benefit proceeds may be paid to
your Beneficiary in a lump sum or under a payment plan offered under the
Policy. The Policy should be consulted for details.
Changes in Death Benefit Option
You may request that the death benefit under your Policy be changed from
Option A to Option B, or from Option B to Option A. Changes in the death
benefit option may be made only once per Policy Year and should be made in
writing to our Home Office. A change from Option B to Option A may be made
without evidence of insurability; a change from Option A to Option B will
require evidence of insurability satisfactory to us. The effective date of any
such change shall be the next Monthly Payment Date after the change is
accepted.
A change in the death benefit from Option A to Option B will result in a
reduction in the Face Amount of your Policy by the amount of the Policy's
Accumulated Value, with the result that the death benefit payable under Option
B at the time of the change will equal that which would have been payable under
Option A immediately prior to the change. The change in option will affect the
determination of the death benefit from that point on since Accumulated Value
will then be added to the new Face Amount, and the death benefit will then vary
with Accumulated Value. This change will not be permitted if it would result in
a Face Amount of less than $50,000, although we reserve the right to waive this
minimum under certain circumstances, such as for group or sponsored
arrangements. A charge of $100 will be deducted from your Accumulated Value on
the effective date of the change from Option A to Option B to cover the costs
of processing the request. This fee will be deducted from the Investment
Options in the proportion that each bears to your Accumulated Value less Debt.
A change in the death benefit from Option B to Option A will result in an
increase in the Face Amount of your Policy by the amount of your Policy's
Accumulated Value, with the result that the death benefit payable under Option
A at the time of the change will equal that which would have been payable under
Option B
21
<PAGE>
immediately prior to the change. However, the change in option will affect the
determination of the death benefit from that point on since your Accumulated
Value will no longer be added to the Face Amount in determining the death
benefit. From that point on, the death benefit will equal the new Face Amount
(or, if higher, the Accumulated Value times the applicable specified
percentage). No charge will be made on a change from Option B to Option A.
A change in death benefit option may affect the monthly cost of insurance
charge since this charge varies with the net amount at risk, which generally is
the amount by which the death benefit exceeds Accumulated Value. See "Charges
and Deductions: Cost of Insurance". Assuming that the Policy's death benefit
would not be equal to Accumulated Value times a death benefit percentage under
either Option A or B, changing from Option B to Option A will generally
decrease the net amount at risk, and therefore decrease the cost of insurance
charges. Changing from Option A to Option B will generally result in a net
amount at risk that remains level. Such a change, however, will result in an
increase in the cost of insurance charges over time, since the cost of
insurance rates increase with the Insured's Age.
Changes in Face Amount
You may request an increase or decrease in the Face Amount under your Policy
subject to our approval. A change in Face Amount may only be made once per
year, and a decrease in Face Amount may only be made after the fifth Policy
Year, or after the fifth Policy Year following the last increase in Face
Amount. Increasing the Face Amount could increase the death benefit under your
Policy, and decreasing the Face Amount could decrease the death benefit. The
amount of change in the death benefit will depend, among other things, upon the
death benefit option chosen by you and whether, and the degree to which, the
death benefit under your Policy exceeds the Face Amount prior to the change.
Changing the Face Amount could affect the subsequent level of the death benefit
while your Policy is in force and the subsequent level of Policy values. An
increase in Face Amount may increase the net amount at risk under your Policy,
which will increase your cost of insurance charge. Conversely, a decrease in
Face Amount may decrease the net amount at risk, which will decrease your cost
of insurance charge.
Any request for an increase or decrease in Face Amount must be made by
written application to our Home Office. It will become effective on the Monthly
Payment Date on or next following our acceptance of the request. If you are not
the Insured, we will also require the consent of the Insured before accepting a
request.
Increases. Additional evidence of insurability satisfactory to us will be
required for an increase in Face Amount. An increase will not be given for
increments of Face Amount less than that indicated in the table below. A charge
of $100 will be deducted from the Accumulated Value on the effective date of
the increase in Face Amount to cover the costs of processing the request. This
fee will be deducted from the Investment Options in the proportion that each
bears to your Accumulated Value less Debt.
<TABLE>
<CAPTION>
Age at Time Minimum
of Increase Increase
----------- --------
<S> <C>
0-19 $17,000
20-24 13,000
25-29 12,000
30-33 11,000
34-74 10,000
75 11,000
76 13,000
77 16,000
78 20,000
79 31,000
80 50,000
</TABLE>
Decreases. Any decrease in Face Amount will first be applied to the most
recent increases, then the next most recent increases successively, and finally
to the original Face Amount. A decrease will not be permitted if the Face
Amount would fall below $50,000, although we reserve the right to waive the
minimum Face Amount
22
<PAGE>
under certain circumstances, such as for group or sponsored arrangements. No
charge will be deducted in connection with a decrease. If a decrease in the
Face Amount would result in total premiums paid exceeding the premium
limitations prescribed under tax law to qualify your Policy as a life insurance
contract, we will refund to you the amount of such excess above the premium
limitations.
We reserve the right to disallow a requested decrease, and will not permit a
requested decrease, among other reasons, (1) if compliance with the guideline
premium limitations under tax law resulting from the requested decrease would
result in immediate termination of your Policy, or (2) if, to effect the
requested decrease, payments to you would have to be made from Accumulated
Value for compliance with the guideline premium limitations, and the amount of
such payments would exceed the Net Cash Surrender Value under your Policy.
Policy Values
Accumulated Value. Your Accumulated Value is the sum of the amounts under
your Policy held in each Investment Option, as well as the amount set aside in
the Loan Account, including any accrued earned interest, to secure any Policy
Debt.
On each Valuation Date, the portion of your Accumulated Value allocated to
any particular Variable Account will be adjusted to reflect the investment
experience of that Variable Account. On each Monthly Payment Date, the portion
of the Accumulated Value allocated to a particular Investment Option also will
be adjusted to reflect the assessment of the monthly deduction. See
"Determination of Accumulated Value". No minimum amount of Accumulated Value is
guaranteed. You bear the risk for the investment experience of Accumulated
Value allocated to the Variable Accounts.
Cash Surrender Value. The Cash Surrender Value of your Policy equals your
Accumulated Value less the surrender charge. Thus, your Accumulated Value will
exceed your Policy's Cash Surrender Value by the amount of the surrender
charge. Once the surrender charge has expired, your Accumulated Value will
equal the Cash Surrender Value.
Net Cash Surrender Value. The Net Cash Surrender Value of your Policy equals
your Cash Surrender Value less any outstanding Policy Debt. You can surrender
your Policy at any time while the Insured is living and receive your Net Cash
Surrender Value. See "Surrender".
Determination of Accumulated Value
Although your death benefit under your Policy can never be less than the
Policy's Face Amount, the Accumulated Value will vary to a degree that depends
upon several factors, including investment performance of the Variable Accounts
to which Accumulated Value has been allocated, payment of premiums, the amount
of any outstanding Policy Debt, Preferred or Partial Withdrawals, and the
charges assessed in connection with the Policy.
The amounts allocated to the Variable Accounts will be invested in shares of
the corresponding Portfolio of the Fund. The investment performance of each
Variable Account will reflect increases or decreases in the net asset value per
share of the corresponding Portfolio and any dividends or distributions
declared by a Portfolio. Any dividends or distributions from any Portfolio of
the Fund will be automatically reinvested in shares of the same Portfolio,
unless we, on behalf of the Separate Account, elect otherwise.
Assets in the Variable Accounts are divided into accumulation units, which
are a measure of value used for bookkeeping purposes. When you allocate net
premiums to a Variable Account, your Policy is credited with accumulation
units. In addition, other transactions including loans, a surrender, Preferred
and Partial Withdrawals, transfers, and assessment of charges against your
Policy affect the number of accumulation units credited to your Policy. The
number of units credited or debited in connection with any such transaction is
determined by dividing the dollar amount of such transaction by the unit value
of the affected Variable Account. The unit value of each Variable Account is
determined on each Valuation Date at or about 4:00 p.m. Eastern time. The
number of units credited will not change because of subsequent changes in unit
value.
The accumulation unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated
by adjusting the unit value from the previous Valuation Date for
23
<PAGE>
(1) the investment performance of the Variable Account, which is based upon the
investment performance of the corresponding Portfolio of the Fund, (2) any
dividends or distributions paid by the corresponding Portfolio, and (3) the
charges, if any, we may assess for income taxes attributable to the operation
of the Variable Account.
Policy Loans
You may borrow money from us using your Policy as the only security for the
loan by submitting a proper written request to our Home Office. We may in our
discretion permit loans to be made by telephone if a properly completed
Authorization For Telephone Requests has been filed at our Home Office. A loan
may be taken any time your Policy is in force. The minimum loan that can be
taken at any time is $500 ($200 in Connecticut, $250 in Oregon). The maximum
amount that can be borrowed at any time is the greater of (1) 100% of the
Accumulated Value in the Fixed Account plus 90% of the Accumulated Value in the
Variable Accounts, and less any surrender charges that would have been imposed
if the Policy were surrendered on the date the loan is taken or (2) 100% of the
product of (a X b/c - d) where (a) equals the Policy's Accumulated Value less
any surrender charge that would be imposed if the Policy were surrendered on
the date the loan is taken and less 12 times the current monthly deduction; (b)
equals 1 plus the annual loan interest rate credited; (c) equals 1 plus the
annual loan interest rate currently charged; and (d) equals any existing Policy
Debt.
When you take a loan, an amount equal to the loan is transferred out of your
Accumulated Value in the Investment Options into the Loan Account to secure the
loan. Unless you request otherwise, loan amounts will be deducted from the
Investment Options in the proportion that each bears to your Accumulated Value
less Debt.
The Policy loan annual effective interest rate maximum is 4.75% per year for
the first 10 years and 4.25% thereafter. We will credit interest monthly on
amounts held in the Loan Account to secure the loan at an annual effective rate
of 4.0%.
You may repay all or part of the loan at any time while your Policy is in
force. Interest on a loan is accrued daily and is due for the prior year on
each Policy Anniversary. If interest is not paid when due, it will be added to
the amount of the loan principal and interest will begin accruing thereon from
that date. An amount equal to the loan interest charged will be transferred to
the Loan Account from the Investment Options on a proportional basis.
Unless you request otherwise, any loan repayment will be transferred into the
Investment Options in accordance with your most recent premium allocation
instructions. In addition, on each Policy Anniversary, any interest earned on
the loan balance held in the Loan Account will be transferred to each of the
Investment Options in accordance with your most recent premium allocation
instructions.
While the amount to secure the loan is held in the Loan Account, you forgo
the investment experience of the Variable Accounts and the current interest
rate of the Fixed Account on the loaned amount. Thus a loan, whether or not
repaid, will have a permanent effect on your Policy's values and may have an
effect on the amount and duration of the death benefit. If not repaid, your
Policy Debt will be deducted from the amount of death benefit paid upon the
death of the Insured, the Cash Surrender Value upon surrender or maturity, or
the refund of premium upon exercise of the Free-Look Right.
A loan may affect the length of time your Policy remains in force. Your
Policy will lapse when Accumulated Value minus Policy Debt is insufficient to
cover the monthly deduction against your Policy's Accumulated Value on any
Monthly Payment Date and the minimum payment required is not made during the
Grace Period. Moreover, your Policy may enter the Grace Period more quickly
when a loan is outstanding, because the loaned amount is not available to cover
the monthly deduction. Additional payments or repayment of a portion of Policy
Debt may be required to keep the Policy in force. See "Lapse".
A loan will not be treated as a distribution from your Policy and will not
result in taxable income to you unless your Policy is a modified endowment
contract, or unless the Policy is surrendered or upon maturity or lapse of the
Policy, in which case a loan will be treated as a distribution that may give
rise to taxable income.
24
<PAGE>
For information on the tax treatment of loans, see "Federal Income Tax
Considerations".
Benefits at Maturity
If the insured is living on your Policy Anniversary nearest the Insured's Age
95, we will pay you, as an endowment benefit, your Accumulated Value, reduced
by any Policy Debt. Payment ordinarily will be made within seven days of your
Policy Anniversary, although payments may be postponed in certain
circumstances. See "Payments".
Surrender
You may fully surrender your Policy at any time during the life of the
Insured. The amount received in the event of a full surrender is your Policy's
Net Cash Surrender Value, which is equal to your Accumulated Value less any
applicable surrender charge and less any outstanding Policy Debt.
You may surrender your Policy by sending a written request together with your
Policy to our Home Office. The proceeds will be determined as of the end of the
Valuation Period during which your request for a surrender is received. You may
elect to have the proceeds paid in cash or applied under a payment plan offered
under the Policy. See "Payment Plan". For information on the tax effects of a
surrender of a Policy, see "Federal Income Tax Considerations".
Preferred and Partial Withdrawal Benefits
We offer two partial surrender benefits by which you can obtain a portion of
your Net Cash Surrender Value: the Preferred Withdrawal Benefit and the Partial
Withdrawal Benefit. The Preferred Withdrawal Benefit is available starting on
your first Policy Anniversary and before your 15th Policy Anniversary. Under
this Benefit, you may make one "Preferred Withdrawal" of the Net Cash Surrender
Value per year. The portion of a Preferred Withdrawal of up to 10% of the
amount of your total premium payments received and accepted prior to the
withdrawal will not reduce the Face Amount under your Policy. The excess of any
Preferred Withdrawal over 10% of total premiums received and accepted prior to
the withdrawal will be treated in the same manner as a "Partial Withdrawal" and
therefore may cause a reduction in Face Amount if the death benefit option is
Option A, as described below.
The Partial Withdrawal Benefit is available on and after your 15th Policy
Anniversary. Under this Benefit, you may make "Partial Withdrawals" of Net Cash
Surrender Value. The limit of one withdrawal per year does not apply to Partial
Withdrawals.
Both Preferred and Partial Withdrawals must be for at least $500, and your
Policy's Net Cash Surrender Value after the withdrawal must be at least $500.
If there is any Policy Debt, the maximum Partial Withdrawal is limited to the
excess, if any, of the Cash Surrender Value immediately prior to the withdrawal
over the result of the Policy Debt divided by 90%. In addition, the amount of a
Partial Withdrawal is further limited on Policies on which the Owner has chosen
death benefit Option A so that the withdrawal will not cause the Face Amount to
be less than $50,000, although we reserve the right to waive the minimum Face
Amount under certain circumstances, such as for group or sponsored
arrangements. If the Policy Owner does not exercise the Preferred Withdrawal
Benefit during one of the first 15 Policy Years, the amount that the Policy
Owner could have withdrawn without affecting Face Amount does not carry over in
the following year.
You may make a Preferred or Partial Withdrawals by submitting a proper
written request to our Home Office. As of the effective date of any withdrawal,
your Accumulated Value, Cash Surrender Value, and Net Cash Surrender Value will
be reduced by the amount of the withdrawal. The amount of the withdrawal will
be allocated proportionately to your Accumulated Value in the Investment
Options unless you request otherwise. If the Insured dies after the request for
a withdrawal is sent to us and prior to the withdrawal being effected, the
amount of the withdrawal will be deducted from the death benefit proceeds,
which will be determined without taking into account the withdrawal. No
surrender charge or withdrawal fee will be charged for a Preferred or Partial
Withdrawal.
25
<PAGE>
When a Partial Withdrawal is made on a Policy on which the Owner has selected
death benefit Option A, the Face Amount under the Policy is decreased by the
lesser of (1) the amount of the Partial Withdrawal or (2) if the death benefit
prior to the withdrawal is greater than the Face Amount, the amount, if any, by
which the Face Amount exceeds the difference between the death benefit and the
amount of the Partial Withdrawal. A Partial Withdrawal will not change the Face
Amount of a Policy on which the Owner has selected death benefit Option B.
However, assuming that the death benefit is not equal to Accumulated Value
times a death benefit percentage, the Partial Withdrawal will reduce the death
benefit by the amount of the Partial Withdrawal. To the extent the death
benefit is based upon the Accumulated Value times the death benefit percentage
applicable to the Insured, a Partial Withdrawal may cause the death benefit to
decrease by an amount greater than the amount of the Partial Withdrawal. See
"Death Benefit".
For information on the tax treatment of Preferred and Partial Withdrawals,
see "Federal Income Tax Considerations".
Right to Examine a Policy--Free-Look Right
You have a Free-Look Right, under which your Policy may be returned within 10
days after you receive it (15 days in Colorado; 20 days in North Dakota; and 30
days if you are a resident of California and are age 60 or older), or within 45
days after you complete the application for insurance, whichever is later.
However, in Pennsylvania, you have a different Free-Look Right under which your
Policy may be returned only within 10 days after you receive it. Certain states
require different Free-Look Rights if you purchase the Policy in exchange for
another policy, in which case we will notify you of your Right. It can be
mailed or delivered to us or our agent. The returned Policy will be treated as
if we never issued it and we will promptly refund the full amount of the
premium paid. If you have taken a loan during the Free-Look Period, your Policy
Debt will be deducted from the amount refunded. During the Free-Look Period,
net premiums will be allocated to the Money Market Variable Account, which
invests in the Money Market Portfolio of the Fund (except for amounts allocated
to the Loan Account to secure a Policy loan). See "Allocation of Net Premiums".
Lapse
Your Policy will lapse only when your Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction on a Monthly Payment Date,
and a Grace Period expires without you making a sufficient payment. If
Accumulated Value less Policy Debt is insufficient to cover the current monthly
deduction on a Monthly Payment Date, you must pay during the Grace Period a
minimum of three times the full monthly deduction due on the Monthly Payment
Date when the insufficiency occurred to avoid termination of your Policy. We
will not accept any payment if it would cause your total premium payments to
exceed the maximum permissible premium for your Policy's Face Amount under the
IRC. This is unlikely to occur unless you have outstanding Policy Debt, in
which case you could repay a sufficient portion of the Policy Debt to avoid
termination. In this instance, you may wish to repay a portion of Policy Debt
to avoid recurrence of the potential lapse. If premium payments have not
exceeded the maximum permissible premiums for your Policy's Face Amount, you
may wish to make larger or more frequent premium payments to avoid recurrence
of the potential lapse.
If your Accumulated Value less Policy Debt is insufficient to cover the
monthly deduction on a Monthly Payment Date, we will deduct the amount that is
available. We will notify you (and any assignee of record) of the payment
required to keep your Policy in force. You will then have a "Grace Period" of
61 days, measured from the date the notice is sent, to make the required
payment. Your Policy will remain in force through the Grace Period. Failure to
make the required payment within the Grace Period will result in termination of
coverage under your Policy, and your Policy will lapse with no value. If the
required payment is made during the Grace Period, any premium paid will be
allocated among the Investment Options in accordance with your current premium
allocation instructions. Any monthly deduction due will be charged to the
Investment Options on a proportionate basis. If the Insured dies during the
Grace Period, the death benefit proceeds will equal the amount of the death
benefit immediately prior to the commencement of the Grace Period, reduced by
any unpaid monthly deductions and any Policy Debt.
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<PAGE>
Reinstatement
We will reinstate a lapsed Policy (but not a Policy which has been
surrendered for its Net Cash Surrender Value) at any time within five years
after the end of the Grace Period but before the Maturity Date provided we
receive the following: (1) your written application, (2) evidence of
insurability satisfactory to us, and (3) payment of all monthly deductions that
were due and unpaid during the Grace Period, and payment of a premium at least
sufficient to keep the Policy in force for three months after the date of
reinstatement.
When your Policy is reinstated, your Accumulated Value will be equal to your
Accumulated Value on the date of the lapse subject to the following: If your
Policy is reinstated after your first Monthly Payment Date following lapse,
your Accumulated Value will be reduced by the amount of Policy Debt on the date
of lapse and no Policy Debt will exist on the date of the reinstatement. If
your Policy is reinstated on your Monthly Payment Date next following lapse,
any Policy Debt on the date of lapse will also be reinstated. No interest on
amounts held in the Loan Account to secure Policy Debt will be paid or credited
between lapse and reinstatement. Reinstatement will be effective as of your
Monthly Payment Date on or next following the date of our approval, and your
Accumulated Value minus, if applicable, Policy Debt will be allocated among the
Investment Options in accordance with your most recent premium allocation
instructions.
CHARGES AND DEDUCTIONS
Premium Load
A premium load is deducted from each premium payment under your Policy prior
to allocation of the net premium to your Accumulated Value. The premium load
consists of the following items:
Sales Load. The sales load is equal to 4% of each premium paid during the
first ten Policy Years and 2% of each premium paid thereafter.
The sales load is deducted to compensate us for the cost of distributing the
Policies. The amount we derive from the sales load is not expected to be
sufficient to cover the sales and distribution expenses in connection with
the Policies. If surrendered within 10 years after issuance, the Policy will
also be subject to a sales surrender charge. See "Surrender Charge," below.
To the extent that sales and distribution expenses exceed sales loads and
any amounts derived from the sales surrender charge, such expenses may be
recovered from other charges, including amounts derived indirectly from the
charge for mortality and expense risks and from mortality gains.
We may reduce or waive the sales load on Policies sold to our directors or
employees, any of our affiliates or to trustees or any employees of the
Fund.
State and Local Tax Charge. A charge equal to 2.35% is assessed against each
premium to pay applicable state and local premium taxes. Premium taxes vary
from state to state, and in some instances, among municipalities. The 2.35%
rate approximates the average tax rate expected to be paid on premiums from
all states.
Deductions from Accumulated Value
A charge called the monthly deduction is deducted from your Accumulated Value
in the Investment Options beginning on the Monthly Payment Date on or next
following the date we first become obligated under your Policy and on each
Monthly Payment Date thereafter. Unless you request otherwise, the monthly
deduction will be deducted from the Investment Options on a pro rata basis. The
monthly deduction consists of the following items:
Cost of Insurance. This monthly charge compensates us for providing life
insurance coverage for the Insured. The amount of the charge is equal to a
current cost of insurance rate multiplied by the net amount at risk under your
Policy at the beginning of the Policy Month. The net amount at risk for these
purposes is equal to the amount of death benefit payable at the beginning of
the Policy Month divided by 1.004074 (a discount factor to account for return
deemed to be earned during the month) less your Accumulated Value at the
beginning of your Policy Month.
27
<PAGE>
The Policy contains guaranteed cost of insurance rates that may not be
increased. The guaranteed rates are no greater than certain of the 1980
Commissioners Standard Ordinary Mortality Tables (and where unisex cost of
insurance rates apply, the 1980 Commissioners Ordinary Mortality Table B).
These rates are based on the Age and underwriting class of the Insured. They
are also based on the sex of the Insured, except that unisex rates are used
where appropriate under applicable law, including in the state of Montana and
in Policies purchased by employers and employee organizations in connection
with employment-related insurance or benefit programs. As of the date of this
prospectus, we charge "current rates" that are lower (i.e., less expensive)
than the guaranteed rates, and we may also charge current rates in the future.
Like the guaranteed rates, the current rates also vary with the Age, gender,
where permissible, and underwriting class of the Insured. In addition, they
also vary with the Insured's smoking status, size of the Face Amount, and the
policy duration. Policies with Face Amounts of $500,000 or more receive more
favorable rates than Policies with smaller Face Amounts. The cost of insurance
rate generally increases with the Age of the Insured.
If there have been increases in your Face Amount, then for purposes of
calculating the cost of insurance charge, your Accumulated Value will first be
applied to the initial Face Amount. If your Accumulated Value exceeds the
initial Face Amount divided by 1.004074, the excess will then be applied to any
increase in Face Amount in the order of the increases. If the death benefit
equals Accumulated Value multiplied by the applicable death benefit percentage,
any increase in Accumulated Value will cause an automatic increase in the death
benefit. The underwriting class and duration for such increase will be the same
as that used for the most recent increase in Face Amount (that has not been
eliminated through a subsequent decrease in Face Amount).
Administrative Charge. A monthly administrative charge is deducted equal to
$25 in each of the first 12 Policy Months and which varies with the size of a
Policy's Face Amount thereafter. For Face Amounts of less than $100,000, the
charge is equal to $7.50 per month; for Face Amounts of $100,000 or more, the
charge is equal to $5.00 per month. For purposes of this charge, only the
initial Face Amount is considered. The administrative charge is assessed to
reimburse us for the expenses associated with administration and maintenance of
the Policies. The administrative charge is guaranteed never to exceed $25
during the first 12 Policy Months and $10 per month thereafter. We do not
expect to profit from this charge.
Mortality and Expense Risk Charge. A monthly charge is deducted for mortality
and expense risks assumed by us. During the first ten Policy Years, this charge
is equal to .000625 multiplied by a Policy's Accumulated Value less any amount
in the Loan Account, which is equivalent to an annual rate of .75% of
Accumulated Value less any amount in the Loan Account. After the tenth Policy
Year, the charge is equal to .000208333 multiplied by a Policy's Accumulated
Value less any amount in the Loan Account, which is equivalent to an annual
rate of .25% of Accumulated Value less any amount in the Loan Account. For
purposes of this charge, the Accumulated Value is based upon its value on the
Monthly Payment Date after the deduction of the charge for the cost of
insurance and any optional insurance benefits added by rider.
The mortality and expense risk charge is assessed to compensate us for
assuming certain mortality and expense risks under the Policies. The mortality
risk assumed is that Insureds, as a group, may live for a shorter period of
time than estimated and, therefore, the cost of insurance charges specified in
the Policy will be insufficient to meet actual claims. The expense risk assumed
is that other expenses incurred in issuing and administering the Policies and
operating the Separate Account will be greater than the charges assessed for
such expenses. We will realize a gain from this charge to the extent it is not
needed to provide the mortality benefits and expenses under the Policies, and
will realize a loss to the extent the charge is not sufficient.
Optional Insurance Benefits Charges. The monthly deduction will include
charges for any optional insurance benefits added to the Policy by Rider. See
"Optional Insurance Benefits".
A death benefit change charge, if applicable, will also be deducted from your
Accumulated Value. If you request and we accept an increase in Face Amount or a
change in death benefit option from Option A to Option B, a charge of $100 will
be deducted from your Accumulated Value on the effective date of the increase
or option change to cover processing costs. The charge will be deducted from
the Investment Options in the proportion each bears to the Accumulated Value of
your Policy less Policy Debt.
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<PAGE>
Surrender Charge
We will assess a surrender charge against your Accumulated Value upon
surrender of your Policy within ten years after its issuance. The surrender
charge consists of two charges: an underwriting surrender charge and a sales
surrender charge.
Underwriting Surrender Charge. The underwriting surrender charge is equal to
a specified amount that varies with the Age of the Insured for each $1,000 of a
Policy's initial Face Amount in accordance with the following schedule:
<TABLE>
<CAPTION>
Age of Insured at
Issuance of Policy Charge Per $1,000
------------------ -----------------
<S> <C>
0-20 $2.50
21-30 2.50
31-40 3.50
41-50 4.50
51-60 5.50
61-80 6.50
</TABLE>
The amount of the charge remains level for five Policy Years. After the fifth
Policy Anniversary, the charge decreases by 1.666% per month until it reaches
zero at the end of the 120th Policy Month.
The charge is based upon the Age of the Insured and the Face Amount on the
Policy Date, and it does not increase as the Insured gets older or with changes
in the Face Amount. For example, if an Insured Age 25 purchases a Policy with
an initial Face Amount of $50,000 and surrenders the Policy in the third Policy
Year, the underwriting surrender charge would be $125.
The underwriting surrender charge is designed to cover the administrative
expenses associated with underwriting and issuing a Policy, including the costs
of processing applications, conducting medical examinations, determining
insurability and the Insured's underwriting class, and establishing policy
records. We do not expect to profit from the underwriting surrender charge.
Sales Surrender Charge. The sales surrender charge is equal to 26% of the
lesser of the premiums paid under the Policy or a maximum amount that is called
the Sales Surrender Target. The Sales Surrender Target is equal to the premium
that would be payable under a Policy for one year if a Policy Owner were to pay
level annual premiums for the life of the Policy, and taking into account
certain Policy charges including the premium load, the guaranteed cost of
insurance, and the mortality and expense risk charge, and assuming net
investment earnings at an annual rate of 5%. The Sales Surrender Target does
not increase as the Insured gets older or with changes in the Face Amount.
Generally, if a Policy Owner pays Planned Periodic Premiums, the sales
surrender charge will be 26% of premium payments until the first Policy
Anniversary, and will be 26% of the Sales Surrender Target thereafter. The
sales surrender charge will not exceed 26% of the Sales Surrender Target for
five Policy Years. After the fifth Policy Year, the charge decreases from its
maximum by 1.666% per month until it reaches zero at the end of the 120th
Policy Month.
For example, if a Male Insured Age 25 purchases a Policy with a Face Amount
of $50,000, the sales surrender target, based upon the assumptions described
above, would be $387.50. The maximum sales surrender charge during the first
five Policy Years would be 26% of this amount, or $100.75.
The purpose of the sales surrender charge is to reimburse us for some of the
expenses of distributing the Policies.
We may reduce or waive the sales surrender charge on Policies sold to our
directors or employees, any of our affiliates or to trustees or any employees
of the Fund.
Corporate and Other Purchasers
The Policy is available for individuals and for corporations and other
institutions. For corporate or other group or sponsored arrangements purchasing
one or more Policies, we may reduce the amount of the sales
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<PAGE>
surrender charge, underwriting surrender charge, or other charges where the
expenses associated with the sale of, or the underwriting or other
administrative costs associated with the Policy or Policies are reduced. Sales,
underwriting or other administrative expenses may be reduced for reasons such
as expected economies resulting from a corporate purchase or a group or
sponsored arrangement, from the amount of the initial premium payment or
payments, or the amount of projected premium payments.
Other Charges
We may charge the Variable Accounts for federal income taxes incurred by us
that are attributable to the Separate Account and its Variable Accounts or to
our operations with respect to the Policies. No such charge is currently
assessed. See "Charge for Our Income Taxes".
We will bear the direct operating expenses of the Separate Account. Each
Variable Account available to you purchases shares of the corresponding
Portfolio of the underlying Fund. The Fund and each of its Portfolios incur
certain charges including the investment advisory fee and certain operating
expenses. The Fund is governed by its Board of Trustees. The Fund's expenses
are not fixed or specified under the terms of the Policy, and these expenses
may vary from year to year. The advisory fees and other expenses are more fully
described in "AN OVERVIEW OF PACIFIC SELECT EXEC: 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. This includes the charge
for mortality and expense risks, the administrative charge with respect to the
guaranteed rates described above, the premium load, the guaranteed cost of
insurance rates, and the surrender charge.
Usage
We may use any profit derived from charges imposed under the Policies for any
lawful purpose, including our sales and distribution expenses.
OTHER INFORMATION
Federal Income Tax Considerations
The following discussion provides a general description of the federal income
tax considerations relating to the Policy. This discussion is based upon our
understanding of the present federal income tax laws as they are currently
interpreted by the Internal Revenue Service ("IRS"). This discussion is not
intended as tax advice. Because of the inherent complexity of such laws and the
fact that tax results will vary according to the particular circumstances of
the individual involved, tax advice may be needed by a person contemplating the
purchase of the Policy. It should, therefore, be understood that these comments
concerning federal income tax consequences are not an exhaustive discussion of
all tax questions that might arise under the Policy and that special rules
which are not discussed herein may apply in certain situations. Moreover, no
representation is made as to the likelihood of continuation of federal income
tax or estate or gift tax laws or of the current interpretations by the IRS or
the courts. Future legislation may adversely affect the tax treatment of life
insurance policies or other tax rules described in this discussion or that
relate directly or indirectly to life insurance policies. Finally, these
comments do not take into account any state or local income tax considerations
which may be involved in the purchase of the Policy.
While we believe that the Policy meets the statutory definition of life
insurance under Section 7702 of the Internal Revenue Code ("IRC") and hence
will receive federal income tax treatment consistent with that of traditional
fixed life insurance, the area of the tax law relating to the definition of
life insurance does not explicitly address all relevant issues (including, for
example, the treatment of substandard risk Policies and Policies with term
insurance on the Insured). We reserve the right to make changes to the Policy
if changes are deemed appropriate by us to attempt to assure qualification of
the Policy as a life insurance contract. If a Policy were determined not to
qualify as life insurance, the Policy would not provide the tax advantages
normally provided by life insurance. The discussion below summarizes the tax
treatment of life insurance contracts.
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The death benefit under a Policy should be excludable from the gross income
of the Beneficiary (whether the Beneficiary is a corporation, individual or
other entity) under IRC Section 101(a)(1) for purposes of the regular federal
income tax and you generally should not be deemed to be in constructive receipt
of the cash values, including increments thereof, under the Policy until a full
surrender thereof, maturity of the Policy, or a Preferred or Partial
Withdrawal. In addition, certain Policy loans may be taxable in the case of
Policies that are modified endowment contracts. Prospective Owners that intend
to use Policies to fund deferred compensation arrangements for their employees
are urged to consult their tax advisors with respect to the tax consequences of
such arrangements. Prospective corporate Owners should consult their tax
advisors about the treatment of life insurance in their particular
circumstances for purposes of the alternative minimum tax applicable to
corporations and the environmental tax under IRC section 59A. Changing the
Policy Owner may also have tax consequences. Exchanging a Policy for another
involving the same Insured generally will not result in the recognition of gain
or loss according to IRC Section 1035(a). Changing the Insured under a Policy
will, however, not be treated as a tax-free exchange under IRC Section 1035,
but rather as a taxable exchange.
Diversification Requirements. To comply with regulations under Section 817(h)
of the IRC, each Portfolio of the Fund is required to diversify its
investments. For details on these diversification requirements, see "Taxation"
in the Fund's SAI.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income and
gains from the separate account assets would be includable in the variable
policy owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor [i.e. the Policy Owner], rather than the insurance company,
to be treated as the owner of the assets in the account." This announcement
also stated the guidance would be issued by way of regulations or rulings on
the "extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets." As of
the date of this prospectus, no such guidance has been issued.
The ownership rights under your Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, you have additional flexibility in allocating premium payments and
Policy values. These differences could result in your being treated as the
owner of your Policy's pro rata portion of the assets of the Separate Account.
In addition, we do not know what standards will be set forth, if any, in the
regulations or ruling which the Treasury Department has stated it expects to
issue. We therefore reserve the right to modify the Policy, as deemed
appropriate by us, to attempt to prevent you from being considered the owner of
your Policy's pro rata share of the assets of the Separate Account. Moreover,
in the event that regulations are adopted or rulings are issued, there can be
no assurance that the Portfolios will be able to operate as currently described
in the Prospectus, or that the Fund will not have to change any Portfolio's
investment objective or investment policies.
Tax Treatment of Policies. IRC Section 7702A defines a class of life
insurance contracts referred to as modified endowment contracts. Under this
provision, the Policies will be treated for tax purposes in one of two ways.
Policies that are not classified as modified endowment contracts will be taxed
as conventional life insurance contracts, as described below. Taxation of pre-
death distributions from Policies that are classified as modified endowment
contracts and that are entered into on or after June 21, 1988 is somewhat
different, as described below.
A life insurance contract becomes a "modified endowment contract" if, at any
time during the first seven contract years, the sum of actual premiums paid
exceeds the sum of the "seven-pay premium." Generally, the "seven-pay premium"
is the level annual premium, such that if paid for each of the first seven
years, will fully pay for all future death and endowment benefits under a
contract. For example, if the "seven-pay premiums" were $1,000, the maximum
premiums that could be paid during the first seven years to avoid "modified
endowment" treatment would be $1,000 in the first year; $2,000 through the
first two years and $3,000 through
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the first three years, etc. Under this test, a Select Exec Policy may or may
not be a modified endowment contract, depending on the amount of premiums paid
during each of the Policy's first seven contract years. Changes in the policy,
including changes in death benefits, may require "retesting" of a Policy to
determine if it is to be classified as a modified endowment contract.
Conventional Life Insurance Policies. If a Policy is not a modified endowment
contract, upon full surrender or maturity of a Policy for its Net Cash
Surrender Value, the excess, if any, of the Net Cash Surrender Value plus any
outstanding Policy Debt over the cost basis under a Policy will be treated as
ordinary income for federal income tax purposes. Such a Policy's cost basis
will usually equal the premiums paid less any premiums previously recovered in
Preferred or Partial Withdrawals. Under IRC Section 7702, if a Preferred
Withdrawal occurring within 15 years of the Policy Date is accompanied by a
reduction in benefits under the Policy, special rules apply to determine
whether part or all of the cash received is paid out of the income of the
Policy and is taxable. Cash distributed to a Policy Owner on Partial
Withdrawals occurring more than 15 years after the Policy Date will be taxable
as ordinary income to the Policy Owner to the extent that it exceeds the cost
basis under a Policy.
We also believe that loans received under Policies that are not modified
endowment contracts will be treated as indebtedness of the Owner for federal
income tax purposes, and that no part of any loan under the Policy will
constitute income to the Owner unless the Policy is surrendered or matures or
lapses. Consult with your tax advisor on whether interest paid (or accrued by
an accrual basis taxpayer) on a loan under a Policy that is not a modified
endowment contract may be deductible. Tax law provisions may limit the
deduction of interest payable on loan proceeds that are used to purchase or
carry certain life insurance policies. 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.
Modified Endowment Contracts. Pre-death distributions from modified endowment
contracts may give rise to taxable income. Upon full surrender or maturity of
the Policy, the Policy Owner would recognize ordinary income for federal income
tax purposes equal to the amount by which the Net Cash Surrender Value plus
Policy Debt exceeds the investment in the Policy (usually the premiums paid
plus certain pre-death distributions that were taxable less any premiums
previously recovered that were excludable from gross income). Upon Preferred
and Partial Withdrawals and Policy loans, the Policy Owner would recognize
ordinary income to the extent allocable to income (which includes all
previously non-taxed gains) on the Policy. The amount allocated to income is
the amount by which the Accumulated Value of the Policy exceeds investment in
the Policy immediately before the distribution. Under a tax law provision, if
two or more policies which are classified as modified endowment contracts are
purchased from any one insurance company, including us, during any calendar
year, all such policies will be aggregated for purposes of determining the
portion of the pre-death distributions allocable to income on the policies and
the portion allocable to investment in the policies.
Amounts received under a modified endowment contract that are included in
gross income are subject to an additional tax equal to 10% of the amount
included in gross income, unless an exception applies. The 10% additional tax
does not apply to any amount received: (i) when the taxpayer is at least 59 1/2
years old; (ii) which is attributable to the taxpayer becoming disabled; or
(iii) which is part of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of the taxpayer and
his or her beneficiary.
If a Policy was not originally a modified endowment contract but becomes one,
under Treasury Department regulations which are yet to be prescribed, pre-death
distributions received in anticipation of a failure of a Policy to meet the
seven-pay premium test are to be treated as pre-death distributions from a
modified endowment contract (and, therefore, are to be taxable as described
above) even though, at the time of
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the distribution(s) the Policy was not yet a modified endowment contract. For
this purpose, pursuant to the IRC, any distribution made within two years
before the Policy is classified as a modified endowment contract shall be
treated as being made in anticipation of the Policy's failing to meet the
seven-pay premium test.
It is unclear whether interest paid (or accrued by an accrual basis taxpayer)
on Policy Debt with respect to a modified endowment contract constitutes
interest for federal income tax purposes. Consult your tax advisor. Tax law
provisions may limit the deduction of interest payable on loans and on loan
proceeds that are used to purchase or carry certain life insurance policies.
Reasonableness Requirement for Charges. Another provision of the tax law
deals with allowable charges for mortality costs and other expenses that are
used in making calculations to determine whether a contract qualifies as life
insurance for federal income tax purposes. For life insurance policies entered
into on or after October 21, 1988, these calculations must be based upon
reasonable mortality charges and other charges reasonably expected to be
actually paid. The Treasury Department has issued proposed regulations and is
expected to promulgate temporary or final regulations governing reasonableness
standards for mortality charges. While we believe under IRS pronouncements
currently in effect that the mortality costs and other expenses used in making
calculations to determine whether the Policy qualifies as life insurance meet
the current requirements, complete assurance cannot be given that the IRS would
necessarily agree. It is possible that future regulations will contain
standards that would require us to modify our mortality charges used for the
purposes of the calculations in order to retain the qualification of the Policy
as life insurance for federal income tax purposes, and we reserve the right to
make any such modifications.
Other. Federal estate and gift and state and local estate, inheritance, and
other tax consequences of ownership or receipt of Policy proceeds depend on the
jurisdiction and the circumstances of each Owner or Beneficiary.
For complete information on federal, state, local and other tax
considerations, a qualified tax adviser should be consulted.
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
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voting interest in corresponding Variable Accounts of the Separate Account.
However, if the Investment Company Act of 1940 or any regulations thereunder
should be amended, or if the present interpretation thereof should change, and
as a result we determine that we are permitted to vote the shares of the Fund
in its own right, we may elect to do so.
You are the person having the voting interest under a Policy. Unless
otherwise required by applicable law, the number of votes as to which a Policy
Owner will have the right to instruct will be determined by dividing your
Accumulated Value in a Variable Account by the net asset value per share of the
corresponding Portfolio of the Fund. Fractional votes will be counted. The
number of votes as to which you will have the right to instruct will be
determined as of the date coincident with the date established by the Fund for
determining shareholders eligible to vote at the meeting of the Fund. If
required by the Securities and Exchange Commission, we reserve the right to
determine in a different fashion the voting rights attributable to the shares
of the Fund based upon the instructions received from Policy Owners. Voting
instructions may be cast in person or by proxy.
If there are shares of a Portfolio held by a Variable Account for which we do
not receive timely voting instructions, we will vote those shares in the same
proportion as the voting instructions for all other shares of that Portfolio
held by that Variable Account for which we have received timely voting
instructions. If we hold shares of a Portfolio in our General Account, we will
vote such shares 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 Policy
Owners.
Confirmation Statements and Other Reports to Owners
A statement will be sent quarterly to you setting forth a summary of the
transactions which occurred during the quarter and indicating the death
benefit, Face Amount, Accumulated Value, Cash Surrender Value, and any Policy
Debt. In addition, the statement will indicate the allocation of Accumulated
Value among the Investment Options and any other information required by law.
Confirmations will be sent out upon premium payments, transfers, loans, loan
repayments, withdrawals, and surrenders. Confirmations of scheduled
transactions under dollar cost averaging, portfolio rebalancing and monthly
deductions will appear on your quarterly statements.
You will also be sent annual financial statements for the Separate Account
and the Fund, the latter of which will include a list of the portfolio
securities of the Fund, as required by the Investment Company Act of 1940,
and/or such other reports as may be required by federal securities laws.
Substitution of Investments
We reserve the right, subject to compliance with the law as then in effect,
to make additions to, deletions from, or substitutions for the securities that
are held by the Separate Account or any Variable Account or that the Separate
Account or any Variable Account may purchase. If shares of any or all of the
Portfolios of the Fund should no longer be available for investment, or if, in
the judgment of our management, further investment in
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shares of any or all Portfolios of the Fund should become inappropriate in view
of the purposes of the Policies, we may substitute shares of another Portfolio
of the Fund or of a different fund for shares already purchased, or to be
purchased in the future under the Policies.
Where required, we will not substitute any shares attributable to your
interest in a Variable Account or the Separate Account without notice, your
approval, or prior approval of the Securities and Exchange Commission and
without following the filing or other procedures established by applicable
state insurance regulators.
We also reserve the right to establish additional Variable Accounts which may
include additional subaccounts of the Separate Account to serve as investment
options under the Policies, which may be managed separate accounts or may
invest in a new Portfolio of the Fund, or in shares of another investment
company, a portfolio thereof, or suitable investment vehicle, with a specified
investment objective. New Variable Accounts may be established when, at our
sole discretion, marketing needs or investment conditions warrant, and any new
Variable Accounts will be made available to existing Policy Owners on a basis
to be determined by us. We may also eliminate one or more Variable Accounts if,
in our sole discretion, marketing, tax, or investment conditions so warrant. We
may also terminate and liquidate any Variable Account.
In the event of any such substitution or change, we may, by appropriate
endorsement, make such changes in this and other policies as may be necessary
or appropriate to reflect such substitution or change. If deemed by us to be in
the best interests of persons having voting rights under the Policies, the
Separate Account may be operated as a management investment company under the
Investment Company Act of 1940 or any other form permitted by law, it may be
deregistered under that Act in the event such registration is no longer
required, or it may be combined with other separate accounts of ours or an
affiliate of ours. Subject to compliance with applicable law, we also may
combine one or more Variable Accounts and may establish a committee, board, or
other group to manage one or more aspects of the operation of the Separate
Account.
Replacement of Life Insurance or Annuities
The term "replacement" has a special meaning in the life insurance industry
and is described more fully below. Before you make your purchase decision,
Pacific Life wants you to understand how a replacement may impact your existing
plan of insurance.
A policy "replacement" occurs when a new policy or contract is purchased and,
in connection with the sale, an existing policy or contract is surrendered,
lapsed, forfeited, assigned to the replacing insurer, otherwise terminated, or
used in a financed purchase. A "financed purchase" occurs when the purchase of
a new life insurance policy or annuity contract involves the use of funds
obtained from the values of an existing life insurance policy or annuity
contract through withdrawal, surrender or loan.
There are circumstances in which replacing your existing life insurance
policy or annuity contract can benefit you. As a general rule, however,
replacement is not in your best interest. Accordingly, you should make a
careful comparison of the costs and benefits of your existing policy or
contract and the proposed policy or contract to determine whether replacement
is in your best interest.
Changes to Comply with Law
We reserve the right to make any change without your consent to the
provisions of the Policy to comply with, or give you the benefit of, any
federal or state statute, rule, or regulation, including but not limited to
requirements for life insurance contracts and modified endowment contracts
under the IRC, under regulations of the United States Treasury Department or
any state.
PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account may
appear in advertisements, sales literature, or reports to Policy Owners or
prospective purchasers. Performance information in advertisements or sales
literature may be expressed in any fashion permitted under applicable law,
which may include presentation of a change in a Policy Owner's Accumulated
Value attributable to the performance of one
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or more Variable Accounts, or as a change in a Policy Owner's death benefit.
Performance quotations may be expressed as a change in a Policy Owner's
Accumulated Value over time or in terms of the average annual compounded rate
of return on the Policy Owner's Accumulated Value, based upon a hypothetical
Policy in which premiums have been allocated to a particular Variable Account
over certain periods of time that will include one year or from the
commencement of operation of the Variable Account. If a Portfolio has been in
existence for a longer period of time than its corresponding Variable Account,
we may also present hypothetical returns that the Variable Account would have
achieved had it invested in its corresponding Portfolio for periods through the
commencement of operation of the Portfolio. For the period that a particular
Variable Account has been in existence, the performance will be actual
performance and not hypothetical in nature. Any such quotation may reflect the
deduction of all applicable charges to the Policy including premium load, the
cost of insurance, the administrative charge, and the mortality and expense
risk charge. The varying death benefit options will result in different
expenses for the cost of insurance, and the varying expenses will result in
different Accumulated Values. Since the Guideline Minimum Death Benefit is
equal to a percentage (e.g. 250% for an Insured Age 40) times Accumulated
Value, it will vary with Accumulated Value. The cost of insurance charge varies
according to the Ages of the Insureds and therefore the cost of insurance
charge reflected in the performance for the hypothetical Policy is based on the
hypothetical Insureds and death benefit option assumed. The quotation may also
reflect the deduction of the surrender charge, if applicable, by assuming a
surrender at the end of the particular period, although other quotations may
simultaneously be given that do not assume a surrender and do not take into
account deduction of the surrender charge or other charges.
Performance information for a Variable Account may be compared, in
advertisements, sales literature, and reports to Policy Owners to: (i) other
variable life separate accounts, mutual funds, or investment products tracked
by research firms, ratings services, companies, publications, or persons who
rank separate accounts or investment products on overall performance or other
criteria; and (ii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from the purchase of a Policy. Reports and promotional
literature may also contain our rating or a rating of our claim-paying ability
as determined by firms that analyze and rate insurance companies and by
nationally recognized statistical rating organizations.
Performance information for any Variable Account of the Separate Account
reflects only the performance of a hypothetical Policy whose Accumulated Value
is allocated to the Variable Account during a particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives and policies, characteristics and quality of
the Portfolio of the Fund in which the Variable Account invests, and the market
conditions during the given period of time, and should not be considered as a
representation of what may be achieved in the future.
THE FIXED ACCOUNT
You may allocate all or a portion of your net premium payments and transfer
Accumulated Value to our Fixed Account. Amounts allocated to the Fixed Account
become part of our General Account, which supports insurance and annuity
obligations. Because of exemptive and exclusionary provisions, interests in the
Fixed Account have not been registered under the Securities Act of 1933 and the
Fixed Account has not been registered as an investment company under the
Investment Company Act of 1940. Accordingly, neither the Fixed Account nor any
interest therein is generally subject to the provisions of these Acts and, as a
result, the staff of the SEC has not reviewed the disclosure in this prospectus
relating to the Fixed Account. Disclosures regarding the Fixed Account may,
however, be subject to certain generally applicable provisions of the federal
securities laws relating to the accuracy and completeness of statements made in
the prospectus. For more details regarding the Fixed Account, see the Policy
itself.
General Description
Amounts allocated to the Fixed Account become part of our General Account
which consists of all assets owned by us other than those in the Separate
Account and our other separate accounts. Subject to applicable law, we have
sole discretion over the investment of the assets of our General Account.
You may elect to allocate net premium payments to the Fixed Account, the
Separate Account, or both. You may also transfer Accumulated Value from the
Variable Accounts to the Fixed Account, or from the Fixed
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Account to the Variable Accounts, subject to the limitations described below.
We guarantee that the Accumulated Value in the Fixed Account will be credited
with a minimum interest rate of .32737% per month, compounded monthly, for a
minimum effective annual rate of 4%. Such interest will be paid regardless of
the actual investment experience of the Fixed Account. In addition, we may in
our sole discretion declare current interest in excess of the 4%, which will be
guaranteed for one year. (The portion of your Accumulated Value that has been
used to secure Policy Debt will be credited with an interest rate of .32737%
per month, compounded monthly, for an effective annual rate of 4%.)
We bear the full investment risk for the Accumulated Value allocated to the
Fixed Account.
Death Benefit
The death benefit under the Policy will be determined in the same fashion for
an Owner who has Accumulated Value in the Fixed Account as for an Owner who has
Accumulated Value in the Variable Accounts. The death benefit under Option A
will be equal to the Face Amount of the Policy or, if greater, Accumulated
Value multiplied by a death benefit percentage. Under Option B, the death
benefit will be equal to the Face Amount of the Policy plus the Accumulated
Value or, if greater, Accumulated Value multiplied by a death benefit
percentage. See "Death Benefit".
Policy Charges
Policy charges will be the same whether you allocate net premiums or transfer
Accumulated Value to the Fixed Account or allocate net premiums to the Variable
Accounts. These charges consist of the premium load, including the sales load
and state and local premium tax charge; the deductions from Accumulated Value,
including the charges for the cost of insurance, administrative charge,
mortality and expense risk charge, the charge for any optional insurance
benefits added by rider, any death benefit change charge; and the surrender
charge, including the underwriting surrender charge and the sales surrender
charge. Any amounts that we pay for income taxes allocable to the Variable
Accounts will not be charged against the Fixed Account. In addition, the
operating expenses of the Variable Accounts, as well as the investment advisory
fee charged by the Fund, will not be paid directly or indirectly by you to the
extent the Accumulated Value is allocated to the Fixed Account; however, to
such extent you will not participate in the investment experience of the
Variable Accounts.
Transfers, Surrenders, Withdrawals, and Policy Loans
Amounts may be transferred after the Free-Look Period from the Variable
Accounts to the Fixed Account and from the Fixed Account to the Variable
Accounts, subject to the following limitations. No transfer may be made if the
Policy is in a Grace Period and the required premium has not been paid. You may
not make more than one transfer from the Fixed Account to the Variable Accounts
in any 12-month period. Further, you may not transfer more than the greater of
25% of your Accumulated Value in the Fixed Account or $5,000 in any year.
Currently there is no charge imposed upon transfers; however, we reserve the
right to assess such a charge in the future and to impose other limitations on
the number of transfers, the amount of transfers, and the amount remaining in
the Fixed Account or Variable Accounts after a transfer. Transfers from the
Variable Accounts to the Fixed Account may be made in the Policy Month
preceding a Policy Anniversary, except that if you reside in Connecticut,
Georgia, Maryland, North Carolina, North Dakota or Pennsylvania may make such a
transfer at any time during the first 18 Policy Months.
You may also make full surrenders, Preferred Withdrawals and Partial
Withdrawals from the Fixed Account to the same extent as an Owner who has
invested in the Variable Accounts. See "Surrender" and "Preferred and Partial
Withdrawal Benefits". You may borrow up to the greater of (1) 90% of the
Accumulated Value in the Variable Accounts and 100% of the Accumulated Value in
the Fixed Account, less any surrender charges that would have been imposed if
your Policy were surrendered on the date the loan is taken or (2) 100% of the
product of (a X b/c - d) where (a) equals your Policy's Accumulated Value less
any surrender charge that would be imposed if your Policy were surrendered on
the date the loan is taken and less 12 times the current monthly deduction;
(b) equals 1 plus the annual loan interest rate credited; (c) equals 1 plus the
annual loan interest rate currently charged; and (d) equals any existing policy
Debt. See "Policy Loans". Transfers, surrenders, and withdrawals payable from
the Fixed Account, and the payment of Policy loans allocated to the Fixed
Account, may be delayed for up to six months.
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MORE ABOUT THE POLICY
Ownership
The Policy Owner is the individual named as such in the application or in any
later change shown in our records. While the Insured is living, the Policy
Owner alone has the right to receive all benefits and exercise all rights that
the Policy grants or we allow.
Joint Owners. If more than one person is named as Policy Owner, they are
joint Owners. Any Policy transaction requires the signature of all persons
named jointly. Unless otherwise provided, if a joint Owner dies, ownership
passes to the surviving joint Owner(s). When the last joint Owner dies,
ownership passes through that person's estate, unless otherwise provided.
Beneficiary
The Beneficiary is the individual named as such in the application or any
later change shown in our records. You may change the Beneficiary at any time
during the life of the Insured by written request on forms provided by us,
which must be received by us at our Home Office. The change will be effective
as of the date this form is signed. Contingent and/or concurrent Beneficiaries
may be designated. You may designate a permanent Beneficiary, whose rights
under the Policy cannot be changed without his or her consent. Unless otherwise
provided, if no designated Beneficiary is living upon the death of the Insured,
you are the Beneficiary, if living; otherwise your estate is the Beneficiary.
We will pay the death benefit proceeds to the Beneficiary. Unless otherwise
provided, in order to receive proceeds at the Insured's death, the Beneficiary
must be living at the time of the Insured's death.
Substitution of Insured
Subject to our approval, you may request a substitution of the Insured under
this Policy for a new Insured after the first Policy Year is completed. We will
require the following before we substitute the Insured:
. The new Insured must submit evidence of insurability satisfactory to us;
. You must submit a written application for the substitution and payment of
a $100 fee.
The Policy Date will not be changed unless the new Insured was born after the
Policy Date. In such case, the Policy Date will be changed to the Policy
Anniversary on or next following the birth date of the new Insured. The cost of
insurance charge will be based on the new Insured's Age and underwriting class.
We may adjust the Face Amount, Accumulated Value, surrender charge, and any
Policy fees and charges to reflect the new Insured. A revised schedule of
benefits will be sent to you outlining the benefits for the new Insured. Riders
on the new Insured will be added only with our consent and subject to our
requirements for those riders.
If approved, the substitution will become effective on the Monthly Payment
Date on or next following our approval.
We reserve the right to disallow a requested substitution of the named
Insured, and will not permit a requested substitution, among other reasons, (1)
if compliance with the guideline premium limitations under tax law resulting
from the substitution of Insured would result in the immediate termination of
the Policy, or (2) if, to effect the requested substitution of Insured,
payments to you would have to be made from Accumulated Value for compliance
with the guideline premium limitations, and the amount of such payments would
exceed the Net Cash Surrender Value under the Policy.
The Contract
This Policy is a contract between the Owner and Pacific Life. The entire
contract consists of the Policy, a copy of the initial application, all
subsequent applications to change the Policy, any endorsements, any Riders, and
all additional Policy information sections (specification pages) added to the
Policy.
Payments
We ordinarily will pay death benefit proceeds, Net Cash Surrender Value on
surrender, Preferred Withdrawals, Partial Withdrawals, and loan proceeds based
on allocations made to the Variable Accounts, and
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<PAGE>
will effect a transfer between Variable Accounts or from a Variable Account to
the Fixed Account within seven days after we receive all the information needed
to process a payment or transfer or, if sooner, any other period required by
law.
However, we can postpone the calculation or payment of such a payment or
transfer of amounts based on investment performance of the Variable Accounts
if:
. The New York Stock Exchange is closed on other than customary weekend and
holiday closing or trading on the New York Stock Exchange is restricted as
determined by the SEC; or
. An emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of a Variable Account's net
assets; or
. The SEC by order permits postponement for the protection of Policy Owners.
Assignment
You may assign a Policy as collateral security for a loan or other
obligation. No assignment will bind us unless the original, or a copy, is
received and recorded by our Home Office. An assignment does not change the
ownership of the Policy. However, after an assignment, the rights of any Owner
or Beneficiary will be subject to the assignment. The entire Policy, including
any attached payment option, Endorsement or Rider, will be subject to the
assignment. We will not be responsible for the validity of any assignment.
Unless otherwise provided, the assignee may exercise all rights this Policy
grants except (a) the right to change the Policy Owner or Beneficiary; and (b)
the right to elect a payment option. Assignment of a Policy that is a modified
endowment contract may generate taxable income. (See "Federal Income Tax
Considerations".)
Errors on the Application
If the Age or sex of the Insured has been misstated, the death benefit under
your Policy will be the greater of that which would be purchased by the most
recent cost of insurance charge at the correct Age and sex, or the death
benefit derived by multiplying Accumulated Value by the death benefit
percentage for the correct Age and sex. If the Insured's Age or sex is
misstated in the application, the Accumulated Value will be modified by
recalculating all prior cost of insurance charges and other monthly deductions
based on the correct Age and sex. If unisex cost of insurance rates apply, no
adjustment will be made for a misstatement of sex. See "Cost of Insurance".
Incontestability
We may contest the validity of your Policy if any material misstatements are
made in the application. However, your Policy will be incontestable after the
expiration of the following: the initial Face Amount cannot be contested after
your Policy has been in force during the Insured's lifetime for two years from
the Policy Date; if the Insured is changed, your Policy cannot be contested
after it has been in force during the new Insured's lifetime for two years from
the effective date of the exchange; and an increase in the Face Amount cannot
be contested after the increase has been in force during an Insured's lifetime
for two years from its effective date.
Payment in Case of Suicide
If the Insured dies by suicide, while sane or insane, within two years from
the Policy Date, we will limit the death benefit proceeds to the premium
payments less any withdrawal amounts and less any Policy Debt. If the Insured
has been changed and the new Insured dies by suicide, while sane or insane,
within two years of the exchange date, the death benefit proceeds will be
limited to your Net Cash Surrender Value as of the exchange date, plus the
premiums paid since the exchange date, less the sum of any increases in Debt,
withdrawal amounts, and any dividends paid in cash since the exchange date. If
an Insured dies by suicide, while sane or insane, within two years of the
effective date of any increase in the Face Amount, we will refund the cost of
insurance charges made with respect to such increase.
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<PAGE>
Participating
The Policy is participating and will share in our surplus earnings. However,
the current dividend scale is zero and we do not anticipate that dividends will
be paid. Any dividends that do become payable will be paid in cash.
Policy Illustrations
Upon request, we will send you an illustration of future benefits under your
Policy based on both guaranteed and current cost factor assumptions. However,
we reserve the right to charge a $25 fee for requests for illustrations in
excess of one per Policy Year.
Payment Plan
Maturity, surrender, or withdrawal benefits may be used to purchase a payment
plan providing monthly income for the lifetime of the Insured, and death
benefit proceeds may be used to purchase a payment plan providing monthly
income for the lifetime of the Beneficiary. The monthly payments consisting of
proceeds plus interest will be paid in equal installments for at least ten
years. The purchase rates for the payment plan are guaranteed not to exceed
those shown in your Policy, but current rates that are lower (i.e., providing
greater income) may be established by us from time to time. This benefit is not
available if the income would be less than $25 a month. Maturity, surrender, or
withdrawal benefits or death benefit proceeds may be used to purchase any other
payment plan that we make available at that time.
Optional Insurance Benefits and Other Policies
At the time you complete the application for a Policy and subject to certain
requirements, you may elect to add one or more Riders to the Policy as optional
insurance benefits (subject to approval of state insurance authorities). These
optional benefits are: additional insurance coverage for the accidental death
of the Insured (Accidental Death Rider); term insurance on the Insured's
children (Children's Term Rider); annual renewal term insurance on the Insured
or any member of his or her immediate family (Annual Renewable Term Rider);
added protection benefit on the Insured (Added Protection Benefit Rider); the
right to purchase additional insurance on the Insured's life on certain
specified dates without proof of insurability (Guaranteed Insurability Rider);
additional protection in the event of a disability (Waiver of Charges Rider);
or early payment of coverage if the Insured is diagnosed with a terminal
illness (Accelerated Living Benefit Rider). The cost of any additional
insurance benefits will be deducted as part of the monthly deduction against
Accumulated Value. See "Charges and Deductions". The amounts of these benefits
are fully guaranteed at issue. Certain restrictions may apply and are described
in the applicable Rider. Under certain circumstances, a Policy can be combined
with an annual renewable term insurance rider (or added protection benefit
rider) to result in a combined coverage amount equal to the same Face Amount
that could be acquired under a single Policy. Combining a Policy and such a
benefit will result in certain charges, including a surrender charge and
possibly cost of insurance charges, for the Policy that are lower than for the
single Policy providing the same coverage amount. We offer other variable life
insurance policies that provide insurance protection on the life of a single
insured or on the lives of two insureds, whose loads and charges may vary. A
registered representative authorized to sell the Policy can describe these
extra benefits further. Samples of the provisions for the extra optional
benefits are available from us upon written request.
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 Insured dies.
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Ledger illustrations are available upon request that portray how the Policy
can be used as a funding mechanism for (non-qualified) supplemental retirement
income, referred to herein as "life insurance retirement plans," 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
illustrations or a comparison of retirement strategies will also be furnished
upon request. Any graphic presentations and retirement strategy charts must be
accompanied by a corresponding ledger illustration; ledger illustrations must
always include or be accompanied by comparable information that is based on
guaranteed cost of insurance rates and that presents a hypothetical gross rate
of return of 0%. Retirement illustrations will not be furnished with a
hypothetical gross rate of return in excess of 12%.
The hypothetical rates of return in ledger illustrations are illustrative
only and should not be interpreted as a representation of past or future
investment results. Policy values and benefits shown in the ledger
illustrations would be different if the gross annual investment rates of return
were different from the hypothetical rates portrayed, if premiums were not paid
when due, and loan interest was paid when due. Withdrawals or loans may have an
adverse effect on Policy benefits.
Risks Regarding Retirement Income Strategy Using Life Insurance
Using your Policy as a funding vehicle for retirement income purposes
presents several risks, including the risk that if your Policy is
insufficiently funded in relation to the income stream from your Policy, your
Policy can lapse prematurely and result in significant income tax liability to
you in the year in which the lapse occurs. Other risks associated with
borrowing from your Policy also apply. Loans will be automatically repaid from
the gross death benefit at the death of the Insured, resulting in the estimated
payment to the Beneficiary of the net death benefit, which will be less than
the gross death benefit and may be less than the Face Amount. Upon surrender or
maturity, the loan will be automatically repaid, resulting in the payment to
you of the Net Surrender Value. Similarly, upon lapse, the loan will be
automatically repaid. The automatic repayment of the loan upon maturity, lapse,
or surrender will cause the recognition of taxable income to the extent that
Net Surrender Value plus the amount of the repaid loan exceeds your basis in
the Policy. Thus, under certain circumstances, maturity, surrender, or lapse of
your Policy could result in tax liability to you. In addition, to reinstate a
lapsed Policy, you would be required to make certain payments as described
under "Reinstatement". Thus, you should be careful to fashion a life insurance
retirement plan so that your Policy will not lapse prematurely under various
market scenarios as a result of withdrawals and loans taken from your Policy.
Your Policy will lapse if your Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction on any Monthly Payment
Date, and a Grace Period expires without you making a sufficient payment. To
avoid lapse of your policy, it is important to fashion a payment stream that
does not leave your Policy with insufficient Accumulated Value. Determinations
as to the amount to withdraw or borrow each year warrant careful consideration.
Careful consideration should also be given to any assumptions respecting the
hypothetical rate of return, to the duration of withdrawals and loans, and to
the amount of Accumulated Value that should remain in your Policy upon its
maturity. Poor investment performance can contribute to the risk that your
Policy may lapse. In addition, the cost of insurance generally increases with
the Age of the Insured, which can further erode existing Accumulated Value and
contribute to the risk of lapse.
Further, interest on a Policy loan is due to us for any Policy Year on the
Policy Anniversary. If this interest is not paid when due, it is added to the
amount of the outstanding Policy Debt, and interest will begin accruing thereon
from that date. This can have a compounding effect, and to the extent that the
outstanding loan balance exceeds your basis in the Policy, the amounts
attributable to interest due on the loans can add to your federal (and possibly
state) income tax liability.
You should consult with your 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
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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 of 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
Pacific Mutual Distributors, Inc. ("PMD") is principal underwriter
(distributor) of the Policies. PMD is registered as a broker-dealer with the
SEC and is a member of the National Association of Securities Dealers ("NASD").
We pay PMD for acting as principal underwriter under a Distribution Agreement.
PMD is a subsidiary of ours. PMD's principal business address is 700 Newport
Center Drive, Newport Beach, California 92660.
We and PMD have sales agreements with various broker-dealers under which the
Policy will be sold by registered representatives of the broker-dealers. The
registered representatives are required to be authorized under applicable state
regulations to sell variable life insurance. The broker-dealers are required to
be registered with the SEC. We pay compensation directly to broker-dealers for
promotion and sales of the Policy. The compensation payable to a broker-dealer
for sales of the Policy may vary with the Sales Agreement, but the most common
schedule of commissions we pay is 90% of expected first year premiums
commissions, 4% of premiums paid through the 10th Policy Year and 2% premiums
paid thereafter. Broker-dealers may also receive annual renewal compensation of
up to .20% of Accumulated Value less Policy Debt, depending upon the
circumstances. The annual renewal compensation will be computed monthly and
payable starting on the fifth or the tenth Policy Year, depending upon the
circumstances. In addition, we may also pay override payments, expense
allowances, bonuses, wholesaler fees, and training allowances. Registered
representatives earn commissions from the broker-dealers with whom they are
affiliated for selling our Policies. Compensation arrangements vary among
broker-dealers. In addition, registered representatives who meet specified
production levels may qualify, under sales incentive programs adopted by us, to
receive non-cash compensation such as expense-paid trips, expense-paid
educational seminars and merchandise and may elect to receive compensation on a
deferred basis.
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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Position Principal Occupation During the Last Five Years
----------------- -----------------------------------------------
<S> <C>
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 (November 1998 to
February 1999) 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.
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; 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 91109.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Position Principal Occupation During the Last Five Years
----------------- -----------------------------------------------
<S> <C>
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, 9th Floor,
Newport Beach, California 92660.
Lynn C. Miller Executive Vice President, Individual Insurance, of Pacific
Executive Vice President Life, January 1995 to present; Senior Vice President,
Individual Insurance, of Pacific Life, 1989 to 1995;
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>
No officer or director listed above receives any compensation from the
Separate Account. No separately allocable compensation has been paid by us or
any of our affiliates to any person listed for services rendered to the
Account.
State Regulation
We are subject to the laws of the state of California governing insurance
companies and to regulation by the Commissioner of Insurance of California. In
addition, we are subject to the insurance laws and regulations of the other
states and jurisdictions in which we are licensed or may become licensed to
operate. An annual statement in a prescribed form must be filed with the
Commissioner of Insurance of California and with regulatory authorities of
other states on or before March 1st in each year. This statement covers our
operations for the preceding year and our financial condition as of December
31st of that year. Our affairs are subject to review and examination at any
time by the Commissioner of Insurance or his agents, and subject to full
examination of our operations at periodic intervals.
Telephone Transfer and Loan Privileges
You may request a transfer of Accumulated Value or a Policy Loan by telephone
if a properly completed Authorization for Telephone Requests ("Telephone
Authorization") has been filed at our Home Office. All or part of any telephone
conversation with respect to transfer or loan instructions may be recorded by
us. Telephone instructions received by us by 1:00 P.M. Pacific time on any
Valuation Date will be processed as of
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<PAGE>
the end of that Valuation Date in accordance with your instructions (presuming
that the Free-Look Period has expired). We reserve the right to deny any
telephone transfer or loan request. If all telephone lines are busy (which
might occur, for example, during periods of substantial market fluctuations),
you might not be able to request transfers and loans by telephone and would
have to submit written requests.
We have established procedures to confirm that instructions communicated by
telephone are genuine. Under the procedures, any person requesting a transfer
by telephone must provide certain personal identification as requested by us,
and we will send a written confirmation of all transfers requested by telephone
within 7 days of the transfer. Upon your submission of a Telephone
Authorization, you authorize us to accept and act upon telephone instructions
for transfers or loans involving your Policy, and agree that neither we, any of
our affiliates, Pacific Select Fund, nor any of our or their directors,
trustees, officers, employees or agents, will be liable for any loss, damages,
cost, or expense (including attorney's fees) arising out of any requests
effected in accordance with the Telephone Authorization and believed by us to
be genuine, provided that we have complied with our procedures. As a result of
this policy on telephonic requests, you will bear the risk of loss arising from
the telephone transfer and loan privileges.
Legal Proceedings
There are no legal proceedings pending to which the Separate Account is a
party, or which would materially affect the Separate Account.
Legal Matters
Legal matters in connection with the issue and sale of the Policies described
in this prospectus and our organization, our authority to issue the Policies
under California law, and the validity of the forms of the Policies under
California law have been passed on by our General Counsel.
Legal matters relating to the federal securities and federal income tax laws
have been passed upon by Dechert Price & Rhoads.
Registration Statement
A registration statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this prospectus. This prospectus
does not include all of the information set forth in the registration
statement, as portions have been omitted pursuant to the rules and regulations
of the SEC. The omitted information may be obtained at the SEC's principal
office in Washington, D.C., upon payment of the SEC's prescribed fees.
Preparation for the Year 2000
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.
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<PAGE>
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 stated in their reports appearing herein, and have been so
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
Financial Statements
The audited financial statements of Pacific Select Exec Separate Account as
of December 31, 1998 and for the two years then ended are set forth herein,
starting on page 47. The audited consolidated financial statements of Pacific
Life as of December 1998 and 1997 and for the three years ended December 31,
1998 are set forth herein starting on page 59.
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.
46
<PAGE>
<TABLE>
<CAPTION>
INDEPENDENT AUDITORS' REPORT
<S> <C>
The Board of Directors
Pacific Life Insurance Company
We have audited the accompanying statement includes assessing the accounting principles
of assets and liabilities of Pacific Select used and significant estimates made by
Exec Separate Account (comprised of the Money management, as well as evaluating the overall
Market, High Yield Bond, Managed Bond, financial statement presentation. We believe
Government Securities, Growth, Aggressive that our audits provide a reasonable basis for
Equity, Growth LT, Equity Income, Multi- our opinion.
Strategy, Equity, Bond and Income, Equity
Index, International, Emerging Markets, In our opinion, such financial statements
Variable Account I, Variable Account II, present fairly, in all material respects, the
Variable Account III, and Variable Account IV financial position of each of the respective
Variable Accounts) as of December 31, 1998 and Variable Accounts constituting Pacific Select
the related statement of operations for the Exec Separate Account as of December 31, 1998
year then ended and statement of changes in and the results of their operations for the
net assets for each of the two years in the year then ended and the changes in their net
period then ended (as to the Equity Variable assets for each of the two years in the period
Account and the Bond and Income Variable then ended (as to the Equity Variable Account
Account, for the year ended December 31, 1998 and the Bond and Income Variable Account, for
and for the period from commencement of the year ended December 31, 1998 and for the
operations through December 31, 1997). These period from commencement of operations through
financial statements are the responsibility of December 31, 1997), in conformity with
the Separate Account's management. Our generally accepted accounting principles.
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 DELOITTE & TOUCHE LLP
whether the financial statements are free of
material misstatement. An audit includes Costa Mesa, California
examining, on a test basis, evidence February 5, 1999
supporting the amounts and disclosures in the
financial statements. An audit also
47
</TABLE>
<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
--------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
48
<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
49
<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
-------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
50
<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
51
<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
--------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
52
<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
53
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
High Govern-
Money Yield Managed ment Aggressive Growth Equity Multi-
Market Bond Bond Securities Growth Equity LT Income Strategy
Variable Variable Variable Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account Account Account Account
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS
Net investment income.. $2,072 $2,559 $3,893 $498 $14,427 $4,656 $7,127 $7,530
Net realized gain from
security transactions.. 94 454 367 96 6,822 $101 3,899 3,288 695
Net unrealized
appreciation
(depreciation) on
investments............ (121) (335) 1,844 306 15,323 230 1,609 16,626 8,279
--------------------------------------------------------------------------------------------
Net Increase in Net
Assets
Resulting from
Operations.............. 2,045 2,678 6,104 900 36,572 331 10,164 27,041 16,504
--------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS FROM POLICY
TRANSACTIONS
Transfer of net
premiums............... 114,902 6,516 11,008 2,026 28,003 2,091 27,890 20,805 20,699
Transfers--policy
charges and
deductions............. (4,303) (1,844) (2,926) (587) (9,059) (469) (6,771) (5,873) (4,507)
Transfers in (from
other variable
accounts).............. 133,629 17,591 15,603 5,190 61,551 12,131 34,622 27,826 9,864
Transfers out (to other
variable accounts)..... (214,125) (15,732) (11,609) (4,376) (46,874) (7,838) (39,146) (18,793) (5,914)
Transfers--other....... (7,489) (1,439) (14,668) (562) (10,114) (104) (5,388) (5,380) (2,426)
--------------------------------------------------------------------------------------------
Net Increase (Decrease)
in Net Assets Derived
from Policy
Transactions............ 22,614 5,092 (2,592) 1,691 23,507 5,811 11,207 18,585 17,716
--------------------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS.................. 24,659 7,770 3,512 2,591 60,079 6,142 21,371 45,626 34,220
--------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year....... 27,425 25,937 69,000 7,830 119,910 3,331 89,067 85,860 79,132
--------------------------------------------------------------------------------------------
End of Year............. $52,084 $33,707 $72,512 $10,421 $179,989 $9,473 $110,438 $131,486 $113,352
--------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
54
<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
55
<PAGE>
<TABLE>
<CAPTION>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
<S> <C>
1. SIGNIFICANT ACCOUNTING POLICIES and liabilities at the date of the financial
statements and the reported amounts of income
The Pacific Select Exec Separate Account and expenses during the reporting period.
(the "Separate Account") is registered as a Actual results could differ from those
unit investment trust under the Investment 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 Variable Investments in shares of the Funds are
Account, the Managed Bond Variable Account, valued at the reported net asset values of the
the Government Securities Variable Account, respective portfolios. Valuation of securities
the Growth Variable Account, the Aggressive held by the Funds is discussed in the notes to
Equity Variable Account, the Growth LT their financial statements.
Variable Account, the Equity Income Variable
Account, the Multi-Strategy Variable Account, B. Security Transactions
the Equity Variable Account, the Bond and
Income Variable Account, the Equity Index Transactions are recorded on the trade date.
Variable Account, the International Variable Realized gains and losses on sales of
Account, the Emerging Markets Variable investments are determined on the basis of
Account, and the Variable Accounts I through identified cost.
IV. The assets in each of the first fourteen
Variable Accounts are invested in shares of C. Federal Income Taxes
the corresponding portfolios of Pacific Select
Fund and the assets of the last four Variable The operations of the Separate Account will
Accounts are invested in shares of the be reported on the Federal income tax return
corresponding portfolios of M Fund, Inc. of Pacific Life, which is taxed as a life
(collectively, the "Funds"). Each Variable insurance company under the provisions of the
Account pursues different investment Tax Reform Act of 1986. Under current tax law,
objectives and policies. The financial no Federal income taxes are expected to be
statements of the Funds, including the paid by Pacific Life with respect to the
schedules of investments, are either included operations of the Separate Account.
in Section B of this report or provided
separately and should be read in conjunction 2. DIVIDENDS
with the Separate Account's financial
statements. During 1998, the Funds declared dividends
for each portfolio. The amounts accrued by the
The Separate Account was established by Separate Account for its share of the
Pacific Life Insurance Company (formerly named dividends were reinvested in additional full
Pacific Mutual Life Insurance Company--see and fractional shares of the related
Note 1 to Financial Statements of the Fund on portfolio.
B-58) on May 12, 1988 and commenced operations
on November 22, 1988. Under applicable 3. CHARGES AND EXPENSES
insurance law, the assets and liabilities of
the Separate Account are clearly identified With respect to variable life insurance
and distinguished from the other assets and policies funded by the Separate Account,
liabilities of Pacific Life. The assets of the Pacific Life makes certain deductions from
Separate Account will not be charged with any premiums for sales load and state premium
liabilities arising out of any other business taxes before amounts are allocated to the
conducted by Pacific Life, but the obligations Separate Account. Pacific Life also makes
of the Separate Account, including benefits certain deductions from the net assets of each
related to variable life insurance, are Variable Account for the mortality and expense
obligations of Pacific Life. risks Pacific Life assumes, administrative
expenses, cost of insurance, charges for
The Separate Account held by Pacific Life optional benefits and any sales and
represents funds from individual flexible underwriting surrender charges. The operating
premium variable life policies. The assets of expenses of the Separate Account are paid by
the Separate Account are carried at market Pacific Life.
value.
4. RELATED PARTY AGREEMENT
The preparation of the accompanying
financial statements requires management to Pacific Mutual Distributors, Inc., a wholly-
make estimates and assumptions that affect the owned subsidiary of Pacific Life, serves as
reported amounts of assets principal underwriter of variable life
insurance policies funded by interests in the
Separate Account, without remuneration from
the Separate Account.
</TABLE>
56
<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>
57
<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
year $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.
58
<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
59
<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
- ------------------------------------------------------------------------------
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
60
<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
61
<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
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
62
<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
63
<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
- -----------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<S> <C>
Cash $1,215.9
Policy loans 440.3
Other assets 43.4
--------
Total assets assumed $1,699.6
========
Policyholder account values $1,693.8
Other liabilities 5.8
--------
Total liabilities assumed $1,699.6
========
</TABLE>
- -----------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion 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
<TABLE>
<S> <C> <C> <C>
Income taxes paid $127.9 $153.0 $189.6
Interest paid $ 24.0 $ 26.1 $ 27.3
- -----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
64
<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."
65
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
66
<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.
67
<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.
68
<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.
69
<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
------------------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
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>
70
<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
71
<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.
72
<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>
73
<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
--------------------------
(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>
74
<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>
75
<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.
76
<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.
77
<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.
78
<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>
79
<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>
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>
80
<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>
81
<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>
82
<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
-------------------------
(In Millions)
<S> <C> <C> <C>
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>
83
<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 premiums $ 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>
84
<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.
85
<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
</TABLE>
86
<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>
87
<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
88
<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
89
<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>
<CAPTION>
Years Ending December 31:
-------------------------
<S> <C>
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.
90
<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.
----------------------------------------------------------------------------
91
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<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
--------------------------------------------------------------------------------
If you ask us, we'll provide you with Illustrations 1 through 6, which appear on the following pages, illustrate how
different kinds of illustrations: the death benefit, Accumulated Value and Net Cash Surrender Value of a
hypothetical Policy may vary over an extended period of time, based on certain
. Illustrations similar to the ones in this hypothetical rates of return.
prospectus, but based on information
you give us about the Age of the person These illustrations are based on a hypothetical Policy with the following
to be insured by the Policy, their risk characteristics:
class, the Face Amount, the death
benefit and premium payments. . the Face Amount for Illustrations 1, 2, 5 and 6 is $560,331
. Illustrations that show the allocation of . the Face Amount for Illustrations 3 and 4 is $223,019
premium payments to specified Variable
Accounts. These will reflect the . the annual premium is $10,000
expenses of the Portfolio of the Fund in
which the Variable Account invests. . on the Policy Date, the person insured by the Policy is:
- a 40-year old male select non-smoker
. Illustrations that use a hypothetical gross
rate of return that's greater than 12%. The death benefit option and the cost of insurance rates vary by illustration,
These are available only to certain large as follows:
institutional investors.
---------------------------------------------------------------------
Death benefit Cost of insurance rate
---------------------------------------------------------------------
Illustration 1 Option A Current
Illustration 2 Option A Guaranteed
Illustration 3 Option B Current
Illustration 4 Option B Guaranteed
Illustration 5 Option Current
Illustration 6 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%.
. All premium payments are made at the beginning of the Policy Year.
. 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.
. 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 . Illustrations 1 to 4 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
Pacific Select Exec. fees of .69% and average expenses of .08% based upon fees and expenses of
Portfolios available as Investment Options under the Policy.
. Illustrations 5 and 6 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.
</TABLE>
92
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<TABLE>
<S> <C>
. 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 4 and -.72%, 5.24% and 11.19% for
illustrations 5 and 6.
. The amounts shown would be different if unisex insurance rates were used or if
the person insured by the Policy was female and insurance rates for females
were used.
. For the illustrations that assume 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 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%
----------------------------------------------
93
</TABLE>
<PAGE>
ILLUSTRATIONS
<TABLE>
<CAPTION>
<S> <C>
--------------------------------------------------------------------------------
Illustration 1
Death benefit Option A at current cost of insurance rates
Based on average annual advisory fees and expenses of the Portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT:$560,331
MALE SELECT NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
-------------------------------------------------------------------------------
Flexible premium survivorship 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%
All premium payments are illustrated as if -------------------------------------------------------------------------------
made at the beginning of the Policy Year. 1 $10,500 $560,331 $560,331 $560,331
2 $21,525 $560,331 $560,331 $560,331
This illustration assumes no Policy loans or 3 $33,101 $560,331 $560,331 $560,331
Partial Withdrawals have been made. 4 $45,256 $560,331 $560,331 $560,331
5 $58,019 $560,331 $560,331 $560,331
The death benefits, Accumulated Values and 6 $71,420 $560,331 $560,331 $560,331
Cash Surrender Values will differ if premiums 7 $85,491 $560,331 $560,331 $560,331
are paid in different amounts or frequencies. 8 $100,266 $560,331 $560,331 $560,331
9 $115,779 $560,331 $560,331 $560,331
The hypothetical investment rates shown 10 $132,068 $560,331 $560,331 $560,331
above and elsewhere in this prospectus are 15 $226,575 $560,331 $560,331 $560,331
illustrative only and should not be 20 $347,193 $560,331 $560,331 $750,501
interpreted as a representation of past 25 $501,135 $560,331 $560,331 $1,212,225
or future investment results. Actual rates 30 $697,608 $560,331 $630,095 $1,983,329
of return may be more or less than those 35 $948,363 $560,331 $789,316 $3,099,008
shown and will depend on a number of factors, -------------------------------------------------------------------------------
including the investment allocations made to End of year End of year
Variable Accounts by the Owner and the ACCUMULATED VALUE NET CASH SURRENDER VALUE
experience of the Accounts. No representation End of assuming hypothetical gross assuming hypothetical gross
can be made by us, the Separate Account or Policy annual investment return of annual investment return of
the Fund that these hypothetical rates of Year 0% 6% 12% 0% 6% 12%
return can be achieved for any one year or -------------------------------------------------------------------------------
sustained over any period of time. 1 $8,022 $8,538 $9,053 $3,804 $4,320 $4,836
2 $15,952 $17,482 $19,074 $11,734 $13,264 $14,856
This is an illustration only. An illustration 3 $23,545 $26,599 $29,905 $19,327 $22,382 $25,687
is not intended to predict actual performance. 4 $30,987 $36,085 $41,824 $26,769 $31,868 $37,606
Interest rates, dividends, and values set 5 $38,283 $45,961 $54,952 $34,065 $41,743 $50,734
forth in the illustration are not guaranteed. 6 $45,438 $56,247 $69,420 $42,063 $52,873 $66,046
7 $52,456 $66,968 $85,377 $49,926 $64,437 $82,847
8 $59,343 $78,148 $102,986 $57,656 $76,461 $101,298
9 $66,104 $89,812 $122,426 $65,260 $88,968 $121,583
10 $72,742 $101,987 $143,899 $72,742 $101,987 $143,899
15 $107,518 $176,675 $298,725 $107,518 $176,675 $298,725
20 $138,680 $271,226 $560,075 $138,680 $271,226 $560,075
25 $162,383 $390,012 $993,627 $162,383 $390,012 $993,627
30 $175,602 $543,185 $1,709,766 $175,602 $543,185 $1,709,766
35 $172,527 $737,679 $2,896,269 $172,527 $737,679 $2,896,269
-------------------------------------------------------------------------------
</TABLE>
94
<PAGE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Illustration 2
Death benefit Option A at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the Portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT:$560,331
MALE SELECT NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
-------------------------------------------------------------------------------
Flexible premium survivorship 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%
All premium payments are illustrated as if ------------------------------------------------------------------------------
made at the beginning of the Policy Year. 1 $10,500 $560,331 $560,331 $560,331
2 $21,525 $560,331 $560,331 $560,331
This illustration assumes no Policy loans or 3 $33,101 $560,331 $560,331 $560,331
Partial Withdrawals have been made. 4 $45,256 $560,331 $560,331 $560,331
5 $58,019 $560,331 $560,331 $560,331
*Additional payment will be required to 6 $71,420 $560,331 $560,331 $560,331
prevent Policy termination. 7 $85,491 $560,331 $560,331 $560,331
8 $100,266 $560,331 $560,331 $560,331
The death benefits, Accumulated Values 9 $115,779 $560,331 $560,331 $560,331
and Cash Surrender Values will differ if 10 $132,068 $560,331 $560,331 $560,331
premiums are paid in different amounts or 15 $226,575 $560,331 $560,331 $560,331
frequencies. 20 $347,193 $560,331 $560,331 $651,703
25 $501,135 $560,331 $560,331 $1,047,527
The hypothetical investment rates shown 30 $697,608 $560,331 $560,331 $1,697,630
above and elsewhere in this prospectus 35 $948,363 $0* $579,249 $2,625,733
are illustrative only and should not be ------------------------------------------------------------------------------
interpreted as a representation of past or End of year End of year
future investment results. Actual rates of ACCUMULATED VALUE NET CASH SURRENDER VALUE
return may be more or less than those End of assuming hypothetical gross assuming hypothetical gross
shown and will depend on a number of Policy annual investment return of annual investment return of
factors, including the investment Year 0% 6% 12% 0% 6% 12%
allocations made to Variable Accounts by ------------------------------------------------------------------------------
the Owner and the experience of the 1 $7,277 $7,769 $8,261 $3,059 $3,551 $4,044
Accounts. No representation can be 2 $14,499 $15,938 $17,438 $10,281 $11,720 $13,220
made by us, the Separate Account or the 3 $21,491 $24,347 $27,441 $17,273 $20,129 $23,223
Fund that these hypothetical rates of 4 $28,239 $32,989 $38,344 $24,021 $28,771 $34,126
return can be achieved for any one year 5 $34,744 $41,877 $50,244 $30,526 $37,659 $46,026
or sustained over any period of time. 6 $40,992 $51,006 $63,237 $37,618 $47,632 $59,862
7 $46,986 $60,391 $77,444 $44,456 $57,860 $74,913
This is an illustration only. An illustration 8 $52,718 $70,036 $92,994 $51,031 $68,349 $91,307
is not intended to predict actual 9 $58,184 $79,951 $110,036 $57,341 $79,108 $109,192
performance. Interest rates, dividends, and 10 $63,367 $90,135 $128,726 $63,367 $90,135 $128,726
values set forth in the illustration are not 15 $87,233 $149,643 $261,583 $87,233 $149,643 $261,583
guaranteed. 20 $100,472 $218,777 $486,346 $100,472 $218,777 $486,346
25 $98,057 $300,588 $858,629 $98,057 $300,588 $858,629
30 $68,030 $401,448 $1,463,474 $68,030 $401,448 $1,463,474
35 $0* $541,354 $2,453,956 $0* $541,354 $2,453,956
------------------------------------------------------------------------------
95
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
------------------------------------------------------------------------------
Illustration 3
Death benefit Option B at current cost of insurance rates
Based on average annual advisory fees and expenses of the Portfolios
DEATH BENEFIT OPTION:B
FACE AMOUNT:$223,019
MALE SELECT NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
------------------------------------------------------------------------------
Flexible premium survivorship 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%
All premium payments are illustrated as if ------------------------------------------------------------------------------
made at the beginning of the Policy Year. 1 $10,500 $231,547 $232,078 $232,609
2 $21,525 $240,084 $241,678 $243,335
This illustration assumes no Policy loans or 3 $33,101 $248,271 $251,472 $254,932
Partial Withdrawals have been made. 4 $45,256 $256,316 $261,678 $267,704
5 $58,019 $264,222 $272,314 $281,774
The death benefits, Accumulated Values 6 $71,420 $271,990 $283,401 $297,275
and Cash Surrender Values will differ if 7 $85,491 $279,625 $294,957 $314,357
premiums are paid in different amounts or 8 $100,266 $287,128 $307,005 $333,182
frequencies. 9 $115,779 $294,501 $319,567 $353,932
10 $132,068 $301,748 $332,666 $376,804
The hypothetical investment rates shown 15 $226,575 $339,604 $412,465 $540,210
above and elsewhere in this prospectus 20 $347,193 $374,931 $513,255 $813,132
are illustrative only and should not be 25 $501,135 $404,899 $637,301 $1,271,808
interpreted as a representation of past or 30 $697,608 $427,583 $788,426 $2,077,025
future investment results. Actual rates of 35 $948,363 $439,777 $969,954 $3,252,411
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 ------------------------------------------------------------------------------
Fund that these hypothetical rates of 1 $8,528 $9,059 $9,590 $6,849 $7,380 $7,912
return can be achieved for any one year 2 $17,065 $18,659 $20,317 $15,386 $16,980 $18,638
or sustained over any period of time. 3 $25,252 $28,453 $31,913 $23,574 $26,774 $30,234
4 $33,297 $38,659 $44,685 $31,619 $36,980 $43,006
This is an illustration only. An illustration 5 $41,203 $49,296 $58,755 $39,524 $47,617 $57,076
is not intended to predict actual 6 $48,972 $60,382 $74,257 $47,629 $59,039 $72,914
performance. Interest rates, dividends, and 7 $56,606 $71,938 $91,338 $55,599 $70,931 $90,331
values set forth in the illustration are not 8 $64,109 $83,986 $110,164 $63,437 $83,315 $109,492
guaranteed. 9 $71,483 $96,548 $130,913 $71,147 $96,212 $130,577
10 $78,730 $109,647 $153,785 $78,730 $109,647 $153,785
15 $116,585 $189,446 $317,191 $116,585 $189,446 $317,191
20 $151,912 $290,236 $590,113 $151,912 $290,236 $590,113
25 $181,880 $414,282 $1,042,466 $181,880 $414,282 $1,042,466
30 $204,564 $565,407 $1,790,539 $204,564 $565,407 $1,790,539
35 $216,758 $746,936 $3,029,392 $216,758 $746,936 $3,029,392
------------------------------------------------------------------------------
</TABLE>
96
<PAGE>
<TABLE>
<S> <C>
------------------------------------------------------------------------------
Illustration 4
Death benefit Option B at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the Portfolios
DEATH BENEFIT OPTION:B
FACE AMOUNT:$223,019
MALE SELECT NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
------------------------------------------------------------------------------
Flexible premium survivorship 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%
All premium payments are illustrated as if ------------------------------------------------------------------------------
made at the beginning of the Policy Year. 1 $10,500 $231,278 $231,801 $232,324
2 $21,525 $239,532 $241,092 $242,715
This illustration assumes no Policy loans or 3 $33,101 $247,602 $250,730 $254,113
Partial Withdrawals have been made. 4 $45,256 $255,481 $260,722 $266,614
5 $58,019 $263,171 $271,081 $280,328
The death benefits, Accumulated Values 6 $71,420 $270,664 $281,812 $295,372
and Cash Surrender Values will differ if 7 $85,491 $277,963 $292,932 $311,879
premiums are paid in different amounts or 8 $100,266 $285,064 $304,450 $329,995
frequencies. 9 $115,779 $291,964 $316,379 $349,879
10 $132,068 $298,656 $328,725 $371,702
The hypothetical investment rates shown 15 $226,575 $331,942 $402,064 $525,526
above and elsewhere in this prospectus 20 $347,193 $358,650 $489,672 $776,660
are illustrative only and should not be 25 $501,135 $376,517 $592,490 $1,187,492
interpreted as a representation of past or 30 $697,608 $381,089 $709,062 $1,896,430
future investment results. Actual rates of 35 $948,363 $365,612 $834,811 $2,953,403
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 ------------------------------------------------------------------------------
Fund that these hypothetical rates of 1 $8,260 $8,782 $9,305 $6,581 $7,103 $7,626
return can be achieved for any one year 2 $16,513 $18,073 $19,696 $14,835 $16,395 $18,017
or sustained over any period of time. 3 $24,583 $27,712 $31,094 $22,904 $26,033 $29,416
4 $32,462 $37,703 $43,595 $30,783 $36,025 $41,916
This is an illustration only. An illustration 5 $40,152 $48,062 $57,310 $38,473 $46,383 $55,631
is not intended to predict actual 6 $47,646 $58,794 $72,353 $46,303 $57,451 $71,010
performance. Interest rates, dividends, and 7 $54,945 $69,913 $88,860 $53,937 $68,906 $87,853
values set forth in the illustration are not 8 $62,045 $81,431 $106,976 $61,373 $80,760 $106,304
guaranteed. 9 $68,945 $93,360 $126,860 $68,609 $93,024 $126,524
10 $75,637 $105,706 $148,684 $75,637 $105,706 $148,684
15 $108,923 $179,045 $302,507 $108,923 $179,045 $302,507
20 $135,632 $266,654 $553,641 $135,632 $266,654 $553,641
25 $153,498 $369,471 $964,473 $153,498 $369,471 $964,473
30 $158,070 $486,043 $1,634,853 $158,070 $486,043 $1,634,853
35 $142,593 $611,792 $2,730,385 $142,593 $611,792 $2,730,385
------------------------------------------------------------------------------
97
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<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
------------------------------------------------------------------------------
Illustration 5
Death benefit Option A at current cost of insurance rates
Based on a weighted average of annual advisory fees and
expenses of the Portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT:$560,331
MALE SELECT NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
------------------------------------------------------------------------------
Flexible premium survivorship 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%
All premium payments are illustrated as if ------------------------------------------------------------------------------
made at the beginning of the policy year. 1 $10,500 $560,331 $560,331 $560,331
2 $21,525 $560,331 $560,331 $560,331
This illustration assumes no policy loans or 3 $33,101 $560,331 $560,331 $560,331
Partial Withdrawals have been made. 4 $45,256 $560,331 $560,331 $560,331
5 $58,019 $560,331 $560,331 $560,331
*Additional payment will be required to 6 $71,420 $560,331 $560,331 $560,331
prevent Policy termination. 7 $85,491 $560,331 $560,331 $560,331
8 $100,266 $560,331 $560,331 $560,331
The death benefits, Accumulated Values 9 $115,779 $560,331 $560,331 $560,331
and Cash Surrender Values will differ if 10 $132,068 $560,331 $560,331 $560,331
premiums are paid in different amounts or 15 $226,575 $560,331 $560,331 $560,331
frequencies. 20 $347,193 $560,331 $560,331 $743,666
25 $501,135 $560,331 $560,331 $1,202,263
The hypothetical investment rates shown 30 $697,608 $560,331 $617,924 $1,967,539
above and elsewhere in this prospectus 35 $948,363 $560,331 $775,213 $3,074,925
are illustrative only and should not be ------------------------------------------------------------------------------
interpreted as a representation of past or End of year End of year
future investment results. Actual rates of ACCUMULATED VALUE NET CASH SURRENDER VALUE
return may be more or less than those End of assuming hypothetical gross assuming hypothetical gross
shown and will depend on a number of Policy annual investment return of annual investment return of
factors, including the investment Year 0% 6% 12% 0% 6% 12%
allocations made to Variable Accounts by ------------------------------------------------------------------------------
the Owner and the experience of the 1 $7,835 $8,344 $8,854 $3,617 $4,126 $4,636
Accounts. No representation can be 2 $15,764 $17,277 $18,852 $11,546 $13,059 $14,634
made by us, the Separate Account or the 3 $23,358 $26,385 $29,660 $19,140 $22,167 $25,442
Fund that these hypothetical rates of 4 $30,770 $35,830 $41,525 $26,553 $31,612 $37,307
return can be achieved for any one year 5 $38,004 $45,631 $54,561 $33,786 $41,413 $50,343
or sustained over any period of time. 6 $45,067 $55,810 $68,902 $41,693 $52,436 $65,528
7 $51,966 $66,393 $84,696 $49,435 $63,862 $82,165
This is an illustration only. An illustration is 8 $58,709 $77,405 $102,106 $57,022 $75,718 $100,419
not intended to predict actual 9 $65,302 $88,873 $121,315 $64,458 $88,030 $120,471
performance. Interest rates, dividends, and 10 $71,752 $100,826 $142,524 $71,752 $100,826 $142,524
values set forth in the illustration are not 15 $105,313 $174,040 $295,630 $105,313 $174,040 $295,630
guaranteed. 20 $134,677 $266,511 $554,975 $134,677 $266,511 $554,975
25 $155,233 $382,403 $985,462 $155,233 $382,403 $985,462
30 $162,882 $532,693 $1,696,154 $162,882 $532,693 $1,696,154
35 $149,419 $724,498 $2,873,762 $149,419 $724,498 $2,873,762
------------------------------------------------------------------------------
</TABLE>
98
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<TABLE>
<S> <C>
------------------------------------------------------------------------------
Illustration 6
Death benefit Option A at guaranteed cost of insurance rates
Based on a weighted average of annual advisory fees and expenses of the
Portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT: $560,331
MALE NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
------------------------------------------------------------------------------
Flexible premium survivorship 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%
All premium payments are illustrated as if ------------------------------------------------------------------------------
made at the beginning of the Policy Year. 1 $10,500 $560,331 $560,331 $560,331
2 $21,525 $560,331 $560,331 $560,331
This illustration assumes no Policy loans or 3 $33,101 $560,331 $560,331 $560,331
Partial Withdrawals have been made. 4 $45,256 $560,331 $560,331 $560,331
5 $58,019 $560,331 $560,331 $560,331
*Additional payment will be required to 6 $71,420 $560,331 $560,331 $560,331
prevent Policy termination. 7 $85,491 $560,331 $560,331 $560,331
8 $100,266 $560,331 $560,331 $560,331
The death benefits, Accumulated Values 9 $115,779 $560,331 $560,331 $560,331
and Cash Surrender Values will differ if 10 $132,068 $560,331 $560,331 $560,331
premiums are paid in different amounts or 15 $226,575 $560,331 $560,331 $560,331
frequencies. 20 $347,193 $560,331 $560,331 $656,537
25 $501,135 $560,331 $560,331 $1,057,306
The hypothetical investment rates shown 30 $697,608 $560,331 $560,331 $1,717,035
above and elsewhere in this prospectus 35 $948,363 $0* $589,841 $2,661,593
are illustrative only and should not be ------------------------------------------------------------------------------
interpreted as a representation of past or End of year End of year
future investment results. Actual rates of ACCUMULATED VALUE NET CASH SURRENDER VALUE
return may be more or less than those End of assuming hypothetical gross assuming hypothetical gross
shown and will depend on a number of Policy annual investment return of annual investment return of
factors, including the investment Year 0% 6% 12% 0% 6% 12%
allocations made to Variable Accounts by ------------------------------------------------------------------------------
the Owner and the experience of the 1 $7,281 $7,773 $8,266 $3,063 $3,555 $4,048
Accounts. No representation can be 2 $14,511 $15,951 $17,452 $10,293 $11,733 $13,234
made by us, the Separate Account or the 3 $21,514 $24,373 $27,471 $17,296 $20,155 $23,253
Fund that these hypothetical rates of 4 $28,276 $33,034 $38,397 $24,058 $28,816 $34,179
return can be achieved for any one year 5 $34,799 $41,945 $50,329 $30,581 $37,728 $46,112
or sustained over any period of time. 6 $41,068 $51,105 $63,363 $37,694 $47,730 $59,989
7 $47,086 $60,526 $77,624 $44,555 $57,995 $75,093
This is an illustration only. An illustration 8 $52,844 $70,213 $93,241 $51,157 $68,526 $91,554
is not intended to predict actual 9 $58,339 $80,178 $110,367 $57,495 $79,335 $109,524
performance. Interest rates, dividends, and 10 $63,554 $90,420 $129,160 $63,554 $90,420 $129,160
values set forth in the illustration are not 15 $87,620 $150,378 $262,976 $87,620 $150,378 $262,976
guaranteed. 20 $101,117 $220,325 $489,953 $101,117 $220,325 $489,953
25 $99,007 $303,548 $866,644 $99,007 $303,548 $866,644
30 $69,328 $406,941 $1,480,203 $69,328 $406,941 $1,480,203
35 $0* $551,253 $2,487,470 $0* $551,253 $2,487,470
------------------------------------------------------------------------------
99
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APPENDIX
DEATH BENEFIT PERCENTAGES
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<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
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100
<PAGE>
PACIFIC SELECT EXEC WHERE TO GO FOR MORE INFORMATION
The Pacific Select Exec For more information about Pacific Select Exec,
variable life insurance please call or write to us at the address below.
policy is underwritten by You should also use this address to send us any
Pacific Life Insurance 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
<PAGE>
Supplement to Prospectus Dated May 1, 1999 for
Pacific Select Exec
Flexible Premium Variable Life Insurance Policies
Issued by Pacific Life Insurance Company
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<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 M Variable Account II: Turner Core Growth Fund
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 Exec prospectus.
Pacific Select Exec is described in detail
in the accompanying variable life INFORMATION ABOUT M FUND
insurance prospectus. Except as described
below, all features and procedures of M Fund, Inc.
the Policy described in its prospectus M Fund is a diversified, open-end management investment company registered with
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
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<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 operation M Financial Investment Advisers, Inc. (MFIA) is the investment adviser for each
of the M Fund or any of its Portfolios. Portfolio of the M Fund, and has retained other firms to manage the Portfolios.
We also are not responsible for ensuring MFIA and the M Fund's Board of Directors oversee the management of all of the M
that the M Fund and its Portfolios comply Fund's Portfolios.
with any laws that apply.
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2
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<S> <C>
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
Exec in the accompanying variable life assets of each Portfolio and may vary from year to year. They are not fixed and
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 and Portfolio returns.
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
<S> <C>
--------------------------------------------------------------------------------
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 Age of the person to be insured by characteristics:
the Policy, their risk class, the Face
Amount, the death benefit and premium . the Face Amount is $560,331
payments.
. the annual premium is $10,000
. Illustrations that show the allocation
of premium payments to specified . on the Policy Date, the person insured by the Policy is a 40-year old male
Variable Accounts. These will reflect select non-smoker
the 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 Cost of insurance rate
gross rate of return that's greater than ----------------------------------------------
12%. These are available only to certain Illustration 1 Current
large 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%.
. All premium payments are made at the beginning of the Policy Year.
. 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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4
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<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 Pacific Select Fund's investment . The Illustrations assume total annual advisory fees and expenses of .80% of
advisory fees and expenses are shown in An total average daily net assets of the Fund. This reflects average advisory
Overview of Pacific Select Exec. fees of .69% and average expenses of .11% based upon fees and expenses of
Portfolios available as Investment Options under the Policy.
The M Fund's investment advisory fees and
expenses are shown on page 3 of this . There are no charges against the Variable Accounts for income taxes but we
supplement. 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 -.80%,
5.15%, and 11.10%.
. The amounts shown would be different if unisex insurance rates were used or if
the person insured by the Policy was female and insurance rates for females
were used.
. 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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<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Illustration 1
Death benefit Option A at current cost of insurance rates
Based on average annual advisory fees and expenses of the Portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT:$560,331
MALE SELECT NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
-------------------------------------------------------------------------------
Flexible 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%
All premium payments are illustrated as if -------------------------------------------------------------------------------
made at the beginning of the Policy Year. 1 $10,500 $560,331 $560,331 $560,331
2 $21,525 $560,331 $560,331 $560,331
This illustration assumes no Policy loans or 3 $33,101 $560,331 $560,331 $560,331
Partial Withdrawals have been made. 4 $45,256 $560,331 $560,331 $560,331
5 $58,019 $560,331 $560,331 $560,331
The death benefits, Accumulated Values 6 $71,420 $560,331 $560,331 $560,331
and Net Cash Surrender Values will differ 7 $85,491 $560,331 $560,331 $560,331
if premiums are paid in different amounts 8 $100,266 $560,331 $560,331 $560,331
or frequencies. 9 $115,779 $560,331 $560,331 $560,331
10 $132,068 $560,331 $560,331 $560,331
The hypothetical investment rates shown 15 $226,575 $560,331 $560,331 $560,331
above and elsewhere in this prospectus 20 $347,193 $560,331 $560,331 $735,419
are illustrative only and should not be 25 $501,135 $560,331 $560,331 $1,185,141
interpreted as a representation of past or 30 $697,608 $560,331 $607,641 $1,932,896
future investment results. Actual rates of 35 $948,363 $560,331 $760,306 $3,009,959
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 $7,828 $8,337 $8,846 $3,610 $4,119 $4,629
rates of return can be achieved for 2 $15,744 $17,255 $18,827 $11,526 $13,037 $14,610
any one year or sustained over any period 3 $23,319 $26,340 $29,609 $19,101 $22,122 $25,391
of time. 4 $30,707 $35,754 $41,434 $26,489 $31,536 $37,216
5 $37,910 $45,514 $54,416 $33,692 $41,296 $50,199
This is an illustration only. An illustration 6 $44,937 $55,642 $68,686 $41,563 $52,268 $65,312
is not intended to predict actual performance. 7 $51,795 $66,163 $84,388 $49,264 $63,632 $81,857
Interest rates, dividends, and values set 8 $58,492 $77,101 $101,682 $56,805 $75,413 $99,995
forth in the illustration are not guaranteed. 9 $65,034 $88,482 $120,747 $64,190 $87,638 $119,903
10 $71,428 $100,334 $141,780 $71,428 $100,334 $141,780
15 $104,629 $172,763 $293,240 $104,629 $172,763 $293,240
20 $133,511 $263,821 $548,820 $133,511 $263,821 $548,820
25 $153,465 $377,303 $971,427 $153,465 $377,303 $971,427
30 $160,388 $523,828 $1,666,290 $160,388 $523,828 $1,666,290
35 $146,026 $710,566 $2,813,045 $146,026 $710,566 $2,813,045
-------------------------------------------------------------------------------
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6
<PAGE>
<TABLE>
<S> <C>
------------------------------------------------------------------------------
Illustration 2
Death Benefit Option A at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT:$560,331
MALE SELECT NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
------------------------------------------------------------------------------
Flexible 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%
All premium payments are illustrated as if ------------------------------------------------------------------------------
made at the beginning of the Policy Year. 1 $10,500 $560,331 $560,331 $560,331
2 $21,525 $560,331 $560,331 $560,331
This illustration assumes no Policy loans 3 $33,101 $560,331 $560,331 $560,331
or Partial Withdrawals have been made. 4 $45,256 $560,331 $560,331 $560,331
5 $58,019 $560,331 $560,331 $560,331
*Additional payment will be required to 6 $71,420 $560,331 $560,331 $560,331
prevent Policy termination. 7 $85,491 $560,331 $560,331 $560,331
8 $100,266 $560,331 $560,331 $560,331
The death benefits, Accumulated Values and 9 $115,779 $560,331 $560,331 $560,331
Net Cash Surrender Values will differ if 10 $132,068 $560,331 $560,331 $560,331
premiums are paid in different amounts 15 $226,575 $560,331 $560,331 $560,331
or frequencies. 20 $347,193 $560,331 $560,331 $648,819
25 $501,135 $560,331 $560,331 $1,041,705
The hypothetical investment rates shown 30 $697,608 $560,331 $560,331 $1,686,097
above and elsewhere in this prospectus 35 $948,363 $0* $572,842 $2,604,458
are illustrative only and should not be ------------------------------------------------------------------------------
interpreted as a representation of past End of year End of year
or future investment results. Actual rates ACCUMULATED VALUE NET CASH SURRENDER VALUE
of return may be more or less than those End of assuming hypothetical gross assuming hypothetical gross
shown and will depend on a number of Policy annual investment return of annual investment return of
factors, including the investment Year 0% 6% 12% 0% 6% 12%
allocations made to Variable Accounts by ------------------------------------------------------------------------------
the Owner and the experience of the 1 $7,275 $7,766 $8,259 $3,057 $3,548 $4,041
Accounts. No representation can be made 2 $14,492 $15,930 $17,429 $10,274 $11,712 $13,211
by us, the Separate Account or the 3 $21,477 $24,331 $27,423 $17,259 $20,113 $23,205
underlying funds that these hypothetical 4 $28,216 $32,962 $38,312 $23,998 $28,744 $34,094
rates of return can be achieved for any one 5 $34,711 $41,835 $50,193 $30,493 $37,618 $45,975
year or sustained over any period of time. 6 $40,947 $50,947 $63,161 $37,572 $47,573 $59,786
7 $46,927 $60,310 $77,336 $44,396 $57,780 $74,805
This is an illustration only. An 8 $52,643 $69,930 $92,845 $50,955 $68,242 $91,158
illustration is not intended to predict 9 $58,091 $79,815 $109,838 $57,248 $78,972 $108,994
actual performance. Interest rates, 10 $63,256 $89,965 $128,467 $63,256 $89,965 $128,467
dividends, and values set forth in the 15 $87,002 $149,204 $260,750 $87,002 $149,204 $260,750
illustration are not guaranteed. 20 $100,087 $217,854 $484,193 $100,087 $217,854 $484,193
25 $97,490 $298,826 $853,856 $97,490 $298,826 $853,856
30 $67,258 $398,184 $1,453,532 $67,258 $398,184 $1,453,532
35 $0* $535,366 $2,434,073 $0* $535,366 $2,434,073
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7
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Form No. 15-20535-04
