<PAGE>
PACIFIC SELECT
ESTATE PRESERVER II PROSPECTUS AUGUST 7, 2000
Pacific Select Estate Preserver II is a last survivor
flexible premium variable life insurance policy issued
by Pacific Life Insurance Company.
This policy is not This prospectus provides information that you should
available in all know before buying a policy. It's accompanied by a
states. This current prospectus for the Pacific Select Fund, a fund
prospectus is not that provides the underlying portfolios for the
an offer in any variable investment options offered under the policy.
state or Please read these prospectuses carefully and keep them
jurisdiction where for future reference.
we're not legally
permitted to offer Here's a list of all of the investment options
the policy. available under your policy:
The policy is
described in detail VARIABLE INVESTMENT OPTIONS
in this prospectus.
The Pacific Select Aggressive Equity Mid-Cap Value
Fund is described
in its prospectus Emerging Markets Equity Index
and in its
Statement of Diversified Research Small-Cap Index
Additional
Information (SAI). Small-Cap Equity REIT
No one has the (formerly called
right to describe "Growth") International Value
the policy or the (formerly called
Pacific Select Fund International Large-Cap "International")
any differently
than they have been Bond and Income Government Securities
described in these
documents. Equity Managed Bond
You should be aware I-Net Tollkeeper (SM) Money Market
that the Securities
and Exchange Multi-Strategy High Yield Bond
Commission (SEC)
has not reviewed Equity Income Large-Cap Value
the policy for its
investment merit, Growth LT
and does not
guarantee that the FIXED OPTIONS
information in this
prospectus is Fixed Account
accurate or
complete. It's a Fixed LT Account
criminal offense
to say otherwise.
<PAGE>
YOUR GUIDE TO THIS PROSPECTUS
<TABLE>
<S> <C>
An overview of Pacific Select Estate Preserver II 4
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Pacific Select Estate Preserver II basics 11
Owners, people insured by the policy, and beneficiaries 12
Policy date, monthly payment date, policy anniversary date 13
Statements and reports we'll send you 14
Your right to cancel 14
Timing of payments, forms and requests 15
Telephone transactions 16
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The death benefit 17
Choosing your death benefit option 17
The guideline minimum death benefit 18
When we pay the death benefit 18
Comparing the death benefit options 19
Changing your death benefit option 19
Decreasing the face amount 20
Optional riders 20
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How premiums work 21
Your first premium payment 21
Planned periodic premium payments 21
Deductions from your premiums 22
Allocating your premiums 22
Limits on the premium payments you can make 23
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Your policy's accumulated value 24
Calculating your policy's accumulated value 24
Monthly deductions 24
Lapsing and reinstatement 26
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Your investment options 28
Variable investment options 28
Fixed options 32
Transferring among investment options 32
Transfer programs 33
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Withdrawals, surrenders and loans 35
Making withdrawals 35
Taking out a loan 36
Ways to use your policy's loan and withdrawal features 37
Surrendering your policy 38
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General information about your policy 39
----------------------------------------------------------------------
Variable life insurance and your taxes 41
----------------------------------------------------------------------
About Pacific Life 45
----------------------------------------------------------------------
Appendices 109
Appendix A: Joint equal age 109
Appendix B: Rates per $1,000 of initial face amount 111
Appendix C: Death benefit percentages 112
Appendix D: Death benefit factor table 113
----------------------------------------------------------------------
Where to go for more information back cover
</TABLE>
2
<PAGE>
Terms used in this prospectus
We've tried to make this prospectus easy to read and
understand, but you may find some words and terms that
are new to you. We've identified some of these below
and the pages where you'll find an explanation of what
they mean.
If you have any questions, please ask your registered
representative or call us at 1-800-800-7681.
<TABLE>
<S> <C> <C> <C>
Accumulated value 24 Joint owners 12
Accumulation units 30 Lapse 26
Age 12 Loan account 36
In this prospectus, Allocation 22 Modified endowment
you and your mean Assignment 40 contract 43
the policy holder Beneficiary 13 Monthly payment date 13
or owner. Pacific Business day 15 Net amount at risk 23
Life, we, us and Cash surrender value 38 Net cash surrender value 38
our refer to Contingent beneficiary 13 Net premium 21
Pacific Life Cost of insurance rate 24 Outstanding loan amount 36
Insurance Company. Death benefit 17 Planned periodic premium 21
The fund refers to Death benefit factor 18 Policy anniversary 13
Pacific Select Death benefit percentage 18 Policy date 13
Fund. Policy means Face amount 17 Policy year 13
a Pacific Select Fixed account 32 Portfolio 28
Estate Preserver II Fixed LT account 32 Proper form 15
variable life Fixed options 32 Reinstatement 27
insurance policy, General account 46 Riders 20
unless we state Guideline minimum death Separate account 46
otherwise. benefit 18 Seven-pay limit 43
Guideline premium limit 23 Tax code 41
Illustration 14 Unit value 30
In force 11 Variable account 28
Income benefit 39 Variable investment
Joint equal age 26 option 28
</TABLE>
3
<PAGE>
AN OVERVIEW OF PACIFIC SELECT ESTATE PRESERVER II
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.
---------------------------------------------------------
Pacific Select Pacific Select Estate Preserver II is a last survivor
Estate Preserver II flexible premium variable life insurance policy.
basics
. Last survivor means the policy insures the lives of
Last survivor life two people and provides a death benefit that's
insurance may be payable after both people have died.
appropriate for two
spouses who want to . Flexible premium means you can vary the amount and
provide a death frequency of your premium payments.
benefit for their
children. . Variable means the policy's value depends on the
performance of the investment options you choose.
This may not be the
right kind of . Life insurance means the policy provides a death
policy for someone benefit to the beneficiary you choose.
who wants to
provide a death In addition to providing a death benefit that is
benefit for his or generally free of federal income tax, any growth in
her spouse. In that your policy's accumulated value is tax-deferred. You
case, a policy that can choose from 21 variable investment options, each of
insures a single which invests in a corresponding portfolio of the
life may be more Pacific Select Fund, and from two fixed options, both
appropriate. of which provide a guaranteed minimum rate of interest.
You may choose to allocate net premium and accumulated
value to no more than 20 investment options at any one
Please discuss your time.
insurance needs and
financial Pacific Select Estate Preserver II is designed for
objectives with long-term financial planning. Please take some time to
your registered read the information in this prospectus before you
representative. decide if this life insurance policy meets your
insurance needs and financial objectives.
You'll find more
about the basics of Your right to cancel
Pacific Select During the free look period, you have the right to
Estate Preserver II cancel your policy and return it to us or your
starting on registered representative for a refund. The amount of
page 11. 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.
4
<PAGE>
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The death benefit
You can choose one of four death benefit options
Your policy depending on what is more important to you: a larger
provides a death death benefit or building the accumulated value of your
benefit for your policy.
beneficiary after
both of the people You can change your death benefit option and reduce
insured by the your policy's face amount (with certain restrictions)
policy have died, while your policy is in force.
as long as your
policy is in force. Optional riders
There are five optional riders that provide extra
You'll find more benefits, some at additional cost. Not all riders are
about the death available in every state, and some riders may only be
benefit starting on added when you apply for your policy.
page 17.
---------------------------------------------------------
How premiums work
Your first premium must be equal to at least 25% of the
Your policy gives sum of your premium load and your policy's monthly
you the flexibility charges for the first year. Your planned periodic
to choose the premium must be for at least $50.
amount and
frequency of your Deductions from your premiums
premium payments, We deduct a premium load from each premium payment you
within certain make. The premium load is made up of a sales load, a
limits. state and local tax charge, and a federal tax charge.
You'll find more Limits on the premium payments you can make
about how premiums Federal tax law puts limits on the premium payments you
work starting on can make in relation to your policy's death benefit. We
page 21. 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.
---------------------------------------------------------
Your policy's
accumulated value
Accumulated value is the value of your policy on any
Accumulated value business day. It is not guaranteed - it depends on the
is used as the performance of the investment options you've chosen,
basis for the premium payments you've made, policy charges, and
determining policy how much you've borrowed or withdrawn from the policy.
benefits and
charges. If there Monthly deductions
is not enough We deduct a monthly charge from your policy's
accumulated value accumulated value on each monthly payment date. The
to cover policy charge is made up of cost of insurance, an
charges, your administrative charge, and a mortality and expense risk
policy could lapse. charge. If you add any riders, we'll add any charges
for them to your monthly charge.
You'll find more
about accumulated Lapsing and reinstatement
value starting on If there is not enough accumulated value to cover the
page 24. monthly charge on 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 at the
end of the grace period, you have five years from the
day it lapses to apply for a reinstatement.
5
<PAGE>
AN OVERVIEW OF PACIFIC SELECT ESTATE PRESERVER II
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Your investment You can choose from 21 variable investment options,
options each of which invests in a corresponding portfolio of
the Pacific Select Fund. We're the investment adviser
The investment for the Pacific Select Fund. We oversee the management
options you choose of all the fund's portfolios and manage two of the
will affect your portfolios directly. We've retained other portfolio
policy's managers to manage the other portfolios. The value of
accumulated value, each portfolio will fluctuate with the value of the
and may affect the investments it holds, and returns are not guaranteed.
death benefit.
You can also choose from two fixed options, the Fixed
Your policy's account and the Fixed LT account, both of which provide
accumulated value a guaranteed minimum annual interest rate of 4%. We may
may be allocated to offer a higher interest rate. If we do, we'll guarantee
up to 20 investment that rate for one year.
options at any one
time. We allocate your premium payments and accumulated value
to the investment options you choose. Your policy's
Please review the accumulated value will fluctuate depending on the
investment options investment options you've chosen. You bear the
carefully and ask investment risk of any variable investment options you
your registered choose.
representative to
help you choose the In some states we'll hold your premium payments in the
right ones for your Money Market investment option until the free look
goals and risk transfer date. Please turn to Your right to cancel for
tolerance. details.
You'll find more Transferring among investment options
about the You can transfer among the investment options during
investment options the life of your policy without paying any current
starting on page income tax. There is currently no charge for transfers.
28.
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 program. These programs are not available
for the fixed options.
You can only make one transfer from each fixed option
in any 12-month period. For the Fixed account, each
transfer may be no more than $5,000 or 25% of the
accumulated value in the Fixed account, whichever is
greater. For the Fixed LT account, each transfer may be
no more than $5,000 or 10% of the accumulated value in
the Fixed LT account. You can only transfer to the
fixed options in the policy month right before each
policy anniversary.
You'll find out You can also make automatic transfers from the Fixed
more about our account to other investment options during the first
automatic transfer policy year using our first year transfer program.
programs starting
on page 33.
---------------------------------------------------------
Withdrawals, You can take out all or part of your policy's
surrenders and accumulated value while your policy is in force by
loans making withdrawals or surrendering your policy. You can
take out a loan from us using your policy as security.
Making a You can also use your policy's loan and withdrawal
withdrawal, taking features to supplement your income, for example, during
out a loan or retirement.
surrendering your
policy can change Making withdrawals
your policy's tax You can withdraw part of your policy's net cash
status, generate surrender value starting on your policy's first
taxable income, or anniversary. This reduces your policy's accumulated
make your policy value and could affect the face amount and death
more susceptible to benefit.
lapsing. Be sure to
plan carefully
before using these
policy benefits.
You'll find more
about withdrawals,
surrenders and
loans starting on
page 35.
6
<PAGE>
Taking out a loan
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 4.5% 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.
Surrendering your policy
You can surrender or cash in your policy for its net
cash surrender value while either of the two people
insured by the policy is still living.
---------------------------------------------------------
Variable life Your beneficiary generally will not have to pay federal
insurance and your income tax on death benefit proceeds. You'll also
taxes generally not be taxed on any or all of your policy's
accumulated value unless you receive a cash
There are tax distribution by making a withdrawal or surrendering
issues to consider your policy.
when you own a life
insurance policy. If your policy is a modified endowment contract, all
These are described distributions you receive during the life of the policy
in detail starting may be subject to tax and a 10% penalty.
on page 41.
---------------------------------------------------------
About Pacific Life
Pacific Life is a life insurance company based in
When you buy a life California. We issue the policies. Pacific Select
insurance policy, Distributors, Inc. (formerly called Pacific Mutual
you're relying on Distributors, Inc.), our subsidiary, is the distributor
the insurance of the policies.
company that issues
it to be able to How our accounts work
meet its financial We put your premium payments in our general and
obligations to you. separate accounts. We own the assets in our accounts
and make the allocations to the investment options
You'll find more you've chosen.
about Pacific Life,
and our strength as Amounts allocated to the fixed options are held in our
a company, starting general account. Our general account includes all of
on page 45. our assets, except for those held in our separate
accounts. Our ability to meet our obligations under the
We may use any policy is backed by our strength as an insurance
profit derived from company.
any charges under
the policy for any Amounts allocated to the variable investment options
lawful purpose, are held in our separate account. The assets in this
including our account are kept separate from the assets in our
distribution and general account and our other separate accounts, and
administrative are protected from our general creditors.
expenses.
7
<PAGE>
AN OVERVIEW OF PACIFIC SELECT ESTATE PRESERVER II
<TABLE>
<CAPTION>
<S> <C>
This section of the overview explains the fees and expenses associated with your
Pacific Select Estate Preserver II Policy.
-----------------------------------------------------------------------------------
Understanding policy expenses
and cash flow -------------------
Your premium
The chart to the right illustrates how You make a
cash normally flows through a Pacific premium
Select Estate Preserver II policy. payment -------------------------------------------
v
The dark shaded boxes show the fees and ------------------- -----------------
expenses you pay directly or indirectly We deduct a
under your policy. These are explained premium load
in the pages that follow.
-------------------
In some states we'll hold your net Net premium
premium payments in the Money Market We allocate the -----------------
investment option until the free look net premium to
transfer date. Please turn to Your right the investment <--------------------------------->
to cancel for details. options you
choose
-------------------
v v
------------------- ------------------- ---------------- -----------------
Fixed options Variable Pacific Select The fund
We hold investment Fund deducts
amounts you options advisory fees
allocate to these <--> The variable ---> and other fund
options in our We hold investment expenses from
general account amounts you options invest the portfolios
allocate to these in the fund's
options in our portfolios
separate account
------------------- ------------------- ---------------- -----------------
-----------------
We deduct:
. cost of
insurance
. administrative
We make monthly deductions charge
-----------------------------> . mortality and
. expense risk
charge
. rider charges
v
--------------- ----------------- ---------------- -----------------
-----------------
Loan account Accumulated We deduct a
Accumulated value If you make withdrawal withdrawal charge
value set aside <--> ---------------------->
to secure a The total value
policy loan of your policy
------------------
------------------
There is no
surrender charge
If you surrender your policy
------------------------------->
------------------
</TABLE>
8
<PAGE>
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Deductions from
your premiums
We deduct a premium load from each premium payment you
The premium load is make. The load is made up of three charges:
explained in more
detail on page 22. Sales load - 6% of each premium payment during the
first 10 policy years and reduced to 4% after the 10th
policy year.
State and local tax charge - 2.35% of each premium
payment.
Federal tax charge - 1.50% of each premium payment.
---------------------------------------------------------
Deductions from We deduct a monthly charge from your policy's
your policy's accumulated value in the investment options on each
accumulated value monthly payment date. This charge is made up of three
charges:
The monthly charge
is explained in Cost of insurance - We calculate this charge by
more detail multiplying the current cost of insurance rate by a
starting on page discounted net amount at risk at the beginning of each
24. policy month. When the younger of the two people
insured by the policy reaches age 100, the cost of
An example insurance charge is zero -- in other words, you no
For a policy with: longer pay any cost of insurance charge.
. a joint equal age
of 50 Administrative charge - We deduct a charge of $16 a
. a face amount of month during the first five policy years, and $6 a
$100,000 month thereafter. When the younger of the two people
. accumulated insured by the policy reaches age 100, the
value of $60,000 administrative charge is zero -- in other words, you no
after deducting longer pay any administrative charge.
any outstanding
loan amount.
The monthly charge Mortality and expense risk charge - The mortality and
for the face amount expense risk charge varies depending on your policy's
component of the face amount, joint equal age on the policy date and
mortality and accumulated value. It's made up of two components:
expense risk charge
is $10.20 . The face amount component, which we deduct every
(($100,000 / 1,000) X month during the first 10 policy years at a rate that
0.102). is based on the joint equal age and each $1,000 of
the initial face amount of your policy.
The monthly charge
for the accumulated . The accumulated value component, which we deduct
value component is every month during the first20 policy years at an
$15 annual rate of 0.30% (0.025% monthly) of your
($60,000 X 0.025%). policy's accumulated value in the investment options.
The charge in During policy years 21 and thereafter, we reduce the
policy year 21 (and annual rate to 0.10% (0.008333% monthly) of the
thereafter) would accumulated value.
be $5
($60,000 X 0.008333%) Riders - If you add any riders to your policy, we add
if the policy's any charges for them to your monthly charge.
accumulated value
was $60,000.
Joint equal age is
explained in
Appendix A. The
rates for the face
amount component
are shown in
Appendix B.
---------------------------------------------------------
Withdrawal and
surrender charges
You can withdraw part of your policy's net cash
Withdrawal charges surrender value at any time starting on your policy's
are explained in first anniversary. There is a $25 charge for each
more detail on withdrawal you make. We deduct this charge
page 35. proportionately from all of your investment options.
If you surrender or cash in your policy, we do not
deduct a surrender charge.
9
<PAGE>
AN OVERVIEW OF PACIFIC SELECT ESTATE PRESERVER II
---------------------------------------------------------
Fees and expenses The Pacific Select Fund pays advisory fees and other
paid by the expenses. These are deducted from the assets of the
Pacific Select Fund fund's portfolios and may vary from year to year. They
are not fixed and are not part of the terms of your
You'll find more policy. If you choose a variable investment option,
about the Pacific these fees and expenses affect you indirectly because
Select Fund they reduce portfolio returns.
starting on page
28, and in the Advisory fee
fund's prospectus, Pacific Life is the investment adviser to the fund. The
which accompanies fund pays an advisory fee to us for these services. The
this prospectus. table below shows the advisory fee as a annual
percentage of each portfolio's average daily net
assets.
Other expenses
The table also shows the fund expenses for each
portfolio in 1999. 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
that we'll continue to do so after December 31, 2001.
In 1999, Pacific Life reimbursed the Small-Cap Index
Portfolio $96,949.
<TABLE>
<CAPTION> --------------------------------------------------------------------
Portfolio Advisory fee Other expenses Total expenses+
--------------------------------------------------------------------
As an annual % of average daily net assets
<S> <C> <C> <C>
Aggressive Equity 0.80 0.05 0.85
Emerging Markets/1/ 1.10 0.32 1.42
Diversified Research/2/ 0.90 0.05 0.95
Small-Cap Equity 0.65 0.05 0.70
International Large-
Cap/2/ 1.05 0.15 1.20
Bond and Income 0.60 0.06 0.66
Equity 0.65 0.04 0.69
I-Net Tollkeeper/2/ 1.50 0.15 1.65
Multi-Strategy 0.65 0.05 0.70
Equity Income 0.65 0.05 0.70
Growth LT 0.75 0.04 0.79
Mid-Cap Value 0.85 0.12 0.97
Equity Index/3/ 0.25 0.05 0.30
Small-Cap Index/4/ 0.50 0.44 0.94
REIT 1.10 0.18 1.28
International Value 0.85 0.16 1.01
Government Securities 0.60 0.06 0.66
Managed Bond/1/ 0.60 0.06 0.66
Money Market/1/ 0.35 0.05 0.40
High Yield Bond/1/ 0.60 0.06 0.66
Large-Cap Value 0.85 0.12 0.97
--------------------------------------------------------------------
</TABLE>
/1/ Total net expenses for these portfolios in 1999,
after deduction of an offset for custodian credits,
were: 1.41% for Emerging Markets Portfolio, 0.65% for
Managed Bond Portfolio, 0.39% for Money Market
Portfolio, and 0.65% for High Yield Bond Portfolio.
/2/ Expenses are estimated. There were no actual
advisory fees or other expenses for these portfolios in
1999 because the portfolios started after December 31,
1999.
/3/ The advisory fee for the Equity Index Portfolio has
been adjusted to reflect the advisory fee increase
effective January 1, 2000. The actual advisory fee, and
total net expenses for this portfolio in 1999 after
deduction of an offset for custodian credits, were
0.16% and 0.20%, respectively.
/4/ Total net expenses for the Small-Cap Index
Portfolio in 1999, after the advisor's reimbursement
and deduction of an offset for custodian credits, were
0.75%.
+ The fund has adopted a brokerage enhancement 12b-1
plan, under which brokerage transactions may be placed
with broker-dealers in return for credits or other
compensation that may be used to help promote
distribution of fund shares. There are no fees or
charges to any portfolio under this plan, although the
fund's distributor may defray expenses of up to
approximately $300,000 for the year 2000, which it
might otherwise incur for distribution. If such
defrayed amount were considered a fund expense, it
would represent approximately .0023% or less of any
portfolio's average daily net assets.
10
<PAGE>
PACIFIC SELECT ESTATE PRESERVER II BASICS
When you buy a Pacific Select Estate Preserver II life
insurance policy, you're entering into a contract with
Pacific Life Insurance Company. Your contract with us
is made up of your application, your policy,
applications to change or reinstate the policy, any
amendments, riders or endorsements to your policy, and
specification pages.
Policy amendments When we approve your signed application, we'll issue
and endorsements your policy. If your application does not meet our
are a part of your underwriting requirements, we can reject it or ask you
policy and confirm for more information. Once we receive your first
changes you or we premium payment, the policy has been delivered to you
make to the policy. and any delivery requirements have been met, we'll
consider your policy to be in force. That's when our
Specification pages obligations under the policy begin.
summarize
information Your policy will be in force until one of the following
specific to your happens:
policy at the time . both people insured by the policy die
the policy is . the grace period expires and your policy lapses, or
issued. . you surrender your policy.
If your policy is not in force when both people insured
Riders provide by the policy die, we are not obligated to pay the
extra benefits, death benefit proceeds to your beneficiary.
some at additional
cost. Not all Pacific Select Estate Preserver II is a last survivor
riders are flexible premium variable life insurance policy that
available in every insures the lives of two people and pays death benefit
state and some proceeds after both people have died.
riders may only be
added when you Under a flexible premium life insurance policy, you
apply for your have the flexibility to choose the amount and frequency
policy. of your premium payments. You must, however, pay enough
premiums to cover the ongoing cost of policy benefits.
Last survivor life
insurance may be A premium load is deducted from each premium payment
appropriate for two you make. The resulting net premium is allocated to the
spouses who want to investment options you choose, and becomes part of your
provide a death policy's accumulated value.
benefit for their
children. Charges are deducted from the accumulated value each
month to help cover the cost of the policy's death
This may not be the benefit and other expenses. If there is not enough
right kind of accumulated value to cover the monthly charge on the
policy for someone day we make the deduction, your policy may lapse after
who wants to a grace period - which means you'll no longer have any
provide a death insurance coverage.
benefit for his or
her spouse. In that Investment earnings will increase your policy's
case, a policy that accumulated value, while investment losses will
insures a single decrease it. The premium payments you'll be required to
life may be more make to keep your policy in force will be influenced by
appropriate. the investment results of the investment options you've
chosen.
Please discuss your
insurance needs and
financial
objectives with
your registered
representative.
In some states
we'll hold your net
premium payments in
the Money Market
investment option
until the free look
transfer date.
Please turn to Your
right to cancel for
details.
11
<PAGE>
PACIFIC SELECT ESTATE PRESERVER II BASICS
---------------------------------------------------------
Owners, people Owners
insured by the The owner is the person named on the application who
policy, and makes the decisions about the policy and its benefits
beneficiaries while it's in force. You can own a policy by yourself
or with someone else. Two or more owners are called
joint owners. You need the signatures of all owners for
Please consult your all policy transactions.
financial advisor
or a lawyer about If one of the joint owners dies, the surviving owners
designating will hold all rights under the policy. If the last
ownership joint owner dies, his or her estate will own the policy
interests. unless you've given us other instructions.
A policy can also be owned by an institution, trust,
corporation or group or sponsored arrangement. These
If you would like owners often buy more than one policy, which may
to change the owner qualify them for reduced charges or lower premium
of your policy, payments.
please contact us
or your registered We may reduce or waive the sales load on policies sold
representative for to our directors or employees, to any of our
a change of owner affiliates, or to trustees, employees or affiliates of
form. We can the fund.
process the change
only if we receive You can change the owner of your policy by completing a
your instructions change of owner form. Once we've received and recorded
in writing. your request, the change will be effective as of the
day you signed the change of owner form.
People insured by the policy
This policy insures the lives of two people who are
between the ages of 20 and 85 at the time you apply for
your policy, and who have given us satisfactory
evidence of insurability. Your policy refers to these
people as the insureds. The policy pays death benefit
proceeds after both of these people have died.
Risk classes are Each person to be insured by the policy is assigned an
usually based on underwriting or insurance risk class which we use to
age, gender, health calculate cost of insurance and other charges. We
and whether or not normally use the medical or paramedical underwriting
the person to be method to assign underwriting or insurance risk
insured by the classes, which may require a medical examination. We
policy smokes. Most may, however, use other forms of underwriting if we
insurance companies think it's appropriate.
use similar risk
classification When we use a person's age in policy calculations, we
criteria. generally use his or her age as of the nearest policy
date, and we add one year to this age on each policy
When we refer to anniversary date. For example, when we talk about
age throughout this someone "reaching age 100", we're referring to the
prospectus, we're policy anniversary date closest to that person's 100th
using the word as birthday, not to the day when he or she actually turns
we've defined it 100.
here, unless we
tell you otherwise.
12
<PAGE>
Beneficiaries
The beneficiary is the person, people, entity or
If you would like entities you name to receive the death benefit
to change the proceeds. Here are some things you need to know about
beneficiary of your naming beneficiaries:
policy, please
contact us or your . You can name one or more primary beneficiaries who
registered each receive an equal share of the death benefit
representative for proceeds unless you tell us otherwise. If one
a change of beneficiary dies, his or her share will pass to the
beneficiary form. surviving primary beneficiaries in proportion to the
We can process the share of the proceeds they're entitled to receive,
change only if we unless you tell us otherwise.
receive your
instructions in . You can also name a contingent beneficiary for each
writing. primary beneficiary you name. The contingent
beneficiary will receive the death benefit proceeds
if the primary beneficiary dies.
. You can choose to make your beneficiary permanent
(sometimes called irrevocable). You cannot change a
permanent beneficiary's rights under the policy
without his or her permission.
. If none of your beneficiaries is still living when
the death benefit proceeds are payable, you as the
policy owner will receive the proceeds. If you're no
longer living, the proceeds will go to your estate.
. You can change your beneficiary at any time while
either person insured by the policy is still living,
and while the policy is in force. The change will be
effective as of the day you signed the change of
beneficiary form.
---------------------------------------------------------
Policy date, Your policy date
monthly payment This is usually the day we approve your policy
date, policy application. It's also the beginning of your first
anniversary date policy year. Your policy's monthly, quarterly, semi-
annual and annual anniversary dates are based on your
policy date.
In Massachusetts,
the policy date is The policy date is set so that it never falls on the
known as the issue 29th, 30th or 31st of any month. We'll apply your first
date. premium payment as of your policy date or as of the day
we receive your premium, whichever is later.
Backdating your policy
In Ohio, your You can have your policy backdated up to six months, as
policy can be long as we approve it. Backdating in some cases may
backdated only lower your cost of insurance rates since these rates
three months. are based on the ages of the people insured by the
policy. Your first premium payment must cover the
premium load and monthly charges for the period between
the backdated policy date and the day your policy is
issued.
Your monthly payment date
This is the day we deduct the monthly charges from your
policy's accumulated value. The first monthly payment
date is your policy date, and it's the same day each
month thereafter. Monthly charges are explained in the
section called Your policy's accumulated value.
Your policy anniversary date
This is the same day as your policy date every year
after we issue your policy. A policy year starts on
your policy date and each anniversary date, and ends on
the day before the next anniversary date.
13
<PAGE>
PACIFIC SELECT ESTATE PRESERVER II BASICS
---------------------------------------------------------
Statements and We send the following statements and reports to policy
reports owners:
we'll send you
. a confirmation for many financial transactions,
usually including premium payments and transfers,
loans, loan repayments, withdrawals and surrenders.
Monthly deductions and scheduled transactions made
We can create under the dollar cost averaging and portfolio
customized rebalancing programs are reported on your quarterly
hypothetical policy statement.
illustrations of
benefits under your . a quarterly policy statement. The statement will tell
policy based on you the accumulated value of your policy by
different investment option, cash surrender value, the amount
assumptions. of the death benefit, the policy's face amount, and
any outstanding loan amount. It will also include a
We'll send you one summary of all transactions that have taken place
policy illustration since the last quarterly statement, as well as any
free of charge each other information required by law.
policy year if you
ask for one. We . supplemental schedules of benefits and planned
reserve the right periodic premiums. We'll send these to you if you
to charge $25 for change your policy's face amount or change any of the
additional policy's other benefits.
illustrations.
. financial statements, at least annually or as
required by law, of the separate account and Pacific
Select Fund, that include a listing of securities for
each portfolio of the Pacific Select Fund.
---------------------------------------------------------
Your right to During the free look period, you have the right to
cancel cancel your policy and return it to us or your
registered representative for a refund.
There are special
rules for the free The amount of your refund may be more or less than the
look period in premium payments you've made, depending on the state
certain states. where you signed your application. We'll always deduct
Here are some any outstanding loan amount from the amount we refund
examples: to you.
. In California the
free look period You'll find a complete description of the free look
ends 30 days period that applies to your policy on the policy's
after you receive cover sheet, or on a notice that accompanied your
your policy if policy. Generally, the free look period ends on the
you're 60 years latest of the following:
old or over or if
you're replacing . 10 days after you receive your policy (20 days for
another life many states if you are replacing another life
insurance policy. insurance policy)
. In Colorado the . 10 days after we mail or deliver this prospectus
free look period which includes a notice of your right of withdrawal
ends after 15 . 45 days after you complete and sign your policy
days. application.
. In North Dakota
the free look In most states, your refund will be based on the
period ends after accumulated value of your policy. In these states,
20 days. we'll allocate your net premiums to the investment
. Pennsylvania options you've chosen. If you exercise your right to
requires that you cancel, your refund will be:
exercise your
right to cancel . any charges or taxes we've deducted from your
your policy premiums
within 10 days . the net premiums allocated to the fixed options
after you receive . the accumulated value allocated to the variable
it, regardless of investment options
the date you . any monthly charges and fees we've deducted from your
signed your policy's accumulated value in the variable investment
application. options.
Please call us or
your registered
representative if
you have questions
about your right to
cancel your policy.
14
<PAGE>
In some states we're required to refund the premium
payments you've made. If you sign your application in
one of these states, we'll hold the net premiums in the
Money Market investment option until the free look
transfer date. On that day, we'll transfer the
accumulated value in the Money Market investment option
to the investment options you've chosen.
The free look transfer date is the latest of the
following:
. 15 days after we issue your policy
. 45 days after you complete and sign your policy
application
. the day we receive your minimum initial premium
. when we consider your policy to be in force.
---------------------------------------------------------
Effective date
Timing of payments, The effective date of payments, forms and requests you
forms and requests send us is usually determined by the day and time we
receive the item in proper form at the mailing address
A business day, that appears on the back cover of this prospectus.
called a valuation
date in your Planned periodic premium payments, loan requests,
policy, is any day transfer requests, loan payments or withdrawal or
that the New York surrender requests that we receive in proper form
Stock Exchange and before 4:00 p.m. Eastern time on a business day will
our life insurance normally be effective as of the end of that day, unless
client services the transaction is scheduled to occur on another
offices are open. business day. If we receive your payment or request on
It usually ends at or after 4:00 p.m. Eastern time on a business day, your
4:00 p.m. Eastern payment or request will be effective as of the end of
time. the next business day. If a scheduled transaction falls
on a day that is not a business day, we'll process it
The New York Stock as of the end of the next business day.
Exchange is usually
closed on weekends Other forms, notices and requests are normally
and on the effective as of the next business day after we receive
following days: them in proper form, unless the transaction is
. New Year's Day, scheduled to occur on another business day. Change of
Martin Luther owner and beneficiary forms are effective as of the day
King, Jr. Day, you sign the change form, once we receive them in
President's Day, proper form.
Good Friday,
Memorial Day, Proper form
July Fourth, We'll process your requests once we receive all
Labor Day, letters, forms or other necessary documents, completed
Thanksgiving Day to our satisfaction. Proper form may require, among
and Christmas other things, a signature guarantee or some other proof
Day, of authenticity. We do not generally require a
and signature guarantee, but we may ask for one if it
. the Friday before appears that your signature has changed, if the
New Year's Day, signature does not appear to be yours, if we have not
July Fourth or received a properly completed application or
Christmas Day if confirmation of an application, or for other reasons to
that holiday protect you and us.
falls on a
Saturday
. the Monday
following New
Year's Day, July
Fourth or
Christmas Day if
that holiday
falls on a Sunday
unless unusual
business conditions
exist, such as the
ending of a monthly
or yearly
accounting period.
Our client services
offices are also
usually closed on
the following days:
. the Monday before
New Year's Day,
July Fourth, or
Christmas Day, if
any of these
holidays falls on
a Tuesday
. the Tuesday
before Christmas
Day if that
holiday falls on
a Wednesday
. the Friday after
New Year's Day,
July Fourth or
Christmas Day, if
any of these
holidays falls on
a Thursday
. the Friday after
Thanksgiving.
Call us or contact
your registered
representative if
you have any
questions about the
proper form
required for a
request.
15
<PAGE>
PACIFIC SELECT ESTATE PRESERVER II BASICS
When we make payments and transfers
We'll normally send the proceeds of transfers,
To request payment withdrawals, loans, surrenders, exchanges and death
of death benefit benefit payments within seven days after the effective
proceeds, send us date of the request. We may delay payments and
proof of death and transfers, or the calculation of payments and transfers
payment based on the value in the variable investment options
instructions. under unusual circumstances, for example, if:
. the New York Stock Exchange closes on a day other
than a regular holiday or weekend
. trading on the New York Stock Exchange is restricted
. an emergency exists as determined by the SEC, as a
result of which the sale of securities is not
practicable, or it is not practicable to determine
the value of a variable account's assets, or
. the SEC permits a delay for the protection of policy
owners.
We may delay transfers and payments from the fixed
options, including the proceeds from withdrawals,
surrenders and loans, for up to six months. We'll pay
interest at an annual rate of at least 4% on any
withdrawals or surrender proceeds from the fixed
options that we delay for 30 days or more.
We pay interest at an annual rate of at least 4% on
death benefit proceeds, calculated from the day the
last surviving person insured by the policy dies to the
day we pay the proceeds.
---------------------------------------------------------
Telephone You can make loans or transfers and give us
transactions instructions regarding the dollar cost averaging
program or portfolio rebalancing program, by telephone
any time after the free look period as long as we have
your signed authorization form on file.
Here are some things you need to know about telephone
transactions:
. You must complete a telephone authorization form.
. If your policy is jointly owned, all joint owners
must sign the telephone authorization. We'll take
instructions from any owner.
. We may use any reasonable method to confirm that your
telephone instructions are genuine. For example, we
may ask you to provide personal identification or we
may record all or part of the telephone conversation.
We may refuse any transaction request made by
telephone.
We'll send you a written confirmation of each telephone
transaction.
Sometimes, you may not be able to make loans or
transfers by telephone, for example, if our telephone
lines are busy because of unusual market activity or a
significant economic or market change, or our telephone
lines are out of service during severe storms or other
emergencies. In these cases, you can send your request
to us in writing, or call us the next business day or
when service has resumed.
When you send us your telephone authorization form, you
agree that:
. we can accept and act upon instructions you give us
over the telephone
. neither we, any of our affiliates, the Pacific Select
Fund, or any director, trustee, officer, employee or
agent of ours or theirs will be liable for any loss,
damages, cost or expenses that result from
transactions processed because of a request by
telephone that we believe to be genuine, as long as
we have followed our own procedures
. you bear the risk of any loss that arises from your
right to make loans or transfers over the telephone.
16
<PAGE>
THE DEATH BENEFIT
We'll pay death benefit proceeds to your beneficiary
after the last surviving person insured by the policy
dies while the policy is still in force. Your
beneficiary generally will not have to pay federal
income tax on death benefit proceeds.
This policy offers four death benefit options, Options
Your policy's A, B, C and D. The option you choose will generally
initial amount of depend on which is more important to you: a larger
insurance coverage death benefit or building the accumulated value of your
is its initial face policy.
amount. We
determine the face Here are some things you need to know about the death
amount based on benefit:
instructions
provided in your . You choose your death benefit option on your policy
application. application.
The minimum face . If you do not choose a death benefit option, we'll
amount when a assume you've chosen Option A.
policy is issued is
usually $100,000, . The death benefit will always be the greater of the
but we may reduce death benefit under the option you choose or the
this in some guideline minimum death benefit.
circumstances.
. The death benefit will never be lower than the face
You'll find your amount of your policy if you've chosen Option A, B or
policy's face D. Of course, the death benefit proceeds will always
amount, which be reduced by any outstanding loan amount.
includes any
increases or . We'll pay the death benefit proceeds to your
decreases, in the beneficiary when we receive proof of the deaths of
specification pages both of the people insured by the policy.
in your policy.
---------------------------------------------------------
Choosing your death You can choose one of the following four options for
benefit option the death benefit on your application. The graphs below
help you compare the options using several hypothetical
examples.
Option A - the Option B - the face amount of
face amount of your policy plus its accumulated
your policy. value.
[ILLUSTRATION [ILLUSTRATION APPEARS HERE]
APPEARS HERE]
The death benefit changes as
your policy's accumulated value
changes. The better your
investment options perform, the
larger the death benefit will
be.
Option C - the Option D - the face amount of
face amount of your policy multiplied by a
your policy plus death benefit factor.
the total premiums
you've paid minus
any withdrawals or [ILLUSTRATION APPEARS HERE]
distributions
made. The death benefit gradually
increases over time no matter
how your investment options
[ILLUSTRATION perform, as long as there is
APPEARS HERE] enough accumulated value to keep
your policy in force.
The more premiums
you pay and the
less you withdraw,
the larger the
death benefit will
be.
17
<PAGE>
THE DEATH BENEFIT
---------------------------------------------------------
How we calculate the death benefit for
Option D
If you choose Option D, we'll calculate the death
benefit by multiplying the face amount by a death
benefit factor. The death benefit factor is a number
from 1.0 to 2.0. A factor of 1.0 means the death
benefit equals the face amount. A factor of 2.0 means
the death benefit is two times the face amount.
The factor changes on each policy anniversary and is
based on the joint equal age of the people insured by
the policy and the number of completed policy years.
Joint equal age is a calculation that blends the ages
and insurance risks of the two people insured by the
policy. Generally, the death benefit factor will reach
the maximum of 2.0 when joint equal age plus the number
of completed policy years is between 85 and 90. You'll
find more information about how we calculate joint
equal age in Appendix A.
You'll find more information about the death benefit
factor in Appendix D and in your policy.
---------------------------------------------------------
The guideline
minimum death
benefit
The guideline minimum death benefit is the minimum
If your policy's death benefit needed for your policy to qualify as life
death benefit is insurance under Section 7702 of the Internal Revenue
equal to the Code. If the amount of the death benefit under the
guideline minimum option you choose is less than the guideline minimum
death benefit, and death benefit, we'll adjust your death benefit to equal
the net amount at the guideline minimum death benefit.
risk is more than
three times the We calculate the guideline minimum death benefit by
death benefit on multiplying the accumulated value of your policy by a
the policy date, we death benefit percentage. This percentage is based on
may reduce the the age of the younger person insured by the policy,
death benefit by and will increase over time. You'll find a table of
making withdrawals guideline minimum death benefit percentages in Appendix
from your policy. C.
We will not charge
you our usual $25
withdrawal fee, but
the withdrawals may
be taxable. Please
turn to
Withdrawals,
surrenders and
loans for
information about
making withdrawals.
---------------------------------------------------------
When we pay the
death benefit
We calculate the amount of the death benefit proceeds
Your beneficiary as of the end of the day the last surviving person
can choose to insured by the policy dies. If that person dies on a
receive the death day that is not a business day, we calculate the
benefit proceeds in proceeds as of the next business day.
a lump sum or use
it to buy an income Your policy's beneficiary must send us proof that both
benefit. Please see people insured by the policy died while the policy was
the discussion in force, along with payment instructions. If both
about income people insured by the policy die at the same time, or
benefits in General if it's not clear who died first, we'll assume the
information about younger of the two died first.
your policy.
Death benefit proceeds equal the total of the death
It is important benefits provided by your policy and any riders you've
that we have a added, minus any outstanding loan amount, minus any
current address for overdue charges.
your beneficiary so
that we can pay We'll pay interest at an annual rate of at least 4% on
death benefit the death benefit proceeds, calculated from the day the
proceeds promptly. last surviving person insured by the policy dies to the
If we cannot pay day we pay the proceeds. In some states we may pay a
the proceeds to higher rate of interest if required by law.
your beneficiary
within five years
of the death of the
last surviving
person insured by
the policy, we'll
be required to pay
them to the state.
18
<PAGE>
---------------------------------------------------------
Comparing the death The tables below compare the death benefits provided by
benefit options the policy's four death benefit options. The examples
are intended only to show differences in death benefits
and net amounts at risk. Accumulated value assumptions
may not be realistic.
Example A assumes These examples show that each death benefit option
the following: provides a different level of protection. Keep in mind
that cost of insurance charges, which affect your
. the people policy's accumulated value, increase with the amount of
insured by the the death benefit, as well as over time. The cost of
policy are male insurance is charged at a rate per $1,000 of the
and female non- discounted net amount at risk. As the net amount at
smokers, each age risk increases, your cost of insurance increases.
45 at the time Accumulated value also varies depending on the
the policy was performance of the investment options in your policy.
issued
. face amount is
$1,000,000
. accumulated value
at year 20 is
$600,000
. total premiums
paid into the
policy at year 20
is $300,000
. the death benefit
percentage for
the guideline
minimum death
benefit is 120%
. the death benefit
factor for Option
D at year 20 is
108.4%
. the guideline
minimum death
benefit is
$720,000
(accumulated
value times a
death benefit
percentage factor
of 120%)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Example A The death benefit is the larger
of these two amounts
-------------------------------
Death Death benefit Guideline Net amount at risk
benefit How it's under minimum used for cost of
option calculated the option death benefit insurance charge
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Option A Face amount $1,000,000 $720,000 $396,736.94
Option B Face amount plus
accumulated value $1,600,000 $720,000 $994,779.11
Option C Face amount plus
premiums less distributions $1,300,000 $720,000 $695,758.03
Option D Face amount times
death benefit factor $1,084,000 $720,000 $480,462.85
------------------------------------------------------------------------------------------
</TABLE>
Example B uses the
same assumptions as
Example A, but has
an accumulated
value of
$1,400,000. Because
accumulated value
has increased, the
guideline minimum
death benefit is
now $1,600,000
($1,400,000 times a
death benefit
factor of 120%).
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Example B The death benefit is the larger
of these two amounts
-------------------------------
Death Death benefit Guideline Net amount at risk
benefit How it's under minimum used for cost of
option calculated the option death benefit insurance charge
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Option A Face amount $1,000,000 $1,680,000 $274,518.06
Option B Face amount plus
accumulated value $2,400,000 $1,680,000 $992,168.66
Option C Face amount plus
premiums less distributions $1,300,000 $1,680,000 $274,518.06
Option D Face amount times
death benefit factor $1,084,000 $1,680,000 $274,518.06
--------------------------------------------------------------------------------------
</TABLE>
---------------------------------------------------------
Changing your death You can change your death benefit option after your
benefit option fifth policy year. Here's how it works:
We will not change . You can change the death benefit once in any policy
your death benefit year.
option if it means . You must send us your request in writing.
your policy will be . You can only change to Option A or Option B.
treated as a . The change will become effective on the first monthly
modified endowment payment date after we receive your request. If we
contract, unless receive your request on a monthly payment date, we'll
you've told us in process it that day.
writing that this . The face amount of your policy will change by the
would be acceptable amount needed to make the death benefit under the new
to you. Modified option equal the death benefit under the old option
endowment contracts just before the change. We will not let you change
are discussed in the death benefit if doing so means the face amount
Variable life of your policy will become less than $100,000. We may
insurance and your waive this minimum amount under certain
taxes. circumstances.
. Changing the death benefit option can also affect the
Net amount at risk monthly cost of insurance charge since this charge
is the difference varies with the net amount at risk.
between the death . The new death benefit option will be used in all
benefit that would future calculations.
be payable if both
people insured by
the policy died,
and the accumulated
value of your
policy.
19
<PAGE>
THE DEATH BENEFIT
---------------------------------------------------------
Decreasing the face You can decrease your policy's face amount starting on
amount the first policy anniversary as long as we approve it.
Here's how it works:
Decreasing the face
amount may affect . You can decrease the face amount as long as at least
your policy's tax one of the people insured by the policy is still
status. To ensure living.
your policy . You can only decrease the face amount once in any
continues to policy year.
qualify as life . You must send us your request in writing while your
insurance, we might policy is in force.
be required to . The decrease will become effective on the first
return part of your monthly payment date after we receive your request.
premium payments to If we receive your request on a monthly payment date,
you, or make we'll process it that day.
distributions from . Decreasing the face amount can affect the monthly
the accumulated cost of insurance charge since this charge varies
value, which may be with the net amount at risk.
taxable. . We can refuse your request to make the face amount
less than $100,000. We can waive this minimum amount
We will not in certain situations, such as group or sponsored
decrease the face arrangements.
amount if it means
your policy will be
treated as a
modified endowment
contract, unless
you've told us in
writing that this
would be acceptable
to you.
For more
information, please
see Variable life
insurance and your
taxes.
---------------------------------------------------------
Optional riders There are five optional riders that provide extra
benefits, some at additional cost. Not all riders are
We offer other available in every state, and some riders may only be
variable life added when you apply for your policy.
insurance policies
which provide . Last survivor added protection benefit
insurance Provides level or varying term insurance on the two
protection on the people insured by the policy.
lives of two people
or on the life of . Individual annual renewable term rider
one person. The Provides level or varying term insurance on either or
loads and charges both people insured by the policy.
on these policies
may be different. . Enhanced policy split option rider
Combining a policy Available only to married couples, it splits the
and a rider, policy into two individual policies without evidence
however, may be of insurability under certain circumstances.
more economical
than adding another . Policy split option rider
policy. It may also Splits the policy into two individual policies with
be more economical evidence of insurability.
to provide an
amount of insurance . Accelerated living benefits rider
coverage through a Gives the policy owner access to a portion of the
policy alone. policy's death benefit if the last surviving person
insured by the policy has been diagnosed with a
terminal illness resulting in a life expectancy of
six months or less (or longer than six months in some
states).
Certain restrictions may apply and are described in the
rider or benefit. We'll add any rider charges to the
Ask your registered monthly charge we deduct from your policy's accumulated
representative for value.
more information
about the riders
available with the
policy, or about
other kinds of life
insurance policies
offered by Pacific
Life.
There may be tax
consequences if you
exercise your
rights under the
Accelerated living
benefits rider or
either of the two
Policy split option
riders. Please see
Variable life
insurance and your
taxes for more
information.
Samples of the
provisions for the
extra optional
benefits are
available from us
upon written
request.
20
<PAGE>
HOW PREMIUMS WORK
Your policy gives you the flexibility to choose the
amount and frequency of your premium payments.
The amount, We usually set the amount of your first premium
frequency, and payment. You can schedule the amount and frequency of
period of time over remaining premium payments within certain limits. Each
which you make premium payment must be at least $50.
premium payments
may affect whether We deduct a premium load from each premium payment, and
your policy will be then allocate your net premium to the investment
classified as a options you've chosen. Depending on the performance of
modified endowment your investment options, and on how many withdrawals,
contract, or no loans or other policy features you've taken advantage
longer qualifies as of, you may need to make additional premium payments to
life insurance for keep your policy in force.
tax purposes. See
Variable life
insurance and your
taxes for more
information.
---------------------------------------------------------
Your first premium We usually require you to make a minimum initial
payment premium payment that's equal to at least 25% of the sum
of your premium load and your policy's monthly charges
for the first year.
The amount of the monthly charge and premium load are
calculated based on your policy's face amount and the
age, smoking status, gender (unless unisex cost of
insurance rates apply), and risk classes of the people
insured by your policy.
We describe premium load later in this section. You'll
find an explanation of the monthly charge in Your
policy's accumulated value.
If we do not receive the minimum initial premium
payment within 20 days after we issue your policy, we
can cancel the policy and refund any partial premium
payment you've made. We may waive the 20 day
requirement in some cases.
---------------------------------------------------------
Planned periodic
premium payments
You can schedule the amount and frequency of your
premium payments. We refer to scheduled premium
Even if you pay all payments as your planned periodic premium. Here's how
your premiums when it works:
they're scheduled,
your policy could . On your application, you choose a fixed amount of at
lapse if the least $50 for each premium payment.
accumulated value,
less any . You indicate whether you want to make premium
outstanding loan payments annually, semi-annually, or quarterly. You
amount, is not can also choose monthly payments using our monthly
enough to pay your Uni-check plan, which is described below.
monthly charges.
Turn to Your . We send you a notice to remind you of your scheduled
policy's premium payment (except for monthly Uni-check
accumulated value payments, which are paid automatically). While you do
for more not have to make the premium payments you've
information. scheduled, not making a premium payment may have an
impact on any financial objectives you may have set
for your policy's accumulated value and death
benefit, and could cause your policy to lapse.
. We'll treat any payment you make during the life of
your policy as a premium, not as a loan repayment,
unless you tell us otherwise.
21
<PAGE>
HOW PREMIUMS WORK
Monthly Uni-check plan
Once you've made your first premium payment, you can
make monthly premium payments using our Uni-check plan.
Here's how it works:
. you authorize us to withdraw a specified amount from
your checking account each month
. you can choose any day between the 4th and 28th of
the month
. if you do not specify a day for us to make the
withdrawal, we'll withdraw the premium payment on
your policy's monthly anniversary. If your policy's
monthly anniversary falls on the 1st, 2nd or 3rd of
the month, we'll withdraw the payment on the 4th of
each month.
---------------------------------------------------------
Deductions from
your premiums
We deduct a premium load from each premium payment you
Your net premium is make. The load is made up of three charges:
your premium
payment less the Sales load
premium load. During the first 10 years of your policy, we deduct a
6% sales load from each premium payment you make. The
sales load is reduced to 4% after the 10th policy year.
This charge helps pay for the cost of distributing our
policies and is guaranteed not to increase. If our
sales and distribution expenses are more than the sales
load, we can recover these expenses from other charges,
such as the mortality and expense risk charge, and from
any mortality gains.
State and local tax charge
We deduct 2.35% from each premium payment to pay state
and local premium and other taxes. The actual taxes we
pay vary from state to state, and in some instances,
among municipalities. This rate approximates the
average rate we pay for all states. We do not expect to
profit from this charge, and do not expect to change
the rate unless the rate we pay increases.
Federal tax charge
We deduct 1.50% from each premium payment to pay
federal taxes. We reserve the right to change this rate
to respond to changes in law.
---------------------------------------------------------
Allocating your
premiums
We generally allocate your net premiums to the
There are special investment options you've chosen on your application on
restrictions when the day we receive them. We currently limit your
allocating premiums allocations to 20 investment options at one time.
to the Fixed LT
account. When we allocate your first premium depends on the
state where you signed your policy application. If you
Please turn to Your signed your application in a state that requires us to
investment options return the premiums you've paid, we'll hold your net
for more premiums in the Money Market investment option until
information about the free look transfer date, and then transfer them to
the investment the investment options you've chosen.
options.
If you signed your application in a state that requires
refunds to be based on accumulated value, we allocate
net premiums to the investment options you've chosen on
the day we receive them.
22
<PAGE>
---------------------------------------------------------
Limits on the Federal tax law puts limits on the amount of premium
premium payments payments you can make in relation to your policy's
you can make death benefit. These limits apply in the following
situations:
Before you buy a . If accepting the premium means your policy will no
policy, you can ask longer qualify as life insurance for federal income
us or your tax purposes.
registered
representative for The total amount you can pay in premiums and still have
a personalized your policy qualify as life insurance is your policy's
illustration that guideline premium limit. The sum of the premiums paid,
will show you the less any withdrawals, at any time cannot exceed the
guideline single guideline premium limit, which is the greater of:
premium and
guideline level . the guideline single premium or
annual premiums. . the sum of the guideline level annual premiums.
Your policy's guideline single premium and guideline
level annual premiums appear on your policy's
specification pages.
We may refuse to accept all or part of a premium
payment if, by accepting it, you will exceed your
policy's guideline premium limit. If we find that
you've exceeded your guideline premium limit, we may
remove all or part of a premium you've paid from your
policy as of the day we applied it, and return it to
you. We'll adjust the death benefit retroactively to
that date to reflect the reduction in premium payments.
You'll find a . If applying the premium in that policy year means your
detailed discussion policy will become a modified endowment contract.
of modified
endowment contracts A life insurance policy will become a modified
in Variable life endowment contract if the sum of premium payments made
insurance and your during the first seven contract years, less a portion
taxes. of withdrawals, exceeds the seven-pay limit defined in
Section 7702A of the Internal Revenue Code.
Unless you've told us in writing that you want your
policy to become a modified endowment contract, we'll
remove all or part of the premium payment from your
policy as of the day we applied it and return it to
you. We'll also adjust the death benefit retroactively
to that date to reflect the reduction in premium
payments. If we receive such a premium within 20 days
before your policy anniversary, we'll hold it and apply
it to your policy on the anniversary date.
In both of these situations, if we remove an excess
premium from your policy, we'll return the premium
amount to you no later than 60 days after the end of
that policy year. We may adjust the amount for interest
or for changes in accumulated value that relate to the
amount of the excess premium payment we're returning to
you.
If we do not return the premium amount to you within
that time, we'll increase your policy's death benefit
retroactively, to the day we applied the premium, and
prospectively, so that it's always the amount necessary
to ensure your policy qualifies as life insurance, or
to prevent it from becoming a modified endowment
contract. If we increase your death benefit, we'll
adjust cost of insurance or rider charges retroactively
and prospectively to reflect the increase.
Net amount at risk . If applying the premium payment to your policy will
is the difference increase the net amount at risk. This will happen if
between the death your policy's death benefit is equal to the guideline
benefit that would minimum death benefit or would be equal to it once we
be payable if both applied your premium payment.
people insured by
the policy died and We may choose to accept your premium payment in this
the accumulated situation, but before we do so, we may require
value of your satisfactory evidence of the insurability of the two
policy. people insured by the policy.
We will not accept premium payments after the youngest
person insured by the policy reaches age 100.
23
<PAGE>
YOUR POLICY'S ACCUMULATED VALUE
Accumulated value Accumulated value is the value of your policy on any
is used as the business day.
basis for
determining policy We use it to calculate how much money is available to
benefits and you for loans and withdrawals, and how much you'll
charges. receive if you surrender your policy. It also affects
the amount of the death benefit if you choose a death
benefit option that's calculated using accumulated
value.
The accumulated value of your policy is not
guaranteed - it depends on the performance of the
investment options you've chosen, the premium payments
you've made, policy charges and how much you've
borrowed or withdrawn from the policy.
---------------------------------------------------------
Calculating your Your policy's accumulated value is the total amount
policy's allocated to the variable investment options and the
accumulated value fixed options, plus the amount in the loan account.
We determine the value allocated to the variable
investment options on any business day by multiplying
the number of accumulation units for each variable
investment option credited to your policy on that day,
by the variable investment option's unit value at the
end of that day. The process we use to calculate unit
values for the variable investment options is described
in Your investment options.
---------------------------------------------------------
Monthly deductions We deduct a monthly charge from your policy's
accumulated value in the investment options each
If there is not monthly payment date.
enough accumulated
value to pay the Unless you tell us otherwise, we deduct the monthly
monthly charge, charge from the investment options that make up your
your policy could policy's accumulated value, in proportion to the
lapse. The accumulated value you have in each option. This charge
performance of the is made up of three charges:
investment options
you choose, not Cost of insurance
making planned This charge covers the cost of providing you with life
premium payments, insurance protection. Like other policy charges, we may
or taking out a profit from the cost of insurance charge and may use
loan all affect the these profits for any lawful purpose such as the
accumulated value payment of distribution and administrative expenses.
of your policy.
There are maximum or guaranteed cost of insurance rates
You'll find a associated with your policy. When the younger of the
discussion about two people insured by your policy reaches age 100, the
when your policy guaranteed cost of insurance rate is zero - in other
might lapse, and words, you no longer pay any cost of insurance.
what you can do to
reinstate it, later The guaranteed rates include the insurance risks
in this section. associated with insuring two people. They are
calculated using 1980 Commissioners Standard Ordinary
Mortality Tables or the 1980 Commissioners Ordinary
Mortality Table B, which are used for unisex cost of
insurance rates. The rates are also based on the ages,
gender and risk classes of the people insured by the
policy unless unisex rates are required.
Our current cost of insurance rates are based on the
ages, risk classes and genders (unless unisex rates are
required) of the two people insured by the policy.
These rates generally increase as the ages of the two
people increase, and they vary with the number of years
the policy has been in force. Our current rates are
lower than the guaranteed rates and they will not
exceed the guaranteed rates in the future.
24
<PAGE>
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How we calculate cost of insurance
We calculate cost of insurance by multiplying the
current cost of insurance rate by a discounted net
amount at risk at the beginning of each policy month.
Net amount at risk for the cost of insurance
calculation is the difference between a discounted
death benefit that would be payable if both people
insured by the policy died, and the accumulated value
of your policy. We calculate it in two steps:
. Step 1: we divide the death benefit that would be
payable at the beginning of the policy month by
1.00327374.
. Step 2: we subtract your policy's accumulated value
at the beginning of the policy month from the amount
we calculated in step 1.
Administrative charge
We deduct a charge of $16 a month during the first five
policy years to help cover the costs of administering
and maintaining our policies. After five policy years,
we reduce this charge to $6 a month. We guarantee that
this charge will not increase. When the younger of the
two people insured by the policy reaches age 100, the
administrative charge is zero - in other words, you no
longer pay any administrative charge.
If you buy additional Pacific Select Estate Preserver
II policies that insure the same two people, we will
not deduct the administrative charge from the
additional policies. Instead, we'll deduct $200 from
each policy's first premium payment to help cover our
processing costs.
Mortality and expense risk charge
Mortality risk is the chance that the people insured by
policies we've issued do not live as long as expected.
This means the cost of insurance charges specified in
the policies may not be enough to pay out actual
claims.
Expense risk is the chance that our actual
administrative and operating expenses are more than
expenses we expected.
The mortality and expense risk charge helps compensate
us for these risks. It has two components, which are
described in the box on the following page. We
guarantee this charge will not increase.
Charges for optional riders
If you add any riders to your policy, we add any
charges for them to your monthly charge.
25
<PAGE>
YOUR POLICY'S ACCUMULATED VALUE
---------------------------------------------------------
An example
How we calculate the mortality and expense risk charge
For a policy with: The mortality and expense risk charge has two
. a joint equal age components: a face amount component and an accumulated
of 50 value component.
. a face amount of
$100,000 . Face amount component We deduct a face amount
. accumulated value component every month during the first 10 policy
of $60,000 after years, at a rate that is based on the joint equal age
deducting any on the policy date and each $1,000 of the initial
outstanding loan face amount of your policy. The rates for the face
amount. amount component are shown in Appendix B. Joint equal
age is a calculation that combines the ages and
The monthly charge insurance risks of the two people insured by the
for the face amount policy, and is explained in Appendix A.
component is $10.20
(($100,000 / 1,000) . Accumulated value component We deduct an accumulated
X 0.102). value component every month during the first 20
policy years at an annual rate of 0.30% (0.025%
The monthly charge monthly) of your policy's accumulated value in the
for the accumulated investment options. During policy years 21 and
value component is thereafter, we reduce the annual rate to 0.10%
$15 ($60,000 X (0.008333% monthly) of the accumulated value. For the
0.025%). The charge purposes of this charge, the amount of accumulated
in policy year 21 value is calculated on the monthly payment date after
(and thereafter) we deduct the cost of insurance and charges for any
would be $5 optional riders.
($60,000 X
.008333%) if the
policy's
accumulated value
was $60,000.
---------------------------------------------------------
Lapsing and Your policy will lapse if there is not enough
reinstatement accumulated value, after subtracting any outstanding
loan amount, to cover the monthly charge on the day we
make the deduction. Your policy's accumulated value is
affected by the following:
. loans or withdrawals you make from your policy
. not making planned premium payments
. the performance of your investment options
. charges under the policy.
There is no guarantee that your policy will not lapse
even if you pay your planned periodic premium.
If there is not enough accumulated value to pay the
total monthly charge, we deduct the amount that's
available and send you, and anyone you've assigned your
policy to, a notice telling you the minimum amount you
have to pay to keep your policy in force. This minimum
amount is equal to three times the monthly charge that
was due on the monthly payment date when there was not
enough accumulated value to pay the charge.
We'll give you a grace period of 61 days from when we
send the notice to pay the required premium. Your
policy will remain in force during the grace period.
If you do not make the minimum payment
If we do not receive your payment within the grace
period, your policy will lapse with no value. This
means we'll end your life insurance coverage.
26
<PAGE>
If you make the minimum payment
If we receive your payment within the grace period,
we'll allocate your net premium to the investment
options you've chosen and deduct the monthly charge
from your investment options in proportion to the
accumulated value you have in each option.
Remember to tell us If your policy is in danger of lapsing and you have an
if a payment is a outstanding loan amount, you may find that making the
premium payment or minimum payment would cause the total premiums paid to
a loan repayment. exceed the maximum amount for your policy's face amount
under tax laws. In that situation, we will not accept
the portion of your payment that would exceed the
maximum amount. To stop your policy from lapsing,
you'll have to repay a portion of your outstanding loan
amount.
How to avoid future lapsing
To stop your policy from lapsing in the future, you may
want to make larger or more frequent premium payments
if tax laws permit it. Or if you have a loan, you may
want to repay a portion if it.
Paying death benefit proceeds during the grace period
If the last surviving person insured by the policy dies
during the grace period, we'll pay death benefit
proceeds to your beneficiary. We'll reduce the payment
by any unpaid monthly charges and any outstanding loan
amount.
Reinstating a lapsed policy
If your policy lapses, you have five years from the end
of the grace period to apply for a reinstatement. We'll
reinstate it if you send us the following:
. a written application
. evidence satisfactory to us that the two people
insured by the policy are still insurable
. a premium payment sufficient to keep your policy in
force for three months after the day your policy is
reinstated
. payment of all unpaid monthly charges that were due
in the grace period.
We'll reinstate your policy as of the first monthly
payment date on or after the day we approve the
reinstatement. When we reinstate your policy, its
accumulated value will be the same as it was on the day
your policy lapsed. We'll allocate it according to your
most recent premium allocation instructions.
Reinstating a lapsed policy with an outstanding loan
amount
If you had an outstanding loan amount when your policy
lapsed, we will not pay or credit interest on it during
the period between the lapsing and reinstatement of
your policy. There are special rules that apply to
reinstating a policy with an outstanding loan amount:
. If we reinstate your policy on the first monthly
payment date that immediately follows the lapse,
we'll also reinstate the loan amount that was
outstanding the day your policy lapsed.
. If we reinstate your policy on any monthly payment
date other than the monthly payment date that
immediately follows the lapse, we'll deduct the
outstanding loan amount from your policy's
accumulated value. This means you will no longer have
an outstanding loan amount when your policy is
reinstated.
27
<PAGE>
YOUR INVESTMENT OPTIONS
This section tells you about the investment options
available under your policy and how they work.
You can change your We put your premium payments in our general and
premium allocation separate accounts. We own the assets in our accounts
instructions by and allocate your premiums, less any charges, to the
writing, sending a investment options you've chosen. Amounts allocated to
fax, or, if we have the fixed options are held in our general account.
your completed Amounts allocated to the variable investment options
telephone are held in our separate account.
authorization form
on file, by calling You choose your initial investment options on your
us at 1-800-800- application. If you choose more than one investment
7681. Or you can option, you must tell us the dollar amount or
ask your registered percentage you want to allocate to each option. You can
representative to change your premium allocation instructions at any
contact us. time.
You'll find The investment options you choose, and how they
information about perform, will affect your policy's accumulated value
when we allocate and may affect the death benefit. Please review the
net premiums to investment options carefully and ask your registered
your investment representative to help you choose the right ones for
options in How your goals and tolerance for risk. Make sure you
premiums work. understand any costs you may pay directly and
indirectly on your investment options because they will
Your policy's affect the value of your policy.
accumulated value
may be allocated to
up to 20 investment
options at any one
time.
---------------------------------------------------------
Variable investment
options
You can choose from 21 variable investment options.
Variable investment Each variable investment option is set up as a variable
options are also account under our separate account and invests in a
known as variable corresponding portfolio of the Pacific Select Fund.
accounts. These Each portfolio invests in different securities and has
variable accounts its own investment goals, strategies and risks. The
are divisions of value of each portfolio will fluctuate with the value
our separate of the investments it holds, and returns are not
account. We bear guaranteed. Your policy's accumulated value will
the direct fluctuate depending on the investment options you've
operating expenses chosen. You bear the investment risk of any variable
of our separate investment options you choose.
account. For more
information about The following chart is a summary of the Pacific Select
how these accounts Fund portfolios. You'll find detailed descriptions of
work, see the portfolios in the Pacific Select Fund prospectus
About Pacific Life. that accompanies this prospectus. There's no guarantee
that a portfolio will achieve its investment objective.
We're the You should read the fund prospectus carefully before
investment adviser investing.
for the Pacific
Select Fund. We
oversee the
management of all
the fund's
portfolios, and
manage two of the
portfolios
directly. We've
retained other
portfolio managers
to manage the other
portfolios.
28
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO THE PORTFOLIO'S THE PORTFOLIO'S PORTFOLIO
INVESTMENT GOAL MAIN INVESTMENTS MANAGER
<S> <C> <C> <C>
Aggressive Equity Capital appreciation. Equity securities of small Alliance Capital
emerging-growth companies and Management L.P.
medium-sized companies.
Emerging Markets Long-term growth of Equity securities of companies Alliance Capital
capital. that are located in countries Management L.P.
generally regarded as "emerging
market" countries.
Diversified Research Long-term growth of Equity securities of U.S. Capital Guardian
capital. companies and securities whose Trust Company
principal markets are in the U.S.
Small-Cap Equity Growth of capital. Equity securities of smaller and Capital Guardian
(formerly called medium-sized companies. Trust Company
Growth)
International Large-Cap Long-term growth of Equity securities of non-U.S. Capital Guardian
capital. companies and securities whose Trust Company
principal markets are outside
of the U.S.
Bond and Income* Total return and income A wide range of fixed income Goldman Sachs Asset
consistent with prudent securities with varying terms to Management
investment management. maturity, with an emphasis
on long-term bonds.
Equity Capital appreciation. Equity securities of large U.S. Goldman Sachs Asset
Current income is of growth-oriented companies. Management
secondary importance.
I-Net Tollkeeper Long-term growth of Equity securities of companies Goldman Sachs Asset
capital. which use, support, or relate Management
directly or indirectly to use of
the Internet. Such companies
include those in the media,
telecommunications, and
technology sectors.
Multi-Strategy High total return. A mix of equity and fixed income J.P. Morgan
securities. Investment
Management Inc.
Equity Income Long-term growth of capital Equity securities of large and J.P. Morgan
and income. medium-sized dividend-paying U.S. Investment
companies. Management Inc.
Growth LT Long-term growth of capital Equity securities of a large Janus Capital
consistent with the number of companies of any size. Corporation
preservation of capital.
Mid-Cap Value Capital appreciation. Equity securities of medium-sized Lazard Asset
U.S. companies believed to be Management
undervalued.
Equity Index Investment results that Equity securities of companies Mercury Asset
correspond to the total that are included in the Standard Management US
return of common stocks & Poor's 500 Composite Stock
publicly traded in the U.S. Price Index.
Small-Cap Index Investment results that Equity securities of companies Mercury Asset
correspond to the total that are included in the Russell Management US
return of an index of small 2000 Small Stock Index.
capitalization companies.
REIT Current income and long- Equity securities of real estate Morgan Stanley
term capital appreciation. investment trusts. Asset Management
International Value Long-term capital Equity securities of companies of Morgan Stanley
(formerly called appreciation primarily any size located in developed Asset Management
International) through investment in countries outside of the U.S.
equity securities of
corporations domiciled in
countries other than the
U.S.
Government Securities Maximize total return Fixed income securities that are Pacific Investment
consistent with prudent issued or guaranteed by the U.S. Management Company
investment management. government, its agencies or
government-sponsored enterprises.
Managed Bond Maximize total return Medium and high-quality fixed Pacific Investment
consistent with prudent income securities with varying Management Company
investment management. terms to maturity.
Money Market Current income consistent Highest quality money market Pacific Life
with preservation of instruments believed to have
capital. limited credit risk.
High Yield Bond High level of current Fixed income securities with Pacific Life
income. lower and medium-quality credit
ratings and intermediate to long
terms to maturity.
Large-Cap Value Long-term growth of Equity securities of large U.S. Salomon Brothers
capital. Current income is companies. Asset Management
of secondary importance. Inc
</TABLE>
* The fund's board of trustees has approved a proposed reorganization of this
portfolio into the Managed Bond Portfolio, subject to the approval of the
shareholders of this portfolio. If shareholder approval is obtained, it is
expected that the reorganization will take place in the summer of 2000. If
the reorganization occurs, shareholders of this portfolio would become
shareholders of the Managed Bond Portfolio, and this Bond and Income
Portfolio would cease to exist.
29
<PAGE>
YOUR INVESTMENT OPTIONS
An example
Calculating unit values
You ask us to When you choose a variable investment option, we credit
allocate $6,000 to your policy with accumulation units. The number of
the Government units we credit equals the amount we've allocated
Securities divided by the unit value of the variable account.
investment option Similarly, the number of accumulation units in your
on a business day. policy will be reduced when you make a transfer,
At the end of that withdrawal or loan from a variable investment option,
day, the unit value and when your monthly charges are deducted.
of the variable
account is $15. The value of an accumulation unit is the basis for all
We'll credit your financial transactions relating to the variable
policy with 400 investment options. We calculate the unit value for
units ($6,000 each variable account once every business day, usually
divided by $15). at or about 4:00 p.m. Eastern time.
The value of an Generally, for any transaction, we'll use the next unit
accumulation unit value calculated after we receive your written request.
is not the same as If we receive your written request before 4:00 p.m.
the value of a Eastern time, we'll use the unit value calculated as of
share in the the end of that business day. If we receive your
underlying request on or after 4:00 p.m. Eastern time, we'll use
portfolio. the unit value calculated as of the end of the next
business day.
For information
about timing of If a scheduled transaction falls on a day that is not a
transactions, see business day, we'll process it as of the end of the
Pacific Select next business day. For your monthly charge, we'll use
Estate Preserver II the unit value calculated on your monthly payment date.
basics. If your monthly payment date does not fall on a
business day, we'll use the unit value calculated as of
the end of the next business day.
The unit value calculation is based on the following:
. the investment performance of the underlying
portfolio
. any dividends or distributions paid by the underlying
portfolio
. any charges for any taxes that are, or may become,
associated with the operation of the variable
account.
The unit value of a variable account will change with
the value of its corresponding Pacific Select Fund
portfolio. Changes in the unit value of a variable
account will not change the number of accumulation
units credited to your policy.
A look at performance
Performance information may appear in advertisements,
sales literature, or reports to policy owners or
prospective buyers.
Information about the performance of any variable
account of the separate account reflects only the
performance of a hypothetical policy. The calculations
are based on allocating the hypothetical policy's
accumulated value to the variable account during a
particular time period.
Performance information is no guarantee of how a
variable account will perform in the future. You should
keep in mind 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 period of time that's
shown.
We may show performance information in any way that's
allowed under the law that applies to it. This may
include presenting a change in accumulated value due to
the performance of one or more variable accounts, or as
a change in a policy owner's death benefit.
30
<PAGE>
We may show performance as a change in accumulated
value over time or in terms of the average annual
compounded rate of return on accumulated value. This
would be based on allocating premium payments for a
hypothetical policy to a particular variable account
over certain periods of time, including one year, or
from the day the variable account started operating. If
a portfolio has existed for longer than its
corresponding variable account, we may also show the
hypothetical returns that the variable account would
have achieved had it invested in the portfolio from the
day the portfolio started operating.
Performance may reflect the deduction of all policy
charges including premium load, the cost of insurance,
the administrative charge, and the mortality and
expense risk charge. The different death benefit
options will result in different expenses for the cost
of insurance, and the varying expenses will result in
different accumulated values.
In our advertisements, sales literature and reports to
policy owners, we may compare performance information
for a variable account to:
. 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
. the Consumer Price Index, to assess the real rate of
return from buying a policy by taking inflation into
consideration.
Reports and promotional literature may also contain our
rating or a rating of our claims-paying ability. These
ratings are set by firms that analyze and rate
insurance companies and by nationally recognized
statistical rating organizations.
You'll find more Fees and expenses paid by the Pacific Select Fund
about Pacific The Pacific Select Fund pays advisory fees and other
Select Fund fees expenses. These are deducted from the assets of the
and expenses in An fund's portfolios and may vary from year to year. They
overview of Pacific are not fixed and are not part of the terms of your
Select Estate policy. If you choose a variable investment option,
Preserver II. these fees and expenses affect you indirectly because
they reduce portfolio returns. The fund is governed by
its own Board of Trustees.
31
<PAGE>
YOUR INVESTMENT OPTIONS
---------------------------------------------------------
Fixed options
You can also choose from two fixed options: the Fixed
The fixed options account and the Fixed LT account. The fixed options
are not securities, provide a guaranteed minimum annual rate of interest.
so they do not fall The amounts allocated to the fixed options are held in
under any our general account.
securities act. For
this reason, the Here are some things you need to know about the fixed
SEC has not options:
reviewed the
disclosure in this . Accumulated value allocated to the fixed options earn
prospectus about interest on a daily basis, using a 365-day year. Our
these options. minimum annual interest rate is 4%.
However, other . We may offer a higher annual interest rate on the
federal securities fixed options. If we do, we'll guarantee the higher
laws may apply to rate for one year.
the accuracy and . There are no investment risks or direct charges.
completeness of the . There are limitations on when and how much you can
disclosure about transfer from the fixed options. These limitations
these options. For are described below in Transferring among investment
more information options.
about the general . We may limit the total amount you allocate to the
account, see About Fixed LT account for all Pacific Life policies you
Pacific Life. own to $1,000,000 in any 12-month period, and
transfer any amount over $1,000,000 to your other
investment options according to your most recent
instructions. We may increase the $1,000,000 limit at
any time at our sole discretion. You should contact
us to find out if a higher limit is in effect.
---------------------------------------------------------
Transferring among You can transfer among your investment options any time
investment options during the life of your policy without triggering any
current income tax. You can make transfers by writing
If your state to us, by making a telephone transfer, or by signing up
requires us to for one of our automatic transfer programs. You'll find
refund your more information about making telephone transfers in
premiums when you Pacific Select Estate Preserver II basics.
exercise your right
to cancel, you can Transfers will normally be effective as of the end of
make transfers and the business day we receive your written or telephone
use transfer request.
programs only after
the free look Here are some things you need to know about making
transfer date. For transfers:
more information,
please see Pacific . Your policy's accumulated value may be invested in up
Select Estate to 20 investment options at one time.
Preserver II . If you're making transfers between variable
basics. investment options, there is no minimum amount
required and you can make as many transfers as you
If you live in like.
Connecticut, . You can make transfers from the variable investment
Georgia, Maryland, options to the fixed options only in the policy month
North Carolina, right before each policy anniversary.
North Dakota, or . You can only make one transfer from each fixed option
Pennsylvania, you in any 12-month period, except if you've signed up
can make a transfer for the first year transfer program.
to the fixed . You can only transfer up to the greater of $5,000 or
options any time 25% of your policy's accumulated value in the Fixed
during the first 18 account in any 12-month period.
months of your . You can only transfer up to the greater of $5,000 or
policy. 10% of your policy's accumulated value in the Fixed
LT account in any 12-month period.
You'll find more . Currently, there is no charge for making a transfer
about the first but we may charge you in the future.
year transfer . There is no minimum required value for the investment
program later in option you're transferring to or from.
this section. . You cannot make a transfer if your policy is in the
grace period and is in danger of lapsing.
. We can restrict or suspend transfers.
. We may choose to impose limits on transfer amounts,
the value of the investment options you're
transferring to or from, or the number and frequency
of transfers you can make.
32
<PAGE>
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Transfer programs We offer three programs that allow you to make
automatic transfers of accumulated value from one
investment option to another. Under the dollar cost
averaging and porfolio rebalancing programs, you can
transfer among the variable investment options. Under
the first year transfer program, you can make transfers
from the Fixed account to the Fixed LT account and the
variable investment options.
Since the value of Dollar cost averaging program
accumulation units Our dollar cost averaging program allows you to make
can change, more scheduled transfers of $50 or more between variable
units are credited investment options. It does not allow you to make
for a scheduled transfers to or from either of the fixed options.
transfer when unit Here's how the program works:
values are lower,
and fewer units . You need to complete a request form to enroll in the
when unit values program. You may enroll by telephone if you have a
are higher. This completed telephone authorization form on file.
allows you to . You must have at least $5,000 in a variable
average the cost of investment option to start the program.
investments over . We'll automatically transfer accumulated value from
time. Investing one variable investment option to one or more of the
this way does not other variable investment options you've selected.
guarantee profits . We'll process transfers as of the end of the business
or prevent losses. day on your policy's monthly, quarterly, semi-annual
or annual anniversary, depending on the interval
you've chosen. We will not make the first transfer
until after the free look transfer date in states
that require us to return your premiums if you
exercise your right to cancel your policy.
. We will not charge you for the dollar cost averaging
program or for transfers made under this program,
even if we decide to charge you in the future for
transfers outside of the program, except if we have
to by law.
. We have the right to discontinue, modify or suspend
the program at any time.
We'll keep making transfers at the intervals you've
chosen until one of the following happens:
. the total amount you've asked us to transfer has been
transferred
. there is no more accumulated value in the investment
option you're transferring from
. your policy enters the grace period and is in danger
of lapsing
. you tell us in writing to cancel the program
. we discontinue the program.
Because the Portfolio rebalancing program
portfolio As the value of the underlying portfolios changes, the
rebalancing program value of the allocations to the variable investment
matches your options will also change. The portfolio rebalancing
original percentage program automatically transfers your policy's
allocations, we may accumulated value among the variable investment options
transfer money from according to your original percentage allocations.
an investment
option with Here's how the program works:
relatively higher
returns to one with . You enroll in the program by sending us a written
relatively lower signed request or a completed automatic rebalancing
returns. form. You may enroll by telephone if you have a
completed telephone authorization form on file.
. Your first rebalancing will take place on the monthly
payment date you choose. You choose whether we should
make transfers quarterly, semi-annually or annually,
based on your policy date.
. If you cancel this program, you must wait 30 days to
begin it again.
. You cannot use this program if you're already using
the dollar cost averaging program.
. We do not currently charge for the portfolio
rebalancing program or for transfers made under this
program.
. We can discontinue, modify or suspend the program at
any time.
33
<PAGE>
YOUR INVESTMENT OPTIONS
This program allows First year transfer program
you to average the Our first year transfer program allows you to make
cost of investments monthly transfers during the first policy year from the
over your first Fixed account to the variable investment options or the
policy year. Fixed LT account. It does not allow you to transfer
Investing this way among variable investment options.
does not guarantee
profits or prevent Here's how the program works:
losses.
. You enroll in the program when you apply for your
policy.
. You choose a regular amount to be transferred every
month for 12 months.
. We make the first transfer on the day we allocate
your first net premium to the investment options
you've chosen. Each transfer will be made on the same
day every month.
. If you sign up for this program, we'll waive the
usual transfer limit for the Fixed account during the
first policy year.
. If we make the last transfer during the second policy
year, we will not count it toward the usual one
transfer per year limit for the Fixed account.
. If the accumulated value in the Fixed account is less
than the amount to be transferred, we'll transfer the
balance and then cancel the program.
. If there is accumulated value remaining in the Fixed
account at the end of the program, our usual rules
for the Fixed account will apply.
. We do not currently charge for the first year
transfer program or for transfers made under this
program.
34
<PAGE>
WITHDRAWALS, SURRENDERS AND LOANS
You can take out all or part of your policy's
Making a accumulated value while your policy is in force by
withdrawal, taking making withdrawals or surrendering your policy. You can
out a loan or take out a loan from us using your policy as security.
surrendering your You can also use your policy's loan and withdrawal
policy can change features to supplement your income, for example, during
your policy's tax retirement.
status, generate
taxable income, or
make your policy
more susceptible to
lapsing. Be sure to
plan carefully
before using these
policy benefits.
If you withdraw a
larger amount than
you've paid into
your policy, your
withdrawal may be
considered taxable
income.
For more
information, see
Variable life
insurance and your
taxes.
---------------------------------------------------------
Making withdrawals You can withdraw part of your policy's net cash
surrender value starting on your policy's first
You can choose to anniversary. Here's how it works:
receive your
withdrawal in a . You must send us a written request that's signed by
lump sum or use it all owners.
to buy an income . Each withdrawal must be at least $500, and the net
benefit. Please see cash surrender value of your policy after the
the discussion withdrawal must be at least $500.
about income . If your policy has an outstanding loan amount, the
benefits in General maximum withdrawal you can take is the amount, if
information about any, by which the cash surrender value just before
your policy. the withdrawal, exceeds the outstanding loan amount
divided by 90%.
We will not accept . We'll charge you $25 for each withdrawal you make.
your request to . If you do not tell us which investment options to
make a withdrawal take the withdrawal from, we'll deduct the withdrawal
if it will cause and the withdrawal charge from all of your investment
your policy to options in proportion to the accumulated value you
become a modified have in each option.
endowment contract, . The accumulated value, cash surrender value and net
unless you've told cash surrender value of your policy will be reduced
us in writing that by the amount of each withdrawal.
you want your . If the last surviving person insured under the policy
policy to become a dies after you've sent a withdrawal request to us,
modified endowment but before we've made the withdrawal, we'll deduct
contract. the amount of the withdrawal from any death benefit
proceeds owing.
How withdrawals affect your policy's death benefit
Making a withdrawal will affect your policy's death
benefit in the following ways:
. if your policy's death benefit does not equal the
guideline minimum death benefit, the death benefit
will decrease by the amount of your withdrawal.
. if your policy's death benefit equals the guideline
minimum death benefit, the death benefit may decrease
by more than the amount of your withdrawal.
How withdrawals affect your policy's face amount
If you've chosen death benefit Option B or Option C,
making a withdrawal does not reduce your policy's face
amount.
If you've chosen death benefit Option A or Option D, a
withdrawal may reduce your face amount. You can make
one withdrawal during each of the first 15 policy years
of $10,000 or 10% of your policy's cash surrender
value, whichever is less, without reducing your
policy's face amount. If you withdraw a larger amount,
or make additional withdrawals, the face amount will be
reduced by the amount if any, by which the face amount
exceeds the death benefit immediately before the
withdrawal, minus the amount of the withdrawal.
35
<PAGE>
WITHDRAWALS, SURRENDERS AND LOANS
---------------------------------------------------------
Taking out a loan
You can borrow money from us any time while your policy
The amount in the is in force either by sending us a request in writing,
loan account, plus or over the telephone. You'll find more information
any interest you about requesting a loan by telephone in Pacific Select
owe, is referred to Estate Preserver II basics.
throughout this
prospectus as your When you borrow money from us, we use your policy's
outstanding loan accumulated value as security. You pay interest on the
amount. Your policy amount you borrow. The accumulated value set aside to
refers to this secure your loan also earns interest. Here's how it
amount as policy works:
debt.
. To secure the loan, we transfer an amount equal to
Taking out a loan the amount you're borrowing from your accumulated
will affect the value in the investment options to the loan account.
growth of your We'll transfer this amount from your investment
policy's options in proportion to the accumulated value you
accumulated value, have in each option, unless you tell us otherwise.
and may affect the . Interest owing on the amount you've borrowed accrues
death benefit. daily at an annual rate of 4.5% during the first 10
years of the loan. Starting in the 11th year of the
loan, interest accrues at an annual rate of 4.25%.
. Interest that has accrued during the policy year is
due on your policy anniversary. If you do not pay the
interest when it's due, we'll add it to the amount of
your loan and begin accruing interest on it from the
day it was due. We'll also transfer an amount equal
to the interest that was due, from your policy's
accumulated value to the loan account. We'll transfer
this amount from your investment options in
proportion to the accumulated value you have in each
option, unless you tell us otherwise.
. The amount in the loan account earns interest daily
at an annual rate of 4.0%. On your policy
anniversary, we transfer the interest that's been
credited to the loan account proportionately to your
investment options according to your most recent
allocation instructions.
How much you can borrow
The minimum amount you can borrow is $500, unless there
are other restrictions in your state. You can borrow up
An example to the larger of the following amounts:
For a policy in
policy year 13 . 100% of the accumulated value in the fixed options,
with: plus 90% of the accumulated value in the variable
. accumulated value investment options.
of $100,000
. a most recent . the result of a x (b / c) - d, where:
monthly charge of
$100 a = the accumulated value of your policy less 12
. an outstanding times the most recent monthly charge
loan amount of b = 1.04
$50,000 c = 1.045 during the first 10 policy years, and
1.0425 during policy year 11 and thereafter
The maximum amount d = any outstanding loan amount.
you can borrow is
$48,327.24 Paying off your loan
(($100,000 - $1200) You can pay off all or part of the loan any time while
X (1.04 / 1.0425)- your policy is in force. Unless you tell us otherwise,
$50,000) we'll transfer any loan payments you make
proportionately to your investment options according to
your most recent allocation instructions.
If you live in
Connecticut, the While you have an outstanding loan, we'll treat any
minimum amount you money you send us as a premium payment unless you tell
can borrow is $200. us in writing that it's a loan repayment.
If you live in
Oregon, the minimum
amount is $250.
36
<PAGE>
What happens if you do not pay off your loan
If you do not pay off your loan, we'll deduct the
Your outstanding amount in the loan account, including any interest you
loan amount could owe, from one of the following:
result in taxable
income if you . the death benefit proceeds before we pay them to your
surrender your beneficiary
policy, if your . the cash surrender value if you surrender your policy
policy lapses, or . the amount we refund if you exercise your right to
if your policy is a cancel.
modified endowment
contract. You Taking out a loan, whether or not you repay it, will
should talk to your have a permanent effect on the value of your policy.
tax advisor before For example, while your policy's accumulated value is
taking out a loan held in the loan account, it will miss out on the
under your policy. potential earnings available through the variable
For more investment options. The amount of interest you earn on
information, please the loan account may be less than the amount of
turn to Taking out interest you would have earned from the fixed options.
a loan in Variable These could lower your policy's accumulated value,
life insurance and which could reduce the amount of the death benefit.
your taxes.
When a loan is outstanding, the amount in the loan
account is not available to help pay for any policy
charges. If, after deducting your outstanding loan
amount, there is not enough accumulated value in your
policy to cover the policy charges, your policy could
lapse. You may need to make additional premium payments
or loan repayments to prevent your policy from lapsing.
---------------------------------------------------------
Ways to use your You can use your policy's loan and withdrawal features
policy's loan and to supplement your income, for example, during
withdrawal features retirement.
If you're Using your policy to supplement your income does not
interested in using change your rights or our obligations under the policy.
your life insurance The terms for loans and withdrawals described in this
policy to prospectus remain the same.
supplement your
retirement income, Here are some things you should consider when setting
please contact us up an income stream:
for more
information. . the rate of return you expect to earn on your
investment options
We can provide you . how long you would like to receive regular income
with illustrations . the amount of accumulated value you want to maintain
that give you in your policy.
examples of how
this could affect Understanding the risks
the accumulated Setting up an income stream may not be suitable for all
value, net cash policy owners. It's important to understand the risks
surrender value and that are involved in using your policy's loan and
death benefit of withdrawal features.
your policy based
on different You must always leave enough accumulated value in your
hypothetical gross policy to help ensure your policy will continue to
rates of return. We qualify as life insurance and will not lapse. Your
will not use a policy will lapse if there is not enough accumulated
higher rate than value, after subtracting any outstanding loan amount,
12%, and will to cover the monthly charge on the day we make the
always compare it deduction and the grace period expires. If your policy
with a rate of 0% lapses, we'll end your life insurance coverage.
based on guaranteed
insurance costs. There are also charges associated with reinstating a
lapsed policy.
The hypothetical
rates of return are You should consult with your financial adviser and
not illustrative of carefully consider how much you can withdraw and borrow
past or future from your policy each year to set up your income
results. Policy stream.
values and benefits
would be different Remember that the performance of your investment
if: options also affects your policy's accumulated value.
Poor performance can increase the danger of your policy
. the gross annual lapsing. And as the cost of insurance generally
rates of return increases with the ages of the persons insured by the
are different policy, this can also reduce the accumulated value.
from the
hypothetical
rates
. premiums were not
paid as
illustrated
. loan interest was
paid when due.
37
<PAGE>
WITHDRAWALS, SURRENDERS AND LOANS
You can also ask In addition, you should carefully review the policy
for accompanying statements we send you. Your statements will allow you
charts and graphs to monitor your policy's accumulated value, less your
that compare outstanding loan amount, to ensure your policy can
results from continue to support the income stream you have chosen.
various retirement
strategies. If your policy lapses, or you surrender your policy
after you have taken out a loan, you could face
You can ask your significant income tax liability in the year of the
registered lapse or surrender. Any outstanding loan amount will
representative for automatically be repaid when your policy lapses or you
illustrations surrender your policy. You could be taxed to the extent
showing how policy that the net surrender value plus the outstanding loan
charges may affect amount repaid exceeds the cost basis of your policy.
existing
accumulated value Interest on a loan is due to us on each policy
and how future anniversary. If we do not receive the interest when
withdrawals and due, it is added to the outstanding loan amount and
loans may affect begins accruing interest from the day it was due. This
the accumulated has a compounding effect and can add to your income tax
value and death liability.
benefit.
If both persons insured by the policy die, we'll deduct
Tax issues are any outstanding loan amount from the death benefit.
described in detail This means the death benefit proceeds will be less than
in Variable the death benefit and may be less than the face amount.
insurance and your
taxes.
---------------------------------------------------------
Surrendering your
policy
You can surrender or cash in your policy at any time
You can choose to while either of the two people insured by the policy is
receive your money still living. Your policy's cash surrender value is its
in a lump sum or accumulated value. The net cash surrender value equals
use it to buy an your policy's cash surrender value after deducting any
income benefit. outstanding loan amount.
Please see the
discussion about Here are some things you need to know about
income benefits in surrendering your policy:
General information
about your policy. . You must send us your policy and a written request.
. We'll send you the policy's net cash surrender value.
There's no surrender charge.
38
<PAGE>
GENERAL INFORMATION ABOUT YOUR POLICY
This section tells you some additional things you
should know about your policy.
---------------------------------------------------------
Income benefit If you surrender or make a withdrawal from your policy,
you can use the money to buy an income benefit that
provides a monthly income. Your policy's beneficiary
can use death benefit proceeds to buy an income
benefit. In addition to the income benefit described
below, you can choose from other income benefits we may
make available from time to time.
The following is one income benefit available under the
Pacific Select Estate Preserver II policy:
. The income benefit is based on the life of the person
receiving the income. If the policy owner is buying
the income benefit, monthly income will be based on
the owner's life. If the policy's beneficiary buys
the income benefit, monthly income will be based on
the beneficiary's life.
. We'll pay a monthly income for at least 10 years
regardless of whether the person receiving the income
is still alive.
. After 10 years, we'll only pay the monthly income for
as long as the person receiving it is still alive.
. The minimum monthly income benefit calculated must be
at least $100.
. For this income benefit, the amount you receive will
always be at least as much as the amount guaranteed
by your policy.
---------------------------------------------------------
Paying the death If either person insured by the policy, whether sane or
benefit in the insane, commits suicide within two years of the policy
case of suicide date, death benefit proceeds will be the total of all
premiums you've paid, less any outstanding loan amount,
any withdrawals you've made, and any cash dividends
we've paid.
---------------------------------------------------------
Replacement of life The term replacement has a special meaning in the life
insurance or insurance industry. Before you make a decision to buy,
annuities we want you to understand what impact a replacement may
have on your existing insurance policy.
A replacement occurs when you buy a new life insurance
policy or annuity contract, and a policy or contract
you already own has been or will be:
. lapsed, forfeited, surrendered or partially
surrendered, assigned to the replacing insurer, or
otherwise terminated
. converted to reduced paid-up insurance, continued as
extended term insurance, or otherwise reduced in
value by the use of nonforfeiture benefits or other
policy values
. amended to effect either a reduction in benefits or
in the term for which coverage would otherwise remain
in force or for which benefits would be paid
. reissued with any reduction in cash value, or
. pledged as collateral or subject to borrowing,
whether in a single loan or under a schedule of
borrowing over a period of time.
There are circumstances when replacing your existing
life insurance policy or annuity contract can benefit
you. As a general rule, however, replacement is not in
your best interest. You should carefully compare the
costs and benefits of your existing policy or contract
with those of the new policy or contract to determine
whether replacement is in your best interest.
39
<PAGE>
GENERAL INFORMATION ABOUT YOUR POLICY
---------------------------------------------------------
Errors on your
application
If the age or gender of either person insured by your
If unisex cost of policy is stated incorrectly on your application, we'll
insurance rates adjust the face amount to reflect the correct age or
apply to your gender. Here's how we'll do it:
policy, we will not
adjust the face . Using the monthly cost of insurance rate for the
amount if we policy year in which we discover the mistake, we'll
discover that multiply the face amount by the rate based on the
gender has been incorrect age or gender. We'll then divide the result
stated incorrectly by the monthly cost of insurance rate that's based on
on your the correct age or gender.
application. . We'll calculate accumulated value using cost of
insurance, rider and benefit charges based on the
correct age and gender, for all policy months
following the month we discover the mistake.
. We will not recalculate accumulated value for the
policy months up to and including the month in which
we discover the mistake.
. We will not recalculate mortality and expense risk
charges.
---------------------------------------------------------
Contesting the We have the right to contest the validity of your
validity policy for two years from the policy date. Once your
of your policy policy has been in force for two years from the policy
date during the lifetime of the people insured by the
policy, we generally lose the right to contest its
validity.
We also have the right to contest the validity of a
policy that you reinstate for two years from the day
that it was reinstated. Once your reinstated policy has
been in force for two years from the reinstatement date
during the lifetime of the people insured by the
policy, we generally lose the right to contest its
validity. During this period, we may contest your
policy only if there is a material misrepresentation on
your application for reinstatement.
Regardless of the above, we can contest the validity of
your policy for failure to pay premiums at any time.
The policy will terminate upon successful contest with
respect to either person insured by the policy.
---------------------------------------------------------
Assigning your
policy as
collateral
You can assign your policy as collateral to secure a
Assigning a policy loan, mortgage, or other kind of debt. Here's how it
that's a modified works:
endowment contract
may generate . An assignment does not change the ownership of the
taxable income and policy.
a 10% penalty tax. . After the policy has been assigned, your rights and
the rights of your beneficiary will be subject to the
assignment. The entire policy, including any income
benefit, rider, benefit and endorsement, will also be
subject to the assignment.
. We're not responsible for the validity of any
assignment.
. We must receive and record a copy of the original
assignment in a form that's acceptable to us before
we'll consider it binding.
. Unless otherwise provided, the person or organization
you assign your policy to may exercise the rights
under the policy, except the right to change the
policy owner or the beneficiary or the right to
choose a monthly income benefit.
---------------------------------------------------------
Dividends We do not expect to pay any dividends. If we do pay
dividends, we'll pay them annually in cash.
40
<PAGE>
VARIABLE LIFE INSURANCE AND YOUR TAXES
This discussion about taxes is based on our
understanding of the present federal income tax laws as
they are currently interpreted by the Internal Revenue
Service (IRS). It's based on the Internal Revenue Code
(the tax code) and does not cover any state or local
tax laws.
This is not a complete discussion of all federal income
tax questions that may arise under the policy. There
are special rules that we do not include here that may
apply in certain situations.
We do not know whether the current treatment of life
The tax insurance policies under current federal income tax or
consequences of estate or gift tax laws will continue. We also do not
owning a policy or know whether the current interpretations of the laws by
receiving proceeds the IRS or the courts will remain the same. Future
from it may vary by legislation may adversely change the tax treatment of
jurisdiction and life insurance policies, other tax consequences
according to the described in this discussion or tax consequences that
circumstances of relate directly or indirectly to life insurance
each owner or policies.
beneficiary.
We do not make any guarantees about the tax status of
Speak to a your policy, and you should not consider the discussion
qualified tax that follows to be tax advice.
adviser for
complete
information about
federal, state and
local taxes that ---------------------------------------------------------
may apply to you.
Tax treatment of Definition of life insurance
life insurance We believe that the policy qualifies as life insurance.
policies That means it will receive the same tax advantages as a
conventional fixed life insurance policy. The two main
In order to qualify tax advantages are:
as a life insurance
contract for . In general, your policy's beneficiary will not be
federal income tax subject to federal income tax when he or she receives
purposes, the the death benefit proceeds. This is true regardless
policy must meet of whether the beneficiary is an individual,
the statutory corporation, or other entity.
definition of life . You'll generally not be taxed on your policy's
insurance. accumulated value unless you receive a cash
distribution by making a withdrawal, surrendering
Death benefits may your policy, or in some instances, taking a loan from
be excluded from your policy.
income under
Section 101(a) of The tax laws defining life insurance, however, do not
the tax code. cover all policy features. Your policy may have
features that could prevent it from qualifying as life
We believe that insurance. For example, the tax laws have yet to
last survivor address many issues concerning the treatment of
policies meet the substandard risk policies, policies with term insurance
statutory on the people insured by the policy or certain tax
definition of life requirements relating to joint survivorship life
insurance under insurance policies. We can make changes to your policy
Section 7702 of the if we believe the changes are needed to ensure that
tax code. However, your policy continues to qualify as a life insurance
the area of tax law contract.
relating to the
definition of life The tax code and tax regulations impose limitations on
insurance does not unreasonable mortality and expense charges for purposes
explicitly address of determining whether a policy qualifies as life
all relevant issues insurance for federal tax purposes. For life insurance
relating to last policies entered into on or after October 21, 1988,
survivor life these calculations must be based upon reasonable
insurance policies. mortality charges and other charges reasonably expected
We reserve the to be actually paid.
right to make
changes to the
policy if we deem
the changes
appropriate to
continue to qualify
your 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. This
includes excluding
the death benefit
from the gross
income of the
beneficiary.
41
<PAGE>
VARIABLE LIFE INSURANCE AND YOUR TAXES
While the Treasury Department has issued proposed
regulations about reasonable standards for mortality
charges, the standards that apply to joint survivor
life insurance policies are not entirely clear. While
we believe that our mortality costs and other expenses
used in calculating whether the policy qualifies as
life insurance are reasonable under current laws, we
cannot be sure that the IRS agrees with us. We can
change our mortality charges if we believe the changes
are needed to ensure that your policy qualifies as a
life insurance contract.
Section 817(h) of Diversification rules and ownership of the separate
the tax code account
describes the Your policy will not qualify for the tax benefit of a
diversification life insurance contract unless the separate account
rules. follows certain rules requiring diversification of
investments underlying the policy. In addition, the IRS
For more requires that the policyholder does not have control
information about over the underlying assets.
diversification
rules, please see The Treasury Department has announced that the
Managing the diversification rules "do not provide guidance
Pacific Select Fund concerning the circumstances in which it will treat an
in the attached investor, rather than the insurance company, as the
Pacific Select Fund owner of the assets in a separate account." The IRS
prospectus. treats a variable policy owner as the owner of separate
account assets if he or she has the ability to exercise
investment control over them. Owners of the assets are
taxed on any income or gains the assets generate.
Although the Treasury Department announced it would
provide further guidance on the issue, it had not done
so when we wrote this prospectus.
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
policyowners were not owners of separate account
assets. Since you have greater flexibility in
allocating premiums and policy values than was the case
in those rulings, it is possible the IRS would treat
you as the owner of your policy's proportionate share
of the assets of the separate account.
We do not know what will be in future Treasury
Department regulations. We cannot guarantee that the
fund's 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
policies. We can modify your policy if we believe it
will prevent you from being considered the owner of
your policy's proportionate share of the assets of the
separate account.
Policy exchanges Policy exchanges
fall under Section If you exchange your policy for another one that
1035(a) of the tax insures the same people, it generally will be treated
code. as a tax-free exchange and, if so, will not result in
the recognition of gain or loss. If any of the people
insured by the policy are changed, the exchange will be
treated as a taxable exchange.
Change of ownership
You may have taxable income if you transfer ownership
of your policy, sell your policy, or change the
ownership of it in any way.
There are special Corporate owners
rules for There are special tax issues for corporate owners:
corporate-owned
policies. You . using your policy to fund deferred compensation
should consult your arrangements for employees has special tax
tax adviser. consequences
. corporate ownership of a policy may affect your
exposure to the alternative minimum tax and the
Section 59A of the environmental tax.
tax code deals with
the environmental
tax.
42
<PAGE>
---------------------------------------------------------
The tax treatment of your policy will depend upon
Conventional life whether it is a type of contract known as a modified
insurance policies endowment contract. We describe modified endowment
contracts later in this section. If your policy is not
Under Section 7702A a modified endowment contract, it will be treated as a
of the tax code, conventional life insurance policy and will have the
policies that are following tax treatment:
not classified as
modified endowment Surrendering your policy
contracts are taxed When you surrender, or cash in, your policy, you'll
as conventional generally be taxed on the difference, if any, between
life insurance the cash surrender value and the cost basis in your
policies. policy.
The cost basis in Making a withdrawal
your policy is If you make a withdrawal after your policy has been in
generally the force for 15 years, you'll only be taxed on the amount
premiums you've you withdraw that exceeds the cost basis in the policy.
paid plus any
taxable Special rules apply if you make a withdrawal within the
distributions less first 15 policy years and it's accompanied by a
any withdrawals or reduction in benefits. In this case, there is a special
premiums previously formula under which you may be taxed on all or a
recovered that were portion of the withdrawal amount.
not taxable.
Taking out a loan
If you take out a loan, you will not pay tax on the
loan amount unless your policy is surrendered or lapses
and you have not repaid your outstanding loan amount.
The interest you pay, or that's accrued, on a loan is
generally nondeductible. Ask your tax adviser for more
information.
Loans and corporate-owned policies
If you borrow money to buy or carry certain life
insurance policies, tax law provisions may limit the
deduction of interest payable on loan proceeds. If the
taxpayer is an entity that's a direct or indirect
beneficiary of certain life insurance, endowment or
annuity contracts, a portion of the entity's deductions
for loan interest may be disallowed, even though this
interest may relate to debt that's completely unrelated
to the contract. There may be a limited exception that
applies to contracts issued on 20% owners, officers,
directors or employees of the entity. For more
information about this exception, you should consult
your tax adviser.
---------------------------------------------------------
Modified endowment A modified endowment contract is a special type of life
contracts insurance policy. If your policy is a modified
endowment contract, it will have the tax treatment
Section 7702A of described below. Any distributions you receive during
the tax code the life of the policy are treated differently than
defines a class of under conventional life insurance policies.
life insurance Withdrawals, loans, pledges, assignments and
policies known as surrendering your policy are all considered
modified endowment distributions and may be subject to tax on an income-
contracts. Like first basis and a 10% penalty.
other life
insurance policies, When a policy becomes a modified endowment contract
the death benefit A life insurance policy becomes a modified endowment
proceeds paid to contract if, at any time during the first seven policy
your beneficiary years, the sum of actual premiums paid exceeds the
generally are not seven-pay limit. The seven-pay limit is the cumulative
subject to federal total of the level annual premiums (or seven-pay
income tax and your premiums) required to pay for the policy's future death
policy's and endowment benefits.
accumulated value
grows on a tax- For example, if the seven-pay premiums were $1,000 a
deferred basis year, the maximum premiums you could pay during the
until you receive a first seven years to avoid modified endowment treatment
cash distribution. would be $1,000 in the first year, $2,000 through the
first two years and $3,000 through the first three
If there is a years, etc. Under this test, a Pacific Select Estate
material change to Preserver II policy may or may not be a modified
your policy, like a endowment contract, depending on the amount of premiums
change in the death paid during the policy's first seven contract years or
benefit, we may after a material change has been made to the policy.
have to retest your
policy and restart
the seven-pay
premium period to
determine whether
the change has
caused the policy
to become a
modified endowment
contract.
43
<PAGE>
VARIABLE LIFE INSURANCE AND YOUR TAXES
Surrendering your policy
If you surrender your policy, you're taxed on the
amount by which the cash surrender value exceeds the
cost basis in the policy.
Making a withdrawal or taking out a loan
If you make a withdrawal or take out a loan from a
modified endowment contract, you're taxed on the amount
of the withdrawal or loan that's considered income,
including all previously non-taxed gains. Income is the
difference between the cash surrender value and the
cost basis in your policy. It's unclear whether
interest paid, or accrued, on a loan is considered
interest for federal income tax purposes. If you borrow
money to buy or carry certain life insurance policies,
tax law provisions may limit the deduction of interest
payable on loan proceeds. You should consult your tax
adviser.
All modified endowment contracts we or our affiliates
issue to you in a calendar year are treated as a single
contract when we calculate whether a distribution
amount is subject to tax.
10% penalty tax
If any amount you receive from a modified endowment
contract is taxable, you may also have to pay a penalty
tax equal to 10% of the taxable amount.
A taxpayer will not have to pay the penalty tax if any
of the following exceptions apply:
. you're at least 59 1/2 years old
. you're receiving an amount because you've become
disabled
. you're receiving an amount that's part of a series of
substantially equal periodic payments, paid out at
least annually. These payments may be made for your
life or life expectancy or for the joint lives or
joint life expectancies of you and your
beneficiaries.
Distributions before a policy becomes a modified
endowment contract
If your policy fails the seven-pay test and becomes a
modified endowment contract, any amount you receive or
are deemed to have received during the two years before
it became a modified endowment contract may be taxable.
The distribution would be treated as having been made
in anticipation of the policy's failing to meet the
seven-pay test under Treasury Department regulations
which are yet to be prescribed.
---------------------------------------------------------
Accelerated living benefits rider
Policy riders Amounts received under this rider should be generally
excluded from taxable income under Section 101(g) of
Please see the the tax code.
discussion of
optional riders in Benefits under the rider will be taxed, however, if
The death benefit. they are paid to someone other than a person insured by
the policy, and either person insured by the policy:
Please consult with
your tax adviser if . is a director, officer or employee of the person
you want to receiving the benefit, or
exercise your . has a financial interest in a business of the person
rights under either receiving the benefit.
of these riders.
In some cases, there may be a question as to whether a
life insurance policy that has an accelerated living
benefit rider can meet technical aspects of the
definition of "life insurance contract" under the tax
code. We may reserve the right (but are not obligated)
to modify the rider to conform under tax code
requirements.
Split policy option rider
This rider allows a policy to be split into two
individual policies. If the split is not treated as a
nontaxable exchange, it could result in the recognition
of taxable income up to any gain or income in the
policy at the time of the split.
44
<PAGE>
ABOUT PACIFIC LIFE
Pacific Life Insurance Company is a life insurance
company 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. At the
end of 1999, we had over $101 billion of individual
life insurance in force and total admitted assets of
approximately $48.2 billion. We are ranked the 16th
largest life insurance carrier in the U.S. in terms of
1999 admitted assets.
The Pacific Life family of companies has total assets
under management of $315 billion. We are authorized to
conduct our life and annuity business in the District
of Columbia and in all states except New York. Our
principal office is at 700 Newport Center Drive,
Newport Beach, California 92660.
---------------------------------------------------------
How we're organized Pacific Life was established on January 2, 1868 under
the name, Pacific Mutual Life Insurance Company of
California. It was reincorporated as Pacific Mutual
Life Insurance Company on July 22, 1936. On September
1, 1997, Pacific Life converted from a mutual life
insurance company to a stock life insurance company.
Pacific Life is 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 charters, Pacific Mutual Holding Company
must always hold at least 51% of the outstanding voting
stock of Pacific LifeCorp. 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. They have the right to vote on
the election of the Board of Directors of the mutual
holding company and on other matters. They also have
certain rights if the mutual holding company is
liquidated or dissolved.
---------------------------------------------------------
How policies are Pacific Select Distributors, Inc. (PSD) (formerly
distributed called Pacific Mutual Distributors, Inc.), our
subsidiary, is the distributor of our policies. PSD is
located at 700 Newport Center Drive, Newport Beach,
California 92660.
PSD is registered as a broker-dealer with the SEC and
is a member of the National Association of Securities
Dealers (NASD). We pay PSD for its services as our
distributor.
The policies are sold by registered representatives of
broker-dealers who have signed agreements with us and
PSD. Registered representatives must be licensed to
sell variable life insurance under the state insurance
and securities regulations that apply. Broker-dealers
must be registered with the SEC.
How we pay broker-dealers
We pay broker-dealers commission for promoting,
marketing and selling our policies. Broker-dealers pay
a portion of the commission to their registered
representatives, under their own arrangements.
45
<PAGE>
ABOUT PACIFIC LIFE
Commissions are based on "target" premiums we
determine. The commission we pay will vary with the
agreement, but the most common schedule of commissions
Targets are based we pay is:
on the joint equal
age on the policy . 30% of premiums paid up to the first target premium
date and each . 25% of the premiums paid under targets 2 through 5
$1,000 of the . 4% of premiums paid in excess of targets 1 through 5
initial face amount in policy years 1 through 10
of your policy. The . 3% of premiums paid thereafter.
targets range from
$2.28 to $59.00 for We may pay broker-dealers an annual renewal commission
each $1,000 of of up to 0.20% of a policy's accumulated value less any
initial face outstanding loan amount. We calculate the renewal
amount. amount monthly and it becomes payable on each policy
anniversary.
We may also pay override payments, expense and
marketing allowances, bonuses, wholesaler fees and
training allowances.
Registered representatives who meet certain sales
levels can qualify for sales incentives programs we
sponsor. We may also pay them non-cash compensation
like expense-paid trips, expense-paid educational
seminars, and merchandise. They can choose to receive
their compensation on a deferred basis.
---------------------------------------------------------
How our accounts We own the assets in our general account and our
work separate account. We allocate your net premiums to
these accounts according to the investment options
you've chosen.
General account
We can provide you Our general account includes all of our assets, except
with reports of our for those held in our separate accounts. We guarantee
ratings as an you an interest rate for up to one year on any amount
insurance company allocated to the fixed options. The rate is reset
and our ability to annually. The fixed options are part of our general
pay claims with account, which we may invest as we wish, according to
respect to our any laws that apply. We'll credit the guaranteed rate
general account even if the investments we make earn less. Our ability
assets. to pay these guarantees is backed by our strength as a
company.
The fixed options are not securities, so they do not
fall under any securities act. For this reason, the SEC
has not reviewed the disclosure in this prospectus
about the fixed options. However, other federal
securities laws may apply to the accuracy and
completeness of the disclosure about the fixed options.
Separate account
You'll find the Amounts allocated to the variable investment options
audited financial are held in our separate account. The assets in this
statements for the account are kept separate from the assets in our
Pacific Select Exec general account and our other separate accounts, and
separate account are protected from our general creditors.
later in this
section of the The separate account was established on May 12, 1988
prospectus. under California law under the authority of our Board
of Directors. It's registered with the SEC as a type of
This section of the investment company called a unit investment trust. The
prospectus also SEC does not oversee the administration or investment
includes the practices or policies of the account.
audited
consolidated The separate account is divided into variable accounts.
financial Each variable account invests in shares of a designated
statements for portfolio of the Pacific Select Fund. We may add
Pacific Life, which variable accounts that invest in other portfolios of
we include to show the fund or in other securities.
our strength as a
company and our
ability to meet our
obligations under
the policies.
46
<PAGE>
We're the legal owner of the assets in the separate
account, and pay its operating expenses. The separate
The separate account is operated only for our variable life
account is not the insurance policies. We must keep enough money in the
only investor in account to pay anticipated obligations under the
the Pacific Select insurance policies funded by the account, but we can
Fund. Investment in transfer any amount that's more than these anticipated
the fund by other obligations to our general account. Some of the money
separate accounts in the separate account may include charges we collect
for variable from the account and any investment results on those
annuity contracts charges.
and variable life
insurance contracts We cannot charge the assets in the separate account
could cause attributable to our reserves and other liabilities
conflicts. For more under the policies funded by the account with any
information, please liabilities from our other business.
see the Statement
of Additional Similarly, the income, gains or losses, realized or
Information for the unrealized, of the assets of any variable account
Pacific Select belong to that variable account and are credited to or
Fund. charged against the assets held in that variable
account without regard to our other income, gains or
losses.
Making changes to the separate account
We can add, change or remove any securities that the
separate account or any variable account holds or buys,
as long as we comply with the laws that apply.
We can substitute shares of one Pacific Select Fund
portfolio with shares of another portfolio or fund if:
. any portfolio is no longer available for investment
. our management believes that a portfolio is no longer
appropriate in view of the purposes of the policy.
We'll give you any required notice or receive any
required approval from policy owners or the SEC before
we substitute any shares. We'll comply with the filing
or other procedures established by insurance regulators
as required by law.
We can add new variable accounts, which may include
additional subaccounts of the separate account, to
serve as investment options under the policies. These
may be managed separate accounts or they may invest in
a new portfolio of the fund, or in shares of another
investment company or one of its portfolios, or in a
suitable investment vehicle with a specified investment
objective.
We can add new variable accounts when we believe that
it's warranted by marketing needs or investment
conditions. We'll decide on what basis we'll make new
accounts available to existing policy owners.
We can also eliminate any of our variable accounts if
we believe marketing, tax or investment conditions
warrant it. We can terminate and liquidate any variable
account.
If we make any changes to variable accounts or
substitution of securities, we can make appropriate
changes to this policy or any of our other policies, by
appropriate endorsement, to reflect the change or
substitution.
47
<PAGE>
ABOUT PACIFIC LIFE
If we believe it's in the best interests of people
holding voting rights under the policies and we meet
any required regulatory approvals we can do the
following:
. operate the separate account as a management
investment company, unit investment trust, or any
other form permitted under securities or other laws
. register or deregister the separate account under
securities law
. combine the separate account with one of our other
separate accounts or our affiliates' separate
accounts
. combine one or more variable accounts
. create a committee, board or other group to manage
the separate account
. change the classification of any variable account.
Taxes we pay
We may be charged for state and local taxes. Currently,
we pay these taxes because they are small amounts with
respect to the policy. If these taxes increase
significantly, we may deduct them from the separate
account.
We may charge the separate account for any federal,
state and local taxes that apply to the separate
account or to our operations. This could happen if our
tax status or the tax treatment of variable life
insurance changes.
---------------------------------------------------------
Voting rights We're the legal owner of the shares of the Pacific
Select Fund that are held by the variable accounts. We
may vote on any matter at shareholder meetings of the
fund. However, we are required by law to vote as you
instruct on the shares relating to your allocation in a
variable investment option. This is called your voting
interest.
Your voting interest is calculated as of a day set by
the Board of Trustees of the fund called the record
date. Your voting interest equals the accumulated value
in a variable investment option divided by the net
asset value of a share of the corresponding portfolio.
Fractional shares are included. If allowed by law, we
may change how we calculate your voting interest.
We'll send you documents from the fund called proxy
materials. They include information about the items
you'll be voting on and forms for you to give us your
instructions. We'll vote shares held in the separate
account for which we do not receive voting instructions
in the same proportion as all other shares in the
portfolio held by that separate account for which we've
received timely instructions.
We'll vote shares of any portfolio we hold in our
general account in the same proportion as the total
votes 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.
If the law changes to allow it, we can vote as we wish
on shares of the portfolios held in the separate
account.
When required by state insurance regulatory
authorities, we may disregard voting instructions that:
. would change a portfolio's investment objective or
subclassification
. would approve or disapprove an investment advisory
contract.
48
<PAGE>
We may disregard voting instructions on a change
initiated by policy owners that would change a
portfolio's investment policy, investment adviser or
portfolio manager if:
. our disapproval is reasonable
. we determine in good faith that the change would be
against state law or otherwise be inappropriate,
considering the portfolio's objectives and purpose,
and considering what effect the change would have on
us.
If we disregard any voting instructions, we'll include
a summary of the action we took and our reasons for it
in the next report to policy owners.
---------------------------------------------------------
We will provide you with illustrations based on
Illustrations different sets of assumptions upon your request. You
can request such illustrations at any time.
If you ask us, Illustrations may help you understand how your policy
we'll provide you values would vary over time based on different
with different assumptions. We have filed examples of such an
kinds of illustration as an exhibit to the registration
illustrations. statement that relates to the policy on file with the
SEC.
. Illustrations
based on
information you
give us about the
age of the person
to be insured by
the policy, their
risk class, the
face amount, the
death benefit and
premium payments.
. Illustrations
that show the
allocation of
premium payments
to specified
variable
accounts. These
will reflect the
expenses of the
portfolio of the
Fund in which the
variable account
invests.
. Illustrations
that use a
hypothetical
gross rate of
return that's
greater than 12%.
These are
available only to
certain large
institutional
investors.
---------------------------------------------------------
State regulation We're subject to the laws of the state of California
governing insurance companies and to regulations issued
by the Commissioner of Insurance of California. In
addition, we're subject to the insurance laws and
regulations of the other states and jurisdictions in
which we're 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.
---------------------------------------------------------
Legal proceedings The separate account is not involved in any legal
and legal matters proceedings that would have a material effect on policy
owners.
Legal matters concerning the issue and sale of the life
insurance policies described in this prospectus, our
organization and authority to issue the policies under
California law, and the validity of the forms of the
policies under California law, have been passed upon by
our general counsel. Legal matters relating to federal
securities laws and federal income tax laws have been
passed upon by Dechert Price & Rhoads.
49
<PAGE>
ABOUT PACIFIC LIFE
---------------------------------------------------------
Registration We've filed a registration statement with the SEC for
statement Pacific Select Estate Preserver II, under the
Securities Act of 1933. The SEC's rules allow us to
omit some of the information required by the
registration statement from this prospectus. You can
ask for it from the SEC's office in Washington, D.C.
They may charge you a fee.
---------------------------------------------------------
Management The following is a list of our directors and certain
officers, along with some information about their
business activities over the past five years. They do
not receive any compensation from the separate account
for services they provide to it nor do we pay any
separately allocable compensation for these services.
The business address of each of these people 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 of Pacific Life;
Director, Chairman Director, Chairman of the Board and Chief Executive Officer of Pacific LifeCorp,
of the Board and August 1997 to present; Director, Chairman of the Board and Chief Executive Officer
Chief Executive of Pacific Mutual Holding Company, August 1997 to present; Trustee and Chairman of
Officer the Board and Former President of Pacific Select Fund; Director and Chairman of the
Board of Pacific Life & Annuity Company (formerly known as PM Group Life Insurance
Company); Management Board Member of PIMCO Advisors L.P., December 1997 to present;
Former Equity Board Member of PIMCO Advisors L.P.; Former Director of Pacific
Corinthian Life Insurance Company; Director of Newhall Land & Farming; The Irvine
Company; Edison International; and similar positions with other affiliated companies
of Pacific Life.
Glenn S. Schafer Director and President of Pacific Life; Executive Vice President and Chief Financial
Director and Officer of Pacific Life, April 1991 to January 1995; Director and President of
President Pacific LifeCorp, August 1997 to present; Director and President of Pacific Mutual
Holding Company, August 1997 to present; President (since February 1999) and Former
Trustee of Pacific Select Fund; Management Board Member of PIMCO Advisors L.P.,
December 1997 to present; Former Equity Board Member of PIMCO Advisors L.P.; Former
Director of Pacific Corinthian Life Insurance Company; Director of Pacific Life &
Annuity Company; and similar positions with other affiliated companies of Pacific
Life.
Khanh T. Tran Director (since August 1997), Senior Vice President and Chief Financial Officer of
Director, Senior Pacific Life, June 1996 to present; Vice President and Treasurer of Pacific Life,
Vice President and November 1991 to June 1996; Senior Vice President and Chief Financial Officer of
Chief Financial Pacific LifeCorp, August 1997 to present; Senior Vice President and Chief Financial
Officer 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 General Counsel of Pacific
Director, Senior Life; Senior Vice President and General Counsel of Pacific LifeCorp, August 1997 to
Vice President and present; Senior Vice President and General Counsel of Pacific Mutual Holding
General Counsel Company, August 1997 to present: Director, Senior Vice President (since July 1998)
and General Counsel (since July 1998) of Pacific Life & Annuity Company; Director
of: 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 Secretary of Pacific
Director, Vice Life; Vice President and Corporate Secretary of Pacific LifeCorp, August 1997 to
President and present; Vice President and Secretary of Pacific Mutual Holding Company, August 1997
Corporate Secretary to present; Secretary of Pacific Select Fund; similar positions with other
affiliated companies of Pacific Life.
Lynn C. Miller Executive Vice President, Individual Insurance, of Pacific Life, Executive Vice
Executive Vice President of Pacific Life & Annuity Company, July 1998 to present.
President
Edward R. Byrd Vice President and Controller of Pacific Life; Vice President and Controller of
Vice President and Pacific LifeCorp, August 1997 to present; Vice President and Controller of Pacific
Controller 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 to present; Assistant
Vice President and Vice President, Accounting and Assistant Controller of Pacific Life, April 1994 to
Treasurer December 1998; Vice President and Treasurer of Pacific LifeCorp, June 1999 to
present; Vice President and Treasurer of Pacific Mutual Holding Company, June 1999
to present; Vice President and Treasurer of other affiliated companies of Pacific
Life.
</TABLE>
50
<PAGE>
---------------------------------------------------------
Financial The next several pages contain the statement of net
statements assets of the Pacific Select Exec Separate Account as
of December 31, 1999 and the related statement of
operations for the year then ended and statements of
changes in net assets for each of the two years in the
period then ended.
These are followed by the consolidated financial
statements for Pacific Life as of December 31, 1999 and
1998 and for each of the three years ended December 31,
1999, which are included in this prospectus so you can
assess our ability to meet our obligations under the
policies. Unaudited financial statements for Pacific
Life as of March 31, 2000 and for the three months
ended March 31, 2000 and 1999 are also included.
Experts ---------------------------------------------------------
The consolidated financial statements of Pacific Life
as of December 31, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999 and
the statement of net assets of Pacific Select Exec
Separate Account as of December 31, 1999 and the
related statement of operations for the year then ended
and statements of changes in net assets for each of the
two years in the period then ended 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.
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of
Pacific Select Exec Separate Account (comprised of the Aggressive Equity,
Emerging Markets, Growth, Bond and Income, Equity, Multi-Strategy, Equity
Income, Growth LT, Mid-Cap Value, Equity Index, Small-Cap Index, REIT,
International, Government Securities, Managed Bond, Money Market, High Yield
Bond, Large-Cap Value, Variable Account I, Variable Account II, Variable
Account III, and Variable Account IV Variable Accounts) as of December 31, 1999
and the related statement of operations for the year then ended and statement
of changes in net assets for each of the two years in the period then ended (as
to the Mid-Cap Value, Small-Cap Index, REIT, and Large-Cap Value Variable
Accounts, for the periods from commencement of operations through December 31,
1999). These financial statements are the responsibility of the Separate
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of each of the respective Variable Accounts
constituting Pacific Select Exec Separate Account as of December 31, 1999 and
the results of their operations for the year then ended and the changes in
their net assets for each of the two years in the period then ended (as to the
Mid-Cap Value, Small-Cap Index, REIT, and Large-Cap Value Variable Accounts,
for the periods from commencement of operations through December 31, 1999), in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 10, 2000
52
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Aggressive Emerging Bond and Multi- Equity Growth Mid-Cap Equity Small-Cap
Equity Markets Growth Income Equity Strategy Income LT Value Index Index
Variable Variable Variable Variable Variable Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account Account Account Account Account Account
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Aggressive
Equity Portfolio
(2,270 shares;
cost $28,345)... $33,035
Emerging Markets
Portfolio
(1,900 shares;
cost $14,846)... $19,910
Growth Portfolio
(9,705 shares;
cost $225,194).. $289,069
Bond and Income
Portfolio
(630 shares;
cost $7,935).... $6,997
Equity Portfolio
(1,589 shares;
cost $48,734)... $59,599
Multi-Strategy
Portfolio
(8,946 shares;
cost $134,934).. $151,897
Equity Income
Portfolio
(8,125 shares;
cost $186,348).. $225,466
Growth LT
Portfolio
(11,253 shares;
cost $266,532).. $536,446
Mid-Cap Value
Portfolio
(496 shares;
cost $5,142).... $5,208
Equity Index
Portfolio
(11,315 shares;
cost $298,365).. $434,565
Small-Cap Index
Portfolio
(547 shares;
cost $5,759).... $6,426
Receivables:
Due from Pacific
Life Insurance
Company......... 45 27 53 5 19 131 4 1
Fund shares
redeemed........ 26 88
-----------------------------------------------------------------------------------------------------
Total Assets..... 33,061 19,955 289,096 6,997 59,652 151,902 225,485 536,577 5,212 434,653 6,427
-----------------------------------------------------------------------------------------------------
LIABILITIES
Payables:
Due to Pacific
Life Insurance
Company......... 26 88
Fund shares
purchased....... 45 27 53 5 19 131 4 1
-----------------------------------------------------------------------------------------------------
Total
Liabilities...... 26 45 27 53 5 19 131 4 88 1
-----------------------------------------------------------------------------------------------------
NET ASSETS....... $33,035 $19,910 $289,069 $6,997 $59,599 $151,897 $225,466 $536,446 $5,208 $434,565 $6,426
-----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
53
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (Continued)
DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Govern- High
Inter- ment Managed Money Yield Large-Cap
REIT national Securities Bond Market Bond Value Variable Variable Variable Variable
Variable Variable Variable Variable Variable Variable Variable Account Account Account Account
Account Account Account Account Account Account Account I II III IV
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
REIT Portfolio
(276 shares;
cost $2,783).... $2,643
International
Portfolio
(11,651 shares;
cost $188,119).. $215,349
Government
Securities
Portfolio
(2,200 shares;
cost $23,386)... $22,218
Managed Bond
Portfolio
(11,058 shares;
cost $120,723).. $114,197
Money Market
Portfolio
(13,001 shares;
cost $131,293).. $131,046
High Yield Bond
Portfolio
(5,450 shares;
cost $50,328)... $48,032
Large-Cap Value
Portfolio
(485 shares;
cost $5,320).... $5,378
Brandes
International
Equity Portfolio
(640 shares;
cost $8,485).... $9,927
Turner Core
Growth Portfolio
(943 shares;
cost $19,237)... $21,622
Frontier Capital
Appreciation
Portfolio
(401 shares;
cost $6,298).... $8,463
Enhanced U.S.
Equity Portfolio
(286 shares;
cost $5,315).... $6,005
Receivables:
Due from Pacific
Life Insurance
Company......... 4 74 3 2 7
Fund shares
redeemed........ 3 209 11
-----------------------------------------------------------------------------------------------------
Total Assets..... 2,647 215,423 22,221 114,200 131,255 48,043 5,380 9,927 21,622 8,463 6,012
-----------------------------------------------------------------------------------------------------
LIABILITIES
Payables:
Due to Pacific
Life Insurance
Company......... 3 209 11
Fund shares
purchased....... 4 74 3 2 7
-----------------------------------------------------------------------------------------------------
Total
Liabilities...... 4 74 3 3 209 11 2 7
-----------------------------------------------------------------------------------------------------
NET ASSETS....... $2,643 $215,349 $22,218 $114,197 $131,046 $48,032 $5,378 $9,927 $21,622 $8,463 $6,005
-----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
54
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Aggressive Emerging Bond and Multi- Equity Growth Mid-Cap Equity Small-Cap
Equity Markets Growth Income Equity Strategy Income LT Value Index Index
Variable Variable Variable Variable Variable Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account Account Account Account (1) Account Account (1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends....... $2,297 $60 $24,357 $647 $2,430 $12,175 $18,449 $24,658 $10 $5,600 $95
------------------------------------------------------------------------------------------------------------
Net Investment
Income........... 2,297 60 24,357 647 2,430 12,175 18,449 24,658 10 5,600 95
------------------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net realized
gain (loss) from
security
transactions.... 835 (293) 17,437 (147) 1,715 1,903 8,208 25,696 (70) 16,677 37
Net unrealized
appreciation
(depreciation)
on investments.. 3,261 6,681 51,373 (970) 8,860 (4,391) (1,356) 195,153 66 45,834 667
------------------------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments...... 4,096 6,388 68,810 (1,117) 10,575 (2,488) 6,852 220,849 (4) 62,511 704
------------------------------------------------------------------------------------------------------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
OPERATIONS...... $6,393 $6,448 $93,167 ($470) $13,005 $9,687 $25,301 $245,507 $6 $68,111 $799
------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operations commenced during 1999 (see Note 1 to Financial Statements).
See Notes to Financial Statements
55
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Govern- High
Inter- ment Managed Money Yield Large-Cap
REIT national Securities Bond Market Bond Value Variable Variable Variable Variable
Variable Variable Variable Variable Variable Variable Variable Account Account Account Account
Account (1) Account Account Account Account Account Account (1) I II III IV
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends....... $82 $7,401 $1,278 $8,539 $4,600 $3,845 $20 $312 $1,181 $243 $474
-----------------------------------------------------------------------------------------------------------
Net Investment
Income........... 82 7,401 1,278 8,539 4,600 3,845 20 312 1,181 243 474
-----------------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net realized
gain (loss) from
security
transactions.... (15) 8,072 9 353 259 (1,968) 29 254 277 224 646
Net unrealized
appreciation
(depreciation)
on investments.. (140) 23,374 (1,640) (10,865) (137) (533) 58 1,374 1,904 1,903 141
-----------------------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments...... (155) 31,446 (1,631) (10,512) 122 (2,501) 87 1,628 2,181 2,127 787
-----------------------------------------------------------------------------------------------------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
OPERATIONS...... ($73) $38,847 ($353) ($1,973) $4,722 $1,344 $107 $1,940 $3,362 $2,370 $1,261
-----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operations commenced during 1999 (see Note 1 to Financial Statements).
See Notes to Financial Statements
56
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Aggressive Emerging Bond and Multi- Equity Growth Mid-Cap Equity
Equity Markets Growth Income Equity Strategy Income LT Value Index
Variable Variable Variable Variable Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account Account Account Account (1) Account
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN NET
ASSETS
FROM OPERATIONS
Net investment
income.......... $2,297 $60 $24,357 $647 $2,430 $12,175 $18,449 $24,658 $10 $5,600
Net realized
gain (loss) from
security
transactions.... 835 (293) 17,437 (147) 1,715 1,903 8,208 25,696 (70) 16,677
Net unrealized
appreciation
(depreciation)
on investments.. 3,261 6,681 51,373 (970) 8,860 (4,391) (1,356) 195,153 66 45,834
----------------------------------------------------------------------------------------------------
Net Increase
(Decrease) in Net
Assets Resulting
from Operations.. 6,393 6,448 93,167 (470) 13,005 9,687 25,301 245,507 6 68,111
----------------------------------------------------------------------------------------------------
INCREASE
(DECREASE) IN NET
ASSETS
FROM POLICY
TRANSACTIONS
Transfer of net
premiums........ 6,178 3,315 31,800 1,814 7,890 13,459 27,427 46,518 1,020 69,793
Transfers--
policy charges
and deductions.. (1,517) (908) (11,435) (439) (2,031) (6,081) (10,117) (16,923) (151) (19,242)
Transfers in
(from other
variable
accounts)....... 29,901 25,855 227,823 6,748 59,920 23,609 71,635 186,813 7,393 156,344
Transfers out
(to other
variable
accounts)....... (25,109) (24,440) (239,257) (5,539) (36,551) (18,440) (63,749) (134,957) (2,988) (122,161)
Transfers--
other........... (577) (432) (12,699) (399) (700) (4,335) (12,898) (17,789) (72) (21,467)
----------------------------------------------------------------------------------------------------
Net Increase
(Decrease) in Net
Assets Derived
from Policy
Transactions..... 8,876 3,390 (3,768) 2,185 28,528 8,212 12,298 63,662 5,202 63,267
----------------------------------------------------------------------------------------------------
NET INCREASE IN
NET ASSETS....... 15,269 9,838 89,399 1,715 41,533 17,899 37,599 309,169 5,208 131,378
----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of
Year............. 17,766 10,072 199,670 5,282 18,066 133,998 187,867 227,277 303,187
----------------------------------------------------------------------------------------------------
End of Year...... $33,035 $19,910 $289,069 $6,997 $59,599 $151,897 $225,466 $536,446 $5,208 $434,565
----------------------------------------------------------------------------------------------------
<CAPTION>
Small-Cap
Index
Variable
Account (1)
-----------
<S> <C>
INCREASE
(DECREASE) IN NET
ASSETS
FROM OPERATIONS
Net investment
income.......... $95
Net realized
gain (loss) from
security
transactions.... 37
Net unrealized
appreciation
(depreciation)
on investments.. 667
-----------
Net Increase
(Decrease) in Net
Assets Resulting
from Operations.. 799
-----------
INCREASE
(DECREASE) IN NET
ASSETS
FROM POLICY
TRANSACTIONS
Transfer of net
premiums........ 1,576
Transfers--
policy charges
and deductions.. (168)
Transfers in
(from other
variable
accounts)....... 17,438
Transfers out
(to other
variable
accounts)....... (13,186)
Transfers--
other........... (33)
-----------
Net Increase
(Decrease) in Net
Assets Derived
from Policy
Transactions..... 5,627
-----------
NET INCREASE IN
NET ASSETS....... 6,426
-----------
NET ASSETS
Beginning of
Year.............
-----------
End of Year...... $6,426
-----------
</TABLE>
(1) Operations commenced during 1999 (see Note 1 to Financial Statements).
See Notes to Financial Statements
57
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Govern- High
Inter- ment Managed Money Yield Large-Cap
REIT national Securities Bond Market Bond Value Variable Variable Variable Variable
Variable Variable Variable Variable Variable Variable Variable Account Account Account Account
Account (1) Account Account Account Account Account Account (1) I II III IV
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN NET
ASSETS
FROM OPERATIONS
Net investment
income.......... $82 $7,401 $1,278 $8,539 $4,600 $3,845 $20 $312 $1,181 $243 $474
Net realized
gain (loss) from
security
transactions.... (15) 8,072 9 353 259 (1,968) 29 254 277 224 646
Net unrealized
appreciation
(depreciation)
on investments.. (140) 23,374 (1,640) (10,865) (137) (533) 58 1,374 1,904 1,903 141
---------------------------------------------------------------------------------------------------------------
Net Increase
(Decrease) in Net
Assets Resulting
from Operations.. (73) 38,847 (353) (1,973) 4,722 1,344 107 1,940 3,362 2,370 1,261
---------------------------------------------------------------------------------------------------------------
INCREASE
(DECREASE) IN NET
ASSETS
FROM POLICY
TRANSACTIONS
Transfer of net
premiums........ 327 29,734 3,788 15,623 255,115 9,673 915 1,409 1,432 1,411 885
Transfers--
policy charges
and deductions.. (65) (8,874) (1,057) (4,945) (9,879) (2,496) (177) (234) (290) (327) (259)
Transfers in
(from other
variable
accounts)....... 3,247 121,103 12,668 65,597 466,728 44,998 6,201 5,989 17,199 3,714 8,944
Transfers out
(to other
variable
accounts)....... (771) (114,670) (7,771) (59,239) (643,243) (46,917) (1,608) (632) (2,837) (2,450) (9,539)
Transfers--
other........... (22) (7,931) (2,206) (2,730) (11,504) (1,940) (60) (67) (192) (707) (273)
---------------------------------------------------------------------------------------------------------------
Net Increase
(Decrease) in Net
Assets Derived
from Policy
Transactions..... 2,716 19,362 5,422 14,306 57,217 3,318 5,271 6,465 15,312 1,641 (242)
---------------------------------------------------------------------------------------------------------------
NET INCREASE IN
NET ASSETS....... 2,643 58,209 5,069 12,333 61,939 4,662 5,378 8,405 18,674 4,011 1,019
---------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of
Year............. 157,140 17,149 101,864 69,107 43,370 1,522 2,948 4,452 4,986
---------------------------------------------------------------------------------------------------------------
End of Year...... $2,643 $215,349 $22,218 $114,197 $131,046 $48,032 $5,378 $9,927 $21,622 $8,463 $6,005
---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operations commenced during 1999 (see Note 1 to Financial Statements).
See Notes to Financial Statements
58
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Aggressive Emerging Bond and Multi- Equity Growth Equity
Equity Markets Growth Income Equity Strategy Income LT Index
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.. $5 $117 $20,232 $147 $507 $12,030 $18,901 $6,250 $4,853
Net realized gain
(loss) from security
transactions........... 653 (1,951) 10,581 19 369 3,108 5,470 5,163 11,629
Net unrealized
appreciation
(depreciation) on
investments............ 1,132 (935) (23,983) 13 1,989 5,144 9,750 63,381 43,404
----------------------------------------------------------------------------------------
Net Increase (Decrease)
in Net Assets Resulting
from Operations......... 1,790 (2,769) 6,830 179 2,865 20,282 34,121 74,794 59,886
----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY TRANSACTIONS
Transfer of net
premiums............... 4,086 3,183 31,972 1,056 2,976 14,554 24,939 29,295 44,705
Transfers--policy
charges and
deductions............. (969) (663) (10,609) (197) (633) (5,260) (7,949) (9,146) (12,955)
Transfers in (from
other variable
accounts).............. 20,958 27,300 89,840 6,550 17,627 13,875 46,109 82,877 108,028
Transfers out (to other
variable accounts)..... (16,962) (25,040) (87,886) (2,820) (8,527) (17,159) (35,074) (53,981) (73,002)
Transfers--other....... (610) (355) (10,466) (171) (432) (5,646) (5,765) (7,000) (10,763)
----------------------------------------------------------------------------------------
Net Increase in Net
Assets Derived
from Policy
Transactions............ 6,503 4,425 12,851 4,418 11,011 364 22,260 42,045 56,013
----------------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS.................. 8,293 1,656 19,681 4,597 13,876 20,646 56,381 116,839 115,899
----------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year....... 9,473 8,416 179,989 685 4,190 113,352 131,486 110,438 187,288
----------------------------------------------------------------------------------------
End of Year............. $17,766 $10,072 $199,670 $5,282 $18,066 $133,998 $187,867 $227,277 $303,187
----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
59
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Govern- High
Inter- ment Managed Money Yield
national Securities Bond Market Bond 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.. $11,985 $881 $5,533 $3,392 $3,403 $87 $52 $21 $154
Net realized gain
(loss) from security
transactions........... 5,435 164 663 (3) (87) 8 96 (64) 183
Net unrealized
appreciation
(depreciation) on
investments............ (10,085) 59 1,408 14 (2,165) 72 460 44 366
--------------------------------------------------------------------------------------
Net Increase in Net
Assets Resulting from
Operations.............. 7,335 1,104 7,604 3,403 1,151 167 608 1 703
--------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY TRANSACTIONS
Transfer of net
premiums............... 28,077 2,186 13,456 164,872 7,612 238 408 1,305 1,358
Transfers--policy
charges and
deductions............. (8,359) (699) (3,939) (6,168) (2,255) (62) (93) (245) (156)
Transfers in (from
other variable
accounts).............. 71,891 10,097 52,698 268,634 34,691 749 2,159 1,700 1,697
Transfers out (to other
variable accounts)..... (64,225) (5,218) (36,135) (399,943) (29,075) (97) (880) (1,374) (481)
Transfers--other....... (6,520) (742) (4,332) (13,775) (2,461) (12) (37) (44) 111
--------------------------------------------------------------------------------------
Net Increase in Net
Assets Derived
from Policy
Transactions............ 20,864 5,624 21,748 13,620 8,512 816 1,557 1,342 2,529
--------------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS.................. 28,199 6,728 29,352 17,023 9,663 983 2,165 1,343 3,232
--------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year....... 128,941 10,421 72,512 52,084 33,707 539 783 3,109 1,754
--------------------------------------------------------------------------------------
End of Year............. $157,140 $17,149 $101,864 $69,107 $43,370 $1,522 $2,948 $4,452 $4,986
--------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
60
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Pacific Select Exec Separate Account (the "Separate Account") is
registered as a unit investment trust under the Investment Company Act of 1940,
as amended, and is currently comprised of twenty-two subaccounts called
Variable Accounts: the Aggressive Equity Variable Account, the Emerging Markets
Variable Account, the Growth Variable Account, the Bond and Income Variable
Account, the Equity Variable Account, the Multi-Strategy Variable Account, the
Equity Income Variable Account, the Growth LT Variable Account, the Mid-Cap
Value Variable Account, the Equity Index Variable Account, the Small-Cap Index
Variable Account, the REIT Variable Account, the International Variable
Account, the Government Securities Variable Account, the Managed Bond Variable
Account, the Money Market Variable Account, the High Yield Bond Variable
Account, the Large-Cap Value Variable Account, and the Variable Accounts I
through IV. The assets in each of the first eighteen Variable Accounts are
invested in shares of the corresponding portfolios of Pacific Select Fund and
the assets of the last four Variable Accounts (Brandes International Equity,
Turner Core Growth, Frontier Capital Appreciation and Enhanced U.S. Equity) are
invested in shares of the corresponding portfolios of M Fund, Inc.
(collectively, the "Funds"). Each Variable Account pursues different investment
objectives and policies. The financial statements of the Funds, including the
schedules of investments, are either included in Sections B through E of this
report or provided separately and should be read in conjunction with the
Separate Account's financial statements.
The Separate Account has organized and registered with the Securities and
Exchange Commission four new Variable Accounts: the Mid-Cap Value Variable
Account, the Small-Cap Index Variable Account, the REIT Variable Account, and
the Large-Cap Value Variable Account. The Mid-Cap Value Variable Account, the
Small-Cap Index Variable Account, and the Large-Cap Value Variable Account
commenced operations on January 8, 1999, and the REIT Variable Account
commenced operations on January 19, 1999.
The Separate Account was established by Pacific Life Insurance Company
("Pacific Life") on May 12, 1988 and commenced operations on November 22, 1988.
Under applicable insurance law, the assets and liabilities of the Separate
Account are clearly identified and distinguished from the other assets and
liabilities of Pacific Life. The assets of the Separate Account will not be
charged with any liabilities arising out of any other business conducted by
Pacific Life, but the obligations of the Separate Account, including benefits
related to variable life insurance, are obligations of Pacific Life.
The Separate Account held by Pacific Life represents funds from individual
flexible premium variable life policies. The assets of the Separate Account are
carried at market value.
The preparation of the accompanying financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
A. Valuation of Investments
Investments in shares of the Funds are valued at the reported net asset values
of the respective portfolios. Valuation of securities held by the Funds is
discussed in the notes to their financial statements.
B. Security Transactions
Transactions are recorded on the trade date. Realized gains and losses on
sales of investments are determined on the basis of identified cost.
C. Federal Income Taxes
The operations of the Separate Account will be reported on the Federal income
tax return of Pacific Life, which is taxed as a life insurance company under
the provisions of the Tax Reform Act of 1986. Under current tax law, no Federal
income taxes are expected to be paid by Pacific Life with respect to the
operations of the Separate Account.
2. DIVIDENDS
During 1999, the Funds declared dividends for each portfolio. The amounts
accrued by the Separate Account for its share of the dividends were reinvested
in additional full and fractional shares of the related portfolio.
3. CHARGES AND EXPENSES
With respect to variable life insurance policies funded by the Separate
Account, Pacific Life makes certain deductions from premiums for sales load and
state premium taxes before amounts are allocated to the Separate Account.
Pacific Life also makes certain deductions from the net assets of each Variable
Account for the mortality and expense risks Pacific Life assumes,
administrative expenses, cost of insurance, charges for optional benefits and
any sales and underwriting surrender charges. The operating expenses of the
Separate Account are paid by Pacific Life.
4. RELATED PARTY AGREEMENT
Pacific Mutual Distributors, Inc., a wholly-owned subsidiary of Pacific Life,
serves as principal underwriter of variable life insurance policies funded by
interests in the Separate Account, without remuneration from the Separate
Account.
61
<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). Total cost and
market value of the Separate Account's investments in the Funds as of December
31, 1999 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Variable Accounts
------------------------------------------------------------------------------
Aggressive Emerging Bond and Multi- Equity Growth
Equity Markets Growth Income Equity Strategy Income LT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of year $16,338 $11,689 $187,167 $5,250 $16,061 $112,643 $147,393 $152,516
Add:Total net proceeds
from policy
transactions 19,528 12,400 103,914 4,132 40,979 16,057 33,867 110,353
Reinvested
distributions from
the Funds:
(a) Net investment
income 60 468 388 42 3,612 1,810
(b) Net realized gain 2,297 23,889 259 2,388 8,563 16,639 24,658
-------------------------------------------------------------------------------
Sub-Total 38,163 24,149 315,438 10,029 59,470 140,875 199,709 287,527
Less:Cost of
investments disposed
during the year 9,818 9,303 90,244 2,094 10,736 5,941 13,361 20,995
-------------------------------------------------------------------------------
Total cost of
investments at end of
year 28,345 14,846 225,194 7,935 48,734 134,934 186,348 266,532
Add:Unrealized
appreciation
(depreciation) 4,690 5,064 63,875 (938) 10,865 16,963 39,118 269,914
-------------------------------------------------------------------------------
Total market value of
investments at end of
year $33,035 $19,910 $289,069 $6,997 $59,599 $151,897 $225,466 $536,446
-------------------------------------------------------------------------------
<CAPTION>
Govern-
Mid-Cap Equity Small-Cap Inter- ment Managed Money
Value (1) Index Index (1) REIT (1) national Securities Bond Market
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of year $212,820 $153,283 $16,677 $97,525 $69,218
Add:Total net proceeds
from policy
transactions $6,149 94,678 $6,917 $2,925 63,456 9,456 32,380 302,607
Reinvested
distributions from
the Funds:
(a) Net investment
income 10 4,038 27 76 1,200 1,012 5,982 4,600
(b) Net realized gain 1,562 68 6 6,201 266 2,557
-------------------------------------------------------------------------------
Sub-Total 6,159 313,098 7,012 3,007 224,140 27,411 138,444 376,425
Less:Cost of
investments disposed
during the year 1,017 14,733 1,253 224 36,021 4,025 17,721 245,132
-------------------------------------------------------------------------------
Total cost of
investments at end of
year 5,142 298,365 5,759 2,783 188,119 23,386 120,723 131,293
Add:Unrealized
appreciation
(depreciation) 66 136,200 667 (140) 27,230 (1,168) (6,526) (247)
-------------------------------------------------------------------------------
Total market value of
investments at end of
year $5,208 $434,565 $6,426 $2,643 $215,349 $22,218 $114,197 $131,046
-------------------------------------------------------------------------------
<CAPTION>
High Yield Large-Cap
Bond Value (1) I II III IV
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of year $45,134 $1,454 $2,467 $4,191 $4,437
Add:Total net proceeds
from policy
transactions 25,603 $5,805 7,684 16,504 3,055 2,983
Reinvested
distributions from
the Funds:
(a) Net investment
income 3,845 20 56 20 7
(b) Net realized gain 256 1,161 243 467
------------------------------------------------------------
Sub-Total 74,582 5,825 9,450 20,152 7,489 7,894
Less:Cost of
investments disposed
during the year 24,254 505 965 915 1,191 2,579
------------------------------------------------------------
Total cost of
investments at end of
year 50,328 5,320 8,485 19,237 6,298 5,315
Add:Unrealized
appreciation
(depreciation) (2,296) 58 1,442 2,385 2,165 690
------------------------------------------------------------
Total market value of
investments at end of
year $48,032 $5,378 $9,927 $21,622 $8,463 $6,005
------------------------------------------------------------
</TABLE>
------
(1) Operations commenced during 1999 (See Note 1 to Financial Statements).
62
<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, 1999
and the selected accumulation unit information as of December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Variable Accounts
-----------------------------------------------------------------------------------------------
Aggressive Emerging Bond and Multi- Equity Growth
Equity Markets Growth Income Equity Strategy Income LT
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 1,392,776 1,425,050 5,054,100 407,552 1,208,588 3,899,102 4,153,101 7,088,988
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 446,295 391,154 731,566 146,464 466,028 378,029 566,767 1,090,385
(b) Transfers--policy
charges and deductions (109,665) (106,579) (260,557) (35,534) (119,693) (170,710) (209,156) (396,786)
(c) Transfers in (from
other variable
accounts) 2,146,964 3,074,166 4,963,234 535,185 3,543,441 572,679 1,295,559 4,047,924
(d) Transfers out (to
other variable
accounts) (1,801,331) (2,898,051) (5,249,564) (439,413) (2,178,697) (445,339) (1,169,106) (2,989,259)
(e) Transfers--other (41,457) (51,197) (278,610) (31,698) (41,773) (104,711) (236,551) (394,019)
-----------------------------------------------------------------------------------------------
Sub-Total 640,806 409,493 (93,931) 175,004 1,669,306 229,948 247,513 1,358,245
-----------------------------------------------------------------------------------------------
Total units outstanding
at end of year 2,033,582 1,834,543 4,960,169 582,556 2,877,894 4,129,050 4,400,614 8,447,233
-----------------------------------------------------------------------------------------------
Accumulation Unit Value:
At beginning of year $12.76 $7.07 $39.51 $12.96 $14.95 $34.37 $45.24 $32.06
At end of year $16.24 $10.85 $58.28 $12.01 $20.71 $36.79 $51.24 $63.51
<CAPTION>
Govern-
Mid-Cap Equity Small-Cap Inter- ment Managed Money
Value (1) Index Index (1) REIT (1) national Securities Bond Market
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 7,178,724 7,183,483 722,500 4,098,497 4,086,161
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 101,351 1,525,978 154,672 32,153 1,297,474 162,177 639,829 14,668,834
(b) Transfers--policy
charges and deductions (15,187) (421,266) (16,372) (6,499) (385,569) (45,293) (202,469) (568,862)
(c) Transfers in (from
other variable
accounts) 733,125 3,170,097 1,703,414 317,169 5,106,667 511,147 2,606,449 26,594,956
(d) Transfers out (to
other variable
accounts) (308,361) (2,484,612) (1,291,374) (76,125) (4,851,038) (308,321) (2,349,734) (36,739,991)
(e) Transfers--other (7,378) (436,615) (3,136) (2,097) (335,483) (87,525) (108,284) (657,157)
-----------------------------------------------------------------------------------------------
Sub-Total 503,550 1,353,582 547,204 264,601 832,051 232,185 585,791 3,297,780
-----------------------------------------------------------------------------------------------
Total units outstanding
at end of year 503,550 8,532,306 547,204 264,601 8,015,534 954,685 4,684,288 7,383,941
-----------------------------------------------------------------------------------------------
Accumulation Unit Value:
At beginning of year $10.00 $42.23 $10.00 $10.00 $21.88 $23.74 $24.85 $16.91
At end of year $10.34 $50.93 $11.74 $9.99 $26.87 $23.27 $24.38 $17.75
<CAPTION>
High Yield Large-Cap
Bond Value (1) I II III IV
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 1,598,243 127,998 167,752 342,807 304,588
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 351,193 86,694 95,802 72,580 94,055 49,583
(b) Transfers--policy
charges and deductions (90,794) (16,717) (16,143) (14,391) (22,248) (14,533)
(c) Transfers in (from
other variable
accounts) 1,565,039 580,019 404,864 806,745 246,076 500,082
(d) Transfers out (to
other variable
accounts) (1,635,967) (150,215) (43,231) (144,796) (161,952) (533,493)
(e) Transfers--other (67,640) (5,540) (4,604) (9,779) (46,779) (15,217)
---------------------------------------------------------------------
Sub-Total 121,831 494,241 436,688 710,359 109,152 (13,578)
---------------------------------------------------------------------
Total units outstanding
at end of year 1,720,074 494,241 564,686 878,111 451,959 291,010
---------------------------------------------------------------------
Accumulation Unit Value:
At beginning of year $27.14 $10.00 $11.89 $17.57 $12.99 $16.37
At end of year $27.92 $10.88 $17.58 $24.62 $18.72 $20.64
</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.
(1) Operations commenced during 1999 (See Note 1 to Financial Statements).
63
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Financial Statements as of
December 31, 1999 and 1998 and for the years ended
December 31, 1999, 1998 and 1997 and Independent Auditors' Report
64
<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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 2000
65
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $14,814.0 $13,804.7
Equity securities 295.2 547.5
Trading securities at estimated fair value 99.9 97.0
Mortgage loans 2,920.2 2,788.7
Real estate 236.0 172.7
Policy loans 4,258.5 4,003.2
Other investments 882.7 951.7
-------------------------------------------------------------------------------
TOTAL INVESTMENTS 23,506.5 22,365.5
Cash and cash equivalents 439.4 154.1
Deferred policy acquisition costs 1,446.1 899.8
Accrued investment income 287.2 259.3
Other assets 830.7 361.2
Separate account assets 23,613.1 15,844.0
-------------------------------------------------------------------------------
TOTAL ASSETS $50,123.0 $39,883.9
-------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life and investment-type products $19,045.5 $17,973.0
Future policy benefits 4,386.0 2,480.5
Short-term and long-term debt 224.4 445.1
Other liabilities 939.2 813.3
Separate account liabilities 23,613.1 15,844.0
-------------------------------------------------------------------------------
TOTAL LIABILITIES 48,208.2 37,555.9
-------------------------------------------------------------------------------
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 139.9 126.2
Unearned ESOP shares (11.6)
Retained earnings 2,034.5 1,663.5
Accumulated other comprehensive income (loss) -
Unrealized gain (loss) on securities available for
sale, net (278.0) 508.3
-------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 1,914.8 2,328.0
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $50,123.0 $39,883.9
-------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
66
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Universal life and investment-type product policy
fees $ 653.8 $ 525.3 $ 431.2
Insurance premiums 483.9 537.1 526.4
Net investment income 1,473.3 1,413.6 1,325.4
Net realized investment gains 101.5 39.4 85.4
Commission revenue 234.3 220.1 146.6
Other income 144.7 112.5 97.9
-------------------------------------------------------------------------------
TOTAL REVENUES 3,091.5 2,848.0 2,612.9
-------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life and investment-
type products 904.4 880.8 797.8
Policy benefits paid or provided 734.4 757.0 712.6
Commission expenses 484.6 387.2 305.1
Operating expenses 453.4 468.0 507.9
-------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,576.8 2,493.0 2,323.4
-------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 514.7 355.0 289.5
Provision for income taxes 143.7 113.5 113.5
-------------------------------------------------------------------------------
NET INCOME $ 371.0 $ 241.5 $ 176.0
-------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
67
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Unearned Other
------------- Paid-in ESOP Retained Comprehensive
Shares Amount Capital Shares Earnings Income (Loss) Total
-----------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1997 $1,318.0 $ 379.2 $1,697.2
Comprehensive income:
Net income 176.0 176.0
Change in unrealized
gain on securities
available for sale,
net 196.0 196.0
--------
Total comprehensive
income 372.0
Issuance of partnership
units by affiliate $ 85.1 85.1
Initial member
capitalization of
Pacific Mutual Holding
Company (2.0) (2.0)
Issuance of common
stock 0.6 $30.0 35.0 (65.0)
Dividend paid to
Pacific LifeCorp (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
Comprehensive loss:
Net income 371.0 371.0
Change in unrealized
gain on securities
available for sale,
net (786.3) (786.3)
--------
Total comprehensive
loss (415.3)
Issuance of partnership
units by affiliate 10.6 10.6
Capital contribution 3.1 3.1
Purchase of ESOP note $(13.1) (13.1)
Allocation of unearned
ESOP shares 1.5 1.5
-----------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1999 0.6 $30.0 $139.9 $(11.6) $2,034.5 $(278.0) $1,914.8
-----------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
68
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 371.0 $ 241.5 $ 176.0
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization on fixed maturity securities (77.8) (39.4) (26.6)
Depreciation and other amortization 20.5 26.0 38.3
Earnings of equity method investees (92.9) (99.0) (78.1)
Deferred income taxes (8.5) (20.6) (14.4)
Net realized investment gains (101.5) (39.4) (85.4)
Net change in deferred policy acquisition
costs (546.3) (171.9) (196.4)
Interest credited to universal life and in-
vestment-type products 904.4 880.8 797.8
Change in trading securities (2.9) (14.3) (18.3)
Change in accrued investment income (27.9) 3.1 (59.9)
Change in future policy benefits 58.1 (9.7) (16.3)
Change in other assets and liabilities 207.1 102.2 574.9
------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 703.3 859.3 1,091.6
------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (4,173.4) (4,330.5) (6,272.3)
Sales 2,333.8 2,209.3 2,224.1
Maturities and repayments 1,400.3 2,221.8 2,394.6
Repayments of mortgage loans 681.0 334.9 179.3
Proceeds from sales of mortgage loans and
real estate 24.4 43.3 104.4
Purchases of mortgage loans and real estate (886.3) (1,246.3) (643.7)
Distributions from partnerships 138.2 119.5 91.6
Change in policy loans (255.3) (129.7) (301.4)
Cash received from acquisitions of insurance
blocks of business 164.9 1,215.9
Other investing activity, net 255.6 (466.6) (70.8)
------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (316.8) (1,244.3) (1,078.3)
------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
69
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1999 1998 1997
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,453.4 $ 4,007.0 $ 2,679.8
Withdrawals (4,322.3) (3,770.7) (2,667.3)
Net change in short-term and long-term
debt (220.7) 191.5 (16.5)
Purchase of ESOP note (13.1)
Allocation of unearned ESOP shares 1.5
Initial capitalization of Pacific Mutual
Holding Company (2.0)
Dividend paid to Pacific LifeCorp (5.0)
-------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (101.2) 427.8 (11.0)
-------------------------------------------------------------------------------
Net change in cash and cash equivalents 285.3 42.8 2.3
Cash and cash equivalents, beginning of
year 154.1 111.3 109.0
-------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 439.4 $ 154.1 $ 111.3
-------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisitions of an annuity and an insurance block of
business in 1999 and 1997, respectively, as discussed in Note 4, the following
assets and liabilities were assumed:
Fixed maturity securities $ 1,592.7
Cash and cash equivalents 164.9 $ 1,215.9
Policy loans 440.3
Other assets 100.4 43.4
--------- ---------
Total assets assumed $ 1,858.0 $ 1,699.6
--------- ---------
Policyholder account values $ 1,693.8
Annuity reserves $ 1,847.4
Other liabilities 10.6 5.8
--------- ---------
Total liabilities assumed $ 1,858.0 $ 1,699.6
--------- ---------
-------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion in 1997, as discussed in Note 1, $65 million of
retained earnings was allocated for the issuance of 600,000 shares of common
stock with a par value totaling $30 million and $35 million to paid-in
capital.
-------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 83.0 $ 127.9 $ 153.0
Interest paid $ 23.3 $ 24.0 $ 26.1
-------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
70
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Life Insurance Company ("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 is an indirect subsidiary of Pacific Mutual
Holding Company ("PMHC"), a mutual holding company, and a wholly owned
subsidiary of Pacific LifeCorp, an intermediate stock holding company. PMHC
and Pacific LifeCorp were organized pursuant to consent received from the
Insurance Department of the State of California and the implementation of a
plan of conversion to form a mutual holding company structure in 1997 (the
"Conversion"). 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.
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.
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 majority owned and controlled
subsidiaries. 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 filed with regulatory authorities (Note 2).
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("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. Adoption of this accounting
standard did not have a material impact on the Company's consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133," is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 requires, among
other things, that all derivatives be recognized in the consolidated
statements of financial condition as either assets or liabilities and
measured at estimated fair value. The corresponding derivative gains and
losses should be reported based upon the hedge relationship, if such a
relationship exists. Changes in the estimated fair value of derivatives
that are not designated as hedges or that do not meet the hedge accounting
criteria in SFAS No. 133 are required to be reported in income. The Company
is required to adopt SFAS No. 133 as of January 1, 2001. The Company is in
the process of quantifying the impact of SFAS No. 133 on its consolidated
financial statements.
During 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk."
SOP 98-7 provides guidance on how to account for insurance and reinsurance
contracts that do not transfer insurance risk under a method referred to as
deposit accounting. SOP 98-7 is effective for fiscal years beginning after
June 15, 1999. The Company currently plans to adopt
71
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
SOP 98-7 on January 1, 2000. Adoption of this accounting standard is not
expected to have a material impact on the Company's consolidated financial
statements.
INVESTMENTS
Available for sale fixed maturity and equity securities are reported at
estimated fair value, with unrealized gains and losses, net of deferred
income taxes and adjustments related to deferred policy acquisition costs,
included as a separate component of equity on the accompanying consolidated
statements of financial condition. The cost of fixed maturity and equity
securities is adjusted for impairments in value deemed to be other than
temporary. Trading securities are reported at estimated fair value with
unrealized gains and losses included in net realized investment 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 investment
gains on the accompanying consolidated statements of operations.
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 liabilities. Unrealized
gains and losses of other derivatives are included in net realized
investment gains on the accompanying consolidated statements of operations.
Mortgage loans, net of valuation allowances, and policy loans are stated at
unpaid principal balances.
Real estate is carried at depreciated cost, net of writedowns, 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.
Partnership and joint venture interests in which the Company does not have
a controlling interest or a majority ownership are generally recorded using
the equity method of accounting and are included in other investments on
the accompanying consolidated statements of financial condition.
The Company, through its wholly owned subsidiary Pacific Asset Management
LLC ("PAM"), has an approximate 33% beneficial ownership interest in PIMCO
Advisors L.P. ("PIMCO Advisors") as of December 31, 1999 and 1998. 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. During 1999 and 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 years ended December 31, 1999 and
1998, there was a direct increase to the Company's stockholder's equity of
$10.6 million and $6.1 million, respectively. During 1998, the Company also
acquired the beneficial ownership of additional partnership units. Deferred
taxes resulting from these transactions have been included in the
accompanying consolidated financial statements.
72
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
On October 31, 1999, PAM entered into an Implementation and Merger
Agreement with Allianz of America, Inc. ("Allianz") and a number of other
parties in which Allianz will purchase 70% of the outstanding partnership
units of PIMCO Advisors. PAM is exchanging its interest in PIMCO Advisors
for a beneficial economic interest in a new class of PIMCO Advisors
partnership units with a cash distribution comprised of a fixed and
variable return. This transaction is anticipated to close during the first
half of 2000, subject to certain closing conditions and approvals.
In connection with this transaction, PAM has entered into a Continuing
Investment Agreement with Allianz with respect to its investment in PIMCO
Advisors. The investment in PIMCO Advisors held by PAM will be subject to
put and call options held by PAM and Allianz, respectively. The put option
gives PAM the right to require Allianz, on the last business day of each
calendar quarter, to purchase all of the investment in PIMCO Advisors held
by PAM. The put option price would be the distributions per unit amount, as
defined in the Continuing Investment Agreement, for the most recently
completed four calendar quarters multiplied by a factor of 14.0. The call
option gives Allianz the right to require PAM, on any January 31, April 30,
July 31, or October 31, beginning on January 31, 2003, to sell its
investment in PIMCO Advisors to Allianz. The call option price would be the
distributions per unit, as defined in the Continuing Investment Agreement,
for the most recently completed four calendar quarters multiplied by a
factor of 14.0 if the call per unit value is at least $50.
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-type products, such costs are generally amortized over the
expected life of the contract 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 traditional
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, 1999, 1998 and 1997,
amortization of deferred policy acquisition costs included in commission
expenses amounted to $131.7 million, $73.0 million and $50.2 million,
respectively, and included in operating expenses amounted to $55.4 million,
$33.5 million and $29.4 million, respectively, on the accompanying
consolidated statements of operations.
UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS
Universal life and investment-type products, including guaranteed
investment contracts and funding agreements, 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% to 8.4% during 1999, 1998 and 1997.
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 1999, 1998 and 1997.
Mortality, morbidity and withdrawal assumptions are generally based on the
Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for
73
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 1999
and 1998, 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-type
products 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
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
certain 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.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments, disclosed in Notes 5, 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.
74
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
RISKS AND UNCERTAINTIES
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include, but are not
limited to, interest rate risk, investment market 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 which can result
in additional, unanticipated expense to the Company. Existing Federal laws
and regulations affect the taxation of life insurance or annuity products,
and insurance companies. There can be no assurance as to what, if any,
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 1999
financial statement presentation.
75
<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,
1999 1998
------------------
(In Millions)
<S> <C> <C>
Statutory capital and surplus $1,219.1 $1,157.4
Deferred policy acquisition costs 1,398.6 944.5
Deferred income taxes 304.5 307.1
Asset valuation reserve 232.1 298.7
Non admitted assets 83.3 40.4
Subsidiary equity 25.2 26.5
Surplus notes (149.6) (149.6)
Unrealized gain (loss) on securities avail-
able for sale, net (278.0) 508.3
Insurance and annuity reserves (845.2) (654.4)
Other (75.2) (150.9)
------------------
Stockholder's equity as reported herein $1,914.8 $2,328.0
------------------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 168.4 $ 187.6 $ 121.5
Deferred policy acquisition costs 379.2 177.3 160.4
Deferred income taxes (2.7) 17.9 41.2
Earnings of subsidiaries (27.5) (32.8) (40.6)
Insurance and annuity reserves (184.3) (145.1) (107.0)
Other 37.9 36.6 0.5
----------------------------
Net income as reported herein $ 371.0 $ 241.5 $ 176.0
----------------------------
</TABLE>
76
<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 the risk-based capital results 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, 1999 and 1998, Pacific Life and
Pacific Life & Annuity Company, formerly PM Group Life Insurance Company, a
wholly owned Arizona domiciled life insurance subsidiary of Pacific Life,
exceeded the minimum risk-based capital requirements.
CODIFICATION
In 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 Pacific LifeCorp 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 1999
statutory results, Pacific Life could pay $174.0 million in dividends in
2000 without prior approval. No dividends were paid during 1999 and 1998.
The maximum amount of ordinary dividends that can be paid by PL&A without
restriction cannot exceed the lesser of 10% of statutory surplus as regards
to policyholders, or the statutory net gain from operations. No dividends
were paid during 1999 and 1998.
PERMITTED PRACTICE
Net cash distributions received on PAM's investment in PIMCO Advisors 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 that support the Closed Block, which are primarily included in fixed
maturity securities, policy loans and accrued investment income, amounted
to $293.5 million and $311.6 million as of December 31, 1999 and 1998,
respectively. Liabilities allocated to the Closed Block, which are
primarily included in future policy benefits amounted to $341.8 million and
$352.8 million as of December 31, 1999 and 1998, respectively. The
contribution
77
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK (Continued)
to income from the Closed Block amounted to $3.8 million, $5.1 million and
$5.7 million and is primarily included in insurance premiums, net
investment income and policy benefits paid or provided for the years ended
December 31, 1999, 1998 and 1997, respectively.
4. ACQUISITIONS
Effective July 15, 1999, Pacific Life acquired a payout annuity block of
business from Confederation Life Insurance Company (U.S.) in
Rehabilitation, which is currently under rehabilitation ("Confederation
Life"). This block of business consists of approximately 16,000 annuitants
having reserves of $1.8 billion. The assets received as part of this
acquisition amounted to $1.6 billion in fixed maturity securities and $0.2
billion in cash.
The remaining cost of acquiring this annuity 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
$74.5 million as of December 31, 1999, and is included in deferred policy
acquisition costs on the accompanying consolidated statement of financial
condition. Amortization of this asset for the year ended December 31, 1999
amounted to $0.4 million, and is included in commission expense on the
accompanying consolidated statement of operations.
On June 1, 1997, Pacific Life acquired a block of corporate-owned life
insurance ("COLI") policies from Confederation Life, which consisted of
approximately 38,000 policies having a face amount of insurance of
$8.6 billion and reserves of $1.7 billion. The assets received as part of
this acquisition amounted to $1.2 billion in cash and $0.4 billion in
policy loans. This block is primarily non leveraged COLI.
The remaining cost of acquiring this COLI 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 $27.9
million and $36.5 million as of December 31, 1999 and 1998, 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, 1999, 1998 and 1997 amounted to $8.6
million, $7.7 million and $0.9 million, respectively, and is included in
commission expenses on the accompanying consolidated statements of
operations.
During 1999, Pacific Life acquired a 95% interest in Grayhawk Golf
Holdings, LLC, which owns 100% of a real estate investment property in
Arizona.
78
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities available for sale 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>
As of December 31, 1999:
-----------------------
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 107.7 $ 9.3 $ 1.0 $ 116.0
Obligations of states, political
subdivisions 642.0 13.0 27.7 627.3
Foreign governments 285.0 10.5 6.7 288.8
Corporate securities 8,725.0 220.3 387.4 8,557.9
Mortgage-backed and asset-backed
securities 5,323.8 33.7 251.1 5,106.4
Redeemable preferred stock 108.5 14.2 5.1 117.6
--------------------------------------
Total fixed maturity securities $15,192.0 $ 301.0 $ 679.0 $14,814.0
--------------------------------------
Total equity securities $ 269.3 $ 57.0 $ 31.1 $ 295.2
--------------------------------------
As of December 31, 1998:
-----------------------
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 95.6 $ 25.1 $ 120.7
Obligations of states, political
subdivisions 481.9 91.3 $ 11.8 561.4
Foreign governments 253.1 28.3 4.3 277.1
Corporate securities 7,888.7 446.3 124.5 8,210.5
Mortgage-backed and asset-backed
securities 4,434.7 143.1 53.0 4,524.8
Redeemable preferred stock 104.0 11.3 5.1 110.2
--------------------------------------
Total fixed maturity securities $13,258.0 $ 745.4 $ 198.7 $13,804.7
--------------------------------------
Total equity securities $ 364.4 $ 202.6 $ 19.5 $ 547.5
--------------------------------------
</TABLE>
79
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (Continued)
The amortized cost and estimated fair value of fixed maturity securities
available for sale as of December 31, 1999, 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>
Due in one year or less $ 566.5 $ 572.6
Due after one year through five years 3,324.0 3,366.5
Due after five years through ten years 2,995.9 2,921.4
Due after ten years 2,981.8 2,847.1
-------------------
9,868.2 9,707.6
Mortgage-backed and asset-backed securities 5,323.8 5,106.4
-------------------
Total $15,192.0 $14,814.0
-------------------
</TABLE>
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $1,030.3 $ 929.7 $ 940.2
Equity securities 14.6 13.5 10.2
Mortgage loans 205.6 174.6 129.5
Real estate 46.5 38.1 53.6
Policy loans 158.6 161.5 144.3
Other 131.7 203.2 156.2
--------------------------
Gross investment income 1,587.3 1,520.6 1,434.0
Investment expense 114.0 107.0 108.6
--------------------------
Net investment income $1,473.3 $1,413.6 $1,325.4
--------------------------
</TABLE>
80
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (Continued)
Net realized investment gain, including changes in valuation allowances,
are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities available
for sale:
Gross gain $ 89.3 $ 92.7 $ 56.3
Gross loss (72.9) (84.8) (31.1)
Equity securites available for sale:
Gross gain 109.0 40.9 36.1
Gross loss (52.0) (6.8) (6.2)
Mortgage loans on real estate 10.1 (10.7) (4.6)
Real estate 18.0 1.2 16.9
Other investments 6.9 18.0
----------------------------
Total $ 101.5 $ 39.4 $ 85.4
----------------------------
</TABLE>
The change in gross unrealized gain on investments in available for sale
and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale securities:
Fixed maturity $ (924.7) $(229.5) $223.5
Equity (157.2) 63.1 85.7
--------------------------
Total $(1,081.9) $(166.4) $309.2
--------------------------
Trading securities $ 0.4 $ (2.5) $ (1.1)
--------------------------
</TABLE>
As of December 31, 1999 and 1998, investments in fixed maturity securities
with a carrying value of $12.6 million and $13.0 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements. One diversified financial security, rated AA, exceeds 10% of
total stockholder's equity as of December 31, 1999.
81
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------
(In Millions)
Assets:
<S> <C> <C> <C> <C>
Fixed maturity and equity
securities (Note 5) $15,109.2 $15,109.2 $14,352.2 $14,352.2
Trading securities 99.9 99.9 97.0 97.0
Mortgage loans 2,920.2 2,983.8 2,788.7 2,911.2
Policy loans 4,258.5 4,258.5 4,003.2 4,003.2
Cash and cash equivalents 439.4 439.4 154.1 154.1
Derivative instruments 43.5 43.5 176.1 176.1
Liabilities:
Guaranteed interest contracts 6,365.0 6,296.3 5,665.3 5,751.0
Deposit liabilities 544.9 533.7 599.9 626.7
Annuity liabilities 1,323.3 1,304.8 1,448.0 1,430.1
Short-term debt 60.0 60.0 295.5 295.5
Long-term debt 164.4 164.3 149.6 176.0
Derivative instruments 229.5 229.5 36.0 36.0
</TABLE>
82
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used to estimate the fair value
of these financial instruments as of December 31, 1999 and 1998:
TRADING SECURITIES
The estimated fair value of trading securities is based on quoted market
prices.
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 because interest rates are generally variable and based on
current market rates.
CASH AND CASH EQUIVALENTS
The carrying values approximate fair values due to the short-term
maturities of these instruments.
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.
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
rates.
LONG-TERM DEBT
The estimated fair value of surplus notes is based on market quotes. The
carrying amount of other long-term debt is a reasonable estimate of its
fair value because the interest on the debt is approximately the same as
current market rates.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Life has issued certain contracts to 401(k) plans totaling $1.7
billion as of December 31, 1999, 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.
83
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE 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 as 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 on 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.
Outstanding derivatives with off balance sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values
as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
--------------------------------------------------
Notional or Carrying Estimated Carrying Estimated
Contract Amounts Value Fair Value Value Fair Value
----------------- -------- ---------- -------- ----------
1999 1998 1999 1999 1998 1998
--------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Interest rate floors,
caps, options and
swaptions $1,003.0 $2,653.0 $ 5.0 $ 5.0 $ 67.9 $ 67.9
Interest rate swap
contracts 2,867.5 2,608.6 38.5 38.5 (23.3) (23.3)
Asset swap contracts 58.1 63.2 (3.6) (3.6) (3.6) (3.6)
Credit default and total
return swaps 2,061.9 649.6 (43.1) (43.1) (9.1) (9.1)
Financial futures
contracts 676.8 608.9
Foreign currency
derivatives 1,685.1 1,131.2 (182.8) (182.8) 108.2 108.2
--------------------------------------------------------------
Total derivatives $8,352.4 $7,714.5 $(186.0) $(186.0) $140.1 $140.1
--------------------------------------------------------------
</TABLE>
84
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE INSTRUMENTS (Continued)
A reconciliation of the notional or contract amounts and discussion of the
various derivative instruments are 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, 1999:
------------------
Interest rate floors, caps,
options and swaptions $2,653.0 $ 670.9 $2,320.9 $1,003.0
Interest rate swap
contracts 2,608.6 1,226.2 967.3 2,867.5
Asset swap contracts 63.2 7.8 12.9 58.1
Credit default and total
return swaps 649.6 1,617.3 205.0 2,061.9
Financial futures contracts 608.9 5,586.8 5,518.9 676.8
Foreign currency
derivatives 1,131.2 874.0 320.1 1,685.1
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
</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 on 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 on the accompanying consolidated
statements of operations over the term of the agreement. Interest rate
floors and caps, options and swaptions mature during the years 2000 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
85
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE INSTRUMENTS (Continued)
be received or paid pursuant to these agreements are accrued and recognized
through an adjustment to net investment income on the accompanying
consolidated statements of operations over the life of the agreements. The
interest rate swap contracts mature during the years 2000 through 2021.
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
on 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 on
the accompanying consolidated statements of operations over the life of the
agreements. Credit default and total return swaps mature during the years
2000 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 on the accompanying consolidated
statements of operations over the life of the agreements. Foreign currency
derivatives expire during the years 2000 through 2013.
86
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS
The detail of universal life and investment-type product liabilities is as
follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------
(In Millions)
<S> <C> <C>
Universal life $10,807.7 $10,218.0
Investment-type products 8,237.8 7,755.0
-------------------
$19,045.5 $17,973.0
-------------------
</TABLE>
The detail of universal life and investment-type product policy fees and
interest credited net of reinsurance ceded is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees:
Universal life $ 509.2 $ 439.9 $ 377.5
Investment-type products 144.6 85.4 53.7
--------------------------
Total policy fees $ 653.8 $ 525.3 $ 431.2
--------------------------
Interest credited:
Universal life $ 443.9 $ 440.8 $ 368.2
Investment-type products 460.5 440.0 429.6
--------------------------
Total interest credited $ 904.4 $ 880.8 $ 797.8
--------------------------
</TABLE>
87
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claim adjustment expenses,
which is included in future policy benefits on the accompanying
consolidated statements of financial condition, is summarized as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1999 1998
--------------
(In Millions)
<S> <C> <C>
Balance at January 1 $137.4 $140.5
Less reinsurance recoverables 0.1 0.7
--------------
Net balance at January 1 137.3 139.8
--------------
Incurred related to:
Current year 376.8 412.9
Prior years (33.8) (18.3)
--------------
Total incurred 343.0 394.6
--------------
Paid related to:
Current year 286.7 303.5
Prior years 77.1 93.6
--------------
Total paid 363.8 397.1
--------------
Net balance at December 31 116.5 137.3
Plus reinsurance recoverables 0.1 0.1
--------------
Balance at December 31 $116.6 $137.4
--------------
</TABLE>
As a result of payment of prior years' estimated claims, the provision for
claims and claim adjustment expenses decreased by $33.8 million and $18.3
million for the years ended December 31, 1999 and 1998, respectively. The
reduction is primarily due to lower than anticipated settlement of claims
and reduced claim adjustment expenses.
88
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SHORT-TERM AND LONG-TERM DEBT
Pacific Life borrows for short-term needs by issuing commercial paper.
There was no commercial paper debt outstanding as of December 31, 1999.
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
5.2%. As of December 31, 1999 and 1998, Pacific Life had a revolving credit
facility of $350 million. There was no debt outstanding under the revolving
credit facility as of December 31, 1999 and 1998.
PAM had bank borrowings outstanding of $60 million as of December 31, 1999
and 1998. The interest rate was 6.0%, 5.1% and 6.2% as of December 31,
1999, 1998 and 1997, respectively. Outstanding debt is due and payable in
2000 and subject to renewal. The borrowing limit for PAM as of December 31,
1999 and 1998 was $100 million and $200 million, respectively.
In connection with Pacific Life's acquisition of Grayhawk Golf Holdings,
LLC in 1999, the Company assumed a note payable with a maturity date of May
22, 2008. The note bears a fixed rate of interest of 7.6%. The outstanding
balance as of December 31, 1999 was $14.8 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, 1999,
1998 and 1997 and is included in net investment income on the accompanying
consolidated statements of operations.
89
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The Company accounts for income taxes using the liability method. The
deferred tax consequences of changes in tax rates or laws must be computed
on the amounts of temporary differences and carryforwards existing at the
date a new tax law is enacted. Recording the effects of a change involves
adjusting deferred tax liabilities and assets with a corresponding charge
or credit recognized in the provision for income taxes. The objective is to
measure a deferred tax liability or asset using the enacted tax rates and
laws expected to apply to taxable income in the periods in which the
deferred tax liability or asset is expected to be settled or realized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Current $152.2 $ 134.1 $ 127.9
Deferred (8.5) (20.6) (14.4)
----------------------------
$143.7 $ 113.5 $ 113.5
----------------------------
The sources of the Company's provision for deferred taxes are as follows:
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Policyholder reserves $ 50.9 $ (29.5) $ 20.1
Deferred policy acquisition
costs 20.0 (12.6) (18.0)
Non deductible reserves 4.0 28.2 (27.6)
Partnership income (25.6) 20.8
Investment valuation (28.0) (24.5) 3.9
Duration hedging (29.6) 20.8 (2.6)
Other (0.2) (2.6) 9.8
----------------------------
Deferred taxes from
operations (8.5) 0.6 (14.4)
Release of subsidiary
deferred taxes (21.2)
----------------------------
Deferred tax provision $ (8.5) $ (20.6) $ (14.4)
----------------------------
</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 in 1998.
90
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (Continued)
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>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Provision for income taxes at the
statutory rate $ 180.1 $ 124.2 $ 101.3
Amortization of intangibles on
equity method investments 2.0 4.3 7.6
Non taxable investment income (7.3) (3.6) (2.6)
Tax settlement (7.5)
Low income housing tax credits (19.2) (3.9)
Equity tax (5.0) 5.0
Other (4.4) (2.5) 2.2
----------------------------
Provision for income taxes $ 143.7 $ 113.5 $ 113.5
----------------------------
</TABLE>
The net deferred tax asset (liability), included in other assets on the
accompanying consolidated statements of financial condition, is comprised
of the following tax effected temporary differences:
<TABLE>
<CAPTION>
December 31,
1999 1998
---------------
(In Millions)
<S> <C> <C>
Deferred tax assets
Policyholder reserves $203.4 $ 254.3
Investment valuation 72.7 44.7
Deferred compensation 35.4 33.7
Duration hedging 21.1 (8.5)
Postretirement benefits 9.0 8.9
Dividends 8.4 7.6
Partnership income 4.8 (20.8)
Non deductible reserves 1.9 5.9
Other 3.1 5.2
---------------
Total deferred tax assets 359.8 331.0
Deferred tax liabilities
Deferred policy acquisition costs 44.0 24.0
Depreciation 2.7 2.4
---------------
Total deferred tax liabilities 46.7 26.4
---------------
Net deferred tax asset from operations 313.1 304.6
Unrealized (gain) loss on securities 150.8 (272.3)
Issuance of partnership units by affiliate (81.1) (74.9)
---------------
Net deferred tax asset (liability) $382.8 $ (42.6)
---------------
</TABLE>
91
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMPREHENSIVE INCOME
The Company displays comprehensive income and its components on the
accompanying consolidated statements of stockholder's equity and the note
herein. Other comprehensive income is shown net of reclassification
adjustments 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,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Calculation of Holding Gain (Loss):
-----------------------------------
Gross holding gain (loss) on
securities
available for sale $(1,179.7) $(53.8) $ 359.8
Deferred policy acquisition costs 43.9 (6.9) (3.1)
Tax (expense) benefit 397.7 21.1 (125.1)
--------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (738.1) $(39.6) $ 231.6
--------------------------
Calculation of Reclassification
Adjustment:
-------------------------------
Realized gain on sale of securities
available for sale $ 73.4 $ 42.0 $ 55.1
Tax expense (25.2) (14.7) (19.5)
--------------------------
Reclassification adjustment, net of
tax $ 48.2 $ 27.3 $ 35.6
--------------------------
Amounts Reported in Other Comprehensive
Income:
---------------------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (738.1) $(39.6) $ 231.6
Less reclassification adjustment, net
of tax 48.2 27.3 35.6
--------------------------
Net unrealized gain (loss) recognized
in other comprehensive income (loss) $ (786.3) $(66.9) $ 196.0
--------------------------
</TABLE>
92
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. REINSURANCE
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger mortality
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 of 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 business reinsured on a yearly renewable term and modified
coinsurance basis remain with, and under the control of the Company.
Approximate amounts recoverable (payable) from (to) reinsurers include the
following amounts:
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(55.3) $(46.0)
Future policy benefits 141.8 108.9
Unpaid claims 8.5 12.5
Paid claims 6.4 24.3
</TABLE>
As of December 31, 1999, 74% 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,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance
premiums $ 92.8 $ 82.7 $ 70.7
Assumed reinsurance included in insurance
premiums 13.9 17.2 18.1
Ceded reinsurance netted against policy fees 52.3 65.0 77.5
Ceded reinsurance netted against net invest-
ment income 211.9 203.3 204.9
Ceded reinsurance netted against interest
credited 110.5 162.8 165.8
Ceded reinsurance netted against policy ben-
efits 88.4 121.3 93.4
Assumed reinsurance included in policy bene-
fits 8.3 17.7 12.7
</TABLE>
93
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION
The Company's six operating segments are Life Insurance, Institutional
Products, Annuities, Group Insurance, 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 Life 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 that has produced over 10% of the segment's in force business. The
Institutional Products 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 Insurance 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 insurance brokerage services and investment advisory services through
approximately 3,200 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 operating 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 investment 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 Life 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 $100.5 million and $110 million as of
December 31, 1999 and 1998, respectively. 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 disclosed
herein is interest credited to universal life and investment-type products.
94
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION (Continued)
Financial information for each of the business segments is as follows:
<TABLE>
<CAPTION>
Life Institutional Group Broker- Investment Corporate
Insurance Products Annuities Insurance Dealers Management and Other Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External customers and (In Millions)
other revenue
December 31, 1999 $ 502.0 $ 39.1 $ 205.0 $478.4 $253.2 $ 14.9 $ 24.1 $ 1,516.7
December 31, 1998 431.9 43.2 124.0 521.2 236.1 17.0 21.6 1,395.0
December 31, 1997 395.6 61.4 83.3 480.6 154.0 21.2 6.0 1,202.1
Intersegment revenues
December 31, 1999 348.5 (348.5) -
December 31, 1998 185.3 (185.3) -
December 31, 1997 143.3 (143.3) -
Net investment income
excluding earnings of
equity method investees
December 31, 1999 580.2 645.1 78.3 23.4 0.9 8.3 44.2 1,380.4
December 31, 1998 586.5 565.5 88.6 23.1 0.9 8.0 42.0 1,314.6
December 31, 1997 507.2 509.6 149.4 24.9 0.8 6.2 49.2 1,247.3
Earnings of equity
method investees
December 31, 1999 (0.7) (1.2) (0.1) 107.9 (13.0) 92.9
December 31, 1998 0.1 103.1 (4.2) 99.0
December 31, 1997 0.2 80.7 (2.8) 78.1
Net realized investment
gains (losses)
December 31, 1999 12.6 26.8 0.1 (0.6) 9.9 52.7 101.5
December 31, 1998 4.1 (13.6) 4.6 1.7 4.0 38.6 39.4
December 31, 1997 9.9 12.8 0.6 2.0 20.8 39.3 85.4
Total revenues
December 31, 1999 1,094.1 709.8 283.3 501.2 602.6 141.0 (240.5) 3,091.5
December 31, 1998 1,022.5 595.2 217.2 546.0 422.3 132.1 (87.3) 2,848.0
December 31, 1997 912.7 584.0 233.3 507.5 298.1 128.9 (51.6) 2,612.9
Income (loss) before
provision for
income tax
December 31, 1999 178.4 111.9 73.2 30.4 11.9 62.6 46.3 514.7
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
Provision (benefit) for
income tax
December 31, 1999 54.4 30.7 24.0 10.1 5.2 11.3 8.0 143.7
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
Net income (loss)
December 31, 1999 124.0 81.2 49.2 20.3 6.7 51.3 38.3 371.0
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
Interest credited on
universal life and
investment-type
products
December 31, 1999 451.4 383.8 65.1 4.1 904.4
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
Assets
As of December 31, 1999 16,276.1 17,649.4 14,565.2 341.5 60.9 264.5 965.4 50,123.0
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
</TABLE>
95
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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 the net periodic pension benefit are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned dur-
ing the year $ 4.6 $ 4.0 $ 3.6
Interest cost on projected benefit
obligation 11.5 10.9 10.4
Expected return on plan assets (16.3) (15.0) (12.8)
Amortization of net obligations and
prior service cost (1.4) (1.4) (1.4)
----------------------------
Net periodic pension benefit $ (1.6) $ (1.5) $ (0.2)
----------------------------
</TABLE>
96
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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>
<CAPTION>
December 31,
1999 1998
--------------
(In Millions)
<S> <C> <C>
Change in Benefit Obligation:
-----------------------------
Benefit obligation, beginning of year $177.8 $157.9
Service cost 4.6 4.0
Interest cost 11.5 10.9
Plan expense (0.3) (0.3)
Actuarial (gain) loss (30.7) 11.9
Benefits paid (7.0) (6.6)
--------------
Benefit obligation, end of year $155.9 $177.8
--------------
Change in Plan Assets:
----------------------
Fair value of plan assets, beginning of year $195.3 $180.3
Actual return on plan assets 23.6 21.9
Plan expense (0.3) (0.3)
Benefits paid (7.0) (6.6)
--------------
Fair value of plan assets, end of year $211.6 $195.3
--------------
Funded Status Reconciliation:
-----------------------------
Funded status $ 55.7 $ 17.5
Unrecognized transition asset (47.7) (3.6)
Unrecognized prior service cost (2.4) (1.0)
Unrecognized actuarial gain (0.8) (9.7)
--------------
Prepaid pension cost $ 4.8 $ 3.2
--------------
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1999 and 1998, the weighted average discount
rate used was 8.0% and 6.5%, respectively, and the rate of increase in
future compensation levels was 5.5% and 5.0%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1999 and 1998.
97
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
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 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, 1999, 1998 and 1997 is $0.5 million, $0.7 million and $0.8 million,
respectively. As of December 31, 1999 and 1998, the accumulated benefit
obligation is $19.7 million and $19.3 million, respectively. The fair value
of the plan assets as of December 31, 1999 and 1998 is zero. The amount of
accrued benefit cost included in other liabilities on the accompanying
consolidated statements of financial condition is $24.4 million and $25.3
million as of December 31, 1999 and 1998, 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 8.0% for 1999 and 1998 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 7.0% for 1999 and 1998 and is assumed to
decrease gradually to 3.0% 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, 1999 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 10.1%. If the health care cost trend rate assumptions were
decreased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1999 would be decreased by 7.0%, and the aggregate of the
service and interest cost components of the net periodic benefit cost would
decrease by 8.9%.
The discount rate used in determining the accumulated postretirement
benefit obligation is 8.0% and 6.5% for 1999 and 1998, 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 ("ESOP"). ESOP contributions made by the Company amounted to $5.4
million, $5.2 million and $1.1 million for the years ended December 31,
1999, 1998 and 1997, respectively, and are included in operating expenses
on the accompanying consolidated statements of operations.
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 LifeCorp issued 1.7 million shares of common stock
at
98
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
$12.50 per share to the ESOP ("ESOP Shares") on September 2, 1997, in
exchange for a promissory note in the amount of $21.2 million ("ESOP
Note"). Interest and principal payments made by the ESOP to Pacific
LifeCorp were funded by ESOP contributions from Pacific Life.
On July 27, 1999, Pacific Life loaned cash to the ESOP to pay off the ESOP
Note due Pacific LifeCorp. This loan is included in unearned ESOP shares on
the accompanying consolidated statement of stockholder's equity as of
December 31, 1999. The unearned ESOP shares account is reduced as ESOP
shares are released for allocation to participants through ESOP
contributions by Pacific Life. In addition, when the fair value of ESOP
shares being released for allocation to participants exceeds the original
issue price of those shares, paid-in capital is increased by this
difference and reflected as a capital contribution on the accompanying
consolidated statement of stockholder's equity as of December 31, 1999.
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.
16. 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 $69.7
million, $42.1 million and $27.5 million for the years ended December 31,
1999, 1998 and 1997, respectively. In addition, Pacific Life provides
certain support services to the Pacific Select Fund for an administration
fee which is based on an allocation of actual costs. Such administration
fees amounted to $265,000, $232,000 and $165,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $7.3 million, $16.9 million and $11.4 million
for the years ended December 31, 1999, 1998 and 1997, 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 $3.2 million and
$40.3 million as of December 31, 1999 and 1998, 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 $1.0 million, $1.2 million and $1.2 million for the years ended December
31, 1999, 1998 and 1997, respectively.
17. TERMINATION AND NON COMPETITION AGREEMENTS
The Company has termination and non competition agreements 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 non
compete 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, 1999, 1998 and 1997, approximately $53.6
million, $49.4 million and $85.8 million, respectively, is included in
operating expenses on the accompanying consolidated statements of
99
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. TERMINATION AND NON COMPETITION AGREEMENTS (Continued)
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.
In connection with the closing of the PIMCO Advisors transaction (Note 1),
the termination and non competition agreements with certain former key
employees of PAM's subsidiaries will be assumed by Allianz.
18. COMMITMENTS AND CONTINGENCIES
The Company has outstanding commitments to make investments primarily in
fixed maturity securities, mortgage loans, limited partnerships and other
investments as follows (In Millions):
<TABLE>
<CAPTION>
Years Ending December 31:
-------------------------
<S> <C>
2000 $437.0
2001 through 2004 210.8
2005 and thereafter 144.3
------
Total $792.1
------
</TABLE>
The Company leases office facilities under various non cancelable operating
leases. Aggregate minimum future commitments as of December 31, 1999
through the term of the leases are approximately $43.3 million.
Pacific Life has a contingent liability of approximately $23 million
related to the posting of an appeal bond in conjunction with one of its
investments. An unrelated third party has agreed to reimburse Pacific Life
for 50% of any losses incurred under the bond. In addition, Pacific Life
has given a commitment for additional capital funding, as may be required,
to certain of its subsidiaries.
Pacific Life 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 Pacific Life on or after January 1, 1982. Pacific Life has
settled this litigation pursuant to a final settlement agreement approved
by the Court in November 1998. The settlement agreement was implemented
during 1999.
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.
----------------------------------------------------------------------------
100
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Financial Statements as of March 31, 2000
and December 31, 1999 and for the three months ended
March 31, 2000 and 1999
101
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(Unaudited) 1999
-----------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair
value:
Fixed maturity securities $15,133.8 $14,814.0
Equity securities 251.8 295.2
Trading securities at estimated fair value 101.4 99.9
Mortgage loans 2,953.8 2,920.2
Real estate 230.9 236.0
Policy loans 4,297.9 4,258.5
Other investments 1,106.0 882.7
-----------------------------------------------------------------------------
TOTAL INVESTMENTS 24,075.6 23,506.5
Cash and cash equivalents 404.0 439.4
Deferred policy acquisition costs 1,517.5 1,446.1
Accrued investment income 312.1 287.2
Other assets 830.0 830.7
Separate account assets 25,224.5 23,613.1
-----------------------------------------------------------------------------
TOTAL ASSETS $52,363.7 $50,123.0
-----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life and investment-type products $19,138.8 $19,045.5
Future policy benefits 4,437.9 4,386.0
Short-term and long-term debt 296.6 224.4
Other liabilities 1,225.7 939.2
Separate account liabilities 25,224.5 23,613.1
-----------------------------------------------------------------------------
TOTAL LIABILITIES 50,323.5 48,208.2
-----------------------------------------------------------------------------
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 143.9 139.9
Unearned ESOP shares (9.5) (11.6)
Retained earnings 2,154.1 2,034.5
Accumulated other comprehensive loss:
Unrealized loss on securities available for sale,
net (278.3) (278.0)
-----------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 2,040.2 1,914.8
-----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $52,363.7 $50,123.0
-----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
102
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
<S> <C> <C>
2000 1999
-------------------------------------------------------------------------------
<CAPTION>
(In Millions)
<S> <C> <C>
REVENUES
Universal life and investment-type product policy fees $ 197.8 $ 144.5
Insurance premiums 126.4 133.6
Net investment income 404.1 335.6
Net realized investment gains 48.6 52.2
Commission revenue 65.8 61.2
Other income 56.6 33.6
-------------------------------------------------------------------------------
TOTAL REVENUES 899.3 760.7
-------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life and investment-
type products 226.5 220.8
Policy benefits paid or provided 236.7 180.5
Commission expenses 131.7 116.7
Operating expenses 133.3 110.2
-------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 728.2 628.2
-------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 171.1 132.5
Provision for income taxes 51.5 44.2
-------------------------------------------------------------------------------
NET INCOME $ 119.6 $ 88.3
-------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
103
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Unearned Other
------------- Paid-in ESOP Retained Comprehensive
Shares Amount Capital Shares Earnings Income (Loss) Total
----------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1999 0.6 $30.0 $126.2 $1,663.5 $ 508.3 $2,328.0
Comprehensive loss:
Net income 371.0 371.0
Change in unrealized
gain on securities
available for sale,
net (786.3) (786.3)
--------
Total comprehensive
loss (415.3)
Issuance of partnership
units by affiliate 10.6 10.6
Capital contributions 3.1 3.1
Purchase of ESOP note $(13.1) (13.1)
Allocation of unearned
ESOP shares 1.5 1.5
----------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1999 0.6 30.0 139.9 (11.6) 2,034.5 (278.0) 1,914.8
Comprehensive income:
Net income 119.6 119.6
Change in unrealized
loss on securities
available for sale,
net (0.3) (0.3)
--------
Total comprehensive
income 119.3
Issuance of partnership
units by affiliate 3.0 3.0
Allocation of unearned
ESOP shares 1.0 2.1 3.1
----------------------------------------------------------------------------------------
BALANCES (Unaudited),
MARCH 31, 2000 0.6 $30.0 $143.9 $ (9.5) $2,154.1 $(278.3) $2,040.2
----------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
104
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 119.6 $ 88.3
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Amortization on fixed maturity securities (19.9) (10.1)
Depreciation and other amortization 5.6 3.9
Earnings of equity method investees (27.1) (14.5)
Deferred income taxes 16.5 (4.0)
Net realized investment gains (48.6) (52.2)
Net change in deferred policy acquisition costs (71.4) (76.8)
Interest credited to universal life and investment-
type products 226.5 220.8
Change in trading securities (1.5) (98.0)
Change in accrued investment income (24.9) (35.4)
Change in future policy benefits 51.9 22.9
Change in other assets and liabilities 211.6 (115.2)
-------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 438.3 (70.3)
-------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (951.9) (990.4)
Sales 335.8 616.0
Maturities and repayments 451.3 236.7
Repayments of mortgage loans 121.2 68.8
Purchases of mortgage loans and real estate (151.3) (89.9)
Distributions from partnerships 33.4 33.5
Change in policy loans (39.4) 34.3
Other investing activity, net (252.0) (40.0)
-------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (452.9) (131.0)
-------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
105
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Continued) 2000 1999
-----------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 1,177.9 $1,223.1
Withdrawals (1,274.0) (920.0)
Net change in short-term and long-term debt 72.2 (101.5)
Allocation of unearned ESOP shares 3.1
-----------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (20.8) 201.6
-----------------------------------------------------------------------------
Net change in cash and cash equivalents (35.4) 0.3
Cash and cash equivalents, beginning of period 439.4 154.1
-----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 404.0 $ 154.4
-----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 0.9 $ 0.1
Interest paid $ 2.1 $ 2.0
-----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
106
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.ORGANIZATION AND BUSINESS
Pacific Life Insurance Company (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 is an indirect subsidiary of Pacific Mutual
Holding Company (PMHC), a mutual holding company, and a wholly owned
subsidiary of Pacific LifeCorp, an intermediate stock holding company. PMHC
and Pacific LifeCorp were organized pursuant to consent received from the
Insurance Department of the State of California and the implementation of a
plan of a conversion to form a mutual holding company structure in 1997.
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.
2.BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The information set forth in the consolidated statements of financial
condition and stockholder's equity as of March 31, 2000 and the
consolidated statements of operations and cash flows for the three months
ended March 31, 2000 and 1999 is unaudited. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. The information reflects all adjustments, consisting
only of normal recurring adjustments, that, in the opinion of management,
are necessary to present fairly the financial position and results of
operations of Pacific Life Insurance Company and subsidiaries (the Company)
for the periods indicated. Results of operations for the interim periods
are not necessarily indicative of the results of operations for the full
year. It is suggested that these unaudited financial statements be read in
conjunction with the audited financial statements for the years ended
December 31, 1999, 1998 and 1997.
The accompanying consolidated financial statements of the Company include
the accounts of Pacific Life and its majority owned and controlled
subsidiaries. All significant intercompany transactions and balances have
been eliminated.
The Company, through its wholly owned subsidiary Pacific Asset Management
LLC (PAM), had an approximate 33% beneficial ownership interest in PIMCO
Advisors L.P. (PIMCO Advisors) as of March 31, 2000 and December 31, 1999.
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.
On May 5, 2000, a transaction was closed whereby Allianz of America, Inc.
(Allianz), a subsidiary of Allianz AG, acquired 70% of the outstanding
partnership units of PIMCO Advisors. PAM exchanged its interest in PIMCO
Advisors for a beneficial economic interest in a new class of PIMCO
Advisors partnership units with a cash distribution comprised of a fixed
and variable return.
In connection with this transaction, PAM entered into a Continuing
Investment Agreement with Allianz with respect to its investment in PIMCO
Advisors. The investment in PIMCO Advisors held by PAM is subject to put
and call options held by PAM and Allianz, respectively. The put option
gives PAM the right to require Allianz, on the last business day of each
calendar quarter, to purchase all of the investment in PIMCO Advisors held
by PAM. The put option price is based on the distributions per unit amount,
as defined in the Continuing Investment Agreement, for the most recently
completed four calendar quarters multiplied by a factor of 14.0. The call
option gives Allianz the right to require PAM, on any January 31, April 30,
July 31, or October 31, beginning on January 31, 2003, to sell its
investment in PIMCO Advisors to Allianz. The call option price is based on
the distributions per unit, as defined in the Continuing Investment
Agreement, for the most recently completed four calendar quarters
multiplied by a factor of 14.0 if the call per unit value reaches a minimum
value.
107
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.ACQUISITION OF INSURANCE BLOCK OF BUSINESS
Effective July 15, 1999, Pacific Life acquired a payout annuity block of
business from Confederation Life Insurance Company (U.S.) in
Rehabilitation, which is currently under rehabilitation. This block of
business consisted of approximately 16,000 annuitants having reserves of
$1.8 billion. The assets received as part of this acquisition amounted to
$1.6 billion in fixed maturity securities and $0.2 billion in cash.
4.LITIGATION
Pacific Life 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 Pacific Life on or after January 1, 1982. Pacific Life has
settled this litigation pursuant to a final settlement agreement approved
by the Court in November 1998. The settlement agreement was implemented
during 1999.
Further, Pacific Life 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 Pacific Life.
----------------------------------------------------------------------------
108
<PAGE>
APPENDIX A - JOINT EQUAL AGE
----------------------------------------------------------
An example Joint equal age is a calculation that combines the
ages and insurance risks of two people insured by a
This example policy. It changes many possible combinations of ages,
assumes a male risk classes, nonstandard ratings and genders for the
smoker who is age two people insured by the policy into a two life status.
65 and a female With joint equal age, we assume that both people have
nonsmoker who is the same age, gender (both always male), and risk class
age 55 and has a (both smoker or both nonsmoker).
Table D nonstandard
rating. How we use joint equal age
Using the joint equal age of the two people insured
Here's how we by the policy eliminates many of the tables needed when
calculate the joint age rates are used. We use the joint equal age for
equal age. calculating the following:
. certain policy charges. We use joint equal age to
Step 1 determine the rates per $1000 of initial face amount
for the sales surrender target, underwriting
Add 6 to the male surrender charge and the face amount component of
age of 65 because the mortality and expense risk charge.
he is a smoker. For
the female, add 0 . cost of insurance rates. Age is used for cost of
to age 55 because insurance rates, both current and guaranteed.
she is a nonsmoker.
. the death benefit under Option D.
Adjusted ages after
Step 1: How we calculate joint equal age
. Male 71 Here are the five steps we use to calculate joint equal
. Female 55 age. We start with the actual ages of the two people
insured by the policy on the policy date.
Step 2
Step 1 Adjust ages for smoker status
Subtract 0 from the
male age of 65. For If one person is a smoker and the other is a
the female, nonsmoker, we add a specified number of years
subtract 5 from age to the age of the smoker. We do not adjust the
55. age of the nonsmoker. The table below shows
how we make the adjustment.
Adjusted ages after
Step 2: ----------------------------------------------
. Male 71 Number of smokers Add to actual age (years)
. Female 50 ----------------------------------------------
None 0
Step 3 One female 4
One male 6
The male's age is One unisex 6
not adjusted here Two 0
because he does not ----------------------------------------------
have a nonstandard
table rating. Add 8 If both people insured by the policy are
to the female's age smokers, or if both people are nonsmokers,
of 50 because her we do not adjust the age in this step.
table rating is D.
Step 2 Adjust ages for gender
Adjusted ages after
Step 3: We subtract years from the adjusted age we
. Male 71 calculated in Step 1, based on gender. The
. Female 58 table below shows how we make the adjustment.
Step 4 ----------------------------------------------
Gender Subtract from adjusted age (years)
Subtract 58 from ----------------------------------------------
71. The difference Female 5
is 13. The add-on Male 0
factor for 13 is 6 Unisex 1
in the table. ----------------------------------------------
Step 5
Add 6, the add-on
factor to 58, the
younger adjusted
age.
The joint equal age
is 64.
109
<PAGE>
Step 3 Adjust ages for table ratings
We add years to the adjusted age in Step 2, based on the nonstandard table
rating for each person insured by the policy. The table below shows how we make
the adjustment.
Table ratings represent a multiple of standard mortality rates. Ratings other
than 0 represent nonstandard ratings.
--------------------------------------------------------------------------------
Table rating 0 A B C D E F H J L N P
Add to adjusted age (years) 0 2 4 6 8 10 12 14 15 16 18 19
--------------------------------------------------------------------------------
We cap the adjusted age for nonstandard at age 100.
For people who are uninsurable, the adjusted age will always be 100, regardless
of their age and gender. We reserve the right to reject an application for a
policy.
After Steps 1 through 3, we have each person's adjusted age.
Step 4 Determine the add-on factor
We subtract the younger adjusted age from the older adjusted age. We find the
difference between the two in the table below and go across the row to
determine the add-on factor.
<TABLE>
<CAPTION>
---------------------- ----------------------
Difference in Add-on Difference in Add-on
adjusted age factor adjusted age factor
(years) (years) (years) (years)
---------------------- ----------------------
<S> <C> <C> <C>
0 0 40-44 12
1-2 1 45-47 13
3-4 2 48-50 14
5-6 3 51-53 15
7-9 4 54-56 16
10-12 5 57-60 17
13-15 6 61-64 18
16-18 7 65-69 19
19-23 8 70-75 20
24-28 9 76-82 21
29-34 10 83-91 22
35-39 11 92-100 23
---------------------- ----------------------
</TABLE>
Step 5 Calculate joint equal age
We add the add-on factor to the younger adjusted age (from Step 3).
The sum is the joint equal age.
110
<PAGE>
APPENDIX B - RATES PER $1,000 OF INITIAL FACE AMOUNT
<TABLE>
<CAPTION>
----------------------------- -----------------------------
Face amount Face amount
Joint component Joint component
equal of M & E equal of M & E
age risk charge age risk charge
----------------------------- -----------------------------
<S> <C> <C> <C>
15 0.051 58 0.208
16 0.052 59 0.230
17 0.053 60 0.253
18 0.054 61 0.275
19 0.055 62 0.298
20 0.056 63 0.320
21 0.056 64 0.341
22 0.057 65 0.362
23 0.058 66 0.382
24 0.059 67 0.401
25 0.060 68 0.420
26 0.061 69 0.439
27 0.062 70 0.457
28 0.063 71 0.475
29 0.064 72 0.492
30 0.065 73 0.510
31 0.066 74 0.528
32 0.067 75 0.547
33 0.068 76 0.566
34 0.069 77 0.585
35 0.070 78 0.605
36 0.072 79 0.626
37 0.073 80 0.647
38 0.074 81 0.668
39 0.075 82 0.689
40 0.076 83 0.711
41 0.078 84 0.733
42 0.079 85 0.756
43 0.080 86 0.778
44 0.082 87 0.801
45 0.085 88 0.824
46 0.087 89 0.848
47 0.090 90 0.871
48 0.093 91 0.895
49 0.097 92 0.919
50 0.102 93 0.944
51 0.107 94 0.968
52 0.113 95 0.993
53 0.120 96 1.018
54 0.134 97 1.044
55 0.150 98 1.069
56 0.168 99 1.095
57 0.188 100 1.121
----------------------------- -----------------------------
</TABLE>
111
<PAGE>
APPENDIX C - DEATH BENEFIT PERCENTAGES
<TABLE>
<CAPTION>
---------------- ---------------- ---------------- ----------------
Age Percentage Age Percentage Age Percentage Age Percentage
---------------- ---------------- ---------------- ----------------
<S> <C> <S> <C> <S> <C> <S> <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 >93 101
---------------- ---------------- ---------------- ----------------
</TABLE>
112
<PAGE>
APPENDIX D - DEATH BENEFIT FACTOR TABLE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Rate per $1.00 of Face Amount
------------------------------------------------------------------------------------------------
Joint
equal
age Policy years*
------------------------------------------------------------------------------------------------
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75+
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
15 1.000 1.000 1.000 1.001 1.002 1.005 1.010 1.022 1.048 1.102 1.210 1.415 1.702 1.957 2.000
20 1.000 1.000 1.001 1.002 1.004 1.009 1.021 1.046 1.100 1.207 1.411 1.700 1.957 2.000 2.000
25 1.000 1.000 1.001 1.003 1.008 1.019 1.044 1.097 1.204 1.408 1.697 1.956 2.000 2.000 2.000
30 1.000 1.001 1.003 1.007 1.018 1.042 1.094 1.200 1.404 1.694 1.955 2.000 2.000 2.000 2.000
35 1.000 1.002 1.006 1.016 1.039 1.091 1.197 1.400 1.692 1.954 2.000 2.000 2.000 2.000 2.000
40 1.001 1.005 1.014 1.036 1.087 1.192 1.395 1.688 1.953 2.000 2.000 2.000 2.000 2.000 2.000
45 1.002 1.011 1.032 1.081 1.185 1.388 1.682 1.952 2.000 2.000 2.000 2.000 2.000 2.000 2.000
50 1.006 1.025 1.072 1.174 1.376 1.674 1.949 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
55 1.015 1.058 1.157 1.358 1.660 1.945 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
60 1.035 1.128 1.327 1.636 1.936 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
65 1.079 1.274 1.595 1.920 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
70 1.175 1.519 1.891 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
75 1.357 1.822 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
80 1.620 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
85 1.894 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
90 1.969 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
95 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
99 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
------------------------------------------------------------------------------------------------
</TABLE>
* Factors are portrayed for both joint equal ages and policy anniversaries, at
five year intervals. See your policy for one year increments in death benefit
factors.
113
<PAGE>
PACIFIC SELECT
ESTATE PRESERVER II WHERE TO GO FOR MORE INFORMATION
---------------------------------------------------------
The Pacific Select For more information about Pacific Select Estate
Estate Preserver II Preserver II, please call or write to us at the address
variable life below. You should also use this address to send us any
insurance policy is notices, forms or requests about your policy.
underwritten by
Pacific Life
Insurance 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 You can also find reports and other information about
SEC 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>
Underwritten by:
[LOGO OF PACIFIC LIFE APPEARS HERE]
Pacific Life Insurance Company
700 Newport Center Drive
Newport Beach, CA 92660
(800) 800-7681
Visit us at our web site: www.pacificlife.com
[LOGO OF IMSA APPEARS HERE]
* Membership promotes ethical market conduct
for individual life insurance and annuities
15-20648-05 8/00
<PAGE>
PACIFIC SELECT PROSPECTUS AUGUST 7, 2000
ESTATE PRESERVER IV
Pacific Select Estate Preserver IV is a last survivor
flexible premium variable life insurance policy issued
by Pacific Life Insurance Company.
This policy is not This prospectus provides information that you should
available in all know before buying a policy. It's accompanied by a
states. This current prospectus for the Pacific Select Fund, a fund
prospectus is not that provides the underlying portfolios for the
an offer in any variable investment options offered under the policy.
state or Please read these prospectuses carefully and keep them
jurisdiction where for future reference.
we're not legally
permitted to offer Here's a list of all of the investment options
the policy. available under your policy:
The policy is
described in detail VARIABLE INVESTMENT OPTIONS
in this prospectus.
The Pacific Select Aggressive Equity Mid-Cap Value
Fund is described
in its prospectus Emerging Markets Equity Index
and in its
Statement of Diversified Research Small-Cap Index
Additional
Information (SAI). Small-Cap Equity REIT
No one has the (formerly called
right to describe "Growth") International Value
the policy or the (formerly called
Pacific Select Fund International Large-Cap "International")
any differently
than they have been Equity Government Securities
described in these
documents. I-Net Tollkeeper(SM) Managed Bond
You should be aware Multi-Strategy Money Market
that the Securities
and Exchange Equity Income High Yield Bond
Commission (SEC)
has not reviewed Growth LT Large-Cap Value
the policy for its
investment merit,
and does not
guarantee that the FIXED OPTIONS
information in this
prospectus is Fixed Account
accurate or
complete. It's a Fixed LT Account
criminal offense
to say otherwise.
<PAGE>
YOUR GUIDE TO THIS PROSPECTUS
<TABLE>
<S> <C>
An overview of Pacific Select Estate Preserver IV 4
----------------------------------------------------------------------
Pacific Select Estate Preserver IV basics 11
Owners, people insured by the policy, and beneficiaries 12
Policy date, monthly payment date, policy anniversary date 13
Statements and reports we'll send you 14
Your right to cancel 14
Timing of payments, forms and requests 15
Telephone transactions 16
----------------------------------------------------------------------
The death benefit 17
Choosing your death benefit option 17
The guideline minimum death benefit 18
When we pay the death benefit 18
Comparing the death benefit options 19
Changing your death benefit option 19
Decreasing the face amount 20
Optional riders 20
----------------------------------------------------------------------
How premiums work 21
Your first premium payment 21
Planned periodic premium payments 21
Deductions from your premiums 22
Allocating your premiums 22
Limits on the premium payments you can make 23
----------------------------------------------------------------------
Your policy's accumulated value 24
Calculating your policy's accumulated value 24
Monthly deductions 24
Lapsing and reinstatement 26
----------------------------------------------------------------------
Your investment options 28
Variable investment options 28
Fixed options 32
Transferring among investment options 32
Transfer programs 33
----------------------------------------------------------------------
Withdrawals, surrenders and loans 35
Making withdrawals 35
Taking out a loan 36
Ways to use your policy's loan and withdrawal features 37
Surrendering your policy 38
----------------------------------------------------------------------
General information about your policy 39
----------------------------------------------------------------------
Variable life insurance and your taxes 41
----------------------------------------------------------------------
About Pacific Life 45
----------------------------------------------------------------------
Appendices 109
Appendix A: Joint equal age 109
Appendix B: Rates per $1,000 of initial face amount 111
Appendix C: Death benefit percentages 112
Appendix D: Death benefit factor table 113
----------------------------------------------------------------------
Where to go for more information back cover
</TABLE>
2
<PAGE>
Terms used in this prospectus
We've tried to make this prospectus easy to read and
understand, but you may find some words and terms that
are new to you. We've identified some of these below
and the pages where you'll find an explanation of what
they mean.
If you have any questions, please ask your registered
representative or call us at 1-800-800-7681.
<TABLE>
<S> <C> <C> <C>
Accumulated value 24 Joint owners 12
Accumulation units 30 Lapse 26
Age 12 Loan account 36
In this prospectus, Allocation 22 Modified endowment
you and your mean Assignment 40 contract 43
the policy holder Beneficiary 13 Monthly payment date 13
or owner. Pacific Business day 15 Net amount at risk 23
Life, we, us and Cash surrender value 38 Net cash surrender value 38
our refer to Contingent beneficiary 13 Net premium 21
Pacific Life Cost of insurance rate 24 Outstanding loan amount 36
Insurance Company. Death benefit 17 Planned periodic premium 21
The fund refers to Death benefit factor 18 Policy anniversary 13
Pacific Select Death benefit percentage 18 Policy date 13
Fund. Policy means Face amount 17 Policy year 13
a Pacific Select Fixed account 32 Portfolio 28
Estate Preserver IV Fixed LT account 32 Proper form 15
variable life Fixed options 32 Reinstatement 27
insurance policy, General account 46 Riders 20
unless we state Guideline minimum death Separate account 46
otherwise. benefit 18 Seven-pay limit 43
Guideline premium limit 23 Tax code 41
Illustration 14 Unit value 30
In force 11 Variable account 28
Income benefit 39 Variable investment
Joint equal age 26 option 28
</TABLE>
3
<PAGE>
AN OVERVIEW OF PACIFIC SELECT ESTATE PRESERVER IV
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.
---------------------------------------------------------
Pacific Select Pacific Select Estate Preserver IV is a last survivor
Estate Preserver IV flexible premium variable life insurance policy.
basics
. Last survivor means the policy insures the lives of
Last survivor life two people and provides a death benefit that's
insurance may be payable after both people have died.
appropriate for two
spouses who want to . Flexible premium means you can vary the amount and
provide a death frequency of your premium payments.
benefit for their
children. . Variable means the policy's value depends on the
performance of the investment options you choose.
This may not be the
right kind of . Life insurance means the policy provides a death
policy for someone benefit to the beneficiary you choose.
who wants to
provide a death In addition to providing a death benefit that is
benefit for his or generally free of federal income tax, any growth in
her spouse. In that your policy's accumulated value is tax-deferred. You
case, a policy that can choose from 20 variable investment options, each of
insures a single which invests in a corresponding portfolio of the
life may be more Pacific Select Fund, and from two fixed options, both
appropriate. of which provide a guaranteed minimum rate of interest.
You may choose to allocate net premium and accumulated
value to no more than 20 investment options at any one
Please discuss your time.
insurance needs and
financial Pacific Select Estate Preserver IV is designed for
objectives with long-term financial planning. Please take some time to
your registered read the information in this prospectus before you
representative. decide if this life insurance policy meets your
insurance needs and financial objectives.
You'll find more
about the basics of Your right to cancel
Pacific Select During the free look period, you have the right to
Estate Preserver IV cancel your policy and return it to us or your
starting on registered representative for a refund. The amount of
page 11. 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.
4
<PAGE>
---------------------------------------------------------
The death benefit
You can choose one of four death benefit options
Your policy depending on what is more important to you: a larger
provides a death death benefit or building the accumulated value of your
benefit for your policy.
beneficiary after
both of the people You can change your death benefit option and reduce
insured by the your policy's face amount (with certain restrictions)
policy have died, while your policy is in force.
as long as your
policy is in force. Optional riders
There are five optional riders that provide extra
You'll find more benefits, some at additional cost. Not all riders are
about the death available in every state, and some riders may only be
benefit starting on added when you apply for your policy.
page 17.
---------------------------------------------------------
How premiums work
Your first premium must be equal to at least 25% of the
Your policy gives sum of your premium load and your policy's monthly
you the flexibility charges for the first year. Your planned periodic
to choose the premium must be for at least $50.
amount and
frequency of your Deductions from your premiums
premium payments, We deduct a premium load from each premium payment you
within certain make. The premium load is made up of a sales load, a
limits. state and local tax charge, and a federal tax charge.
You'll find more Limits on the premium payments you can make
about how premiums Federal tax law puts limits on the premium payments you
work starting on can make in relation to your policy's death benefit. We
page 21. 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.
---------------------------------------------------------
Your policy's
accumulated value
Accumulated value is the value of your policy on any
Accumulated value business day. It is not guaranteed - it depends on the
is used as the performance of the investment options you've chosen,
basis for the premium payments you've made, policy charges, and
determining policy how much you've borrowed or withdrawn from the policy.
benefits and
charges. If there Monthly deductions
is not enough We deduct a monthly charge from your policy's
accumulated value accumulated value on each monthly payment date. The
to cover policy charge is made up of cost of insurance, an
charges, your administrative charge, and a mortality and expense risk
policy could lapse. charge. If you add any riders, we'll add any charges
for them to your monthly charge.
You'll find more
about accumulated Lapsing and reinstatement
value starting on If there is not enough accumulated value to cover the
page 24. monthly charge on 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 at the
end of the grace period, you have five years from the
day it lapses to apply for a reinstatement.
5
<PAGE>
AN OVERVIEW OF PACIFIC SELECT ESTATE PRESERVER IV
---------------------------------------------------------
Your investment
options
You can choose from 20 variable investment options,
The investment each of which invests in a corresponding portfolio of
options you choose the Pacific Select Fund. We're the investment adviser
will affect your for the Pacific Select Fund. We oversee the management
policy's of all the fund's portfolios and manage two of the
accumulated value, portfolios directly. We've retained other portfolio
and may affect the managers to manage the other portfolios. The value of
death benefit. each portfolio will fluctuate with the value of the
investments it holds, and returns are not guaranteed.
Your policy's
accumulated value You can also choose from two fixed options, the Fixed
may be allocated to account and the Fixed LT account, both of which provide
up to 20 investment a guaranteed minimum annual interest rate of 4%. We may
options at any one offer a higher interest rate. If we do, we'll guarantee
time. that rate for one year.
Please review the We allocate your premium payments and accumulated value
investment options to the investment options you choose. Your policy's
carefully and ask accumulated value will fluctuate depending on the
your registered investment options you've chosen. You bear the
representative to investment risk of any variable investment options you
help you choose the choose.
right ones for your
goals and risk In some states we'll hold your premium payments in the
tolerance. Money Market investment option until the free look
transfer date. Please turn to Your right to cancel for
You'll find more details.
about the
investment options Transferring among investment options
starting on page You can transfer among the investment options during
28. the life of your policy without paying any current
income 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 program. These programs are not available
for the fixed options.
You can only make one transfer from each fixed option
in any 12-month period. For the Fixed account, each
transfer may be no more than $5,000 or 25% of the
accumulated value in the Fixed account, whichever is
greater. For the Fixed LT account, each transfer may be
no more than $5,000 or 10% of the accumulated value in
the Fixed LT account. You can only transfer to the
fixed options in the policy month right before each
policy anniversary.
You'll find out You can also make automatic transfers from the Fixed
more about our account to other investment options during the first
automatic transfer policy year using our first year transfer program.
programs starting
on page 33.
---------------------------------------------------------
Withdrawals, You can take out all or part of your policy's
surrenders and accumulated value while your policy is in force by
loans making withdrawals or surrendering your policy. You can
take out a loan from us using your policy as security.
Making a You can also use your policy's loan and withdrawal
withdrawal, taking features to supplement your income, for example, during
out a loan or retirement.
surrendering your
policy can change Making withdrawals
your policy's tax You can withdraw part of your policy's net cash
status, generate surrender value starting on your policy's first
taxable income, or anniversary. This reduces your policy's accumulated
make your policy value and could affect the face amount and death
more susceptible to benefit.
lapsing. Be sure to
plan carefully
before using these
policy benefits.
You'll find more
about withdrawals,
surrenders and
loans starting on
page 35.
6
<PAGE>
Taking out a loan
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 4.5% 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.
Surrendering your policy
You can surrender or cash in your policy for its net
cash surrender value while either of the two people
insured by the policy is still living.
---------------------------------------------------------
Variable life Your beneficiary generally will not have to pay federal
insurance and your income tax on death benefit proceeds. You'll also
taxes generally not be taxed on any or all of your policy's
accumulated value unless you receive a cash
There are tax distribution by making a withdrawal or surrendering
issues to consider your policy.
when you own a life
insurance policy. If your policy is a modified endowment contract, all
These are described distributions you receive during the life of the policy
in detail starting may be subject to tax and a 10% penalty.
on page 41.
---------------------------------------------------------
About Pacific Life
Pacific Life is a life insurance company based in
When you buy a life California. We issue the policies. Pacific Select
insurance policy, Distributors, Inc. (formerly called Pacific Mutual
you're relying on Distributors, Inc.), our subsidiary, is the distributor
the insurance of the policies.
company that issues
it to be able to How our accounts work
meet its financial We put your premium payments in our general and
obligations to you. separate accounts. We own the assets in our accounts
and make the allocations to the investment options
You'll find more you've chosen.
about Pacific Life,
and our strength as Amounts allocated to the fixed options are held in our
a company, starting general account. Our general account includes all of
on page 45. our assets, except for those held in our separate
accounts. Our ability to meet our obligations under the
We may use any policy is backed by our strength as an insurance
profit derived from company.
any charges under
the policy for any Amounts allocated to the variable investment options
lawful purpose, are held in our separate account. The assets in this
including our account are kept separate from the assets in our
distribution and general account and our other separate accounts, and
administrative are protected from our general creditors.
expenses.
7
<PAGE>
AN OVERVIEW OF PACIFIC SELECT ESTATE PRESERVER IV
<TABLE>
<S> <C>
This section of the overview explains the fees and expenses associated with your
Pacific Select Estate Preserver IV Policy.
-----------------------------------------------------------------------------------
Understanding policy expenses
and cash flow -------------------
Your premium
The chart to the right illustrates how You make a
cash normally flows through a Pacific premium
Select Estate Preserver IV policy. payment -------------------------------------------
v
The dark shaded boxes show the fees and ------------------- -----------------
expenses you pay directly or indirectly We deduct a
under your policy. These are explained premium load
in the pages that follow.
-------------------
In some states we'll hold your net Net premium
premium payments in the Money Market We allocate the -----------------
investment option until the free look net premium to
transfer date. Please turn to Your right the investment <--------------------------------->
to cancel for details. options you
choose
-------------------
v v
------------------- ------------------- ---------------- -----------------
Fixed options Variable Pacific Select The fund
We hold investment Fund deducts
amounts you options advisory fees
allocate to these <--> The variable ---> and other fund
options in our We hold investment expenses from
general account amounts you options invest the portfolios
allocate to these in the fund's
options in our portfolios
separate account
------------------- ------------------- ---------------- -----------------
-----------------
We deduct:
. cost of
insurance
. administrative
We make monthly deductions charge
-----------------------------> . mortality and
. expense risk
charge
. rider charges
v
--------------- ----------------- ---------------- -----------------
-----------------
Loan account Accumulated We deduct a
Accumulated value If you make withdrawal withdrawal charge
value set aside <--> ---------------------->
to secure a The total value
policy loan of your policy
------------------
------------------
There is no
surrender charge
If you surrender your policy
------------------------------->
------------------
</TABLE>
8
<PAGE>
---------------------------------------------------------
Deductions from
your premiums
We deduct a premium load from each premium payment you
The premium load is make. The load is made up of three charges:
explained in more
detail on page 22. Sales load - 6% of each premium payment during the
first 10 policy years and reduced to 4% after the 10th
policy year.
State and local tax charge - 2.35% of each premium
payment.
Federal tax charge - 1.50% of each premium payment.
---------------------------------------------------------
Deductions from We deduct a monthly charge from your policy's
your policy's accumulated value in the investment options on each
accumulated value monthly payment date. This charge is made up of three
charges:
The monthly charge
is explained in Cost of insurance - We calculate this charge by
more detail multiplying the current cost of insurance rate by a
starting on page discounted net amount at risk at the beginning of each
24. policy month. When the younger of the two people
insured by the policy reaches age 100, the cost of
An example insurance charge is zero -- in other words, you no
For a policy with: longer pay any cost of insurance charge.
. a joint equal age
of 50 Administrative charge - We deduct a charge of $16 a
. a face amount of month during the first five policy years, and $6 a
$100,000 month thereafter. When the younger of the two people
. accumulated insured by the policy reaches age 100, the
value of $60,000 administrative charge is zero -- in other words, you no
after deducting longer pay any administrative charge.
any outstanding
loan amount.
The monthly charge Mortality and expense risk charge - The mortality and
for the face amount expense risk charge varies depending on your policy's
component of the face amount, joint equal age on the policy date and
mortality and accumulated value. It's made up of two components:
expense risk charge
is $14.50 . The face amount component, which we deduct every
(($100,000 / 1,000) X month during the first 10 policy years at a rate that
0.145). is based on the joint equal age and each $1,000 of
the initial face amount of your policy.
The monthly charge
for the accumulated . The accumulated value component, which we deduct
value component is every month during the first20 policy years at an
$15 annual rate of 0.30% (0.025% monthly) of your
($60,000 X 0.025%). policy's accumulated value in the investment options.
The charge in During policy years 21 and thereafter, we reduce the
policy year 21 (and annual rate to 0.10% (0.008333% monthly) of the
thereafter) would accumulated value.
be $5
($60,000 X 0.008333%) Riders - If you add any riders to your policy, we add
if the policy's any charges for them to your monthly charge.
accumulated value
was $60,000.
Joint equal age is
explained in
Appendix A. The
rates for the face
amount component
are shown in
Appendix B.
---------------------------------------------------------
Withdrawal and
surrender charges
You can withdraw part of your policy's net cash
Withdrawal charges surrender value at any time starting on your policy's
are explained in first anniversary. There is a $25 charge for each
more detail on withdrawal you make. We deduct this charge
page 35. proportionately from all of your investment options.
If you surrender or cash in your policy, we do not
deduct a surrender charge.
9
<PAGE>
AN OVERVIEW OF PACIFIC SELECT ESTATE PRESERVER IV
---------------------------------------------------------
Fees and expenses The Pacific Select Fund pays advisory fees and other
paid by the expenses. These are deducted from the assets of the
Pacific Select Fund fund's portfolios and may vary from year to year. They
are not fixed and are not part of the terms of your
You'll find more policy. If you choose a variable investment option,
about the Pacific these fees and expenses affect you indirectly because
Select Fund they reduce portfolio returns.
starting on page
28, and in the Advisory fee
fund's prospectus, Pacific Life is the investment adviser to the fund. The
which accompanies fund pays an advisory fee to us for these services. The
this prospectus. table below shows the advisory fee as a annual
percentage of each portfolio's average daily net
assets.
Other expenses
The table also shows the fund expenses for each
portfolio in 1999. 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
that we'll continue to do so after December 31, 2001.
In 1999, Pacific Life reimbursed the Small-Cap Index
Portfolio $96,949.
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Portfolio Advisory fee Other expenses Total expenses+
--------------------------------------------------------------------
As an annual % of average daily net assets
<S> <C> <C> <C>
Aggressive Equity 0.80 0.05 0.85
Emerging Markets/1/ 1.10 0.32 1.42
Diversified Research/2/ 0.90 0.05 0.95
Small-Cap Equity 0.65 0.05 0.70
International Large-
Cap/2/ 1.05 0.15 1.20
Equity 0.65 0.04 0.69
I-Net Tollkeeper/2/ 1.50 0.15 1.65
Multi-Strategy 0.65 0.05 0.70
Equity Income 0.65 0.05 0.70
Growth LT 0.75 0.04 0.79
Mid-Cap Value 0.85 0.12 0.97
Equity Index/3/ 0.25 0.05 0.30
Small-Cap Index/4/ 0.50 0.44 0.94
REIT 1.10 0.18 1.28
International Value 0.85 0.16 1.01
Government Securities 0.60 0.06 0.66
Managed Bond/1/ 0.60 0.06 0.66
Money Market/1/ 0.35 0.05 0.40
High Yield Bond/1/ 0.60 0.06 0.66
Large-Cap Value 0.85 0.12 0.97
--------------------------------------------------------------------
</TABLE>
/1/ Total net expenses for these portfolios in 1999,
after deduction of an offset for custodian credits,
were: 1.41% for Emerging Markets Portfolio, 0.65% for
Managed Bond Portfolio, 0.39% for Money Market
Portfolio, and 0.65% for High Yield Bond Portfolio.
/2/ Expenses are estimated. There were no actual
advisory fees or other expenses for these portfolios in
1999 because the portfolios started after December 31,
1999.
/3/ The advisory fee for the Equity Index Portfolio has
been adjusted to reflect the advisory fee increase
effective January 1, 2000. The actual advisory fee, and
total net expenses for this portfolio in 1999 after
deduction of an offset for custodian credits, were
0.16% and 0.20%, respectively.
/4/ Total net expenses for the Small-Cap Index
Portfolio in 1999, after the advisor's reimbursement
and deduction of an offset for custodian credits, were
0.75%.
+ The fund has adopted a brokerage enhancement 12b-1
plan, under which brokerage transactions may be placed
with broker-dealers in return for credits or other
compensation that may be used to help promote
distribution of fund shares. There are no fees or
charges to any portfolio under this plan, although the
fund's distributor may defray expenses of up to
approximately $300,000 for the year 2000, which it
might otherwise incur for distribution. If such
defrayed amount were considered a fund expense, it
would represent approximately .0023% or less of any
portfolio's average daily net assets.
10
<PAGE>
PACIFIC SELECT ESTATE PRESERVER IV BASICS
When you buy a Pacific Select Estate Preserver IV life
insurance policy, you're entering into a contract with
Pacific Life Insurance Company. Your contract with us
is made up of your application, your policy,
applications to change or reinstate the policy, any
amendments, riders or endorsements to your policy, and
specification pages.
Policy amendments When we approve your signed application, we'll issue
and endorsements your policy. If your application does not meet our
are a part of your underwriting requirements, we can reject it or ask you
policy and confirm for more information. Once we receive your first
changes you or we premium payment, the policy has been delivered to you
make to the policy. and any delivery requirements have been met, we'll
consider your policy to be in force. That's when our
Specification pages obligations under the policy begin.
summarize
information Your policy will be in force until one of the following
specific to your happens:
policy at the time . both people insured by the policy die
the policy is . the grace period expires and your policy lapses, or
issued. . you surrender your policy.
If your policy is not in force when both people insured
Riders provide by the policy die, we are not obligated to pay the
extra benefits, death benefit proceeds to your beneficiary.
some at additional
cost. Not all Pacific Select Estate Preserver IV is a last survivor
riders are flexible premium variable life insurance policy that
available in every insures the lives of two people and pays death benefit
state and some proceeds after both people have died.
riders may only be
added when you Under a flexible premium life insurance policy, you
apply for your have the flexibility to choose the amount and frequency
policy. of your premium payments. You must, however, pay enough
premiums to cover the ongoing cost of policy benefits.
Last survivor life
insurance may be A premium load is deducted from each premium payment
appropriate for two you make. The resulting net premium is allocated to the
spouses who want to investment options you choose, and becomes part of your
provide a death policy's accumulated value.
benefit for their
children. Charges are deducted from the accumulated value each
month to help cover the cost of the policy's death
This may not be the benefit and other expenses. If there is not enough
right kind of accumulated value to cover the monthly charge on the
policy for someone day we make the deduction, your policy may lapse after
who wants to a grace period - which means you'll no longer have any
provide a death insurance coverage.
benefit for his or
her spouse. In that Investment earnings will increase your policy's
case, a policy that accumulated value, while investment losses will
insures a single decrease it. The premium payments you'll be required to
life may be more make to keep your policy in force will be influenced by
appropriate. the investment results of the investment options you've
chosen.
Please discuss your
insurance needs and
financial
objectives with
your registered
representative.
In some states
we'll hold your net
premium payments in
the Money Market
investment option
until the free look
transfer date.
Please turn to Your
right to cancel for
details.
11
<PAGE>
PACIFIC SELECT ESTATE PRESERVER IV BASICS
---------------------------------------------------------
Owners, people Owners
insured by the The owner is the person named on the application who
policy, and makes the decisions about the policy and its benefits
beneficiaries while it's in force. You can own a policy by yourself
or with someone else. Two or more owners are called
joint owners. You need the signatures of all owners for
Please consult your all policy transactions.
financial advisor
or a lawyer about If one of the joint owners dies, the surviving owners
designating will hold all rights under the policy. If the last
ownership joint owner dies, his or her estate will own the policy
interests. unless you've given us other instructions.
A policy can also be owned by an institution, trust,
corporation or group or sponsored arrangement. These
If you would like owners often buy more than one policy, which may
to change the owner qualify them for reduced charges or lower premium
of your policy, payments.
please contact us
or your registered We may reduce or waive the sales load on policies sold
representative for to our directors or employees, to any of our
a change of owner affiliates, or to trustees, employees or affiliates of
form. We can the fund.
process the change
only if we receive You can change the owner of your policy by completing a
your instructions change of owner form. Once we've received and recorded
in writing. your request, the change will be effective as of the
day you signed the change of owner form.
People insured by the policy
This policy insures the lives of two people who are
between the ages of 20 and 85 at the time you apply for
your policy, and who have given us satisfactory
evidence of insurability. Your policy refers to these
people as the insureds. The policy pays death benefit
proceeds after both of these people have died.
Risk classes are Each person to be insured by the policy is assigned an
usually based on underwriting or insurance risk class which we use to
age, gender, health calculate cost of insurance and other charges. We
and whether or not normally use the medical or paramedical underwriting
the person to be method to assign underwriting or insurance risk
insured by the classes, which may require a medical examination. We
policy smokes. Most may, however, use other forms of underwriting if we
insurance companies think it's appropriate.
use similar risk
classification When we use a person's age in policy calculations, we
criteria. generally use his or her age as of the nearest policy
date, and we add one year to this age on each policy
When we refer to anniversary date. For example, when we talk about
age throughout this someone "reaching age 100", we're referring to the
prospectus, we're policy anniversary date closest to that person's 100th
using the word as birthday, not to the day when he or she actually turns
we've defined it 100.
here, unless we
tell you otherwise.
12
<PAGE>
Beneficiaries
The beneficiary is the person, people, entity or
If you would like entities you name to receive the death benefit
to change the proceeds. Here are some things you need to know about
beneficiary of your naming beneficiaries:
policy, please
contact us or your . You can name one or more primary beneficiaries who
registered each receive an equal share of the death benefit
representative for proceeds unless you tell us otherwise. If one
a change of beneficiary dies, his or her share will pass to the
beneficiary form. surviving primary beneficiaries in proportion to the
We can process the share of the proceeds they're entitled to receive,
change only if we unless you tell us otherwise.
receive your
instructions in . You can also name a contingent beneficiary for each
writing. primary beneficiary you name. The contingent
beneficiary will receive the death benefit proceeds
if the primary beneficiary dies.
. You can choose to make your beneficiary permanent
(sometimes called irrevocable). You cannot change a
permanent beneficiary's rights under the policy
without his or her permission.
. If none of your beneficiaries is still living when
the death benefit proceeds are payable, you as the
policy owner will receive the proceeds. If you're no
longer living, the proceeds will go to your estate.
. You can change your beneficiary at any time while
either person insured by the policy is still living,
and while the policy is in force. The change will be
effective as of the day you signed the change of
beneficiary form.
---------------------------------------------------------
Policy date, Your policy date
monthly payment This is usually the day we approve your policy
date, policy application. It's also the beginning of your first
anniversary date policy year. Your policy's monthly, quarterly, semi-
annual and annual anniversary dates are based on your
policy date.
In Massachusetts,
the policy date is The policy date is set so that it never falls on the
known as the issue 29th, 30th or 31st of any month. We'll apply your first
date. premium payment as of your policy date or as of the day
we receive your premium, whichever is later.
Backdating your policy
In Ohio, your You can have your policy backdated up to six months, as
policy can be long as we approve it. Backdating in some cases may
backdated only lower your cost of insurance rates since these rates
three months. are based on the ages of the people insured by the
policy. Your first premium payment must cover the
premium load and monthly charges for the period between
the backdated policy date and the day your policy is
issued.
Your monthly payment date
This is the day we deduct the monthly charges from your
policy's accumulated value. The first monthly payment
date is your policy date, and it's the same day each
month thereafter. Monthly charges are explained in the
section called Your policy's accumulated value.
Your policy anniversary date
This is the same day as your policy date every year
after we issue your policy. A policy year starts on
your policy date and each anniversary date, and ends on
the day before the next anniversary date.
13
<PAGE>
PACIFIC SELECT ESTATE PRESERVER IV BASICS
---------------------------------------------------------
Statements and We send the following statements and reports to policy
reports owners:
we'll send you
. a confirmation for many financial transactions,
usually including premium payments and transfers,
loans, loan repayments, withdrawals and surrenders.
Monthly deductions and scheduled transactions made
We can create under the dollar cost averaging and portfolio
customized rebalancing programs are reported on your quarterly
hypothetical policy statement.
illustrations of
benefits under your . a quarterly policy statement. The statement will tell
policy based on you the accumulated value of your policy by
different investment option, cash surrender value, the amount
assumptions. of the death benefit, the policy's face amount, and
any outstanding loan amount. It will also include a
We'll send you one summary of all transactions that have taken place
policy illustration since the last quarterly statement, as well as any
free of charge each other information required by law.
policy year if you
ask for one. We . supplemental schedules of benefits and planned
reserve the right periodic premiums. We'll send these to you if you
to charge $25 for change your policy's face amount or change any of the
additional policy's other benefits.
illustrations.
. financial statements, at least annually or as
required by law, of the separate account and Pacific
Select Fund, that include a listing of securities for
each portfolio of the Pacific Select Fund.
---------------------------------------------------------
Your right to During the free look period, you have the right to
cancel cancel your policy and return it to us or your
registered representative for a refund.
There are special
rules for the free The amount of your refund may be more or less than the
look period in premium payments you've made, depending on the state
certain states. where you signed your application. We'll always deduct
Here are some any outstanding loan amount from the amount we refund
examples: to you.
. In California the
free look period You'll find a complete description of the free look
ends 30 days period that applies to your policy on the policy's
after you receive cover sheet, or on a notice that accompanied your
your policy if policy. Generally, the free look period ends on the
you're 60 years latest of the following:
old or over or if
you're replacing . 10 days after you receive your policy (20 days for
another life many states if you are replacing another life
insurance policy. insurance policy)
. In Colorado the . 10 days after we mail or deliver this prospectus
free look period which includes a notice of your right of withdrawal
ends after 15 . 45 days after you complete and sign your policy
days. application.
. In North Dakota
the free look In most states, your refund will be based on the
period ends after accumulated value of your policy. In these states,
20 days. we'll allocate your net premiums to the investment
. Pennsylvania options you've chosen. If you exercise your right to
requires that you cancel, your refund will be:
exercise your
right to cancel . any charges or taxes we've deducted from your
your policy premiums
within 10 days . the net premiums allocated to the fixed options
after you receive . the accumulated value allocated to the variable
it, regardless of investment options
the date you . any monthly charges and fees we've deducted from your
signed your policy's accumulated value in the variable investment
application. options.
Please call us or
your registered
representative if
you have questions
about your right to
cancel your policy.
14
<PAGE>
In some states we're required to refund the premium
payments you've made. If you sign your application in
one of these states, we'll hold the net premiums in the
Money Market investment option until the free look
transfer date. On that day, we'll transfer the
accumulated value in the Money Market investment option
to the investment options you've chosen.
The free look transfer date is the latest of the
following:
. 15 days after we issue your policy
. 45 days after you complete and sign your policy
application
. the day we receive your minimum initial premium
. when we consider your policy to be in force.
---------------------------------------------------------
Effective date
Timing of payments, The effective date of payments, forms and requests you
forms and requests send us is usually determined by the day and time we
receive the item in proper form at the mailing address
A business day, that appears on the back cover of this prospectus.
called a valuation
date in your Planned periodic premium payments, loan requests,
policy, is any day transfer requests, loan payments or withdrawal or
that the New York surrender requests that we receive in proper form
Stock Exchange and before 4:00 p.m. Eastern time on a business day will
our life insurance normally be effective as of the end of that day, unless
client services the transaction is scheduled to occur on another
offices are open. business day. If we receive your payment or request on
It usually ends at or after 4:00 p.m. Eastern time on a business day, your
4:00 p.m. Eastern payment or request will be effective as of the end of
time. the next business day. If a scheduled transaction falls
on a day that is not a business day, we'll process it
The New York Stock as of the end of the next business day.
Exchange is usually
closed on weekends Other forms, notices and requests are normally
and on the effective as of the next business day after we receive
following days: them in proper form, unless the transaction is
. New Year's Day, scheduled to occur on another business day. Change of
Martin Luther owner and beneficiary forms are effective as of the day
King, Jr. Day, you sign the change form, once we receive them in
President's Day, proper form.
Good Friday,
Memorial Day, Proper form
July Fourth, We'll process your requests once we receive all
Labor Day, letters, forms or other necessary documents, completed
Thanksgiving Day to our satisfaction. Proper form may require, among
and Christmas other things, a signature guarantee or some other proof
Day, of authenticity. We do not generally require a
and signature guarantee, but we may ask for one if it
. the Friday before appears that your signature has changed, if the
New Year's Day, signature does not appear to be yours, if we have not
July Fourth or received a properly completed application or
Christmas Day if confirmation of an application, or for other reasons to
that holiday protect you and us.
falls on a
Saturday
. the Monday
following New
Year's Day, July
Fourth or
Christmas Day if
that holiday
falls on a Sunday
unless unusual
business conditions
exist, such as the
ending of a monthly
or yearly
accounting period.
Our client services
offices are also
usually closed on
the following days:
. the Monday before
New Year's Day,
July Fourth, or
Christmas Day, if
any of these
holidays falls on
a Tuesday
. the Tuesday
before Christmas
Day if that
holiday falls on
a Wednesday
. the Friday after
New Year's Day,
July Fourth or
Christmas Day, if
any of these
holidays falls on
a Thursday
. the Friday after
Thanksgiving.
Call us or contact
your registered
representative if
you have any
questions about the
proper form
required for a
request.
15
<PAGE>
PACIFIC SELECT ESTATE PRESERVER IV BASICS
When we make payments and transfers
We'll normally send the proceeds of transfers,
To request payment withdrawals, loans, surrenders, exchanges and death
of death benefit benefit payments within seven days after the effective
proceeds, send us date of the request. We may delay payments and
proof of death and transfers, or the calculation of payments and transfers
payment based on the value in the variable investment options
instructions. under unusual circumstances, for example, if:
. the New York Stock Exchange closes on a day other
than a regular holiday or weekend
. trading on the New York Stock Exchange is restricted
. an emergency exists as determined by the SEC, as a
result of which the sale of securities is not
practicable, or it is not practicable to determine
the value of a variable account's assets, or
. the SEC permits a delay for the protection of policy
owners.
We may delay transfers and payments from the fixed
options, including the proceeds from withdrawals,
surrenders and loans, for up to six months. We'll pay
interest at an annual rate of at least 4% on any
withdrawals or surrender proceeds from the fixed
options that we delay for 30 days or more.
We pay interest at an annual rate of at least 4% on
death benefit proceeds, calculated from the day the
last surviving person insured by the policy dies to the
day we pay the proceeds.
---------------------------------------------------------
Telephone You can make loans or transfers, and give us
transactions instructions regarding the dollar cost averaging
program or portfolio rebalancing program, by telephone
any time after the free look period as long as we have
your signed authorization form on file.
Here are some things you need to know about telephone
transactions:
. You must complete a telephone authorization form.
. If your policy is jointly owned, all joint owners
must sign the telephone authorization. We'll take
instructions from any owner.
. We may use any reasonable method to confirm that your
telephone instructions are genuine. For example, we
may ask you to provide personal identification or we
may record all or part of the telephone conversation.
We may refuse any transaction request made by
telephone.
We'll send you a written confirmation of each telephone
transaction.
Sometimes, you may not be able to make loans or
transfers by telephone, for example, if our telephone
lines are busy because of unusual market activity or a
significant economic or market change, or our telephone
lines are out of service during severe storms or other
emergencies. In these cases, you can send your request
to us in writing, or call us the next business day or
when service has resumed.
When you send us your telephone authorization form, you
agree that:
. we can accept and act upon instructions you give us
over the telephone
. neither we, any of our affiliates, the Pacific Select
Fund, or any director, trustee, officer, employee or
agent of ours or theirs will be liable for any loss,
damages, cost or expenses that result from
transactions processed because of a request by
telephone that we believe to be genuine, as long as
we have followed our own procedures
. you bear the risk of any loss that arises from your
right to make loans or transfers over the telephone.
16
<PAGE>
THE DEATH BENEFIT
We'll pay death benefit proceeds to your beneficiary
after the last surviving person insured by the policy
dies while the policy is still in force. Your
beneficiary generally will not have to pay federal
income tax on death benefit proceeds.
This policy offers four death benefit options, Options
Your policy's A, B, C and D. The option you choose will generally
initial amount of depend on which is more important to you: a larger
insurance coverage death benefit or building the accumulated value of your
is its initial face policy.
amount. We
determine the face Here are some things you need to know about the death
amount based on benefit:
instructions
provided in your . You choose your death benefit option on your policy
application. application.
The minimum face . If you do not choose a death benefit option, we'll
amount when a assume you've chosen Option A.
policy is issued is
usually $100,000, . The death benefit will always be the greater of the
but we may reduce death benefit under the option you choose or the
this in some guideline minimum death benefit.
circumstances.
. The death benefit will never be lower than the face
You'll find your amount of your policy if you've chosen Option A, B or
policy's face D. Of course, the death benefit proceeds will always
amount, which be reduced by any outstanding loan amount.
includes any
increases or . We'll pay the death benefit proceeds to your
decreases, in the beneficiary when we receive proof of the deaths of
specification pages both of the people insured by the policy.
in your policy.
---------------------------------------------------------
Choosing your death You can choose one of the following four options for
benefit option the death benefit on your application. The graphs below
help you compare the options using several hypothetical
examples.
Option A - the Option B - the face amount of
face amount of your policy plus its accumulated
your policy. value.
[ILLUSTRATION [ILLUSTRATION APPEARS HERE]
APPEARS HERE]
The death benefit changes as
your policy's accumulated value
changes. The better your
investment options perform, the
larger the death benefit will
be.
Option C - the Option D - the face amount of
face amount of your policy multiplied by a
your policy plus death benefit factor.
the total premiums
you've paid minus
any withdrawals or [ILLUSTRATION APPEARS HERE]
distributions
made. The death benefit gradually
increases over time no matter
how your investment options
[ILLUSTRATION perform, as long as there is
APPEARS HERE] enough accumulated value to keep
your policy in force.
The more premiums
you pay and the
less you withdraw,
the larger the
death benefit will
be.
17
<PAGE>
THE DEATH BENEFIT
---------------------------------------------------------
How we calculate the death benefit for
Option D
If you choose Option D, we'll calculate the death
benefit by multiplying the face amount by a death
benefit factor. The death benefit factor is a number
from 1.0 to 2.0. A factor of 1.0 means the death
benefit equals the face amount. A factor of 2.0 means
the death benefit is two times the face amount.
The factor changes on each policy anniversary and is
based on the joint equal age of the people insured by
the policy and the number of completed policy years.
Joint equal age is a calculation that blends the ages
and insurance risks of the two people insured by the
policy. Generally, the death benefit factor will reach
the maximum of 2.0 when joint equal age plus the number
of completed policy years is between 85 and 90. You'll
find more information about how we calculate joint
equal age in Appendix A.
You'll find more information about the death benefit
factor in Appendix D and in your policy.
---------------------------------------------------------
The guideline
minimum death
benefit
The guideline minimum death benefit is the minimum
If your policy's death benefit needed for your policy to qualify as life
death benefit is insurance under Section 7702 of the Internal Revenue
equal to the Code. If the amount of the death benefit under the
guideline minimum option you choose is less than the guideline minimum
death benefit, and death benefit, we'll adjust your death benefit to equal
the net amount at the guideline minimum death benefit.
risk is more than
three times the We calculate the guideline minimum death benefit by
death benefit on multiplying the accumulated value of your policy by a
the policy date, we death benefit percentage. This percentage is based on
may reduce the the age of the younger person insured by the policy,
death benefit by and will increase over time. You'll find a table of
making withdrawals guideline minimum death benefit percentages in Appendix
from your policy. C.
We will not charge
you our usual $25
withdrawal fee, but
the withdrawals may
be taxable. Please
turn to
Withdrawals,
surrenders and
loans for
information about
making withdrawals.
---------------------------------------------------------
When we pay the
death benefit
We calculate the amount of the death benefit proceeds
Your beneficiary as of the end of the day the last surviving person
can choose to insured by the policy dies. If that person dies on a
receive the death day that is not a business day, we calculate the
benefit proceeds in proceeds as of the next business day.
a lump sum or use
it to buy an income Your policy's beneficiary must send us proof that both
benefit. Please see people insured by the policy died while the policy was
the discussion in force, along with payment instructions. If both
about income people insured by the policy die at the same time, or
benefits in General if it's not clear who died first, we'll assume the
information about younger of the two died first.
your policy.
Death benefit proceeds equal the total of the death
It is important benefits provided by your policy and any riders you've
that we have a added, minus any outstanding loan amount, minus any
current address for overdue charges.
your beneficiary so
that we can pay We'll pay interest at an annual rate of at least 4% on
death benefit the death benefit proceeds, calculated from the day the
proceeds promptly. last surviving person insured by the policy dies to the
If we cannot pay day we pay the proceeds. In some states we may pay a
the proceeds to higher rate of interest if required by law.
your beneficiary
within five years
of the death of the
last surviving
person insured by
the policy, we'll
be required to pay
them to the state.
18
<PAGE>
---------------------------------------------------------
Comparing the death The tables below compare the death benefits provided by
benefit options the policy's four death benefit options. The examples
are intended only to show differences in death benefits
and net amounts at risk. Accumulated value assumptions
may not be realistic.
Example A assumes These examples show that each death benefit option
the following: provides a different level of protection. Keep in mind
that cost of insurance charges, which affect your
. the people policy's accumulated value, increase with the amount of
insured by the the death benefit, as well as over time. The cost of
policy are male insurance is charged at a rate per $1,000 of the
and female non- discounted net amount at risk. As the net amount at
smokers, each age risk increases, your cost of insurance increases.
45 at the time Accumulated value also varies depending on the
the policy was performance of the investment options in your policy.
issued
. face amount is
$1,000,000
. accumulated value
at year 20 is
$600,000
. total premiums
paid into the
policy at year 20
is $300,000
. the death benefit
percentage for
the guideline
minimum death
benefit is 120%
. the death benefit
factor for Option
D at year 20 is
108.4%
. the guideline
minimum death
benefit is
$720,000
(accumulated
value times a
death benefit
percentage factor
of 120%)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Example A The death benefit is the larger
of these two amounts
-------------------------------
Death Death benefit Guideline Net amount at risk
benefit How it's under minimum used for cost of
option calculated the option death benefit insurance charge
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Option A Face amount $1,000,000 $720,000 $396,736.94
Option B Face amount plus
accumulated value $1,600,000 $720,000 $994,779.11
Option C Face amount plus
premiums less distributions $1,300,000 $720,000 $695,758.03
Option D Face amount times
death benefit factor $1,084,000 $720,000 $480,462.85
------------------------------------------------------------------------------------------
</TABLE>
Example B uses the
same assumptions as
Example A, but has
an accumulated
value of
$1,400,000. Because
accumulated value
has increased, the
guideline minimum
death benefit is
now $1,600,000
($1,400,000 times a
death benefit
factor of 120%).
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Example B The death benefit is the larger
of these two amounts
-------------------------------
Death Death benefit Guideline Net amount at risk
benefit How it's under minimum used for cost of
option calculated the option death benefit insurance charge
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Option A Face amount $1,000,000 $1,680,000 $274,518.06
Option B Face amount plus
accumulated value $2,400,000 $1,680,000 $992,168.66
Option C Face amount plus
premiums less distributions $1,300,000 $1,680,000 $274,518.06
Option D Face amount times
death benefit factor $1,084,000 $1,680,000 $274,518.06
--------------------------------------------------------------------------------------
</TABLE>
---------------------------------------------------------
Changing your death You can change your death benefit option after your
benefit option fifth policy year. Here's how it works:
We will not change . You can change the death benefit once in any policy
your death benefit year.
option if it means . You must send us your request in writing.
your policy will be . You can only change to Option A or Option B.
treated as a . The change will become effective on the first monthly
modified endowment payment date after we receive your request. If we
contract, unless receive your request on a monthly payment date, we'll
you've told us in process it that day.
writing that this . The face amount of your policy will change by the
would be acceptable amount needed to make the death benefit under the new
to you. Modified option equal the death benefit under the old option
endowment contracts just before the change. We will not let you change
are discussed in the death benefit if doing so means the face amount
Variable life of your policy will become less than $100,000. We may
insurance and your waive this minimum amount under certain
taxes. circumstances.
. Changing the death benefit option can also affect the
Net amount at risk monthly cost of insurance charge since this charge
is the difference varies with the net amount at risk.
between the death . The new death benefit option will be used in all
benefit that would future calculations.
be payable if both
people insured by
the policy died,
and the accumulated
value of your
policy.
19
<PAGE>
THE DEATH BENEFIT
---------------------------------------------------------
Decreasing the face You can decrease your policy's face amount starting on
amount the first policy anniversary as long as we approve it.
Here's how it works:
Decreasing the face
amount may affect . You can decrease the face amount as long as at least
your policy's tax one of the people insured by the policy is still
status. To ensure living.
your policy . You can only decrease the face amount once in any
continues to policy year.
qualify as life . You must send us your request in writing while your
insurance, we might policy is in force.
be required to . The decrease will become effective on the first
return part of your monthly payment date after we receive your request.
premium payments to If we receive your request on a monthly payment date,
you, or make we'll process it that day.
distributions from . Decreasing the face amount can affect the monthly
the accumulated cost of insurance charge since this charge varies
value, which may be with the net amount at risk.
taxable. . We can refuse your request to make the face amount
less than $100,000. We can waive this minimum amount
We will not in certain situations, such as group or sponsored
decrease the face arrangements.
amount if it means
your policy will be
treated as a
modified endowment
contract, unless
you've told us in
writing that this
would be acceptable
to you.
For more
information, please
see Variable life
insurance and your
taxes.
---------------------------------------------------------
Optional riders There are five optional riders that provide extra
benefits, some at additional cost. Not all riders are
We offer other available in every state, and some riders may only be
variable life added when you apply for your policy.
insurance policies
which provide . Last survivor added protection benefit
insurance Provides level or varying term insurance on the two
protection on the people insured by the policy.
lives of two people
or on the life of . Individual annual renewable term rider
one person. The Provides level or varying term insurance on either or
loads and charges both people insured by the policy.
on these policies
may be different. . Enhanced policy split option rider
Combining a policy Available only to married couples, it splits the
and a rider, policy into two individual policies without evidence
however, may be of insurability under certain circumstances.
more economical
than adding another . Policy split option rider
policy. It may also Splits the policy into two individual policies with
be more economical evidence of insurability.
to provide an
amount of insurance . Accelerated living benefits rider
coverage through a Gives the policy owner access to a portion of the
policy alone. policy's death benefit if the last surviving person
insured by the policy has been diagnosed with a
terminal illness resulting in a life expectancy of
six months or less (or longer than six months in some
states).
Certain restrictions may apply and are described in the
rider or benefit. We'll add any rider charges to the
Ask your registered monthly charge we deduct from your policy's accumulated
representative for value.
more information
about the riders
available with the
policy, or about
other kinds of life
insurance policies
offered by Pacific
Life.
There may be tax
consequences if you
exercise your
rights under the
Accelerated living
benefits rider or
either of the two
Policy split option
riders. Please see
Variable life
insurance and your
taxes for more
information.
Samples of the
provisions for the
extra optional
benefits are
available from us
upon written
request.
20
<PAGE>
HOW PREMIUMS WORK
Your policy gives you the flexibility to choose the
amount and frequency of your premium payments.
The amount, We usually set the amount of your first premium
frequency, and payment. You can schedule the amount and frequency of
period of time over remaining premium payments within certain limits. Each
which you make premium payment must be at least $50.
premium payments
may affect whether We deduct a premium load from each premium payment, and
your policy will be then allocate your net premium to the investment
classified as a options you've chosen. Depending on the performance of
modified endowment your investment options, and on how many withdrawals,
contract, or no loans or other policy features you've taken advantage
longer qualifies as of, you may need to make additional premium payments to
life insurance for keep your policy in force.
tax purposes. See
Variable life
insurance and your
taxes for more
information.
---------------------------------------------------------
Your first premium We usually require you to make a minimum initial
payment premium payment that's equal to at least 25% of the sum
of your premium load and your policy's monthly charges
for the first year.
The amount of the monthly charge and premium load are
calculated based on your policy's face amount and the
age, smoking status, gender (unless unisex cost of
insurance rates apply), and risk classes of the people
insured by your policy.
We describe premium load later in this section. You'll
find an explanation of the monthly charge in Your
policy's accumulated value.
If we do not receive the minimum initial premium
payment within 20 days after we issue your policy, we
can cancel the policy and refund any partial premium
payment you've made. We may waive the 20 day
requirement in some cases.
---------------------------------------------------------
Planned periodic
premium payments
You can schedule the amount and frequency of your
premium payments. We refer to scheduled premium
Even if you pay all payments as your planned periodic premium. Here's how
your premiums when it works:
they're scheduled,
your policy could . On your application, you choose a fixed amount of at
lapse if the least $50 for each premium payment.
accumulated value,
less any . You indicate whether you want to make premium
outstanding loan payments annually, semi-annually, or quarterly. You
amount, is not can also choose monthly payments using our monthly
enough to pay your Uni-check plan, which is described below.
monthly charges.
Turn to Your . We send you a notice to remind you of your scheduled
policy's premium payment (except for monthly Uni-check
accumulated value payments, which are paid automatically). While you do
for more not have to make the premium payments you've
information. scheduled, not making a premium payment may have an
impact on any financial objectives you may have set
for your policy's accumulated value and death
benefit, and could cause your policy to lapse.
. We'll treat any payment you make during the life of
your policy as a premium, not as a loan repayment,
unless you tell us otherwise.
21
<PAGE>
HOW PREMIUMS WORK
Monthly Uni-check plan
Once you've made your first premium payment, you can
make monthly premium payments using our Uni-check plan.
Here's how it works:
. you authorize us to withdraw a specified amount from
your checking account each month
. you can choose any day between the 4th and 28th of
the month
. if you do not specify a day for us to make the
withdrawal, we'll withdraw the premium payment on
your policy's monthly anniversary. If your policy's
monthly anniversary falls on the 1st, 2nd or 3rd of
the month, we'll withdraw the payment on the 4th of
each month.
---------------------------------------------------------
Deductions from
your premiums
We deduct a premium load from each premium payment you
Your net premium is make. The load is made up of three charges:
your premium
payment less the Sales load
premium load. During the first 10 years of your policy, we deduct a
6% sales load from each premium payment you make. The
sales load is reduced to 4% after the 10th policy year.
This charge helps pay for the cost of distributing our
policies and is guaranteed not to increase. If our
sales and distribution expenses are more than the sales
load, we can recover these expenses from other charges,
such as the mortality and expense risk charge, and from
any mortality gains.
State and local tax charge
We deduct 2.35% from each premium payment to pay state
and local premium and other taxes. The actual taxes we
pay vary from state to state, and in some instances,
among municipalities. This rate approximates the
average rate we pay for all states. We do not expect to
profit from this charge, and do not expect to change
the rate unless the rate we pay increases.
Federal tax charge
We deduct 1.50% from each premium payment to pay
federal taxes. We reserve the right to change this rate
to respond to changes in law.
---------------------------------------------------------
Allocating your
premiums
We generally allocate your net premiums to the
There are special investment options you've chosen on your application on
restrictions when the day we receive them. We currently limit your
allocating premiums allocations to 20 investment options at one time.
to the Fixed LT
account. When we allocate your first premium depends on the
state where you signed your policy application. If you
Please turn to Your signed your application in a state that requires us to
investment options return the premiums you've paid, we'll hold your net
for more premiums in the Money Market investment option until
information about the free look transfer date, and then transfer them to
the investment the investment options you've chosen.
options.
If you signed your application in a state that requires
refunds to be based on accumulated value, we allocate
net premiums to the investment options you've chosen on
the day we receive them.
22
<PAGE>
---------------------------------------------------------
Limits on the Federal tax law puts limits on the amount of premium
premium payments payments you can make in relation to your policy's
you can make death benefit. These limits apply in the following
situations:
Before you buy a . If accepting the premium means your policy will no
policy, you can ask longer qualify as life insurance for federal income
us or your tax purposes.
registered
representative for The total amount you can pay in premiums and still have
a personalized your policy qualify as life insurance is your policy's
illustration that guideline premium limit. The sum of the premiums paid,
will show you the less any withdrawals, at any time cannot exceed the
guideline single guideline premium limit, which is the greater of:
premium and
guideline level . the guideline single premium or
annual premiums. . the sum of the guideline level annual premiums.
Your policy's guideline single premium and guideline
level annual premiums appear on your policy's
specification pages.
We may refuse to accept all or part of a premium
payment if, by accepting it, you will exceed your
policy's guideline premium limit. If we find that
you've exceeded your guideline premium limit, we may
remove all or part of a premium you've paid from your
policy as of the day we applied it, and return it to
you. We'll adjust the death benefit retroactively to
that date to reflect the reduction in premium payments.
You'll find a . If applying the premium in that policy year means your
detailed discussion policy will become a modified endowment contract.
of modified
endowment contracts A life insurance policy will become a modified
in Variable life endowment contract if the sum of premium payments made
insurance and your during the first seven contract years, less a portion
taxes. of withdrawals, exceeds the seven-pay limit defined in
Section 7702A of the Internal Revenue Code.
Unless you've told us in writing that you want your
policy to become a modified endowment contract, we'll
remove all or part of the premium payment from your
policy as of the day we applied it and return it to
you. We'll also adjust the death benefit retroactively
to that date to reflect the reduction in premium
payments. If we receive such a premium within 20 days
before your policy anniversary, we'll hold it and apply
it to your policy on the anniversary date.
In both of these situations, if we remove an excess
premium from your policy, we'll return the premium
amount to you no later than 60 days after the end of
that policy year. We may adjust the amount for interest
or for changes in accumulated value that relate to the
amount of the excess premium payment we're returning to
you.
If we do not return the premium amount to you within
that time, we'll increase your policy's death benefit
retroactively, to the day we applied the premium, and
prospectively, so that it's always the amount necessary
to ensure your policy qualifies as life insurance, or
to prevent it from becoming a modified endowment
contract. If we increase your death benefit, we'll
adjust cost of insurance or rider charges retroactively
and prospectively to reflect the increase.
Net amount at risk . If applying the premium payment to your policy will
is the difference increase the net amount at risk. This will happen if
between the death your policy's death benefit is equal to the guideline
benefit that would minimum death benefit or would be equal to it once we
be payable if both applied your premium payment.
people insured by
the policy died and We may choose to accept your premium payment in this
the accumulated situation, but before we do so, we may require
value of your satisfactory evidence of the insurability of the two
policy. people insured by the policy.
We will not accept premium payments after the youngest
person insured by the policy reaches age 100.
23
<PAGE>
YOUR POLICY'S ACCUMULATED VALUE
Accumulated value Accumulated value is the value of your policy on any
is used as the business day.
basis for
determining policy We use it to calculate how much money is available to
benefits and you for loans and withdrawals, and how much you'll
charges. receive if you surrender your policy. It also affects
the amount of the death benefit if you choose a death
benefit option that's calculated using accumulated
value.
The accumulated value of your policy is not
guaranteed - it depends on the performance of the
investment options you've chosen, the premium payments
you've made, policy charges and how much you've
borrowed or withdrawn from the policy.
---------------------------------------------------------
Calculating your Your policy's accumulated value is the total amount
policy's allocated to the variable investment options and the
accumulated value fixed options, plus the amount in the loan account.
We determine the value allocated to the variable
investment options on any business day by multiplying
the number of accumulation units for each variable
investment option credited to your policy on that day,
by the variable investment option's unit value at the
end of that day. The process we use to calculate unit
values for the variable investment options is described
in Your investment options.
---------------------------------------------------------
Monthly deductions We deduct a monthly charge from your policy's
accumulated value in the investment options each
If there is not monthly payment date.
enough accumulated
value to pay the Unless you tell us otherwise, we deduct the monthly
monthly charge, charge from the investment options that make up your
your policy could policy's accumulated value, in proportion to the
lapse. The accumulated value you have in each option. This charge
performance of the is made up of three charges:
investment options
you choose, not Cost of insurance
making planned This charge covers the cost of providing you with life
premium payments, insurance protection. Like other policy charges, we may
or taking out a profit from the cost of insurance charge and may use
loan all affect the these profits for any lawful purpose such as the
accumulated value payment of distribution and administrative expenses.
of your policy.
There are maximum or guaranteed cost of insurance rates
You'll find a associated with your policy. When the younger of the
discussion about two people insured by your policy reaches age 100, the
when your policy guaranteed cost of insurance rate is zero - in other
might lapse, and words, you no longer pay any cost of insurance.
what you can do to
reinstate it, later The guaranteed rates include the insurance risks
in this section. associated with insuring two people. They are
calculated using 1980 Commissioners Standard Ordinary
Mortality Tables or the 1980 Commissioners Ordinary
Mortality Table B, which are used for unisex cost of
insurance rates. The rates are also based on the ages,
gender and risk classes of the people insured by the
policy unless unisex rates are required.
Our current cost of insurance rates are based on the
ages, risk classes and genders (unless unisex rates are
required) of the two people insured by the policy.
These rates generally increase as the ages of the two
people increase, and they vary with the number of years
the policy has been in force. Our current rates are
lower than the guaranteed rates and they will not
exceed the guaranteed rates in the future.
24
<PAGE>
---------------------------------------------------------
How we calculate cost of insurance
We calculate cost of insurance by multiplying the
current cost of insurance rate by a discounted net
amount at risk at the beginning of each policy month.
Net amount at risk for the cost of insurance
calculation is the difference between a discounted
death benefit that would be payable if both people
insured by the policy died, and the accumulated value
of your policy. We calculate it in two steps:
. Step 1: we divide the death benefit that would be
payable at the beginning of the policy month by
1.00327374.
. Step 2: we subtract your policy's accumulated value
at the beginning of the policy month from the amount
we calculated in step 1.
Administrative charge
We deduct a charge of $16 a month during the first five
policy years to help cover the costs of administering
and maintaining our policies. After five policy years,
we reduce this charge to $6 a month. We guarantee that
this charge will not increase. However, subject to
state approval, for policies issued in New Jersey, we
guarantee that the administrative charge will never
exceed $16 a month. When the younger of the two people
insured by the policy reaches age 100, the
administrative charge is zero - in other words, you no
longer pay any administrative charge.
If you buy additional Pacific Select Estate Preserver
IV policies that insure the same two people, we will
not deduct the administrative charge from the
additional policies. Instead, we'll deduct $200 from
each policy's first premium payment to help cover our
processing costs.
Mortality and expense risk charge
Mortality risk is the chance that the people insured by
policies we've issued do not live as long as expected.
This means the cost of insurance charges specified in
the policies may not be enough to pay out actual
claims.
Expense risk is the chance that our actual
administrative and operating expenses are more than
expenses we expected.
The mortality and expense risk charge helps compensate
us for these risks. It has two components, which are
described in the box on the following page. We
guarantee this charge will not increase.
Charges for optional riders
If you add any riders to your policy, we add any
charges for them to your monthly charge.
25
<PAGE>
YOUR POLICY'S ACCUMULATED VALUE
---------------------------------------------------------
An example
How we calculate the mortality and expense risk charge
For a policy with: The mortality and expense risk charge has two
. a joint equal age components: a face amount component and an accumulated
of 50 value component.
. a face amount of
$100,000 . Face amount component We deduct a face amount
. accumulated value component every month during the first 10 policy
of $60,000 after years, at a rate that is based on the joint equal age
deducting any on the policy date and each $1,000 of the initial
outstanding loan face amount of your policy. The rates for the face
amount. amount component are shown in Appendix B. Joint equal
age is a calculation that combines the ages and
The monthly charge insurance risks of the two people insured by the
for the face amount policy, and is explained in Appendix A.
component is $14.50
(($100,000 / 1,000) . Accumulated value component We deduct an accumulated
X 0.145). value component every month during the first 20
policy years at an annual rate of 0.30% (0.025%
The monthly charge monthly) of your policy's accumulated value in the
for the accumulated investment options. During policy years 21 and
value component is thereafter, we reduce the annual rate to 0.10%
$15 ($60,000 X (0.008333% monthly) of the accumulated value. For the
0.025%). The charge purposes of this charge, the amount of accumulated
in policy year 21 value is calculated on the monthly payment date after
(and thereafter) we deduct the cost of insurance and charges for any
would be $5 optional riders.
($60,000 X
.008333%) if the
policy's
accumulated value
was $60,000.
---------------------------------------------------------
Lapsing and Your policy will lapse if there is not enough
reinstatement accumulated value, after subtracting any outstanding
loan amount, to cover the monthly charge on the day we
make the deduction. Your policy's accumulated value is
affected by the following:
. loans or withdrawals you make from your policy
. not making planned premium payments
. the performance of your investment options
. charges under the policy.
There is no guarantee that your policy will not lapse
even if you pay your planned periodic premium.
If there is not enough accumulated value to pay the
total monthly charge, we deduct the amount that's
available and send you, and anyone you've assigned your
policy to, a notice telling you the minimum amount you
have to pay to keep your policy in force. This minimum
amount is equal to three times the monthly charge that
was due on the monthly payment date when there was not
enough accumulated value to pay the charge.
We'll give you a grace period of 61 days from when we
send the notice to pay the required premium. Your
policy will remain in force during the grace period.
If you do not make the minimum payment
If we do not receive your payment within the grace
period, your policy will lapse with no value. This
means we'll end your life insurance coverage.
26
<PAGE>
If you make the minimum payment
If we receive your payment within the grace period,
we'll allocate your net premium to the investment
options you've chosen and deduct the monthly charge
from your investment options in proportion to the
accumulated value you have in each option.
Remember to tell us If your policy is in danger of lapsing and you have an
if a payment is a outstanding loan amount, you may find that making the
premium payment or minimum payment would cause the total premiums paid to
a loan repayment. exceed the maximum amount for your policy's face amount
under tax laws. In that situation, we will not accept
the portion of your payment that would exceed the
maximum amount. To stop your policy from lapsing,
you'll have to repay a portion of your outstanding loan
amount.
How to avoid future lapsing
To stop your policy from lapsing in the future, you may
want to make larger or more frequent premium payments
if tax laws permit it. Or if you have a loan, you may
want to repay a portion if it.
Paying death benefit proceeds during the grace period
If the last surviving person insured by the policy dies
during the grace period, we'll pay death benefit
proceeds to your beneficiary. We'll reduce the payment
by any unpaid monthly charges and any outstanding loan
amount.
Reinstating a lapsed policy
If your policy lapses, you have five years from the end
of the grace period to apply for a reinstatement. We'll
reinstate it if you send us the following:
. a written application
. evidence satisfactory to us that the two people
insured by the policy are still insurable
. a premium payment sufficient to keep your policy in
force for three months after the day your policy is
reinstated
. payment of all unpaid monthly charges that were due
in the grace period.
We'll reinstate your policy as of the first monthly
payment date on or after the day we approve the
reinstatement. When we reinstate your policy, its
accumulated value will be the same as it was on the day
your policy lapsed. We'll allocate it according to your
most recent premium allocation instructions.
Reinstating a lapsed policy with an outstanding loan
amount
If you had an outstanding loan amount when your policy
lapsed, we will not pay or credit interest on it during
the period between the lapsing and reinstatement of
your policy. There are special rules that apply to
reinstating a policy with an outstanding loan amount:
. If we reinstate your policy on the first monthly
payment date that immediately follows the lapse,
we'll also reinstate the loan amount that was
outstanding the day your policy lapsed.
. If we reinstate your policy on any monthly payment
date other than the monthly payment date that
immediately follows the lapse, we'll deduct the
outstanding loan amount from your policy's
accumulated value. This means you will no longer have
an outstanding loan amount when your policy is
reinstated.
27
<PAGE>
YOUR INVESTMENT OPTIONS
This section tells you about the investment options
available under your policy and how they work.
You can change your We put your premium payments in our general and
premium allocation separate accounts. We own the assets in our accounts
instructions by and allocate your premiums, less any charges, to the
writing, sending a investment options you've chosen. Amounts allocated to
fax, or, if we have the fixed options are held in our general account.
your completed Amounts allocated to the variable investment options
telephone are held in our separate account.
authorization form
on file, by calling You choose your initial investment options on your
us at 1-800-800- application. If you choose more than one investment
7681. Or you can option, you must tell us the dollar amount or
ask your registered percentage you want to allocate to each option. You can
representative to change your premium allocation instructions at any
contact us. time.
You'll find The investment options you choose, and how they
information about perform, will affect your policy's accumulated value
when we allocate and may affect the death benefit. Please review the
net premiums to investment options carefully and ask your registered
your investment representative to help you choose the right ones for
options in How your goals and tolerance for risk. Make sure you
premiums work. understand any costs you may pay directly and
indirectly on your investment options because they will
Your policy's affect the value of your policy.
accumulated value
may be allocated to
up to 20 investment
options at any one
time.
---------------------------------------------------------
Variable investment
options
You can choose from 20 variable investment options.
Variable investment Each variable investment option is set up as a variable
options are also account under our separate account and invests in a
known as variable corresponding portfolio of the Pacific Select Fund.
accounts. These Each portfolio invests in different securities and has
variable accounts its own investment goals, strategies and risks. The
are divisions of value of each portfolio will fluctuate with the value
our separate of the investments it holds, and returns are not
account. We bear guaranteed. Your policy's accumulated value will
the direct fluctuate depending on the investment options you've
operating expenses chosen. You bear the investment risk of any variable
of our separate investment options you choose.
account. For more
information about The following chart is a summary of the Pacific Select
how these accounts Fund portfolios. You'll find detailed descriptions of
work, see the portfolios in the Pacific Select Fund prospectus
About Pacific Life. that accompanies this prospectus. There's no guarantee
that a portfolio will achieve its investment objective.
We're the You should read the fund prospectus carefully before
investment adviser investing.
for the Pacific
Select Fund. We
oversee the
management of all
the fund's
portfolios, and
manage two of the
portfolios
directly. We've
retained other
portfolio managers
to manage the other
portfolios.
28
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO THE PORTFOLIO'S THE PORTFOLIO'S PORTFOLIO
INVESTMENT GOAL MAIN INVESTMENTS MANAGER
<S> <C> <C> <C>
Aggressive Equity Capital appreciation. Equity securities of small Alliance Capital
emerging-growth companies and Management L.P.
medium-sized companies.
Emerging Markets Long-term growth of Equity securities of companies Alliance Capital
capital. that are located in countries Management L.P.
generally regarded as "emerging
market" countries.
Diversified Research Long-term growth of Equity securities of U.S. Capital Guardian
capital. companies and securities whose Trust Company
principal markets are in the U.S.
Small-Cap Equity Growth of capital. Equity securities of smaller and Capital Guardian
(formerly called medium-sized companies. Trust Company
Growth)
International Large-Cap Long-term growth of Equity securities of non-U.S. Capital Guardian
capital. companies and securities whose Trust Company
principal markets are outside
of the U.S.
Equity Capital appreciation. Equity securities of large U.S. Goldman Sachs Asset
Current income is of growth-oriented companies. Management
secondary importance.
I-Net Tollkeeper Long-term growth of Equity securities of companies Goldman Sachs Asset
capital. which use, support, or relate Management
directly or indirectly to use of
the Internet. Such companies
include those in the media,
telecommunications, and
technology sectors.
Multi-Strategy High total return. A mix of equity and fixed income J.P. Morgan
securities. Investment
Management Inc.
Equity Income Long-term growth of capital Equity securities of large and J.P. Morgan
and income. medium-sized dividend-paying U.S. Investment
companies. Management Inc.
Growth LT Long-term growth of capital Equity securities of a large Janus Capital
consistent with the number of companies of any size. Corporation
preservation of capital.
Mid-Cap Value Capital appreciation. Equity securities of medium-sized Lazard Asset
U.S. companies believed to be Management
undervalued.
Equity Index Investment results that Equity securities of companies Mercury Asset
correspond to the total that are included in the Standard Management US
return of common stocks & Poor's 500 Composite Stock
publicly traded in the U.S. Price Index.
Small-Cap Index Investment results that Equity securities of companies Mercury Asset
correspond to the total that are included in the Russell Management US
return of an index of small 2000 Small Stock Index.
capitalization companies.
REIT Current income and long- Equity securities of real estate Morgan Stanley
term capital appreciation. investment trusts. Asset Management
International Value Long-term capital Equity securities of companies of Morgan Stanley
(formerly called appreciation primarily any size located in developed Asset Management
International) through investment in countries outside of the U.S.
equity securities of
corporations domiciled in
countries other than the
U.S.
Government Securities Maximize total return Fixed income securities that are Pacific Investment
consistent with prudent issued or guaranteed by the U.S. Management Company
investment management. government, its agencies or
government-sponsored enterprises.
Managed Bond Maximize total return Medium and high-quality fixed Pacific Investment
consistent with prudent income securities with varying Management Company
investment management. terms to maturity.
Money Market Current income consistent Highest quality money market Pacific Life
with preservation of instruments believed to have
capital. limited credit risk.
High Yield Bond High level of current Fixed income securities with Pacific Life
income. lower and medium-quality credit
ratings and intermediate to long
terms to maturity.
Large-Cap Value Long-term growth of Equity securities of large U.S. Salomon Brothers
capital. Current income is companies. Asset Management
of secondary importance. Inc
</TABLE>
29
<PAGE>
YOUR INVESTMENT OPTIONS
An example
Calculating unit values
You ask us to When you choose a variable investment option, we credit
allocate $6,000 to your policy with accumulation units. The number of
the Government units we credit equals the amount we've allocated
Securities divided by the unit value of the variable account.
investment option Similarly, the number of accumulation units in your
on a business day. policy will be reduced when you make a transfer,
At the end of that withdrawal or loan from a variable investment option,
day, the unit value and when your monthly charges are deducted.
of the variable
account is $15. The value of an accumulation unit is the basis for all
We'll credit your financial transactions relating to the variable
policy with 400 investment options. We calculate the unit value for
units ($6,000 each variable account once every business day, usually
divided by $15). at or about 4:00 p.m. Eastern time.
The value of an Generally, for any transaction, we'll use the next unit
accumulation unit value calculated after we receive your written request.
is not the same as If we receive your written request before 4:00 p.m.
the value of a Eastern time, we'll use the unit value calculated as of
share in the the end of that business day. If we receive your
underlying request on or after 4:00 p.m. Eastern time, we'll use
portfolio. the unit value calculated as of the end of the next
business day.
For information
about timing of If a scheduled transaction falls on a day that is not a
transactions, see business day, we'll process it as of the end of the
Pacific Select next business day. For your monthly charge, we'll use
Estate Preserver IV the unit value calculated on your monthly payment date.
basics. If your monthly payment date does not fall on a
business day, we'll use the unit value calculated as of
the end of the next business day.
The unit value calculation is based on the following:
. the investment performance of the underlying
portfolio
. any dividends or distributions paid by the underlying
portfolio
. any charges for any taxes that are, or may become,
associated with the operation of the variable
account.
The unit value of a variable account will change with
the value of its corresponding Pacific Select Fund
portfolio. Changes in the unit value of a variable
account will not change the number of accumulation
units credited to your policy.
A look at performance
Performance information may appear in advertisements,
sales literature, or reports to policy owners or
prospective buyers.
Information about the performance of any variable
account of the separate account reflects only the
performance of a hypothetical policy. The calculations
are based on allocating the hypothetical policy's
accumulated value to the variable account during a
particular time period.
Performance information is no guarantee of how a
variable account will perform in the future. You should
keep in mind 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 period of time that's
shown.
We may show performance information in any way that's
allowed under the law that applies to it. This may
include presenting a change in accumulated value due to
the performance of one or more variable accounts, or as
a change in a policy owner's death benefit.
30
<PAGE>
We may show performance as a change in accumulated
value over time or in terms of the average annual
compounded rate of return on accumulated value. This
would be based on allocating premium payments for a
hypothetical policy to a particular variable account
over certain periods of time, including one year, or
from the day the variable account started operating. If
a portfolio has existed for longer than its
corresponding variable account, we may also show the
hypothetical returns that the variable account would
have achieved had it invested in the portfolio from the
day the portfolio started operating.
Performance may reflect the deduction of all policy
charges including premium load, the cost of insurance,
the administrative charge, and the mortality and
expense risk charge. The different death benefit
options will result in different expenses for the cost
of insurance, and the varying expenses will result in
different accumulated values.
In our advertisements, sales literature and reports to
policy owners, we may compare performance information
for a variable account to:
. 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
. the Consumer Price Index, to assess the real rate of
return from buying a policy by taking inflation into
consideration.
Reports and promotional literature may also contain our
rating or a rating of our claims-paying ability. These
ratings are set by firms that analyze and rate
insurance companies and by nationally recognized
statistical rating organizations.
You'll find more Fees and expenses paid by the Pacific Select Fund
about Pacific The Pacific Select Fund pays advisory fees and other
Select Fund fees expenses. These are deducted from the assets of the
and expenses in An fund's portfolios and may vary from year to year. They
overview of Pacific are not fixed and are not part of the terms of your
Select Estate policy. If you choose a variable investment option,
Preserver IV. these fees and expenses affect you indirectly because
they reduce portfolio returns. The fund is governed by
its own Board of Trustees.
31
<PAGE>
YOUR INVESTMENT OPTIONS
---------------------------------------------------------
Fixed options
You can also choose from two fixed options: the Fixed
The fixed options account and the Fixed LT account. The fixed options
are not securities, provide a guaranteed minimum annual rate of interest.
so they do not fall The amounts allocated to the fixed options are held in
under any our general account.
securities act. For
this reason, the Here are some things you need to know about the fixed
SEC has not options:
reviewed the
disclosure in this . Accumulated value allocated to the fixed options earn
prospectus about interest on a daily basis, using a 365-day year. Our
these options. minimum annual interest rate is 4%.
However, other . We may offer a higher annual interest rate on the
federal securities fixed options. If we do, we'll guarantee the higher
laws may apply to rate for one year.
the accuracy and . There are no investment risks or direct charges.
completeness of the . There are limitations on when and how much you can
disclosure about transfer from the fixed options. These limitations
these options. For are described below in Transferring among investment
more information options.
about the general . We may limit the total amount you allocate to the
account, see About Fixed LT account for all Pacific Life policies you
Pacific Life. own to $1,000,000 in any 12-month period, and
transfer any amount over $1,000,000 to your other
investment options according to your most recent
instructions. We may increase the $1,000,000 limit at
any time at our sole discretion. You should contact
us to find out if a higher limit is in effect.
---------------------------------------------------------
Transferring among You can transfer among your investment options any time
investment options during the life of your policy without triggering any
current income tax. You can make transfers by writing
If your state to us, by making a telephone transfer, or by signing up
requires us to for one of our automatic transfer programs. You'll find
refund your more information about making telephone transfers in
premiums when you Pacific Select Estate Preserver IV basics.
exercise your right
to cancel, you can Transfers will normally be effective as of the end of
make transfers and the business day we receive your written or telephone
use transfer request.
programs only after
the free look Here are some things you need to know about making
transfer date. For transfers:
more information,
please see Pacific . Your policy's accumulated value may be invested in up
Select Estate to 20 investment options at one time.
Preserver IV . If you're making transfers between variable
basics. investment options, there is no minimum amount
required and you can make as many transfers as you
If you live in like.
Connecticut, . You can make transfers from the variable investment
Georgia, Maryland, options to the fixed options only in the policy month
North Carolina, right before each policy anniversary.
North Dakota, or . You can only make one transfer from each fixed option
Pennsylvania, you in any 12-month period, except if you've signed up
can make a transfer for the first year transfer program.
to the fixed . You can only transfer up to the greater of $5,000 or
options any time 25% of your policy's accumulated value in the Fixed
during the first 18 account in any 12-month period.
months of your . You can only transfer up to the greater of $5,000 or
policy. 10% of your policy's accumulated value in the Fixed
LT account in any 12-month period.
You'll find more . Currently, there is no charge for making a transfer
about the first but we may charge you in the future.
year transfer . There is no minimum required value for the investment
program later in option you're transferring to or from.
this section. . You cannot make a transfer if your policy is in the
grace period and is in danger of lapsing.
. We can restrict or suspend transfers.
. We may choose to impose limits on transfer amounts,
the value of the investment options you're
transferring to or from, or the number and frequency
of transfers you can make.
32
<PAGE>
---------------------------------------------------------
Transfer programs We offer three programs that allow you to make
automatic transfers of accumulated value from one
investment option to another. Under the dollar cost
averaging and portfolio rebalancing programs, you can
transfer among the variable investment options. Under
the first year transfer program, you can make transfers
from the Fixed account to the Fixed LT account and the
variable investment options.
Since the value of Dollar cost averaging program
accumulation units Our dollar cost averaging program allows you to make
can change, more scheduled transfers of $50 or more between variable
units are credited investment options. It does not allow you to make
for a scheduled transfers to or from either of the fixed options.
transfer when unit Here's how the program works:
values are lower,
and fewer units . You need to complete a request form to enroll in the
when unit values program. You may enroll by telephone if you have a
are higher. This completed telephone authorization form on file.
allows you to . You must have at least $5,000 in a variable
average the cost of investment option to start the program.
investments over . We'll automatically transfer accumulated value from
time. Investing one variable investment option to one or more of the
this way does not other variable investment options you've selected.
guarantee profits . We'll process transfers as of the end of the business
or prevent losses. day on your policy's monthly, quarterly, semi-annual
or annual anniversary, depending on the interval
you've chosen. We will not make the first transfer
until after the free look transfer date in states
that require us to return your premiums if you
exercise your right to cancel your policy.
. We will not charge you for the dollar cost averaging
program or for transfers made under this program,
even if we decide to charge you in the future for
transfers outside of the program, except if we have
to by law.
. We have the right to discontinue, modify or suspend
the program at any time.
We'll keep making transfers at the intervals you've
chosen until one of the following happens:
. the total amount you've asked us to transfer has been
transferred
. there is no more accumulated value in the investment
option you're transferring from
. your policy enters the grace period and is in danger
of lapsing
. you tell us in writing to cancel the program
. we discontinue the program.
Because the Portfolio rebalancing program
portfolio As the value of the underlying portfolios changes, the
rebalancing program value of the allocations to the variable investment
matches your options will also change. The portfolio rebalancing
original percentage program automatically transfers your policy's
allocations, we may accumulated value among the variable investment options
transfer money from according to your original percentage allocations.
an investment
option with Here's how the program works:
relatively higher
returns to one with . You enroll in the program by sending us a written
relatively lower signed request or a completed automatic rebalancing
returns. form. You may enroll by telephone if you have a
completed telephone authorization form on file.
. Your first rebalancing will take place on the monthly
payment date you choose. You choose whether we should
make transfers quarterly, semi-annually or annually,
based on your policy date.
. If you cancel this program, you must wait 30 days to
begin it again.
. You cannot use this program if you're already using
the dollar cost averaging program.
. We do not currently charge for the portfolio
rebalancing program or for transfers made under this
program.
. We can discontinue, modify or suspend the program at
any time.
33
<PAGE>
YOUR INVESTMENT OPTIONS
This program allows First year transfer program
you to average the Our first year transfer program allows you to make
cost of investments monthly transfers during the first policy year from the
over your first Fixed account to the variable investment options or the
policy year. Fixed LT account. It does not allow you to transfer
Investing this way among variable investment options.
does not guarantee
profits or prevent Here's how the program works:
losses.
. You enroll in the program when you apply for your
policy.
. You choose a regular amount to be transferred every
month for 12 months.
. We make the first transfer on the day we allocate
your first net premium to the investment options
you've chosen. Each transfer will be made on the same
day every month.
. If you sign up for this program, we'll waive the
usual transfer limit for the Fixed account during the
first policy year.
. If we make the last transfer during the second policy
year, we will not count it toward the usual one
transfer per year limit for the Fixed account.
. If the accumulated value in the Fixed account is less
than the amount to be transferred, we'll transfer the
balance and then cancel the program.
. If there is accumulated value remaining in the Fixed
account at the end of the program, our usual rules
for the Fixed account will apply.
. We do not currently charge for the first year
transfer program or for transfers made under this
program.
34
<PAGE>
WITHDRAWALS, SURRENDERS AND LOANS
You can take out all or part of your policy's
Making a accumulated value while your policy is in force by
withdrawal, taking making withdrawals or surrendering your policy. You can
out a loan or take out a loan from us using your policy as security.
surrendering your You can also use your policy's loan and withdrawal
policy can change features to supplement your income, for example, during
your policy's tax retirement.
status, generate
taxable income, or
make your policy
more susceptible to
lapsing. Be sure to
plan carefully
before using these
policy benefits.
If you withdraw a
larger amount than
you've paid into
your policy, your
withdrawal may be
considered taxable
income.
For more
information, see
Variable life
insurance and your
taxes.
---------------------------------------------------------
Making withdrawals You can withdraw part of your policy's net cash
surrender value starting on your policy's first
You can choose to anniversary. Here's how it works:
receive your
withdrawal in a . You must send us a written request that's signed by
lump sum or use it all owners.
to buy an income . Each withdrawal must be at least $500, and the net
benefit. Please see cash surrender value of your policy after the
the discussion withdrawal must be at least $500.
about income . If your policy has an outstanding loan amount, the
benefits in General maximum withdrawal you can take is the amount, if
information about any, by which the cash surrender value just before
your policy. the withdrawal, exceeds the outstanding loan amount
divided by 90%.
We will not accept . We'll charge you $25 for each withdrawal you make.
your request to . If you do not tell us which investment options to
make a withdrawal take the withdrawal from, we'll deduct the withdrawal
if it will cause and the withdrawal charge from all of your investment
your policy to options in proportion to the accumulated value you
become a modified have in each option.
endowment contract, . The accumulated value, cash surrender value and net
unless you've told cash surrender value of your policy will be reduced
us in writing that by the amount of each withdrawal.
you want your . If the last surviving person insured under the policy
policy to become a dies after you've sent a withdrawal request to us,
modified endowment but before we've made the withdrawal, we'll deduct
contract. the amount of the withdrawal from any death benefit
proceeds owing.
How withdrawals affect your policy's death benefit
Making a withdrawal will affect your policy's death
benefit in the following ways:
. if your policy's death benefit does not equal the
guideline minimum death benefit, the death benefit
will decrease by the amount of your withdrawal.
. if your policy's death benefit equals the guideline
minimum death benefit, the death benefit may decrease
by more than the amount of your withdrawal.
How withdrawals affect your policy's face amount
If you've chosen death benefit Option B or Option C,
making a withdrawal does not reduce your policy's face
amount.
If you've chosen death benefit Option A or Option D, a
withdrawal may reduce your face amount. You can make
one withdrawal during each of the first 15 policy years
of $10,000 or 10% of your policy's cash surrender
value, whichever is less, without reducing your
policy's face amount. If you withdraw a larger amount,
or make additional withdrawals, the face amount will be
reduced by the amount if any, by which the face amount
exceeds the death benefit immediately before the
withdrawal, minus the amount of the withdrawal.
35
<PAGE>
WITHDRAWALS, SURRENDERS AND LOANS
---------------------------------------------------------
Taking out a loan
You can borrow money from us any time while your policy
The amount in the is in force either by sending us a request in writing,
loan account, plus or over the telephone. You'll find more information
any interest you about requesting a loan by telephone in Pacific Select
owe, is referred to Estate Preserver IV basics.
throughout this
prospectus as your When you borrow money from us, we use your policy's
outstanding loan accumulated value as security. You pay interest on the
amount. Your policy amount you borrow. The accumulated value set aside to
refers to this secure your loan also earns interest. Here's how it
amount as policy works:
debt.
. To secure the loan, we transfer an amount equal to
Taking out a loan the amount you're borrowing from your accumulated
will affect the value in the investment options to the loan account.
growth of your We'll transfer this amount from your investment
policy's options in proportion to the accumulated value you
accumulated value, have in each option, unless you tell us otherwise.
and may affect the . Interest owing on the amount you've borrowed accrues
death benefit. daily at an annual rate of 4.5% during the first 10
years of the loan. Starting in the 11th year of the
loan, interest accrues at an annual rate of 4.25%.
. Interest that has accrued during the policy year is
due on your policy anniversary. If you do not pay the
interest when it's due, we'll add it to the amount of
your loan and begin accruing interest on it from the
day it was due. We'll also transfer an amount equal
to the interest that was due, from your policy's
accumulated value to the loan account. We'll transfer
this amount from your investment options in
proportion to the accumulated value you have in each
option, unless you tell us otherwise.
. The amount in the loan account earns interest daily
at an annual rate of 4.0%. On your policy
anniversary, we transfer the interest that's been
credited to the loan account proportionately to your
investment options according to your most recent
allocation instructions.
How much you can borrow
The minimum amount you can borrow is $500, unless there
are other restrictions in your state. You can borrow up
An example to the larger of the following amounts:
For a policy in
policy year 13 . 100% of the accumulated value in the fixed options,
with: plus 90% of the accumulated value in the variable
. accumulated value investment options.
of $100,000
. a most recent . the result of a x (b / c) - d, where:
monthly charge of
$100 a = the accumulated value of your policy less 12
. an outstanding times the most recent monthly charge
loan amount of b = 1.04
$50,000 c = 1.045 during the first 10 policy years, and
1.0425 during policy year 11 and thereafter
The maximum amount d = any outstanding loan amount.
you can borrow is
$48,327.24 Paying off your loan
(($100,000 - $1200) You can pay off all or part of the loan any time while
X (1.04 / 1.0425) - your policy is in force. Unless you tell us otherwise,
$50,000) we'll transfer any loan payments you make
proportionately to your investment options according to
your most recent allocation instructions.
If you live in
Connecticut, the While you have an outstanding loan, we'll treat any
minimum amount you money you send us as a premium payment unless you tell
can borrow is $200. us in writing that it's a loan repayment.
If you live in
Oregon, the minimum
amount is $250.
36
<PAGE>
What happens if you do not pay off your loan
If you do not pay off your loan, we'll deduct the
Your outstanding amount in the loan account, including any interest you
loan amount could owe, from one of the following:
result in taxable
income if you . the death benefit proceeds before we pay them to your
surrender your beneficiary
policy, if your . the cash surrender value if you surrender your policy
policy lapses, or . the amount we refund if you exercise your right to
if your policy is a cancel.
modified endowment
contract. You Taking out a loan, whether or not you repay it, will
should talk to your have a permanent effect on the value of your policy.
tax advisor before For example, while your policy's accumulated value is
taking out a loan held in the loan account, it will miss out on the
under your policy. potential earnings available through the variable
For more investment options. The amount of interest you earn on
information, please the loan account may be less than the amount of
turn to Taking out interest you would have earned from the fixed options.
a loan in Variable These could lower your policy's accumulated value,
life insurance and which could reduce the amount of the death benefit.
your taxes.
When a loan is outstanding, the amount in the loan
account is not available to help pay for any policy
charges. If, after deducting your outstanding loan
amount, there is not enough accumulated value in your
policy to cover the policy charges, your policy could
lapse. You may need to make additional premium payments
or loan repayments to prevent your policy from lapsing.
---------------------------------------------------------
Ways to use your You can use your policy's loan and withdrawal features
policy's loan and to supplement your income, for example, during
withdrawal features retirement.
If you're Using your policy to supplement your income does not
interested in using change your rights or our obligations under the policy.
your life insurance The terms for loans and withdrawals described in this
policy to prospectus remain the same.
supplement your
retirement income, Here are some things you should consider when setting
please contact us up an income stream:
for more
information. . the rate of return you expect to earn on your
investment options
We can provide you . how long you would like to receive regular income
with illustrations . the amount of accumulated value you want to maintain
that give you in your policy.
examples of how
this could affect Understanding the risks
the accumulated Setting up an income stream may not be suitable for all
value, net cash policy owners. It's important to understand the risks
surrender value and that are involved in using your policy's loan and
death benefit of withdrawal features.
your policy based
on different You must always leave enough accumulated value in your
hypothetical gross policy to help ensure your policy will continue to
rates of return. We qualify as life insurance and will not lapse. Your
will not use a policy will lapse if there is not enough accumulated
higher rate than value, after subtracting any outstanding loan amount,
12%, and will to cover the monthly charge on the day we make the
always compare it deduction and the grace period expires. If your policy
with a rate of 0% lapses, we'll end your life insurance coverage.
based on guaranteed
insurance costs. There are also charges associated with reinstating a
lapsed policy.
The hypothetical
rates of return are You should consult with your financial adviser and
not illustrative of carefully consider how much you can withdraw and borrow
past or future from your policy each year to set up your income
results. Policy stream.
values and benefits
would be different Remember that the performance of your investment
if: options also affects your policy's accumulated value.
Poor performance can increase the danger of your policy
. the gross annual lapsing. And as the cost of insurance generally
rates of return increases with the ages of the persons insured by the
are different policy, this can also reduce the accumulated value.
from the
hypothetical
rates
. premiums were not
paid as
illustrated
. loan interest was
paid when due.
37
<PAGE>
WITHDRAWALS, SURRENDERS AND LOANS
You can also ask In addition, you should carefully review the policy
for accompanying statements we send you. Your statements will allow you
charts and graphs to monitor your policy's accumulated value, less your
that compare outstanding loan amount, to ensure your policy can
results from continue to support the income stream you have chosen.
various retirement
strategies. If your policy lapses, or you surrender your policy
after you have taken out a loan, you could face
You can ask your significant income tax liability in the year of the
registered lapse or surrender. Any outstanding loan amount will
representative for automatically be repaid when your policy lapses or you
illustrations surrender your policy. You could be taxed to the extent
showing how policy that the net surrender value plus the outstanding loan
charges may affect amount repaid exceeds the cost basis of your policy.
existing
accumulated value Interest on a loan is due to us on each policy
and how future anniversary. If we do not receive the interest when
withdrawals and due, it is added to the outstanding loan amount and
loans may affect begins accruing interest from the day it was due. This
the accumulated has a compounding effect and can add to your income tax
value and death liability.
benefit.
If both persons insured by the policy die, we'll deduct
Tax issues are any outstanding loan amount from the death benefit.
described in detail This means the death benefit proceeds will be less than
in Variable the death benefit and may be less than the face amount.
insurance and your
taxes.
---------------------------------------------------------
Surrendering your
policy
You can surrender or cash in your policy at any time
You can choose to while either of the two people insured by the policy is
receive your money still living. Your policy's cash surrender value is its
in a lump sum or accumulated value. The net cash surrender value equals
use it to buy an your policy's cash surrender value after deducting any
income benefit. outstanding loan amount.
Please see the
discussion about Here are some things you need to know about
income benefits in surrendering your policy:
General information
about your policy. . You must send us your policy and a written request.
. We'll send you the policy's net cash surrender value.
There's no surrender charge.
38
<PAGE>
GENERAL INFORMATION ABOUT YOUR POLICY
This section tells you some additional things you
should know about your policy.
---------------------------------------------------------
Income benefit If you surrender or make a withdrawal from your policy,
you can use the money to buy an income benefit that
provides a monthly income. Your policy's beneficiary
can use death benefit proceeds to buy an income
benefit. In addition to the income benefit described
below, you can choose from other income benefits we may
make available from time to time.
The following is one income benefit available under the
Pacific Select Estate Preserver IV policy:
. The income benefit is based on the life of the person
receiving the income. If the policy owner is buying
the income benefit, monthly income will be based on
the owner's life. If the policy's beneficiary buys
the income benefit, monthly income will be based on
the beneficiary's life.
. We'll pay a monthly income for at least 10 years
regardless of whether the person receiving the income
is still alive.
. After 10 years, we'll only pay the monthly income for
as long as the person receiving it is still alive.
. The minimum monthly income benefit calculated must be
at least $100.
. For this income benefit, the amount you receive will
always be at least as much as the amount guaranteed
by your policy.
---------------------------------------------------------
Paying the death If either person insured by the policy, whether sane or
benefit in the insane, commits suicide within two years of the policy
case of suicide date, death benefit proceeds will be the total of all
premiums you've paid, less any outstanding loan amount,
any withdrawals you've made, and any cash dividends
we've paid.
---------------------------------------------------------
Replacement of life The term replacement has a special meaning in the life
insurance or insurance industry. Before you make a decision to buy,
annuities we want you to understand what impact a replacement may
have on your existing insurance policy.
A replacement occurs when you buy a new life insurance
policy or annuity contract, and a policy or contract
you already own has been or will be:
. lapsed, forfeited, surrendered or partially
surrendered, assigned to the replacing insurer, or
otherwise terminated
. converted to reduced paid-up insurance, continued as
extended term insurance, or otherwise reduced in
value by the use of nonforfeiture benefits or other
policy values
. amended to effect either a reduction in benefits or
in the term for which coverage would otherwise remain
in force or for which benefits would be paid
. reissued with any reduction in cash value, or
. pledged as collateral or subject to borrowing,
whether in a single loan or under a schedule of
borrowing over a period of time.
There are circumstances when replacing your existing
life insurance policy or annuity contract can benefit
you. As a general rule, however, replacement is not in
your best interest. You should carefully compare the
costs and benefits of your existing policy or contract
with those of the new policy or contract to determine
whether replacement is in your best interest.
39
<PAGE>
GENERAL INFORMATION ABOUT YOUR POLICY
---------------------------------------------------------
Errors on your
application
If the age or gender of either person insured by your
If unisex cost of policy is stated incorrectly on your application, we'll
insurance rates adjust the face amount to reflect the correct age or
apply to your gender. Here's how we'll do it:
policy, we will not
adjust the face . Using the monthly cost of insurance rate for the
amount if we policy year in which we discover the mistake, we'll
discover that multiply the face amount by the rate based on the
gender has been incorrect age or gender. We'll then divide the result
stated incorrectly by the monthly cost of insurance rate that's based on
on your the correct age or gender.
application. . We'll calculate accumulated value using cost of
insurance, rider and benefit charges based on the
correct age and gender, for all policy months
following the month we discover the mistake.
. We will not recalculate accumulated value for the
policy months up to and including the month in which
we discover the mistake.
. We will not recalculate mortality and expense risk
charges.
---------------------------------------------------------
Contesting the We have the right to contest the validity of your
validity policy for two years from the policy date. Once your
of your policy policy has been in force for two years from the policy
date during the lifetime of the people insured by the
policy, we generally lose the right to contest its
validity.
We also have the right to contest the validity of a
policy that you reinstate for two years from the day
that it was reinstated. Once your reinstated policy has
been in force for two years from the reinstatement date
during the lifetime of the people insured by the
policy, we generally lose the right to contest its
validity. During this period, we may contest your
policy only if there is a material misrepresentation on
your application for reinstatement.
Regardless of the above, we can contest the validity of
your policy for failure to pay premiums at any time.
The policy will terminate upon successful contest with
respect to either person insured by the policy.
---------------------------------------------------------
Assigning your
policy as
collateral
You can assign your policy as collateral to secure a
Assigning a policy loan, mortgage, or other kind of debt. Here's how it
that's a modified works:
endowment contract
may generate . An assignment does not change the ownership of the
taxable income and policy.
a 10% penalty tax. . After the policy has been assigned, your rights and
the rights of your beneficiary will be subject to the
assignment. The entire policy, including any income
benefit, rider, benefit and endorsement, will also be
subject to the assignment.
. We're not responsible for the validity of any
assignment.
. We must receive and record a copy of the original
assignment in a form that's acceptable to us before
we'll consider it binding.
. Unless otherwise provided, the person or organization
you assign your policy to may exercise the rights
under the policy, except the right to change the
policy owner or the beneficiary or the right to
choose a monthly income benefit.
---------------------------------------------------------
Dividends We do not expect to pay any dividends. If we do pay
dividends, we'll pay them annually in cash.
40
<PAGE>
VARIABLE LIFE INSURANCE AND YOUR TAXES
This discussion about taxes is based on our
understanding of the present federal income tax laws as
they are currently interpreted by the Internal Revenue
Service (IRS). It's based on the Internal Revenue Code
(the tax code) and does not cover any state or local
tax laws.
This is not a complete discussion of all federal income
tax questions that may arise under the policy. There
are special rules that we do not include here that may
apply in certain situations.
We do not know whether the current treatment of life
The tax insurance policies under current federal income tax or
consequences of estate or gift tax laws will continue. We also do not
owning a policy or know whether the current interpretations of the laws by
receiving proceeds the IRS or the courts will remain the same. Future
from it may vary by legislation may adversely change the tax treatment of
jurisdiction and life insurance policies, other tax consequences
according to the described in this discussion or tax consequences that
circumstances of relate directly or indirectly to life insurance
each owner or policies.
beneficiary.
We do not make any guarantees about the tax status of
Speak to a your policy, and you should not consider the discussion
qualified tax that follows to be tax advice.
adviser for
complete
information about
federal, state and
local taxes that ---------------------------------------------------------
may apply to you.
Tax treatment of Definition of life insurance
life insurance We believe that the policy qualifies as life insurance.
policies That means it will receive the same tax advantages as a
conventional fixed life insurance policy. The two main
In order to qualify tax advantages are:
as a life insurance
contract for . In general, your policy's beneficiary will not be
federal income tax subject to federal income tax when he or she receives
purposes, the the death benefit proceeds. This is true regardless
policy must meet of whether the beneficiary is an individual,
the statutory corporation, or other entity.
definition of life . You'll generally not be taxed on your policy's
insurance. accumulated value unless you receive a cash
distribution by making a withdrawal, surrendering
Death benefits may your policy, or in some instances, taking a loan from
be excluded from your policy.
income under
Section 101(a) of The tax laws defining life insurance, however, do not
the tax code. cover all policy features. Your policy may have
features that could prevent it from qualifying as life
We believe that insurance. For example, the tax laws have yet to
last survivor address many issues concerning the treatment of
policies meet the substandard risk policies, policies with term insurance
statutory on the people insured by the policy or certain tax
definition of life requirements relating to joint survivorship life
insurance under insurance policies. We can make changes to your policy
Section 7702 of the if we believe the changes are needed to ensure that
tax code. However, your policy continues to qualify as a life insurance
the area of tax law contract.
relating to the
definition of life The tax code and tax regulations impose limitations on
insurance does not unreasonable mortality and expense charges for purposes
explicitly address of determining whether a policy qualifies as life
all relevant issues insurance for federal tax purposes. For life insurance
relating to last policies entered into on or after October 21, 1988,
survivor life these calculations must be based upon reasonable
insurance policies. mortality charges and other charges reasonably expected
We reserve the to be actually paid.
right to make
changes to the
policy if we deem
the changes
appropriate to
continue to qualify
your 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. This
includes excluding
the death benefit
from the gross
income of the
beneficiary.
41
<PAGE>
VARIABLE LIFE INSURANCE AND YOUR TAXES
While the Treasury Department has issued proposed
regulations about reasonable standards for mortality
charges, the standards that apply to joint survivor
life insurance policies are not entirely clear. While
we believe that our mortality costs and other expenses
used in calculating whether the policy qualifies as
life insurance are reasonable under current laws, we
cannot be sure that the IRS agrees with us. We can
change our mortality charges if we believe the changes
are needed to ensure that your policy qualifies as a
life insurance contract.
Section 817(h) of Diversification rules and ownership of the separate
the tax code account
describes the Your policy will not qualify for the tax benefit of a
diversification life insurance contract unless the separate account
rules. follows certain rules requiring diversification of
investments underlying the policy. In addition, the IRS
For more requires that the policyholder does not have control
information about over the underlying assets.
diversification
rules, please see The Treasury Department has announced that the
Managing the diversification rules "do not provide guidance
Pacific Select Fund concerning the circumstances in which it will treat an
in the attached investor, rather than the insurance company, as the
Pacific Select Fund owner of the assets in a separate account." The IRS
prospectus. treats a variable policy owner as the owner of separate
account assets if he or she has the ability to exercise
investment control over them. Owners of the assets are
taxed on any income or gains the assets generate.
Although the Treasury Department announced it would
provide further guidance on the issue, it had not done
so when we wrote this prospectus.
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
policyowners were not owners of separate account
assets. Since you have greater flexibility in
allocating premiums and policy values than was the case
in those rulings, it is possible the IRS would treat
you as the owner of your policy's proportionate share
of the assets of the separate account.
We do not know what will be in future Treasury
Department regulations. We cannot guarantee that the
fund's 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
policies. We can modify your policy if we believe it
will prevent you from being considered the owner of
your policy's proportionate share of the assets of the
separate account.
Policy exchanges Policy exchanges
fall under Section If you exchange your policy for another one that
1035(a) of the tax insures the same people, it generally will be treated
code. as a tax-free exchange and, if so, will not result in
the recognition of gain or loss. If any of the people
insured by the policy are changed, the exchange will be
treated as a taxable exchange.
Change of ownership
You may have taxable income if you transfer ownership
of your policy, sell your policy, or change the
ownership of it in any way.
There are special Corporate owners
rules for There are special tax issues for corporate owners:
corporate-owned
policies. You . using your policy to fund deferred compensation
should consult your arrangements for employees has special tax
tax adviser. consequences
. corporate ownership of a policy may affect your
exposure to the alternative minimum tax and the
Section 59A of the environmental tax.
tax code deals with
the environmental
tax.
42
<PAGE>
---------------------------------------------------------
Conventional life
insurance policies
The tax treatment of your policy will depend upon
Under Section 7702A whether it is a type of contract known as a modified
of the tax code, endowment contract. We describe modified endowment
policies that are contracts later in this section. If your policy is not
not classified as a modified endowment contract, it will be treated as a
modified endowment conventional life insurance policy and will have the
contracts are taxed following tax treatment:
as conventional
life insurance Surrendering your policy
policies. When you surrender, or cash in, your policy, you'll
generally be taxed on the difference, if any, between
The cost basis in the cash surrender value and the cost basis in your
your policy is policy.
generally the
premiums you've Making a withdrawal
paid plus any If you make a withdrawal after your policy has been in
taxable force for 15 years, you'll only be taxed on the amount
distributions less you withdraw that exceeds the cost basis in the policy.
any withdrawals or
premiums previously Special rules apply if you make a withdrawal within the
recovered that were first 15 policy years and it's accompanied by a
not taxable. reduction in benefits. In this case, there is a special
formula under which you may be taxed on all or a
portion of the withdrawal amount.
Taking out a loan
If you take out a loan, you will not pay tax on the
loan amount unless your policy is surrendered or lapses
and you have not repaid your outstanding loan amount.
The interest you pay, or that's accrued, on a loan is
generally nondeductible. Ask your tax adviser for more
information.
Loans and corporate-owned policies
If you borrow money to buy or carry certain life
insurance policies, tax law provisions may limit the
deduction of interest payable on loan proceeds. If the
taxpayer is an entity that's a direct or indirect
beneficiary of certain life insurance, endowment or
annuity contracts, a portion of the entity's deductions
for loan interest may be disallowed, even though this
interest may relate to debt that's completely unrelated
to the contract. There may be a limited exception that
applies to contracts issued on 20% owners, officers,
directors or employees of the entity. For more
information about this exception, you should consult
your tax adviser.
---------------------------------------------------------
Modified endowment
contracts
A modified endowment contract is a special type of life
Section 7702A of insurance policy. If your policy is a modified
the tax code endowment contract, it will have the tax treatment
defines a class of described below. Any distributions you receive during
life insurance the life of the policy are treated differently than
policies known as under conventional life insurance policies.
modified endowment Withdrawals, loans, pledges, assignments and
contracts. Like surrendering your policy are all considered
other life distributions and may be subject to tax on an income-
insurance policies, first basis and a 10% penalty.
the death benefit
proceeds paid to When a policy becomes a modified endowment contract
your beneficiary A life insurance policy becomes a modified endowment
generally are not contract if, at any time during the first seven policy
subject to federal years, the sum of actual premiums paid exceeds the
income tax and your seven-pay limit. The seven-pay limit is the cumulative
policy's total of the level annual premiums (or seven-pay
accumulated value premiums) required to pay for the policy's future death
grows on a tax- and endowment benefits.
deferred basis
until you receive a For example, if the seven-pay premiums were $1,000 a
cash distribution. year, the maximum premiums you could pay during the
first seven years to avoid modified endowment treatment
If there is a would be $1,000 in the first year, $2,000 through the
material change to first two years and $3,000 through the first three
your policy, like a years, etc. Under this test, a Pacific Select Estate
change in the death Preserver IV policy may or may not be a modified
benefit, we may endowment contract, depending on the amount of premiums
have to retest your paid during the policy's first seven contract years or
policy and restart after a material change has been made to the policy.
the seven-pay
premium period to
determine whether
the change has
caused the policy
to become a
modified endowment
contract.
43
<PAGE>
VARIABLE LIFE INSURANCE AND YOUR TAXES
Surrendering your policy
If you surrender your policy, you're taxed on the
amount by which the cash surrender value exceeds the
cost basis in the policy.
Making a withdrawal or taking out a loan
If you make a withdrawal or take out a loan from a
modified endowment contract, you're taxed on the amount
of the withdrawal or loan that's considered income,
including all previously non-taxed gains. Income is the
difference between the cash surrender value and the
cost basis in your policy. It's unclear whether
interest paid, or accrued, on a loan is considered
interest for federal income tax purposes. If you borrow
money to buy or carry certain life insurance policies,
tax law provisions may limit the deduction of interest
payable on loan proceeds. You should consult your tax
adviser.
All modified endowment contracts we or our affiliates
issue to you in a calendar year are treated as a single
contract when we calculate whether a distribution
amount is subject to tax.
10% penalty tax
If any amount you receive from a modified endowment
contract is taxable, you may also have to pay a penalty
tax equal to 10% of the taxable amount.
A taxpayer will not have to pay the penalty tax if any
of the following exceptions apply:
. you're at least 59 1/2 years old
. you're receiving an amount because you've become
disabled
. you're receiving an amount that's part of a series of
substantially equal periodic payments, paid out at
least annually. These payments may be made for your
life or life expectancy or for the joint lives or
joint life expectancies of you and your
beneficiaries.
Distributions before a policy becomes a modified
endowment contract
If your policy fails the seven-pay test and becomes a
modified endowment contract, any amount you receive or
are deemed to have received during the two years before
it became a modified endowment contract may be taxable.
The distribution would be treated as having been made
in anticipation of the policy's failing to meet the
seven-pay test under Treasury Department regulations
which are yet to be prescribed.
---------------------------------------------------------
Accelerated living benefits rider
Policy riders Amounts received under this rider should be generally
excluded from taxable income under Section 101(g) of
Please see the the tax code.
discussion of
optional riders in Benefits under the rider will be taxed, however, if
The death benefit. they are paid to someone other than a person insured by
the policy, and either person insured by the policy:
Please consult with
your tax adviser if . is a director, officer or employee of the person
you want to receiving the benefit, or
exercise your . has a financial interest in a business of the person
rights under either receiving the benefit.
of these riders.
In some cases, there may be a question as to whether a
life insurance policy that has an accelerated living
benefit rider can meet technical aspects of the
definition of "life insurance contract" under the tax
code. We may reserve the right (but are not obligated)
to modify the rider to conform under tax code
requirements.
Split policy option rider
This rider allows a policy to be split into two
individual policies. If the split is not treated as a
nontaxable exchange, it could result in the recognition
of taxable income up to any gain or income in the
policy at the time of the split.
44
<PAGE>
ABOUT PACIFIC LIFE
Pacific Life Insurance Company is a life insurance
company 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. At the
end of 1999, we had over $101 billion of individual
life insurance in force and total admitted assets of
approximately $48.2 billion. We are ranked the 16th
largest life insurance carrier in the U.S. in terms of
1999 admitted assets.
The Pacific Life family of companies has total assets
under management of $315 billion. We are authorized to
conduct our life and annuity business in the District
of Columbia and in all states except New York. Our
principal office is at 700 Newport Center Drive,
Newport Beach, California 92660.
---------------------------------------------------------
How we're organized Pacific Life was established on January 2, 1868 under
the name, Pacific Mutual Life Insurance Company of
California. It was reincorporated as Pacific Mutual
Life Insurance Company on July 22, 1936. On September
1, 1997, Pacific Life converted from a mutual life
insurance company to a stock life insurance company.
Pacific Life is 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 charters, Pacific Mutual Holding Company
must always hold at least 51% of the outstanding voting
stock of Pacific LifeCorp. 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. They have the right to vote on
the election of the Board of Directors of the mutual
holding company and on other matters. They also have
certain rights if the mutual holding company is
liquidated or dissolved.
---------------------------------------------------------
How policies are Pacific Select Distributors, Inc. (PSD) (formerly
distributed called Pacific Mutual Distributors, Inc.), our
subsidiary, is the distributor of our policies. PSD is
located at 700 Newport Center Drive, Newport Beach,
California 92660.
PSD is registered as a broker-dealer with the SEC and
is a member of the National Association of Securities
Dealers (NASD). We pay PSD for its services as our
distributor.
The policies are sold by registered representatives of
broker-dealers who have signed agreements with us and
PSD. Registered representatives must be licensed to
sell variable life insurance under the state insurance
and securities regulations that apply. Broker-dealers
must be registered with the SEC.
How we pay broker-dealers
We pay broker-dealers commission for promoting,
marketing and selling our policies. Broker-dealers pay
a portion of the commission to their registered
representatives, under their own arrangements.
45
<PAGE>
ABOUT PACIFIC LIFE
Commissions are based on "target" premiums we
determine. The commission we pay will vary with the
agreement, but the most common schedule of commissions
Targets are based we pay is:
on the joint equal
age on the policy . 30% of premiums paid up to the first target premium
date and each . 25% of the premiums paid under targets 2 through 5
$1,000 of the . 4% of premiums paid in excess of targets 1 through 5
initial face amount in policy years 1 through 10
of your policy. The . 3% of premiums paid thereafter.
targets range from
$2.28 to $59.00 for We may pay broker-dealers an annual renewal commission
each $1,000 of of up to 0.20% of a policy's accumulated value less any
initial face outstanding loan amount. We calculate the renewal
amount. amount monthly and it becomes payable on each policy
anniversary.
We may also pay override payments, expense and
marketing allowances, bonuses, wholesaler fees and
training allowances.
Registered representatives who meet certain sales
levels can qualify for sales incentives programs we
sponsor. We may also pay them non-cash compensation
like expense-paid trips, expense-paid educational
seminars, and merchandise. They can choose to receive
their compensation on a deferred basis.
---------------------------------------------------------
How our accounts We own the assets in our general account and our
work separate account. We allocate your net premiums to
these accounts according to the investment options
you've chosen.
General account
We can provide you Our general account includes all of our assets, except
with reports of our for those held in our separate accounts. We guarantee
ratings as an you an interest rate for up to one year on any amount
insurance company allocated to the fixed options. The rate is reset
and our ability to annually. The fixed options are part of our general
pay claims with account, which we may invest as we wish, according to
respect to our any laws that apply. We'll credit the guaranteed rate
general account even if the investments we make earn less. Our ability
assets. to pay these guarantees is backed by our strength as a
company.
The fixed options are not securities, so they do not
fall under any securities act. For this reason, the SEC
has not reviewed the disclosure in this prospectus
about the fixed options. However, other federal
securities laws may apply to the accuracy and
completeness of the disclosure about the fixed options.
Separate account
You'll find the Amounts allocated to the variable investment options
audited financial are held in our separate account. The assets in this
statements for the account are kept separate from the assets in our
Pacific Select Exec general account and our other separate accounts, and
separate account are protected from our general creditors.
later in this
section of the The separate account was established on May 12, 1988
prospectus. under California law under the authority of our Board
of Directors. It's registered with the SEC as a type of
This section of the investment company called a unit investment trust. The
prospectus also SEC does not oversee the administration or investment
includes the practices or policies of the account.
audited
consolidated The separate account is divided into variable accounts.
financial Each variable account invests in shares of a designated
statements for portfolio of the Pacific Select Fund. We may add
Pacific Life, which variable accounts that invest in other portfolios of
we include to show the fund or in other securities.
our strength as a
company and our
ability to meet our
obligations under
the policies.
46
<PAGE>
We're the legal owner of the assets in the separate
account, and pay its operating expenses. The separate
The separate account is operated only for our variable life
account is not the insurance policies. We must keep enough money in the
only investor in account to pay anticipated obligations under the
the Pacific Select insurance policies funded by the account, but we can
Fund. Investment in transfer any amount that's more than these anticipated
the fund by other obligations to our general account. Some of the money
separate accounts in the separate account may include charges we collect
for variable from the account and any investment results on those
annuity contracts charges.
and variable life
insurance contracts We cannot charge the assets in the separate account
could cause attributable to our reserves and other liabilities
conflicts. For more under the policies funded by the account with any
information, please liabilities from our other business.
see the Statement
of Additional Similarly, the income, gains or losses, realized or
Information for the unrealized, of the assets of any variable account
Pacific Select belong to that variable account and are credited to or
Fund. charged against the assets held in that variable
account without regard to our other income, gains or
losses.
Making changes to the separate account
We can add, change or remove any securities that the
separate account or any variable account holds or buys,
as long as we comply with the laws that apply.
We can substitute shares of one Pacific Select Fund
portfolio with shares of another portfolio or fund if:
. any portfolio is no longer available for investment
. our management believes that a portfolio is no longer
appropriate in view of the purposes of the policy.
We'll give you any required notice or receive any
required approval from policy owners or the SEC before
we substitute any shares. We'll comply with the filing
or other procedures established by insurance regulators
as required by law.
We can add new variable accounts, which may include
additional subaccounts of the separate account, to
serve as investment options under the policies. These
may be managed separate accounts or they may invest in
a new portfolio of the fund, or in shares of another
investment company or one of its portfolios, or in a
suitable investment vehicle with a specified investment
objective.
We can add new variable accounts when we believe that
it's warranted by marketing needs or investment
conditions. We'll decide on what basis we'll make new
accounts available to existing policy owners.
We can also eliminate any of our variable accounts if
we believe marketing, tax or investment conditions
warrant it. We can terminate and liquidate any variable
account.
If we make any changes to variable accounts or
substitution of securities, we can make appropriate
changes to this policy or any of our other policies, by
appropriate endorsement, to reflect the change or
substitution.
47
<PAGE>
ABOUT PACIFIC LIFE
If we believe it's in the best interests of people
holding voting rights under the policies and we meet
any required regulatory approvals we can do the
following:
. operate the separate account as a management
investment company, unit investment trust, or any
other form permitted under securities or other laws
. register or deregister the separate account under
securities law
. combine the separate account with one of our other
separate accounts or our affiliates' separate
accounts
. combine one or more variable accounts
. create a committee, board or other group to manage
the separate account
. change the classification of any variable account.
Taxes we pay
We may be charged for state and local taxes. Currently,
we pay these taxes because they are small amounts with
respect to the policy. If these taxes increase
significantly, we may deduct them from the separate
account.
We may charge the separate account for any federal,
state and local taxes that apply to the separate
account or to our operations. This could happen if our
tax status or the tax treatment of variable life
insurance changes.
---------------------------------------------------------
Voting rights We're the legal owner of the shares of the Pacific
Select Fund that are held by the variable accounts. We
may vote on any matter at shareholder meetings of the
fund. However, we are required by law to vote as you
instruct on the shares relating to your allocation in a
variable investment option. This is called your voting
interest.
Your voting interest is calculated as of a day set by
the Board of Trustees of the fund called the record
date. Your voting interest equals the accumulated value
in a variable investment option divided by the net
asset value of a share of the corresponding portfolio.
Fractional shares are included. If allowed by law, we
may change how we calculate your voting interest.
We'll send you documents from the fund called proxy
materials. They include information about the items
you'll be voting on and forms for you to give us your
instructions. We'll vote shares held in the separate
account for which we do not receive voting instructions
in the same proportion as all other shares in the
portfolio held by that separate account for which we've
received timely instructions.
We'll vote shares of any portfolio we hold in our
general account in the same proportion as the total
votes 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.
If the law changes to allow it, we can vote as we wish
on shares of the portfolios held in the separate
account.
When required by state insurance regulatory
authorities, we may disregard voting instructions that:
. would change a portfolio's investment objective or
subclassification
. would approve or disapprove an investment advisory
contract.
48
<PAGE>
We may disregard voting instructions on a change
initiated by policy owners that would change a
portfolio's investment policy, investment adviser or
portfolio manager if:
. our disapproval is reasonable
. we determine in good faith that the change would be
against state law or otherwise be inappropriate,
considering the portfolio's objectives and purpose,
and considering what effect the change would have on
us.
If we disregard any voting instructions, we'll include
a summary of the action we took and our reasons for it
in the next report to policy owners.
---------------------------------------------------------
We will provide you with illustrations based on
Illustrations different sets of assumptions upon your request. You
can request such illustrations at any time.
If you ask us, Illustrations may help you understand how your policy
we'll provide you values would vary over time based on different
with different assumptions. We have filed examples of such an
kinds of illustration as an exhibit to the registration
illustrations. statement that relates to the policy on file with the
SEC.
. Illustrations
based on
information you
give us about the
age of the person
to be insured by
the policy, their
risk class, the
face amount, the
death benefit and
premium payments.
. Illustrations
that show the
allocation of
premium payments
to specified
variable
accounts. These
will reflect the
expenses of the
portfolio of the
Fund in which the
variable account
invests.
. Illustrations
that use a
hypothetical
gross rate of
return that's
greater than 12%.
These are
available only to
certain large
institutional
investors.
---------------------------------------------------------
State regulation We're subject to the laws of the state of California
governing insurance companies and to regulations issued
by the Commissioner of Insurance of California. In
addition, we're subject to the insurance laws and
regulations of the other states and jurisdictions in
which we're 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.
---------------------------------------------------------
Legal proceedings The separate account is not involved in any legal
and legal matters proceedings that would have a material effect on policy
owners.
Legal matters concerning the issue and sale of the life
insurance policies described in this prospectus, our
organization and authority to issue the policies under
California law, and the validity of the forms of the
policies under California law, have been passed upon by
our general counsel. Legal matters relating to federal
securities laws and federal income tax laws have been
passed upon by Dechert Price & Rhoads.
49
<PAGE>
ABOUT PACIFIC LIFE
---------------------------------------------------------
Registration We've filed a registration statement with the SEC for
statement Pacific Select Estate Preserver IV, under the
Securities Act of 1933. The SEC's rules allow us to
omit some of the information required by the
registration statement from this prospectus. You can
ask for it from the SEC's office in Washington, D.C.
They may charge you a fee.
---------------------------------------------------------
Management The following is a list of our directors and certain
officers, along with some information about their
business activities over the past five years. They do
not receive any compensation from the separate account
for services they provide to it nor do we pay any
separately allocable compensation for these services.
The business address of each of these people 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 of Pacific Life;
Director, Chairman Director, Chairman of the Board and Chief Executive Officer of Pacific LifeCorp,
of the Board and August 1997 to present; Director, Chairman of the Board and Chief Executive Officer
Chief Executive of Pacific Mutual Holding Company, August 1997 to present; Trustee and Chairman of
Officer the Board and Former President of Pacific Select Fund; Director and Chairman of the
Board of Pacific Life & Annuity Company (formerly known as PM Group Life Insurance
Company); Management Board Member of PIMCO Advisors L.P., December 1997 to present;
Former Equity Board Member of PIMCO Advisors L.P.; Former Director of Pacific
Corinthian Life Insurance Company; Director of Newhall Land & Farming; The Irvine
Company; Edison International; and similar positions with other affiliated companies
of Pacific Life.
Glenn S. Schafer Director and President of Pacific Life; Executive Vice President and Chief Financial
Director and Officer of Pacific Life, April 1991 to January 1995; Director and President of
President Pacific LifeCorp, August 1997 to present; Director and President of Pacific Mutual
Holding Company, August 1997 to present; President (since February 1999) and Former
Trustee of Pacific Select Fund; Management Board Member of PIMCO Advisors L.P.,
December 1997 to present; Former Equity Board Member of PIMCO Advisors L.P.; Former
Director of Pacific Corinthian Life Insurance Company; Director of Pacific Life &
Annuity Company; and similar positions with other affiliated companies of Pacific
Life.
Khanh T. Tran Director (since August 1997), Senior Vice President and Chief Financial Officer of
Director, Senior Pacific Life, June 1996 to present; Vice President and Treasurer of Pacific Life,
Vice President and November 1991 to June 1996; Senior Vice President and Chief Financial Officer of
Chief Financial Pacific LifeCorp, August 1997 to present; Senior Vice President and Chief Financial
Officer 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 General Counsel of Pacific
Director, Senior Life; Senior Vice President and General Counsel of Pacific LifeCorp, August 1997 to
Vice President and present; Senior Vice President and General Counsel of Pacific Mutual Holding
General Counsel Company, August 1997 to present: Director, Senior Vice President (since July 1998)
and General Counsel (since July 1998) of Pacific Life & Annuity Company; Director
of: 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 Secretary of Pacific
Director, Vice Life; Vice President and Corporate Secretary of Pacific LifeCorp, August 1997 to
President and present; Vice President and Secretary of Pacific Mutual Holding Company, August 1997
Corporate Secretary to present; Secretary of Pacific Select Fund; similar positions with other
affiliated companies of Pacific Life.
Lynn C. Miller Executive Vice President, Individual Insurance, of Pacific Life, Executive Vice
Executive Vice President of Pacific Life & Annuity Company, July 1998 to present.
President
Edward R. Byrd Vice President and Controller of Pacific Life; Vice President and Controller of
Vice President and Pacific LifeCorp, August 1997 to present; Vice President and Controller of Pacific
Controller 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 to present; Assistant
Vice President and Vice President, Accounting and Assistant Controller of Pacific Life, April 1994 to
Treasurer December 1998; Vice President and Treasurer of Pacific LifeCorp, June 1999 to
present; Vice President and Treasurer of Pacific Mutual Holding Company, June 1999
to present; Vice President and Treasurer of other affiliated companies of Pacific
Life.
</TABLE>
50
<PAGE>
---------------------------------------------------------
Financial The next several pages contain the statement of net
statements assets of the Pacific Select Exec Separate Account as
of December 31, 1999 and the related statement of
operations for the year then ended and statements of
changes in net assets for each of the two years in the
period then ended.
These are followed by the consolidated financial
statements for Pacific Life as of December 31, 1999 and
1998 and for each of the three years ended December 31,
1999, which are included in this prospectus so you can
assess our ability to meet our obligations under the
policies. Unaudited financial statements for Pacific
Life as of March 31, 2000 and for the three months
ended March 31, 2000 and 1999 are also included.
Experts ---------------------------------------------------------
The consolidated financial statements of Pacific Life
as of December 31, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999 and
the statement of net assets of Pacific Select Exec
Separate Account as of December 31, 1999 and the
related statement of operations for the year then ended
and statements of changes in net assets for each of the
two years in the period then ended 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.
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of
Pacific Select Exec Separate Account (comprised of the Aggressive Equity,
Emerging Markets, Growth, Bond and Income, Equity, Multi-Strategy, Equity
Income, Growth LT, Mid-Cap Value, Equity Index, Small-Cap Index, REIT,
International, Government Securities, Managed Bond, Money Market, High Yield
Bond, Large-Cap Value, Variable Account I, Variable Account II, Variable
Account III, and Variable Account IV Variable Accounts) as of December 31, 1999
and the related statement of operations for the year then ended and statement
of changes in net assets for each of the two years in the period then ended (as
to the Mid-Cap Value, Small-Cap Index, REIT, and Large-Cap Value Variable
Accounts, for the periods from commencement of operations through December 31,
1999). These financial statements are the responsibility of the Separate
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of each of the respective Variable Accounts
constituting Pacific Select Exec Separate Account as of December 31, 1999 and
the results of their operations for the year then ended and the changes in
their net assets for each of the two years in the period then ended (as to the
Mid-Cap Value, Small-Cap Index, REIT, and Large-Cap Value Variable Accounts,
for the periods from commencement of operations through December 31, 1999), in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 10, 2000
52
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Aggressive Emerging Bond and Multi- Equity Growth Mid-Cap Equity Small-Cap
Equity Markets Growth Income Equity Strategy Income LT Value Index Index
Variable Variable Variable Variable Variable Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account Account Account Account Account Account
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Aggressive
Equity Portfolio
(2,270 shares;
cost $28,345)... $33,035
Emerging Markets
Portfolio
(1,900 shares;
cost $14,846)... $19,910
Growth Portfolio
(9,705 shares;
cost $225,194).. $289,069
Bond and Income
Portfolio
(630 shares;
cost $7,935).... $6,997
Equity Portfolio
(1,589 shares;
cost $48,734)... $59,599
Multi-Strategy
Portfolio
(8,946 shares;
cost $134,934).. $151,897
Equity Income
Portfolio
(8,125 shares;
cost $186,348).. $225,466
Growth LT
Portfolio
(11,253 shares;
cost $266,532).. $536,446
Mid-Cap Value
Portfolio
(496 shares;
cost $5,142).... $5,208
Equity Index
Portfolio
(11,315 shares;
cost $298,365).. $434,565
Small-Cap Index
Portfolio
(547 shares;
cost $5,759).... $6,426
Receivables:
Due from Pacific
Life Insurance
Company......... 45 27 53 5 19 131 4 1
Fund shares
redeemed........ 26 88
-----------------------------------------------------------------------------------------------------
Total Assets..... 33,061 19,955 289,096 6,997 59,652 151,902 225,485 536,577 5,212 434,653 6,427
-----------------------------------------------------------------------------------------------------
LIABILITIES
Payables:
Due to Pacific
Life Insurance
Company......... 26 88
Fund shares
purchased....... 45 27 53 5 19 131 4 1
-----------------------------------------------------------------------------------------------------
Total
Liabilities...... 26 45 27 53 5 19 131 4 88 1
-----------------------------------------------------------------------------------------------------
NET ASSETS....... $33,035 $19,910 $289,069 $6,997 $59,599 $151,897 $225,466 $536,446 $5,208 $434,565 $6,426
-----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
53
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (Continued)
DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Govern- High
Inter- ment Managed Money Yield Large-Cap
REIT national Securities Bond Market Bond Value Variable Variable Variable Variable
Variable Variable Variable Variable Variable Variable Variable Account Account Account Account
Account Account Account Account Account Account Account I II III IV
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
REIT Portfolio
(276 shares;
cost $2,783).... $2,643
International
Portfolio
(11,651 shares;
cost $188,119).. $215,349
Government
Securities
Portfolio
(2,200 shares;
cost $23,386)... $22,218
Managed Bond
Portfolio
(11,058 shares;
cost $120,723).. $114,197
Money Market
Portfolio
(13,001 shares;
cost $131,293).. $131,046
High Yield Bond
Portfolio
(5,450 shares;
cost $50,328)... $48,032
Large-Cap Value
Portfolio
(485 shares;
cost $5,320).... $5,378
Brandes
International
Equity Portfolio
(640 shares;
cost $8,485).... $9,927
Turner Core
Growth Portfolio
(943 shares;
cost $19,237)... $21,622
Frontier Capital
Appreciation
Portfolio
(401 shares;
cost $6,298).... $8,463
Enhanced U.S.
Equity Portfolio
(286 shares;
cost $5,315).... $6,005
Receivables:
Due from Pacific
Life Insurance
Company......... 4 74 3 2 7
Fund shares
redeemed........ 3 209 11
-----------------------------------------------------------------------------------------------------
Total Assets..... 2,647 215,423 22,221 114,200 131,255 48,043 5,380 9,927 21,622 8,463 6,012
-----------------------------------------------------------------------------------------------------
LIABILITIES
Payables:
Due to Pacific
Life Insurance
Company......... 3 209 11
Fund shares
purchased....... 4 74 3 2 7
-----------------------------------------------------------------------------------------------------
Total
Liabilities...... 4 74 3 3 209 11 2 7
-----------------------------------------------------------------------------------------------------
NET ASSETS....... $2,643 $215,349 $22,218 $114,197 $131,046 $48,032 $5,378 $9,927 $21,622 $8,463 $6,005
-----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
54
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Aggressive Emerging Bond and Multi- Equity Growth Mid-Cap Equity Small-Cap
Equity Markets Growth Income Equity Strategy Income LT Value Index Index
Variable Variable Variable Variable Variable Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account Account Account Account (1) Account Account (1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends....... $2,297 $60 $24,357 $647 $2,430 $12,175 $18,449 $24,658 $10 $5,600 $95
------------------------------------------------------------------------------------------------------------
Net Investment
Income........... 2,297 60 24,357 647 2,430 12,175 18,449 24,658 10 5,600 95
------------------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net realized
gain (loss) from
security
transactions.... 835 (293) 17,437 (147) 1,715 1,903 8,208 25,696 (70) 16,677 37
Net unrealized
appreciation
(depreciation)
on investments.. 3,261 6,681 51,373 (970) 8,860 (4,391) (1,356) 195,153 66 45,834 667
------------------------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments...... 4,096 6,388 68,810 (1,117) 10,575 (2,488) 6,852 220,849 (4) 62,511 704
------------------------------------------------------------------------------------------------------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
OPERATIONS...... $6,393 $6,448 $93,167 ($470) $13,005 $9,687 $25,301 $245,507 $6 $68,111 $799
------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operations commenced during 1999 (see Note 1 to Financial Statements).
See Notes to Financial Statements
55
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Govern- High
Inter- ment Managed Money Yield Large-Cap
REIT national Securities Bond Market Bond Value Variable Variable Variable Variable
Variable Variable Variable Variable Variable Variable Variable Account Account Account Account
Account (1) Account Account Account Account Account Account (1) I II III IV
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends....... $82 $7,401 $1,278 $8,539 $4,600 $3,845 $20 $312 $1,181 $243 $474
-----------------------------------------------------------------------------------------------------------
Net Investment
Income........... 82 7,401 1,278 8,539 4,600 3,845 20 312 1,181 243 474
-----------------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net realized
gain (loss) from
security
transactions.... (15) 8,072 9 353 259 (1,968) 29 254 277 224 646
Net unrealized
appreciation
(depreciation)
on investments.. (140) 23,374 (1,640) (10,865) (137) (533) 58 1,374 1,904 1,903 141
-----------------------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain
(Loss) on
Investments...... (155) 31,446 (1,631) (10,512) 122 (2,501) 87 1,628 2,181 2,127 787
-----------------------------------------------------------------------------------------------------------
NET INCREASE
(DECREASE) IN
NET ASSETS
RESULTING FROM
OPERATIONS...... ($73) $38,847 ($353) ($1,973) $4,722 $1,344 $107 $1,940 $3,362 $2,370 $1,261
-----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operations commenced during 1999 (see Note 1 to Financial Statements).
See Notes to Financial Statements
56
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Aggressive Emerging Bond and Multi- Equity Growth Mid-Cap Equity
Equity Markets Growth Income Equity Strategy Income LT Value Index
Variable Variable Variable Variable Variable Variable Variable Variable Variable Variable
Account Account Account Account Account Account Account Account Account (1) Account
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN NET
ASSETS
FROM OPERATIONS
Net investment
income.......... $2,297 $60 $24,357 $647 $2,430 $12,175 $18,449 $24,658 $10 $5,600
Net realized
gain (loss) from
security
transactions.... 835 (293) 17,437 (147) 1,715 1,903 8,208 25,696 (70) 16,677
Net unrealized
appreciation
(depreciation)
on investments.. 3,261 6,681 51,373 (970) 8,860 (4,391) (1,356) 195,153 66 45,834
----------------------------------------------------------------------------------------------------
Net Increase
(Decrease) in Net
Assets Resulting
from Operations.. 6,393 6,448 93,167 (470) 13,005 9,687 25,301 245,507 6 68,111
----------------------------------------------------------------------------------------------------
INCREASE
(DECREASE) IN NET
ASSETS
FROM POLICY
TRANSACTIONS
Transfer of net
premiums........ 6,178 3,315 31,800 1,814 7,890 13,459 27,427 46,518 1,020 69,793
Transfers--
policy charges
and deductions.. (1,517) (908) (11,435) (439) (2,031) (6,081) (10,117) (16,923) (151) (19,242)
Transfers in
(from other
variable
accounts)....... 29,901 25,855 227,823 6,748 59,920 23,609 71,635 186,813 7,393 156,344
Transfers out
(to other
variable
accounts)....... (25,109) (24,440) (239,257) (5,539) (36,551) (18,440) (63,749) (134,957) (2,988) (122,161)
Transfers--
other........... (577) (432) (12,699) (399) (700) (4,335) (12,898) (17,789) (72) (21,467)
----------------------------------------------------------------------------------------------------
Net Increase
(Decrease) in Net
Assets Derived
from Policy
Transactions..... 8,876 3,390 (3,768) 2,185 28,528 8,212 12,298 63,662 5,202 63,267
----------------------------------------------------------------------------------------------------
NET INCREASE IN
NET ASSETS....... 15,269 9,838 89,399 1,715 41,533 17,899 37,599 309,169 5,208 131,378
----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of
Year............. 17,766 10,072 199,670 5,282 18,066 133,998 187,867 227,277 303,187
----------------------------------------------------------------------------------------------------
End of Year...... $33,035 $19,910 $289,069 $6,997 $59,599 $151,897 $225,466 $536,446 $5,208 $434,565
----------------------------------------------------------------------------------------------------
<CAPTION>
Small-Cap
Index
Variable
Account (1)
-----------
<S> <C>
INCREASE
(DECREASE) IN NET
ASSETS
FROM OPERATIONS
Net investment
income.......... $95
Net realized
gain (loss) from
security
transactions.... 37
Net unrealized
appreciation
(depreciation)
on investments.. 667
-----------
Net Increase
(Decrease) in Net
Assets Resulting
from Operations.. 799
-----------
INCREASE
(DECREASE) IN NET
ASSETS
FROM POLICY
TRANSACTIONS
Transfer of net
premiums........ 1,576
Transfers--
policy charges
and deductions.. (168)
Transfers in
(from other
variable
accounts)....... 17,438
Transfers out
(to other
variable
accounts)....... (13,186)
Transfers--
other........... (33)
-----------
Net Increase
(Decrease) in Net
Assets Derived
from Policy
Transactions..... 5,627
-----------
NET INCREASE IN
NET ASSETS....... 6,426
-----------
NET ASSETS
Beginning of
Year.............
-----------
End of Year...... $6,426
-----------
</TABLE>
(1) Operations commenced during 1999 (see Note 1 to Financial Statements).
See Notes to Financial Statements
57
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Govern- High
Inter- ment Managed Money Yield Large-Cap
REIT national Securities Bond Market Bond Value Variable Variable Variable Variable
Variable Variable Variable Variable Variable Variable Variable Account Account Account Account
Account (1) Account Account Account Account Account Account (1) I II III IV
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN NET
ASSETS
FROM OPERATIONS
Net investment
income.......... $82 $7,401 $1,278 $8,539 $4,600 $3,845 $20 $312 $1,181 $243 $474
Net realized
gain (loss) from
security
transactions.... (15) 8,072 9 353 259 (1,968) 29 254 277 224 646
Net unrealized
appreciation
(depreciation)
on investments.. (140) 23,374 (1,640) (10,865) (137) (533) 58 1,374 1,904 1,903 141
---------------------------------------------------------------------------------------------------------------
Net Increase
(Decrease) in Net
Assets Resulting
from Operations.. (73) 38,847 (353) (1,973) 4,722 1,344 107 1,940 3,362 2,370 1,261
---------------------------------------------------------------------------------------------------------------
INCREASE
(DECREASE) IN NET
ASSETS
FROM POLICY
TRANSACTIONS
Transfer of net
premiums........ 327 29,734 3,788 15,623 255,115 9,673 915 1,409 1,432 1,411 885
Transfers--
policy charges
and deductions.. (65) (8,874) (1,057) (4,945) (9,879) (2,496) (177) (234) (290) (327) (259)
Transfers in
(from other
variable
accounts)....... 3,247 121,103 12,668 65,597 466,728 44,998 6,201 5,989 17,199 3,714 8,944
Transfers out
(to other
variable
accounts)....... (771) (114,670) (7,771) (59,239) (643,243) (46,917) (1,608) (632) (2,837) (2,450) (9,539)
Transfers--
other........... (22) (7,931) (2,206) (2,730) (11,504) (1,940) (60) (67) (192) (707) (273)
---------------------------------------------------------------------------------------------------------------
Net Increase
(Decrease) in Net
Assets Derived
from Policy
Transactions..... 2,716 19,362 5,422 14,306 57,217 3,318 5,271 6,465 15,312 1,641 (242)
---------------------------------------------------------------------------------------------------------------
NET INCREASE IN
NET ASSETS....... 2,643 58,209 5,069 12,333 61,939 4,662 5,378 8,405 18,674 4,011 1,019
---------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of
Year............. 157,140 17,149 101,864 69,107 43,370 1,522 2,948 4,452 4,986
---------------------------------------------------------------------------------------------------------------
End of Year...... $2,643 $215,349 $22,218 $114,197 $131,046 $48,032 $5,378 $9,927 $21,622 $8,463 $6,005
---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operations commenced during 1999 (see Note 1 to Financial Statements).
See Notes to Financial Statements
58
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Aggressive Emerging Bond and Multi- Equity Growth Equity
Equity Markets Growth Income Equity Strategy Income LT Index
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.. $5 $117 $20,232 $147 $507 $12,030 $18,901 $6,250 $4,853
Net realized gain
(loss) from security
transactions........... 653 (1,951) 10,581 19 369 3,108 5,470 5,163 11,629
Net unrealized
appreciation
(depreciation) on
investments............ 1,132 (935) (23,983) 13 1,989 5,144 9,750 63,381 43,404
----------------------------------------------------------------------------------------
Net Increase (Decrease)
in Net Assets Resulting
from Operations......... 1,790 (2,769) 6,830 179 2,865 20,282 34,121 74,794 59,886
----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY TRANSACTIONS
Transfer of net
premiums............... 4,086 3,183 31,972 1,056 2,976 14,554 24,939 29,295 44,705
Transfers--policy
charges and
deductions............. (969) (663) (10,609) (197) (633) (5,260) (7,949) (9,146) (12,955)
Transfers in (from
other variable
accounts).............. 20,958 27,300 89,840 6,550 17,627 13,875 46,109 82,877 108,028
Transfers out (to other
variable accounts)..... (16,962) (25,040) (87,886) (2,820) (8,527) (17,159) (35,074) (53,981) (73,002)
Transfers--other....... (610) (355) (10,466) (171) (432) (5,646) (5,765) (7,000) (10,763)
----------------------------------------------------------------------------------------
Net Increase in Net
Assets Derived
from Policy
Transactions............ 6,503 4,425 12,851 4,418 11,011 364 22,260 42,045 56,013
----------------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS.................. 8,293 1,656 19,681 4,597 13,876 20,646 56,381 116,839 115,899
----------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year....... 9,473 8,416 179,989 685 4,190 113,352 131,486 110,438 187,288
----------------------------------------------------------------------------------------
End of Year............. $17,766 $10,072 $199,670 $5,282 $18,066 $133,998 $187,867 $227,277 $303,187
----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
59
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Govern- High
Inter- ment Managed Money Yield
national Securities Bond Market Bond 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.. $11,985 $881 $5,533 $3,392 $3,403 $87 $52 $21 $154
Net realized gain
(loss) from security
transactions........... 5,435 164 663 (3) (87) 8 96 (64) 183
Net unrealized
appreciation
(depreciation) on
investments............ (10,085) 59 1,408 14 (2,165) 72 460 44 366
--------------------------------------------------------------------------------------
Net Increase in Net
Assets Resulting from
Operations.............. 7,335 1,104 7,604 3,403 1,151 167 608 1 703
--------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY TRANSACTIONS
Transfer of net
premiums............... 28,077 2,186 13,456 164,872 7,612 238 408 1,305 1,358
Transfers--policy
charges and
deductions............. (8,359) (699) (3,939) (6,168) (2,255) (62) (93) (245) (156)
Transfers in (from
other variable
accounts).............. 71,891 10,097 52,698 268,634 34,691 749 2,159 1,700 1,697
Transfers out (to other
variable accounts)..... (64,225) (5,218) (36,135) (399,943) (29,075) (97) (880) (1,374) (481)
Transfers--other....... (6,520) (742) (4,332) (13,775) (2,461) (12) (37) (44) 111
--------------------------------------------------------------------------------------
Net Increase in Net
Assets Derived
from Policy
Transactions............ 20,864 5,624 21,748 13,620 8,512 816 1,557 1,342 2,529
--------------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS.................. 28,199 6,728 29,352 17,023 9,663 983 2,165 1,343 3,232
--------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year....... 128,941 10,421 72,512 52,084 33,707 539 783 3,109 1,754
--------------------------------------------------------------------------------------
End of Year............. $157,140 $17,149 $101,864 $69,107 $43,370 $1,522 $2,948 $4,452 $4,986
--------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
60
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Pacific Select Exec Separate Account (the "Separate Account") is
registered as a unit investment trust under the Investment Company Act of 1940,
as amended, and is currently comprised of twenty-two subaccounts called
Variable Accounts: the Aggressive Equity Variable Account, the Emerging Markets
Variable Account, the Growth Variable Account, the Bond and Income Variable
Account, the Equity Variable Account, the Multi-Strategy Variable Account, the
Equity Income Variable Account, the Growth LT Variable Account, the Mid-Cap
Value Variable Account, the Equity Index Variable Account, the Small-Cap Index
Variable Account, the REIT Variable Account, the International Variable
Account, the Government Securities Variable Account, the Managed Bond Variable
Account, the Money Market Variable Account, the High Yield Bond Variable
Account, the Large-Cap Value Variable Account, and the Variable Accounts I
through IV. The assets in each of the first eighteen Variable Accounts are
invested in shares of the corresponding portfolios of Pacific Select Fund and
the assets of the last four Variable Accounts (Brandes International Equity,
Turner Core Growth, Frontier Capital Appreciation and Enhanced U.S. Equity) are
invested in shares of the corresponding portfolios of M Fund, Inc.
(collectively, the "Funds"). Each Variable Account pursues different investment
objectives and policies. The financial statements of the Funds, including the
schedules of investments, are either included in Sections B through E of this
report or provided separately and should be read in conjunction with the
Separate Account's financial statements.
The Separate Account has organized and registered with the Securities and
Exchange Commission four new Variable Accounts: the Mid-Cap Value Variable
Account, the Small-Cap Index Variable Account, the REIT Variable Account, and
the Large-Cap Value Variable Account. The Mid-Cap Value Variable Account, the
Small-Cap Index Variable Account, and the Large-Cap Value Variable Account
commenced operations on January 8, 1999, and the REIT Variable Account
commenced operations on January 19, 1999.
The Separate Account was established by Pacific Life Insurance Company
("Pacific Life") on May 12, 1988 and commenced operations on November 22, 1988.
Under applicable insurance law, the assets and liabilities of the Separate
Account are clearly identified and distinguished from the other assets and
liabilities of Pacific Life. The assets of the Separate Account will not be
charged with any liabilities arising out of any other business conducted by
Pacific Life, but the obligations of the Separate Account, including benefits
related to variable life insurance, are obligations of Pacific Life.
The Separate Account held by Pacific Life represents funds from individual
flexible premium variable life policies. The assets of the Separate Account are
carried at market value.
The preparation of the accompanying financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
A. Valuation of Investments
Investments in shares of the Funds are valued at the reported net asset values
of the respective portfolios. Valuation of securities held by the Funds is
discussed in the notes to their financial statements.
B. Security Transactions
Transactions are recorded on the trade date. Realized gains and losses on
sales of investments are determined on the basis of identified cost.
C. Federal Income Taxes
The operations of the Separate Account will be reported on the Federal income
tax return of Pacific Life, which is taxed as a life insurance company under
the provisions of the Tax Reform Act of 1986. Under current tax law, no Federal
income taxes are expected to be paid by Pacific Life with respect to the
operations of the Separate Account.
2. DIVIDENDS
During 1999, the Funds declared dividends for each portfolio. The amounts
accrued by the Separate Account for its share of the dividends were reinvested
in additional full and fractional shares of the related portfolio.
3. CHARGES AND EXPENSES
With respect to variable life insurance policies funded by the Separate
Account, Pacific Life makes certain deductions from premiums for sales load and
state premium taxes before amounts are allocated to the Separate Account.
Pacific Life also makes certain deductions from the net assets of each Variable
Account for the mortality and expense risks Pacific Life assumes,
administrative expenses, cost of insurance, charges for optional benefits and
any sales and underwriting surrender charges. The operating expenses of the
Separate Account are paid by Pacific Life.
4. RELATED PARTY AGREEMENT
Pacific Mutual Distributors, Inc., a wholly-owned subsidiary of Pacific Life,
serves as principal underwriter of variable life insurance policies funded by
interests in the Separate Account, without remuneration from the Separate
Account.
61
<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). Total cost and
market value of the Separate Account's investments in the Funds as of December
31, 1999 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Variable Accounts
------------------------------------------------------------------------------
Aggressive Emerging Bond and Multi- Equity Growth
Equity Markets Growth Income Equity Strategy Income LT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of year $16,338 $11,689 $187,167 $5,250 $16,061 $112,643 $147,393 $152,516
Add:Total net proceeds
from policy
transactions 19,528 12,400 103,914 4,132 40,979 16,057 33,867 110,353
Reinvested
distributions from
the Funds:
(a) Net investment
income 60 468 388 42 3,612 1,810
(b) Net realized gain 2,297 23,889 259 2,388 8,563 16,639 24,658
-------------------------------------------------------------------------------
Sub-Total 38,163 24,149 315,438 10,029 59,470 140,875 199,709 287,527
Less:Cost of
investments disposed
during the year 9,818 9,303 90,244 2,094 10,736 5,941 13,361 20,995
-------------------------------------------------------------------------------
Total cost of
investments at end of
year 28,345 14,846 225,194 7,935 48,734 134,934 186,348 266,532
Add:Unrealized
appreciation
(depreciation) 4,690 5,064 63,875 (938) 10,865 16,963 39,118 269,914
-------------------------------------------------------------------------------
Total market value of
investments at end of
year $33,035 $19,910 $289,069 $6,997 $59,599 $151,897 $225,466 $536,446
-------------------------------------------------------------------------------
<CAPTION>
Govern-
Mid-Cap Equity Small-Cap Inter- ment Managed Money
Value (1) Index Index (1) REIT (1) national Securities Bond Market
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of year $212,820 $153,283 $16,677 $97,525 $69,218
Add:Total net proceeds
from policy
transactions $6,149 94,678 $6,917 $2,925 63,456 9,456 32,380 302,607
Reinvested
distributions from
the Funds:
(a) Net investment
income 10 4,038 27 76 1,200 1,012 5,982 4,600
(b) Net realized gain 1,562 68 6 6,201 266 2,557
-------------------------------------------------------------------------------
Sub-Total 6,159 313,098 7,012 3,007 224,140 27,411 138,444 376,425
Less:Cost of
investments disposed
during the year 1,017 14,733 1,253 224 36,021 4,025 17,721 245,132
-------------------------------------------------------------------------------
Total cost of
investments at end of
year 5,142 298,365 5,759 2,783 188,119 23,386 120,723 131,293
Add:Unrealized
appreciation
(depreciation) 66 136,200 667 (140) 27,230 (1,168) (6,526) (247)
-------------------------------------------------------------------------------
Total market value of
investments at end of
year $5,208 $434,565 $6,426 $2,643 $215,349 $22,218 $114,197 $131,046
-------------------------------------------------------------------------------
<CAPTION>
High Yield Large-Cap
Bond Value (1) I II III IV
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total cost of
investments at
beginning of year $45,134 $1,454 $2,467 $4,191 $4,437
Add:Total net proceeds
from policy
transactions 25,603 $5,805 7,684 16,504 3,055 2,983
Reinvested
distributions from
the Funds:
(a) Net investment
income 3,845 20 56 20 7
(b) Net realized gain 256 1,161 243 467
------------------------------------------------------------
Sub-Total 74,582 5,825 9,450 20,152 7,489 7,894
Less:Cost of
investments disposed
during the year 24,254 505 965 915 1,191 2,579
------------------------------------------------------------
Total cost of
investments at end of
year 50,328 5,320 8,485 19,237 6,298 5,315
Add:Unrealized
appreciation
(depreciation) (2,296) 58 1,442 2,385 2,165 690
------------------------------------------------------------
Total market value of
investments at end of
year $48,032 $5,378 $9,927 $21,622 $8,463 $6,005
------------------------------------------------------------
</TABLE>
------
(1) Operations commenced during 1999 (See Note 1 to Financial Statements).
62
<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, 1999
and the selected accumulation unit information as of December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Variable Accounts
-----------------------------------------------------------------------------------------------
Aggressive Emerging Bond and Multi- Equity Growth
Equity Markets Growth Income Equity Strategy Income LT
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 1,392,776 1,425,050 5,054,100 407,552 1,208,588 3,899,102 4,153,101 7,088,988
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 446,295 391,154 731,566 146,464 466,028 378,029 566,767 1,090,385
(b) Transfers--policy
charges and deductions (109,665) (106,579) (260,557) (35,534) (119,693) (170,710) (209,156) (396,786)
(c) Transfers in (from
other variable
accounts) 2,146,964 3,074,166 4,963,234 535,185 3,543,441 572,679 1,295,559 4,047,924
(d) Transfers out (to
other variable
accounts) (1,801,331) (2,898,051) (5,249,564) (439,413) (2,178,697) (445,339) (1,169,106) (2,989,259)
(e) Transfers--other (41,457) (51,197) (278,610) (31,698) (41,773) (104,711) (236,551) (394,019)
-----------------------------------------------------------------------------------------------
Sub-Total 640,806 409,493 (93,931) 175,004 1,669,306 229,948 247,513 1,358,245
-----------------------------------------------------------------------------------------------
Total units outstanding
at end of year 2,033,582 1,834,543 4,960,169 582,556 2,877,894 4,129,050 4,400,614 8,447,233
-----------------------------------------------------------------------------------------------
Accumulation Unit Value:
At beginning of year $12.76 $7.07 $39.51 $12.96 $14.95 $34.37 $45.24 $32.06
At end of year $16.24 $10.85 $58.28 $12.01 $20.71 $36.79 $51.24 $63.51
<CAPTION>
Govern-
Mid-Cap Equity Small-Cap Inter- ment Managed Money
Value (1) Index Index (1) REIT (1) national Securities Bond Market
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 7,178,724 7,183,483 722,500 4,098,497 4,086,161
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 101,351 1,525,978 154,672 32,153 1,297,474 162,177 639,829 14,668,834
(b) Transfers--policy
charges and deductions (15,187) (421,266) (16,372) (6,499) (385,569) (45,293) (202,469) (568,862)
(c) Transfers in (from
other variable
accounts) 733,125 3,170,097 1,703,414 317,169 5,106,667 511,147 2,606,449 26,594,956
(d) Transfers out (to
other variable
accounts) (308,361) (2,484,612) (1,291,374) (76,125) (4,851,038) (308,321) (2,349,734) (36,739,991)
(e) Transfers--other (7,378) (436,615) (3,136) (2,097) (335,483) (87,525) (108,284) (657,157)
-----------------------------------------------------------------------------------------------
Sub-Total 503,550 1,353,582 547,204 264,601 832,051 232,185 585,791 3,297,780
-----------------------------------------------------------------------------------------------
Total units outstanding
at end of year 503,550 8,532,306 547,204 264,601 8,015,534 954,685 4,684,288 7,383,941
-----------------------------------------------------------------------------------------------
Accumulation Unit Value:
At beginning of year $10.00 $42.23 $10.00 $10.00 $21.88 $23.74 $24.85 $16.91
At end of year $10.34 $50.93 $11.74 $9.99 $26.87 $23.27 $24.38 $17.75
<CAPTION>
High Yield Large-Cap
Bond Value (1) I II III IV
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total units outstanding
at beginning of year 1,598,243 127,998 167,752 342,807 304,588
Increase (decrease) in
units resulting from
policy transactions:
(a) Transfer of net
premiums 351,193 86,694 95,802 72,580 94,055 49,583
(b) Transfers--policy
charges and deductions (90,794) (16,717) (16,143) (14,391) (22,248) (14,533)
(c) Transfers in (from
other variable
accounts) 1,565,039 580,019 404,864 806,745 246,076 500,082
(d) Transfers out (to
other variable
accounts) (1,635,967) (150,215) (43,231) (144,796) (161,952) (533,493)
(e) Transfers--other (67,640) (5,540) (4,604) (9,779) (46,779) (15,217)
---------------------------------------------------------------------
Sub-Total 121,831 494,241 436,688 710,359 109,152 (13,578)
---------------------------------------------------------------------
Total units outstanding
at end of year 1,720,074 494,241 564,686 878,111 451,959 291,010
---------------------------------------------------------------------
Accumulation Unit Value:
At beginning of year $27.14 $10.00 $11.89 $17.57 $12.99 $16.37
At end of year $27.92 $10.88 $17.58 $24.62 $18.72 $20.64
</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.
(1) Operations commenced during 1999 (See Note 1 to Financial Statements).
63
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Financial Statements as of
December 31, 1999 and 1998 and for the years ended
December 31, 1999, 1998 and 1997 and Independent Auditors' Report
64
<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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 2000
65
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $14,814.0 $13,804.7
Equity securities 295.2 547.5
Trading securities at estimated fair value 99.9 97.0
Mortgage loans 2,920.2 2,788.7
Real estate 236.0 172.7
Policy loans 4,258.5 4,003.2
Other investments 882.7 951.7
-------------------------------------------------------------------------------
TOTAL INVESTMENTS 23,506.5 22,365.5
Cash and cash equivalents 439.4 154.1
Deferred policy acquisition costs 1,446.1 899.8
Accrued investment income 287.2 259.3
Other assets 830.7 361.2
Separate account assets 23,613.1 15,844.0
-------------------------------------------------------------------------------
TOTAL ASSETS $50,123.0 $39,883.9
-------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life and investment-type products $19,045.5 $17,973.0
Future policy benefits 4,386.0 2,480.5
Short-term and long-term debt 224.4 445.1
Other liabilities 939.2 813.3
Separate account liabilities 23,613.1 15,844.0
-------------------------------------------------------------------------------
TOTAL LIABILITIES 48,208.2 37,555.9
-------------------------------------------------------------------------------
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 139.9 126.2
Unearned ESOP shares (11.6)
Retained earnings 2,034.5 1,663.5
Accumulated other comprehensive income (loss) -
Unrealized gain (loss) on securities available for
sale, net (278.0) 508.3
-------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 1,914.8 2,328.0
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $50,123.0 $39,883.9
-------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
66
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Universal life and investment-type product policy
fees $ 653.8 $ 525.3 $ 431.2
Insurance premiums 483.9 537.1 526.4
Net investment income 1,473.3 1,413.6 1,325.4
Net realized investment gains 101.5 39.4 85.4
Commission revenue 234.3 220.1 146.6
Other income 144.7 112.5 97.9
-------------------------------------------------------------------------------
TOTAL REVENUES 3,091.5 2,848.0 2,612.9
-------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life and investment-
type products 904.4 880.8 797.8
Policy benefits paid or provided 734.4 757.0 712.6
Commission expenses 484.6 387.2 305.1
Operating expenses 453.4 468.0 507.9
-------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,576.8 2,493.0 2,323.4
-------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 514.7 355.0 289.5
Provision for income taxes 143.7 113.5 113.5
-------------------------------------------------------------------------------
NET INCOME $ 371.0 $ 241.5 $ 176.0
-------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
67
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Unearned Other
------------- Paid-in ESOP Retained Comprehensive
Shares Amount Capital Shares Earnings Income (Loss) Total
-----------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1997 $1,318.0 $ 379.2 $1,697.2
Comprehensive income:
Net income 176.0 176.0
Change in unrealized
gain on securities
available for sale,
net 196.0 196.0
--------
Total comprehensive
income 372.0
Issuance of partnership
units by affiliate $ 85.1 85.1
Initial member
capitalization of
Pacific Mutual Holding
Company (2.0) (2.0)
Issuance of common
stock 0.6 $30.0 35.0 (65.0)
Dividend paid to
Pacific LifeCorp (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
Comprehensive loss:
Net income 371.0 371.0
Change in unrealized
gain on securities
available for sale,
net (786.3) (786.3)
--------
Total comprehensive
loss (415.3)
Issuance of partnership
units by affiliate 10.6 10.6
Capital contribution 3.1 3.1
Purchase of ESOP note $(13.1) (13.1)
Allocation of unearned
ESOP shares 1.5 1.5
-----------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1999 0.6 $30.0 $139.9 $(11.6) $2,034.5 $(278.0) $1,914.8
-----------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
68
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 371.0 $ 241.5 $ 176.0
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization on fixed maturity securities (77.8) (39.4) (26.6)
Depreciation and other amortization 20.5 26.0 38.3
Earnings of equity method investees (92.9) (99.0) (78.1)
Deferred income taxes (8.5) (20.6) (14.4)
Net realized investment gains (101.5) (39.4) (85.4)
Net change in deferred policy acquisition
costs (546.3) (171.9) (196.4)
Interest credited to universal life and in-
vestment-type products 904.4 880.8 797.8
Change in trading securities (2.9) (14.3) (18.3)
Change in accrued investment income (27.9) 3.1 (59.9)
Change in future policy benefits 58.1 (9.7) (16.3)
Change in other assets and liabilities 207.1 102.2 574.9
------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 703.3 859.3 1,091.6
------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (4,173.4) (4,330.5) (6,272.3)
Sales 2,333.8 2,209.3 2,224.1
Maturities and repayments 1,400.3 2,221.8 2,394.6
Repayments of mortgage loans 681.0 334.9 179.3
Proceeds from sales of mortgage loans and
real estate 24.4 43.3 104.4
Purchases of mortgage loans and real estate (886.3) (1,246.3) (643.7)
Distributions from partnerships 138.2 119.5 91.6
Change in policy loans (255.3) (129.7) (301.4)
Cash received from acquisitions of insurance
blocks of business 164.9 1,215.9
Other investing activity, net 255.6 (466.6) (70.8)
------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (316.8) (1,244.3) (1,078.3)
------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
69
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1999 1998 1997
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,453.4 $ 4,007.0 $ 2,679.8
Withdrawals (4,322.3) (3,770.7) (2,667.3)
Net change in short-term and long-term
debt (220.7) 191.5 (16.5)
Purchase of ESOP note (13.1)
Allocation of unearned ESOP shares 1.5
Initial capitalization of Pacific Mutual
Holding Company (2.0)
Dividend paid to Pacific LifeCorp (5.0)
-------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (101.2) 427.8 (11.0)
-------------------------------------------------------------------------------
Net change in cash and cash equivalents 285.3 42.8 2.3
Cash and cash equivalents, beginning of
year 154.1 111.3 109.0
-------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 439.4 $ 154.1 $ 111.3
-------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisitions of an annuity and an insurance block of
business in 1999 and 1997, respectively, as discussed in Note 4, the following
assets and liabilities were assumed:
Fixed maturity securities $ 1,592.7
Cash and cash equivalents 164.9 $ 1,215.9
Policy loans 440.3
Other assets 100.4 43.4
--------- ---------
Total assets assumed $ 1,858.0 $ 1,699.6
--------- ---------
Policyholder account values $ 1,693.8
Annuity reserves $ 1,847.4
Other liabilities 10.6 5.8
--------- ---------
Total liabilities assumed $ 1,858.0 $ 1,699.6
--------- ---------
-------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion in 1997, as discussed in Note 1, $65 million of
retained earnings was allocated for the issuance of 600,000 shares of common
stock with a par value totaling $30 million and $35 million to paid-in
capital.
-------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 83.0 $ 127.9 $ 153.0
Interest paid $ 23.3 $ 24.0 $ 26.1
-------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
70
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Life Insurance Company ("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 is an indirect subsidiary of Pacific Mutual
Holding Company ("PMHC"), a mutual holding company, and a wholly owned
subsidiary of Pacific LifeCorp, an intermediate stock holding company. PMHC
and Pacific LifeCorp were organized pursuant to consent received from the
Insurance Department of the State of California and the implementation of a
plan of conversion to form a mutual holding company structure in 1997 (the
"Conversion"). 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.
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.
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 majority owned and controlled
subsidiaries. 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 filed with regulatory authorities (Note 2).
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("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. Adoption of this accounting
standard did not have a material impact on the Company's consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133," is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 requires, among
other things, that all derivatives be recognized in the consolidated
statements of financial condition as either assets or liabilities and
measured at estimated fair value. The corresponding derivative gains and
losses should be reported based upon the hedge relationship, if such a
relationship exists. Changes in the estimated fair value of derivatives
that are not designated as hedges or that do not meet the hedge accounting
criteria in SFAS No. 133 are required to be reported in income. The Company
is required to adopt SFAS No. 133 as of January 1, 2001. The Company is in
the process of quantifying the impact of SFAS No. 133 on its consolidated
financial statements.
During 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk."
SOP 98-7 provides guidance on how to account for insurance and reinsurance
contracts that do not transfer insurance risk under a method referred to as
deposit accounting. SOP 98-7 is effective for fiscal years beginning after
June 15, 1999. The Company currently plans to adopt
71
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
SOP 98-7 on January 1, 2000. Adoption of this accounting standard is not
expected to have a material impact on the Company's consolidated financial
statements.
INVESTMENTS
Available for sale fixed maturity and equity securities are reported at
estimated fair value, with unrealized gains and losses, net of deferred
income taxes and adjustments related to deferred policy acquisition costs,
included as a separate component of equity on the accompanying consolidated
statements of financial condition. The cost of fixed maturity and equity
securities is adjusted for impairments in value deemed to be other than
temporary. Trading securities are reported at estimated fair value with
unrealized gains and losses included in net realized investment 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 investment
gains on the accompanying consolidated statements of operations.
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 liabilities. Unrealized
gains and losses of other derivatives are included in net realized
investment gains on the accompanying consolidated statements of operations.
Mortgage loans, net of valuation allowances, and policy loans are stated at
unpaid principal balances.
Real estate is carried at depreciated cost, net of writedowns, 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.
Partnership and joint venture interests in which the Company does not have
a controlling interest or a majority ownership are generally recorded using
the equity method of accounting and are included in other investments on
the accompanying consolidated statements of financial condition.
The Company, through its wholly owned subsidiary Pacific Asset Management
LLC ("PAM"), has an approximate 33% beneficial ownership interest in PIMCO
Advisors L.P. ("PIMCO Advisors") as of December 31, 1999 and 1998. 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. During 1999 and 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 years ended December 31, 1999 and
1998, there was a direct increase to the Company's stockholder's equity of
$10.6 million and $6.1 million, respectively. During 1998, the Company also
acquired the beneficial ownership of additional partnership units. Deferred
taxes resulting from these transactions have been included in the
accompanying consolidated financial statements.
72
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
On October 31, 1999, PAM entered into an Implementation and Merger
Agreement with Allianz of America, Inc. ("Allianz") and a number of other
parties in which Allianz will purchase 70% of the outstanding partnership
units of PIMCO Advisors. PAM is exchanging its interest in PIMCO Advisors
for a beneficial economic interest in a new class of PIMCO Advisors
partnership units with a cash distribution comprised of a fixed and
variable return. This transaction is anticipated to close during the first
half of 2000, subject to certain closing conditions and approvals.
In connection with this transaction, PAM has entered into a Continuing
Investment Agreement with Allianz with respect to its investment in PIMCO
Advisors. The investment in PIMCO Advisors held by PAM will be subject to
put and call options held by PAM and Allianz, respectively. The put option
gives PAM the right to require Allianz, on the last business day of each
calendar quarter, to purchase all of the investment in PIMCO Advisors held
by PAM. The put option price would be the distributions per unit amount, as
defined in the Continuing Investment Agreement, for the most recently
completed four calendar quarters multiplied by a factor of 14.0. The call
option gives Allianz the right to require PAM, on any January 31, April 30,
July 31, or October 31, beginning on January 31, 2003, to sell its
investment in PIMCO Advisors to Allianz. The call option price would be the
distributions per unit, as defined in the Continuing Investment Agreement,
for the most recently completed four calendar quarters multiplied by a
factor of 14.0 if the call per unit value is at least $50.
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-type products, such costs are generally amortized over the
expected life of the contract 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 traditional
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, 1999, 1998 and 1997,
amortization of deferred policy acquisition costs included in commission
expenses amounted to $131.7 million, $73.0 million and $50.2 million,
respectively, and included in operating expenses amounted to $55.4 million,
$33.5 million and $29.4 million, respectively, on the accompanying
consolidated statements of operations.
UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS
Universal life and investment-type products, including guaranteed
investment contracts and funding agreements, 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% to 8.4% during 1999, 1998 and 1997.
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 1999, 1998 and 1997.
Mortality, morbidity and withdrawal assumptions are generally based on the
Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for
73
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 1999
and 1998, 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-type
products 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
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
certain 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.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments, disclosed in Notes 5, 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.
74
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
RISKS AND UNCERTAINTIES
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include, but are not
limited to, interest rate risk, investment market 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 which can result
in additional, unanticipated expense to the Company. Existing Federal laws
and regulations affect the taxation of life insurance or annuity products,
and insurance companies. There can be no assurance as to what, if any,
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 1999
financial statement presentation.
75
<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,
1999 1998
------------------
(In Millions)
<S> <C> <C>
Statutory capital and surplus $1,219.1 $1,157.4
Deferred policy acquisition costs 1,398.6 944.5
Deferred income taxes 304.5 307.1
Asset valuation reserve 232.1 298.7
Non admitted assets 83.3 40.4
Subsidiary equity 25.2 26.5
Surplus notes (149.6) (149.6)
Unrealized gain (loss) on securities avail-
able for sale, net (278.0) 508.3
Insurance and annuity reserves (845.2) (654.4)
Other (75.2) (150.9)
------------------
Stockholder's equity as reported herein $1,914.8 $2,328.0
------------------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 168.4 $ 187.6 $ 121.5
Deferred policy acquisition costs 379.2 177.3 160.4
Deferred income taxes (2.7) 17.9 41.2
Earnings of subsidiaries (27.5) (32.8) (40.6)
Insurance and annuity reserves (184.3) (145.1) (107.0)
Other 37.9 36.6 0.5
----------------------------
Net income as reported herein $ 371.0 $ 241.5 $ 176.0
----------------------------
</TABLE>
76
<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 the risk-based capital results 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, 1999 and 1998, Pacific Life and
Pacific Life & Annuity Company, formerly PM Group Life Insurance Company, a
wholly owned Arizona domiciled life insurance subsidiary of Pacific Life,
exceeded the minimum risk-based capital requirements.
CODIFICATION
In 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 Pacific LifeCorp 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 1999
statutory results, Pacific Life could pay $174.0 million in dividends in
2000 without prior approval. No dividends were paid during 1999 and 1998.
The maximum amount of ordinary dividends that can be paid by PL&A without
restriction cannot exceed the lesser of 10% of statutory surplus as regards
to policyholders, or the statutory net gain from operations. No dividends
were paid during 1999 and 1998.
PERMITTED PRACTICE
Net cash distributions received on PAM's investment in PIMCO Advisors 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 that support the Closed Block, which are primarily included in fixed
maturity securities, policy loans and accrued investment income, amounted
to $293.5 million and $311.6 million as of December 31, 1999 and 1998,
respectively. Liabilities allocated to the Closed Block, which are
primarily included in future policy benefits amounted to $341.8 million and
$352.8 million as of December 31, 1999 and 1998, respectively. The
contribution
77
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK (Continued)
to income from the Closed Block amounted to $3.8 million, $5.1 million and
$5.7 million and is primarily included in insurance premiums, net
investment income and policy benefits paid or provided for the years ended
December 31, 1999, 1998 and 1997, respectively.
4. ACQUISITIONS
Effective July 15, 1999, Pacific Life acquired a payout annuity block of
business from Confederation Life Insurance Company (U.S.) in
Rehabilitation, which is currently under rehabilitation ("Confederation
Life"). This block of business consists of approximately 16,000 annuitants
having reserves of $1.8 billion. The assets received as part of this
acquisition amounted to $1.6 billion in fixed maturity securities and $0.2
billion in cash.
The remaining cost of acquiring this annuity 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
$74.5 million as of December 31, 1999, and is included in deferred policy
acquisition costs on the accompanying consolidated statement of financial
condition. Amortization of this asset for the year ended December 31, 1999
amounted to $0.4 million, and is included in commission expense on the
accompanying consolidated statement of operations.
On June 1, 1997, Pacific Life acquired a block of corporate-owned life
insurance ("COLI") policies from Confederation Life, which consisted of
approximately 38,000 policies having a face amount of insurance of
$8.6 billion and reserves of $1.7 billion. The assets received as part of
this acquisition amounted to $1.2 billion in cash and $0.4 billion in
policy loans. This block is primarily non leveraged COLI.
The remaining cost of acquiring this COLI 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 $27.9
million and $36.5 million as of December 31, 1999 and 1998, 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, 1999, 1998 and 1997 amounted to $8.6
million, $7.7 million and $0.9 million, respectively, and is included in
commission expenses on the accompanying consolidated statements of
operations.
During 1999, Pacific Life acquired a 95% interest in Grayhawk Golf
Holdings, LLC, which owns 100% of a real estate investment property in
Arizona.
78
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities available for sale 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>
As of December 31, 1999:
-----------------------
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 107.7 $ 9.3 $ 1.0 $ 116.0
Obligations of states, political
subdivisions 642.0 13.0 27.7 627.3
Foreign governments 285.0 10.5 6.7 288.8
Corporate securities 8,725.0 220.3 387.4 8,557.9
Mortgage-backed and asset-backed
securities 5,323.8 33.7 251.1 5,106.4
Redeemable preferred stock 108.5 14.2 5.1 117.6
-------------------------------------
Total fixed maturity securities $15,192.0 $ 301.0 $ 679.0 $14,814.0
-------------------------------------
Total equity securities $ 269.3 $ 57.0 $ 31.1 $ 295.2
-------------------------------------
As of December 31, 1998:
-----------------------
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 95.6 $ 25.1 $ 120.7
Obligations of states, political
subdivisions 481.9 91.3 $ 11.8 561.4
Foreign governments 253.1 28.3 4.3 277.1
Corporate securities 7,888.7 446.3 124.5 8,210.5
Mortgage-backed and asset-backed
securities 4,434.7 143.1 53.0 4,524.8
Redeemable preferred stock 104.0 11.3 5.1 110.2
-------------------------------------
Total fixed maturity securities $13,258.0 $ 745.4 $ 198.7 $13,804.7
-------------------------------------
Total equity securities $ 364.4 $ 202.6 $ 19.5 $ 547.5
-------------------------------------
</TABLE>
79
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (Continued)
The amortized cost and estimated fair value of fixed maturity securities
available for sale as of December 31, 1999, 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>
Due in one year or less $ 566.5 $ 572.6
Due after one year through five years 3,324.0 3,366.5
Due after five years through ten years 2,995.9 2,921.4
Due after ten years 2,981.8 2,847.1
-------------------
9,868.2 9,707.6
Mortgage-backed and asset-backed securities 5,323.8 5,106.4
-------------------
Total $15,192.0 $14,814.0
-------------------
</TABLE>
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $1,030.3 $ 929.7 $ 940.2
Equity securities 14.6 13.5 10.2
Mortgage loans 205.6 174.6 129.5
Real estate 46.5 38.1 53.6
Policy loans 158.6 161.5 144.3
Other 131.7 203.2 156.2
--------------------------
Gross investment income 1,587.3 1,520.6 1,434.0
Investment expense 114.0 107.0 108.6
--------------------------
Net investment income $1,473.3 $1,413.6 $1,325.4
--------------------------
</TABLE>
80
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (Continued)
Net realized investment gain, including changes in valuation allowances,
are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities available
for sale:
Gross gain $ 89.3 $ 92.7 $ 56.3
Gross loss (72.9) (84.8) (31.1)
Equity securites available for sale:
Gross gain 109.0 40.9 36.1
Gross loss (52.0) (6.8) (6.2)
Mortgage loans on real estate 10.1 (10.7) (4.6)
Real estate 18.0 1.2 16.9
Other investments 6.9 18.0
----------------------------
Total $ 101.5 $ 39.4 $ 85.4
----------------------------
</TABLE>
The change in gross unrealized gain on investments in available for sale
and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale securities:
Fixed maturity $ (924.7) $(229.5) $223.5
Equity (157.2) 63.1 85.7
--------------------------
Total $(1,081.9) $(166.4) $309.2
--------------------------
Trading securities $ 0.4 $ (2.5) $ (1.1)
--------------------------
</TABLE>
As of December 31, 1999 and 1998, investments in fixed maturity securities
with a carrying value of $12.6 million and $13.0 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements. One diversified financial security, rated AA, exceeds 10% of
total stockholder's equity as of December 31, 1999.
81
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------
(In Millions)
Assets:
<S> <C> <C> <C> <C>
Fixed maturity and equity
securities (Note 5) $15,109.2 $15,109.2 $14,352.2 $14,352.2
Trading securities 99.9 99.9 97.0 97.0
Mortgage loans 2,920.2 2,983.8 2,788.7 2,911.2
Policy loans 4,258.5 4,258.5 4,003.2 4,003.2
Cash and cash equivalents 439.4 439.4 154.1 154.1
Derivative instruments 43.5 43.5 176.1 176.1
Liabilities:
Guaranteed interest contracts 6,365.0 6,296.3 5,665.3 5,751.0
Deposit liabilities 544.9 533.7 599.9 626.7
Annuity liabilities 1,323.3 1,304.8 1,448.0 1,430.1
Short-term debt 60.0 60.0 295.5 295.5
Long-term debt 164.4 164.3 149.6 176.0
Derivative instruments 229.5 229.5 36.0 36.0
</TABLE>
82
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used to estimate the fair value
of these financial instruments as of December 31, 1999 and 1998:
TRADING SECURITIES
The estimated fair value of trading securities is based on quoted market
prices.
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 because interest rates are generally variable and based on
current market rates.
CASH AND CASH EQUIVALENTS
The carrying values approximate fair values due to the short-term
maturities of these instruments.
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.
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
rates.
LONG-TERM DEBT
The estimated fair value of surplus notes is based on market quotes. The
carrying amount of other long-term debt is a reasonable estimate of its
fair value because the interest on the debt is approximately the same as
current market rates.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Life has issued certain contracts to 401(k) plans totaling $1.7
billion as of December 31, 1999, 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.
83
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE 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 as 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 on 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.
Outstanding derivatives with off balance sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values
as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
--------------------------------------------------
Notional or Carrying Estimated Carrying Estimated
Contract Amounts Value Fair Value Value Fair Value
----------------- -------- ---------- -------- ----------
1999 1998 1999 1999 1998 1998
--------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Interest rate floors,
caps, options and
swaptions $1,003.0 $2,653.0 $ 5.0 $ 5.0 $ 67.9 $ 67.9
Interest rate swap
contracts 2,867.5 2,608.6 38.5 38.5 (23.3) (23.3)
Asset swap contracts 58.1 63.2 (3.6) (3.6) (3.6) (3.6)
Credit default and total
return swaps 2,061.9 649.6 (43.1) (43.1) (9.1) (9.1)
Financial futures
contracts 676.8 608.9
Foreign currency
derivatives 1,685.1 1,131.2 (182.8) (182.8) 108.2 108.2
--------------------------------------------------------------
Total derivatives $8,352.4 $7,714.5 $(186.0) $(186.0) $140.1 $140.1
--------------------------------------------------------------
</TABLE>
84
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE INSTRUMENTS (Continued)
A reconciliation of the notional or contract amounts and discussion of the
various derivative instruments are 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, 1999:
------------------
Interest rate floors, caps,
options and swaptions $2,653.0 $ 670.9 $2,320.9 $1,003.0
Interest rate swap
contracts 2,608.6 1,226.2 967.3 2,867.5
Asset swap contracts 63.2 7.8 12.9 58.1
Credit default and total
return swaps 649.6 1,617.3 205.0 2,061.9
Financial futures contracts 608.9 5,586.8 5,518.9 676.8
Foreign currency
derivatives 1,131.2 874.0 320.1 1,685.1
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
</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 on 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 on the accompanying consolidated
statements of operations over the term of the agreement. Interest rate
floors and caps, options and swaptions mature during the years 2000 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
85
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE INSTRUMENTS (Continued)
be received or paid pursuant to these agreements are accrued and recognized
through an adjustment to net investment income on the accompanying
consolidated statements of operations over the life of the agreements. The
interest rate swap contracts mature during the years 2000 through 2021.
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
on 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 on
the accompanying consolidated statements of operations over the life of the
agreements. Credit default and total return swaps mature during the years
2000 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 on the accompanying consolidated
statements of operations over the life of the agreements. Foreign currency
derivatives expire during the years 2000 through 2013.
86
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS
The detail of universal life and investment-type product liabilities is as
follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------
(In Millions)
<S> <C> <C>
Universal life $10,807.7 $10,218.0
Investment-type products 8,237.8 7,755.0
-------------------
$19,045.5 $17,973.0
-------------------
</TABLE>
The detail of universal life and investment-type product policy fees and
interest credited net of reinsurance ceded is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees:
Universal life $ 509.2 $ 439.9 $ 377.5
Investment-type products 144.6 85.4 53.7
--------------------------
Total policy fees $ 653.8 $ 525.3 $ 431.2
--------------------------
Interest credited:
Universal life $ 443.9 $ 440.8 $ 368.2
Investment-type products 460.5 440.0 429.6
--------------------------
Total interest credited $ 904.4 $ 880.8 $ 797.8
--------------------------
</TABLE>
87
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claim adjustment expenses,
which is included in future policy benefits on the accompanying
consolidated statements of financial condition, is summarized as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1999 1998
--------------
(In Millions)
<S> <C> <C>
Balance at January 1 $137.4 $140.5
Less reinsurance recoverables 0.1 0.7
--------------
Net balance at January 1 137.3 139.8
--------------
Incurred related to:
Current year 376.8 412.9
Prior years (33.8) (18.3)
--------------
Total incurred 343.0 394.6
--------------
Paid related to:
Current year 286.7 303.5
Prior years 77.1 93.6
--------------
Total paid 363.8 397.1
--------------
Net balance at December 31 116.5 137.3
Plus reinsurance recoverables 0.1 0.1
--------------
Balance at December 31 $116.6 $137.4
--------------
</TABLE>
As a result of payment of prior years' estimated claims, the provision for
claims and claim adjustment expenses decreased by $33.8 million and $18.3
million for the years ended December 31, 1999 and 1998, respectively. The
reduction is primarily due to lower than anticipated settlement of claims
and reduced claim adjustment expenses.
88
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SHORT-TERM AND LONG-TERM DEBT
Pacific Life borrows for short-term needs by issuing commercial paper.
There was no commercial paper debt outstanding as of December 31, 1999.
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
5.2%. As of December 31, 1999 and 1998, Pacific Life had a revolving credit
facility of $350 million. There was no debt outstanding under the revolving
credit facility as of December 31, 1999 and 1998.
PAM had bank borrowings outstanding of $60 million as of December 31, 1999
and 1998. The interest rate was 6.0%, 5.1% and 6.2% as of December 31,
1999, 1998 and 1997, respectively. Outstanding debt is due and payable in
2000 and subject to renewal. The borrowing limit for PAM as of December 31,
1999 and 1998 was $100 million and $200 million, respectively.
In connection with Pacific Life's acquisition of Grayhawk Golf Holdings,
LLC in 1999, the Company assumed a note payable with a maturity date of May
22, 2008. The note bears a fixed rate of interest of 7.6%. The outstanding
balance as of December 31, 1999 was $14.8 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, 1999,
1998 and 1997 and is included in net investment income on the accompanying
consolidated statements of operations.
89
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The Company accounts for income taxes using the liability method. The
deferred tax consequences of changes in tax rates or laws must be computed
on the amounts of temporary differences and carryforwards existing at the
date a new tax law is enacted. Recording the effects of a change involves
adjusting deferred tax liabilities and assets with a corresponding charge
or credit recognized in the provision for income taxes. The objective is to
measure a deferred tax liability or asset using the enacted tax rates and
laws expected to apply to taxable income in the periods in which the
deferred tax liability or asset is expected to be settled or realized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Current $152.2 $ 134.1 $ 127.9
Deferred (8.5) (20.6) (14.4)
----------------------------
$143.7 $ 113.5 $ 113.5
----------------------------
The sources of the Company's provision for deferred taxes are as follows:
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Policyholder reserves $ 50.9 $ (29.5) $ 20.1
Deferred policy acquisition
costs 20.0 (12.6) (18.0)
Non deductible reserves 4.0 28.2 (27.6)
Partnership income (25.6) 20.8
Investment valuation (28.0) (24.5) 3.9
Duration hedging (29.6) 20.8 (2.6)
Other (0.2) (2.6) 9.8
----------------------------
Deferred taxes from
operations (8.5) 0.6 (14.4)
Release of subsidiary
deferred taxes (21.2)
----------------------------
Deferred tax provision $ (8.5) $ (20.6) $ (14.4)
----------------------------
</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 in 1998.
90
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (Continued)
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>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Provision for income taxes at the
statutory rate $ 180.1 $ 124.2 $ 101.3
Amortization of intangibles on
equity method investments 2.0 4.3 7.6
Non taxable investment income (7.3) (3.6) (2.6)
Tax settlement (7.5)
Low income housing tax credits (19.2) (3.9)
Equity tax (5.0) 5.0
Other (4.4) (2.5) 2.2
----------------------------
Provision for income taxes $ 143.7 $ 113.5 $ 113.5
----------------------------
</TABLE>
The net deferred tax asset (liability), included in other assets on the
accompanying consolidated statements of financial condition, is comprised
of the following tax effected temporary differences:
<TABLE>
<CAPTION>
December 31,
1999 1998
---------------
(In Millions)
<S> <C> <C>
Deferred tax assets
Policyholder reserves $203.4 $ 254.3
Investment valuation 72.7 44.7
Deferred compensation 35.4 33.7
Duration hedging 21.1 (8.5)
Postretirement benefits 9.0 8.9
Dividends 8.4 7.6
Partnership income 4.8 (20.8)
Non deductible reserves 1.9 5.9
Other 3.1 5.2
---------------
Total deferred tax assets 359.8 331.0
Deferred tax liabilities
Deferred policy acquisition costs 44.0 24.0
Depreciation 2.7 2.4
---------------
Total deferred tax liabilities 46.7 26.4
---------------
Net deferred tax asset from operations 313.1 304.6
Unrealized (gain) loss on securities 150.8 (272.3)
Issuance of partnership units by affiliate (81.1) (74.9)
---------------
Net deferred tax asset (liability) $382.8 $ (42.6)
---------------
</TABLE>
91
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMPREHENSIVE INCOME
The Company displays comprehensive income and its components on the
accompanying consolidated statements of stockholder's equity and the note
herein. Other comprehensive income is shown net of reclassification
adjustments 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,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Calculation of Holding Gain (Loss):
-----------------------------------
Gross holding gain (loss) on
securities
available for sale $(1,179.7) $(53.8) $ 359.8
Deferred policy acquisition costs 43.9 (6.9) (3.1)
Tax (expense) benefit 397.7 21.1 (125.1)
--------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (738.1) $(39.6) $ 231.6
--------------------------
Calculation of Reclassification
Adjustment:
-------------------------------
Realized gain on sale of securities
available for sale $ 73.4 $ 42.0 $ 55.1
Tax expense (25.2) (14.7) (19.5)
--------------------------
Reclassification adjustment, net of
tax $ 48.2 $ 27.3 $ 35.6
--------------------------
Amounts Reported in Other Comprehensive
Income:
---------------------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (738.1) $(39.6) $ 231.6
Less reclassification adjustment, net
of tax 48.2 27.3 35.6
--------------------------
Net unrealized gain (loss) recognized
in other comprehensive income (loss) $ (786.3) $(66.9) $ 196.0
--------------------------
</TABLE>
92
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. REINSURANCE
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger mortality
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 of 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 business reinsured on a yearly renewable term and modified
coinsurance basis remain with, and under the control of the Company.
Approximate amounts recoverable (payable) from (to) reinsurers include the
following amounts:
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(55.3) $(46.0)
Future policy benefits 141.8 108.9
Unpaid claims 8.5 12.5
Paid claims 6.4 24.3
</TABLE>
As of December 31, 1999, 74% 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,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance
premiums $ 92.8 $ 82.7 $ 70.7
Assumed reinsurance included in insurance
premiums 13.9 17.2 18.1
Ceded reinsurance netted against policy fees 52.3 65.0 77.5
Ceded reinsurance netted against net invest-
ment income 211.9 203.3 204.9
Ceded reinsurance netted against interest
credited 110.5 162.8 165.8
Ceded reinsurance netted against policy ben-
efits 88.4 121.3 93.4
Assumed reinsurance included in policy bene-
fits 8.3 17.7 12.7
</TABLE>
93
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION
The Company's six operating segments are Life Insurance, Institutional
Products, Annuities, Group Insurance, 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 Life 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 that has produced over 10% of the segment's in force business. The
Institutional Products 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 Insurance 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 insurance brokerage services and investment advisory services through
approximately 3,200 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 operating 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 investment 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 Life 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 $100.5 million and $110 million as of
December 31, 1999 and 1998, respectively. 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 disclosed
herein is interest credited to universal life and investment-type products.
94
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION (Continued)
Financial information for each of the business segments is as follows:
<TABLE>
<CAPTION>
Life Institutional Group Broker- Investment Corporate
Insurance Products Annuities Insurance Dealers Management and Other Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External customers and (In Millions)
other revenue
December 31, 1999 $ 502.0 $ 39.1 $ 205.0 $478.4 $253.2 $ 14.9 $ 24.1 $ 1,516.7
December 31, 1998 431.9 43.2 124.0 521.2 236.1 17.0 21.6 1,395.0
December 31, 1997 395.6 61.4 83.3 480.6 154.0 21.2 6.0 1,202.1
Intersegment revenues
December 31, 1999 348.5 (348.5) -
December 31, 1998 185.3 (185.3) -
December 31, 1997 143.3 (143.3) -
Net investment income
excluding earnings of
equity method investees
December 31, 1999 580.2 645.1 78.3 23.4 0.9 8.3 44.2 1,380.4
December 31, 1998 586.5 565.5 88.6 23.1 0.9 8.0 42.0 1,314.6
December 31, 1997 507.2 509.6 149.4 24.9 0.8 6.2 49.2 1,247.3
Earnings of equity
method investees
December 31, 1999 (0.7) (1.2) (0.1) 107.9 (13.0) 92.9
December 31, 1998 0.1 103.1 (4.2) 99.0
December 31, 1997 0.2 80.7 (2.8) 78.1
Net realized investment
gains (losses)
December 31, 1999 12.6 26.8 0.1 (0.6) 9.9 52.7 101.5
December 31, 1998 4.1 (13.6) 4.6 1.7 4.0 38.6 39.4
December 31, 1997 9.9 12.8 0.6 2.0 20.8 39.3 85.4
Total revenues
December 31, 1999 1,094.1 709.8 283.3 501.2 602.6 141.0 (240.5) 3,091.5
December 31, 1998 1,022.5 595.2 217.2 546.0 422.3 132.1 (87.3) 2,848.0
December 31, 1997 912.7 584.0 233.3 507.5 298.1 128.9 (51.6) 2,612.9
Income (loss) before
provision for
income tax
December 31, 1999 178.4 111.9 73.2 30.4 11.9 62.6 46.3 514.7
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
Provision (benefit) for
income tax
December 31, 1999 54.4 30.7 24.0 10.1 5.2 11.3 8.0 143.7
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
Net income (loss)
December 31, 1999 124.0 81.2 49.2 20.3 6.7 51.3 38.3 371.0
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
Interest credited on
universal life and
investment-type
products
December 31, 1999 451.4 383.8 65.1 4.1 904.4
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
Assets
As of December 31, 1999 16,276.1 17,649.4 14,565.2 341.5 60.9 264.5 965.4 50,123.0
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
</TABLE>
95
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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 the net periodic pension benefit are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned dur-
ing the year $ 4.6 $ 4.0 $ 3.6
Interest cost on projected benefit
obligation 11.5 10.9 10.4
Expected return on plan assets (16.3) (15.0) (12.8)
Amortization of net obligations and
prior service cost (1.4) (1.4) (1.4)
----------------------------
Net periodic pension benefit $ (1.6) $ (1.5) $ (0.2)
----------------------------
</TABLE>
96
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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>
<CAPTION>
December 31,
1999 1998
--------------
(In Millions)
<S> <C> <C>
Change in Benefit Obligation:
-----------------------------
Benefit obligation, beginning of year $177.8 $157.9
Service cost 4.6 4.0
Interest cost 11.5 10.9
Plan expense (0.3) (0.3)
Actuarial (gain) loss (30.7) 11.9
Benefits paid (7.0) (6.6)
--------------
Benefit obligation, end of year $155.9 $177.8
--------------
Change in Plan Assets:
----------------------
Fair value of plan assets, beginning of year $195.3 $180.3
Actual return on plan assets 23.6 21.9
Plan expense (0.3) (0.3)
Benefits paid (7.0) (6.6)
--------------
Fair value of plan assets, end of year $211.6 $195.3
--------------
Funded Status Reconciliation:
-----------------------------
Funded status $ 55.7 $ 17.5
Unrecognized transition asset (47.7) (3.6)
Unrecognized prior service cost (2.4) (1.0)
Unrecognized actuarial gain (0.8) (9.7)
--------------
Prepaid pension cost $ 4.8 $ 3.2
--------------
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1999 and 1998, the weighted average discount
rate used was 8.0% and 6.5%, respectively, and the rate of increase in
future compensation levels was 5.5% and 5.0%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1999 and 1998.
97
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
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 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, 1999, 1998 and 1997 is $0.5 million, $0.7 million and $0.8 million,
respectively. As of December 31, 1999 and 1998, the accumulated benefit
obligation is $19.7 million and $19.3 million, respectively. The fair value
of the plan assets as of December 31, 1999 and 1998 is zero. The amount of
accrued benefit cost included in other liabilities on the accompanying
consolidated statements of financial condition is $24.4 million and $25.3
million as of December 31, 1999 and 1998, 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 8.0% for 1999 and 1998 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 7.0% for 1999 and 1998 and is assumed to
decrease gradually to 3.0% 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, 1999 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 10.1%. If the health care cost trend rate assumptions were
decreased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1999 would be decreased by 7.0%, and the aggregate of the
service and interest cost components of the net periodic benefit cost would
decrease by 8.9%.
The discount rate used in determining the accumulated postretirement
benefit obligation is 8.0% and 6.5% for 1999 and 1998, 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 ("ESOP"). ESOP contributions made by the Company amounted to $5.4
million, $5.2 million and $1.1 million for the years ended December 31,
1999, 1998 and 1997, respectively, and are included in operating expenses
on the accompanying consolidated statements of operations.
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 LifeCorp issued 1.7 million shares of common stock
at
98
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
$12.50 per share to the ESOP ("ESOP Shares") on September 2, 1997, in
exchange for a promissory note in the amount of $21.2 million ("ESOP
Note"). Interest and principal payments made by the ESOP to Pacific
LifeCorp were funded by ESOP contributions from Pacific Life.
On July 27, 1999, Pacific Life loaned cash to the ESOP to pay off the ESOP
Note due Pacific LifeCorp. This loan is included in unearned ESOP shares on
the accompanying consolidated statement of stockholder's equity as of
December 31, 1999. The unearned ESOP shares account is reduced as ESOP
shares are released for allocation to participants through ESOP
contributions by Pacific Life. In addition, when the fair value of ESOP
shares being released for allocation to participants exceeds the original
issue price of those shares, paid-in capital is increased by this
difference and reflected as a capital contribution on the accompanying
consolidated statement of stockholder's equity as of December 31, 1999.
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.
16. 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 $69.7
million, $42.1 million and $27.5 million for the years ended December 31,
1999, 1998 and 1997, respectively. In addition, Pacific Life provides
certain support services to the Pacific Select Fund for an administration
fee which is based on an allocation of actual costs. Such administration
fees amounted to $265,000, $232,000 and $165,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $7.3 million, $16.9 million and $11.4 million
for the years ended December 31, 1999, 1998 and 1997, 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 $3.2 million and
$40.3 million as of December 31, 1999 and 1998, 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 $1.0 million, $1.2 million and $1.2 million for the years ended December
31, 1999, 1998 and 1997, respectively.
17. TERMINATION AND NON COMPETITION AGREEMENTS
The Company has termination and non competition agreements 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 non
compete 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, 1999, 1998 and 1997, approximately $53.6
million, $49.4 million and $85.8 million, respectively, is included in
operating expenses on the accompanying consolidated statements of
99
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. TERMINATION AND NON COMPETITION AGREEMENTS (Continued)
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.
In connection with the closing of the PIMCO Advisors transaction (Note 1),
the termination and non competition agreements with certain former key
employees of PAM's subsidiaries will be assumed by Allianz.
18. COMMITMENTS AND CONTINGENCIES
The Company has outstanding commitments to make investments primarily in
fixed maturity securities, mortgage loans, limited partnerships and other
investments as follows (In Millions):
<TABLE>
<CAPTION>
Years Ending December 31:
-------------------------
<S> <C>
2000 $437.0
2001 through 2004 210.8
2005 and thereafter 144.3
------
Total $792.1
------
</TABLE>
The Company leases office facilities under various non cancelable operating
leases. Aggregate minimum future commitments as of December 31, 1999
through the term of the leases are approximately $43.3 million.
Pacific Life has a contingent liability of approximately $23 million
related to the posting of an appeal bond in conjunction with one of its
investments. An unrelated third party has agreed to reimburse Pacific Life
for 50% of any losses incurred under the bond. In addition, Pacific Life
has given a commitment for additional capital funding, as may be required,
to certain of its subsidiaries.
Pacific Life 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 Pacific Life on or after January 1, 1982. Pacific Life has
settled this litigation pursuant to a final settlement agreement approved
by the Court in November 1998. The settlement agreement was implemented
during 1999.
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.
----------------------------------------------------------------------------
100
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Financial Statements as of March 31, 2000
and December 31, 1999 and for the three months ended
March 31, 2000 and 1999
101
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(Unaudited) 1999
-----------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair
value:
Fixed maturity securities $15,133.8 $14,814.0
Equity securities 251.8 295.2
Trading securities at estimated fair value 101.4 99.9
Mortgage loans 2,953.8 2,920.2
Real estate 230.9 236.0
Policy loans 4,297.9 4,258.5
Other investments 1,106.0 882.7
-----------------------------------------------------------------------------
TOTAL INVESTMENTS 24,075.6 23,506.5
Cash and cash equivalents 404.0 439.4
Deferred policy acquisition costs 1,517.5 1,446.1
Accrued investment income 312.1 287.2
Other assets 830.0 830.7
Separate account assets 25,224.5 23,613.1
-----------------------------------------------------------------------------
TOTAL ASSETS $52,363.7 $50,123.0
-----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life and investment-type products $19,138.8 $19,045.5
Future policy benefits 4,437.9 4,386.0
Short-term and long-term debt 296.6 224.4
Other liabilities 1,225.7 939.2
Separate account liabilities 25,224.5 23,613.1
-----------------------------------------------------------------------------
TOTAL LIABILITIES 50,323.5 48,208.2
-----------------------------------------------------------------------------
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 143.9 139.9
Unearned ESOP shares (9.5) (11.6)
Retained earnings 2,154.1 2,034.5
Accumulated other comprehensive loss:
Unrealized loss on securities available for sale,
net (278.3) (278.0)
-----------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 2,040.2 1,914.8
-----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $52,363.7 $50,123.0
-----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
102
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
<S> <C> <C>
2000 1999
-------------------------------------------------------------------------------
<CAPTION>
(In Millions)
<S> <C> <C>
REVENUES
Universal life and investment-type product policy fees $ 197.8 $ 144.5
Insurance premiums 126.4 133.6
Net investment income 404.1 335.6
Net realized investment gains 48.6 52.2
Commission revenue 65.8 61.2
Other income 56.6 33.6
-------------------------------------------------------------------------------
TOTAL REVENUES 899.3 760.7
-------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life and investment-
type products 226.5 220.8
Policy benefits paid or provided 236.7 180.5
Commission expenses 131.7 116.7
Operating expenses 133.3 110.2
-------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 728.2 628.2
-------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 171.1 132.5
Provision for income taxes 51.5 44.2
-------------------------------------------------------------------------------
NET INCOME $ 119.6 $ 88.3
-------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
103
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Unearned Other
------------- Paid-in ESOP Retained Comprehensive
Shares Amount Capital Shares Earnings Income (Loss) Total
----------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1999 0.6 $30.0 $126.2 $1,663.5 $ 508.3 $2,328.0
Comprehensive loss:
Net income 371.0 371.0
Change in unrealized
gain on securities
available for sale,
net (786.3) (786.3)
--------
Total comprehensive
loss (415.3)
Issuance of partnership
units by affiliate 10.6 10.6
Capital contributions 3.1 3.1
Purchase of ESOP note $(13.1) (13.1)
Allocation of unearned
ESOP shares 1.5 1.5
----------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1999 0.6 30.0 139.9 (11.6) 2,034.5 (278.0) 1,914.8
Comprehensive income:
Net income 119.6 119.6
Change in unrealized
loss on securities
available for sale,
net (0.3) (0.3)
--------
Total comprehensive
income 119.3
Issuance of partnership
units by affiliate 3.0 3.0
Allocation of unearned
ESOP shares 1.0 2.1 3.1
----------------------------------------------------------------------------------------
BALANCES (Unaudited),
MARCH 31, 2000 0.6 $30.0 $143.9 $ (9.5) $2,154.1 $(278.3) $2,040.2
----------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
104
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 119.6 $ 88.3
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Amortization on fixed maturity securities (19.9) (10.1)
Depreciation and other amortization 5.6 3.9
Earnings of equity method investees (27.1) (14.5)
Deferred income taxes 16.5 (4.0)
Net realized investment gains (48.6) (52.2)
Net change in deferred policy acquisition costs (71.4) (76.8)
Interest credited to universal life and investment-
type products 226.5 220.8
Change in trading securities (1.5) (98.0)
Change in accrued investment income (24.9) (35.4)
Change in future policy benefits 51.9 22.9
Change in other assets and liabilities 211.6 (115.2)
-------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 438.3 (70.3)
-------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (951.9) (990.4)
Sales 335.8 616.0
Maturities and repayments 451.3 236.7
Repayments of mortgage loans 121.2 68.8
Purchases of mortgage loans and real estate (151.3) (89.9)
Distributions from partnerships 33.4 33.5
Change in policy loans (39.4) 34.3
Other investing activity, net (252.0) (40.0)
-------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (452.9) (131.0)
-------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
105
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Continued) 2000 1999
-----------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 1,177.9 $1,223.1
Withdrawals (1,274.0) (920.0)
Net change in short-term and long-term debt 72.2 (101.5)
Allocation of unearned ESOP shares 3.1
-----------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (20.8) 201.6
-----------------------------------------------------------------------------
Net change in cash and cash equivalents (35.4) 0.3
Cash and cash equivalents, beginning of period 439.4 154.1
-----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 404.0 $ 154.4
-----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 0.9 $ 0.1
Interest paid $ 2.1 $ 2.0
-----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
106
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.ORGANIZATION AND BUSINESS
Pacific Life Insurance Company (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 is an indirect subsidiary of Pacific Mutual
Holding Company (PMHC), a mutual holding company, and a wholly owned
subsidiary of Pacific LifeCorp, an intermediate stock holding company. PMHC
and Pacific LifeCorp were organized pursuant to consent received from the
Insurance Department of the State of California and the implementation of a
plan of a conversion to form a mutual holding company structure in 1997.
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.
2.BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The information set forth in the consolidated statements of financial
condition and stockholder's equity as of March 31, 2000 and the
consolidated statements of operations and cash flows for the three months
ended March 31, 2000 and 1999 is unaudited. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. The information reflects all adjustments, consisting
only of normal recurring adjustments, that, in the opinion of management,
are necessary to present fairly the financial position and results of
operations of Pacific Life Insurance Company and subsidiaries (the Company)
for the periods indicated. Results of operations for the interim periods
are not necessarily indicative of the results of operations for the full
year. It is suggested that these unaudited financial statements be read in
conjunction with the audited financial statements for the years ended
December 31, 1999, 1998 and 1997.
The accompanying consolidated financial statements of the Company include
the accounts of Pacific Life and its majority owned and controlled
subsidiaries. All significant intercompany transactions and balances have
been eliminated.
The Company, through its wholly owned subsidiary Pacific Asset Management
LLC (PAM), had an approximate 33% beneficial ownership interest in PIMCO
Advisors L.P. (PIMCO Advisors) as of March 31, 2000 and December 31, 1999.
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.
On May 5, 2000, a transaction was closed whereby Allianz of America, Inc.
(Allianz), a subsidiary of Allianz AG, acquired 70% of the outstanding
partnership units of PIMCO Advisors. PAM exchanged its interest in PIMCO
Advisors for a beneficial economic interest in a new class of PIMCO
Advisors partnership units with a cash distribution comprised of a fixed
and variable return.
In connection with this transaction, PAM entered into a Continuing
Investment Agreement with Allianz with respect to its investment in PIMCO
Advisors. The investment in PIMCO Advisors held by PAM is subject to put
and call options held by PAM and Allianz, respectively. The put option
gives PAM the right to require Allianz, on the last business day of each
calendar quarter, to purchase all of the investment in PIMCO Advisors held
by PAM. The put option price is based on the distributions per unit amount,
as defined in the Continuing Investment Agreement, for the most recently
completed four calendar quarters multiplied by a factor of 14.0. The call
option gives Allianz the right to require PAM, on any January 31, April 30,
July 31, or October 31, beginning on January 31, 2003, to sell its
investment in PIMCO Advisors to Allianz. The call option price is based on
the distributions per unit, as defined in the Continuing Investment
Agreement, for the most recently completed four calendar quarters
multiplied by a factor of 14.0 if the call per unit value reaches a minimum
value.
107
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.ACQUISITION OF INSURANCE BLOCK OF BUSINESS
Effective July 15, 1999, Pacific Life acquired a payout annuity block of
business from Confederation Life Insurance Company (U.S.) in
Rehabilitation, which is currently under rehabilitation. This block of
business consisted of approximately 16,000 annuitants having reserves of
$1.8 billion. The assets received as part of this acquisition amounted to
$1.6 billion in fixed maturity securities and $0.2 billion in cash.
4.LITIGATION
Pacific Life 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 Pacific Life on or after January 1, 1982. Pacific Life has
settled this litigation pursuant to a final settlement agreement approved
by the Court in November 1998. The settlement agreement was implemented
during 1999.
Further, Pacific Life 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 Pacific Life.
----------------------------------------------------------------------------
108
<PAGE>
APPENDIX A - JOINT EQUAL AGE
----------------------------------------------------------
An example Joint equal age is a calculation that combines the
ages and insurance risks of two people insured by a
This example policy. It changes many possible combinations of ages,
assumes a male risk classes, nonstandard ratings and genders for the
smoker who is age two people insured by the policy into a two life status.
65 and a female With joint equal age, we assume that both people have
nonsmoker who is the same age, gender (both always male), and risk class
age 55 and has a (both smoker or both nonsmoker).
Table D nonstandard
rating. How we use joint equal age
Using the joint equal age of the two people insured
Here's how we by the policy eliminates many of the tables needed when
calculate the joint age rates are used. We use the joint equal age for
equal age. calculating the following:
Step 1 . certain policy charges. We use joint equal age to
determine the rates per $1000 of initial face amount
Add 6 to the male for the sales surrender target, underwriting
age of 65 because surrender charge and the face amount component of
he is a smoker. For the mortality and expense risk charge.
the female, add 0
to age 55 because . the death benefit under Option D.
she is a nonsmoker.
How we calculate joint equal age
Adjusted ages after Here are the five steps we use to calculate joint equal
Step 1: age. We start with the actual ages of the two people
. Male 71 insured by the policy on the policy date.
. Female 55
Step 1 Adjust ages for smoker status
Step 2
If one person is a smoker and the other is a
Subtract 0 from the nonsmoker, we add a specified number of years
male age of 65. For to the age of the smoker. We do not adjust the
the female, age of the nonsmoker. The table below shows
subtract 5 from age how we make the adjustment.
55.
----------------------------------------------
Adjusted ages after Number of smokers Add to actual age (years)
Step 2: ----------------------------------------------
. Male 71 None 0
. Female 50 One female 4
One male 6
Step 3 One unisex 6
Two 0
The male's age is ----------------------------------------------
not adjusted here
because he does not If both people insured by the policy are
have a nonstandard smokers, or if both people are nonsmokers,
table rating. Add 8 we do not adjust the age in this step.
to the female's age
of 50 because her Step 2 Adjust ages for gender
table rating is D.
We subtract years from the adjusted age we
Adjusted ages after calculated in Step 1, based on gender. The
Step 3: table below shows how we make the adjustment.
. Male 71
. Female 58 ----------------------------------------------
Gender Subtract from adjusted age (years)
Step 4 ----------------------------------------------
Female 5
Subtract 58 from Male 0
71. The difference Unisex 1
is 13. The add-on ----------------------------------------------
factor for 13 is 6
in the table.
Step 5
Add 6, the add-on
factor to 58, the
younger adjusted
age.
The joint equal age
is 64.
109
<PAGE>
Step 3 Adjust ages for table ratings
We add years to the adjusted age in Step 2, based on the nonstandard table
rating for each person insured by the policy. The table below shows how we make
the adjustment.
Table ratings represent a multiple of standard mortality rates. Ratings other
than 0 represent nonstandard ratings.
--------------------------------------------------------------------------------
Table rating 0 A B C D E F H J L N P
Add to adjusted age (years) 0 2 4 6 8 10 12 14 15 16 18 19
--------------------------------------------------------------------------------
We cap the adjusted age for nonstandard at age 100.
For people who are uninsurable, the adjusted age will always be 100, regardless
of their age and gender. We reserve the right to reject an application for a
policy.
After Steps 1 through 3, we have each person's adjusted age.
Step 4 Determine the add-on factor
We subtract the younger adjusted age from the older adjusted age. We find the
difference between the two in the table below and go across the row to
determine the add-on factor.
<TABLE>
<CAPTION>
---------------------- ----------------------
Difference in Add-on Difference in Add-on
adjusted age factor adjusted age factor
(years) (years) (years) (years)
---------------------- ----------------------
<S> <C> <C> <C>
0 0 40-44 12
1-2 1 45-47 13
3-4 2 48-50 14
5-6 3 51-53 15
7-9 4 54-56 16
10-12 5 57-60 17
13-15 6 61-64 18
16-18 7 65-69 19
19-23 8 70-75 20
24-28 9 76-82 21
29-34 10 83-91 22
35-39 11 92-100 23
---------------------- ----------------------
</TABLE>
Step 5 Calculate joint equal age
We add the add-on factor to the younger adjusted age (from Step 3).
The sum is the joint equal age.
110
<PAGE>
APPENDIX B - RATES PER $1,000 OF INITIAL FACE AMOUNT
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
Face amount Face amount
Joint component Joint component
equal of M & E equal of M&E
age risk charge age risk charge
---------------------------------- ----------------------------------
<S> <C> <S> <C>
15 0.051 58 0.222
16 0.052 59 0.237
17 0.053 60 0.253
18 0.054 61 0.275
19 0.055 62 0.298
20 0.056 63 0.320
21 0.056 64 0.341
22 0.057 65 0.362
23 0.058 66 0.382
24 0.059 67 0.401
25 0.060 68 0.420
26 0.061 69 0.441
27 0.062 70 0.472
28 0.063 71 0.505
29 0.064 72 0.540
30 0.065 73 0.569
31 0.066 74 0.620
32 0.067 75 0.664
33 0.068 76 0.711
34 0.069 77 0.763
35 0.070 78 0.804
36 0.072 79 0.881
37 0.075 80 0.947
38 0.078 81 1.018
39 0.083 82 1.092
40 0.087 83 1.148
41 0.092 84 1.183
42 0.096 85 1.220
43 0.100 86 1.256
44 0.106 87 1.293
45 0.112 88 1.330
46 0.118 89 1.369
47 0.124 90 1.406
48 0.129 91 1.445
49 0.137 92 1.484
50 0.145 93 1.524
51 0.153 94 1.563
52 0.161 95 1.603
53 0.168 96 1.643
54 0.179 97 1.685
55 0.189 98 1.726
56 0.200 99 1.768
57 0.212 100 1.810
---------------------------------- ---------------------------------
</TABLE>
111
<PAGE>
APPENDIX C - DEATH BENEFIT PERCENTAGES
<TABLE>
<CAPTION>
---------------- ---------------- ---------------- ----------------
Age Percentage Age Percentage Age Percentage Age Percentage
---------------- ---------------- ---------------- ----------------
<S> <C> <S> <C> <S> <C> <S> <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 >93 101
---------------- ---------------- ---------------- ----------------
</TABLE>
112
<PAGE>
APPENDIX D - DEATH BENEFIT FACTOR TABLE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Rate per $1.00 of Face Amount
------------------------------------------------------------------------------------------------
Joint
equal
age Policy years*
------------------------------------------------------------------------------------------------
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75+
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
15 1.000 1.000 1.000 1.001 1.002 1.005 1.010 1.022 1.048 1.102 1.210 1.415 1.702 1.957 2.000
20 1.000 1.000 1.001 1.002 1.004 1.009 1.021 1.046 1.100 1.207 1.411 1.700 1.957 2.000 2.000
25 1.000 1.000 1.001 1.003 1.008 1.019 1.044 1.097 1.204 1.408 1.697 1.956 2.000 2.000 2.000
30 1.000 1.001 1.003 1.007 1.018 1.042 1.094 1.200 1.404 1.694 1.955 2.000 2.000 2.000 2.000
35 1.000 1.002 1.006 1.016 1.039 1.091 1.197 1.400 1.692 1.954 2.000 2.000 2.000 2.000 2.000
40 1.001 1.005 1.014 1.036 1.087 1.192 1.395 1.688 1.953 2.000 2.000 2.000 2.000 2.000 2.000
45 1.002 1.011 1.032 1.081 1.185 1.388 1.682 1.952 2.000 2.000 2.000 2.000 2.000 2.000 2.000
50 1.006 1.025 1.072 1.174 1.376 1.674 1.949 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
55 1.015 1.058 1.157 1.358 1.660 1.945 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
60 1.035 1.128 1.327 1.636 1.936 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
65 1.079 1.274 1.595 1.920 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
70 1.175 1.519 1.891 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
75 1.357 1.822 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
80 1.620 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
85 1.894 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
90 1.969 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
95 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
99 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
------------------------------------------------------------------------------------------------
</TABLE>
* Factors are portrayed for both joint equal ages and policy anniversaries, at
five year intervals. See your policy for one year increments in death benefit
factors.
113
<PAGE>
PACIFIC SELECT
ESTATE PRESERVER IV WHERE TO GO FOR MORE INFORMATION
---------------------------------------------------------
The Pacific Select For more information about Pacific Select Estate
Estate Preserver IV Preserver IV, please call or write to us at the address
variable life below. You should also use this address to send us any
insurance policy is notices, forms or requests about your policy.
underwritten by
Pacific Life
Insurance 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 You can also find reports and other information about
SEC 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>
Underwritten by:
[LOGO OF PACIFIC LIFE APPEARS HERE]
Pacific Life Insurance Company
700 Newport Center Drive
Newport Beach, CA 92660
(800) 800-7681
Visit us at our web site: www.pacificlife.com
[LOGO OF IMSA APPEARS HERE]
* Membership promotes ethical market conduct
for individual life insurance and annuities
15-22491-00 8/00
<PAGE>
Supplement to Prospectus Dated August 7, 2000 for
Pacific Select Estate Preserver and
Pacific Select Estate Preserver II
Last Survivor Flexible Premium Variable Life Insurance Policies
(each a "policy") Issued by Pacific Life Insurance Company
In this supplement, This supplement provides information about four
you and your mean the additional variable investment options offered
Policyholder or Owner. under your policy. Each of these investment options
Pacific Life, we, us, is set up as a variable account under our separate
and our refer to account and invests in a corresponding portfolio of
Pacific Life Insurance the M Fund.
Company. M Fund refers
to M Fund, Inc. You'll Variable Account I: Brandes International Equity
find an explanation of Fund
what terms used in this Variable Account II: Turner Core Growth Fund
supplement mean in the Variable Account III: Frontier Capital
accompanying variable Appreciation Fund
life insurance prospectus Variable Account IV: Clifton Enhanced U.S. Equity
or the M Fund prospectus. Fund (formerly called
"Enhanced U.S. Equity Fund")
The M Fund is described
in detail in its You can allocate premium payments and transfer
prospectus and in its accumulated value to these variable investment
Statement of Additional options, as well as to the other investment options
Information (SAI). described in the accompanying variable life
insurance prospectus.
Each policy is described
in detail its accompanying
variable life insurance
prospectus. Except as
described below, all
features and procedures
of each policy described
in its prospectus remain
intact.
Supplement dated August 7, 2000
1
<PAGE>
Your policy's accumulated value will fluctuate depending on the investment
options you've chosen.
We are not responsible for the operation of the M Fund or any of its
portfolios. We also are not responsible for ensuring that the M Fund and its
portfolios comply with any laws that apply.
About the variable investment options
The following chart is a summary of the M Fund portfolios. Each M Fund
portfolio invests in different securities and has its own investment goals,
strategies and risks. The value of each portfolio will fluctuate with the value
of the investments it holds and returns are not guaranteed. You'll find
detailed descriptions of the portfolios, including the risks associated with
investing in the portfolios, in the accompanying 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.
<TABLE>
<CAPTION>
The
Portfolio's
Investment The Portfolio's Main Portfolio
Portfolio Goal Investments Manager
<C> <C> <S> <C>
Brandes Long-term Equity securities of Brandes
International capital foreign issuers, Investment
Equity appreciation. including common Partners,
stocks, preferred L.P.
stocks and securities
that are convertible
into common stocks.
Focuses on stocks with
capitalizations of
$1 billion or more.
Turner Core Long-term Common stocks that Turner
Growth Fund capital show strong earnings Investment
appreciation. potential and also Partners,
have reasonable Inc.
valuations.
Frontier Capital Maximum Common stock of U.S. Frontier
Appreciation capital companies of all sizes Capital
appreciation. with emphasis on Management
stocks companies with Company, LLC
capitalizations of
less than $3 billion.
Clifton Enhanced Above-market Futures contracts on The Clifton
U.S. Equity total return. the Standard & Poor's Group
500 Composite Stock
Price Index (the "S&P
500" or the "Index")
to have 100% exposure
to the S&P 500 to try
to earn a return equal
to that of the Index.
</TABLE>
M Financial Investment Advisers, Inc. (MFIA) is the investment adviser for each
portfolio of the M Fund, and has retained other firms to manage the portfolios.
MFIA and the M Fund's Board of Directors oversee the management of all of the M
Fund's portfolios.
2
<PAGE>
You'll find more information about Policy charges in An overview of the policy
in the accompanying variable life insurance prospectus.
You'll find more about M Fund fees and expenses in the accompanying M Fund
prospectus.
The rights we describe in the accompanying variable life insurance prospectus
under Making changes to the separate account also apply to the M Fund.
Fees and expenses paid by the M Fund
The M Fund pays advisory fees and other expenses. These are deducted from the
assets of each Portfolio and may vary from year to year. They are not fixed and
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
portfolio returns.
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. The unit value
of a variable account will change with the value of its corresponding M Fund
portfolio.
. 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 1999 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, 2000.
<TABLE>
------------------------------------------------------------------------------
<CAPTION>
M Fund Portfolios/1/ Advisory fee Other expenses Total expenses
------------------------------------------------------------------------------
As an annual % of average daily net assets
<S> <C> <C> <C>
Brandes International Equity 0.98% 0.99% 1.95%
Turner Core Growth 0.45% 0.95% 1.40%
Frontier Capital Appreciation 0.90% 0.57% 1.47%
Clifton Enhanced U.S. Equity 0.40% 1.08% 1.48%
------------------------------------------------------------------------------
</TABLE>
/1/ The advisory fees for Brandes International Equity and Clifton Enhanced
U.S. Equity have been adjusted to reflect a change in advisory fees effective
May 1, 2000. Actual advisory fees in 1999 as a percent of average daily net
assets for the two funds were 0.96% for the Brandes International Equity and
0.55% for the Clifton Enhanced U.S. Equity. Actual total net expenses for these
portfolios in 1999 after the adviser's reimbursements were: 1.21% for Brandes
International Equity, 0.70% for Turner Core Growth, 1.15% for Frontier Capital
Appreciation, and 0.80% for Clifton Enhanced U.S. Equity. MFIA paid the
difference.
Statements and reports we'll send you
We'll send you financial statements that we receive from M Fund.
Voting rights
We're the legal owner of the shares of the M Fund that are held by the variable
accounts. The voting rights we describe in the Voting rights section of the
accompanying variable life insurance prospectus and how we'll exercise them
also apply to the M Fund.
3
<PAGE>
Supplement to Prospectus Dated August 7, 2000 for
Pacific Select Estate Preserver III and Pacific Select Estate Preserver IV
Last Survivor Flexible Premium Variable Life Insurance Policies
(each a "policy") Issued by Pacific Life Insurance Company
In this supplement, This supplement provides information about four
you and your mean the additional variable investment options offered
Policyholder or Owner. under your policy. Each of these investment options
Pacific Life, we, us, is set up as a variable account under our separate
and our refer to account and invests in a corresponding portfolio of
Pacific Life Insurance the M Fund.
Company. M Fund refers
to M Fund, Inc. You'll Variable Account I: Brandes International
find an explanation of Equity Fund
what terms used in this Variable Account II: Turner Core Growth Fund
supplement mean in the Variable Account III: Frontier Capital
accompanying variable Appreciation Fund
life insurance prospectus Variable Account IV: Clifton Enhanced U.S.
or the M Fund prospectus. Equity Fund (formerly
called "Enhanced U.S.
The M Fund is described Equity Fund")
in detail in its
prospectus and in its You can allocate premium payments and transfer
Statement of Additional accumulated value to these variable investment
Information (SAI). options, as well as to the other investment options
described in the accompanying variable life
Each policy is described insurance prospectus.
in detail its accompanying
variable life insurance
prospectus. Except as
described below, all
features and procedures
of each policy described
in its prospectus remain
intact.
Supplement dated August 7, 2000
1
<PAGE>
<TABLE>
<S> <C>
Your policy's accumulated value will About the variable investment options The following chart is a summary of the M Fund
fluctuate depending on the investment portfolios. Each M Fund portfolio invests in different securities and has its own
options you've chosen. investment goals, strategies and risks. The value of each portfolio will fluctuate
with the value of the investments it holds and returns are not guaranteed. You'll
find detailed descriptions of the portfolios, including the risks associated with
investing in the portfolios, in the accompanying 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
Investment The Portfolio's Main Portfolio
Portfolio Goal Investments Manager
Brandes Long-term Equity securities of Brandes
International capital foreign issuers, Investment
Equity appreciation. including common Partners,
stocks, preferred L.P.
stocks and securities
that are convertible
into common stocks.
Focuses on stocks with
capitalizations of
$1 billion or more.
Turner Core Long-term Common stocks that Turner
Growth Fund capital show strong earnings Investment
appreciation. potential and also Partners,
have reasonable Inc.
valuations.
Frontier Capital Maximum Common stock of U.S. Frontier
Appreciation capital companies of all sizes Capital
appreciation. with emphasis on Management
stocks companies with Company, LLC
capitalizations of
less than $3 billion.
Clifton Enhanced Above-market Futures contracts on The Clifton
U.S. Equity total return. the Standard & Poor's Group
500 Composite Stock
Price Index (the "S&P
500" or the "Index")
to have 100% exposure
to the S&P 500 to try
to earn a return equal
to that of the Index.
We are not responsible for the operation of M Financial Investment Advisers, Inc. (MFIA) is the investment adviser for each
the M Fund or any of its portfolios. We also portfolio of the M Fund, and has retained other firms to manage the portfolios.
are not responsible for ensuring that the MFIA and the M Fund's Board of Directors oversee the management of all of the M
M Fund and its portfolios comply with any Fund's portfolios.
laws that apply.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
You'll find more information about Policy Fees and expenses paid by the M Fund
charges in An overview of the policy in the The M Fund pays advisory fees and other expenses. These are deducted from the
accompanying variable life insurance assets of each Portfolio and may vary from year to year. They are not fixed and
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
portfolio returns.
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. The unit value
of a variable account will change with the value of its corresponding M Fund
portfolio.
You'll find more about M Fund fees and . Advisory fee
expenses in the accompanying M Fund MFIA is the investment adviser to the M Fund. The M Fund pays an advisory fee
prospectus. 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 1999 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, 2000.
------------------------------------------------------------------------------
M Fund Portfolios/1/ Advisory fee Other expenses Total expenses
------------------------------------------------------------------------------
As an annual % of average daily net assets
Brandes International Equity 0.98% 0.99% 1.95%
Turner Core Growth 0.45% 0.95% 1.40%
Frontier Capital Appreciation 0.90% 0.57% 1.47%
Clifton Enhanced U.S. Equity 0.40% 1.08% 1.48%
------------------------------------------------------------------------------
/1/ The advisory fees for Brandes International Equity and Clifton Enhanced
U.S. Equity have been adjusted to reflect a change in advisory fees effective
May 1, 2000. Actual advisory fees in 1999 as a percent of average daily net
assets for the two funds were 0.96% for the Brandes International Equity and
0.55% for the Clifton Enhanced U.S. Equity. Actual total net expenses for these
portfolios in 1999 after the adviser's reimbursements were: 1.21% for Brandes
International Equity, 0.70% for Turner Core Growth, 1.15% for Frontier Capital
Appreciation, and 0.80% for Clifton Enhanced U.S. Equity. 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
Making changes to the separate account also accounts. The voting rights we describe in the Voting rights section of the
apply to the M Fund. accompanying variable life insurance prospectus and how we'll exercise them
also apply to the M Fund.
</TABLE>
3
