<PAGE>
PROSPECTUS
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[LOGO OF PACIFIC SELECT VARIABLE ANNUITY APPEARS HERE]
PROSPECTUS
FOR
PACIFIC SELECT VARIABLE ANNUITY
ISSUED BY
PACIFIC LIFE INSURANCE COMPANY
DATED MAY 1, 1997
AS SUPPLEMENTED SEPTEMBER 2, 1997
--------------
PROSPECTUS
FOR
PACIFIC SELECT FUND
DATED MAY 1, 1997
AS SUPPLEMENTED SEPTEMBER 2, 1997
<PAGE>
PACIFIC SELECT VARIABLE ANNUITY
ISSUED BY:
PACIFIC LIFE INSURANCE COMPANY
1-800-722-2333
MAILING ADDRESS:
VARIABLE ANNUITY DEPARTMENT
P.O. BOX 7187
PASADENA, CALIFORNIA 91109-7187
[LOGO OF PACIFIC SELECT VARIABLE ANNUITY APPEARS HERE]
This Prospectus describes Pacific Select Variable Annuity--an individual
flexible premium variable accumulation deferred annuity contract (the
"Contract") offered by Pacific Life Insurance Company ("Pacific Life", "we",
"us", or "our", formerly known as Pacific Mutual Life Insurance Company). The
Contract presents a dynamic concept in retirement planning designed to give
Policyholders ("Contract Owners" or "Owners") flexibility in attaining
financial goals. The Contract is available for individuals as a non-tax
qualified retirement plan ("Non-Qualified Plan") under certain tax-qualified
retirement plans ("Qualified Plan").
During the Accumulation Period, the Contract provides for the accumulation
of a Contract Owner's value on either a variable basis, a fixed basis, or
both. The Contract also provides several options for fixed annuity payments to
begin on a future date. Premium payments may be allocated at the Contract
Owner's discretion to one or more of the Investment Options currently
available. Each of the Variable Investment Options (also called "Variable
Accounts") is a subaccount of a separate account of ours called the Pacific
Select Variable Annuity Separate Account (the "Separate Account"). Each
Variable Account invests in a corresponding Portfolio of the Pacific Select
Fund (the "Fund"):
Money Market Portfolio Equity Income Portfolio
High Yield Bond Portfolio Multi-Strategy Portfolio
Managed Bond Portfolio Equity Portfolio
Government Securities Portfolio Bond and Income Portfolio
Growth Portfolio* Equity Index Portfolio
Aggressive Equity Portfolio International Portfolio
Growth LT Portfolio Emerging Markets Portfolio
A Fixed Option called the Fixed Account is also available. The Accumulated
Value in the Fixed Account will accrue interest at rates that are paid by us
as described in "The Fixed Account".
The Accumulated Value in the Variable Accounts under a Contract will vary
based on investment performance of the Variable Accounts to which the
Accumulated Value is allocated. No minimum amount of Accumulated Value is
guaranteed.
A Contract may be returned according to the terms of its Free-Look Right
(See "Free-Look Right").
THE CONTRACT INVOLVES INVESTMENT RISK, INCLUDING LOSS OF PRINCIPAL, AND IS
NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE
CONTRACT IS NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
This Prospectus concisely sets forth information about the Contract and the
Separate Account that an investor should know before purchasing a Contract.
Certain additional information is contained in a "Statement of Additional
Information ("SAI")," dated May 1, 1997, as supplemented September 2, 1997,
which has been filed with the Securities and Exchange Commission (the "SEC"),
and can be obtained by calling or writing us at the telephone number and
address above. The table of contents of the Statement of Additional
Information is set forth on page 43 of this Prospectus.
* The Growth Variable Account that invests in the Growth Portfolio is
available only to Owners of Contracts issued prior to January 1, 1994. It is
not available to Owners of Contracts issued on or after January 1, 1994.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE FUND.
THESE PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE
REFERENCE.
DATE: MAY 1, 1997 AS SUPPLEMENTED SEPTEMBER 2, 1997
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DEFINITIONS................................................................ 4
SUMMARY.................................................................... 6
Purpose of the Contract.................................................. 6
The Variable Accounts and the Fund....................................... 6
Fixed Account............................................................ 6
Premiums................................................................. 6
Contract Benefits........................................................ 7
Free-Look Right.......................................................... 7
Charges and Deductions................................................... 7
Contacting Pacific Life.................................................. 9
EXPENSE TABLE.............................................................. 10
Contractual Expenses..................................................... 10
Separate Account Annual Expenses......................................... 10
Fund Annual Expenses After Expense Limitation............................ 10
FINANCIAL HIGHLIGHTS....................................................... 13
SELECTED ACCUMULATION UNIT INFORMATION..................................... 13
INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT, AND THE FUND......... 14
Pacific Life Insurance Company........................................... 14
Separate Account......................................................... 14
Pacific Select Fund...................................................... 15
The Investment Adviser................................................... 17
THE CONTRACT............................................................... 17
General.................................................................. 17
Application for a Contract............................................... 17
Premium Payments......................................................... 17
Allocation Limitation.................................................... 18
Allocation of Premiums................................................... 18
Dollar Cost Averaging Option............................................. 18
Portfolio Rebalancing Option............................................. 19
Transfers of Accumulated Value........................................... 19
Accumulated Value........................................................ 19
Determination of Accumulated Value....................................... 20
Full and Partial Withdrawals............................................. 20
Preauthorized Scheduled Withdrawals...................................... 21
Free-Look Right.......................................................... 21
Death Benefit............................................................ 22
Death of Owner........................................................... 23
CHARGES AND DEDUCTIONS..................................................... 24
Contingent Deferred Sales Charge......................................... 24
Mortality and Expense Risk Charge........................................ 25
Administrative Charge.................................................... 25
Maintenance Fee.......................................................... 25
Transfer Fee............................................................. 25
Premium Tax and Other Taxes.............................................. 26
Variations in Charges.................................................... 26
Guarantee of Certain Charges............................................. 26
Fund Expenses............................................................ 27
</TABLE>
2
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<TABLE>
<CAPTION>
PAGE
<S> <C>
ANNUITY PERIOD............................................................. 27
General.................................................................. 27
Annuity Options.......................................................... 28
Selection of an Option................................................... 28
THE FIXED ACCOUNT.......................................................... 29
Interest................................................................. 29
Bail Out Provision....................................................... 30
Death Benefit............................................................ 30
Contract Charges......................................................... 30
Transfers and Withdrawals................................................ 30
Payments from the Fixed Account.......................................... 30
MORE ABOUT THE CONTRACT.................................................... 31
Ownership................................................................ 31
Designation and Change of Beneficiary.................................... 31
Payments from the Separate Account....................................... 31
Proof of Age and Survival................................................ 31
Loans.................................................................... 31
Restriction on Withdrawals from 403(b) Programs.......................... 33
Restrictions Under the Texas Optional Retirement Program................. 33
FEDERAL TAX MATTERS........................................................ 34
Introduction............................................................. 34
Tax Status of Pacific Life and the Separate Account...................... 34
Taxation of Annuities in General--Non-Qualified Plans.................... 35
Additional Considerations................................................ 36
Qualified Plans.......................................................... 37
Charge for Our Income Taxes.............................................. 38
OTHER INFORMATION.......................................................... 39
Voting of Fund Shares.................................................... 39
Substitution of Investments.............................................. 39
Changes to Comply with Law and Amendments................................ 40
Reports to Owners........................................................ 40
Telephone Transfer Privileges............................................ 40
Legal Proceedings........................................................ 41
Legal Matters............................................................ 41
PERFORMANCE INFORMATION.................................................... 41
ADDITIONAL INFORMATION..................................................... 42
Registration Statement................................................... 42
Financial Statements..................................................... 42
STATEMENT OF ADDITIONAL INFORMATION........................................ 43
APPENDIX................................................................... 44
</TABLE>
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THE CONTRACT IS NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN AS CONTAINED IN THIS PROSPECTUS OR
THE STATEMENT OF ADDITIONAL INFORMATION, THE FUND'S PROSPECTUS OR THE
STATEMENT OF ADDITIONAL INFORMATION OF THE FUND, OR ANY SUPPLEMENT THERETO.
3
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DEFINITIONS
In this Prospectus, "you" and "your" refer to the Contract Owner.
Accumulated Value--The total value of the amounts in the Investment Options as
well as any amount set aside in the Loan Account to secure loans as of any
Valuation Date.
Accumulation Period--The period commencing on the Contract Date and ending on
the Annuity Start Date or, if earlier, when the Contract is terminated, either
through a full withdrawal, payment of charges, or payment of the death benefit
proceeds.
Accumulation Unit--A unit of measure used to calculate the value of your
interest in a Variable Account during the Accumulation Period.
Age--The Owner's or Annuitant's age as of his or her nearest birthday as of
the Contract Date, increased by the number of complete Contract Years elapsed.
Annuitant--The person or persons on whose life annuity payments depend. If
Joint Annuitants are named in the Contract, "Annuitant" means both Annuitants
unless otherwise stated.
Annuity--A series of periodic income payments made by us to an Annuitant,
Contingent Annuitant, or Beneficiary during the period specified in the
Annuity Option.
Annuity Options--Options under the Contract that prescribe the provisions
under which a series of annuity payments are made.
Annuity Period--The period during which annuity payments are made.
Annuity Start Date--The date when annuity payments are to begin.
Beneficiary--The person having the right to the death benefit, if any, payable
upon the death of the Annuitant during the Accumulation Period, and the person
having the right to benefits, if any, payable upon the death of the Annuitant
during the Annuity Period.
Contract--An individual flexible premium variable accumulation deferred
annuity contract offered by us.
Contract Date--The date shown as the Contract Date in a Contract. Contract
monthly, quarterly, semi-annual, and annual anniversaries and Contract months,
quarters, and years are measured from the Contract Date. It is usually the
date that the initial premium is credited to the Contracts. The term "Issue
Date" shall be substituted for the term "Contract Date" for Contracts issued
to residents of the Commonwealth of Massachusetts.
Contract Debt--The unpaid loan balance including accrued loan interest.
Contract Owner, Owner, Policyholder, you or your--The person entitled to the
ownership rights under the Contract and in whose name the Contract is issued.
Contract Year--Each twelve-month period measured from the Contract Date.
Designated Beneficiary--The person selected by you to succeed to your interest
in the Contract for purposes of Section 72(s) of the Internal Revenue Code,
and which includes an Owner Beneficiary and a Joint or Contingent Owner.
Fixed Account--An account that is part of our General Account in which all or
a portion of the Accumulated Value may be held for accumulation at fixed rates
of interest (which may not be less than 4.0%) declared by us at least
annually.
Full Withdrawal Value--The amount you may receive upon full withdrawal of the
Contract, which is equal to Accumulated Value minus any unpaid maintenance
fee, any applicable contingent deferred sales charge, and any Contract Debt.
4
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Fund--Pacific Select Fund. The Fund is a diversified, open-end management
investment company commonly referred to as a mutual fund.
General Account--All of our assets other than those allocated to the Separate
Account or to any of our other separate accounts.
Investment Option--A Variable Account or the Fixed Account.
Owner Beneficiary--The person named (other than a Joint or Contingent Owner)
to receive death benefit proceeds if the Owner dies before the Annuitant
during the Accumulation Period.
Policyholder--The Contract Owner.
Premium--The amounts paid to us as consideration for the Contract.
Separate Account--The Pacific Select Variable Annuity Separate Account. A
separate account of ours that consists of subaccounts, referred to as Variable
Accounts, each of which invests in a separate Portfolio of the Pacific Select
Fund.
Valuation Date--Each date on which the Separate Account is valued, which
currently includes each day that the New York Stock Exchange is open for
trading and on which our administrative offices are open. The New York Stock
Exchange is closed on weekends and on the following holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, July Fourth, Labor Day,
Thanksgiving Day, and Christmas Day. We may choose to close on other holidays,
a day immediately preceding or following a national holiday, or in emergency
situations. Any transaction called for on or as of any day is effected as of
the end of that day. If any transaction or event called for under a Contract
is scheduled to occur on a day that is not a Valuation Date, such transaction
or event will be deemed to occur on the next following Valuation Date, unless
otherwise specified. Each Valuation Date ends at 1:00 p.m. Pacific time, or
the close of the New York Stock Exchange, if earlier.
Valuation Period--A period used in measuring the investment experience of each
Variable Account of the Separate Account. The Valuation Period begins at the
close of one Valuation Date and ends at the close of the next succeeding
Valuation Date.
Variable Account--A separate account of ours or a subaccount of a separate
account to which the Accumulated Value under the Contract may be allocated for
variable accumulation. Currently, fourteen Variable Accounts are available
under the Contract unless otherwise indicated in this Prospectus.
Variable Annuities Department--Our Department that services the Contract. The
addresses of the Variable Annuities Department are described in "Contacting
Pacific Life".
Variable Investment Option--A subaccount of the Separate Account.
5
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SUMMARY
This summary is intended to provide a brief overview of the more significant
aspects of the Contract. Further detail is provided in this Prospectus, the
Statement of Additional Information, and the Contract. Unless the context
indicates otherwise, the discussion in this summary and the remainder of the
Prospectus relates to the portion of the Contract involving the Separate
Account. The Fixed Account is briefly described under "The Fixed Account," in
this Prospectus and in the Contract.
PURPOSE OF THE CONTRACT
The Contract described in this Prospectus presents a dynamic concept in
retirement planning designed to give Contract Owners flexibility in attaining
financial goals. The Contract provides for the accumulation of values on a
variable basis, a fixed basis, or both, during the Accumulation Period and
provides several options for fixed annuity payments. During the Accumulation
Period, you can pursue various allocation options by allocating premiums to the
Variable Accounts of the Separate Account or to the Fixed Account. See "The
Contract," page 17.
The Contract is eligible for purchase as a non-tax qualified retirement plan
for an individual ("Non-Qualified Plan"). The Contract is also eligible for an
individual in connection with a retirement plan qualified under Section 401,
408, or 457 of the Internal Revenue Code of 1986, as amended. These plans are
sometimes referred to in this Prospectus as "Qualified Plans."
THE VARIABLE ACCOUNTS AND THE FUND
Premiums designated to accumulate on a variable basis are allocated to the
Separate Account. See "Separate Account." The Separate Account is currently
divided into subaccounts called Variable Accounts or Variable Investment
Options. Each Variable Account invests exclusively in shares of a specific
Portfolio of the Fund. The Portfolios of the Fund, each of which has a
different investment objective or objectives, are as follows: Money Market
Portfolio, High Yield Bond Portfolio, Managed Bond Portfolio, Government
Securities Portfolio, Growth Portfolio, Aggressive Equity Portfolio, Growth LT
Portfolio, Equity Income Portfolio, Multi-Strategy Portfolio, Equity Portfolio,
Bond and Income Portfolio, Equity Index Portfolio, International Portfolio, and
Emerging Markets Portfolio. See "Pacific Select Fund," page 15. Amounts held in
a Variable Account will increase or decrease in dollar value depending on the
investment performance of the corresponding Portfolio of the Fund in which such
Variable Account invests. You bear the investment risk for amounts allocated to
a Variable Account.
The Growth Variable Account that invests in the Growth Portfolio is available
only to Owners of Contracts issued prior to January 1, 1994. It is not
available to Owners of Contracts issued on or after January 1, 1994.
FIXED ACCOUNT
Premiums designated to accumulate on a fixed basis may be allocated to the
Fixed Account, which is part of our General Account. Amounts allocated to the
Fixed Account earn interest at rates determined at least annually by us and
that are guaranteed to be at least an effective annual rate of 4%. See "The
Fixed Account," on page 29.
PREMIUMS
The minimum initial premium is $5,000 for a Contract issued in connection
with a Non-Qualified Plan and $2,000 for a Contract issued in connection with a
Qualified Plan. Thereafter, you may choose the amount and frequency of premium
payments, except that the minimum subsequent premium is $250 for both Non-
Qualified and Qualified Plans, except for certain Qualified Plans, in which
case it is $50.
6
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CONTRACT BENEFITS
During the Accumulation Period, you may transfer Accumulated Value among the
Variable Accounts and to and from the Fixed Account, subject to certain
restrictions as described in "Transfers of Accumulated Value," on page 19.
At any time before the Annuity Start Date, a Contract may be surrendered for
its Full Withdrawal Value, and partial withdrawals, including preauthorized
scheduled withdrawals, may be taken from the Accumulated Value. Full and
partial withdrawals, including preauthorized scheduled withdrawals, may result
in the deduction of a contingent deferred sales charge. See "Full and Partial
Withdrawals," on page 20 and "Preauthorized Scheduled Withdrawals," on page 21
for more information, including the possible charges and tax consequences
associated with full and partial withdrawals.
The Contract provides for a death benefit upon the death of the Annuitant
during the Accumulation Period. See "Death Benefit," on page 22. The Contract
provides for several fixed Annuity Options. Payments under the Annuity Options
will be fixed and guaranteed by us. We reserve the right to offer annuity
options on a variable basis. See "Annuity Period," on page 27.
FREE-LOOK RIGHT
You may return a Contract within the Free-Look Period, which is usually a
ten-day period beginning when you receive the Contract but may vary if required
by state law.
Premiums received during the Free-Look Period will, except as indicated
below, be allocated according to your instructions contained in the application
or more recent instructions received, if any. In the event that you return a
Contract within the Free-Look Period, we will refund to you any premium
payments allocated to the Fixed Account and the Accumulated Value allocated to
the Variable Accounts as of the end of the Valuation Period in which we receive
the Contract plus any Contract Fees and Charges deducted from your Accumulated
Value allocated to the Variable Accounts.
If you reside in a state that requires us to return premium payments if you
exercise the Free-Look Right within your Free-Look Period, we will refund any
premiums received or, if required by your state of residence, premiums
allocated to the Fixed Account plus the greater of premiums allocated to the
Variable Accounts or Accumulated Value in the Variable Accounts plus any
Contract charges and fees deducted from the Variable Accounts on the Contract
Date. Premiums received during the Free-Look Period usually will initially be
allocated to the Money Market Variable Account. The Accumulated Value in the
Money Market Variable Account will be transferred automatically to the Variable
Accounts and the Fixed Account elected in the Owner's application (or, if
received more recently, in written instructions) 15 days after the Contract is
issued. In Pennsylvania, we will refund premiums allocated to the Fixed Account
plus the Accumulated Value in the Variable Accounts plus any Charges deducted
from the Variable Accounts on the Contract Date.
CHARGES AND DEDUCTIONS
We do not make any deductions for sales load from premium payments before
allocating them to your Accumulated Value. Certain charges will be deducted in
connection with the Contract.
7
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Contingent Deferred Sales Charge
A contingent deferred sales charge (which may also be referred to as a
withdrawal charge) may be assessed by us on a full or partial withdrawal,
including a scheduled withdrawal, during the Accumulation Period and, under
certain circumstances, upon annuitization. The withdrawal charge will be waived
on withdrawals to the extent that total withdrawals that are free of charge
during the Contract Year do not exceed 10% of the sum of the premium payments
made during the current Contract Year up to the Valuation Date of the
withdrawal and the preceding four Contract Years. The withdrawal charge applies
against any withdrawal to the extent the amount withdrawn is attributable to
premium payments made. For the purpose of determining any withdrawal charge,
withdrawals are applied to premium payments in the order premium payments are
made, then to earnings. The amount of the charge will depend upon the number of
Contract Years that a premium has remained credited under the Contract, as
follows:
<TABLE>
<CAPTION>
AGE OF PREMIUM
IN CONTRACT
YEARS WITHDRAWAL CHARGE
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<S> <C>
1 6%
2 6%
3 5%
4 4%
5 3%
6 0%
</TABLE>
In no event will the amount of any withdrawal charge, when added to any such
charge previously assessed against any amount withdrawn from the Contract,
exceed 6% of the premiums paid under a Contract. In addition, no withdrawal
charge will be imposed upon: (1) payment of death benefit proceeds under the
Contract; (2) withdrawals effected to meet the minimum distribution rules for
Qualified Plans as they apply to amounts held under the Contract; and (3) in
certain instances annuitization. Subject to approval of state insurance
authorities, the withdrawal charge will also be waived on a full or partial
withdrawal if the Annuitant has been diagnosed with a medically determinable
condition which results in a life expectancy of 12 months or less. See
"Contingent Deferred Sales Charge," on page 24.
Mortality and Expense Risk Charge
We deduct a daily charge from the assets of each Variable Account for
mortality and expense risks equal to an annual rate of 1.25% of the average
daily net assets of each Variable Account. See "Mortality and Expense Risk
Charge," on page 25.
Administrative Charge
On each Monthly Anniversary following the Contract Date, we deduct a monthly
administrative charge during the Accumulation Period equal to .000125
multiplied by a Contract's Accumulated Value in the Investment Options, which
is equal to an annual rate of 0.15% of a Contract's Accumulated Value in the
Investment Options. On Contracts issued in connection with applications
received by us at its Variable Annuity Department before May 1, 1992, the rate
of this charge is currently reduced to .0001 (.12% on an annual basis), and, if
the initial premium is $50,000 or more on such Contracts, to .00005 (.06% on an
annual basis). See "Administrative Charge," on page 25.
Maintenance Fee
During the Accumulation Period, an annual fee of $30 is deducted on each
Contract Anniversary to cover the costs of maintaining records for the
Contract. This charge is pro-rated upon annuitization or a full withdrawal. The
charge is currently waived on Contracts for which the premium payments received
during the first Contract Year equal $50,000 or more. See "Maintenance Fee," on
page 25.
8
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Transfer Fee
Currently no transfer fee is imposed. We reserve the right to assess a
transfer fee of $10 per transaction on the thirteenth and any subsequent
transfer occurring in a Contract Year.
Premium Tax Charge
We assess a premium tax charge to reimburse us for any premium taxes that it
incurs. This charge will be deducted on annuitization or upon full withdrawal
if a premium tax was incurred by us and is not refundable. Partial withdrawals,
including scheduled withdrawals, may result in a premium tax charge if a
premium tax is incurred by us and is not refundable. We reserve the right to
deduct such taxes when incurred or upon distributions. Premium tax rates
currently range from 0% to 3.5%. See "Premium Tax and Other Taxes," on page 26.
Other Expenses
The operating expenses of the Separate Account are paid by us. Investment
advisory fees and operating expenses of the Fund are paid by the Fund. For a
description of these charges and expenses, see the Expense Table on the next
page and the Prospectus for the Fund.
CONTACTING PACIFIC LIFE
Premium payments, applications accompanying premium payments, and loan
repayments should be directed to Pacific Life at P.O. Box 100060, Pasadena,
California 91189-0060. All written requests, notices, and other forms required
by the Contract, including applications not accompanied by premium payments,
and any questions or inquiries should be directed to Pacific Life at P.O. Box
7187, Pasadena, California 91109-7187. Express Mail should be directed to
Pacific Life Insurance Company, c/o FCNPC, 1111 South Arroyo Parkway, 1st
Floor, Pasadena, California 91105. A service representative may be reached by
calling 1-800-722-2333 between the hours of 6:00 a.m. and 5:00 p.m., Pacific
time.
The effective date of certain notices or of instructions is determined by the
date and time on which we "receive" the notice or instructions. We "receive"
this information only when it arrives, in proper form, at the correct mailing
address set out above. Please call us at 1-800-722-2333 if you have any
questions regarding which address to use.
Additional premium payments, loan requests, loan repayments, transfer
requests, and withdrawal requests we receive before 4:00 p.m. Eastern time (or
the close of the New York Stock Exchange, if earlier) will normally be
effective on the same Valuation Date that we receive them in "proper form",
unless the transaction or event is scheduled to occur on another day.
Generally, whenever you submit any other form, notice or request, the
instructions will be effective on the next Valuation Date after we receive them
in "proper form" unless the transaction or event is scheduled to occur on
another day. "Proper form" may require, among other things, a signature
guarantee or other verification of authenticity. We may require a signature
guarantee if an executed application or confirmation of application, as
applicable, in proper form, is not received by us, it appears that the Owner's
signature may have changed over time; or, due to other circumstances. Requests
regarding death benefits must be accompanied by both proof of death and
instructions regarding payment satisfactory to us. You should call your
registered representative or us if you have any questions regarding the
required form of a request.
9
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EXPENSE TABLE
The purpose of this table is to assist investors in understanding the
various costs and expenses borne directly and indirectly by Owners of the
Contracts with Accumulated Value allocated to the Variable Accounts. The table
reflects contractual charges, expenses of the Separate Account, and charges
and expenses of the Fund. Expenses shown under "Contractual Expenses" and
"Separate Account Annual Expenses" are specified under the terms of the
Contract and are fixed. Expenses shown under "Fund Annual Expenses After
Expense Limitation" are estimated expenses of the Fund; Fund expenses are not
specified under the terms of the Contract and may vary from year to year. The
table does not reflect premium taxes that may be imposed by various
jurisdictions. See "Premium Tax and Other Taxes". The information contained in
the table is not generally applicable to amounts allocated to the Fixed
Account (although certain contractual charges also apply to this Account).
For a complete description of a Contract's costs and expenses, see "Charges
and Deductions". For a more complete description of the Fund's costs and
expenses, see the Fund Prospectus, which accompanies this Prospectus.
CONTRACTUAL EXPENSES
<TABLE>
<S> <C>
Sales load on premiums................................................ None
Contingent deferred sales charge (as a percentage of amounts withdrawn
attributable to
premiums paid in the last five Contract Years)/1/
<CAPTION>
AGE OF PREMIUM CHARGE
-------------- ------
<S> <C>
Contract Year 1...................................................... 6%
Contract Year 2...................................................... 6%
Contract Year 3...................................................... 5%
Contract Year 4...................................................... 4%
Contract Year 5...................................................... 3%
Contract Year 6 and over............................................. None
Administrative Charge (per year)/2/..................................... 0.15%
Maintenance Fee (per year)/3/
Premiums received during the first Contract Year of less than
$50,000............................................................. $30
Premiums received during the first Contract Year of $50,000 or more.. None
Transfer Fee/4/......................................................... None
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and expense risk charge (as a percentage of each Variable
Account's average daily net assets).................................... 1.25%
</TABLE>
FUND ANNUAL EXPENSES AFTER EXPENSE LIMITATION (as a percentage of each
Portfolio's average daily net assets)/5/
<TABLE>
<CAPTION>
ADVISORY OTHER TOTAL
FEE EXPENSES EXPENSES
-------- -------- --------
<S> <C> <C> <C>
Money Market Portfolio............................ .40% .08% .48%
High Yield Bond Portfolio......................... .60% .10% .70%
Managed Bond Portfolio............................ .60% .09% .69%
Government Securities Portfolio................... .60% .10% .70%
Growth Portfolio.................................. .65% .09% .74%
Aggressive Equity Portfolio....................... .80% .15% .95%
Growth LT Portfolio............................... .75% .10% .85%
Equity Income Portfolio........................... .65% .08% .73%
Multi-Strategy Portfolio.......................... .65% .11% .76%
Equity Portfolio.................................. .65% .08% .73%
Bond and Income Portfolio......................... .60% .09% .69%
Equity Index Portfolio............................ .21% .08% .29%
International Portfolio........................... .85% .21% 1.06%
Emerging Markets Portfolio........................ 1.10% 1.05% 2.15%
</TABLE>
(Footnotes on following page)
10
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- --------
/1/ The withdrawal charge will be waived to the extent that total withdrawals
free of charge during the Contract Year do not exceed 10% of the sum of
the premium payments made during the current Contract Year and the
preceding four Contract Years. When added to the withdrawal charges
assessed on prior withdrawals, the total withdrawal charge will never
exceed 6% of total premiums paid.
/2/ On Contracts issued in connection with applications received by us before
May 1, 1992, the rate of this charge is currently reduced to .0001 (.12%
on an annual basis), and, if the initial premium is $50,000 or more on
such Contracts, to .00005 (.06% on an annual basis). We have reserved the
right to increase the administrative fee on such Contracts up to 0.15% per
year.
/3/ The Maintenance Fee is currently waived on Contracts for which premiums
received in the first Contract Year are $50,000 or more.
/4/ We reserve the right to assess a transfer fee of $10 per transaction on
the thirteenth and any subsequent transfer occurring in any Contract Year.
/5/ The expenses listed for the Fund Portfolios reflect current expenses for
the year ending December 31, 1996 adjusted to reflect a decrease in fees
for certain operating expenses. The Aggressive Equity and Emerging Markets
Portfolios did not begin operations until April 1, 1996 and their "other
expenses" are on an annualized basis and reflect the policy adopted by us
as Investment Adviser to the Fund, to waive our fees or otherwise
reimburse expenses so that operating expenses (exclusive of advisory fees,
additional custodial fees associated with holding foreign securities,
foreign taxes on dividends, interest or capital gains, and extraordinary
expenses) expressed as a decimal are not greater than 0.0025 of average
daily net assets per year. We began this policy in 1989 and intend to
continue this policy until at least December 31, 1998, but may discontinue
it after that time. In the absence of this policy, such expenses for the
Emerging Markets Portfolio would have exceeded this expense cap in 1996
and total adjusted expenses would have been approximately 2.22% on an
annualized basis. No reimbursement to the other Portfolios was necessary
for the Fund's fiscal year 1996. Actual total expenses after reimbursement
and before the adjustment for the year ended December 31, 1996, were:
Money Market Portfolio--0.50%; High Yield Bond Portfolio--0.71%; Managed
Bond Portfolio--0.71%; Government Securities Portfolio--0.72%; Growth
Portfolio--0.76%; Aggressive Equity Portfolio (annualized)--1.02%; Growth
LT Portfolio--0.87%; Equity Income Portfolio--0.75%; Multi-Strategy
Portfolio--0.78%; Equity Portfolio--0.74%; Bond and Income Portfolio--
0.71%; Equity Index Portfolio--0.31%; International Portfolio--1.07%; and
Emerging Markets Portfolio (annualized)--2.18%.
EXAMPLES
Different examples are presented below that show expenses that an Owner of a
Contract with Accumulated Value allocated to a Variable Account would pay at
the end of one, three, five or ten years if, at the end of those time periods,
the Contract is (1) surrendered, (2) annuitized, (3) not surrendered or
annuitized. The examples assume a $1000 investment and a 5% annual rate of
return. In addition, the examples reflect an average initial premium of
approximately $45,000 and a prorata portion of the annual maintenance fee.
Each example shows expenses based upon allocation to each of the Variable
Accounts.
The examples below should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown.
The 5% return assumed in the examples is hypothetical and should not be
considered a representation of past or future actual returns, which may be
greater or lesser than the assumed amount.
11
<PAGE>
<TABLE>
<CAPTION>
CONTRACT NOT SURRENDERED
CONTRACT SURRENDERED AT CONTRACT ANNUITIZED AT OR ANNUITIZED AND REMAINS
VARIABLE ACCOUNT END OF TIME PERIOD END OF TIME PERIOD* IN FORCE AT END OF TIME PERIOD
---------------- ----------------------- ---------------------- ------------------------------
<S> <C> <C> <C>
Money Market
1 yr.................. $ 74 $ 74 $ 20
3 yrs................. 106 61 61
5 yrs................. 132 105 105
10 yrs................ 226 226 226
Managed Bond
1 yr.................. 76 76 22
3 yrs................. 112 67 67
5 yrs................. 142 115 115
10 yrs................ 248 248 248
Growth
1 yr.................. 76 76 22
3 yrs................. 114 69 69
5 yrs................. 145 118 118
10 yrs................ 253 253 253
Aggressive Equity
1 yr.................. 78 78 24
3 yrs................. 120 75 75
5 yrs................. 156 129 129
10 yrs................ 274 274 274
Growth LT
1 yr.................. 77 77 23
3 yrs................. 117 72 72
5 yrs................. 151 124 124
10 yrs................ 264 264 264
Equity Income
1 yr.................. 76 76 22
3 yrs................. 114 69 69
5 yrs................. 144 117 117
10 yrs................ 252 252 252
Multi-Strategy
1 yr.................. 77 77 23
3 yrs................. 115 70 70
5 yrs................. 146 119 119
10 yrs................ 255 255 255
Equity
1 yr.................. 76 76 22
3 yrs................. 114 69 69
5 yrs................. 144 117 117
10 yrs................ 252 252 252
Bond and Income
1 yr.................. 76 76 22
3 yrs................. 112 67 67
5 yrs................. 142 115 115
10 yrs................ 248 248 248
Equity Index
1 yr.................. 72 72 18
3 yrs................. 100 55 55
5 yrs................. 122 95 95
10 yrs................ 206 206 206
International
1 yr.................. 80 80 26
3 yrs................. 124 79 79
5 yrs................. 161 134 134
10 yrs................ 285 285 285
Emerging Markets
1 yr.................. 90 90 36
3 yrs................. 156 111 111
5 yrs................. 214 187 187
10 yrs................ 387 387 387
Government Securities
1 yr.................. 76 76 22
3 yrs................. 113 68 68
5 yrs................. 143 116 116
10 yrs................ 249 249 249
High Yield Bond
1 yr.................. 76 76 22
3 yrs................. 113 68 68
5 yrs................. 143 116 116
10 yrs................ 249 249 249
</TABLE>
- --------
*In this example, it is assumed that an Annuity Option has been selected that
provides for annuity payments that continue for at least five years, in which
case the contingent deferred sales charge would not be assessed if the
Contract was in force during the Accumulation Period for at least two Contract
Years.
12
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables present financial highlights with respect to each
Variable Account of the Separate Account. The information in the tables for
the years or periods ended December 31, 1990, 1991, 1992, 1993, 1994, 1995 and
1996 is included in the Separate Account's financial statements that have been
audited by Deloitte & Touche llp, independent auditors. The tables should be
read in conjunction with the Separate Account's financial statements, which
are in the Separate Account's Annual Report dated as of December 31, 1996.
The Equity Income, Multi-Strategy and International Portfolios of the Fund,
in which each corresponding Variable Account invests, were advised by other
Portfolio Managers during the periods presented in the 1990, 1991, 1992 and
1993 tables. Effective January 1, 1994, J.P. Morgan Investment Management Inc.
became the Portfolio Manager of the Equity Income and Multi-Strategy
Portfolios and Templeton Investment Counsel, Inc. became the Portfolio Manager
of the International Portfolio.
SELECTED ACCUMULATION UNIT* INFORMATION
Selected accumulation unit information as of the year ended December 31st
for each period:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATION UNIT VALUE
AT BEGINNING OF PERIOD:
Money Market Variable
Account................ 11.84 11.36 11.08 10.94 10.73 10.27 10.00(a)
High Yield Bond Variable
Account................ 18.82 16.03 16.16 13.86 11.82 9.58 10.00(b)
Managed Bond Variable
Account................ 16.11 13.70 14.51 13.15 12.25 10.56 10.00(c)
Government Securities
Variable Account....... 15.68 13.37 14.26 13.03 12.27 10.61 10.00(d)
Aggressive Equity Vari-
able Account........... 10.00(m)
Growth Variable Account. 19.95 16.07 18.18 15.10 12.68 9.11 10.00(e)
Growth LT Variable Ac-
count.................. 15.11 11.19 10.00(f)
Equity Income Variable
Account................ 18.32 14.09 14.31 13.38 12.85 9.88 10.00(g)
Multi-Strategy Variable
Account................ 17.68 14.29 14.69 13.62 13.06 10.63 10.00(h)
Equity Variable Account. 12.24 10.00(i)
Bond and Income Variable
Account................ 13.21 10.00(j)
Equity Index Variable
Account................ 17.62 13.03 13.06 12.09 11.44 10.00(k)
International Variable
Account................ 12.52 11.47 11.27 8.77 9.85 9.02 10.00(l)
Emerging Markets Vari-
able Account .......... 10.00(n)
- ------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE
AT END OF PERIOD:
Money Market Variable
Account................ 12.29 11.84 11.36 11.08 10.94 10.73 10.27
High Yield Bond Variable
Account................ 20.68 18.82 16.03 16.16 13.86 11.82 9.58
Managed Bond Variable
Account................ 16.58 16.11 13.70 14.51 13.15 12.25 10.56
Government Securities
Variable Account....... 15.94 15.68 13.37 14.26 13.03 12.27 10.61
Aggressive Equity Vari-
able Account........... 10.69
Growth Variable Account. 24.36 19.95 16.07 18.18 15.10 12.68 9.11
Growth LT Variable Ac-
count.................. 17.59 15.11 11.19
Equity Income Variable
Account................ 21.61 18.32 14.09 14.31 13.38 12.85 9.88
Multi-Strategy Variable
Account................ 19.65 17.68 14.29 14.69 13.62 13.06 10.63
Equity Variable Account. 15.47 12.24
Bond and Income Variable
Account................ 12.94 13.21
Equity Index Variable
Account................ 21.29 17.62 13.03 13.06 12.09 11.44
International Variable
Account................ 15.07 12.52 11.47 11.27 8.77 9.85 9.02
Emerging Markets Vari-
able Account........... 9.59
- ------------------------------------------------------------------------------------------------------------
NUMBER OF ACCUMULATION
UNITS OUTSTANDING AT
END OF PERIOD:
Money Market Variable
Account................ 10,826,212 5,268,194 3,822,842 1,329,477 841,839 596,386 290,145
High Yield Bond Variable
Account................ 7,031,597 3,499,795 915,875 579,127 204,530 28,473 5,555
Managed Bond Variable
Account................ 9,789,438 4,110,672 1,972,516 1,653,806 608,417 159,134 9,725
Government Securities
Variable Account....... 4,989,942 3,144,652 1,085,199 1,168,824 668,500 264,937 14,888
Aggressive Equity Vari-
able Account........... 3,457,578
Growth Variable Account. 1,217,042 1,431,985 1,684,966 1,951,727 744,468 232,180 41,227
Growth LT Variable Ac-
count.................. 18,364,396 9,411,999 3,169,124
Equity Income Variable
Account................ 13,975,807 7,116,753 2,165,096 1,337,697 748,646 255,940 30,402
Multi-Strategy Variable
Account................ 5,736,463 3,112,558 1,848,366 1,288,197 737,841 276,429 7,594
Equity Variable Account. 7,078,169 2,377,743
Bond and Income Variable
Account................ 3,669,755 1,389,028
Equity Index Variable
Account................ 11,570,124 4,142,024 765,184 554,737 291,497 132,256
International Variable
Account................ 21,638,113 9,523,524 3,744,811 1,397,587 442,951 173,609 25,363
Emerging Markets Vari-
able Account........... 3,004,491
- ------------------------------------------------------------------------------------------------------------
</TABLE>
*Accumulation Unit: unit of measure used to calculate the value of a Contract
Owner's interest in a Variable Account during the Accumulation Period.
Date Variable Account began operations:
(a) 07/24/90 (b) 08/16/90 (c) 09/05/90 (d) 08/22/90 (e) 08/16/90 (f) 01/04/94
(m) 04/01/96 (g) 08/16/90 (h) 09/25/90 (i) 01/01/95 (j) 01/01/95 (k) 02/11/91
(l) 08/16/90 (n) 04/01/96
13
<PAGE>
INFORMATION ABOUT PACIFIC LIFE,
THE SEPARATE ACCOUNT, AND THE FUND
PACIFIC LIFE INSURANCE COMPANY
We are a life insurance company that is domiciled in California. Our
operations include both life insurance and annuity products as well as
financial and retirement services. As of the end of 1996, we had over
$50.8 billion of individual life insurance in force and total admitted assets
of approximately $21.2 billion. We have been ranked according to admitted
assets as the 22nd largest life insurance carrier in the nation for 1996.
Together with our subsidiaries and affiliated enterprises, we have total
assets and funds under management of over $136 billion. We are authorized to
conduct life insurance and annuity business in the District of Columbia and
all states except New York. Our principal offices are located at 700 Newport
Center Drive, Newport Beach, California 92660.
We were originally organized on January 2, 1868, under the name "Pacific
Mutual Life Insurance Company of California" and reincorporated as "Pacific
Mutual Life Insurance Company" on July 22, 1936. On September 1, 1997, we
converted from a mutual life insurance company to a stock life insurance
company ultimately controlled by a mutual holding company and were authorized
by California regulatory authorities to change our name to Pacific Life
Insurance Company. As part of the process we have applied for authorization to
do business as Pacific Life Insurance Company in all states in which we do
business. It may be necessary for us to use forms bearing the name Pacific
Mutual Life Insurance Company at some times and places and forms bearing the
name Pacific Life Insurance Company at other times and places during the
transition period. Any request received in proper order or any transaction
made on a form bearing either of these names will be honored.
We are a subsidiary of Pacific LifeCorp, a holding company which, in turn,
is a subsidiary of Pacific Mutual Holding Company, a mutual holding company.
Under their respective charters, Pacific Mutual Holding Company must always
hold at least 51% of the outstanding voting stock of Pacific LifeCorp, and
Pacific LifeCorp must always own 100% of the voting stock of Pacific Life.
Owners of Pacific Life's annuity contracts and life insurance policies have
certain membership interests in Pacific Mutual Holding Company, consisting
principally of the right to vote on the election of the Board of Directors of
the mutual holding company and on other matters, and certain rights upon
liquidation or dissolutions of the mutual holding company.
The principal underwriter for the Contracts is Pacific Mutual Distributors,
Inc. ("PMD"). PMD is registered as a broker-dealer with the SEC and is a
wholly-owned subsidiary of ours. PMD is located at 700 Newport Center Drive,
Newport Beach, California, 92660.
SEPARATE ACCOUNT
The Separate Account was established by us on November 30, 1989, under
procedures established under California law. The income, gains, or losses of
the Separate Account are credited to or charged against the assets of the
Separate Account without regard to our other income, gains, or losses. Assets
in the Separate Account attributable to the reserves and other liabilities
under the Contracts are not chargeable with liabilities arising from any other
business that we conduct. We own the assets in the Separate Account and are
required to maintain sufficient assets in the Separate Account to meet all
Separate Account obligations under the Contracts. We may transfer to our
General Account assets that exceed anticipated obligations of the Separate
Account. All obligations arising under the Contracts are general corporate
obligations of ours. We may invest our own assets in the Separate Account for
other purposes, but not to support contracts other than variable annuity
contracts, and may accumulate in the Separate Account proceeds from Contract
charges and investment results applicable to those assets.
The Separate Account is currently divided into fourteen Variable Accounts.
Each Variable Account invests exclusively in shares of a specific Portfolio of
the Fund. We may in the future establish additional Variable Accounts of the
Separate Account, which may invest in other Portfolios of the Fund or in other
securities, mutual funds, or investment vehicles.
14
<PAGE>
The Separate Account is not the sole investor in the Fund. Investment in the
Fund by other separate accounts in connection with variable annuity and
variable life insurance contracts may create conflicts. See MORE ON THE FUND'S
SHARES in the accompanying Prospectus for the Fund.
The Separate Account is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940 (the "1940 Act"). Registration with
the SEC does not involve supervision by the SEC of the administration or
investment practices of the Separate Account or of us.
PACIFIC SELECT FUND
The Fund is a diversified, open-end management investment company of the
series type. The Fund is registered with the SEC under the 1940 Act. The Fund
currently has fourteen separate Portfolios, each of which pursues different
investment objectives and policies.
Shares of the Fund currently are offered only for purchase by separate
accounts of ours and an affiliated insurer to serve as an investment medium
for variable annuity contracts and for variable life insurance policies issued
by these insurers. Shares of the Fund may also be sold in the future to
separate accounts of other insurance companies, either affiliated and not
affiliated with us.
15
<PAGE>
The chart below summarizes some basic data about each Portfolio of the Fund.
There can be no assurance that any Portfolio will achieve its objective. More
detailed information is contained in the accompanying prospectus of the Fund,
including information on the risks associated with the investments and
investment techniques of each of the Portfolios.
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ CAREFULLY
BEFORE INVESTING.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
<C> <C> <S> <C>
Money Market Current income consistent Highest quality money Pacific Life
with preservation of capital market instruments.
- ------------------------------------------------------------------------------------------------------------
High Yield Bond High level of current income Intermediate and long- Pacific Life
term, high-yielding,
lower and medium quality
(high risk) fixed-income
securities.
- ------------------------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific Investment
consistent with prudent marketable debt Management Company
investment management securities. Will
normally maintain an
average portfolio
duration of 3-7 years.
- ------------------------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government Pacific Investment
Securities consistent with prudent securities including Management Company
investment management futures and options
thereon and high-grade
corporate debt
securities. Will
normally maintain an
average portfolio
duration of 3-7 years.
- ------------------------------------------------------------------------------------------------------------
Growth Growth of capital Common stock. Capital Guardian
Trust Company
- ------------------------------------------------------------------------------------------------------------
Aggressive Capital appreciation Common stock of small Columbus Circle Investors
Equity emerging growth and
medium capitalization
companies.
- ------------------------------------------------------------------------------------------------------------
Growth LT Long-term growth of capital Common stock. Janus Capital Corporation
consistent with the
preservation of capital
- ------------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Dividend paying common J.P. Morgan Investment
and income stock. Management Inc.
- ------------------------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed income J.P. Morgan Investment
securities. Management Inc.
- ------------------------------------------------------------------------------------------------------------
Equity Capital appreciation Common stocks and Greenwich Street Advisors
securities convertible
into or exchangeable for
common stocks.
- ------------------------------------------------------------------------------------------------------------
Bond and High level of current Investment grade debt Greenwich Street Advisors
Income income consistent with securities.
prudent investment
management and
preservation of capital
- ------------------------------------------------------------------------------------------------------------
Equity Index Provide investment results Stocks included in the Bankers Trust Company
that correspond to the total S&P 500.
return performance of
common stocks publicly traded
in the U.S.
- ------------------------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Morgan Stanley Asset
appreciation corporations domiciled Management Inc.
outside the United
States.
- ------------------------------------------------------------------------------------------------------------
Emerging Long-term growth of capital Common stocks of Blairlogie Capital Management
Markets companies domi-ciled in
emerging market
countries.
</TABLE>
THE GROWTH VARIABLE ACCOUNT THAT INVESTS IN THE GROWTH PORTFOLIO IS
AVAILABLE ONLY TO OWNERS OF CONTRACTS ISSUED PRIOR TO JANUARY 1, 1994. IT IS
NOT AVAILABLE TO OWNERS OF CONTRACTS ISSUED ON OR AFTER JANUARY 1, 1994.
16
<PAGE>
THE INVESTMENT ADVISER
Pacific Life, located at 700 Newport Center Drive, Newport Beach, California
92660, serves as Investment Adviser to each Portfolio of the Fund. We are
registered with the SEC as an investment adviser. For twelve of the
Portfolios, the Investment Adviser and the Fund have engaged other firms to
serve as Portfolio Managers under our supervision.
THE CONTRACT
GENERAL
To the extent that all or a portion of premium payments are allocated to the
Variable Accounts, the Contract is significantly different from a fixed
annuity contract in that it is the Owner under a Contract who assumes the risk
of investment gain or loss rather than us. Upon the maturity of a Contract,
the Contract provides several fixed Annuity Options under which we will pay
specified periodic annuity payments beginning on the Annuity Start Date. The
amount that will be available for annuity payments will depend on the
investment performance of the Variable Accounts to which premiums have been
allocated.
The Contract is available for purchase as a non-tax qualified retirement
plan by an individual. The Contract is also eligible for use in connection
with certain tax qualified retirement plans that meet the requirements of
Sections 401 and 408 of the Internal Revenue Code. Certain Federal tax
advantages are currently available to retirement plans that qualify as (1)
self-employed individuals' retirement plans under Section 401, such as HR-10
or Keogh plans, (2) pension or profit-sharing plans established by an employer
for the benefit of its employees under Section 401, (3) individual retirement
accounts or annuities, including those established by an employer as a
simplified employee pension plan under Section 408, (4) Section 403(b) Tax-
Sheltered Annuities, and (5) Section 457 plans. Joint Owners are permitted on
a Contract issued pursuant to a Non-Qualified Plan. The Contract is not
available for use in connection with tax qualified retirement plans under
Section 403(b) unless otherwise approved by us.
APPLICATION FOR A CONTRACT
Any person wishing to purchase a Contract may submit an application and an
initial premium to us, as well as any other form or information that we may
require. We reserve the right to reject an application or premium payment for
any reason, subject to our underwriting standards and guidelines and any
applicable state or Federal law relating to nondiscrimination.
The maximum Age of an Annuitant for which a Contract will be issued is 85.
The Annuitant's Age is calculated as of his or her nearest birthday. If there
are Joint Annuitants, the maximum issue Age will be determined by reference to
the younger Annuitant. If the sole Contract Owner or sole annuitant named in
the application for a Contract dies prior to our issuance of a Contract, then
the application for the Contract and/or any Contract issued shall be deemed
null and void; and any premiums we receive including any proceeds received in
connection with an exchange or transfer, will be returned to the
applicant/Owner or the applicant/Owner's estate.
PREMIUM PAYMENTS
The minimum initial premium for the purchase of a Contract is $5,000 in
connection with a Non-Qualified Plan and $2,000 in connection with a Qualified
Plan. Thereafter, the Contract Owner may choose the amount and frequency of
premium payments, except that the minimum subsequent premium is $250 for both
Non-Qualified and Qualified Plans, except for individual retirement annuities
and simplified employee pension plans, in which case it is $50. No minimum
initial or subsequent premium requirements will apply to a Contract purchased
in connection with the Texas Optional Retirement Program. We may reduce the
minimum premium requirements under certain circumstances, such as for group or
sponsored arrangements.
Any premium that results in total premiums paid under a Contract exceeding
$1,000,000 will not be accepted without our prior approval. No premium or
transfer can be allocated to the Fixed Account without our prior
17
<PAGE>
approval if, immediately after the premium payment or transfer, the
Accumulated Value in the Fixed Account would be $250,000 or more.
An initial premium payment will be applied not later than the end of the
second Valuation Date after the Valuation Date it is received by us if the
premium is preceded or accompanied by sufficient information necessary to
establish an account and properly credit such premium payment. If we do not
receive sufficient information, we will notify the applicant that we do not
have the necessary information to issue a Contract. If the necessary
information is not provided to us within five Valuation Dates after the
Valuation Date on which we first receive the initial premium (or, if sooner,
other period required by law), or if we determine we cannot otherwise issue
the Contract, we will return the initial premium to the applicant unless the
applicant consents to our retaining the premium until the requested
information has been provided.
Subsequent premiums will be credited as of the end of the Valuation Period
in which they are received by us. Premium payments after the initial premium
may be made at any time prior to the Annuity Start Date, so long as the
Annuitant is living. Subsequent premiums under a Qualified Plan may be limited
by the terms of the plan and provisions of the Internal Revenue Code. Premiums
may be paid monthly via electronic funds transfer under the Uni-Check plan
where you authorize us to withdraw premiums from your checking account each
month. The minimum initial premium can be met by payment under the Uni-Check
plan.
ALLOCATION LIMITATION
The Growth Variable Account that invests in the Growth Portfolio is
available only to Owners of Contracts issued prior to January 1, 1994. It is
not available to Owners of Contracts issued on or after January 1, 1994.
ALLOCATION OF PREMIUMS
In an application for a Contract, you select the Investment Options to which
premium payments will be allocated. During the Free-Look Period, except as
indicated below, premiums will be allocated according to your instructions
contained in the application (or more recent instructions received, if any).
For residents of states that require a refund of premiums to a Contract Owner
who returns a Contract during the Free-Look Period, premiums received during
the Free-Look Period will usually be allocated to the Money Market Variable
Account. The Accumulated Value will then be automatically allocated according
to your instructions contained in the application (or, if received more
recently, in written instructions) 15 days after the Contract is issued.
Premiums credited to the Contract after this time will be allocated according
to your most recent instructions as of the end of the Valuation Period in
which the premiums are received by us. If your Contract is issued in exchange
for another annuity contract or a life insurance contract, our administrative
procedures may vary depending on the state in which your Contract is issued.
A Contract Owner may change the premium allocation instructions by
submitting a proper written request to us. Changes in premium allocation
instructions may be made by telephone provided an authorization for telephone
requests is on file with us. A proper change in allocation instructions will
be effective upon receipt by us and will continue in effect until subsequently
changed. Changes in the allocation of future premiums have no effect on
existing Accumulated Value. Such Accumulated Value, however, may be
transferred among the Investment Options in the manner described in "Transfers
of Accumulated Value."
DOLLAR COST AVERAGING OPTION
We currently offer an option under which you may dollar cost average your
allocations in the Variable Accounts under the Contract by authorizing us to
make periodic allocations of Accumulated Value from any one Variable Account
to one or more of the other Variable Accounts, subject to the limitation on
the Growth Variable Account. You may authorize us to make periodic allocations
from the Fixed Account to one or more Variable Accounts. Dollar Cost Averaging
allocations may not be made from the Fixed Account and a Variable Account at
the same time. Dollar cost averaging is a systematic method of investing in
which securities are purchased at regular intervals in fixed dollar amounts so
that the cost of the securities gets averaged over time and possibly
18
<PAGE>
over various market cycles. The option will result in the allocation of
Accumulated Value to one or more Variable Accounts, and these amounts will be
credited at the Accumulation Unit values as of the end of the Valuation Period
during which each transfer is processed. Since the value of Accumulation Units
will vary, the amounts allocated to a Variable Account will result in the
crediting of a greater number of units when the Accumulation Unit value is low
and a lesser number of units when the Accumulation Unit value is high.
Similarly, the amounts transferred from a Variable Account will result in a
debiting of a greater number of units when the Accumulation Unit value is low
and a lesser number of units when the Accumulation Unit value is high. Dollar
cost averaging does not guarantee profits, nor does it assure that you will
not have losses.
You may request Dollar Cost Averaging by sending a proper written request to
us, or by telephone request provided an authorization for telephone requests
is on file with us. The Contract Owner must designate the specific dollar
amounts or percentages to be transferred, the Variable Account or Accounts to
which the transfer will be made, the desired frequency of the transfer, which
may be on a monthly, quarterly, semi-annual, or annual basis, and the length
of time during which the transfers shall continue or the total amount to be
transferred over time.
To elect the Dollar Cost Averaging Option, the Accumulated Value in the
Variable Account or Fixed Account from which the Dollar Cost Averaging
transfers will be made must be at least $5,000. The minimum amount that may be
transferred to any one Variable Account is $50. We may discontinue, modify, or
suspend the Dollar Cost Averaging Option at any time. See the SAI for further
information on the Dollar Cost Averaging feature.
PORTFOLIO REBALANCING OPTION
We currently offer an option which allows Contract Owners who are not
currently Dollar Cost Averaging to maintain the percentage of Contract Value
allocated to each Variable Investment Option at a pre-set level (e.g., 30% in
the Equity Index Variable Account, 40% in the Managed Bond Variable Account,
and 30% in the Growth LT Variable Account). Periodically, we will "rebalance"
the Contract Value to the percentages specified by you. Rebalancing may result
in transferring amounts from a Variable Account earning a relatively higher
return to one earning a relatively lower return. The Fixed Option is not
available for rebalancing. More detailed information appears in the SAI.
TRANSFERS OF ACCUMULATED VALUE
During the Accumulation Period and after the Free-Look Period, you may
transfer Accumulated Value among the Variable Accounts upon proper written
request to us. Transfers may be made by telephone if an authorization for
telephone requests is on file with us. Transfer requests received after 1:00
p.m. Pacific Time, or the close of the New York Stock Exchange, if earlier,
will be processed as of the end of the next following Valuation Date.
Currently there are no limitations on the number of transfers between Variable
Accounts, no minimum amount required for a transfer (except as required under
the Dollar Cost Averaging Option), nor any minimum amount required to be
remaining in a given Variable Account after a transfer. Owners of Contracts
issued prior to January 1, 1994 may continue to transfer to or from the Growth
Variable Account.
Accumulated Value may also be transferred from the Variable Accounts to the
Fixed Account. Transfers from the Fixed Account to the Variable Accounts are
restricted as described in "The Fixed Account".
No charges are currently imposed upon transfers. We reserve the right,
however, at a future date to charge a transfer fee of $10 per transaction on
the thirteenth and any subsequent transfer in any Contract Year. See "Transfer
Fee". We also reserve the right (unless otherwise required by law) to limit
the size of transfers and remaining balances, to limit the number and
frequency of transfers, and to discontinue telephone transfers.
ACCUMULATED VALUE
The Accumulated Value is the sum of the amounts under the Contract held in
each Variable Account of the Separate Account and in the Fixed Account, as
well as the amount set aside in our Loan Account to secure any Contract Debt.
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On each Valuation Date, the portion of the Accumulated Value allocated to
any particular Variable Account will be adjusted to reflect the investment
experience of that Variable Account. See "Determination of Accumulated Value,"
below. No minimum amount of Accumulated Value is guaranteed. You bear the
entire investment risk relating to the investment performance of your
Accumulated Value allocated to the Variable Accounts.
DETERMINATION OF ACCUMULATED VALUE
The Accumulated Value will vary to a degree that depends upon several
factors, including investment performance of the Variable Accounts to which
Accumulated Value has been allocated, payment of premiums, the amount of any
outstanding Contract Debt, partial withdrawals, and the charges assessed in
connection with the Contract. The amounts allocated to the Variable Accounts
will be invested in shares of the corresponding Portfolios of the Fund. The
investment performance of the Variable Accounts will reflect increases or
decreases in the net asset value per share of the corresponding Portfolios and
any dividends or distributions declared by a Portfolio. Any dividends or
distributions from any Portfolio of the Fund will be automatically reinvested
in shares of the same Portfolio, unless we, on behalf of the Separate Account,
elect otherwise.
Assets in the Variable Accounts are divided into Accumulation Units, which
are accounting units of measure used to calculate the value of a Contract
Owner's interest in a Variable Account. When a Contract Owner allocates
premiums to a Variable Account, the Contract is credited with Accumulation
Units. The number of Accumulation Units to be credited is determined by
dividing the dollar amount allocated to the particular Variable Account by the
Accumulation Unit value for the particular Variable Account at the end of the
Valuation Period in which the premium is credited. In addition, other
transactions including loans, full or partial withdrawals, transfers, and
assessment of certain charges against the Contract affect the number of
Accumulation Units credited to a Contract. The number of units credited or
debited in connection with any such transaction is determined by dividing the
dollar amount of such transaction by the unit value of the affected Variable
Account. The Accumulation Unit value of each Variable Account is determined on
each Valuation Date at or about 1:00 p.m. Pacific Time. The number of
Accumulation Units credited to a Contract shall not be changed by any
subsequent change in the value of an Accumulation Unit, but the dollar value
of an Accumulation Unit may vary from Valuation Date to Valuation Date
depending upon the investment experience of the Variable Account and charges
against the Variable Account.
The Accumulation Unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated
by dividing the value of each Variable Account's net assets by the number of
Accumulation Units credited to the Variable Account on that date.
Determination of the value of the net assets of a Variable Account takes into
account the following: (1) the investment performance of the Variable Account,
which is based upon the investment performance of the corresponding Portfolio
of the Fund, (2) any dividends or distributions paid by the corresponding
Portfolio, (3) the charges, if any, that may be assessed by us for taxes
attributable to the operation of the Variable Account, or to our operations
with respect to the Contract, and (4) the mortality and expense risk charge
under the Contract.
FULL AND PARTIAL WITHDRAWALS
You may obtain proceeds from a Contract by surrendering the Contract for its
Full Withdrawal Value or by making a partial withdrawal. A full or partial
withdrawal, including a scheduled partial withdrawal, may be taken from your
Contract's Accumulated Value at any time while the Annuitant is living and
before the Annuity Start Date, subject to the limitations under the applicable
plan for Qualified Plans and applicable law. A full or unscheduled partial
withdrawal request will be effective as of the end of the Valuation Period
that we receive a proper written request.
The proceeds received upon a full withdrawal will be the Contract's Full
Withdrawal Value. The Full Withdrawal Value is equal to the Accumulated Value
as of the end of the Valuation Period during which a proper withdrawal request
is received by us minus any maintenance fee, any applicable contingent
deferred sales charge, and any outstanding Contract Debt. A partial withdrawal
may be requested for a specified percentage or dollar amount of Accumulated
Value. Each unscheduled partial withdrawal must be for at least $500. A
request for a
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partial withdrawal will result in a payment by us in accordance with the
amount specified in the partial withdrawal request. Upon payment, your
Accumulated Value will be reduced by an amount equal to the payment and any
applicable contingent deferred sales charge, and any applicable premium tax.
If a partial withdrawal is requested that would leave the Full Withdrawal
Value in the Contract less than $500 then we reserve the right to treat the
partial withdrawal as a request for a full withdrawal.
The amount of a partial withdrawal will be allocated proportionately from
your Accumulated Value in the Variable Accounts and the Fixed Account, except
that you may instruct us otherwise with regard to an unscheduled partial
withdrawal. A full or partial withdrawal, including a scheduled partial
withdrawal, may result in the deduction of a contingent deferred sales charge.
See "Contingent Deferred Sales Charge".
A full or partial withdrawal, including a scheduled withdrawal, may result
in a premium tax charge to reimburse us for any premium tax on a Contract that
may be imposed by various states and municipalities. See "Premium Tax and
Other Taxes".
A full or partial withdrawal, including a scheduled partial withdrawal, may
result in receipt of taxable income to you and, in some instances, in a
penalty tax. In the case of Contracts issued in connection with retirement
plans that meet the requirements of Section 401(a), 401(k), 408 or 457 of the
Internal Revenue Code, reference should be made to the terms of the particular
Qualified Plan for any limitations or restrictions on withdrawals. In the case
of Contracts issued in connection with tax qualified retirement plans under
Section 403(b), Section 403(b) imposes restrictions on certain distributions.
For more information, see "Restrictions on Withdrawals from 403(b) Programs".
The tax consequences of a withdrawal under the Contract should be carefully
considered. See "Federal Tax Matters".
PREAUTHORIZED SCHEDULED WITHDRAWALS
We have implemented a feature under which preauthorized scheduled
withdrawals may be elected. Under this feature, you may elect to receive
preauthorized scheduled partial withdrawals while the Annuitant is living
before the Annuity Start Date and after the Free-Look Period by sending a
properly completed Preauthorized Scheduled Withdrawal Request form to us. A
Contract Owner may designate the scheduled withdrawal amount as a percentage
of Accumulated Value allocated to the Variable Accounts and Fixed Account, or
as a specified dollar amount, and the desired frequency of the scheduled
withdrawals, which may be monthly, quarterly, semi-annually or annually. The
day of the month that you wish each scheduled withdrawal to be effected may
also be elected. Scheduled withdrawals may be stopped or modified upon your
proper written request received by us at least 10 days in advance. A proper
request must include the written consent of any effective assignee or
irrevocable Beneficiary, if applicable.
Each scheduled withdrawal must be at least $100. Upon payment, your
Accumulated Value will be reduced by an amount equal to the payment proceeds
plus any applicable contingent deferred sales charge and any applicable
premium tax. Any scheduled withdrawal that equals or exceeds the Full
Withdrawal Value will be treated as a full withdrawal. In no event will
payment of a scheduled withdrawal exceed the Full Withdrawal Value less any
applicable premium tax. The Contract will automatically terminate if a
scheduled withdrawal causes the Contract's Full Withdrawal Value to equal
zero.
Each scheduled withdrawal will be effected as of the end of the Valuation
Period during which the withdrawal is scheduled. The deduction caused by the
scheduled withdrawal will be allocated proportionately from your Accumulated
Value in the Variable Accounts and the Fixed Account.
FREE-LOOK RIGHT
You may return a Contract within the Free-Look Period, which is usually 10
days after you receive the Contract (15 days in Colorado, 20 days in North
Dakota and Idaho, and 30 days if you reside in California and are age 60 or
older) unless state law requires otherwise.
Premiums received during the Free-Look Period will, except as indicated
below, be allocated according to your instructions contained in the
application or more recent instructions, if any. The returned Contract will
then
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be deemed void and we will refund any premium payments allocated to the Fixed
Account and any Variable Account Accumulated Value as of the end of the
Valuation Period in which we receive the Contract plus any Contract Charges
and Fees deducted from your Accumulated Value allocated to the Variable
Accounts. Thus, an Owner who returns a Contract within the Free-Look Period
bears only the investment risk, (i.e., the Owner's Accumulated Value allocated
to the Variable Accounts may increase or decrease based on investment
performance), but the Owner will not be subject to any Contract Charges or
Fees which would otherwise be deducted from Accumulated Value. Any amount
credited to your Contract as described in "Variation of Charges" and any
earnings thereon will not be included in the amount refunded to you.
If you reside in a state that requires us to return premium payments if you
exercise the Free-Look Right, we will refund any premiums received or, if
required by your state of residence, premiums allocated to the Fixed Account
plus the greater of premiums allocated to the Separate Account or Accumulated
Value in the Separate Account plus any Contract charges and fees deducted from
the Variable Accounts on the contract date. Premiums received during the Free-
Look Period usually will initially be allocated to the Money Market Variable
Account. The Accumulated Value in the Money Market Variable Account will be
transferred automatically to the Variable Accounts and the Fixed Account
elected in your application (or, if received more recently, in written
instructions) 15 days after the Contract is issued. In Pennsylvania, we will
refund premiums allocated to the Fixed Account plus the Accumulated Value in
the Separate Account plus any Charges deducted from the Separate Account on
the Contract Date. As of the date of this Prospectus, the following states
require return of premium payments:
Georgia North Carolina
Idaho Oklahoma
Michigan South Carolina
Missouri Utah
Nebraska Washington
West Virginia
If your Contract is issued in exchange for another annuity contract or a
life insurance policy, our administrative procedures may vary, depending on
the state in which your contract is issued.
DEATH BENEFIT
If the Annuitant dies during the Accumulation Period, we will pay the death
benefit proceeds to the Beneficiary upon receipt of due proof of the
Annuitant's death and instructions regarding payment to the Beneficiary. If
there are Joint Annuitants, the death benefit proceeds will only be payable
upon receipt of due proof of death of both Annuitants during the Accumulation
Period and instructions regarding payment. In the event there is no
Beneficiary living on the date of death of the Annuitant during the
Accumulation Period, we will pay the death benefit proceeds to the Owner, if
living; otherwise to the Owner's estate. If the death of the Annuitant occurs
on or after the Annuity Start Date and there is no living Beneficiary on the
date of death, any remaining unpaid payments for a specified period or
specified amount will be made to the Owner, if living; otherwise to the
Owner's estate.
The death benefit proceeds will be the death benefit reduced by any
outstanding Contract Debt. On or before the fifth Contract Anniversary, the
amount of the death benefit will be the greater of (1) the Accumulated Value
as of the end of the Valuation Period in which we receive due proof of death
and instructions regarding payment, or (2) the aggregate premium payments
received less any reductions caused by previous withdrawals. Unless otherwise
required by state insurance authorities, after the fifth Contract Anniversary
the amount of the death benefit will be the greater of (1) the Accumulated
Value as of the end of the Valuation Period in which we receive due proof of
death and instructions regarding payment, (2) the aggregate premium payments
received less any reductions caused by previous withdrawals, or (3) subject to
approval of state insurance authorities, the "Minimum Guaranteed Death
Benefit." After the fifth Contract Anniversary up to the tenth Contract
Anniversary, the Minimum Guaranteed Death Benefit is equal to the Accumulated
Value on the fifth Contract Anniversary plus any premiums received after the
fifth Contract Anniversary and less any reductions caused by previous
withdrawals taken after the fifth Contract Anniversary. The Minimum Guaranteed
Death Benefit is adjusted on the tenth Contract Anniversary and each
succeeding fifth Contract Anniversary to the greater of the most recent
Minimum Guaranteed Death Benefit or the Accumulated Value as of such
Anniversary, and during
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the next five year interval, is decreased by any reductions caused by partial
withdrawals and increased by any premium payments since such fifth Contract
Anniversary. After the Contract Year in which the Annuitant reaches Age 85, or
after the death of the Owner or Annuitant, whichever occurs first, the Minimum
Guaranteed Death Benefit will no longer be adjusted on each fifth Contract
Anniversary (except for adjustments for reductions caused by partial
withdrawals and for premium payments).
The death benefit proceeds will be paid to the Beneficiary in a single sum
or under one of the Annuity Options, as directed by you or as elected by the
Beneficiary. If the Beneficiary is to receive annuity payments under an
Annuity Option, there may be limits under applicable law on the amount and
duration of payments that the Beneficiary may receive, and requirements
respecting timing of payments. A tax adviser should be consulted in
considering Annuity Options.
DEATH OF OWNER
If the Owner of a Contract issued in connection with a Non-Qualified Plan
dies before the Annuitant and before the Annuity Start Date, the death benefit
proceeds will be paid upon receipt of due proof of the Owner's death and
instructions regarding payment. If there are Joint Owners, the term Owner
means the first Joint Owner to die.
Death benefit proceeds will be paid to the Joint Owner or Contingent Owner,
if any, otherwise to the Owner Beneficiary. If there is no Owner Beneficiary,
death benefit proceeds will be paid to the Owner's estate. If an Owner is not
also an Annuitant, then in the event that the deaths of the Owner and the
Annuitant occur under circumstances in which it cannot be determined who died
first, payment will be made to the Annuitant's Beneficiary. If the Owner and
the Annuitant are the same, payment will be made to the Annuitant's
Beneficiary. If the surviving spouse of the deceased Owner is the Owner
Beneficiary, or is the sole surviving joint tenant or Contingent Owner, such
spouse may continue this Contract in force as Owner (and Annuitant if the
deceased Owner was the sole Annuitant), rather than receive the death benefit
proceeds, until the earliest of the spouse's death, the death of the
Annuitant, or the Annuity Start Date. For any Designated Beneficiary other
than a surviving spouse any death benefit proceeds under this Contract must
begin distribution within five years after the Owner's death. In order to
satisfy this requirement, the designated recipient must receive a lump sum
payment or elect to receive an annuity for life or over a period that does not
exceed the life expectancy of the designated recipient with annuity payments
that start within one year after the Owner's death. If an election to receive
an annuity is not made within 60 days of our receipt of proof in proper form
of the Owner's death or, if earlier, 60 days (or shorter period as we permit)
prior to the first anniversary of the Owner's death, the lump sum option will
be deemed elected, unless otherwise required by law. If the lump sum option is
deemed elected, we will consider that deemed election as receipt of
instructions regarding payment of death benefit proceeds. If a Non-Qualified
Contract has Joint Owners, this requirement applies to the first Contract
Owner to die.
The death benefit is as stated in the "Death Benefit" section, except that
the Owner's Age, as opposed to the Annuitant's, is used in determining the
death benefit.
If the Owner of the Contract is a non-individual person, these distribution
rules are applicable upon the death of or a change in the primary Annuitant,
except that the "Death Benefit" will be the Accumulated Value if the Owner
elects to maintain the Contract, or the Full Withdrawal Value if the Owner
elects a cash distribution, as of the Valuation Date we receive in proper form
the request to change the primary Annuitant and instructions regarding
distribution or maintenance. These distribution requirements do not apply to
Contracts issued in connection with Qualified Plans.
On the death of any Owner on or after the Annuity Start Date, any guaranteed
payments remaining unpaid will continue to be paid to the Annuitant pursuant
to the Annuity Option in force at the date of death. No death benefit will be
paid if the Owner dies on or after the Annuity Start Date. On the death of the
Annuitant, any unpaid benefit will be paid to the Beneficiary of the
Annuitant, if living, otherwise to the Owner, if living; otherwise to the
Owner's estate. See "Federal Tax Matters" for a discussion of the tax
consequences in the event of death.
The above distribution rules will determine when a distribution must be made
under the Contract. These rules do not affect our determination of the amount
of benefit payable or distribution proceeds.
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CHARGES AND DEDUCTIONS
CONTINGENT DEFERRED SALES CHARGE
We do not make any deduction for sales charges from premium payments paid
for a Contract before allocating them to your Accumulated Value. However,
except as set forth below, a contingent deferred sales charge (which may also
be referred to as a withdrawal charge), may be assessed by us on a full or
partial withdrawal, depending upon the amount of time such withdrawal amounts
have been held under the Contract. The withdrawal charge will be waived on
withdrawals to the extent that total withdrawals that are free of charge
during the Contract Year do not exceed 10% of the sum of the premium payments
made during the current Contract Year up to the Valuation Date of the
withdrawal and the preceding four Contract Years. If a full or partial
withdrawal, including a scheduled withdrawal, in excess of the 10% allowable
amount is made, a withdrawal charge may be assessed on the amount withdrawn in
excess of the 10% allowable amount. If the Contract is surrendered or a
scheduled withdrawal causes the Full Withdrawal Value to equal zero, any
amount allocated to the Loan Account will be included in determining the
charge.
For purposes of the charge, a withdrawal will be attributed to premium
payments in the order they were received by us, then earnings, even if you
elect to redeem amounts allocated to an Account (including the Fixed Account)
other than an Account to which premium payments were allocated. The amount of
the charge will depend upon the number of Contract Years that the premiums to
which the withdrawal is attributed have remained credited under the Contract,
as follows:
<TABLE>
<CAPTION>
AGE OF PREMIUM
IN CONTRACT YEARS WITHDRAWAL CHARGE
----------------- -----------------
<S> <C>
1 6%
2 6%
3 5%
4 4%
5 3%
6 0%
</TABLE>
For purposes of determining the age of the premium, the premium is
considered age 1 in the Contract Year the premium is received by us and
increases in age each Contract Anniversary thereafter. In no event will the
amount of any withdrawal charge, when added to any such charge previously
assessed against any amount withdrawn from the Contract, exceed 6% of the
premiums paid under a Contract. In addition, no charge will be imposed (1)
upon payment of death benefit proceeds under the Contract, (2) upon
withdrawals by you to meet the minimum distribution rules for Qualified Plans
as they apply to amounts held under the Contract, or (3) upon annuitization if
your Contract has been in force two years, and if an Annuity Option offered
under the Contract is elected or proceeds are applied to purchase any other
Annuity Option then offered by us, and, in each instance, the Annuity Period
is at least five years. Subject to approval of state insurance authorities,
after the first Contract Anniversary, the withdrawal charge will also be
waived on a full or partial withdrawal if the Annuitant has been diagnosed
with a medically determinable condition which results in a life expectancy of
12 months or less. This waiver will be subject to medical evidence
satisfactory to us, and certain other conditions specified in the Contract.
The withdrawal charge will be assessed against the Variable Accounts and Fixed
Account in the same proportion as the withdrawal proceeds are allocated. (See
the Appendix for examples of the operation of the withdrawal charge.)
We pay sales commissions to broker-dealers and other expenses associated
with promotion and sales of the Contracts. The withdrawal charge is designed
to reimburse us for these costs, although it is expected that actual expenses
will be greater than the amount of the charge. To the extent that all sales
expenses are not recovered from the charge, such expenses may be recovered
from other charges, including amounts derived indirectly from the charge for
mortality and expense risks. Broker-dealers may receive aggregate commissions
up to 6.5% of aggregate premium payments. Under certain circumstances and in
exchange for lower initial commissions, certain sellers of Contracts may be
paid a persistency trail commission which will take into account, among other
things, the length of time premium payments have been held under a Contract,
and Contract Accumulated Values. A trail commission is not anticipated to
exceed 1.00%, on an annual basis, of the
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Accumulated Value considered in connection with the trail commission. We may
also pay override payments, expense allowances, bonuses, wholesaler fees and
training allowances. Registered representatives earn commissions from the
broker-dealers with which they are affiliated and such arrangements may vary.
In addition, registered representatives who meet specified production levels
may qualify, under sales incentive programs adopted by us, to receive non-cash
compensation such as expense-paid trips, expense-paid educational seminars,
and merchandise.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from the assets of each Variable Account for
mortality and expense risks assumed by us under the Contracts. The charge is
equal to an annual rate of 1.25% of the average daily net assets of each
Variable Account. This amount is intended to compensate us for certain
mortality and expense risks we assume in offering and administering the
Contracts and in operating the Variable Accounts. The 1.25% charge consists of
approximately .25% for expense risk and 1.00% for mortality risk.
The expense risk is the risk that our actual expenses in issuing and
administering the Contracts and operating the Variable Accounts will be more
than the charges assessed for such expenses. The mortality risk borne by us is
the risk that Annuitants, as a group, will live longer than our actuarial
tables predict. In this event, we guarantee that annuity payments will not be
affected by a change in mortality experience that results in the payment of
greater annuity income than assumed under the Annuity Options in the Contract.
We also assume a mortality risk in connection with the death benefit under the
Contract.
We may ultimately realize a profit from this charge to the extent it is not
needed to cover mortality and administrative expenses, but we may realize a
loss to the extent the charge is not sufficient. We may use any profit derived
from this charge for any lawful purpose, including any distribution expenses
not covered by the contingent deferred sales charge.
ADMINISTRATIVE CHARGE
We deduct a monthly administrative charge equal to .000125 multiplied by a
Contract's Accumulated Value in the Variable Accounts and the Fixed Account,
which will be deducted monthly, beginning on the Monthly Anniversary following
the Contract Date, during the Accumulation Period. This charge is equivalent
to an annual rate of 0.15% of a Contract's Accumulated Value in the Variable
Accounts and the Fixed Account. On Contracts issued in connection with
applications received by us before May 1, 1992, the rate of this charge is
currently reduced to .0001 (.12% on an annual basis), and, if the initial
premium is $50,000 or more on such contracts, to .00005 (.06% on an annual
basis). We reserve the right to increase the administrative charge on such
contracts, but in no event will the charge exceed 0.15% on an annual basis.
The charge will be assessed to each Account in proportion to the Contract's
Accumulated Value in each Variable Account and the Fixed Account. The charge
is deducted at the Contract level and results in the debiting of Accumulation
Units in the Variable Accounts and/or a deduction from the Fixed Account.
MAINTENANCE FEE
During the Accumulation Period, an annual fee of $30 is deducted on each
Contract Anniversary to cover the costs of maintaining records for the
Contracts. The fee will be assessed to each Account in proportion to the
Contract's Accumulated Value in each Variable Account and the Fixed Account.
Upon annuitization or a full withdrawal, the charge will be pro-rated for the
portion of the Contract year during which the Contract was in force. This
charge is currently waived on Contracts issued for which premium payments
received in the first Contract Year equal $50,000 or more, or if you annuitize
or make a full withdrawal on other than your Contract Anniversary. We reserve
the right to impose the charge on Contracts on which the fee is waived in the
future. The charge is deducted at the Contract level and results in the
debiting of Accumulation Units in the Variable Accounts and or a deduction
from the Fixed Account.
TRANSFER FEE
No transfer fee is currently imposed. We reserve the right to assess a
transfer fee of $10 per transaction on the thirteenth and any subsequent
transfer occurring in a Contract year. The transfer fee will be deducted from
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the remaining balances in the Variable Accounts and Fixed Account from which
the transfer is made. If the remaining balances are insufficient to pay the
transfer fee, the fee will be deducted from the transferred Accumulated
Values.
PREMIUM TAX AND OTHER TAXES
Various states and municipalities impose a tax on premiums on annuity
contracts received by insurance companies. Whether or not a premium tax is
imposed will depend upon, among other things, your state of residence, the
Annuitant's state of residence, and the insurance tax laws and our status in a
particular state. We assess a premium tax charge to reimburse us for premium
taxes that it incurs on behalf of the Contract Owner. This charge will be
deducted upon annuitization or upon full withdrawal if premium taxes are
incurred and are not refundable. Partial withdrawals, including scheduled
withdrawals, may result in a premium tax charge if a premium tax is incurred
by us and it is not refundable. We reserve the right to deduct premium taxes
when incurred. Premium tax rates currently range from 0% to 3.5%, but are
subject to change by a governmental entity. We may charge Variable Accounts of
the Separate Account for the Federal, state, or local income taxes we incur
that are attributable to the Separate Account and its Variable Accounts, or to
our operations with respect to the Contracts, or that are attributable to
payment of premiums or acquisition costs under the Contracts. No such charge
is currently assessed. See "Tax Status of Pacific Life and the Separate
Account."
VARIATIONS IN CHARGES
We may agree to reduce or waive the withdrawal charge, administrative
charges, or the maintenance fee, or credit additional amounts under our
Contracts, in situations where selling and/or maintenance costs associated
with the Contracts are reduced, such as the sale of several Contracts to the
same Contract Owner(s), sales of large Contracts, sales of Contracts in
connection with a group or sponsored arrangement or mass transactions over
multiple Contracts.
In addition, we may agree to reduce or waive some or all of such charges
and/or credit additional amounts under our Contracts, for those Contracts sold
to persons who meet criteria established by us, who may include current and
retired officers, directors and employees of us and our affiliates, trustees
of Pacific Select Fund, registered representatives and employees of
broker/dealers with a current selling agreement with us and their affiliates,
employees of affiliated asset management firms and certain other service
providers, and immediate family members of such persons ("Eligible Persons").
We will credit additional amounts to Contracts owned by Eligible Persons if
such Contracts are purchased directly through Pacific Mutual Distributors,
Inc. Under such circumstances, Eligible Persons will not be afforded the
benefit of services of any other broker/dealer nor will commissions be payable
to any broker/dealer in connection with such purchases. Eligible Persons must
contact us directly with servicing questions, Contract changes and other
matters relating to their Contracts. The amount credited to Contracts owned by
Eligible Persons will equal the reduction in expenses we enjoy by not
incurring brokerage commissions in selling such Contracts, with the
determination of the expense reduction and of such crediting being made in
accordance with our administrative procedures. We may also agree to waive
minimum Purchase Payment requirements for Eligible Persons.
We will only reduce or waive such charges or credit additional amounts on
any Contract where expenses associated with the sale of the Contract and/or
costs associated with administering and maintaining the Contract are reduced.
We reserve the right to terminate waiver, reduced charge and crediting
programs at any time, including for issued Contracts.
For certain trusts, we may change the order in which withdrawals are applied
to premium payments and earnings to determine any withdrawal charge.
GUARANTEE OF CERTAIN CHARGES
We guarantee that the charge for mortality and expense risks will not
increase. The maintenance fee is guaranteed not to exceed $30. The
administrative charge is guaranteed not to exceed an annual rate of 0.15% of a
Contract Owner's Accumulated Value less any Contract Debt. We do not intend to
profit from the administrative charge and maintenance fee.
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FUND EXPENSES
Each Variable Account of the Separate Account purchases shares at the net
asset value of the corresponding Portfolio of the Fund. Each Portfolio's net
asset value reflects the investment advisory fee and other expenses that are
deducted from the assets of the Portfolio. The Fund is governed by its Board
of Trustees. The Fund's expenses are not fixed or specified under the terms of
the Contract. The advisory fees and other expenses are more fully described in
the Expense Table and in the Fund's prospectus.
ANNUITY PERIOD
GENERAL
You select the Annuity Start Date at the time of application. The Annuity
Start Date may not be deferred beyond the first day of the month following the
Annuitant's 95th birthday (85th birthday in Pennsylvania, and for certain
trusts, 100th birthday, unless state law requires otherwise), although the
terms of a Qualified Plan generally require annuitization at an earlier age.
If you do not select an Annuity Start Date, the Annuity Start Date will be the
Contract Anniversary nearest the Annuitant's 85th birthday if the Contract is
issued in connection with a Non-Qualified Plan. See "Selection of an Option."
If there are Joint Annuitants, the birth date of the younger Annuitant will be
used to determine the latest Annuity Start Date unless the terms of a
Qualified Plan require otherwise.
On the Annuity Start Date, the proceeds under the Contract will be applied
to provide an annuity under one of the options described below, unless a lump
sum distribution has been elected. The proceeds attributable to the Variable
Accounts will be transferred to the General Account. The proceeds will be
equal to your Accumulated Value in the Investment Options (which excludes
Accumulated Value in the Loan Account) as of the Annuity Start Date, reduced
by any applicable premium taxes, any prorated portion of maintenance fee due,
and any applicable withdrawal charge. However, no withdrawal charge will be
imposed if the Contract has been in force two years, and an Annuity Option is
elected or proceeds are applied to purchase any other Annuity Option then
offered by us, and, in each case, the Annuity Period is five years or longer.
The Contracts provide for five optional annuity forms. A lump sum
distribution may also be elected. Other Annuity Options may be available upon
request at our discretion. All Annuity Options are fixed and the annuity
payments remain constant throughout the Annuity Period. Annuity payments are
based upon annuity rates that vary with the Annuity Option selected. In the
case of Options 1, 2, and 3, the rates will vary based on the Age and sex of
the Annuitant, except that unisex rates are available where required by law.
In the case of Options 4 and 5, as described below, Age and sex are not
considerations. The annuity rates are based upon an assumed interest rate of
4%, compounded annually. If no Annuity Option has been selected, annuity
payments will be made to the Annuitant under an automatic option. For non-
qualified Contracts and Contracts used in connection with a Qualified Plan
under Section 408 of the Internal Revenue Code, the automatic option shall be
an annuity payable during the lifetime of the Annuitant with payments certain
for 120 months under Option 1 or, if a non-qualified Contract and Joint
Annuitants are named, a joint and 50% last survivor annuity under Option 3.
For a Contract used in connection with a Qualified Plan under Section 401 of
the Internal Revenue Code, the automatic option shall be an annuity payable
during the lifetime of the Annuitant with payments certain for 120 months
under Option 1, or, for a married Annuitant, a joint and 50% survivor annuity
as described in Option 2 below.
Annuity payments can be made on a monthly, quarterly, semiannual, or annual
basis, although no payments will be made for less than $50. If the frequency
of payments selected would result in payments of less than $50, We reserve the
right to change the frequency. We also reserve the right to pay the Contract
proceeds in a lump sum if the proceeds are less than $10,000. Once annuity
payments have commenced, an Annuitant or Owner cannot change the Annuity
Option and cannot surrender his or her annuity and receive a lump sum
settlement in lieu thereof.
You may, during the lifetime of the Annuitant, designate or change an
Annuity Start Date, Annuity Option, and Contingent Annuitant, provided we
receive proper written notice at least 30 days prior to the Annuity Start Date
set forth in the Contract. The date selected as the new Annuity Start Date
must be after the date the written notice is received by us.
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The Contract contains annuity tables for each Annuity Option described
below. The tables show the dollar amount of periodic annuity payments for each
$1,000 applied to an Annuity Option. We reserve the right to offer variable
annuity options in the future.
ANNUITY OPTIONS
Option 1--Life Income with Guaranteed Payment of 10 or 20 Years
Periodic annuity payments will be made during the lifetime of the Annuitant
with the promise that if, at the death of the Annuitant, payments have been
made for less than a stated period, which may be ten or twenty years, as
elected, annuity payments will be continued during the remainder of such
period to the Beneficiary.
Option 2--Joint and Survivor
Periodic annuity payments will be made during the lifetime of the primary
Annuitant and, after the death of the primary Annuitant, an amount equal to
50%, 66 2/3%, or 100% (as specified in the election) of such payments will be
paid to the secondary Annuitant named in the election if and so long as such
secondary Annuitant lives. THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED
UNDER THIS OPTION. PAYMENTS CEASE UPON THE DEATH OF THE LAST SURVIVING
ANNUITANT, REGARDLESS OF THE NUMBER OF PAYMENTS RECEIVED.
Option 3--Joint and Last Survivor
Periodic annuity payments will be made while both the Annuitants are living,
and, after the death of either of the Annuitants, an amount equal to 50%, 66
2/3%, or 100% (as specified in the election) of such payments will be paid to
the surviving Annuitant for so long as he or she lives. AS IN THE CASE OF
OPTION 2, THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED UNDER THIS OPTION.
PAYMENTS CEASE UPON THE DEATH OF THE LAST SURVIVING ANNUITANT, REGARDLESS OF
THE NUMBER OF PAYMENTS RECEIVED.
Option 4--Fixed Payments for Specified Period
Periodic annuity payments will be made for a fixed period, which may be from
three to thirty years, as elected, with the guarantee that, if, at the death
of the Annuitant, payments have been made for less than the selected fixed
period, the discounted value, based on the interest rate that we use to
determine the amount of each payment (which will be at least 4%), of the
remaining unpaid payments will be paid to the Beneficiary, if living;
otherwise to the Owner, if living; otherwise to the Owner's estate.
Option 5--Fixed Payments of a Specified Amount
Periodic payments of the amount elected will be made until the amount
applied and interest thereon are exhausted, with the guarantee that, if, at
the death of the Annuitant, all guaranteed payments have not yet been made,
the discounted value, based on the interest rate that we use to determine the
amount of each payment (which will be at least 4%), of the remaining unpaid
payments will be paid to the Beneficiary, if living; otherwise to the Owner,
if living; otherwise to the Owner's estate.
SELECTION OF AN OPTION
You should carefully review the Annuity Options with your financial or tax
adviser, and, for Contracts used in connection with a Qualified Plan,
reference should be made to the terms of the particular plan and the
requirements of the Internal Revenue Code for pertinent limitations respecting
annuity payments and other matters. For instance, under requirements for
retirement plans that qualify under Sections 401 or 408 of the Internal
Revenue Code, annuity payments generally must begin no later than April 1 of
the calendar year following the year in which the Annuitant reaches age 70
1/2. For Non-Qualified Plans, annuity payments must begin no later than the
first day of the month following the Annuitant's 95th birthday. Under
requirements for
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retirement plans that qualify under Sections 401 or 408 of the Internal
Revenue Code, the period elected for receipt of annuity payments under Annuity
Options 1 and 4 generally may be no longer than the joint life expectancy of
the Annuitant and Beneficiary in the year that the Annuitant reaches age 70
1/2, and must be shorter than such joint life expectancy if the Beneficiary is
not the Annuitant's spouse and is more than 10 years younger than the
Annuitant. Under Options 2 and 3, if the secondary or other Annuitant is not
the Annuitant's spouse and is more than 10 years younger than the Annuitant,
the 66 2/3% and 100% elections specified above may not be available. The
restrictions on options for retirement plans that qualify under Sections 401
and 408 also apply to a retirement plan that qualifies under Section 403(b)
with respect to amounts that accrued after December 31, 1986.
THE FIXED ACCOUNT
You may allocate all or a portion of your premium payments and transfer
Accumulated Value to the Fixed Account. Amounts allocated to the Fixed Account
become part of our General Account, which supports our insurance and annuity
obligations. The General Account is subject to regulation and supervision by
the California Department of Insurance as well as the insurance laws and
regulations of other jurisdictions in which the Contract is distributed. In
reliance on certain exemptive and exclusionary provisions, interests in the
Fixed Account have not been registered as securities under the Securities Act
of 1933 (the "1933 Act") and the Fixed Account has not been registered as an
investment company under the Investment Company Act of 1940 (the "1940 Act").
Accordingly, neither the Fixed Account nor any interests therein are generally
subject to the provisions of the 1933 Act or the 1940 Act. We have been
advised that the staff of the SEC has not reviewed the disclosure in this
Prospectus relating to the Fixed Account. This disclosure, however, may be
subject to certain generally applicable provisions of the Federal securities
laws relating to the accuracy and completeness of statements made in the
Prospectus. This Prospectus is generally intended to serve as a disclosure
document only for aspects of a Contract involving the Separate Account and
contains only selected information regarding the Fixed Account. For more
information regarding the Fixed Account, see "The Contract".
Amounts allocated to the Fixed Account become part of our General Account,
which consists of all assets we own other than those in the Separate Account
and our other separate accounts. Subject to applicable law, we have sole
discretion over the investment of the assets of our General Account.
INTEREST
Amounts allocated to the Fixed Account earn interest at a fixed rate or
rates that are paid by us. The Accumulated Value in the Fixed Account earns
interest at an interest rate that is guaranteed to be at least 0.3273% per
month, compounded monthly, which is equivalent to an annual effective rate of
4% per year, and which will accrue daily ("Guaranteed Rate"). Such interest
will be paid regardless of the actual investment experience of the Fixed
Account. In addition, we may in our discretion pay interest at a rate
("Current Rate") that exceeds the Guaranteed Rate. We will determine the
Current Rate, if any, from time to time. If we determine a Current Rate that
exceeds the Guaranteed Rate, premiums or transfers allocated or made to the
Fixed Account during the time the Current Rate is in effect are guaranteed to
earn interest at that particular Current Rate until the next Contract
Anniversary. Upon the Contract Anniversary, a Current Rate or Rates may be
paid that would remain in effect until the next succeeding Contract
Anniversary.
Accumulated Value that was allocated or transferred to the Fixed Account
during one Contract Year may be credited with a different Current Rate than
amounts allocated or transferred to the Fixed Account in another Contract
Year. Therefore, at any given time, various portions of your Accumulated Value
allocated to the Fixed Account may be earning interest at different Current
Rates, depending upon the Contract Year during which such portions were
originally allocated or transferred to the Fixed Account. We bear the
investment risk for the Accumulated Value allocated to the Fixed Account and
for paying interest at the Guaranteed or Current Rates, as applicable, on
amounts allocated to the Fixed Account.
For purposes of determining the interest rates to be credited on remaining
Accumulated Value in the Fixed Account, withdrawals, loans, or transfers from
the Fixed Account will be deemed to be taken from premiums or
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transfers in the order in which they were credited to the Fixed Account, and
interest attributable to each such premium or transfer shall be deemed taken
before the amount of each premium or transfer.
BAIL OUT PROVISION
The first time that the interest rate paid on any portion of your
Accumulated Value allocated to the Fixed Account falls 1% or more below the
initial Current Rate credited to the premium or transfer from which that
portion of Accumulated Value is derived, the limitations on transfers from the
Fixed Account to the Variable Accounts will be waived for 60 days with respect
to that portion of Accumulated Value in the Fixed Account.
DEATH BENEFIT
The death benefit under the Contract will be determined in the same fashion
for a Contract that has Accumulated Value in the Fixed Account as for a
Contract that has Accumulated Value allocated to the Variable Accounts. See
"Death Benefit".
CONTRACT CHARGES
The contingent deferred sales charge, the administrative charge, the
maintenance fee, and premium taxes will be the same for Contract Owners who
allocate premium payments or transfer Accumulated Value to the Fixed Account
as for those who allocate premium payments to the Variable Accounts. The
charge for mortality and expense risks will not be assessed against the Fixed
Account, and any amounts that we pay for income taxes allocable to the
Variable Accounts will not be charged against the Fixed Account. In addition,
the investment advisory fees and operating expenses paid by the Fund will not
be paid directly or indirectly by you to the extent your Accumulated Value is
allocated to the Fixed Account; however, to that extent you will not
participate in the investment experience of the Variable Accounts.
TRANSFERS AND WITHDRAWALS
Amounts may be transferred from the Variable Accounts to the Fixed Account
and from the Fixed Account to the Variable Accounts after the Free-Look
Period, subject to the following limitations. You may not make more than one
transfer from the Fixed Account to the Variable Accounts in any 12-month
period except as provided under the Dollar Cost Averaging Option. The Growth
Variable Account is not available to Owners of Contracts issued on or after
January 1, 1994. Further, if you have $1,000 or more in the Fixed Account, you
may not transfer more than 20% of such amount to the Variable Accounts in any
12-month period except as provided under Dollar Cost Averaging. Currently
there is no charge imposed upon transfers; however, we reserve the right to
assess a $10 transfer fee in the future on the thirteenth and any subsequent
transfer made during a Contract Year and to impose other limitations on the
number of transfers, the amount of transfers, and the amount remaining in the
Fixed Account or Variable Accounts after a transfer. See "Transfer of
Accumulated Value".
You may also make full and partial withdrawals to the same extent as a
Contract Owner who has allocated Accumulated Value to the Variable Accounts.
See "Full and Partial Withdrawals". In addition, to the same extent as
Contract Owners with Accumulated Value in the Variable Accounts, the Owner of
a Contract used in connection with a Qualified Plan under Section 401 and
403(b) of the Internal Revenue Code may obtain a loan. See "Loans".
PAYMENTS FROM THE FIXED ACCOUNT
Full and partial withdrawals, loans, and transfers from the Fixed Account
may be delayed for up to six months after a written request in proper form is
received by us. During the period of deferral, interest at the applicable
interest rate or rates will continue to be credited to the amounts allocated
to the Fixed Account. However, payment of any amounts will not be deferred if
they are to be used to pay premiums on any policies or contracts issued by us.
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MORE ABOUT THE CONTRACT
OWNERSHIP
The Contract Owner is the individual named as such in the application or in
any later change shown in our records. While the Annuitant is living, the
Contract Owner alone has the right to receive all benefits and exercise all
rights that the Contract grants or we allow.
Joint Owners. Joint Owners are permitted only for Contracts issued in
connection with Non-Qualified Plans. The Joint Owners will be joint tenants
with rights of survivorship and upon the death of an Owner, the surviving
Owner shall be the sole Owner. Any Contract transaction requires the signature
of all persons named jointly.
Contingent Owner. A Contingent Owner, if named in the application, succeeds
to the rights of Owner if the Owner dies before the Annuitant during the
Accumulation Period.
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary is the individual named as such in the application or any
later change shown in our records. You may change the Beneficiary at any time
during the life of the Annuitant while the Contract is in force by written
request to us. The change will not be binding on us until it is received and
recorded. The change will be effective as of the date the notice is properly
signed subject to any payments made or other actions taken by us before the
properly signed notice is received and recorded. A Contingent Beneficiary may
be designated. You may designate a permanent Beneficiary whose rights under
the Contract cannot be changed without his or her consent.
Reference should be made to the terms of a particular Qualified Plan and any
applicable law for any restrictions on the beneficiary designation.
PAYMENTS FROM THE SEPARATE ACCOUNT
We ordinarily will pay any full or partial withdrawal benefit or death
benefit proceeds from Accumulated Value allocated to the Variable Accounts,
and will effect a transfer between Variable Accounts or from a Variable
Account to the Fixed Account within seven days from the Valuation Date on
which a proper request is received by us or, if sooner, other period required
by law. However, we can postpone the calculation or payment of such a payment
or transfer of amounts from the Variable Accounts to the extent permitted
under applicable law, which is currently permissible only for any period: (a)
during which the New York Stock Exchange is closed other than customary
weekend and holiday closings, (b) during which trading on the New York Stock
Exchange is restricted as determined by the SEC, (c) during which an
emergency, as determined by the SEC, exists as a result of which (i) disposal
of securities held by the Separate Account is not reasonably practicable, or
(ii) it is not reasonably practicable to determine the value of the assets of
the Separate Account, or (d) for such other periods as the SEC may by order
permit for the protection of investors.
PROOF OF AGE AND SURVIVAL
We may require proof of age or survival of any person on whose life annuity
payments depend.
LOANS
An Owner of a Contract issued in connection with a retirement plan that is
qualified under Section 401 or 403(b) of the Internal Revenue Code (but not
Section 408) may request a loan, provided that loans are permitted by the
Participant's Plan, from us using his or her Accumulated Value as the only
security for the loan by submitting a proper written request to us. No other
Contract Owners may borrow against the Contract. A loan may be taken by
eligible Contract Owners after the first Contract Year while the Annuitant is
living and before the Annuity Start Date. The minimum loan that can be taken
at any time is $1,000. For Contracts with Accumulated Value of $20,000 or
less, the maximum loan that can be taken is the amount that produces a loan
balance immediately after the loan that is 50% of your Accumulated Value. For
Contracts with
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Accumulated Value over $20,000, the maximum loan that can be taken is the
amount that produces a loan balance immediately after the loan that is the
lesser of (1) $50,000 reduced by the excess of (a) the highest outstanding
loan balance within the preceding 12 month period ending on the date the loan
is made over (b) the outstanding loan balance on the date the loan is made or
(2) 50% of your Accumulated Value. Reference should be made to the terms of
the particular Qualified Plan for any additional loan restrictions.
When an eligible Owner takes a loan, an amount equal to the loan is
transferred out of the Owner's Accumulated Value in the Investment Options
into an account called the "Loan Account" to secure the loan. Unless otherwise
requested by you, loan amounts will be deducted from the Investment Options in
the proportion that each bears to the Accumulated Value less Contract Debt.
Subject to any necessary approval of state insurance authorities, any payment
received by us while a loan is outstanding will be considered a premium
payment unless you indicate that it is a loan repayment.
Interest will be charged for the loan and will accrue on the loan balance
from the effective date of any loan. Subject to state insurance authorities,
the loan interest rate will be set at the time loan is made and will be equal
to the higher of Moody's Corporate Bond Yield Average-Monthly Average
Corporates, as published by Moody's Investors Service, Inc., or its successor,
for the calendar month immediately preceding the calendar quarter in which the
loan is effective, or 5%. The loan interest rate charged on any outstanding
loan balance will be determined at the time the loan is taken.
In the event that the Moody's Corporate Bond Yield Average-Monthly Average
Corporates is no longer published, we will use a substantially similar average
as established by regulation within the state in which the Contract is
delivered. We will credit interest monthly on amounts held in the Loan Account
to secure the loan at a rate equal to the loan interest rate charged minus
1.75%. Interest on a loan is accrued daily.
Loans must be repaid within five years (30 years if you certify to us that
the loan is to be used to acquire a principal residence for the Annuitant) and
before the Annuity Start Date. Loan repayments must be made quarterly. Loans
not repaid within the required time periods will be subject to taxation as
distributions from the Contract. Loans may be prepaid at any time before the
Annuity Start Date. Subject to any necessary approval of state insurance
authorities, repayments of loan principal plus accrued interest will be due
quarterly on the date corresponding to your quarterly loan anniversary,
beginning with the first such date following the effective date of the loan.
If the repayment is not made when due, we will declare the entire remaining
loan balance in default. At that time, we will send written notification of
the amount needed to bring the loan back to a current status. You will have
sixty (60) days from the date on which the loan was declared in default (the
"grace period") to make the required payment. If the required payment is not
received by the end of the grace period, the defaulted loan balance plus
accrued interest will be withdrawn from the Accumulated Value, if amounts
under the Contract are eligible for distribution. If those amounts are not
eligible for distribution, the defaulted loan balance plus accrued interest
will be withdrawn when such values become eligible (a "Deemed Distribution").
In either case, the Distribution or the Deemed Distribution will be considered
a currently taxable event, may be subject to federal tax withholding and may
be subject to the federal early withdrawal penalty tax.
If there is a Deemed Distribution under your Contract and to the extent
allowed by law, any future withdrawals will first be applied as repayment of
the defaulted Contract Debt, including accrued interest and any charge for
applicable taxes. Any amounts withdrawn and applied as repayment of loan
principle will be withdrawn from the Loan Account. Any amounts withdrawn and
applied as repayment of Contract Debt will first be withdrawn from your Loan
Account, and then from your Investment Options on a proportionate basis
relative to the Accumulated Value in each Account.
Adverse tax consequences may result if you fail to meet the repayments
requirements for your loan. The tax and ERISA rules relating to Contract loans
are complex and in many cases unclear. For these reasons, and because the
rules vary depending on the individual circumstances of each Contract, WE
ADVISE THAT THE CONTRACT OWNER CONSULT WITH A QUALIFIED TAX ADVISER BEFORE
EXERCISING THE LOAN PROVISIONS OF THE CONTRACT.
If a repayment in excess of the quarterly amount due is received by us, to
the extent allowed by law we will refund such excess unless the loan is paid
in full. Payments received by us which are less than the quarterly
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amount due will be returned to you, unless otherwise required by law.
Prepayment of the entire outstanding Contract Debt may be made. At the time of
the prepayment, you will be billed for any interest due and unpaid. The loan
will be considered paid when the interest due is also paid.
Unless otherwise requested by you, a loan repayment will be transferred into
the Investment Options in accordance with the most recent premium allocation
instructions. In addition, on each Contract Anniversary, any interest earned
on the loan balance held in the Loan Account will be transferred to each of
the Investment Options in accordance with your most recent premium allocation
instructions.
While the amount to secure the loan is held in the Loan Account, you forgo
the investment experience of the Variable Accounts and the Current Rate of
interest of the Fixed Account on the loaned amount. Outstanding Contract Debt
will reduce the amount of proceeds paid upon full withdrawal of the Contract
proceeds, upon payment of the death benefit or upon your exercise of the Free-
Look Right. If you have an outstanding loan that is in default, the defaulted
Contract Debt will be counted as a withdrawal for purposes of calculating any
Minimum Guaranteed Death Benefit.
We may change the loan provisions of the Contract to reflect changes in the
Internal Revenue Code or interpretations in the Code.
RESTRICTION ON WITHDRAWALS FROM 403(b) PROGRAMS
Section 403(b) of the Internal Revenue Code permits public school employees
and employees of certain types of charitable, educational, and scientific
organizations specified in Section 501(c)(3) of the Internal Revenue Code to
purchase annuity contracts, and, subject to certain limitations, to exclude
the amount of purchase payments from gross income for tax purposes. Section
403(b) imposes restrictions on certain distributions from tax-sheltered
annuity contracts meeting the requirements of Section 403(b) that apply to tax
years beginning on or after January 1, 1989.
Section 403(b) requires that distributions from Section 403(b) tax-sheltered
annuities that are attributable to employee contributions made after December
31, 1988 under a salary reduction agreement begin only after the employee
reaches age 59 1/2, separates from service, dies, becomes disabled, or incurs
a hardship. Furthermore, distributions of gains attributable to such
contributions accrued after December 31, 1988 may not be made on account of
hardship. Hardship, for this purpose, is generally defined as an immediate and
heavy financial need, such as paying for medical expenses, the purchase of a
residence, or paying certain tuition expenses, that may only be met by the
distribution.
An Owner of a Contract purchased as a tax-sheltered Section 403(b) annuity
contract will not, therefore, be entitled to make a full or partial
withdrawal, as described in this Prospectus, in order to receive proceeds from
the Contract attributable to contributions under a salary reduction agreement
or any gains credited to such Contract after December 31, 1988 unless one of
the above-described conditions has been satisfied. In the case of transfers of
amounts accumulated in a different Section 403(b) contract to this Contract
under a Section 403(b) Program, the withdrawal constraints described above
would not apply to the amount transferred to the Contract attributable to the
Owner's December 31, 1988 account balance under the old contract, provided the
amounts transferred between contracts qualified as a tax-free exchange under
the Internal Revenue Code. An Owner of a Contract may be able to transfer the
Contract's Full Withdrawal Value to certain other investment alternatives
meeting the requirements of Section 403(b) that are available under an
Employer's Section 403(b) arrangement.
Pursuant to Revenue Ruling 90-24, a direct transfer between issuers of an
amount representing all or part of an individual's interest in a Section
403(b) annuity or custodial account is not a distribution subject to tax or to
premature distribution penalty, provided the funds transferred continue after
the transfer to be subject to distribution requirements at least as strict as
those applicable to them before the transfer.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Title 8, Section 830.105 of the Texas Government Code restricts withdrawal
of contributions and earnings in a variable annuity contract in the Texas
Optional Retirement Program (ORP) prior to (1) termination of
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employment in all Texas public institutions of higher education, (2)
retirement, (3) death, or (4) the participant's attainment of age 70 1/2. A
participant in the Texas ORP will not, therefore, be entitled to make full or
partial withdrawals under a Contract unless one of the foregoing conditions
has been satisfied. Appropriate certification must be submitted to redeem the
participant's account. Restrictions on withdrawal do not apply to transfers of
values from one annuity contract to another during participation in the Texas
ORP. Loans are not available in the Texas ORP.
Currently we do not accept applications for Contracts issued under the Texas
ORP.
FEDERAL TAX MATTERS
INTRODUCTION
The Contract described in this Prospectus is designed for use by individuals
in retirement plans which may or may not be Qualified Plans under the
provisions of the Internal Revenue Code ("Code"). The ultimate effect of
Federal income taxes on the amounts held under a Contract, on annuity
payments, and on the economic benefits to the Owner, the Annuitant, and the
Beneficiary or other payee may depend on our tax status, on the type of
retirement plan, if any, for which the Contract is purchased, and upon the tax
and employment status of the individuals concerned. The discussion contained
herein and in the SAI is general in nature. It is based upon our understanding
of the present Federal income tax laws as currently interpreted by the
Internal Revenue Service ("IRS"), and is not intended as tax advice. No
representation is made regarding the likelihood of continuation of the present
Federal income tax laws or of the current interpretations by the IRS or the
courts. Future legislation may affect annuity contracts adversely. Moreover,
no attempt has been made to consider any applicable state or other laws.
Because of the inherent complexity of such laws and the fact that tax results
will vary according to the particular circumstances of the individual involved
and, if applicable, the Qualified Plan, any person contemplating the purchase
of a Contract, contemplating selection of an Annuity Option under a Contract,
or receiving annuity payments under a Contract should consult a qualified tax
adviser. WE DO NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS, FEDERAL,
STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX STATUS OF PACIFIC LIFE AND THE SEPARATE ACCOUNT
General
We are taxed as a life insurance company under Part I, Subchapter L of the
Code. Because the Separate Account is not taxed as a separate entity and its
operations form a part of us, we will be responsible for any Federal income
taxes that become payable with respect to the income of the Separate Account.
However, each Variable Account will bear its allocable share of such
liabilities. Under current law, no item of dividend income, interest income,
or realized capital gain of the Variable Accounts will be taxed to us to the
extent it is applied to increase reserves under the Contracts.
Under the principles set forth in IRS Revenue Ruling 81-225 and Section
817(h) of the Code and regulations thereunder, we believe that we will be
treated as the owner of the assets in the Separate Account for Federal income
tax purposes.
The Separate Account will invest its assets in a mutual fund that is
intended to qualify as a regulated investment company under Part I, Subchapter
M of the Code. If the requirements of the Code are met, the Fund will not be
taxed on amounts distributed on a timely basis to the Separate Account.
Diversification Standards
Each Portfolio of the Fund will be required to adhere to regulations adopted
by the Treasury Department pursuant to Section 817(h) of the Code prescribing
asset diversification requirements for investment companies whose shares are
sold to insurance company separate accounts funding variable contracts. For
details on these diversification requirements, see "What is the Federal Income
Tax Status of the Fund" in the Fund's prospectus.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability
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to exercise investment control over the assets. In those circumstances, income
and gains from the separate account assets would be includable in the variable
contract owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor [i.e., the Contract Owner], rather than the insurance
company, to be treated as the owner of the assets in the account." This
announcement also stated that guidance would be issued by way of regulations
or rulings on the "extent to which policyholders may direct their investments
to particular subaccounts without being treated as owners of the underlying
assets." As of the date of this prospectus, no such guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Contract Owner has additional flexibility in allocating premium
payments and Contract Values. These differences could result in a Contract
Owner being treated as the owner of the Contract's pro rata portion of the
assets of the Separate Account. In addition, we do not know what standards
will be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. We therefore reserve the right to
modify the Contract, as deemed appropriate by us, to attempt to prevent a
Contract Owner from being considered the owner of the Contract's pro rata
share of the assets of the Separate Account. Moreover, in the event that
regulations are adopted or rulings are issued, there can be no assurance that
the Portfolio will be able to operate as currently described in the
Prospectus, or that the Fund will not have to change any Portfolio's
investment objective or investment policies.
TAXATION OF ANNUITIES IN GENERAL--NON-QUALIFIED PLANS
Section 72 of the Code governs taxation of annuities. In general, a contract
owner is not taxed on increases in value under an annuity contract until some
form of distribution is made under the contract. However, the increase in
value may be subject to tax currently under certain circumstances. See
"Contracts Owned by Non-Natural Persons" on page 36 and "Diversification
Standards" above.
1. Surrenders or Withdrawals Prior to the Annuity Start Date
Code Section 72 provides that amounts received upon a total or partial
surrender or withdrawal from a contract prior to the annuity start date
generally will be treated as gross income to the extent that the cash value of
the contract (determined without regard to any surrender charge in the case of
a partial withdrawal) exceeds the "investment in the contract." The
"investment in the contract" is that portion, if any, of premiums paid under a
contract less any distributions received previously under the contract that
are excluded from the recipient's gross income. The taxable portion is taxed
at ordinary income tax rates. For purposes of this rule, a pledge or
assignment of a contract is treated as a payment received on account of a
partial withdrawal of a contract. Similarly, loans under a contract generally
are treated as distributions under the contract. These rules do not apply to
amounts received under Qualified Plans pursuant to Section 401 of the Code.
2. Surrenders or Withdrawals on or after the Annuity Start Date
Upon receipt of a lump sum payment or an annuity payment under an annuity
contract, the receipt is taxed if the cash value of the contract exceeds the
investment in the contract. Ordinarily, the taxable portion of such payments
will be taxed at ordinary income tax rates.
For fixed annuity payments, the taxable portion of each payment is
determined by using a formula known as the "exclusion ratio," which
establishes the ratio that the investment in the contract bears to the total
expected amount of annuity payments for the term of the contract. That ratio
is then applied to each payment to determine the non-taxable portion of the
payment. That remaining portion of each payment is taxed at ordinary income
rates. Once the excludable portion of annuity payments to date equals the
investment in the contract, the balance of the annuity payments will be fully
taxable.
Withholding of Federal income taxes on all distributions may be required
unless a recipient who is eligible elects not to have any amounts withheld and
properly notifies us of that election.
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<PAGE>
3. Penalty Tax on Certain Surrenders and Withdrawals
With respect to amounts withdrawn or distributed before the taxpayer reaches
age 59 1/2, a penalty tax is imposed equal to 10% of the portion of such
amount which is includable in gross income. However, the penalty tax is not
applicable to withdrawals: (i) made on or after the death of the owner (or
where the owner is not an individual, the death of the "primary annuitant,"
who is defined as the individual the events in whose life are of primary
importance in affecting the timing and amount of the payout under the
contract); (ii) attributable to the taxpayer's becoming totally disabled
within the meaning of Code Section 72(m)(7); (iii) which are part of a series
of substantially equal periodic payments (not less frequently than annually)
made for the life (or life expectancy) of the taxpayer, or the joint lives (or
joint life expectancies) of the taxpayer and his beneficiary; (iv) from
certain qualified plans; (v) under a so-called qualified funding asset (as
defined in Code Section 130(d)); (vi) under an immediate annuity contract, or
(vii) which are purchased by an employer on termination of certain types of
qualified plans and which are held by the employer until the employee
separates from service.
If the penalty tax does not apply to a surrender or withdrawal as a result
of the application of item (iii) above, and the series of payments are
subsequently modified (other than by reason of death or disability), the tax
for the first year in which the modification occurs will be increased by an
amount (determined by the regulations) equal to the tax that would have been
imposed but for item (iii) above, plus interest for the deferral period, if
the modification takes place (a) before the close of the period which is five
years from the date of the first payment and after the taxpayer attains age 59
1/2, or (b) before the taxpayer reaches age 59 1/2.
ADDITIONAL CONSIDERATIONS
1. Death of Owner Distribution Rules
In order to be treated as an annuity contract, a contract issued on or after
January 19, 1985 must provide the following two distribution rules: (a) if the
owner dies on or after the annuity start date, and before the entire interest
in the contract has been distributed, the remainder of his interest will be
distributed at least as quickly as the method in effect on the owner's death;
and (b) if the owner dies before the annuity start date, the entire interest
in the contract must generally be distributed within five years after the date
of death, or, if payable to a designated beneficiary, must be annuitized over
the life of that designated beneficiary or over a period not extending beyond
the life expectancy of that beneficiary, commencing within one year after the
date of death of the owner. However, such option to annuitize must be elected
within 60 days after the date a lump sum death benefit first becomes payable;
then the designated recipient will not be treated for tax purposes as having
received a lump sum distribution in the tax year it first becomes payable.
Rather, in that case, the designated beneficiary will be taxed on the annuity
payments as they are received. If the designated beneficiary is the spouse of
the owner, the contract (together with the deferral of tax on the accrued and
future income thereunder) may be continued in the name of the spouse as owner.
Designation of a beneficiary who is either 37 1/2 years younger than the
contract owner or a grandchild of the contract owner may have Generation
Skipping Transfer Tax consequences under Section 2601 of the Code.
For purposes of determining how generally distributions must begin under the
foregoing rules, where the owner is not an individual, the primary annuitant
is considered the owner. In that case, a change in the primary annuitant will
be treated as the death of the owner. In the case of joint owners, the Death
of Owner Distribution Rules will be applied by treating the death of the first
owner as the one to be considered in determining how generally distributions
must commence, unless the sole surviving owner is the deceased owner's spouse.
2. Gift of Annuity Contracts
Generally, gifts of non-tax qualified contracts prior to the annuity start
date will trigger tax on the gain on the contract, with the donee getting a
stepped-up basis for the amount included in the donor's income. The 10%
penalty tax and gift tax also may be applicable. This provision does not apply
to transfers between spouses or incident to a divorce.
3. Contracts Owned by Non-Natural Persons
For contributions to annuity contracts after February 28, 1986, if the
contract is held by a non-natural person (for example, a corporation) the
income on that contract (generally the net surrender value less the premium
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<PAGE>
payments) is includable in taxable income each year. The rule does not apply
where the contract is acquired by the estate of a decedent, where the contract
is held by certain types of retirement plans, where the contract is a
qualified funding asset for structured settlements, where the contract is
purchased on behalf of an employee upon termination of a qualified plan, and
in the case of a so-called immediate annuity. Code Section 457 (deferred
compensation) plans for employees of state and local governments and tax-
exempt organizations are not within the purview of the exceptions.
4. Multiple Contract Rule
For contracts entered into on or after October 21, 1988, for purposes of
determining the amount of any distribution under Code Section 72(e) (amounts
not received as annuities) that is includable in gross income, all annuity
contracts issued by the same insurer to the same contract owner during any
calendar year are to be aggregated and treated as one contract. Thus, any
amount received under any such contract prior to the contract's annuity start
date, such as a partial surrender, dividend, or loan, will be taxable (and
possibly subject to the 10% penalty tax) to the extent of the combined income
in all such contracts.
In addition, the Treasury Department has broad regulatory authority in
applying this provision to prevent avoidance of the purposes of this new rule.
It is possible that, under this authority, the Treasury Department may apply
this rule to amounts that are paid as annuities (on and after the annuity
start date) under annuity contracts issued by the same company to the same
owner during any calendar year. In this case, annuity payments could be fully
taxable (and possibly subject to the 10% penalty tax) to the extent of the
combined income in all such contracts and regardless of whether any amount
would otherwise have been excluded from income because of the "exclusion
ratio" under the contract.
QUALIFIED PLANS
THE FOLLOWING IS ONLY A GENERAL DISCUSSION ABOUT TYPES OF QUALIFIED PLANS
FOR WHICH THE CONTRACTS ARE AVAILABLE. WE ARE NOT THE ADMINISTRATOR OF ANY
QUALIFIED PLAN. IF YOU ARE PURCHASING A QUALIFIED CONTRACT, YOU SHOULD CONSULT
WITH YOUR PLAN ADMINISTRATOR AND/OR QUALIFIED TAX ADVISER.
The Contract may be used with several types of Qualified Plans. Keoghs,
individual retirement annuities, Section 403(b) tax sheltered annuities,
Section 457 plans, and pension and profit sharing plans (including Keoghs)
will be treated, for purposes of this discussion, as Qualified Plans. The tax
rules applicable to participants in such Qualified Plans vary according to the
type of plan and the terms and conditions of the plan itself. No attempt is
made herein to provide more than general information about the use of the
Contract with the various types of Qualified Plans. Contract Owners,
Annuitants, and Beneficiaries, are cautioned that the rights of any person to
any benefits under such Qualified Plans may be subject to the terms and
conditions of the plans themselves or limited by applicable law, regardless of
the terms and conditions of the Contract issued in connection therewith. For
example, we may accept beneficiary designations and payment instructions under
the terms of the Contract without regard to any spousal consents that may be
required under the Retirement Equity Act (REA). Consequently, a Contract
Owner's Beneficiary designation or elected payment option may not be
enforceable.
The following are brief descriptions of the various types of Qualified Plans
for which the Contract is available:
1. Individual Retirement Annuities
Code Section 408 permits eligible individuals to contribute to an individual
retirement program known as an "IRA." These IRAs are subject to limitations on
the amount that may be contributed, the persons who may be eligible, and on
the time when distributions may commence. In addition, distribution from
certain other types of Qualified Plans may be placed on a tax-deferred basis
into an IRA.
2. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c) (3) of the Code. These eligible
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<PAGE>
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employee until the employee receives distributions from the Contract. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. Any employee should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
3. 401(k) Plans; Pension and Profit Sharing Plans
Code Sections 401(a) and 401(k) permit employers to establish various types
of deferred compensation plans for employees. Such retirement plans may permit
the purchase of Contracts to provide benefits thereunder. Contributions to
these plans are subject to limitations.
4. Government Plans
Section 457 of the Code permits employees of a state or local government (or
of certain other tax-exempt entities) to defer compensation through an
eligible government plan. Contributions to a Contract in connection with an
eligible government plan are subject to limitations.
Distributions from Qualified Plans are subject to certain restrictions. A
10% penalty tax is imposed on the amount includable in gross income from
distributions from Qualified Plans (other than Section 457 plans) before the
participant reaches age 59 1/2 and that are not made on account of death or
disability with certain exceptions. These exceptions include distributions:
(1) which are part of a series of substantially equal periodic payments made
(at least annually) for the life (or life expectancy) of the participant or
the joint lives (or joint life expectancies) of the participant and a
designated beneficiary; and (for other than IRA distributions) (2) made to an
employee after termination of employment after reaching age 55; or (3) made to
pay for certain medical expenses. Distributions of minimum amounts specified
by the Code must commence by April 1 of the calendar year following the
calendar year in which the participant reaches age 70 1/2. Additional
distribution rules apply after the participant's death. Failure to make
mandatory distributions may result in the imposition of a 50% penalty tax on
any difference between the required distribution amount and the amount
distributed. Distributions to a participant from all Qualified Plans (other
than Section 457 plans) in a calendar year that exceed a specific limit under
the Code are generally subject to a 15% penalty tax (in addition to any
ordinary income tax) on the excess portion of the distributions.
Distributions from a Qualified Plan (not including an individual retirement
annuity subject to Code Section 408) to an employee, surviving spouse, or
former spouse who is an alternate payee under a qualified domestic relations
order, in the form of a lump sum settlement or periodic annuity payments for a
fixed period of fewer than 10 years are subject to mandatory income tax
withholding of 20% of the taxable amount of the distribution, unless (1) the
distributee directs the transfer of such amounts in cash to another Qualified
Plan or an IRA; or (2) the payment is a minimum distribution required under
the Code. The taxable amount is the amount of the distribution less the amount
allocable to after-tax contributions. All other types of taxable distributions
are subject to withholding unless the distributee elects not to have
withholding apply.
The above description of the Federal income tax consequences of the
different types of Qualified Plans which may be funded by the Contract offered
by this Prospectus is only a brief summary and is not intended as tax advice.
The rules governing the provisions of Qualified Plan distributions are
extremely complex and often difficult to comprehend. Anything less than full
compliance with the applicable rules, all of which are subject to change, may
have adverse tax consequences. A prospective Contract Owner considering
adoption of a Qualified Plan and purchase of a Contract in connection
therewith should first consult a qualified and competent tax adviser, with
regard to the suitability of the Contract as an investment vehicle for the
Qualified Plan. We are not the Administrator of your Qualified Plan. You
should also consult with your tax advisor and/or administrator before you
withdraw any portion of your Contract's Accumulated Value.
CHARGE FOR OUR INCOME TAXES
A charge may be made for any federal taxes incurred by us that are
attributable to the Variable Accounts or to our operations with respect to the
Contracts or attributable to payment or premiums or acquisition costs under
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<PAGE>
the Contracts. We will review the question of a charge to the Variable
Accounts or the Contracts for our federal taxes periodically. Charges may
become necessary if, among other reasons, the tax treatment of us or of income
and expenses under the Contracts is ultimately determined to be other than
what we currently believe it to be, if there are changes made in the federal
income tax treatment of variable annuities at the insurance company level, or
if there is a change in our tax status.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, we
reserve the right to charge the Variable Accounts for such taxes, if any,
attributable to the Variable Accounts.
OTHER INFORMATION
VOTING OF FUND SHARES
We are the legal owner of the shares of the Fund held by the Variable
Accounts of the Separate Account. In accordance with its view of present
applicable law, we will exercise voting rights attributable to the shares of
each Portfolio of the Fund held in the Variable Accounts at any regular and
special meetings of the shareholders of the Fund on matters requiring
shareholder voting under the 1940 Act. We will exercise these voting rights
based on instructions received from persons having the voting interest in
corresponding Variable Accounts of the Separate Account. However, if the 1940
Act or any regulations thereunder should be amended, or if the present
interpretation thereof should change, and as a result we determine that we are
permitted to vote the shares of the Fund in our own right, we may elect to do
so.
The person having the voting interest under a Contract is the Owner. Unless
otherwise required by applicable law, the number of Fund shares of a
particular Portfolio as to which voting instructions may be given to us is
determined by dividing a Contract Owner's Accumulated Value in a Variable
Account on a particular date by the net asset value per share of that
Portfolio as of the same date. Fractional votes will be counted. The number of
votes as to which voting instructions may be given will be determined as of
the date coincident with the date established by the Fund for determining
shareholders eligible to vote at the meeting of the Fund. If required by the
SEC, we reserve the right to determine in a different fashion the voting
rights attributable to the shares of the Fund. Voting instructions may be cast
in person or by proxy.
Voting rights attributable to the Contract Owner's Accumulated Value in a
Variable Account for which no timely voting instructions are received will be
voted by us in the same proportion as the voting instructions that are
received in a timely manner for all Contracts participating in that Variable
Account. We will also exercise the voting rights from assets in each Variable
Account that are not otherwise attributable to Contract Owners, if any, in the
same proportion as the voting instructions that are received in a timely
manner for all Contracts participating in that Variable Account. If we hold
shares of a Portfolio in our General Account, and/or if any of our non-
insurance subsidiaries hold shares of a Portfolio, such shares will be voted
in the same proportion as votes cast by the Separate Account and other
separate accounts of ours, in the aggregate.
SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to compliance with the law as then in effect,
to make additions to, deletions from, substitutions for, or combinations of
the securities that are held by the Separate Account or any Variable Account
or that the Separate Account or any Variable Account may purchase. If shares
of any or all of the Portfolios of the Fund should no longer be available for
investment, or if, in the judgment of our management, further investment in
shares of any or all Portfolios of the Fund should become inappropriate in
view of the purposes of the Contract, we may substitute shares of another
Portfolio of the Fund or of a different fund for shares already purchased, or
to be purchased in the future under the Contract. We may also purchase,
through the Variable Account, other securities for other classes or contracts,
or permit a conversion between classes of contracts on the basis of requests
made by Owners.
In connection with a substitution of any shares attributable to an Owner's
interest in a Variable Account or the Separate Account, we will provide
notice, seek Owner approval, seek prior approval of the SEC, and comply
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<PAGE>
with the filing or other procedures established by applicable state insurance
regulators, to the extent required under applicable law.
We also reserve the right to establish additional Variable Accounts of the
Separate Account that would invest in a new Portfolio of the Fund or in shares
of another investment company, a portfolio thereof, or other suitable
investment vehicle. New Variable Accounts may be established in our sole
discretion, and any new Variable Account will be made available to existing
Owners on a basis to be determined by us. We may also eliminate or combine one
or more Variable Accounts if, in our sole discretion, marketing, tax, or
investment conditions so warrant.
Subject to compliance with applicable law, we may transfer assets to the
General Account. We also reserve the right, subject to any required regulatory
approvals, to transfer assets of any Variable Account of the Separate Account
to another separate account or Variable Account.
In the event of any such substitution or change, we may, by appropriate
endorsement, make such changes in these and other contracts as may be
necessary or appropriate to reflect such substitution or change. If deemed by
us to be in the best interests of persons having voting rights under the
Contracts, the Separate Account may be operated as a management investment
company under the 1940 Act or any other form permitted by law; it may be
deregistered under that Act in the event such registration is no longer
required, or it may be combined with other separate accounts of ours or an
affiliate of ours. Subject to compliance with applicable law, we also may
combine one or more Variable Accounts and may establish a committee, board, or
other group to manage one or more aspects of the operation of the Separate
Account.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
We reserve the right, without the consent of Owners, to suspend sales of the
Contract as presently offered and to make any change to the provisions of the
Contracts to comply with, or give Owners the benefit of, any Federal or state
statute, rule, or regulation, including but not limited to requirements for
annuity contracts and retirement plans under the Internal Revenue Code and
regulations thereunder or any state statute or regulation. We also reserve the
right to limit the amount and frequency of subsequent premium payments.
REPORTS TO OWNERS
A statement will be sent quarterly to each Contract Owner setting forth a
summary of the transactions that occurred during the quarter, and indicating
the Accumulated Value, Full Withdrawal Value, and any Contract Debt as of the
end of each quarter. In addition, the statement will indicate the allocation
of Accumulated Value among the Fixed Account and the Variable Accounts and any
other information required by law. Confirmations will also be sent out upon
unscheduled premium payments and transfers, loans, loan repayments, and full
and unscheduled partial withdrawals, and on payment of death benefit proceeds.
Confirmation of your transactions under the pre-authorized checking plan,
dollar cost averaging, portfolio rebalancing and preauthorized withdrawal
options will appear on your quarterly account statements. If you suspect an
error on a confirmation or quarterly statement, you must notify us in writing
within 30 days from the date of the first confirmation or statement on which
the transaction appeared. When you write, tell us your name, contract number
and description of the error.
Each Contract Owner will also receive an Annual report containing financial
statements for the Separate Account and the Fund, the latter of which will
include a list of the portfolio securities of the Fund, as required by the
1940 Act, and/or such other reports as may be required by Federal securities
laws.
TELEPHONE TRANSFER PRIVILEGES
You may request a transfer of Accumulated Value by telephone if an
authorization for telephone requests ("telephone authorization") is on file
with us. All or part of any telephone conversation with respect to transfer
instructions may be recorded by us. Telephone instructions received by us by
1:00 P.M. Pacific time, or the close of the New York Stock Exchange, if
earlier, on any Valuation Date will be effected as of the end of that
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<PAGE>
Valuation Date in accordance with your instructions, (presuming that the Free-
Look Period has expired). We reserve the right to deny any telephone transfer
request. If all telephone lines are busy (which might occur, for example,
during periods of substantial market fluctuations), you might not be able to
request transfers by telephone and would have to submit written requests.
We have established procedures to confirm that instructions communicated by
telephone are genuine. Under the procedures, any person requesting a transfer
by telephone must provide certain personal identification as requested by us,
and we will send a written confirmation of all transfers requested by
telephone within 7 days of the transfer. Upon request in writing for telephone
authorization, you authorize us to accept and act upon telephonic instructions
for transfers involving your Contract, and agree that neither we, any of our
affiliates, nor Pacific Select Fund, nor any of the directors, trustees,
officers, employees or agents, will be liable for any loss, damages, cost, or
expense (including attorneys fees) arising out of any requests effected in
accordance with the telephone authorization and believed by us to be genuine,
provided that we have complied with our procedures. As a result of this policy
on telephone requests, you will bear the risk of loss arising from the
telephone transfer privileges.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a
party, or which would materially affect the Separate Account.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Contracts
described in this Prospectus, our authority to issue the Contracts under
California law, and the validity of the forms of the Contracts under
California law have been passed upon by David R. Carmichael, Esq., Senior Vice
President and General Counsel of Pacific Life.
Legal matters relating to the Federal securities and Federal income tax laws
have been passed upon by Dechert Price & Rhoads, Washington, D.C.
PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account,
including the yield and effective yield of the Variable Account investing in
the Fund's Money Market Portfolio ("Money Market Variable Account"), the yield
of the remaining Variable Accounts, and the total return of all Variable
Accounts may appear in advertisements, reports, and promotional literature to
current or prospective Owners.
Quotations of average annual total return for any Variable Account will be
expressed in terms of the average annual compounded rate of return on a
hypothetical investment in a Contract over a period of one, five, and ten
years (or, if less, up to the life of the Variable Account), and will reflect
the deduction of the applicable contingent deferred sales charge, the
administrative charge, the maintenance fee, and the mortality and expense risk
charge. Quotations of total return may simultaneously be shown that do not
take into account certain contractual charges such as the contingent deferred
sales charge, the administrative charge, and the maintenance fee.
Performance information for Variable Accounts may also be advertised based
on the historical performance of the Fund Portfolio underlying the Variable
Account for periods beginning prior to the date each Variable Account
commenced operations. Any such performance calculation will be based on the
assumption that the Variable Account corresponding to the applicable Fund
Portfolio was in existence throughout the stated period and that the
contractual charges and expenses of the Variable Account during that period
were equal to those currently assessed under the Contract.
Performance information for any Variable Account reflects only the
performance of a hypothetical Contract under which Accumulated Value is
allocated to a Variable Account during a particular time period on which the
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<PAGE>
calculations are based. Performance information should be considered in light
of the investment objectives and policies, characteristics, and quality of the
Portfolio of the Fund in which the Variable Account invests, and the market
conditions during the given time period, and should not be considered as a
representation of what may be achieved in the future. For a description of the
methods used to determine yield and total return and of the usage of
performance and other related information for the Variable Accounts, see the
Statement of Additional Information.
We may also provide you with reports on our rating as an insurance company
and on our claims-paying ability that are produced by rating agencies and
organizations.
ADDITIONAL INFORMATION
REGISTRATION STATEMENT
A Registration Statement under the 1933 Act has been filed with the SEC
relating to the offering described in this Prospectus. This Prospectus does
not include all the information included in the Registration Statement,
certain portions of which, including the Statement of Additional Information,
have been omitted pursuant to the rules and regulations of the SEC. The
omitted information may be obtained at the SEC's principal office in
Washington, D.C., upon payment of the SEC's prescribed fees.
FINANCIAL STATEMENTS
Audited financial statements of the Separate Account as of December 31, 1996
and for each of the two years then ended, are incorporated by reference in the
SAI from the Annual Report of the Separate Account dated as of December 31,
1996. Audited consolidated financial statements of Pacific Mutual Life as of
December 31, 1996 and 1995, and for the three years ended December 31, 1996,
are contained in the SAI.
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STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information
and financial statements relating to us. The Table of Contents of the Statement
of Additional Information is set forth below:
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY.......................................... 1
Dollar Cost Averaging.................................................. 1
Portfolio Rebalancing Option........................................... 2
Safekeeping of Assets.................................................. 2
Dividends.............................................................. 2
Misstatements.......................................................... 2
DISTRIBUTION OF THE CONTRACT............................................. 2
PERFORMANCE INFORMATION.................................................. 3
TAX DEFERRED ACCUMULATION................................................ 7
FINANCIAL STATEMENTS..................................................... 9
</TABLE>
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APPENDIX
EXAMPLES OF CONTINGENT DEFERRED SALES CHARGE
The following examples illustrate the operation of the contingent deferred
sales charge.
EXAMPLE 1:
A Contract Owner makes a single premium payment of $10,000 in the first
Contract Year and the Contract's Accumulated Value grows to $15,000 in the
fifth Contract Year. A partial withdrawal of $11,000 is requested at that time
and no prior withdrawals have been made.
<TABLE>
<CAPTION>
BASIS OF CHARGE RATE OF CHARGE EXPLANATION
--------------- -------------- -----------
<S> <C> <C>
$1,000 0% 10% free withdrawal amount on premium Age 5--No
charge imposed.
9,000 3% Applied against remaining premium Age 5.
1,000 0% No charge imposed on an amount in excess of ag-
gregate premiums received in last 5 Contract
Years.
</TABLE>
The contingent deferred sales charge would be $270.
EXAMPLE 2:
A Contract Owner makes an initial premium payment of $5,000 in the first
Contract Year, and subsequent premium payments of $2,000 in the second, third,
and fourth Contract Years for total premiums of $11,000, and the Contract's
Accumulated Value has grown to $17,000 in the sixth Contract Year. A
withdrawal of $12,000 is requested in the sixth Contract Year and no prior
withdrawals have been made.
<TABLE>
<CAPTION>
BASIS OF CHARGE RATE OF CHARGE EXPLANATION
--------------- -------------- -----------
<S> <C> <C>
$5,000 0% Applied against premiums Age 6--No charge im-
posed.
600 0% 10% free withdrawal amount applied against pre-
mium Age 5.
1,400 3% Applied against remaining premium Age 5.
2,000 4% Applied against premium Age 4.
2,000 5% Applied against premium Age 3.
1,000 0% No charge imposed on an amount in excess of ag-
gregate premium received in last 5 Contract
Years.
</TABLE>
The contingent deferred sales charge would be $222.
EXAMPLE 3:
A Contract Owner makes a single premium payment of $12,000 and has received
four quarterly scheduled withdrawals of $200 in the second Contract Year. An
unscheduled partial withdrawal was also made of $500 after the third scheduled
withdrawal.
<TABLE>
<CAPTION>
BASIS OF CHARGE RATE OF CHARGE EXPLANATION
--------------- -------------- -----------
<S> <C> <C>
$200 0% 10% free withdrawal amount on premium Age 2--No
charge imposed.
200 0% 10% free withdrawal amount on premium Age 2--No
charge imposed.
200 0% 10% free withdrawal amount on premium Age 2--No
charge imposed.
500 0% 10% free withdrawal amount on premium Age 2--No
charge imposed.
100 0% 10% free withdrawal amount on premium Age 2--No
charge imposed.
100 6% Applied against premium Age 2.
</TABLE>
The contingent deferred sales charge would be $6.
44
<PAGE>
To receive a current copy of the Pacific Select Variable Annuity Statement of
Additional Information without charge, call (800) 722-2333 or complete the
following and send it to:
Pacific Life Insurance Company
Variable Annuities
Post Office Box 7187
Pasadena, CA 91109-7187
Name _________________________________
Address ______________________________
City__________________________________ State____________________ Zip
<PAGE>
[LOGO OF PACIFIC SELECT VARIABLE ANNUITY APPEARS HERE]
Issued By: Principal Underwriter:
Pacific Life Insurance Company Pacific Mutual Distributors, Inc.
700 Newport Center Drive Member: NASD/SIPC
P.O. Box 9000 700 Newport Center Drive
Newport Beach, California 92660 P.O. Box 9000
Newport Beach, California 92660
Prospectus dated May 1, 1997 as supplemented September 2, 1997
<PAGE>
Sponsored by:
[LOGO OF PACIFIC LIFE A PACIFIC MUTUAL COMPANY APPEARS HERE]
Home Office
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
1-800-722-2333
Mailing Address
VARIABLE ANNUITY DEPARTMENT
P.O. BOX 7187
PASADENA, CALIFORNIA 91109-7187
Distributed by:
[LOGO OF PACIFIC MUTUAL DISTRIBUTORS, INC. APPEARS HERE]
Pacific Mutual Distributors, Inc.
MEMBER NASD & SIPC
700 NEWPORT CENTER DRIVE, NB-3
NEWPORT BEACH, CA 92660
1-800-800-7681
FORM NO. 249-7B
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
PACIFIC SELECT VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
DATE: MAY 1, 1997
AS SUPPLEMENTED SEPTEMBER 2, 1997
----------------
INDIVIDUAL FLEXIBLE PREMIUM VARIABLE ACCUMULATION
DEFERRED ANNUITY CONTRACT
----------------
ISSUED BY
PACIFIC LIFE INSURANCE COMPANY
1-800-722-2333
MAILING ADDRESS:
VARIABLE ANNUITY DEPARTMENT
P.O. BOX 7187
NEWPORT BEACH, CALIFORNIA 91109-7187
----------------
This Statement of Additional Information ("SAI") is intended to supplement
the information provided to investors in the Prospectus dated May 1, 1997 as
supplemented September 2, 1997 of the Pacific Select Variable Annuity Separate
Account ("the Separate Account") of Pacific Life Insurance Company and has
been filed with the Securities and Exchange Commission as part of the Separate
Account's Registration Statement. This SAI is not itself a prospectus and
should be read in conjunction with the current Prospectus for Pacific Select
Variable Annuity Separate Account dated May 1, 1997 as supplemented September
2, 1997. The Prospectus may be obtained from Pacific Life Insurance Company.
The contents of this SAI are incorporated by reference in the Prospectus in
their entirety.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION AND HISTORY............................................ 1
Dollar Cost Averaging Option............................................. 1
Portfolio Rebalancing Option............................................. 2
Safekeeping of Assets.................................................... 2
Dividends................................................................ 2
Misstatements............................................................ 2
DISTRIBUTION OF THE CONTRACT............................................... 2
PERFORMANCE INFORMATION.................................................... 3
TAX DEFERRED ACCUMULATION.................................................. 7
FINANCIAL STATEMENTS....................................................... 9
</TABLE>
i
<PAGE>
GENERAL INFORMATION AND HISTORY
For a description of the Individual Flexible Premium Variable Accumulation
Deferred Annuity Contract (the "Contract"), Pacific Life, and the Pacific
Select Variable Annuity Separate Account (the "Separate Account"), see the
Prospectus. This SAI contains information that supplements the information in
the Prospectus. Defined terms used in this SAI have the same meaning as terms
defined in the section entitled "Definitions" in the Prospectus.
DOLLAR COST AVERAGING OPTION
We currently offer an option under which Contract Owners may dollar cost
average their allocations in the Variable Accounts under the Contract by
authorizing us to make periodic allocations of Accumulated Value from any one
Variable Account to one or more of the other Variable Accounts, subject to the
limitation on the Growth Variable Account.
Contract Owners may authorize us to make periodic allocations from the Fixed
Account to one or more Variable Accounts. Dollar Cost Averaging allocations
may not be made from the Fixed Account and a Variable Account at the same
time.
You may request Dollar Cost Averaging by sending a proper request to us. You
must designate the Variable Account or Fixed Account from which the transfers
will be made, the specific dollar amounts or percentages to be transferred,
the Variable Account or Accounts to which the transfers will be made, the
desired frequency of the transfer, which may be on a monthly, quarterly, semi-
annual, or annual basis, and the length of time during which the transfers
shall continue or the total amount to be transferred over time.
To elect the Dollar Cost Averaging Option, the Accumulated Value in the
Variable Account from which the Dollar Cost Averaging transfers will be made
must be at least $5,000. The Dollar Cost Averaging request will not be
considered complete until the Contract Owner's Accumulated Value in the
Variable Account from which the transfers will be made is at least $5,000.
After we have received a Dollar Cost Averaging request in proper form, we will
transfer Accumulated Value in amounts designated by you from the Variable
Account or Fixed Account from which transfers are to be made to the Variable
Account or Accounts you have chosen. (The minimum amount or percentages that
may be transferred to any one Variable Account is $50). After the Free-Look
Period, the first transfer will be effected on the Contract's Monthly,
Quarterly, Semi-Annual, or Annual Anniversary, whichever corresponds to the
period selected by you, coincident with or next following receipt by us of a
Dollar Cost Averaging request in proper form, and subsequent transfers will be
effected on the following Monthly, Quarterly, Semi-Annual, or Annual
Anniversary for so long as designated by the Contract Owner until the total
amount elected has been transferred, or until Accumulated Value in the Fixed
Account or Variable Account from which transfers are made has been depleted.
Amounts periodically transferred under this Option will not be subject to any
transfer charges that may be imposed by us in the future, except as may be
required by applicable law.
You may instruct us at any time to terminate the option. In that event, the
Accumulated Value in the Variable Account or Fixed Account from which
transfers were being made that has not been transferred will remain in that
Account unless you instruct otherwise. If you wish to continue transferring on
a Dollar Cost Averaging basis after the expiration of the applicable period,
the total amount elected has been transferred, or the Variable Account or
Fixed Account has been depleted, or after the Dollar Cost Averaging Option has
been cancelled, a new Dollar Cost Averaging request must be sent to us. The
Variable Account from which transfers are to be made must meet the minimum
amount of Accumulated Value requirement. We may discontinue, modify, or
suspend the Dollar Cost Averaging Option at any time.
1
<PAGE>
PORTFOLIO REBALANCING OPTION
Portfolio rebalancing allows Contract Owners who are not currently Dollar
Cost Averaging, to maintain the percentage of Accumulated Value allocated to
each Variable Investment Option at a pre-set level during the Accumulation
Period. For example, you could specify that 30% of the Contract's Accumulated
Value be allocated to the Equity Index Variable Account, 40% in the Managed
Variable Account, and 30% in the Growth LT Variable Account. Over time, the
variations in each Variable Account's investment results will shift this
balance of your Accumulated Value in the Contract. If you elect the portfolio
rebalancing feature, we will automatically transfer the Accumulated Value back
to the percentages you specified.
You may request portfolio rebalancing by sending a proper written request to
us during the Accumulation Period. You must designate the percentages to
allocate to each Variable Account and the desired frequency of rebalancing,
which may be on a quarterly, semi-annual or annual basis. You may specify a
date for the first rebalance, or we will treat the request as if you selected
the request's effective date. If you specify a date fewer than 30 days after
the Contract Date, the first rebalance will be delayed one month, and if
rebalancing was requested on the application with no specific date,
rebalancing will occur one period after the Contract Date. You may instruct us
at any time to terminate the portfolio rebalancing option by written request.
We may change, terminate or suspend the portfolio rebalancing feature at any
time.
SAFEKEEPING OF ASSETS
We are responsible for the safekeeping of the assets of the Variable
Accounts. These assets are held separate and apart from the assets of our
general account and our other separate accounts.
DIVIDENDS
The current dividend scale is zero and we do not anticipate that dividends
will be paid. If any dividend is paid, you may elect to receive the dividend
in cash or to add the dividend to the Contract's Accumulated Value. If no
election is made by you, the dividend will be added to the Accumulated Value.
We will allocate any dividend to Accumulated Value in accordance with your
most recent premium allocation instructions, unless instructed. You should
consult with your tax adviser before making an election.
MISSTATEMENTS
If the age or sex of an Annuitant or age of an Owner has been misstated, the
correct amount paid or payable by us under the Contract shall be such as the
Accumulated Value would have provided for the correct Age or sex (unless
unisex rates apply).
DISTRIBUTION OF THE CONTRACT
PACIFIC MUTUAL DISTRIBUTORS, INC.
Pacific Mutual Distributors, Inc. ("PMD") an indirect wholly-owned
subsidiary of ours, acts as the principal underwriter (distributor) of the
Contracts and offers the Contracts on a continuous basis. PMD is registered as
a broker-dealer, with the SEC and is a member of the National Association of
Securities Dealers ("NASD"). We pay PMD for acting as principal underwriter
under a distribution agreement. We and PMD enter into selling agreements with
broker-dealers whose registered representatives are authorized by state
insurance departments to sell the Contracts.
The aggregate amount of underwriting commissions paid to PMD for 1996, 1995,
and 1994 was $60,122,455, $27,712,281 and $6,999,408, respectively, of which
$0 was retained. Broker-dealers may choose one of two compensation structures
for sales of the Contracts or may permit their registered representatives to
choose on a Contract-by-Contract basis.
2
<PAGE>
PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account,
including the yield and effective yield of the Variable Account investing in
the Fund's Money Market Portfolio ("Money Market Variable Account"), the yield
of the remaining Variable Accounts, and the total return of all Variable
Accounts, may appear in advertisements, reports, and promotional literature to
current or prospective Owners.
Current yield for the Money Market Variable Account will be based on the
change in the value of a hypothetical investment (exclusive of capital
charges) over a particular 7-day period, less a pro-rata share of the Variable
Account's expenses accrued over that period (the "base period"), and stated as
a percentage of the investment at the start of the base period (the "base
period return"). The base period return is then annualized by multiplying by
365/7, with the resulting yield figures carried to at least the nearest
hundredth of one percent. Calculation of "effective yield" begins with the
same "base period return" used in the calculation of yield, which is then
annualized to reflect weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1) (To the power of 365/7)] - 1
Quotations of yield for the remaining Variable Accounts will be based on all
investment income per Accumulation Unit earned during a particular 30-day
period, less expenses accrued during the period ("net investment income"), and
will be computed by dividing net investment income by the value of the
Accumulation Unit on the last day of the period, according to the following
formula:
YIELD = 2[(a-b + 1)/6/ - 1]
---
cd
where a= net investment income earned during the period by the
Portfolio attributable to shares owned by the Variable Account,
b= expenses accrued for the period (net of reimbursements),
c= the average daily number of Accumulation Units outstanding
during the period that were entitled to receive dividends, and
d= the maximum offering price per Accumulation Unit on the last
day of the period.
Quotations of average annual total return for any Variable Account will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Contract over a period of one, five, and ten
years (or, if less, up to the life of the Variable Account), calculated
pursuant to the following formula: P(1 + T)/n/ = ERV (where P = a hypothetical
initial payment of $1,000, T = the average annual total return, n = the number
of years, and ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period). All total return figures reflect
the deduction of the applicable contingent deferred sales charge, the
administrative charge, the maintenance fee, and the mortality and expense risk
charge. Performance information for Variable Accounts may also be advertised
based on the historical performance of the Fund Portfolio underlying the
Variable Account for periods beginning prior to the date each Variable Account
commenced operations. Any such performance calculation will be based on the
assumption that the Variable Account corresponding to the applicable Fund
Portfolio was in existence throughout the stated period and that the
contractual charges and expenses of the Variable Account during that period
were equal to those currently assessed under the Contract. Quotations of total
return may simultaneously be shown for the same or other periods that do not
take into account certain contractual charges such as the contingent deferred
sales charge, the administrative charge, and the maintenance fee.
Performance information for a Variable Account may be compared, in reports
and promotional literature, to the Standard & Poor's 500 Stock Index ("S&P
500"), the Dow Jones Industrial Average ("DJIA"), the Donoghue Money Market
Institutional Averages, the Lehman Brothers Government Corporate Index, the
Lehman Brothers Government Bond Index, the Salomon Brothers High Yield Bond
Indexes, the Morgan Stanley Capital International's EAFE Index or other
indices that measure performance of a pertinent group of securities so that
investors may compare a Variable Account's results with those of a group of
securities widely regarded by investors as representative of the securities
markets in general or representative of a particular type of security.
3
<PAGE>
Performance information may also be compared to (i) other groups of variable
annuity separate accounts or other investment products tracked by Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds and other investment companies by overall performance, investment
objectives, and assets, or tracked by other services, companies, publications
or persons who rank such investment companies on overall performance or other
criteria; and (ii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Contract. Unmanaged indices
may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
Performance information for any Variable Account reflects only the
performance of a hypothetical Contract under which an Owner's Accumulated
Value is allocated to a Variable Account during a particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies, characteristics and
quality of the Portfolio of the Fund in which the Variable Account invests,
and the market conditions during the given time period, and should not be
considered as a representation of what may be achieved in the future.
Reports and promotional literature may also contain other information
including (i) the ranking of any Variable Account derived from rankings of
variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services or by other rating services, companies,
publications, or other persons who rank separate accounts or other investment
products on overall performance or other criteria, (ii) the effect of tax-
deferred compounding on a Variable Account's investment returns, or returns in
general, which may be illustrated by graphs, charts, or otherwise, and which
may include a comparison, at various points in time, of the return from an
investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a taxable basis, and (iii)
our rating or a rating of our claims paying ability as determined by firms
that analyze and rate insurance companies and by nationally recognized
statistical rating organizations.
4
<PAGE>
The following table presents the annualized total return for each Variable
Account, for the periods ended December 31, 1996 and for the period from each
such Variable Account's commencement of operations through December 31, 1996.
The table is based on a Contract for which the average initial premium is
approximately $45,000. The Accumulated Value (AV) reflects the deductions for
all contractual expenses except the contingent deferred sales charge. The Full
Withdrawal Value (FWV) reflects the deduction for all contractual expenses.
The information presented also includes data representing unmanaged market
indices.
THE RESULTS SHOWN IN THIS SECTION ARE NOT AN ESTIMATE OR GUARANTEE OF FUTURE
INVESTMENT PERFORMANCE.
ANNUALIZED RATES OF RETURN FOR PERIODS ENDED DECEMBER 31, 1996
ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
<TABLE>
<CAPTION>
SINCE
1 YEAR 3 YEARS** 5 YEARS** 10 YEARS** INCEPTION**
------------- ------------- ------------- -------------- -------------
VARIABLE ACCOUNTS AV FWV AV FWV AV FWV AV FWV AV FWV
- ----------------- ------ ----- ------- ----- ------- ----- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market 7/24/90*... 3.54 (1.86) 3.27 1.85 2.53 2.03 3.03 3.03
High Yield Bond
8/16/90*............... 9.69 4.29 8.34 7.05 11.63 11.28 11.85 11.84
Managed Bond 9/5/90*.... 2.73 (2.67) 4.34 2.94 6.02 5.59 8.11 8.11
Government Securities
8/22/90*............... 1.44 (3.96) 3.56 2.15 5.16 4.71 7.39 7.39
Aggressive Equity
4/1/96*................ 6.76+ 1.31+
Growth 8/16/90*......... 21.82 16.42 10.01 8.76 13.73 13.41 14.75 14.75
Growth LT 1/4/94*....... 16.16 10.76 20.55 19.49
Equity Income 8/16/90*.. 17.70 12.30 14.50 13.34 10.72 10.36 12.61 12.61
Multi-Strategy 9/25/90*. 10.92 5.52 9.95 8.70 8.30 7.90 11.16 11.16
Equity 1/4/95*.......... 26.18 20.78 13.84 12.67 12.08 11.73 11.51 11.51 13.16 13.16
Bond and Income 1/4/95*. (2.25) (7.65) 5.18 3.80 7.85 7.44 7.82 7.82 10.61 10.61
Equity Index 2/11/91*... 20.59 15.19 17.46 16.37 13.00 12.67 13.47 13.47
International 8/16/90*.. 20.13 14.73 9.93 8.86 8.65 8.26 6.42 6.42
Emerging Markets
4/1/96*................ (4.24)+ (9.69)+
<CAPTION>
MAJOR INDICES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
EAFE.................... 6.04 8.32 8.15 8.42
First Boston High Yield
Bond................... 12.42 9.33 12.63 11.48
LB Aggregate............ 3.61 6.02 7.03 8.47
LBG/Bond................ 2.77 5.53 6.87 8.13
LBG/C Bond.............. 2.91 5.79 7.18 8.38
LBG/C LT Bond........... 0.13 6.52 8.79 9.44
Russell 2500............ 19.03 15.76 16.00 13.87
Russell 2000............ 16.49 13.68 15.64 12.41
MSCI Emerging Markets
Free................... (0.20) (2.34) 12.65
S & P 500............... 22.96 19.68 15.22 15.29
</TABLE>
- --------
* Date Variable Account commenced operations.
** The performance of the Equity Income, Multi-Strategy and International
Variable Accounts for a portion of this period occurred at a time when
other Portfolio Managers managed the corresponding Portfolio in which each
Variable Account invests. Effective January 1, 1994, J.P. Morgan Investment
Management, Inc. became the Portfolio Manager of the Equity Income and
Multi-Strategy Portfolio and Templeton Investment Counsel, Inc. became the
Portfolio Manager of the International Portfolio; prior to 1/1/94, some of
the investment policies of the Equity Income Portfolio and the investment
objective of the Multi-Strategy Portfolio differed. Performance of the
Equity Portfolio and the Bond and Income Portfolio is based in part on the
performance of predecessor portfolios of Pacific Corinthian Variable Fund,
which began their first full year of operations January 1, 1984 and were
acquired by the Fund on December 31, 1994.
+ Returns for the Aggressive Equity and Emerging Markets Variable Accounts
are total returns from April 1, 1996.
In order to help you understand how investment performance can affect your
Variable Account Accumulated Value, we are including performance information
based on the historical performance of the Portfolios of the Fund. The
information presented also includes data representing unmanaged market
indices.
5
<PAGE>
The following table represents what the performance of the Variable Accounts
would have been if the Variable Accounts had been both in existence and
invested in the corresponding Portfolio since the date of the Portfolio's (or
predecessor series') inception or for the indicated period. Nine of the
Portfolios of the Fund available under the Contract have been in operation
since January 4, 1988 (January 30, 1991 in the case of the Equity Index
Portfolio, January 4, 1994 in the case of the Growth LT Portfolio and April 1,
1996 in the case of the Aggressive Equity Portfolio and Emerging Markets
Portfolio). Historical performance information for each of the Equity
Portfolio and the Bond and Income Portfolio is based in part on the
performance of that Portfolio's predecessor; each predecessor series was a
series of Pacific Corinthian Variable Fund and began its first full year of
operations January 1, 1984, the assets of which were acquired by the Fund on
December 31, 1994. Because the Variable Accounts had not commenced operations
until July 24, 1990 or later, as indicated in the chart above, however, and
because the Contracts were not available during this period; THESE ARE NOT
ACTUAL PERFORMANCE NUMBERS FOR THE VARIABLE ACCOUNTS OR FOR THE CONTRACT.
These are hypothetical total return numbers that represent the actual
performance of the Portfolios, adjusted for the fees and charges applicable to
the Contract. The Accumulated Value (AV) reflects the deduction for all
contractual expenses except the contingent deferred sales charge. The Full
Withdrawal Value (FWV) reflects the deduction for all contractual expenses.
Any charge for premium taxes and/or other taxes are not reflected in these
data, and reflection of the annual Maintenance Fee assumes an average Contract
size of $45,000.
THE RESULTS SHOWN IN THIS SECTION ARE NOT AN ESTIMATE OR GUARANTEE OF FUTURE
INVESTMENT PERFORMANCE.
ANNUALIZED RATES OF RETURN FOR PERIODS ENDED DECEMBER 31, 1996
ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
<TABLE>
<CAPTION>
SINCE
1 YEAR 3 YEARS* 5 YEARS* 10 YEARS* INCEPTION*
------------- ------------- ------------- -------------- -------------
VARIABLE ACCOUNTS AV FWV AV FWV AV FWV AV FWV AV FWV
- ----------------- ------ ----- ------- ----- ------- ----- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market............ 3.54 (1.86) 3.27 1.85 2.53 2.03 3.86 3.85
High Yield Bond......... 9.69 4.29 8.34 7.05 11.63 11.28 9.75 9.75
Managed Bond............ 2.73 (2.67) 4.34 2.94 6.02 5.59 7.87 7.86
Government Securities... 1.44 (3.96) 3.56 2.15 5.16 4.71 7.21 7.20
Aggressive Equity....... 6.76+ 1.31+
Growth.................. 21.82 16.42 10.01 8.76 13.73 13.41 13.89 13.89
Growth LT............... 16.16 10.76 20.53 19.47
Equity Income........... 17.70 12.30 14.50 13.34 10.72 10.36 11.56 11.55
Multi-Strategy.......... 10.92 5.52 9.95 8.70 8.30 7.90 9.54 9.53
Equity.................. 26.18 20.78 13.84 12.67 12.08 11.73 11.51 11.51 13.16 13.16
Bond and Income......... (2.25) (7.65) 5.18 3.80 7.85 7.44 7.82 7.82 10.61 10.61
Equity Index............ 20.59 15.19 17.46 16.37 13.00 12.67 14.87 14.86
International........... 20.13 14.73 9.93 8.86 8.65 8.26 7.72 7.71
Emerging Markets........ (4.24)+ (9.69)+
<CAPTION>
MAJOR INDICES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
EAFE.................... 6.04 8.32 8.15 8.42
First Boston High Yield
Bond................... 12.42 9.33 12.63 11.48
LB Aggregate............ 3.61 6.02 7.03 8.47
LBG/Bond................ 2.77 5.53 6.87 8.13
LBG/C Bond.............. 2.91 5.79 7.18 8.38
LBG/C LT Bond........... 0.13 6.52 8.79 9.44
Russell 2500............ 19.03 5.76 16.00 13.87
Russell 2000............ 16.49 13.68 15.64 12.41
MSCI Emerging Markets
Free................... (0.20) (2.34) 12.65
S&P 500................. 22.96 19.68 15.22 15.29
</TABLE>
- --------
* The performance of the Equity Income, Multi-Strategy and International
Variable Accounts for a portion of this period occurred at a time when other
Portfolio Managers managed the corresponding Portfolio in which each
Variable Account invests. Effective January 1, 1994, J.P. Morgan Investment
Management, Inc. became the Portfolio Manager of the Equity Income and
Multi-Strategy Portfolios and Templeton Investment Counsel, Inc. became the
Portfolio Manager of the International Portfolio; prior to January 1, 1994,
some of the investment policies of the Equity Income Portfolio and the
investment objective of the Multi-Strategy Portfolio differed.
+ Returns for the Aggressive Equity and Emerging Markets Variable Accounts are
total returns from April 1, 1996.
6
<PAGE>
TAX DEFERRED ACCUMULATION
In general, individuals who own annuity contracts are not taxed on increases
in the value under an annuity contract until some form of distribution is made
under the contract. Thus, the annuity contract will benefit from tax deferral
during the accumulation period, which generally will have the effect of
permitting an investment in an annuity contract to grow more rapidly than a
comparable investment under which increases in value are taxed on a current
basis. The following chart illustrates this benefit by comparing accumulation
under a variable annuity contract versus accumulation from an investment on
which gains are taxed on a current basis. The chart portrays accumulation of a
$10,000 premium or investment, assuming hypothetical gross annual rates of
return of 0%, 4% and 8%, compounded annually, and a tax bracket of 36%. Values
for the taxable investment are presented with the assumption that annual taxes
are paid from returns of the investment and they do not reflect the deduction
of any management fees or other expenses. The values shown for the variable
annuity do not reflect the deduction of contractual expenses, such as the
Mortality and Expense Risk Charge (equal to an annual rate of 1.25% of each
Variable Account's average daily net assets), the monthly Administrative
Charge (equal to an annual rate of 0.15% of each Variable Account's
Accumulated Value), the annual Maintenance Fee of $30, any Transfer Fee (equal
to $10.00 per transfer for the thirteenth and subsequent transfers occurring
during a Contract year), or Premium Tax Charge or the investment advisory fees
and operating expenses of the Fund. The values shown also do not reflect the
withdrawal charge. Generally, the withdrawal charge is equal to 6% of the
amount withdrawn attributable to premium payments that are two years old or
less, 5% of the amount withdrawn attributable to premium payments that are
three years old, 4% of the amount withdrawn attributable to premium payments
that are four years old, 3% of the amount withdrawn attributable to premium
payments that are five years old, and 0% of the amount withdrawn attributable
to premium payments that are six years old or older. Each premium payment is
considered one year old in the Contract year it is received by us and
increases in Age by one on each Contract Anniversary. There is no withdrawal
charge to the extent that total withdrawals that are free of charge during the
Contract year do not exceed 10% of the sum of your premium payments paid up to
the date of the withdrawal, plus premium paid in the previous four Contract
years. If these expenses were taken into account, they would reduce the
investment return shown for both the taxable investment and the hypothetical
variable annuity contract. In addition, these values assume that you do not
surrender the Contract or make any withdrawals until the periods shown. The
chart assumes a full withdrawal, at the end of the periods shown, of all
Accumulated Value and the payment of taxes at the 36% tax rate on the amount
in excess of the Premium Payments.
The rates of returns illustrated are hypothetical and are not a guarantee of
performance. Tax rates may vary for different taxpayers from the 36% used in
the chart, which would result in different values than those shown on the
chart and withdrawals and surrenders by Contract Owners who have not reached
age 59 1/2 may be subject to a tax penalty of 10%.
7
<PAGE>
POWER OF TAX DEFERRAL
$10,000 investment at annual rates of 0.00%, 4.00% and 8.00%, taxed @ 36%
<TABLE>
<CAPTION>
Taxable Tax-Deferred
Investment Investment
---------- ------------
<S> <C> <C>
19 Years
0% $10,000.00 $10,000.00
4% $12,875.97 $13,073.56
8% $16,476.07 $17,417.12
20 Years
0% $10,000.00 $10,000.00
4% $16,579.07 $17,623.19
8% $27,146.07 $33,430.13
30 Years
0% $10,000.00 $10,000.00
4% $21,347.17 $24,357.74
8% $44,726.05 $68,001.00
</TABLE>
8
<PAGE>
FINANCIAL STATEMENTS
Audited financial statements of the Separate Account as of December 31, 1996
and for each of the two years then ended, are incorporated by reference in
this SAI from the Annual Report of the Separate Account dated as of December
31, 1996.
The consolidated financial statements of Pacific Mutual Life as of December
31, 1996 and 1995 and for the three years ended December 31, 1996 are set
forth herein, starting on page 10. The financial statements of Pacific Mutual
Life which are included in this SAI should be considered only as bearing on
the ability of Pacific Mutual Life to meet our obligations under the
Contracts. They should not be considered as bearing on the investment
performance of the assets held in the Separate Account.
9
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Pacific Mutual Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated statements of financial
position of Pacific Mutual Life Insurance Company and subsidiaries (the
"Company") as of December 31, 1996 and 1995, and the related
consolidated statements of operations and equity and cash flows for
each of the three years in the period ended December 31, 1996. These
consolidated 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 Mutual Life
Insurance Company and subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company has adopted all applicable generally accepted accounting
principles relating to mutual life insurance companies for all periods
presented.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 1997
10
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1996 1995
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at fair value:
Fixed maturity securities $12,193.8 $11,359.2
Equity securities 260.8 218.5
Short-term investments 66.1 103.3
Mortgage loans 1,477.3 1,346.2
Real estate 280.0 288.6
Policy loans 3,131.8 2,793.3
Other investments 208.0 214.6
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS 17,617.8 16,323.7
Cash and cash equivalents 109.0 286.1
Deferred policy acquisition costs 531.5 391.1
Accrued investment income 202.5 198.8
Other assets 462.4 416.5
Separate account assets 8,142.1 5,686.9
- -------------------------------------------------------------------------------
TOTAL ASSETS $27,065.3 $23,303.1
===============================================================================
LIABILITIES AND EQUITY
Liabilities:
Universal life, annuity and other investment contract de-
posits $13,877.4 $12,719.4
Future policy benefits 2,442.0 2,378.9
Policyholders' dividends payable 64.5 65.3
Borrowings 120.5 83.0
Surplus notes 149.6 149.6
Other liabilities 572.0 586.6
Separate account liabilities 8,142.1 5,686.9
- -------------------------------------------------------------------------------
Total Liabilities 25,368.1 21,669.7
- -------------------------------------------------------------------------------
Commitments and contingencies
Equity:
Retained earnings 1,318.0 1,151.4
Unrealized gain on available for sale securities, net 379.2 482.0
- -------------------------------------------------------------------------------
Total Equity 1,697.2 1,633.4
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $27,065.3 $23,303.1
===============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
11
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Insurance premiums $ 465.4 $ 458.5 $ 455.9
Policy fees from universal life, annuity and
other investment contract deposits 348.6 309.0 280.0
Net investment income 1,063.0 1,022.3 933.6
Net realized capital gains (losses) 68.3 77.6 (2.1)
Investment management fees 14.1 12.9 144.6
Other income 188.6 139.4 203.6
- -------------------------------------------------------------------------------
TOTAL REVENUES 2,148.0 2,019.7 2,015.6
- -------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 653.2 654.2 638.6
Policy benefits paid or provided 664.7 668.5 590.2
Commission expenses 199.8 167.8 139.9
Operating expenses 350.0 308.3 433.8
- -------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 1,867.7 1,798.8 1,802.5
- -------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 280.3 220.9 213.1
Provision for income taxes 113.7 86.1 111.7
- -------------------------------------------------------------------------------
NET INCOME 166.6 134.8 101.4
Equity, beginning of year 1,633.4 809.3 942.8
Change in unrealized gain (loss) on available for
sale securities, net (102.8) 689.3 (234.9)
- -------------------------------------------------------------------------------
EQUITY, END OF YEAR $1,697.2 $1,633.4 $ 809.3
===============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
12
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 166.6 $ 134.8 $ 101.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization (1.4) (30.4) (28.3)
Deferred income taxes (49.7) (30.3) 26.2
Net realized capital (gains) losses (68.3) (77.6) 2.1
Deferred policy acquisition costs (140.4) 48.8 (126.5)
Interest credited to universal life, annuity
and other investment contract deposits 653.2 654.2 638.6
Change in accrued investment income (3.7) (16.1) 28.5
Change in future policy benefits 63.1 89.3 48.7
Change in policyholders' dividends payable (0.8) (0.5) (0.2)
Change in other assets and liabilities 169.7 172.9 (51.2)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 788.3 945.1 639.3
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Purchases (4,525.0) (3,001.3) (4,376.9)
Sales 2,511.0 1,940.3 2,690.3
Maturities and repayments 1,184.7 926.9 1,220.4
Held to maturity securities:
Purchases (181.9) (415.0)
Sales 62.3
Maturities and repayments 111.0 202.2
Repayments of mortgage loans 220.4 267.7 399.1
Proceeds from sales of mortgage loans and real
estate 14.5 27.4 52.8
Purchases of mortgage loans and real estate (414.3) (244.7) (237.7)
Distributions from partnerships 78.8 49.0
Change in policy loans (338.5) (389.8) (349.7)
Change in short-term investments 37.2 (66.7) 129.0
Other investing activity, net (120.1) (121.1) 15.7
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,351.3) (620.9) (669.8)
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
13
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1996 1995 1994
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 2,105.0 $ 1,437.9 $ 1,355.0
Withdrawals (1,756.6) (1,774.2) (1,376.0)
Net change in borrowings 37.5 (43.8) 36.9
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING AC-
TIVITIES 385.9 (380.1) 15.9
- -------------------------------------------------------------------------------
Net change in cash and cash equivalents (177.1) (55.9) (14.6)
Cash and cash equivalents, beginning of year 286.1 342.0 356.6
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 109.0 $ 286.1 $ 342.0
===============================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMA-
TION
Federal income taxes paid $ 185.9 $ 96.9 $ 82.8
Interest paid $ 27.2 $ 23.3 $ 24.1
===============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
14
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Mutual Life Insurance Company ("Pacific Mutual Life") was
established in 1868 and is organized under the laws of the State of
California as a mutual life insurance company. Pacific Mutual Life
conducts business in every state except New York.
Pacific Mutual Life and its subsidiaries and affiliates have primary
business operations which consist of life insurance, annuities, pension
products, group employee benefits and investment management and advisory
services. These primary business operations provide a broad range of life
insurance, accumulation and investment products for individuals and
businesses and offer a range of investment products to institutions and
pension plans. Additionally, through its major subsidiaries and
affiliates, Pacific Mutual Life provides a variety of group employee
benefits, as well as investment management and advisory services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Pacific Mutual Life
Insurance Company and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Mutual Life and its wholly-owned
insurance subsidiaries, Pacific Corinthian Life Insurance Company ("PCL"-
Note 3), PM Group Life Insurance Company ("PM Group") and World-Wide
Holdings Limited, and its noninsurance subsidiaries, Pacific Financial
Asset Management Corporation ("PFAMCo"), Pacific Mutual Distributors,
Inc. ("PMD"), Pacific Mutual Realty Finance, Inc., Pacific Mezzanine
Associates, L.L.C. and MC Associates, LLC. All significant intercompany
transactions and balances have been eliminated. Pacific Mutual Life
prepares its regulatory financial statements based on accounting
practices prescribed or permitted by the Insurance Department of the
State of California. These consolidated financial statements differ from
those followed in reports to regulatory authorities (Note 2).
On December 21, 1995, Pacific Mutual Life completed a subsidiary
reorganization in which PFAMCo became a direct, wholly-owned subsidiary
of Pacific Mutual Life. Prior to the reorganization PFAMCo was a wholly-
owned, second-tier subsidiary of Pacific Mutual Life. The intermediate
company, Pacific Financial Holding Company ("PFHC"), and certain of its
assets and liabilities were merged into PFAMCo in connection with this
reorganization. The remaining assets were merged into Pacific Mutual Life
which consisted of investments in subsidiaries as follows: PFAMCo, PMD
and PM Group.
ACCOUNTING PRONOUNCEMENTS ADOPTED
Pacific Mutual Life has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts," and Interpretation No.
40, "Applicability of Generally Accepted Accounting Principles to Mutual
Life Insurance and Other Enterprises" (the "Interpretation") issued by
the Financial Accounting Standards Board. SFAS No. 120 and the
Interpretation require that mutual life insurance companies and their
insurance subsidiaries adopt all applicable authoritative GAAP
pronouncements in any general purpose financial statements that they may
issue. This differs from prior years when Pacific Mutual Life issued its
regulatory financial statements as general purpose financial statements.
The accompanying consolidated financial statements for 1996, 1995 and
1994 reflect the effects of implementing SFAS No. 120 and the
Interpretation.
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires that long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used
shall be assessed for recoverability if certain events or changes in
circumstances are present. An impairment loss shall be recognized if the
carrying amount of
15
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the asset exceeds the fair value of the asset. Adoption of this
accounting standard did not have a significant impact on the consolidated
financial position or consolidated results of operations of the Company.
On January 1, 1996, the Company also adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights." SFAS No. 122 requires that rights
acquired to service mortgage loans for others be recognized separately
from the mortgage loan asset. SFAS No. 122 also requires that capitalized
mortgage servicing rights be assessed for impairment based on the fair
value of those rights and any impairment should be recognized through a
valuation allowance. Adoption of this accounting standard did not have a
significant impact on the consolidated financial position or consolidated
results of operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This
statement provides consistent accounting standards for securitizations
and other transfers of financial assets, determines when financial assets
(liabilities) should be considered sold (settled) and removed from the
statement of financial position, and determines when related revenues and
expenses should be recognized. The Company currently plans to adopt SFAS
No. 125 beginning on January 1, 1997. The adoption is not expected to
have a significant impact on the consolidated financial position or
consolidated results of operations of the Company.
INVESTMENTS
Fixed maturity securities and equity securities are reported at fair
value, with unrealized gains and losses, net of deferred income tax and
adjustments to related deferred policy acquisition costs, included as a
separate component of equity on the accompanying consolidated statements
of financial position. Trading securities, which are included in short-
term investments, are reported at fair value with unrealized gains and
losses included in net realized capital gains (losses) on the
accompanying consolidated statements of operations.
For mortgage-backed securities included in fixed maturity securities the
Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since
the acquisition of the securities. This adjustment is reflected in net
investment income.
In the first and second quarter of 1995, Pacific Mutual Life sold two
securities from the held to maturity category. The amortized cost of the
securities was $62.3 million and a net after tax loss of $0.7 million was
realized on the sales. The securities were sold due to the significant
deterioration of the issuer's creditworthiness.
Beginning with the third quarter of 1995, Pacific Mutual Life transferred
approximately $1.5 billion of securities from the held to maturity
category to the available for sale category. This amount represented the
amortized cost of the securities at the date of transfer. The fair value
of those securities was approximately $1.6 billion, resulting in a net
after tax unrealized gain of $52.5 million, which was reflected as a
direct increase to equity. The change in classification was a result of a
change in management's intent with respect to these securities. In order
to have the flexibility to respond to changes in interest rates and to
take advantage of changes in the availability of and the yield on
alternative investments, management has determined that the
reclassification of these securities as available for sale was
appropriate.
16
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in revenues.
Short-term investments are carried at fair value and include all trading
securities.
Derivative financial instruments are carried at fair value. Unrealized
gains and losses of derivatives used to hedge securities classified as
available for sale are reflected in a separate component of equity,
similar to the accounting of the underlying hedged assets. Realized gains
and losses on derivatives used for hedging are deferred and amortized
over the average life of the related hedged assets or insurance
liabilities. Unrealized gains and losses of other derivatives are
reflected in operations.
Mortgage loans and policy loans are stated at unpaid principal balances.
Real estate is carried at depreciated cost, or for real estate acquired
in satisfaction of debt, estimated fair value less estimated selling
costs at the date of acquisition if lower than the related unpaid
balance.
On November 15, 1994, PFAMCo and five of its subsidiaries (Pacific
Investment Management Company and subsidiaries, Parametric Portfolio
Associates, Inc., Cadence Capital Management Corporation, NFJ Investment
Group, Inc. and Blairlogie Capital Management Limited) entered into an
agreement and plan of consolidation with Thomson Advisory Group L.P., a
Delaware limited partnership with publicly traded units, to merge into a
newly capitalized partnership named PIMCO Advisors L.P. ("PIMCO
Advisors"). Collectively, PFAMCo and various of its subsidiaries
beneficially own approximately 42% of the outstanding General and Limited
Partner units of PIMCO Advisors as of December 31, 1996 and 1995. This
investment, which is included in other investments on the accompanying
consolidated statements of financial position, is accounted for on the
equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid debt instruments with an
original maturity of three months or less.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business, principally commissions,
medical examinations, underwriting, policy issue and other expenses, all
of which vary with and are primarily related to the production of new
business, have been deferred. For universal life, annuity and other
investment contract products, such costs are generally amortized in
proportion to the present value of expected gross profits using the
assumed crediting rate. Adjustments are reflected in earnings or equity
in the period the Company experiences deviations in gross profit
assumptions. Adjustments directly affecting equity result from experience
deviations due to changes in unrealized gains and losses in investments
classified as available for sale. For life insurance products, such costs
are being amortized over the premium-paying period of the related
policies in proportion to premium revenues recognized, using assumptions
consistent with those used in computing policy reserves. For the years
ended December 31, 1996, 1995 and 1994, net amortization of deferred
policy acquisition costs included in operating expenses amounted to $70.0
million, $63.3 million and $44.2 million, respectively, on the
accompanying consolidated statements of operations and equity.
PRESENT VALUE OF FUTURE PROFITS
Included in other assets is $16.1 million and $38.4 million which
represents the present value of estimated future profits of acquired
business in connection with the rehabilitation of First Capital Life
Insurance Company ("FCL" -Note 3) as of December 31, 1996 and 1995,
respectively. The aforementioned future profits are discounted to
17
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provide an appropriate rate of return and are being amortized over the
rehabilitation plan period. Amortization for the years ended December 31,
1996, 1995 and 1994 amounted to $24.2 million, $17.1 million and $4.7
million, respectively. During 1996, the Company changed certain
assumptions regarding the estimated life which resulted in an increase in
amortization in 1996 of approximately $17.0 million.
UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Universal life, annuity and other investment contract deposits are valued
using the retrospective deposit method and consist principally of
deposits received plus interest credited less accumulated assessments.
Interest credited to these policies ranged from 4% to 8.4% during 1996,
1995 and 1994.
The following detail of universal life, annuity and other investment
contract deposits is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------------
(In Millions)
<S> <C> <C>
Universal life $ 7,562.5 $ 6,930.7
Annuity 2,459.3 2,426.6
Other investment contract deposits 3,855.6 3,362.1
-------------------
$13,877.4 $12,719.4
===================
</TABLE>
The following detail of universal life, annuity and other investment
contract deposits policy fees and interest credited is as follows:
<TABLE>
<CAPTION>
Years Ended December
31,
1996 1995 1994
--------------------
(In Millions)
<S> <C> <C> <C>
Policy fees
Universal life $318.4 $292.6 $267.1
Annuity 26.6 12.8 9.4
Other investment contract deposits 3.6 3.6 3.5
--------------------
Total policy fees $348.6 $309.0 $280.0
--------------------
Interest credited
Universal life $279.3 $258.6 $226.9
Annuity 131.9 125.2 120.7
Other investment contract deposits 242.0 270.4 291.0
--------------------
Total interest credited $653.2 $654.2 $638.6
--------------------
</TABLE>
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions range from 4.5% to 9.3% for 1996, 1995 and
1994. Mortality, morbidity and withdrawal assumptions are generally based
on the Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for participating business are provided for
in the liability for future policy benefits. Included in policy benefits
paid or provided on the accompanying consolidated statements of
operations and equity are dividends to policyholders.
18
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Dividends are provided based on dividend formulas approved by the Board
of Directors and reviewed for reasonableness and equitable treatment of
policyholders by an independent consulting actuary. As of December 31,
1996 and 1995, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
STATE GUARANTY FUND ASSESSMENTS
Insurance companies are subject to assessments by life and health
guaranty associations in most states in which they are licensed to do
business. These assessments are based on the volume and type of business
they sell in those states and may be partially recovered in some states
through a future reduction in premium taxes. Based on current information
available from the National Organization of Life and Health Guaranty
Association, the Company, as of December 31, 1996, has accrued in other
liabilities on the accompanying consolidated statements of financial
position an amount adequate for anticipated payments of known
insolvencies, net of estimated recoveries of premium tax offsets.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized
when incurred.
Generally, receipts for universal life, annuities and other investment
contracts are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Investment management fees are recorded as revenues during the period
such services are performed.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 15 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over varying periods ranging from 3 to 40 years. Depreciation of
investment real estate is included in net investment income on the
accompanying consolidated statements of operations and equity.
Depreciation and amortization of other assets is included in operating
expenses on the accompanying consolidated statements of operations and
equity.
FEDERAL INCOME TAXES
Pacific Mutual Life is taxed as a life insurance company for Federal
income tax purposes and files a consolidated Federal income tax return
with all its includable domestic subsidiaries. The amount of Federal
income tax expense includes an equity tax calculated by a prescribed
formula that incorporates a differential earnings rate between stock and
mutual life insurance companies. Deferred income taxes are provided for
timing differences in the recognition of revenues and expenses for
financial reporting and income tax purposes.
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in
accounts with individual investment objectives. The investment results of
separate account assets generally pass through to separate account
policyholders and contract owners.
19
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 5
and 6 have been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented may not be indicative of the amounts
the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
significant effect on the estimated fair value amounts.
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.
2. STATUTORY RESULTS
The following are reconciliations of statutory surplus and statutory net
income for Pacific Mutual 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 equity and net
income included in the accompanying consolidated financial statements:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Millions)
<S> <C> <C>
Statutory surplus $ 815.2 $ 723.2
Deferred policy acquisition costs 542.0 411.9
Unrealized gain on available for sale
securities, net 379.2 482.0
Asset valuation reserve 209.4 191.4
Deferred income tax 174.6 129.2
Subsidiary equity 60.7 66.0
Non-admitted assets 22.8 22.5
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (340.4) (249.1)
Other (16.7) 5.9
------------------
Equity as reported herein $1,697.2 $1,633.4
==================
</TABLE>
20
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December
31,
1996 1995 1994
----------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $113.1 $ 85.1 $ 81.0
Deferred policy acquisition costs 111.2 76.4 59.4
Deferred income tax 70.9 31.5 (27.7)
Interest maintenance reserve 3.8 12.2 (7.7)
Net realized gain (loss) on trading
securities (11.6) 13.2 (2.0)
Earnings of subsidiaries (33.0) 5.9 20.7
Insurance and annuity reserves (91.3) (95.5) (28.2)
Other 3.5 6.0 5.9
----------------------
Net income as reported herein $166.6 $134.8 $101.4
======================
</TABLE>
RISK-BASED CAPITAL
Each insurance company's state of domicile imposes minimum risk-based
capital requirements that were developed by the National Association of
Insurance Commissioners ("NAIC"). 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. Regulatory compliance is determined by a ratio
of a company's regulatory total adjusted capital, as defined by the NAIC,
to its authorized control level risk-based capital, as defined by the
NAIC. Companies below specific trigger points or ratios are classified
within certain levels, each of which requires specified corrective
action. As of December 31, 1996 and 1995, the Company's ratios exceeded
the minimum risk-based capital requirements.
DIVIDENDS
Dividends to Pacific Mutual Life from its insurance subsidiaries are
subject to regulatory restrictions and approvals. The maximum amount of
dividends that can be paid by PM Group cannot exceed the lesser of 10% of
surplus as regards to policyholders, or the net statutory gain from
operations, without prior approval from the Insurance Commissioner of the
State of Arizona. During 1996, 1995 and 1994, PM Group received approval
to pay extraordinary dividends in excess of these limitations. PM Group
paid dividends of $25 million, $25 million and $20 million for the years
ended December 31, 1996, 1995 and 1994 of which $18 million, $17.2
million and $12.4 million, respectively, were considered extraordinary.
In accordance with the terms of the rehabilitation agreement (Note 3),
PCL is precluded from paying any dividends during the rehabilitation
period without the prior consent of the Insurance Department of the State
of California. No such dividends have been paid.
3. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
Pursuant to a five-year rehabilitation agreement approved by a California
Superior Court and the Insurance Department of the State of California in
July 1992, Pacific Mutual Life, through its wholly-owned subsidiary, PCL,
will facilitate the rehabilitation of FCL. In accordance with the five-
year rehabilitation agreement, insurance policies of FCL were
restructured and substantially all the assets and certain liabilities of
FCL were assumed by PCL on December 31, 1992, pursuant to an assumption
reinsurance agreement and asset purchase agreement and have been
accounted for as a purchase transaction.
21
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY (CONTINUED)
The rehabilitation agreement provides for the holders of restructured
policies to share in a substantial percentage of the unallocated
statutory surplus of PCL at the end of the rehabilitation period.
Policyholders have the option to surrender their restructured policies
with reduced benefits during this five-year period. During the
rehabilitation plan period, PCL is prohibited from issuing new insurance
policies. PCL will merge into Pacific Mutual Life, with Pacific Mutual
Life as the surviving entity, within thirty days following September 30,
1997, the end of the rehabilitation period.
In the event PCL is unable to pay contract benefits, Pacific Mutual Life
is obligated to contribute funds to pay those benefits in accordance with
the rehabilitation agreement.
4. ACQUISITION OF INSURANCE BLOCK OF BUSINESS
In 1996, Pacific Mutual Life signed a definitive agreement to acquire a
block of corporate-owned life insurance ("COLI") policies from
Confederation Life Insurance Company (U.S.) in Rehabilitation, which is
currently under rehabilitation. This block consists of approximately
40,000 policies, having a face amount of $9 billion and reserves of $1.7
billion. This block is primarily non-leveraged COLI. The transaction is
expected to close during the first half of 1997.
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 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 Estimated
Amortized ----------------- Fair
Cost Gains Losses Value
-------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Available for Sale Securities
As of December 31, 1996:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 297.9 $ 11.2 $ 0.3 $ 308.8
Obligations of states, political
subdivisions and foreign
governments 638.1 46.2 1.0 683.3
Corporate securities 6,848.3 506.3 91.9 7,262.7
Mortgage-backed and asset-backed
securities 3,753.6 98.0 19.4 3,832.2
Redeemable preferred stock 102.5 6.4 2.1 106.8
-------------------------------------
Total Fixed Maturity Securities $11,640.4 $668.1 $114.7 $12,193.8
=====================================
Equity Securities $ 229.6 $ 40.8 $ 9.6 $ 260.8
=====================================
</TABLE>
22
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Amortized ----------------- Fair
Cost Gains Losses Value
-------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Available for Sale Securities
-----------------------------
As of December 31, 1995:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 378.4 $ 33.4 $ 411.8
Obligations of states, political
subdivisions and foreign
governments 625.1 70.7 $ 3.3 692.5
Corporate securities 6,179.1 537.1 45.0 6,671.2
Mortgage-backed and asset-backed
securities 3,366.9 138.6 12.0 3,493.5
Redeemable preferred stock 89.4 3.1 2.3 90.2
-------------------------------------
Total Fixed Maturity Securities $10,638.9 $ 782.9 $ 62.6 $11,359.2
=====================================
Equity Securities $ 192.3 $ 32.2 $ 6.0 $ 218.5
=====================================
</TABLE>
The amortized cost and estimated fair values of fixed maturity securities
as of December 31, 1996, 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>
Available for Sale:
Due in one year or less $ 1,482.3 $ 1,489.0
Due after one year through five years 2,830.0 3,042.3
Due after five years through ten years 1,907.4 1,991.7
Due after ten years 1,667.1 1,838.6
-------------------
7,886.8 8,361.6
Mortgage-backed and asset-backed securities 3,753.6 3,832.2
-------------------
Total $11,640.4 $12,193.8
===================
</TABLE>
Proceeds from sales of all available for sale securities during 1996,
1995 and 1994 were $2.5 billion, $1.9 billion and $2.7 billion,
respectively. Gross gains of $89.3 million, $58.0 million and $56.0
million and gross losses of $29.9 million, $32.3 million and $70.8
million were realized on those sales during 1996, 1995 and 1994,
respectively.
23
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 831.6 $ 808.1 $ 741.3
Equity securities 17.8 7.3 8.9
Mortgage loans 107.9 112.9 136.3
Real estate 51.3 43.2 37.2
Policy loans 113.0 105.2 89.0
Other 48.9 47.1 3.3
--------------------------
Gross investment income 1,170.5 1,123.8 1,016.0
Investment expense 107.5 101.5 82.4
--------------------------
Net investment income $1,063.0 $1,022.3 $ 933.6
==========================
</TABLE>
The change in gross unrealized gain (loss) on investments in available
for sale and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
-------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale and trading
securities:
Fixed maturity $(169.1) $1,039.3 $(320.6)
Equity 6.5 17.2 (29.7)
-------------------------
Total $(162.6) $1,056.5 $(350.3)
=========================
</TABLE>
As of December 31, 1996 and 1995, investments in fixed maturity
securities with a carrying value of $19.6 million and $20.5 million,
respectively, were on deposit with state insurance departments to satisfy
regulatory requirements.
No investment, aggregated by issuer, exceeded 10% of total equity as of
December 31, 1996.
The Company has no non-income producing fixed maturity securities,
mortgage loans, real estate or other long-term investments as of December
31, 1996.
24
<PAGE>
Pacific Mutual 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, 1996 December 31, 1995
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities (Note 5) $12,454.6 $12,454.6 $11,577.7 $11,577.7
Mortgage loans 1,477.3 1,533.9 1,346.2 1,535.1
Policy loans 3,131.8 3,131.8 2,793.3 2,793.3
Cash and cash equivalents 109.0 109.0 286.1 286.1
Derivative financial
instruments:
Interest rate floors and
caps, options and
swaptions 59.3 59.3 39.4 39.4
Interest rate swap
contracts 1.0 1.0 2.4 2.4
Credit and total return
swaps 1.1 1.1 1.0 1.0
Liabilities:
Guaranteed interest
contracts 2,948.3 3,056.1 2,375.9 2,459.3
Deposit liabilities 799.6 800.6 876.3 899.4
Annuity liabilities 2,459.4 2,459.4 2,427.2 2,427.2
Surplus notes 149.6 157.5 149.6 157.7
Derivative financial
instruments:
Options written 1.5 1.5 1.5 1.5
Asset swap contracts 12.5 12.5 3.5 3.5
Foreign currency
derivatives 4.3 4.3 5.0 5.0
</TABLE>
The following methods and assumptions were used to estimate the fair
value of these financial instruments as of December 31, 1996 and 1995:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flow, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The carrying amounts of policy loans are a reasonable estimate of their
fair values.
CASH AND CASH EQUIVALENTS
The carrying amounts of these items are a reasonable estimate of their
fair values.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose value or cash flows are
"derived" from another source, such as an underlying security. They can
facilitate total return and, when used for hedging, they achieve the
lowest cost and most efficient execution of positions. Derivatives can
also be used to leverage by using very large notional amounts or by
creating formulas that multiply changes in the underlying security. The
Company's approach is to avoid highly leveraged or overly complex
investments. The Company utilizes certain derivative financial
instruments to diversify its business risk and to minimize its exposure
to fluctuations in market prices, interest rates or basis risk as well as
for facilitating total return. Risk is limited through modeling
derivative performance in product portfolios for hedging and setting loss
limits in total return portfolios.
25
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
Derivatives used by the Company involve elements of credit risk and
market risk in excess of amounts recognized in the accompanying
consolidated financial statements. The notional amounts of these
instruments reflect the extent of involvement in the various types of
financial instruments. The estimated fair values of these instruments are
based on quoted market prices, dealer quotations or internal price
estimates believed to be comparable to dealer quotations. These amounts
estimate what the Company would have to pay or receive if the contracts
were terminated. The Company determines, on an individual counterparty
basis, the need for collateral or other security to support financial
instruments with off-balance sheet counterparty risk.
A reconciliation of the notional or contract amounts and discussion of
the various derivative instruments is as follows:
<TABLE>
<CAPTION>
Balance Balance
Beginning Terminations End
of Year Acquisitions and Maturities of Year
---------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1996:
Interest rate floors and
caps, options and
swaptions $2,159.6 $3,075.0 $ 371.4 $4,863.2
Interest rate swap
contracts 619.6 620.9 252.2 988.3
Asset swap contracts 20.0 15.3 5.3 30.0
Credit and total return
swaps 146.1 307.2 96.8 356.5
Financial futures
contracts 310.1 3,358.9 3,059.8 609.2
Foreign currency
derivatives 15.4 43.1 17.1 41.4
December 31, 1995:
Interest rate floors and
caps, options and
swaptions 1,950.9 1,126.6 917.9 2,159.6
Interest rate swap
contracts 370.5 339.0 89.9 619.6
Asset swap contracts 30.0 10.0 20.0
Credit and total return
swaps 116.3 99.8 70.0 146.1
Financial futures
contracts 137.6 1,877.0 1,704.5 310.1
Foreign currency
derivatives 35.2 19.8 15.4
</TABLE>
Interest Rate Floors and Caps, Options and Swaptions
----------------------------------------------------
The Company uses interest rate floors and caps, options and swaptions to
hedge against fluctuations in interest rates and in its total return
portfolios. Interest rate floor agreements entitle the Company to receive
the differential, if below, between the specified rate and the current
value of the underlying index. Interest rate cap agreements entitle the
Company to receive the differential, if above, between the specified rate
and the current value of the underlying index. Options purchased involve
the right, but not the obligation, to purchase the underlying securities
at a specified price during a given time period. Swaptions are options to
enter into a swap transaction at a specified price. The Company uses
written covered call options on a limited basis. Gains and losses on
covered calls are offset by gains and losses on the underlying position.
Options and floors are reported as assets and options written are
reported as liabilities in the consolidated statements of financial
position. Cash requirements for these instruments are generally limited
to the premium paid by the Company at acquisition. The purchase premium
of these instruments is amortized on a constant effective yield basis and
included as a component of net investment income over the term of the
agreement. Interest rate floors and caps, options and swaptions mature
during fiscal years 1997 through 2007.
26
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
Interest Rate Swap Contracts
----------------------------
The Company uses interest rate swaps to manage interest rate risk. The
interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments or the exchange of floating to floating
interest payments tied to different indexes. Generally, no premium is
paid to enter into the contract and no principal payments are made by
either party. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. The interest rate swap contracts mature during fiscal
years 1997 through 2026.
Asset Swap Contracts
--------------------
The Company uses asset swap contracts to manage interest rate and equity
risk to better match portfolio duration to liabilities. Asset swap
contracts involve the exchange of upside equity potential for preferred
cash flow streams. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. The asset swap contracts mature during fiscal years
1998 through 2000.
Credit and Total Return Swaps
-----------------------------
The Company uses credit and total return swaps to take advantage of
market opportunities. Credit swaps involve the receipt of floating or
fixed rate payments in exchange for assuming potential credit losses of
an underlying security. Total return swaps involve the exchange of
floating rate payments for the total return performance of a specified
index or market. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. Credit and total return swaps mature during fiscal
years 1997 through 2013.
Financial Futures Contracts
---------------------------
The Company uses exchange-traded financial futures contracts to hedge
cash flow timing differences between assets and liabilities and overall
portfolio duration. Assets and liabilities are rarely acquired or sold at
the same time, which creates a need to hedge their change in value during
the unmatched period. In addition, foreign currency futures may be used
to hedge foreign currency risk on non U.S. dollar denominated securities.
Financial futures contracts obligate the holder to buy or sell the
underlying financial instrument at a specified future date for a set
price and may be settled in cash or delivery of the financial instrument.
Price changes on futures are settled daily through the daily margin cash
flows. The notional amounts of the contracts do not represent future cash
requirements, as the Company intends to close out open positions prior to
expiration.
Foreign Currency Derivatives
----------------------------
The Company enters into foreign exchange forward contracts and swaps to
hedge against fluctuations in foreign currency exposure. Foreign currency
derivatives involve the exchange of foreign currency denominated payments
for U.S. dollar denominated payments. Gains and losses on foreign
exchange forward contracts offset currency gains and losses on the
related assets. The amounts to be received or paid under the foreign
currency swaps are accrued and recognized in the consolidated statements
of operations through an adjustment to net investment income over the
life of the agreements. Foreign currency derivatives expire during fiscal
years 1997 through 2006.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair values of fixed maturity guaranteed interest contracts
are estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of deposit liabilities
with no defined maturities is the amount payable on demand.
27
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
ANNUITY LIABILITIES
The fair value of annuity liabilities approximates carrying value and
primarily includes policyholder deposits and accumulated credited
interest.
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Mutual Life has issued PRO GIC and Diversifier GIC contracts to
plan sponsors totaling $1.1 billion as of December 31, 1996, pursuant to
the terms of which the plan sponsor retains direct ownership and control
of the assets related to these contracts. Pacific Mutual Life agrees to
provide benefit responsiveness in the event that plan benefit requests
exceed plan cash flows. In return for this guarantee, Pacific Mutual Life
receives a fee which varies by contract. Pacific Mutual Life sets the
investment guidelines to provide for appropriate credit quality and cash
flow matching.
7. CONCENTRATION OF CREDIT RISK
The Company manages its investments to limit credit risk by diversifying
its portfolio among various security types and industry sectors. The
credit risk of financial instruments is controlled through credit
approvals, limits and monitoring procedures. Real estate and mortgage
loan investments are diversified by geographic location and property
type. Management believes that significant concentrations of credit risk
do not exist.
The Company is exposed to credit loss in the event of nonperformance by
the counterparties to interest rate swap contracts and other derivative
securities. However, the Company does not anticipate nonperformance by
the counterparties.
8. BORROWINGS
Pacific Mutual Life borrows for short-term needs by issuing commercial
paper. There were no commercial paper borrowings outstanding as of
December 31, 1996 and 1995. Pacific Mutual Life has a revolving credit
facility available of $250 million as of December 31, 1996 and 1995.
There were no borrowings under the revolving credit facility outstanding
as of December 31, 1996 and 1995.
PFHC had the ability to borrow up to $50 million from certain banks at
variable rates of interest. On December 21, 1995, outstanding loans
totaling $37 million were transferred to PFAMCo (Note 1). The borrowing
limit as of December 31, 1996 and 1995 was $150 million and $100 million,
respectively. The interest rate averaged 5.6%, 6.1% and 4.6% for the
years ended December 31, 1996, 1995 and 1994, respectively. The balance
outstanding as of December 31, 1996 and 1995 totaled $95.5 million and
$53 million, respectively. Outstanding borrowings are due and payable in
1997 and are subject to renewal.
During 1992, PFHC entered into a credit agreement with a group of banks
for borrowings of $45 million. Proceeds of this note were paid to PCL in
connection with the issuance of a certificate of contribution by PCL
(Note 3). On December 31, 1996 and 1995, the applicable interest rate was
6.2% and 6.5%, respectively. The outstanding balance of $25 million as of
December 31, 1996 was prepaid per the terms of the agreement on January
27, 1997.
28
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SURPLUS NOTES
Pacific Mutual Life has $150 million 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 Mutual Life or any holder of the Notes.
The Surplus Notes are unsecured and subordinated to all present and
future senior indebtedness and policy claims of Pacific Mutual 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
the years ended December 31, 1996, 1995 and 1994 and is included in net
investment income in the accompanying consolidated statements of
operations and equity.
10. INCOME TAXES
As required by SFAS No. 109, "Accounting for Income Taxes," the Company
accounts for income taxes using the liability method. Under SFAS No. 109,
the deferred tax consequences of changes in tax rates or laws must be
computed on the amounts of temporary differences and carryforwards
existing at the date a new law is enacted. Recording the effects of the
change involves adjusting deferred tax liabilities and assets with a
corresponding charge or credit recognized in the provision for income
taxes. The objective is to measure a deferred tax liability or asset
using the enacted tax rates and laws expected to apply to taxable income
in the periods in which the deferred tax liability or asset is expected
to be settled or realized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------------------
(In Millions)
<S> <C> <C> <C>
Current $163.5 $116.4 $ 85.5
Deferred (49.8) (30.3) 26.2
----------------------
$113.7 $ 86.1 $111.7
======================
</TABLE>
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------------------
(In Millions)
<S> <C> <C> <C>
Deferred policy acquisition costs $ 2.1 $ (6.0) $ (5.0)
Interest in advance 2.0 2.9 25.4
Investment valuation (7.3) 8.1 11.4
Reserves (28.5) (28.7) 7.1
Other (18.1) (6.6) (12.7)
----------------------
$(49.8) $(30.3) $ 26.2
======================
</TABLE>
29
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes based on the
prevailing corporate tax rate to the provision reflected in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
----------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $ 98.1 $ 77.3 $ 74.6
Equity tax-current year 16.3 36.1
Amortization of intangibles on equity
method investments 6.5 6.5
Non-taxable investment income (2.1) (2.1) (4.7)
Equity tax-recomputation of prior years (17.3)
Other 12.2 4.4 5.7
----------------------------
$ 113.7 $ 86.1 $ 111.7
============================
</TABLE>
The net deferred tax asset (liability) included in other assets on the
accompanying consolidated statement of financial position was comprised
of the tax effects of the following temporary differences:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------------
(In Millions)
<S> <C> <C>
Reserves $ 244.9 $ 216.4
Deferred compensation 27.6 25.4
Investment valuation 24.0 16.7
Postretirement benefits 9.8 9.4
Dividends 9.6 10.4
Interest in advance 1.7 3.6
Depreciation (9.8) (10.0)
Deferred policy acquisition costs (43.9) (41.8)
Other 22.1 6.1
----------------
Deferred taxes from operations 286.0 236.2
Unrealized gain on available for sale securities (204.5) (259.6)
----------------
Net deferred tax asset (liability) $ 81.5 $ (23.4)
================
</TABLE>
11. REINSURANCE
The Company accounts for reinsurance transactions utilizing SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration And Long-
Duration Contracts." SFAS No. 113 establishes the conditions required for
a contract with a reinsurer to be accounted for as reinsurance and
prescribes accounting and reporting standards for those contracts.
Amounts receivable from reinsurers for reinsurance on future policy
benefits, universal life deposits, and unpaid losses is reported as an
asset and included in other assets on the accompanying consolidated
statements of financial position.
30
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. REINSURANCE (CONTINUED)
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger risks
or, in the case of the producer-owned reinsurance company, to diversify
risk and retain top producing agents. All assets associated with
reinsured business remain with, and under the control of the Company.
Approximate amounts recoverable (payable) from (to) reinsurers include
the following amounts:
<TABLE>
<CAPTION>
December 31,
1996 1995
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(35.9) $(42.7)
Future policy benefits 90.0 87.7
Unpaid claims 4.6 7.8
Paid claims 8.4 7.9
</TABLE>
As of December 31, 1996, 85% 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,
1996 1995 1994
--------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance
premiums $ 44.3 $ 29.2 $ 26.0
Assumed reinsurance included in insurance
premiums 17.8 15.6 20.2
Ceded reinsurance netted against policy fees 71.0 66.5 66.7
Ceded reinsurance netted against net invest-
ment
income 192.5 176.6 151.0
Ceded reinsurance netted against interest
credited 155.2 140.0 119.9
Ceded reinsurance netted against policy ben-
efits 56.7 51.4 45.4
Assumed reinsurance included in policy bene-
fits 9.9 14.5 16.8
</TABLE>
31
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT INFORMATION
The operations of the Company have been classified into four business
segments as follows: Individual Life Insurance and Annuities, Pensions,
Group Employee Benefits and Corporate and Other. These segments are based
on the organization of the Company and are generally distinguished by the
products offered. The Corporate and Other segment generally includes the
assets and operations that do not support the other segments such as
certain non-life insurance related subsidiary operations. Depreciation
expense and capital expenditures are not material and have not been
reported. Revenues, income before income taxes and assets by segment are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-----------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Individual Life Insurance and Annuities $ 962.1 $ 927.0 $ 795.9
Pensions 507.3 513.9 464.0
Group Employee Benefits 454.2 419.3 423.7
Corporate and Other 224.4 159.5 332.0
-----------------------------
$ 2,148.0 $ 2,019.7 $ 2,015.6
=============================
Income before income taxes:
Individual Life Insurance and Annuities $ 92.0 $ 102.3 $ 94.8
Pensions 80.7 53.3 34.3
Group Employee Benefits 24.7 25.2 36.5
Corporate and Other 82.9 40.1 47.5
-----------------------------
$ 280.3 $ 220.9 $ 213.1
=============================
<CAPTION>
December 31,
1996 1995 1994
-----------------------------
(In Millions)
<S> <C> <C> <C>
Assets:
Individual Life Insurance and Annuities $15,484.4 $12,953.2 $10,912.3
Pensions 8,097.2 7,592.5 6,497.9
Group Employee Benefits 344.4 329.8 341.3
Corporate and Other 3,139.3 2,427.6 1,954.3
-----------------------------
$27,065.3 $23,303.1 $19,705.8
=============================
</TABLE>
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLAN
Pacific Mutual Life provides a qualified noncontributory defined benefit
pension plan which covers 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 Mutual 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
32
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
such contributions are made to a tax-exempt trust. Plan assets consist
primarily of group annuity contracts issued by Pacific Mutual Life, as
well as participating units of a real estate trust and mutual funds
managed by an indirect subsidiary of Pacific Mutual Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-----------------------
(In Millions)
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 3.7 $ 2.8 $ 3.2
Interest cost on projected benefit obligation 9.4 8.8 8.5
Actual return on plan assets (19.7) (24.1) 0.6
Amortization of net obligations and prior
service cost 8.0 14.0 (11.4)
----------------------
Net periodic pension cost $ 1.4 $ 1.5 $ 0.9
======================
</TABLE>
The following table sets forth the Plan's funded status and
amounts recognized on Pacific Mutual Life's consolidated
statements of financial position:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------------
(In Millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 114.4 $ 115.8
Nonvested benefits 1.2 0.8
----------------
Accumulated benefit obligation 115.6 116.6
Effect of projected future compensation increases 18.5 19.5
----------------
Projected benefit obligation 134.1 136.1
Plan assets at fair value (141.2) (125.6)
----------------
Plan assets (in excess) less than projected benefit
obligation (7.1) 10.5
Unrecognized net gain (loss) 2.5 (15.5)
Unrecognized transition asset 6.0 7.2
Unrecognized prior service cost 2.2 2.5
----------------
Accrued pension cost $ 3.6 $ 4.7
================
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1996 and 1995, the weighted average
discount rate used was 7.5% and 7%, respectively, and the rate of
increase in future compensation levels was 6% for both years. The
expected long-term rate of return on plan assets was 8.5% in 1996 and
1995.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE PLANS
Pacific Mutual 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 Mutual
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 Mutual Life's
33
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
commitment to qualified employees who retire after April 1, 1994 is
limited to specific dollar amounts. Pacific Mutual Life reserves the
right to modify or terminate the Plans at any time. As in the past, the
general policy is to fund these benefits on a pay-as-you-go basis. The
amount of benefits paid under the programs during 1996, 1995 and 1994 was
approximately $1.6 million, $1.7 million and $1.7 million, respectively.
Components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995 1994
-------------------
(In Millions)
<S> <C> <C> <C>
Service cost $ 0.2 $ 0.2 $ 0.2
Interest cost 1.5 1.9 1.8
Amortization (0.3) (0.3) (0.3)
-------------------
Net periodic postretirement benefit cost $ 1.4 $ 1.8 $ 1.7
===================
</TABLE>
The following table sets forth the Plan's funded status and amounts
recorded in other liabilities on the accompanying consolidated statements
of financial position:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------
(In Millions)
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $17.3 $20.9
Fully eligible active plan participants 2.0 1.7
Other active plan participants 2.5 2.3
-----------
Total accumulated postretirement obligation 21.8 24.9
Fair value of plan assets -- --
-----------
Unfunded accumulated postretirement obligation 21.8 24.9
Unrecognized net gain 3.7 0.4
Prior service cost 1.3 1.6
-----------
Accrued postretirement benefit liability $26.8 $26.9
===========
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 9% for 1996 and 10% for 1995 and is assumed to
decrease gradually to 4% in 2003 and remain at that level thereafter. The
amount reported is materially effected by the health care cost trend rate
assumptions. If the health care cost trend rate assumptions were
increased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1996 and 1995 would be increased by 11.5% and 10.9%,
respectively. The effect of this change would increase the aggregate of
the service and interest cost components of the net periodic benefit cost
by 12.3%, 11.4% and 13.6% for 1996, 1995 and 1994, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7.5% and 7% for 1996 and 1995, respectively.
OTHER PLANS
Pacific Mutual Life has a voluntary Retirement Incentive Savings Plan
pursuant to Section 401(k) of the Internal Revenue Code covering all
eligible employees of the Company. Pacific Mutual Life matches 50% of
each employees' contributions, up to a maximum of six percent of eligible
compensation.
34
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
Pacific Mutual Life also has a deferred compensation plan which permits
certain employees to defer portions of their compensation and earn a
guaranteed interest rate on the deferred amounts. The interest rate is
determined annually and is guaranteed for one year. The compensation
which has been deferred has been accrued and the primary expense, other
than compensation, related to this plan is interest on the deferred
amounts.
The Company also has performance based incentive compensation plans for
its employees.
14. TRANSACTIONS WITH AFFILIATES
Pacific Mutual 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 Mutual Life charges
fees based upon the net asset value of the portfolios of the Pacific
Select Fund, which amounted to $14.3 million, $6.5 million and $3.0
million for the years ended December 31, 1996, 1995 and 1994,
respectively. In addition, Pacific Mutual Life entered into an agreement
with the Pacific Select Fund on October 1, 1995, to provide certain
support services for an administration fee which is based on an
allocation of actual costs. Such administration fees amounted to $108,000
and $28,550 for the years ended December 31, 1996 and 1995, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $6.2 million, $5.0 million and $0.4 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
Included in equity securities on the accompanying consolidated statements
of financial position are investments in mutual funds and other
investments managed by PIMCO Advisors which amounted to $110.6 million
and $77.6 million as of December 31, 1996 and 1995, respectively.
Pacific Mutual Life provides certain support services to PIMCO Advisors.
Charges for these services are based on an allocation of actual costs and
amounted to $1.4 million, $1.9 million and $0.2 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
15. SUBSIDIARY PROFIT-SHARING PLANS AND OTHER COMPENSATION PLANS
Prior to the PIMCO Advisors transaction (Note 1), certain of PFAMCo's
direct subsidiaries had nonqualified profit-sharing plans (the "Profit-
Sharing Plans") covering certain key employees ("Key Employees") and
other employees. The Profit-Sharing Plans provided for awards based on
the profitability of the respective subsidiary, as defined in the
employment agreements. Such profitability was primarily based on income
before income taxes and before profit-sharing. The awards ranged from 40%
to 80% of such amounts depending on the level of profitability. The
profit-sharing awards were fully vested as of the PIMCO Advisors
transaction date of November 15, 1994.
In addition, Key Employees of certain indirect subsidiaries participated
in long-term incentive plans that provided compensation under the Profit-
Sharing Plans for a specified period of time subsequent to their
termination of employment. These plans were terminated as of the PIMCO
Advisors transaction date.
Effective November 15, 1994, termination and non-competition agreements
were entered into with certain Key Employees. These agreements provide
terms and conditions for the allocation of future proceeds from
distributions and sales of certain PIMCO Advisors units and other
noncompete payments. When the amount of future payments to be made to a
Key Employee is determinable, a liability for such amount is established
and is included in other liabilities in the consolidated statements of
financial position.
For the years ended December 31, 1996, 1995 and 1994, approximately $35.3
million, $28.6 million and $166.9 million, respectively, is included in
operating expenses in the consolidated statements of operations related
to the above agreements.
35
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. INVESTMENT COMMITMENTS
The Company has outstanding commitments to make investments in fixed
maturities and other investments as follows (In Millions):
<TABLE>
<CAPTION>
Years Ending
December 31:
------------
<S> <C>
1997 $193.1
1998-2001 109.0
2002 and thereafter 19.5
------
Total $321.6
======
</TABLE>
17. LITIGATION
The Company is a respondent in a number of legal proceedings, some of
which involve extra-contractual damages. In the opinion of management,
the outcome of these proceedings is not likely to have a material adverse
effect on the consolidated financial position of the Company.
--------------------------------------------------------------------------
36
<PAGE>
FORM NO. 250-7B
