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PACIFIC SELECT
VARIABLE ANNUITY PROSPECTUS MAY 1, 1999
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Pacific Select Variable Annuity is an individual flexible premium deferred
variable accumulation deferred annuity contract issued by Pacific Life
Insurance Company.
This Contract is not available in all This Prospectus provides information you should know before buying a Contract.
states. This Prospectus is not an offer in It's accompanied by a current Prospectus for the Pacific Select Fund, the Fund
any state or jurisdiction where we're not that provides the underlying Portfolios for the Variable Investment Options
legally permitted to offer the Contract. offered under the Contract. The Variable Investment Options are funded by the
Pacific Select Variable Annuity Separate Account of Pacific Life. Please read
The Contract is described in detail in both Prospectuses carefully, and keep them for future reference.
this Prospectus and its Statement of
Additional Information (SAI). The Pacific Here's a list of all of the Investment Options available under your Contract:
Select Fund is described in its prospectus
and its SAI. No one has the right to VARIABLE INVESTMENT OPTIONS
describe the Contract or the Pacific Select Money Market Large-Cap Value
Fund any differently than they have been High Yield Bond Mid-Cap Value
described in these documents. Managed Bond Equity
Government Securities Bond and Income
You should be aware that the Securities and Growth* Equity Index
Exchange Commission (SEC) has not reviewed Aggressive Equity Small-Cap Index
the Contract and does not guarantee that the Growth LT REIT
information in this Prospectus is accurate Equity Income International
or complete. It's a criminal offense to Multi-Strategy Emerging Markets
say otherwise.
* You can only choose the Growth Investment Option if your Contract was issued
This Contract is not a deposit or obligation before January 1, 1994.
of, or guaranteed or endorsed by, any bank.
It's not federally insured by the Federal FIXED OPTION
Deposit Insurance Corporation, the Federal Fixed
Reserve Board, or any other government
agency. Investment in a Contract involves You'll find more information about the Contract and the Pacific Select Variable
risk, including possible loss of principal. Annuity Separate Account in the SAI dated May 1, 1999. The SAI has been filed
with the SEC and is considered to be part of this Prospectus because it's
incorporated by reference. You'll find a table of contents for the SAI on page
41 of this Prospectus. You can get a copy of the SAI without charge by calling
or writing to Pacific Life. You can also visit the SEC's website at
www.sec.gov, which contains the SAI, material incorporated into this Prospectus
by reference, and other information about registrants that file electronically
with the SEC.
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YOUR GUIDE TO THIS PROSPECTUS
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An Overview of Pacific Select Variable Annuity 3 The Fixed Account 24
- ------------------------------------------------------------ Interest 24
Your Investment Options 9 Bail Out Provision 25
- ------------------------------------------------------------ Death Benefit 25
Pacific Life, the Separate Account, and the Contract Charges 25
Investment Adviser 10 Transfers and Withdrawals 25
Pacific Life Insurance Company 10 Payments from the Fixed Account 26
Separate Account 10 ------------------------------------------------------------
The Investment Adviser 10 More About the Contract 26
Financial Highlights 11 Ownership 26
- ------------------------------------------------------------ Designation and Change of Beneficiary 26
The Contract 12 Payments from the Separate Account 26
General 12 Proof of Age and Survival 26
Application for a Contract 12 Loans 27
Premium Payments 12 Restriction on Withdrawals from 403(b) Programs 28
Allocation Limitation 13 Restrictions Under the Texas Optional Retirement Program 29
Allocation of Premiums 13 ------------------------------------------------------------
Automatic Transfer Options 13 Federal Tax Status 29
Dollar Cost Averaging Option 13 Introduction 29
Portfolio Rebalancing Option 14 Tax Status of Pacific Life and the Separate Account 29
Transfers of Accumulated Value 14 Taxation of Annuities in General--Non-Qualified Plans 30
Accumulated Value 14 Additional Considerations 31
Determination of Accumulated Value 15 Qualified Plans 32
Full and Partial Withdrawals 15 Taxes on Pacific Life 35
Preauthorized Scheduled Withdrawals 16 ------------------------------------------------------------
Free Look Right 16 Additional Information 35
Death Benefit 17 Voting Rights 35
Death of Owner 18 Substitution of Investments 35
- ------------------------------------------------------------ Replacement of Life Insurance or Annuities 36
Charges and Deductions 19 Changes to Comply with Law and Amendments 36
Contingent Deferred Sales Charge 19 Reports to Owners 36
Mortality and Expense Risk Charge 20 Inquiries and Submitting Forms and Requests 37
Administrative Charge 20 Telephone Transfer Privileges 38
Maintenance Fee 20 Preparation for the Year 2000 38
Transfer Fee 20 Performance Information 39
Premium Tax and Other Taxes 21 Financial Statements 39
Variations in Charges 21 ------------------------------------------------------------
Guarantee of Certain Charges 22 Terms Used in This Prospectus 40
Fund Expenses 22 ------------------------------------------------------------
- ------------------------------------------------------------ Contents of the Statement of Additional Information 41
Annuity Period 22 ------------------------------------------------------------
General 22 Appendix 42
Annuity Options 23 ------------------------------------------------------------
Selection of an Option 24 Where to Go for More Information Back Cover
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2
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AN OVERVIEW OF PACIFIC SELECT VARIABLE ANNUITY
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This overview tells you some key things you should know about your Contract.
It's designed as a summary only - please read this Prospectus, your Contract
and the Statement of Additional Information for more detailed information.
Some states have different rules about how annuity contracts are described or
administered. The terms of your Contract, or of any endorsement or supplement,
prevail over what's in this Prospectus.
In this Prospectus, you and your mean the Contract Owner or Policyholder.
Pacific Life, we, us and our refer to Pacific Life Insurance Company. Contract
means a Pacific Select Variable Annuity contract, unless we state otherwise.
--------------------------------------------------------------------------------
Pacific Select Variable Annuity Basics Pacific Select Variable Annuity is an annuity contract between you and Pacific
Life Insurance Company.
An annuity contract may be appropriate if
you're looking for retirement income or This Contract is designed for long-term financial planning. It allows you to
you want to meet other long-term invest money on a tax-deferred basis for retirement or other goals, and to
financial objectives. receive income in a variety of ways, including a series of income payments for
life or for a specified period of years.
This Contract may not be the right one for
you, however, if you need to withdraw money Non-Qualified and Qualified Contracts are available. You buy a Non-Qualified
for short-term needs, because withdrawal Contract with "after-tax" dollars. You buy a Qualified Contract under a
charges and tax penalties for early qualified retirement or pension plan, or an individual retirement annuity or
withdrawal may apply. account (IRA), or form thereof.
You should consider the Contract's Pacific Select Variable Annuity is a variable annuity, which means that the
investment and income benefits, as well as value of your Contract fluctuates depending on the performance of the Investment
its costs. Options you choose. The Contract allows you to choose how often you make premium
payments and how much you add each time. The Contract provides a death benefit if the
first Owner or last surviving Annuitant dies during the accumulation phase.
Your Right to Cancel
During the right to cancel period (your Free Look Period), you have the right
to cancel your Contract and return it to us or to your registered
representative for a refund. The amount refunded may be more or less than the
premium payments you've made, depending on the state where you signed your
application and the kind of Contract you buy. If you signed your application in
a state that requires us to refund premium payments, we'll hold any premium
payments allocated to the Variable Investment Options in the Money Market
Investment Option until the Free Look Transfer Date.
3
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AN OVERVIEW OF PACIFIC SELECT VARIABLE ANNUITY
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The Accumulation Phase During the accumulation phase, you can put money in your Contract by making
premium payments, and choose Investment Options to allocate them to. You can
The Investment Options you choose and how also take money out of your Contract by making a withdrawal. The accumulation
they perform will affect the value of your phase begins on your Contract Date and continues until your Annuity Start Date.
Contract during the accumulation phase. We call the accumulation phase the Accumulation Period.
Premium Payments
Your initial premium payment must be at least $5,000 for a Non-Qualified
Contract and at least $2,000 for a Qualified Contract. Additional premium
payments must be at least $250 for a Non-Qualified Contract and $50 for a
Qualified Contract.
You can ask your registered representative Investment Options
to help you choose the right Investment You can choose from 17 Variable Investment Options (also called Subaccounts),
Options for your goals and risk tolerance. each of which invests in a corresponding Portfolio of the Pacific Select Fund.
If you bought your Contract before January 1, 1994, you can also choose the
You'll find more about the Investment Growth Variable Account. We're the investment adviser for the Pacific Select
Options starting on page 9. Fund. We oversee the management of all the Fund's Portfolios and manage two of
the Portfolios directly. We've retained other managers to manage the other
Portfolios. The value of each Portfolio will fluctuate with the value of the
investments it holds, and returns are not guaranteed.
You can also choose the Fixed Account Option that earns a guaranteed rate of
interest of at least 4% annually.
We allocate your premium payments to the Investment Options you choose. The
value of your Contract will fluctuate during the Accumulation Period depending
on the Investment Options you've chosen. You bear the investment risk of any
Variable Investment Options you choose.
You'll find more about transfers starting Transferring among Investment Options
on page 14. You can transfer among Investment Options any time until your Annuity Start
Date without paying any current income tax. You can also make automatic
transfers by enrolling in our dollar cost averaging or portfolio rebalancing
programs. Some restrictions apply to transfers to and from the Fixed Account.
You'll find more about withdrawals starting Withdrawals
on page 15. You can make full and partial withdrawals to supplement your income or for
other purposes. You can withdraw a certain amount each year without paying a
withdrawal charge, but you may pay a withdrawal charge if you withdraw premium
payments that are less than six years old. Some restrictions apply to making
withdrawals from the Fixed Account.
In general, you may have to pay tax on withdrawals or other distributions from
your Contract. If you're under age 59 1/2, a 10% federal penalty tax may also
apply to withdrawals.
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4
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The Income Phase The income phase of your Contract begins on your Annuity Date. Generally, you
can choose to surrender your Contract and receive a single payment or you can
You'll find more about annuitization annuitize your Contract and receive a series of income payments. We call the
starting on page 22. income phase the Annuity Period.
You can choose to receive fixed annuity payments for life or for a specified
period of years. You can choose monthly, quarterly, semiannual or annual
payments. We'll make the income payments to your designated payee.
--------------------------------------------------------------------------------
The Death Benefit The Contract provides a death benefit if the first Owner or last surviving
Annuitant dies during the Accumulation Period. Death benefit proceeds are
You'll find more about the death benefit payable when we receive proof of death and payment instructions. Who we pay a
starting on page 17. death benefit to, and how we calculate the amount of the death benefit depend
on who dies first and the type of Contract you own.
5
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<CAPTION>
AN OVERVIEW OF PACIFIC SELECT VARIABLE ANNUITY
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This section of the overview explains the fees and expenses associated with
your Pacific Select Variable Annuity Contract.
For information about how Separate Account . Contract Expenses are expenses that we deduct from your Contract. These
and Fund expenses affect accumulation units, expenses are fixed under the terms of your Contract. Premium taxes or other
see Financial Highlights on page 11. taxes may also apply to your Contract. We generally charge premium taxes when
you annuitize your Contract, but there may be other times when we charge them
to your Contract instead. Please see your Contract for details.
. Separate Account Annual Expenses are expenses that we deduct from the assets
of each Variable Investment Option. They are guaranteed not to increase under
the terms of your Contract.
. Fees and Expenses Paid by the Pacific Select Fund affect you indirectly if you
choose a Variable Investment Option because they reduce Portfolio returns. They
can vary from year to year. They are not fixed and are not part of the terms of
your Contract.
---------------------------------------------------------------------------------
Contract Expenses Sales charge on premium payments........................................... None
Maximum Withdrawal Charge, as a percentage of premium payments.......... 6%
Administrative Charge/2/, as an annual percentage of Accumulated
Value.................................................................. 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%
/1/ The withdrawal charge may not apply or may be reduced under certain
circumstances. See THE CONTRACT--Full and Partial Withdrawals, and CHARGES
AND DEDUCTIONS.
/2/ In the future, we may charge a fee of up to $10 for any transfer over 12
that you make in a Contract Year. See THE CONTRACT--Transfers of Accumulated
Value.
/3/ This charge is deducted monthly. The monthly rate is calculated by dividing
the annual rate by 12. The Administrative Charge is equal to 0.12% annually
for Contracts issued from applications we received before May 1, 1992. If the
initial premium payment for any of these Contracts was $50,000 or more, the
charge is reduced to 0.06% on an annual basis. In the future, we may increase
the charge on these Contracts to 0.15% on an annual basis.
/4/ We deduct the Maintenance Fee on each Contract Anniversary up to your
Annuity Start Date and when you make a full withdrawal or annuitize your
Contract. The fee does not apply if the premium payments we receive for your
Contract in the first Contract Year are $50,000 or more. See CHARGES AND
DEDUCTIONS.
/5/ This is an annual rate. The daily rate is calculated by dividing the annual
rate by 365.
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6
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Fees and Expenses Paid by The Pacific Select Fund pays advisory fees and other expenses. These are
the Pacific Select Fund deducted from the assets of the Fund's Portfolios and may vary from year to
year. They are not fixed and are not part of the terms of your Contract. If you
You'll find more about the Pacific Select choose a Variable Investment Option, these fees and expenses affect you
Fund starting on page 9, and in the Fund's indirectly because they reduce Portfolio returns.
prospectus, which accompanies this
Prospectus. Advisory Fee
Pacific Life is the investment adviser to the Fund. The Fund pays an advisory
fee to us for these services. The table below shows the advisory fee as an
annual percentage of each Portfolio's average daily net assets.
Other Expenses
The table also shows expenses the Fund paid in 1998 as an annual percentage of
each Portfolio's average daily net assets. To help limit Fund expenses, we've
agreed to waive all or part of our investment advisory fees or otherwise
reimburse each Portfolio for expenses (not including advisory fees, additional
costs associated with foreign investing and extraordinary expenses) that exceed
0.25% of its average daily net assets. We do this voluntarily, but do not
guarantee that we'll continue to do so after December 31, 2000. No
reimbursement was necessary for 1998.
--------------------------------------------------------------------------------
Portfolio Advisory Fee Other Expenses Total Expenses
--------------------------------------------------------------------------------
Money Market/1/ 0.37% 0.06% 0.43%
High Yield Bond/1/ 0.60% 0.06% 0.66%
Managed Bond 0.60% 0.06% 0.66%
Government Securities 0.60% 0.06% 0.66%
Growth 0.65% 0.05% 0.70%
Aggressive Equity 0.80% 0.09% 0.89%
Growth LT 0.75% 0.05% 0.80%
Equity Income/1/ 0.65% 0.05% 0.70%
Multi-Strategy/1/ 0.65% 0.06% 0.71%
Large-Cap Value/2/ 0.85% 0.06% 0.91%
Mid-Cap Value/2/ 0.85% 0.06% 0.91%
Equity 0.65% 0.06% 0.71%
Bond and Income 0.60% 0.10% 0.70%
Equity Index 0.16% 0.05% 0.21%
Small-Cap Index/2/ 0.50% 0.06% 0.56%
REIT/2/ 1.10% 0.06% 1.16%
International 0.85% 0.15% 1.00%
Emerging Markets 1.10% 0.36% 1.46%
--------------------------------------------------------------------------------
/1/ Total net expenses for these Portfolios in 1998, after deduction of an
offset for custodian credits, were: 0.42% for Money Market Portfolio, 0.65%
for High Yield Bond Portfolio, 0.69% for Equity Income Portfolio, and 0.70%
for Multi-Strategy Portfolio.
/2/ Expenses are estimated. There were no actual advisory fees or other expenses
for these Portfolios in 1998 because the Portfolios started on January 4,
1999.
7
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<CAPTION>
AN OVERVIEW OF PACIFIC SELECT VARIABLE ANNUITY
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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.
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Contract not
Surrendered or
Contract Contract Annuitized and
Surrendered at End Annuitized at End Remains in Force at
of Time Period of Time Period* End of Time Period
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Variable Account 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr
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Money Market $73 $104 $129 $220 $73 $59 $102 $220 $19 $59 $102 $220
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High Yield Bond 76 111 141 245 76 66 114 245 22 66 114 245
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Managed Bond 76 111 141 245 76 66 114 245 22 66 114 245
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Government Securities 76 111 141 245 76 66 114 245 22 66 114 245
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Growth 76 113 143 249 76 68 116 249 22 68 116 249
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Aggressive Equity 78 118 153 268 78 73 126 268 24 73 126 268
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Growth LT 77 116 148 259 77 71 121 259 23 71 121 259
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Equity Income 76 113 143 249 76 68 116 249 22 68 116 249
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Multi-Strategy 76 113 143 250 76 68 116 249 22 68 116 250
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Large-Cap Value 78 119 154 270 78 74 127 270 24 74 127 270
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Mid-Cap Value 78 119 154 270 78 74 127 270 24 74 127 270
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Equity 76 113 143 250 76 68 116 250 22 68 116 250
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Bond and Income 76 113 143 249 76 68 116 249 22 68 116 249
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Equity Index 71 98 118 197 71 53 91 197 17 53 91 197
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Small-Cap Index 75 108 136 234 75 63 109 234 21 63 109 234
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REIT 81 127 166 295 81 82 139 295 27 82 139 295
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International 79 122 158 279 79 77 131 279 25 77 131 279
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Emerging Markets 84 135 181 324 84 90 154 324 30 90 154 324
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* 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 withdrawal charge would not be assessed if the Contract was in force
during the Accumulation Period for at least two Contract Years.
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8
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YOUR INVESTMENT OPTIONS
You may choose among the different Variable Investment Options and the Fixed
Option.
Your Variable Investment Options
Each Variable Investment Option invests in a separate Portfolio of the Fund.
For your convenience, the following chart summarizes some basic data about each
Portfolio. This chart is only a summary. For more complete information on each
Portfolio, including a discussion of the Portfolio's investment techniques and
the risks associated with its investments, see the accompanying Fund
Prospectus. No assurance can be given that a Portfolio will achieve its
investment objective. YOU SHOULD READ THE FUND PROSPECTUS CAREFULLY BEFORE
INVESTING.
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Primary Investments
Portfolio Objective (under normal circumstances) Portfolio Manager
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<S> <C> <C> <C>
Money Market Current income consistent Highest quality money market Pacific Life
with preservation of instruments believed to have
capital. limited credit risk.
- ------------------------------------------------------------------------------------------------------
High Yield High level of current Fixed income securities with Pacific Life
Bond income. lower and medium-quality credit
ratings and intermediate to long
terms to maturity.
- ------------------------------------------------------------------------------------------------------
Managed Bond Maximize total return Medium and high-quality fixed Pacific Investment
consistent with prudent income securities with varying Management Company
investment management. terms to maturity.
- ------------------------------------------------------------------------------------------------------
Government Maximize total return Fixed income securities that are Pacific Investment
Securities consistent with prudent issued or guaranteed by the U.S. Management Company
investment management. government, its agencies or
government-sponsored enterprises.
- ------------------------------------------------------------------------------------------------------
Growth Growth of capital. Equity securities of smaller and Capital Guardian
medium-sized companies. Trust Company
- ------------------------------------------------------------------------------------------------------
Aggressive Capital appreciation. Equity securities of small Alliance Capital
Equity emerging-growth companies and Management L.P.
medium-sized companies.
- ------------------------------------------------------------------------------------------------------
Growth LT Long-term growth of capital Equity securities of a large Janus Capital
consistent with the number of companies of any size. Corporation
preservation of capital.
- ------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Equity securities of large and J.P. Morgan
and income. medium-sized dividend-paying U.S. Investment Management
companies. Inc.
- ------------------------------------------------------------------------------------------------------
Multi-Strategy High total return. A mix of equity and fixed income J.P. Morgan
securities. Investment Management
Inc.
- ------------------------------------------------------------------------------------------------------
Large-Cap Long-term growth of capital. Equity securities of large U.S. Salomon Brothers
Value Current income is of companies. Asset Management Inc
secondary importance.
- ------------------------------------------------------------------------------------------------------
Mid-Cap Value Capital appreciation. Equity securities of medium-sized Lazard Asset
U.S. companies believed to be Management
undervalued.
- ------------------------------------------------------------------------------------------------------
Equity Capital appreciation. Equity securities of large U.S. Goldman Sachs
Current income is of growth-oriented companies. Asset Management
secondary importance.
- ------------------------------------------------------------------------------------------------------
Bond and Total return and income A wide range of fixed income Goldman Sachs
Income consistent with prudent securities with varying terms to Asset Management
investment management. maturity, with an emphasis on
long-term bonds.
- ------------------------------------------------------------------------------------------------------
Equity Index Investment results that Equity securities of companies Bankers Trust
correspond to the total that are included in the Standard Company
return of common stocks & Poor's 500 Composite Stock
publicly traded in the U.S. Price Index.
- ------------------------------------------------------------------------------------------------------
Small-Cap Investment results that Equity securities of companies Bankers Trust
Index correspond to the total that are included in the Russell Company
return of an index of small 2000 Small Stock Index.
capitalization companies.
- ------------------------------------------------------------------------------------------------------
REIT Current income and long-term Equity securities of real estate Morgan Stanley Asset
capital appreciation. investment trusts. Management
- ------------------------------------------------------------------------------------------------------
International Long-term capital Equity securities of companies of Morgan Stanley Asset
appreciation. any size located in developed Management
countries outside of the U.S.
- ------------------------------------------------------------------------------------------------------
Emerging Long-term growth of capital. Equity securities of companies Blairlogie Capital
Markets that are located in countries Management
generally regarded as "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.
9
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PACIFIC LIFE, THE SEPARATE ACCOUNT,
AND THE INVESTMENT ADVISER
Pacific Life Insurance Company
We are a life insurance company that is based in California. Along with our
subsidiaries and affiliates, our operations include life insurance, annuities,
pension and institutional products, group employee benefits, broker-dealer
operations and investment advisory services. As of the end of 1998, Pacific
Life had over $89.6 billion of individual life insurance in force and total
admitted assets of approximately $37.6 billion. We have been ranked according
to admitted assets as the 18th largest life insurance carrier in the nation
based on December 31, 1998 assets. The Pacific Life family of companies has
total assets and funds under management of over $290 billion as of December 31,
1998. We are authorized to conduct life insurance and annuity business in the
District of Columbia and all states except New York. Our principal office is
located at 700 Newport Center Drive, Newport Beach, California 92660.
We were originally organized on January 2, 1868, under the name "Pacific
Mutual Life Insurance Company of California" and reincorporated as "Pacific
Mutual Life Insurance Company" on July 22, 1936. On September 1, 1997, Pacific
Life converted from a mutual life insurance company to a stock life insurance
company ultimately controlled by a mutual holding company and were authorized
by California regulatory authorities to change our name to Pacific Life
Insurance Company.
We are a subsidiary of Pacific LifeCorp, a holding company which, in turn, is
a subsidiary of Pacific Mutual Holding Company, a mutual holding company. Under
their respective charters, Pacific Mutual Holding Company must always hold at
least 51% of the outstanding voting stock of Pacific LifeCorp, and Pacific
LifeCorp must always own 100% of the voting stock of Pacific Life. Owners of
Pacific Life's annuity contracts and life insurance policies have certain
membership interests in Pacific Mutual Holding Company, consisting principally
of the right to vote on the election of the Board of Directors of the mutual
holding company and on other matters, and certain rights upon liquidation or
dissolutions of the mutual holding company.
The principal underwriter for the Contracts is Pacific Mutual Distributors,
Inc. ("PMD"). PMD is registered as a broker-dealer with the SEC and is a
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 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 or in other securities,
mutual funds, or investment vehicles.
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 the accompanying
Prospectus and the SAI for the Fund for more information.
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.
The Investment Adviser
We are the Investment Adviser to the Fund. We and the Fund have engaged other
firms to serve as Portfolio Managers, supervised by us, for sixteen of the
Portfolios.
10
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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, 1996,
1997 and 1998 is included in the Separate Account's financial statements for
the respective years which 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, 1998.
SELECTED ACCUMULATION UNIT* INFORMATION
Selected accumulation unit information as of the year ended December 31st for
each period:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value
at Beginning of Period:
Money Market Variable
Account................ 12.77 12.29 11.84 11.36 11.08 10.94 10.73 10.27 10.00(a)
High Yield Bond Variable
Account................ 22.35 20.68 18.82 16.03 16.16 13.86 11.82 9.58 10.00(b)
Managed Bond Variable
Account................ 18.00 16.58 16.11 13.70 14.51 13.15 12.25 10.56 10.00(c)
Government Securities
Variable Account....... 17.24 15.94 15.68 13.37 14.26 13.03 12.27 10.61 10.00(d)
Growth Variable Ac-
count.................. 31.34 24.36 19.95 16.07 18.18 15.10 12.68 9.11 10.00(e)
Aggressive Equity Vari-
able Account........... 10.95 10.69 10.00(m)
Growth LT Variable Ac-
count.................. 19.27 17.59 15.11 11.19 10.00(f)
Equity Income Variable
Account................ 27.45 21.61 18.32 14.09 14.31 13.38 12.85 9.88 10.00(g)
Multi-Strategy Variable
Account................ 23.22 19.65 17.68 14.29 14.69 13.62 13.06 10.63 10.00(h)
Equity Variable Ac-
count.................. 18.06 15.47 12.24 10.00(i)
Bond and Income Variable
Account................ 14.86 12.94 13.21 10.00(j)
Equity Index Variable
Account................ 27.96 21.29 17.62 13.03 13.06 12.09 11.44 10.00(k)
International Variable
Account................ 16.27 15.07 12.52 11.47 11.27 8.77 9.85 9.02 10.00(l)
Emerging Markets Vari-
able Account .......... 9.31 9.59 10.00(n)
- -------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value
at End of Period:
Money Market Variable
Account................ 13.28 12.77 12.29 11.84 11.36 11.08 10.94 10.73 10.27
High Yield Bond Variable
Account................ 22.62 22.35 20.68 18.82 16.03 16.16 13.86 11.82 9.58
Managed Bond Variable
Account................ 19.42 18.00 16.58 16.11 13.70 14.51 13.15 12.25 10.56
Government Securities
Variable Account....... 18.60 17.24 15.94 15.68 13.37 14.26 13.03 12.27 10.61
Growth Variable Ac-
count.................. 31.78 31.34 24.36 19.95 16.07 18.18 15.10 12.68 9.11
Aggressive Equity Vari-
able Account........... 12.25 10.95 10.69
Growth LT Variable Ac-
count.................. 30.13 19.27 17.59 15.11 11.19
Equity Income Variable
Account................ 33.66 27.45 21.61 18.32 14.09 14.31 13.38 12.85 9.88
Multi-Strategy Variable
Account................ 27.10 23.22 19.65 17.68 14.29 14.69 13.62 13.06 10.63
Equity Variable Ac-
count.................. 23.24 18.06 15.47 12.24
Bond and Income Variable
Account................ 16.00 14.86 12.94 13.21
Equity Index Variable
Account................ 35.47 27.96 21.29 17.62 13.03 13.06 12.09 11.44
International Variable
Account................ 16.96 16.27 15.07 12.52 11.47 11.27 8.77 9.85 9.02
Emerging Markets Vari-
able Account........... 6.73 9.31 9.59
- -------------------------------------------------------------------------------------------------------------------------------
Number of Accumulation
Units Outstanding at
End of Period:
Money Market Variable
Account................ 14,031,831 14,071,168 10,826,212 5,268,194 3,822,842 1,329,477 841,839 596,386 290,145
High Yield Bond Variable
Account................ 10,599,470 10,646,620 7,031,597 3,499,795 915,875 579,127 204,530 28,473 5,555
Managed Bond Variable
Account................ 21,143,468 17,140,870 9,789,438 4,110,672 1,972,516 1,653,806 608,417 159,134 9,725
Government Securities
Variable Account....... 6,164,020 5,756,107 4,989,942 3,144,652 1,085,199 1,168,824 668,500 264,937 14,888
Growth Variable Ac-
count.................. 790,323 1,072,376 1,217,042 1,431,985 1,684,966 1,951,727 744,468 232,180 41,227
Aggressive Equity Vari-
able Account........... 10,535,854 8,602,223 3,457,578
Growth LT Variable Ac-
count.................. 25,453,009 25,269,203 18,364,396 9,411,999 3,169,124
Equity Income Variable
Account................ 22,451,064 21,208,366 13,975,807 7,116,753 2,165,096 1,337,697 748,646 255,940 30,402
Multi-Strategy Variable
Account................ 10,327,173 8,424,713 5,736,463 3,112,558 1,848,366 1,288,197 737,841 276,429 7,594
Equity Variable Ac-
count.................. 12,842,016 11,810,163 7,078,169 2,377,743
Bond and Income Variable
Account................ 6,592,827 5,223,465 3,669,755 1,389,028
Equity Index Variable
Account................ 21,758,653 20,127,373 11,570,124 4,142,024 765,184 554,737 291,497 132,256
International Variable
Account................ 35,347,056 33,155,306 21,638,113 9,523,524 3,744,811 1,397,587 442,951 173,609 25,363
Emerging Markets Vari-
able Account........... 10,031,439 8,096,690 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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
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 (g) 08/16/90
(h) 09/25/90 (i) 01/01/95 (j) 01/01/95 (k) 02/11/91 (l) 08/16/90 (m) 04/01/96 (n) 04/01/96
</TABLE>
11
<PAGE>
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, 408 and 408A 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 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
12
<PAGE>
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. See
ADDITIONAL INFORMATION--Inquiries and Submitting Forms and Requests. 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 THE CONTRACT--Transfers of Accumulated
Value.
Automatic Transfer Options
We offer two automatic transfer options: Dollar cost averaging and portfolio
rebalancing. There is no charge for these options, although transfers under the
dollar cost averaging option are counted towards your total transfers in a
Contract Year.
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 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
13
<PAGE>
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 program.
Portfolio Rebalancing Option
We currently offer an option which allows Contract Owners who are not
currently Dollar Cost Averaging to maintain the percentage of the Contract's
Accumulated 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's Accumulated 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 4:00
p.m. Eastern 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 CHARGES
AND DEDUCTIONS--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.
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.
14
<PAGE>
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 4:00 p.m. Eastern 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
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.
15
<PAGE>
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 CHARGES AND DEDUCTIONS--Contingent Deferred Sales Charge.
A full or partial withdrawal, including a scheduled withdrawal, may result in
a tax charge to reimburse us for any tax on premiums on a Contract that may be
imposed by various states and municipalities. See CHARGES AND DEDUCTIONS--
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 STATUS.
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 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,
on amounts attributable to premium payments. If you are an Eligible Person and
we credit additional amounts to your Contract as described in CHARGES AND
DEDUCTION--Variations in Charges, if you return your Contract during the Free
Look Period
16
<PAGE>
you will not receive any amounts that we add as a credit or any gains or losses
on the amounts credited (but if the credited amounts and gains on such amounts
exceed the withdrawal charge percentage on your Contract, we will refund the
amount of the excess). You will receive any Contract Fees and Charges that we
deducted from the credited amounts. We have applied to the Securities and
Exchange Commission for an exemptive order to change the amount you would
receive if you return your Contract during the Free Look Period. We can not be
sure that the SEC will grant this order, but if it is granted, you would not
receive any amounts that we add as a credit or Contract Fees and Charges
deducted from those amounts, but you would keep the gains or losses on the
credited amounts.
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 (the Free Look Transfer
Date). 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 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
17
<PAGE>
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 THE FIXED ACCOUNT--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 for
purposes of determining when a distribution must be made under the Contract. If
there is a change in the Primary Annuitant prior to the Annuity Date, such
change will be treated as the death of the Owner for such distribution timing
purposes. Payment of death benefit proceeds will be made to Annuitant's
Beneficiary, if the Owner is the Annuitant's Beneficiary, 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 a
Qualified Plan as defined in Section 401 or 403 of the Code.
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 STATUS 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 Withdrawal
in Contract Years 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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<PAGE>
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 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 .0125% 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, this charge is currently
reduced to .01% (.12% on an annual basis), and, if the initial premium is
$50,000 or more on such contracts, to .005% (.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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<PAGE>
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.
Transfers under the dollar cost averaging option are counted toward your total
transfers in a Contract Year.
Premium Tax and Other Taxes
Various states and municipalities impose a tax on premiums ("premium tax") 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 FEDERAL TAX STATUS--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.
These credits will be added to an Eligible Person's Contract when we apply the
premium payments. 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.
If you are an Eligible Person, you will not keep any amounts credited if you
return your Contract during the Free Look Period as described under THE
CONTRACT--Free Look Right.
For certain trusts, we may change the order in which withdrawals are applied
to premium payments and earnings to determine any withdrawal charge.
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<PAGE>
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.
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
Fund's prospectus and its SAI.
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. Adverse tax consequences may occur if the Annuity Start
Date is prior to the Owner's reaching Age 59 1/2.
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
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<PAGE>
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.
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.
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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. However, if a
plan qualified under Section 401(a) of the Code or a 403(b) contract so
provides, no distributions are required for individuals who are employed after
age 70 1/2 (other than 5% owners) until they retire. 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 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.
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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 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 THE
CONTRACT--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 THE CONTRACT-- 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 THE CONTRACT--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 MORE ABOUT THE
CONTRACT--Loans.
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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.
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.
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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 or Section 408A) 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 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. There is a loan
administration fee of $500, unless state law requires otherwise. As of the date
of this prospectus, we currently waive this fee.
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.
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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 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
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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 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 STATUS
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.
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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 the Fund's SAI.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income and
gains from the separate account assets would be includable in the variable
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 32 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.
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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.
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. Any amount
payable upon the Contract Owner's death, whether before or after the Annuity
Start Date, will be included in the estate of the Contract Owner for federal
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estate tax purposes. 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
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. You should also
consult your tax adviser and/or plan administrator before you withdraw any
portion of your contract value.
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. Tax
restrictions and consequences for Contracts under each type of Qualified Plan
differ from each other and from those for Non-Qualified
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Contracts. In addition, individual Qualified Plans may have terms and
conditions that impose additional rules. 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
Recent federal tax legislation has expanded the type of IRAs available to
individuals for tax deferred retirement savings: In addition to "traditional"
IRAs established under Code Section 408, there are Roth IRAs governed by Code
Section 408A and SIMPLE IRAs established under Code Section 408(p).
Contributions to each of these types of IRAs are subject to differing
limitations. In addition, distributions from each type of IRA are subject to
differing restrictions. The following is a very general description of each
type of IRA:
Traditional IRAs
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when
distributions must commence. Depending upon the circumstances of the
individual, contributions to a traditional IRA may be made on a deductible or
non-deductible basis. In addition, distribution from certain other types of
Qualified Plans may be placed on a tax-deferred basis into a traditional IRA.
SIMPLE IRAs
The Small Business Job Protection Act of 1996 created a new retirement plan,
the Savings Incentive Match Plan for Employees of Small Employers ("SIMPLE
Plans"). Depending upon the type of SIMPLE Plan, employers may deposit the plan
contributions into a single trust or into SIMPLE individual retirement
annuities ("SIMPLE IRAs") established by each participant. Contributions to a
SIMPLE IRA may be either salary deferral contributions or employer
contributions. Distributions from a SIMPLE IRA may be rolled over to another
SIMPLE IRA tax free or may be eligible for tax free rollover to a traditional
IRA after a required two year period. A distribution from a SIMPLE IRA,
however, is never eligible to be rolled over to a retirement plan qualified
under Code section 401 or a Section 403(b) annuity contract.
Roth IRAs
Section 408A of the Code permits eligible individuals to establish a Roth
IRA, a new type of IRA which became available in 1998. Contributions to a Roth
IRA are not deductible, but withdrawals that meet certain requirements are not
subject to federal income tax. In general, Roth IRAs are subject to limitations
on the amount that may be contributed and the persons who may be eligible to
contribute and are subject to certain required distribution rules on the death
of the Contract Owner. Unlike a traditional IRA, Roth IRAs are not subject to
minimum required distribution rules during the Contract Owner's lifetime.
Generally, however, the amount remaining in a Roth IRA must be distributed by
the end of the fifth year after the death of the Contract Owner. Beginning in
1998, the owner of a traditional IRA may convert a traditional IRA into a Roth
IRA under certain circumstances. The conversion of a traditional IRA to a Roth
IRA will subject the amount of the converted traditional IRA to federal income
tax. Anyone considering the purchase of a Qualified Contract as a "conversion"
Roth IRA should consult with a qualified tax adviser.
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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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 but in the case of a participant in a plan qualified under Section
401(a) of the Code or the owner of a 403(b) contract only if the individual has
separated from service; (2) also in the case of a corporate plans qualified
under Section 401(a) of the Code and 403(b) contracts, made to an employee
after termination of employment after reaching age 55; (3) made to pay for
certain medical expenses; or (4) in the case of IRAs, made for certain
qualifying expenditures for first time homebuyers or for qualified higher
education 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; however, if a plan qualified under Section
401(a) of the Code or a 403(b) contract so provides, no distributions are
required for individuals who are employed after age 70 1/2 (other than 5%
owners) until they retire. 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 from a Qualified Plan (not including an individual retirement
annuity subject to Code Section 408 or a Roth IRA subject to Code Section 408A)
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 a traditional 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.
34
<PAGE>
Taxes on Pacific Life
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 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.
ADDITIONAL INFORMATION
Voting Rights
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.
We will pass proxy materials on to you so that you have an opportunity to
give us voting instructions for your voting interest. You may provide your
instructions by proxy or in person at the shareholders' meeting. If there are
shares of a Portfolios held by a Variable Account for which we do not receive
timely voting instructions, we will vote those shares in the same proportion as
all other shares of that Portfolio held by that Variable Account for which we
have received timely voting instructions. If we hold shares of a Portfolio in
our General Account, we will vote such shares in the same proportion as the
total votes cast for all of our separate accounts, including the Separate
Account. We will vote shares of any Portfolio held by our non-insurance
affiliates in the same proportion as the total votes for all separate accounts
of ours and our insurance affiliates.
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.
35
<PAGE>
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 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.
Replacement of Life Insurance or Annuities
The term "replacement" has a special meaning in the life insurance industry
and is described more fully below. Before you make your purchase decision,
Pacific Life wants you to understand how a replacement may impact your existing
plan of insurance.
A policy "replacement" occurs when a new policy or contract is purchased and,
in connection with the sale, an existing policy or contract is surrendered,
lapsed, forfeited, assigned to the replacing insurer, otherwise terminated, or
used in a financed purchase. A "financed purchase" occurs when the purchase of
a new life insurance policy or annuity contract involves the use of funds
obtained from the values of an existing life insurance policy or annuity
contract through withdrawal, surrender or loan.
There are circumstances in which replacing your existing life insurance
policy or annuity contract can benefit you. As a general rule, however,
replacement is not in your best interest. Accordingly, you should make a
careful comparison of the costs and benefits of your existing policy or
contract and the proposed policy or contract to determine whether replacement
is in your best interest.
Changes to Comply with Law 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
36
<PAGE>
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.
Inquiries and Submitting Forms and Requests
You may reach our service representatives at 1-800-722-2333 between the hours
of 6:00 a.m. and 5:00 p.m., Pacific time.
Please send your forms and written requests or questions to:
Pacific Life Insurance Company
P.O. Box 7187
Pasadena, California 91109-7187
If you are submitting a premium or other payment by mail, please send it, along
with your application if you are submitting one, to:
Pacific Life Insurance Company
P.O. Box 100060
Pasadena, California 91189-0060
If you are using an overnight delivery service to send payments, please send
them to:
Pacific Life Insurance Company
c/o FCNPC
1111 South Arroyo Parkway, First Floor
Pasadena, California 91105
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 you should use.
Premium payments after your initial premium payment, loan requests, transfer
requests, loan repayments and withdrawal requests we receive before 4:00 p.m.
Eastern time will normally be effective on the same Valuation Day 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, your instructions will be effective on the next Valuation Day after we
receive them in "proper form" unless the transaction or event is scheduled to
occur on another day. "Proper form" means in a form satisfactory to us and may
require, among other things, a signature guarantee or other verification of
authenticity. We do not generally require a signature guarantee unless it
appears that your signature may have changed over time or the signature does
not appear to be yours; an executed application or confirmation of application,
as applicable, in proper form is not received by us; or, to protect you or us.
Requests regarding death benefits must be accompanied by both proof of death
and instructions regarding payment satisfactory to us. You should call your
registered representative or us if you have questions regarding the required
form of a request.
37
<PAGE>
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
4:00 p.m. Eastern 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 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.
Preparation for the Year 2000
Pacific Life long ago recognized the challenges associated with the Year 2000
date change. This change involves the ability of computer systems to properly
recognize the Year 2000. The inability to do so could result in major failures
or miscalculations. We began prior to 1995 to assess and plan for the potential
impact of the Year 2000. More recently, Pacific Life has been executing a
company-wide plan adopted during 1998 which called for correction or
replacement of remaining non-compliant systems by December 31, 1998.
We have successfully executed this project plan to date. Virtually all
affected systems were remediated and tested in time for use during 1998 year-
end processing cycles. Although it is not possible to certify that any system
will be completely free of Year 2000 problems, we have performed extensive
testing to identify and deal with such potential problems. Additionally, most
of the company's critical systems were subject to an independent third-party
review process which used sophisticated automated tools to identify Year 2000
related bugs. The results have been very positive and we feel the company's
internal systems are positioned well for the date change in the century.
We plan to continue to test and re-test throughout 1999 and we will respond
promptly should any problems arise at any time thereafter.
We are continuing to work on contingency plans for critical business
processes. When appropriate, alternative methods and procedures are being
developed to work around unanticipated problems.
In addition to the above, we will continue to carefully evaluate responses
from vendors and significant business partners regarding the compliance of
their critical business processes and products. Although ultimately Pacific
Life cannot be responsible for the Year 2000 compliance efforts of these
outside entities, we will take appropriate steps wherever possible to develop
contingency plans to address vendors and partners deemed non-compliant.
Expenses to make our systems Year 2000 compliant are currently estimated to
range from $12 million to $15 million, which excludes the cost of our personnel
who support Year 2000 compliance efforts. We do not anticipate any other
material future costs associated with the Year 2000 compliance projects,
although there can be no assurance.
These Year 2000 related statements are designated as "Year 2000 Readiness
Disclosure" pursuant to the Year 2000 Information Readiness Disclosure Act,
enacted October 19, 1998.
38
<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.
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
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.
Financial Statements
Audited financial statements of the Separate Account as of December 31, 1998
and for 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, 1998.
Audited consolidated financial statements of Pacific Life as of December 31,
1998 and 1997, and for the three years ended December 31, 1998, are contained
in the SAI.
39
<PAGE>
<TABLE>
<CAPTION>
TERMS USED IN THIS PROSPECTUS
<S> <C>
Some of the terms we've used in this Prospectus may be new Fixed Account - An account that is part of our General
to you. We've identified them in the Prospectus by Account in which all or a portion of the Accumulated Value
capitalizing the first letter of each word. You'll find an may be held for accumulation at fixed rates of interest
explanation of what they mean below. (which may not be less than 4.0%) declared by us at least
annually.
If you have any questions, please ask your registered
representative or call us at 1-800-722-2333. Fixed Option - The Fixed Account
Accumulated Value - The total value of the amounts in the Full Withdrawal Value -- The amount you may receive upon
Investment Options as well as any amount set aside in the full withdrawal of the Contract, which is equal to
Loan Account to secure loans, increased by interest earned Accumulated Value minus any unpaid maintenance fee, any
and decreased by any principal repayments and/or withdrawals applicable contingent deferred sales charge, and any
or transfers of interest earned, as of any Valuation Date. Contract Debt.
Accumulation Period - The period commencing on the Contract Fund -- Pacific Select Fund. The Fund is a diversified,
Date and ending on the Annuity Start Date or, if earlier, open-end management investment company commonly referred
when the Contract is terminated, either through a full to as a mutual fund.
withdrawal, payment of charges, or payment of the death
benefit proceeds. General Account -- All of our assets other than those
allocated to the Separate Account or to any of our other
Accumulation Unit - A unit of measure used to calculate the separate accounts.
value of your interest in a Variable Account during the
Accumulation Period. Investment Option -- A Variable Account or the Fixed
Account.
Age - The Owner's or Annuitant's age as of his or her
nearest birthday as of the Contract Date, increased by Loan Account -- The Account in which the amount equal to
the number of complete Contract Years elapsed. the principal amount of a loan and any interest accrued is
held to secure any Contract Debt.
Annuitant - The person or persons on whose life annuity
payments depend. If Joint Annuitants are named in the Loan Account Value -- The amount, including any interest
Contract, "Annuitant" means both Annuitants unless accrued, held in the Loan Account to secure any Contract
otherwise stated. Debt.
Annuity - A series of periodic income payments made by us Owner Beneficiary -- The person named (other than a Joint or
to an Annuitant, Contingent Annuitant, or Beneficiary during Contingent Owner) to receive death benefit proceeds if the
the period specified in the Annuity Option. Owner dies before the Annuitant during the Accumulation
Period.
Annuity Options - Any one of the Annuity Options (income
options) available for a series of annuity payments after Primary Annuitant -- The individual that is named in your
your Annuity Start Date. Contract, the events in the life of whom are of primary
importance in affecting the timing or amount of the
Annuity Period - The period during which annuity payments payout under the Contract.
are made.
Policyholder -- The Contract Owner.
Annuity Start Date - The date when annuity payments are to
begin, which may not be earlier than the first Contract Portfolio -- A separate portfolio of the Fund.
Anniversary.
Separate Account -- The Pacific Select Variable Annuity
Beneficiary - The person having the right to the death Separate Account. A separate account of ours that consists
benefit, if any, payable upon the death of the Annuitant of subaccounts, referred to as Variable Accounts, each of
during the Accumulation Period, and the person having the which invests in a separate Portfolio of the Pacific Select
right to benefits, if any, payable upon the death of the Fund.
Annuitant during the Annuity Period.
Valuation Date -- Each date on which the Separate Account is
Contract - An individual flexible premium variable valued, which currently includes each day that the New York
accumulation deferred annuity contract offered by us. Stock Exchange is open for trading and our Annuities
administrative offices are open. The New York Stock Exchange
Contract Date - The date shown as the Contract Date in a and our Annuities administrative offices are closed on
Contract. Contract monthly, quarterly, semi-annual, and weekends and on the following holidays: New Year's Day,
annual anniversaries and Contract months, quarters, and Martin Luther King, Jr. Day, President's Day, Good Friday,
years are measured from the Contract Date. It is usually Memorial Day, July Fourth, Labor Day, Thanksgiving Day, and
the date that the initial premium is credited to the Christmas Day. Any transaction called for on or as of any
Contracts. The term "Issue Date" shall be substituted for day is effected as of the end of that day. If any
the term "Contract Date" for Contracts issued to residents transaction or event called for under a Contract is
of the Commonwealth of Massachusetts. scheduled to occur on a day that is not a Valuation Date,
such transaction or event will be deemed to occur on the
Contract Debt - The unpaid loan balance including accrued next following Valuation Date, unless otherwise specified.
loan interest.
Valuation Period -- A period used in measuring the
Contract Owner, Owner, Policyholder, you or your - The investment experience of each Variable Account of the
person entitled to the ownership rights under the Contract Separate Account. The Valuation Period begins at the close
and in whose name the Contract is issued. of one Valuation Date and ends at the close of the next
succeeding Valuation Date.
Contract Year - Each twelve-month period measured from the
Contract Date. Variable Account -- A separate account of ours or a
subaccount of the Separate Account. Each Variable Account
Designated Beneficiary - The person selected by you to invests its assets in shares of a corresponding Portfolio.
succeed to your interest in the Contract for purposes of
Section 72(s) of the Internal Revenue Code, and which Variable Annuities Department -- Our Department that
includes an Owner Beneficiary and a Joint or Contingent services the Contract. The addresses of the Variable
Owner. Annuities Department are on the back cover of the
Prospectus.
Variable Investment Option -- A subaccount of the Separate
Account.
</TABLE>
40
<PAGE>
CONTENTS OF THE 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>
41
<PAGE>
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.
42
<PAGE>
- -----------------------------------------------------------[SYMBOL]------------
To receive a current copy of the Pacific Select Variable Annuity SAI 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 _____
PH02/53003.29
<PAGE>
<TABLE>
<CAPTION>
PACIFIC SELECT
VARIABLE ANNUITY WHERE TO GO FOR MORE INFORMATION
<S> <C>
The Pacific Select Variable Annuity You'll find more information about the Pacific Select Variable Annuity Contract
Contract is underwritten by Pacific Life and the Pacific Select Variable Annuity Separate Account in the Statement of
Insurance Company, 700 Newport Center Additional Information (SAI) dated May 1, 1999.
Drive, P.O. Box 9000, Newport Beach,
California 92660. The SAI has been filed with the SEC and is considered to be part of this
Prospectus because it's incorporated by reference. You'll find the table of
If you have any questions about the contents for the SAI on page 41 of this Prospectus.
Contract, please ask your registered
representative or contact us. You can get a copy of the SAI at no charge by calling or writing to us, or by
contacting the SEC. The SEC may charge you a fee for this information.
--------------------------------------------------------------------------------
How to contact us Call or write to us at:
Pacific Life Insurance Company
Variable Annuities Department
P.O. Box 7187
Pasadena, California 91109-7187
1-800-722-2333
6 a.m. through 5 p.m. Pacific time
Send Purchase Payments, other payments and application forms:
By mail
Pacific Life Insurance Company
P.O. Box 100060
Pasadena, California 91189-0060
By overnight delivery service
Pacific Life Insurance Company
c/o FCNPC
1111 South Arroyo Parkway, Suite 150
Pasadena, California 91105
--------------------------------------------------------------------------------
How to contact the SEC Public Reference Section of the SEC
Washington, D.C. 20549-6009
1-800-SEC-0330
Internet: www.sec.gov
</TABLE>
<PAGE>
PACIFIC SELECT VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
Date: May 1, 1999
----------------
Individual Flexible Premium Variable Accumulation
Deferred Annuity Contract
----------------
Underwritten 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, 1999 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, 1999. 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
Bond 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"), a 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 1998, 1997
and 1996 was $39,235,795, $76,763,607, and $60,122,455, 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) (To the power of 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.
At December 31, 1998, the Money Market Variable Account current yield was
3.33% and the effective yield was 3.39%.
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)(To the power of 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 various benchmarks that measure the 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 being representative of the securities markets in general or as
being representative of a particular type of security. Performance information
may also be compared to (i) other groups of variable annuity separate accounts
or other investment products tracked by Lipper Analytical Services, Inc.
("Lipper") a widely used independent research
3
<PAGE>
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 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, 1998 and for the period from each
such Variable Account's commencement of operations through December 31, 1998.
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.
Historical Separate Account Performance
Annualized Rates of Return for Periods Ended December 31, 1998
All numbers are expressed as a percentage
<TABLE>
<CAPTION>
1 Year** 3 Years** 5 Years** 10 Years** Since 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*... 3.76 (1.64) 3.69 2.28 3.47 3.00 3.21 3.21
High Yield Bond
8/16/90*............... 0.97 (4.43) 6.11 4.76 6.74 6.32 10.02 10.02
Managed Bond 9/5/90*.... 7.62 2.22 6.20 4.86 5.78 5.35 8.08 8.08
Government Securities
8/22/90*............... 7.65 2.25 5.62 4.26 5.23 4.79 7.49 7.49
Aggressive Equity
4/1/96*................ 11.58 6.18 7.44 5.97
Growth 8/16/90*......... 1.20 (4.20) 16.56 15.44 11.54 11.24 14.58 14.58
Growth LT 1/4/94*....... 56.02 50.62 25.62 24.66 24.50 24.26
Equity Income 8/16/90*.. 22.39 16.99 22.23 21.22 18.43 18.15 15.36 15.36
Multi-Strategy
9/25/90*............... 16.47 11.07 15.06 13.92 12.80 12.46 12.59 12.59
Equity 1/4/95*.......... 28.41 23.01 23.59 22.60 23.63 23.15
Bond and Income
1/4/95*................ 7.39 1.99 6.37 5.03 12.19 11.54
Equity Index 2/11/91*... 26.60 21.20 26.02 25.06 21.89 21.64 17.18 17.18
International 8/16/90*.. 4.06 (1.34) 10.43 9.18 8.30 7.90 6.29 6.29
Emerging Markets
4/1/96*................ (27.91) (33.31) (13.60) (15.78)
<CAPTION>
Major Indices 1 year 3 years 5 years 10 years
- ------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
CS First Boston High
Yield Bond............. 0.58 8.39 8.16 10.74
Lehman Brothers
Aggregate Bond......... 8.67 7.29 7.27 9.26
Lehman Brothers
Government Bond........ 9.85 7.35 7.18 9.17
Lehman Brothers
Government/Corporate
Bond................... 9.47 7.33 7.30 9.34
Lehman Brothers Long-
Term
Government/Corporate
Bond................... 11.76 8.62 9.12 11.30
Morgan Stanley Capital
International EAFE..... 20.33 9.31 9.50 5.86
Morgan Stanley Capital
International Emerging
Markets Free........... (25.34) (11. 21) (9.27) 10.95
Russell 1000 Growth..... 38.71 30.62 25.70 20.57
Russell 2000 Small-
Stock.................. (2.55) 11.58 11.86 12.92
Russell 2500............ 0.38 14.11 14.13 14.61
Standard & Poor's 500
Composite Stock Price.. 28.58 28.27 24.06 19.19
</TABLE>
- -------
* Date Variable Account commenced operations.
** The performance of the Aggressive Equity, Equity Income, Multi-Strategy,
Equity, Bond and Income 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; 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.
Effective June 1, 1997 Morgan Stanley Asset Management became the Portfolio
Manager of the International Portfolio. Effective May 1, 1998 Alliance
Capital Management L.P. became the Portfolio Manager of the Aggressive
Equity Portfolio and Goldman Sachs Asset Management became the Portfolio
Manager of the Equity and Bond and Income Portfolios; prior to May 1, 1998
some of the investment policies of the Aggressive Equity, Equity and Bond
and Income Portfolios and the investment objective of the Bond and Income
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 in 1984, the assets of which were acquired by the
Fund on December 31, 1994.
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.
Prior to January 1, 1999, the Large-Cap Value, the Mid-Cap Value, the Small-
Cap Index and the REIT Variable Accounts and corresponding Portfolios had not
yet begun operations and there is no historical value available for these
Subaccounts and Portfolios.
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.
Historical and Hypothetical Separate Account Performance
Annualized Rates of Return for Periods Ended December 31, 1998
All numbers are expressed as a percentage
<TABLE>
<CAPTION>
1 Year* 3 Years* 5 Years* 10 Years* Since 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............ 3.76 (1.64) 3.69 2.28 3.47 3.00 3.79 3.79 3.84 3.84
High Yield Bond......... 0.97 (4.43) 6.11 4.76 6.74 6.32 8.95 8.95 8.76 8.76
Managed Bond............ 7.62 2.22 6.20 4.86 5.78 5.35 8.12 8.12 7.89 7.89
Government Securities... 7.65 2.25 5.62 4.26 5.23 4.79 7.53 7.53 7.31 7.31
Aggressive Equity....... 11.58 6.18 7.44 5.97
Growth.................. 1.20 (4.20) 16.56 15.44 11.59 11.24 13.93 13.93 13.92 13.92
Growth LT............... 56.02 50.62 25.62 24.66 24.48 24.25
Equity Income........... 22.39 16.99 22.23 21.22 18.43 18.15 14.55 14.55 13.82 13.82
Multi-Strategy.......... 16.47 11.07 15.06 13.92 12.80 12.46 11.46 11.46 10.90 10.89
Equity.................. 28.41 23.01 23.59 22.60 17.16 16.87 15.36 15.36 14.35 14.35
Bond and Income......... 7.39 1.99 6.37 5.03 7.46 7.05 9.97 9.97 10.66 10.66
Equity Index............ 26.60 21.20 26.02 25.06 21.89 21.64 18.25 18.24
International........... 4.06 (1.34) 10.43 9.18 8.30 7.90 6.54 6.54 7.38 7.38
Emerging Markets........ (27.91) (33.31) (13.60) (15.78)
<CAPTION>
Major Indices 1 year 3 years 5 years 10 years
- ------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
CS First Boston High
Yield Bond............. 0.58 8.39 8.16 10.74
Lehman Brothers
Aggregate Bond......... 8.67 7.29 7.27 9.26
Lehman Brothers
Government Bond........ 9.85 7.35 7.18 9.17
Lehman Brothers
Government/Corporate
Bond................... 9.47 7.33 7.30 9.34
Lehman Brothers Long-
Term
Government/Corporate
Bond................... 11.76 8.62 9.12 11.30
Morgan Stanley Capital
International EAFE..... 20.33 9.31 9.50 5.86
Morgan Stanley Capital
International Emerging
Markets Free........... (25.34) (11. 21) (9.27) 10.95
Russell 1000 Growth..... 38.71 30.62 25.70 20.57
Russell 2000 Small-
Stock.................. (2.55) 11.58 11.86 12.92
Russell 2500............ 0.38 14.11 14.13 14.61
Standard & Poor's 500
Composite Stock Price.. 28.58 28.27 24.06 19.19
</TABLE>
- -------
* The performance of the Aggressive Equity, Equity Income, Multi-Strategy,
Equity, Bond and Income 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; 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.
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 in
1984, the assets of which were acquired by the Fund on December 31, 1994.
Effective June 1, 1997 Morgan Stanley Asset Management became the Portfolio
Manager of the International Portfolio; Effective May 1, 1998 Alliance
Capital Management L.P. became the Portfolio Manager of the Aggressive
Equity Portfolio and Goldman Sachs Asset Management became the Portfolio
Manager of the Equity and Bond and Income Portfolios; prior to May 1, 1998
some of the investment policies of the Aggressive Equity, Equity and Bond
and Income Portfolios and the investment objective of the Bond and Income
Portfolio differed.
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 ordinary income 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 assets and 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 and distributions to 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%, 4% and 8% taxed @ 36%
[GRAPH OF POWER OF TAX DEFERRAL APPEARS HERE]
<TABLE>
<CAPTION>
Taxable Tax-Deferred
Investment Investment
---------- ------------
<S> <C> <C>
10 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, 1998
and for 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, 1998.
The consolidated financial statements of Pacific Life as of December 31,
1998 and 1997 and for the three years ended December 31, 1998 are set forth
beginning on the next page. The financial statements of Pacific Life which are
included in this SAI should be considered only as bearing on the ability of
Pacific 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 Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated statements of financial
condition of Pacific Life Insurance Company and Subsidiaries (the
"Company") as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pacific Life Insurance
Company and Subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 1999
10
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1998 1997
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $13,617.0 $13,938.5
Equity securities 547.5 346.4
Mortgage loans 2,788.7 1,922.1
Real estate 172.7 192.1
Policy loans 3,901.2 3,769.2
Short-term investments 99.9 83.8
Other investments 948.0 432.4
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS 22,075.0 20,684.5
Cash and cash equivalents 150.1 110.4
Deferred policy acquisition costs 889.7 716.9
Accrued investment income 252.3 255.4
Other assets 672.8 636.5
Separate account assets 15,844.0 11,605.1
- ------------------------------------------------------------------------------
TOTAL ASSETS $39,883.9 $34,008.8
==============================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life, annuity and other investment contract
deposits $17,973.0 $16,644.5
Future policy benefits 2,131.6 2,133.8
Short-term and long-term debt 445.1 253.6
Other liabilities 1,162.2 1,224.5
Separate account liabilities 15,844.0 11,605.1
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 37,555.9 31,861.5
- ------------------------------------------------------------------------------
Commitments and contingencies
Stockholder's Equity:
Common stock - $50 par value; 600,000 shares authorized,
issued and outstanding 30.0 30.0
Paid-in capital 126.2 120.1
Retained earnings 1,663.5 1,422.0
Accumulated other comprehensive income -
Unrealized gain on securities available for sale, net 508.3 575.2
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 2,328.0 2,147.3
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $39,883.9 $34,008.8
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
11
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Policy fees from universal life, annuity and other
investment contract deposits $ 525.3 $ 431.2 $ 348.6
Insurance premiums 514.7 504.3 465.4
Net investment income 1,293.8 1,225.3 1,087.3
Net realized capital gains 38.7 85.3 44.0
Commission revenue 220.1 146.6 79.6
Other income 216.6 181.7 123.1
- ------------------------------------------------------------------------------
TOTAL REVENUES 2,809.2 2,574.4 2,148.0
- ------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 880.8 797.8 665.0
Policy benefits paid or provided 719.5 675.7 652.9
Commission expenses 386.1 303.7 233.6
Operating expenses 467.8 507.7 316.2
- ------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,454.2 2,284.9 1,867.7
- ------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 355.0 289.5 280.3
Provision for income taxes 113.5 113.5 113.7
- ------------------------------------------------------------------------------
NET INCOME $ 241.5 $ 176.0 $ 166.6
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
12
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
- -------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1996 $1,151.4 $ 482.0 $1,633.4
Comprehensive income:
Net income 166.6 166.6
Change in unrealized gain on
securities available for sale,
net (102.8) (102.8)
--------
Total comprehensive income 63.8
- -------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1996 1,318.0 379.2 1,697.2
Comprehensive income:
Net income 176.0 176.0
Change in unrealized gain on
securities available for sale,
net 196.0 196.0
--------
Total comprehensive income 372.0
Issuance of partnership units by
affiliate $ 85.1 85.1
Initial member capitalization
of Pacific Mutual Holding Company (2.0) (2.0)
Issuance of common stock 0.6 $30.0 35.0 (65.0)
Dividend paid to parent (5.0) (5.0)
- -------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1997 0.6 30.0 120.1 1,422.0 575.2 2,147.3
Comprehensive income:
Net income 241.5 241.5
Change in unrealized gain on
securities available for sale,
net (66.9) (66.9)
--------
Total comprehensive income 174.6
Issuance of partnership units by
affiliate 6.1 6.1
- -------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1998 0.6 $30.0 $126.2 $1,663.5 $ 508.3 $2,328.0
===========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
13
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 241.5 $ 176.0 $ 166.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization on fixed maturities (39.4) (26.6) (45.2)
Depreciation and other amortization 26.0 38.3 43.8
Deferred income taxes (20.6) (14.4) (49.8)
Net realized capital gains (38.7) (85.3) (44.0)
Net change in deferred policy acquisition costs (172.8) (185.4) (140.4)
Interest credited to universal life, annuity
and other investment contract deposits 880.8 797.8 665.0
Change in accrued investment income 3.1 (52.9) (3.7)
Change in future policy benefits (2.2) (372.7) 62.3
Change in other assets and liabilities 99.4 577.4 158.1
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 977.1 852.2 812.7
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (4,302.3) (6,272.3) (4,525.0)
Sales 2,201.9 2,224.1 2,511.0
Maturities and repayments 2,196.1 2,394.6 1,184.7
Repayments of mortgage loans 334.9 179.3 220.4
Proceeds from sales of mortgage loans and real
estate 43.3 104.4 14.5
Purchases of mortgage loans and real estate (1,246.3) (643.7) (414.3)
Distributions from partnerships 119.5 91.6 78.8
Change in policy loans (132.0) (637.4) (338.5)
Change in short-term investments (16.1) (17.7) 37.2
Other investing activity, net (564.2) 43.5 (144.5)
- -------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,365.2) (2,533.6) (1,375.7)
- -------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
14
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1998 1997 1996
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,007.0 $ 4,373.6 $ 2,105.0
Withdrawals (3,770.7) (2,667.3) (1,756.6)
Net change in short-term debt 191.5 8.5 42.5
Repayment of long-term debt (25.0) (5.0)
Initial capitalization of Pacific Mutual
Holding Company (2.0)
Dividend paid to parent (5.0)
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 427.8 1,682.8 385.9
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents 39.7 1.4 (177.1)
Cash and cash equivalents, beginning of year 110.4 109.0 286.1
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 150.1 $ 110.4 $ 109.0
==============================================================================
</TABLE>
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of an insurance block of business in 1997,
as discussed in Note 5, the following assets and liabilities were assumed:
<TABLE>
<S> <C>
Cash $1,215.9
Policy loans 440.3
Other assets 43.4
--------
Total assets assumed $1,699.6
========
Policyholder account values $1,693.8
Other liabilities 5.8
--------
Total liabilities assumed $1,699.6
========
</TABLE>
==============================================================================
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion in 1997, as discussed in Note 1, $65 million of
retained earnings was allocated for the issuance of 600,000 shares of common
stock with a par value totaling $30 million and $35 million to paid-in
capital.
==============================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<S> <C> <C> <C>
Income taxes paid $127.9 $153.0 $189.6
Interest paid $ 24.0 $ 26.1 $ 27.3
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
15
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
CONVERSION TO MUTUAL HOLDING COMPANY STRUCTURE
Pursuant to consent received from the Insurance Department of the State of
California, Pacific Mutual Life Insurance Company ("Pacific Mutual")
implemented a plan of conversion to form a mutual holding company
structure (the "Conversion") on September 1, 1997. The Conversion created
Pacific LifeCorp, an intermediate stock holding company and Pacific Mutual
Holding Company ("PMHC"), a mutual holding company. Pacific Mutual was
converted to a stock life insurance company and renamed Pacific Life
Insurance Company ("Pacific Life"). Under their respective charters, PMHC
must always own at least 51% of the outstanding voting stock of Pacific
LifeCorp, and Pacific LifeCorp must always own 100% of the voting stock of
Pacific Life. Owners of Pacific Life's annuity contracts and life
insurance policies have certain membership interests in PMHC, consisting
principally of the right to vote on the election of the Board of Directors
of PMHC and on other matters, and certain rights upon liquidation or
dissolution of PMHC.
As a result of the Conversion, $65 million of retained earnings was
allocated for the issuance of 600,000 shares of common stock with a par
value totaling $30 million and $35 million to paid-in capital.
DESCRIPTION OF BUSINESS
Pacific Life was established in 1868 and is organized under the laws of
the State of California as a stock life insurance company. Pacific Life
conducts business in every state except New York.
Pacific Life and its subsidiaries and affiliates have primary business
operations which consist of life insurance, annuities, pension and
institutional products, group employee benefits, broker-dealer operations
and investment management and advisory services. Pacific Life's primary
business operations provide a broad range of life insurance, asset
accumulation and investment products for individuals and businesses and
offer a range of investment products to institutions and pension plans.
Additionally, through its major subsidiaries and affiliates, Pacific Life
provides a variety of group employee benefits, broker-dealer operations
and investment management and advisory services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Pacific Life
Insurance Company and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Life and its wholly-owned insurance
subsidiaries, PM Group Life Insurance Company ("PM Group") and World-Wide
Holdings Limited, and its wholly-owned noninsurance subsidiaries, Pacific
Asset Management LLC ("PAM"), Pacific Mutual Distributors, Inc. ("PMD"),
Pacific Mutual Realty Finance, Inc. and Pacific Mezzanine Associates,
L.L.C. (50% owned). All significant intercompany transactions and balances
have been eliminated. Pacific Life prepares its regulatory financial
statements based on accounting practices prescribed or permitted by the
Insurance Department of the State of California. These consolidated
financial statements differ from those followed in reports to regulatory
authorities (Note 2).
PAM was initially capitalized on December 31, 1997, when Pacific Life
completed a subsidiary restructuring in which all the assets and
liabilities of Pacific Financial Asset Management Corporation ("PFAMCo")
were contributed into this newly formed limited liability company. PFAMCo
was then merged into Pacific Life. On October 30, 1997, Pacific Corinthian
Life Insurance Company ("PCL"-Note 4), a wholly-owned insurance
subsidiary, was merged into Pacific Life, with Pacific Life as the
surviving entity.
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," and SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits."
16
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No. 130 established standards for the reporting and display of
comprehensive income and its components in financial statements (Note 11).
SFAS No. 131 established standards for the way information about operating
segments is reported in financial statements. It also established
standards for related disclosures about products and services, geographic
areas and major customers (Note 13). SFAS No. 132 standardized disclosure
requirements for employers' pensions and other retiree benefits (Note 14).
Adoption of these accounting standards did not have a significant impact
on the consolidated financial position or results of operations of the
Company.
On January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance on when a liability should be
recognized for guaranty fund and other assessments and how to measure the
liability. Adoption of this accounting standard did not have a significant
impact on the consolidated financial position or results of operations of
the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. The Company currently plans to adopt
SFAS No. 133 on January 1, 2000. The impact on the consolidated financial
position or results of operations of the Company due to the adoption of
this statement has not yet been determined.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires that certain costs incurred in developing internal use computer
software be capitalized. The Company currently plans to adopt SOP 98-1 on
January 1, 1999. The adoption is not expected to have a significant impact
on the consolidated financial position or results of operations of the
Company.
INVESTMENTS
Available for sale fixed maturity and equity securities are reported at
estimated fair value, with unrealized gains and losses, net of deferred
income tax and adjustments related to deferred policy acquisition costs,
included as a separate component of equity on the accompanying
consolidated statements of financial condition. Trading securities, which
are included in short-term investments, are reported at estimated fair
value with unrealized gains and losses included in net realized capital
gains on the accompanying consolidated statements of operations.
For mortgage-backed securities included in fixed maturity securities, the
Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities.
When estimates of prepayments change, the effective yield is recalculated
to reflect actual payments to date and anticipated future payments. The
net investment in the securities is adjusted to the amount that would have
existed had the new effective yield been applied since the acquisition of
the securities. This adjustment is reflected in net investment income on
the accompanying consolidated statements of operations.
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in net realized capital
gains on the accompanying consolidated statements of operations.
Short-term investments are carried at estimated fair value and include all
trading securities.
Derivative financial instruments are carried at estimated fair value.
Unrealized gains and losses of derivatives used to hedge securities
classified as available for sale are reflected in a separate component of
equity on the accompanying consolidated statements of financial condition,
similar to the accounting of the underlying hedged assets. Realized gains
and losses on derivatives used for hedging are deferred and amortized over
the average life of the related hedged assets or insurance liabilities.
Unrealized gains and losses of other derivatives are included in net
realized capital gains on the accompanying consolidated statements of
operations.
Mortgage loans and policy loans are stated at unpaid principal balances.
17
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real estate is carried at depreciated cost, or for real estate acquired in
satisfaction of debt, estimated fair value less estimated selling costs at
the date of acquisition if lower than the related unpaid balance.
On November 15, 1994, certain of the Company's investment management and
advisory subsidiaries entered into an agreement and plan of consolidation
with Thomson Advisory Group L.P., a Delaware limited partnership with
publicly traded units, to merge into a newly capitalized partnership named
PIMCO Advisors L.P. ("PIMCO Advisors"). In December 1997, PIMCO Advisors
completed a transaction in which it acquired the assets of Oppenheimer
Capital, L.P., including its interest in Oppenheimer Capital, by issuing
approximately 33 million PIMCO Advisors General and Limited Partner units.
In connection with this transaction, the Company increased its investment
in PIMCO Advisors to reflect the excess of the Company's pro rata share of
PIMCO Advisors partners' capital subsequent to this transaction over the
carrying value of the Company's investment in PIMCO Advisors. The net
result of this transaction was to directly increase stockholder's equity
by $85.1 million. The Company's beneficial ownership in PIMCO Advisors was
approximately 42% prior to this transaction and 31% as of December 31,
1997. During 1998, the Company increased its investment in PIMCO Advisors
to reflect its pro rata share of the increase to PIMCO Advisors partners'
capital due to the issuance of additional partnership units. For the year
ended December 31, 1998, there was a direct increase to the Company's
stockholder's equity of $6.1 million. During 1998, the Company also
acquired the beneficial ownership of additional partnership units which
increased its ownership to 33% as of December 31, 1998. Deferred taxes
resulting from these transactions have been included in the accompanying
consolidated financial statements. The Company's investment in PIMCO
Advisors, which is included in other investments on the accompanying
consolidated statements of financial condition, is accounted for using the
equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid debt instruments with an
original maturity of three months or less.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business, principally commissions,
medical examinations, underwriting, policy issue and other expenses, all
of which vary with and are primarily related to the production of new
business, have been deferred. For universal life, annuity and other
investment contract products, such costs are generally amortized in
proportion to the present value of expected gross profits using the
assumed crediting rate. Adjustments are reflected in earnings or equity in
the period the Company experiences deviations in gross profit assumptions.
Adjustments directly affecting equity result from experience deviations
due to changes in unrealized gains and losses in investments classified as
available for sale. For life insurance products, such costs are being
amortized over the premium-paying period of the related policies in
proportion to premium revenues recognized, using assumptions consistent
with those used in computing policy reserves. For the years ended December
31, 1998, 1997 and 1996, net amortization of deferred policy acquisition
costs included in commission expenses amounted to $73.0 million,
$50.2 million and $42.6 million, respectively, and included in operating
expenses amounted to $33.5 million, $29.4 million and $27.4 million,
respectively, on the accompanying consolidated statements of operations.
PRESENT VALUE OF FUTURE PROFITS
In connection with the rehabilitation of First Capital Life Insurance
Company ("FCL"-Note 4), an asset was established which represented the
present value of estimated future profits of the acquired business. The
future profits were discounted to provide an appropriate rate of return
and were amortized over the rehabilitation plan period. Amortization for
the years ended December 31, 1997 and 1996 amounted to $16.1 million and
$24.2 million, respectively, and is included in commission expenses on the
accompanying consolidated statements of operations. During 1996, the
Company changed certain assumptions regarding the estimated life which
resulted in an increase in amortization in 1996 of approximately $17.0
million.
18
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Universal life, annuity and other investment contract deposits are valued
using the retrospective deposit method and consist principally of deposits
received plus interest credited less accumulated assessments. Interest
credited to these policies primarily ranged from 4.0% to 8.4% during 1998,
1997 and 1996.
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions ranged from 4.5% to 9.3% for 1998, 1997 and
1996. Mortality, morbidity and withdrawal assumptions are generally based
on the Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for participating business are provided for
in the liability for future policy benefits. Dividends to policyholders
are included in policy benefits paid or provided on the accompanying
consolidated statements of operations.
Dividends are accrued based on dividend formulas approved by the Board of
Directors and reviewed for reasonableness and equitable treatment of
policyholders by an independent consulting actuary. As of December 31,
1998 and 1997, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized
when incurred.
Generally, receipts for universal life, annuities and other investment
contracts are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Commission revenue from Pacific Life's broker-dealer subsidiaries is
generally recorded on the trade date.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 5 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over periods ranging from 3 to 40 years. Depreciation of investment
real estate is included in net investment income on the accompanying
consolidated statements of operations. Depreciation and amortization of
other assets is included in operating expenses on the accompanying
consolidated statements of operations.
INCOME TAXES
Pacific Life is taxed as a life insurance company for income tax purposes
and is included in the consolidated income tax returns of PMHC. Prior to
1998, Pacific Life was subject to an equity tax calculated by a prescribed
formula that incorporated a differential earnings rate between stock and
mutual life insurance companies. In December 1998, the Internal Revenue
Service released Revenue Ruling 99-3 which exempts Pacific Life from this
tax for taxable years beginning in 1998. Deferred income taxes are
provided for timing differences in the recognition of revenues and
expenses for financial reporting and income tax purposes.
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in
accounts with individual investment objectives. The investment results of
separate account assets generally pass through to separate account
contract owners.
19
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 6 and
7 has been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented may not be indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies could have a significant
effect on the estimated fair value amounts.
BUSINESS RISKS
The Company operates in a business environment that is subject to various
risks and uncertainties. Such risks and uncertainties include, but are not
limited to, interest rate risk, credit risk, and legal and regulatory
changes.
Interest rate risk is the potential for interest rates to change, which
can cause fluctuations in the value of investments. To the extent that
fluctuations in interest rates cause the duration of assets and
liabilities to differ, the Company may have to sell assets prior to their
maturity and realize losses. The Company controls its exposure to this
risk by, among other things, asset/liability matching techniques which
attempt to match the duration of assets and liabilities and utilization of
derivative instruments. Additionally, the Company includes contractual
provisions limiting withdrawal rights for certain of its products. A
substantial portion of the Company's liabilities are not subject to
surrender or can be surrendered only after deduction of a surrender charge
or a market value adjustment.
Credit risk is the risk that issuers of investments owned by the Company
may default or that other parties may not be able to pay amounts due to
the Company. The Company manages its investments to limit credit risk by
diversifying its portfolio among various security types and industry
sectors. The credit risk of financial instruments is controlled through
credit approval procedures, limits and ongoing monitoring. Real estate and
mortgage loan investment risks are limited by diversification of
geographic location and property type. Management does not believe that
significant concentrations of credit risk exist.
The Company is also exposed to credit loss in the event of nonperformance
by the counterparties to interest rate swap contracts and other derivative
securities. The Company manages this risk through credit approvals and
limits on exposure to any specific counterparty. However, the Company does
not anticipate nonperformance by the counterparties.
The Company is subject to various state and Federal regulatory
authorities. The potential exists for changes in regulatory initiatives
that can result in additional, unanticipated expense to the Company.
Existing Federal laws and regulations affect the taxation of life
insurance or annuity products and insurance companies. There can be no
assurance as to what, if any, cases might be decided or future legislation
might be enacted, or if decided or enacted, whether such cases or
legislation would contain provisions with possible negative effects on the
Company's life insurance or annuity products.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
financial statement presentation.
20
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS
The following are reconciliations of statutory capital and surplus and
statutory net income for Pacific Life as calculated in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, to the amounts reported as stockholder's
equity and net income included on the accompanying consolidated financial
statements:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------
(In Millions)
<S> <C> <C>
Statutory capital and surplus $1,157.4 $ 944.8
Deferred policy acquisition costs 908.0 730.7
Unrealized gain on securities available for
sale, net 508.3 575.2
Deferred income tax 307.1 289.2
Asset valuation reserve 298.7 252.4
Non admitted assets 40.4 25.2
Subsidiary equity 26.5 60.4
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (654.4) (511.5)
Other (114.4) (69.5)
------------------
Stockholder's equity as reported herein $2,328.0 $2,147.3
==================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 187.6 $ 121.5 $113.1
Deferred policy acquisition costs 177.3 160.4 111.2
Interest maintenance reserve 24.1 7.6 3.8
Deferred income tax 17.9 41.2 70.9
Net realized gain (loss) on trading secu-
rities 9.2 (5.8) (11.6)
Earnings of subsidiaries (32.8) (40.6) (33.0)
Insurance and annuity reserves (145.1) (107.0) (91.3)
Other 3.3 (1.3) 3.5
------------------------
Net income as reported herein $ 241.5 $ 176.0 $166.6
========================
</TABLE>
21
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (Continued)
RISK-BASED CAPITAL
Risk-based capital is a method developed by the National Association of
Insurance Commissioners ("NAIC") to measure the minimum amount of capital
appropriate for an insurance company to support its overall business
operations in consideration of its size and risk profile. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. The adequacy of a
company's actual capital is measured by comparing it to the risk-based
capital as determined by the formulas. Companies below minimum risk-based
capital requirements are classified within certain levels, each of which
requires specified corrective action. As of December 31, 1998 and 1997,
Pacific Life and PM Group exceeded the minimum risk-based capital
requirements.
CODIFICATION
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). The Codification, which is intended to
standardize regulatory accounting and reporting for the insurance
industry, is proposed to be effective January 1, 2001. However, statutory
accounting principles will continue to be established by individual state
laws and permitted practices and it is uncertain when, or if, the states
of California and Arizona will require adoption of Codification for the
preparation of statutory financial statements. The Company has not
finalized the quantification of the effects of Codification on its
statutory financial statements.
DIVIDEND RESTRICTIONS
Dividend payments by Pacific Life to its parent in any 12-month period
cannot exceed the greater of 10% of statutory capital and surplus as of
the preceding year-end or the statutory net gain from operations for the
previous calendar year, without prior approval from the Insurance
Department of the State of California. Based on this limitation and 1998
statutory results, Pacific Life could pay approximately $240.9 million in
dividends in 1999 without prior approval. No dividends were paid during
1998.
Extraordinary dividends to Pacific Life from PM Group are subject to
regulatory restrictions and approvals by the Insurance Department of the
State of Arizona, PM Group's state of domicile. The maximum amount of
ordinary dividends that can be paid by PM Group without restriction cannot
exceed the lesser of 10% of surplus as regards policyholders, or the
statutory net gain from operations. PM Group received approval to pay
dividends of $14 million and $25 million for the years ended December 31,
1997 and 1996 of which $8 million and $18 million, respectively, were
considered extraordinary. No dividends were paid during 1998.
PERMITTED PRACTICE
As discussed in Note 1, the Company beneficially owns approximately 33% of
the outstanding General and Limited Partner units in PIMCO Advisors L.P.
as of December 31, 1998. Net cash distributions received on these units
are recorded as income as permitted by the Insurance Department of the
State of California for statutory accounting purposes.
3. CLOSED BLOCK
In connection with the Conversion, an arrangement known as a closed block
(the "Closed Block"), was established, for dividend purposes only, for the
exclusive benefit of certain individual life insurance policies that had
an experience based dividend scale for 1997. The Closed Block was designed
to give reasonable assurance to holders of Closed Block policies that
policy dividends will not change solely as a result of the Conversion.
Assets of Pacific Life have been allocated to the Closed Block in an
amount that produces cash flows, which, together with anticipated
revenues, are expected to be sufficient to support the policies. Pacific
Life is not
22
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK (Continued)
required to support the payment of dividends on these policies from its
general funds. The Closed Block will continue in effect until either the
last policy is no longer in force, or the dissolution of the Closed Block.
Total assets of $311.6 million and $316.2 million and total liabilities of
$352.8 million and $356.0 million for the Closed Block are included in
other assets and other liabilities, respectively, on the accompanying
consolidated statements of financial condition as of December 31, 1998 and
1997, respectively. The contribution to income from the Closed Block of
$5.1 million and $5.7 million, consisting of net revenues and expenses
generated by the Closed Block, is included in other income on the
accompanying consolidated statements of operations for the years ended
December 31, 1998 and 1997, respectively.
4. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
On September 30, 1997, PCL completed the rehabilitation of FCL pursuant to
a five-year rehabilitation plan approved by the California Superior Court
and the Insurance Department of the State of California (the
"Rehabilitation Plan"). Under the terms of the Rehabilitation Plan, FCL's
insurance policies in force, primarily individual annuities and universal
life insurance, were restructured and assumed by PCL on December 31, 1992,
pursuant to an assumption reinsurance agreement and asset purchase
agreement. On October 30, 1997, PCL was merged into Pacific Life, with
Pacific Life as the surviving entity.
5. ACQUISITION OF INSURANCE BLOCKS OF BUSINESS
On June 1, 1997, Pacific Life acquired a block of corporate-owned life
insurance ("COLI") policies from Confederation Life Insurance Company
(U.S.) in Rehabilitation, which is currently under rehabilitation
("Confederation Life"), which consisted of approximately 38,000 policies
having a face amount of insurance of $8.6 billion and reserves of
approximately $1.7 billion. The assets received as part of this
acquisition amounted to approximately $1.2 billion in cash and
approximately $0.4 billion in policy loans. This block is primarily
non-leveraged COLI.
The remaining cost of acquiring this business, representing the amount
equal to the excess of the estimated fair value of the reserves assumed
over the estimated fair value of the assets acquired, amounted to $36.5
million and $43.4 million as of December 31, 1998 and 1997, respectively,
and is included in deferred policy acquisition costs on the accompanying
consolidated statements of financial condition. Amortization of this asset
for the years ended December 31, 1998 and 1997 was $7.7 million and $0.9
million, respectively, and is included in commission expenses on the
accompanying consolidated statements of operations.
In January 1999, Pacific Life signed a definitive agreement to acquire a
payout annuity block of business from Confederation Life. This block of
business consists of approximately 18,000 policies, having reserves
amounting to approximately $2.0 billion. The transaction is subject to
various regulatory and Court approvals and is anticipated to close during
1999.
23
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities are shown below. The
estimated fair value of publicly traded securities is based on quoted
market prices. For securities not actively traded, estimated fair values
were provided by independent pricing services specializing in "matrix
pricing" and modeling techniques. The Company also estimates certain fair
values based on interest rates, credit quality and average maturity or
from securities with comparable trading characteristics.
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Estimated
Cost Gains Losses Fair Value
--------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Securities Available for Sale:
------------------------------
As of December 31, 1998:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 94.0 $ 24.9 $ 118.9
Obligations of states, political
subdivisions and foreign govern-
ments 726.0 118.0 $ 16.1 827.9
Corporate securities 7,766.0 438.0 122.4 8,081.6
Mortgage-backed and asset-backed
securities 4,391.7 139.6 52.9 4,478.4
Redeemable preferred stock 104.0 11.3 5.1 110.2
-------------------------------------
Total fixed maturity securities $13,081.7 $ 731.8 $ 196.5 $13,617.0
=====================================
Total equity securities $ 364.4 $ 202.6 $ 19.5 $ 547.5
=====================================
Securities Available for Sale:
------------------------------
As of December 31, 1997:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 85.4 $ 17.5 $ 102.9
Obligations of states, political
subdivisions and foreign govern-
ments 730.2 89.4 $ 3.0 816.6
Corporate securities 7,658.6 594.3 72.7 8,180.2
Mortgage-backed and asset-backed
securities 4,597.2 147.1 15.5 4,728.8
Redeemable preferred stock 102.3 10.3 2.6 110.0
-------------------------------------
Total fixed maturity securities $13,173.7 $ 858.6 $ 93.8 $13,938.5
=====================================
Total equity securities $ 226.4 $ 122.5 $ 2.5 $ 346.4
=====================================
</TABLE>
24
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (Continued)
The amortized cost and estimated fair value of fixed maturity securities
as of December 31, 1998, by contractual repayment date of principal, are
shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------------------
(In Millions)
<S> <C> <C>
Securities Available for Sale:
------------------------------
Due in one year or less $ 479.8 $ 482.6
Due after one year through five years 3,131.7 3,236.6
Due after five years through ten years 2,923.1 3,033.4
Due after ten years 2,155.4 2,386.0
----------------------
8,690.0 9,138.6
Mortgage-backed and asset-backed securities 4,391.7 4,478.4
----------------------
Total $13,081.7 $13,617.0
======================
</TABLE>
Gross gains of $110.6 million, $69.1 million and $89.3 million and gross
losses of $35.9 million, $32.9 million and $29.9 million on securities
available for sale were realized during 1998, 1997 and 1996, respectively.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 915.9 $ 925.4 $ 820.7
Equity securities 17.5 12.8 17.8
Mortgage loans 174.6 129.5 109.4
Real estate 38.1 53.6 51.3
Policy loans 154.5 137.1 113.0
Other 100.2 75.5 82.6
--------------------------
Gross investment income 1,400.8 1,333.9 1,194.8
Investment expense 107.0 108.6 107.5
--------------------------
Net investment income $1,293.8 $1,225.3 $1,087.3
==========================
</TABLE>
25
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (Continued)
The change in gross unrealized gain on investments in available for sale
and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale securities:
Fixed maturity $(229.5) $223.5 $(168.6)
Equity 63.1 85.7 6.3
------------------------
Total $(166.4) $309.2 $(162.3)
========================
Trading securities:
Fixed maturity $ (2.5) $ (1.1) $ (0.5)
Equity 0.2
------------------------
Total $ (2.5) $ (1.1) $ (0.3)
========================
</TABLE>
As of December 31, 1998 and 1997, investments in fixed maturity securities
with a carrying value of $13.0 million and $14.4 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements.
No investment, aggregated by issuer, exceeded 10% of total stockholder's
equity as of December 31, 1998.
7. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities (Note 6) $14,164.5 $14,164.5 $14,284.9 $14,284.9
Mortgage loans 2,788.7 2,911.2 1,922.1 1,990.9
Policy loans 3,901.2 3,901.2 3,769.2 3,769.2
Cash and cash equivalents 150.1 150.1 110.4 110.4
Derivative financial
instruments:
Interest rate floors, caps,
options and swaptions 67.9 67.9 22.9 22.9
Interest rate swap contracts 0.5 0.5
Foreign currency derivatives 108.2 108.2 4.1 4.1
Liabilities:
Guaranteed interest contracts 5,665.3 5,751.0 3,982.0 4,035.7
Deposit liabilities 599.9 626.7 733.5 737.4
Annuity liabilities 1,448.0 1,430.1 1,883.5 1,872.6
Short-term debt 295.5 295.5 104.0 104.0
Surplus notes 149.6 176.0 149.6 164.7
Derivative financial
instruments:
Options written 1.6 1.6
Interest rate swap contracts 23.3 23.3
Asset swap contracts 3.6 3.6 12.6 12.6
Credit default and total
return swaps 9.1 9.1 4.0 4.0
</TABLE>
26
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used to estimate the fair value
of these financial instruments as of December 31, 1998 and 1997:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The carrying amounts of policy loans are a reasonable estimate of their
fair values.
CASH AND CASH EQUIVALENTS
The carrying amounts of these items are a reasonable estimate of their
fair values.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose value or cash flows are
"derived" from another source, such as an underlying security. They can
facilitate total return and, when used for hedging, they achieve the
lowest cost and most efficient execution of positions. Derivatives can
also be used to leverage by using very large notional amounts or by
creating formulas that multiply changes in the underlying security. The
Company's approach is to avoid highly leveraged or overly complex
investments. The Company utilizes certain derivative financial instruments
to diversify its business risk and to minimize its exposure to
fluctuations in market prices, interest rates or basis risk as well as for
facilitating total return. Risk is limited through modeling derivative
performance in product portfolios for hedging and setting loss limits in
total return portfolios.
Derivatives used by the Company involve elements of credit risk and market
risk in excess of amounts recognized in the accompanying consolidated
financial statements. The notional amounts of these instruments reflect
the extent of involvement in the various types of financial instruments.
The estimated fair values of these instruments are based on dealer
quotations or internal price estimates believed to be comparable to dealer
quotations. These amounts estimate what the Company would have to pay or
receive if the contracts were terminated at that time. The Company
determines, on an individual counterparty basis, the need for collateral
or other security to support financial instruments with off-balance sheet
counterparty risk.
27
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (Continued)
A reconciliation of the notional or contract amounts and discussion of the
various derivative instruments is as follows:
<TABLE>
<CAPTION>
Balance Terminations Balance
Beginning and End
of Year Acquisitions Maturities of Year
--------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1998:
------------------
Interest rate floors, caps,
options and swaptions $2,730.0 $ 160.6 $ 237.6 $2,653.0
Interest rate swap
contracts 2,026.1 960.8 378.3 2,608.6
Asset swap contracts 67.4 30.3 34.5 63.2
Credit default and total
return swaps 288.5 771.5 410.4 649.6
Financial futures contracts 214.1 4,108.4 3,713.6 608.9
Foreign currency
derivatives 207.0 959.4 35.2 1,131.2
December 31, 1997:
------------------
Interest rate floors, caps,
options and swaptions 4,538.2 1,644.2 3,452.4 2,730.0
Interest rate swap
contracts 988.3 1,356.0 318.2 2,026.1
Asset swap contracts 30.0 47.4 10.0 67.4
Credit default and total
return swaps 356.5 98.9 166.9 288.5
Financial futures contracts 609.2 3,930.6 4,325.7 214.1
Foreign currency
derivatives 41.4 217.0 51.4 207.0
</TABLE>
Interest Rate Floors, Caps, Options and Swaptions
-------------------------------------------------
The Company uses interest rate floors, caps, options and swaptions to
hedge against fluctuations in interest rates and to take positions in its
total return portfolios. Interest rate floor agreements entitle the
Company to receive the difference when the current rate of the underlying
index is below the strike rate. Interest rate cap agreements entitle the
Company to receive the difference when the current rate of the underlying
index is above the strike rate. Options purchased involve the right, but
not the obligation, to purchase the underlying securities at a specified
price during a given time period. Swaptions are options to enter into a
swap transaction at a specified price. The Company uses written covered
call options on a limited basis. Gains and losses on covered calls are
offset by gains and losses on the underlying position. Floors, caps and
options are reported as assets and options written are reported as
liabilities in the accompanying consolidated statements of financial
condition. Cash requirements for these instruments are generally limited
to the premium paid by the Company at acquisition. The purchase premium of
these instruments is amortized on a constant effective yield basis and
included as a component of net investment income in the accompanying
consolidated statements of operations over the term of the agreement.
Interest rate floors and caps, options and swaptions mature during the
years 1999 through 2017.
Interest Rate Swap Contracts
----------------------------
The Company uses interest rate swaps to manage interest rate risk and to
take positions in its total return portfolios. The interest rate swap
agreements generally involve the exchange of fixed and floating rate
interest payments or the exchange of floating to floating interest
payments tied to different indexes. Generally, no premium is paid to enter
into the contract and no principal payments are made by either party. The
amounts to be received or paid pursuant to these agreements are accrued
and recognized through an adjustment to net investment income in the
accompanying consolidated statements of operations over the life of the
agreements. The interest rate swap contracts mature during the years 1999
through 2021.
28
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (Continued)
Asset Swap Contracts
--------------------
The Company uses asset swap contracts to manage interest rate and equity
risk to better match portfolio duration to liabilities. Asset swap
contracts involve the exchange of upside equity potential for fixed income
streams. The amounts to be received or paid pursuant to these agreements
are accrued and recognized through an adjustment to net investment income
in the accompanying consolidated statements of operations over the life of
the agreements. The asset swap contracts mature during the years 2000
through 2005.
Credit Default and Total Return Swaps
-------------------------------------
The Company uses credit default and total return swaps to take advantage
of market opportunities. Credit default swaps involve the receipt of fixed
rate payments in exchange for assuming potential credit exposure of an
underlying security. Total return swaps involve the exchange of floating
rate payments for the total return performance of a specified index or
market. The amounts to be received or paid pursuant to these agreements
are accrued and recognized through an adjustment to net investment income
in the accompanying consolidated statements of operations over the life of
the agreements. Credit default and total return swaps mature during the
years 1999 through 2028.
Financial Futures Contracts
---------------------------
The Company uses exchange-traded financial futures contracts to hedge cash
flow timing differences between assets and liabilities and overall
portfolio duration. Assets and liabilities are rarely acquired or sold at
the same time, which creates a need to hedge their change in value during
the unmatched period. In addition, foreign currency futures may be used to
hedge foreign currency risk on non-U.S. dollar denominated securities.
Financial futures contracts obligate the holder to buy or sell the
underlying financial instrument at a specified future date for a set price
and may be settled in cash or by delivery of the financial instrument.
Price changes on futures are settled daily through the required margin
cash flows. The notional amounts of the contracts do not represent future
cash requirements, as the Company intends to close out open positions
prior to expiration.
Foreign Currency Derivatives
----------------------------
The Company enters into foreign exchange forward contracts and swaps to
hedge against fluctuations in foreign currency exposure. Foreign currency
derivatives involve the exchange of foreign currency denominated payments
for U.S. dollar denominated payments. Gains and losses on foreign exchange
forward contracts offset losses and gains, respectively, on the related
foreign currency denominated assets. The amounts to be received or paid
under the foreign currency swaps are accrued and recognized through an
adjustment to net investment income in the accompanying consolidated
statements of operations over the life of the agreements. Foreign currency
derivatives expire during the years 1999 through 2013.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair value of fixed maturity guaranteed interest contracts
is estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of deposit liabilities with
no defined maturities is the amount payable on demand.
ANNUITY LIABILITIES
The estimated fair value of annuity liabilities approximates carrying
value and primarily includes policyholder deposits and accumulated
credited interest.
29
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (Continued)
SHORT-TERM DEBT
The carrying amount of short-term debt is a reasonable estimate of its
fair value because the interest rates are variable and based on current
market values.
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Life has issued certain contracts to 401(k) plans totaling $1.6
billion as of December 31, 1998, pursuant to the terms of which the 401(k)
plan retains direct ownership and control of the assets related to these
contracts. Pacific Life agrees to provide benefit responsiveness in the
event that plan benefit requests exceed plan cash flows. In return for
this guarantee, Pacific Life receives a fee which varies by contract.
Pacific Life sets the investment guidelines to provide for appropriate
credit quality and cash flow matching.
8. UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
The detail of universal life, annuity and other investment contract
deposit liabilities is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------------
(In Millions)
<S> <C> <C>
Universal life $10,218.0 $10,012.0
Annuity 1,429.0 1,817.4
Other investment contract depos-
its 6,326.0 4,815.1
-------------------
$17,973.0 $16,644.5
===================
</TABLE>
The detail of universal life, annuity and other investment contract
deposits policy fees and interest credited net of reinsurance ceded is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees:
Universal life $ 439.9 $ 377.5 $ 318.4
Annuity 82.1 50.3 26.6
Other investment contract de-
posits 3.3 3.4 3.6
--------------------------
Total policy fees $ 525.3 $ 431.2 $ 348.6
==========================
Interest credited:
Universal life $ 440.8 $ 368.2 $ 284.3
Annuity 79.8 116.8 138.7
Other investment contract de-
posits 360.2 312.8 242.0
--------------------------
Total interest credited $ 880.8 $ 797.8 $ 665.0
==========================
</TABLE>
30
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHORT-TERM AND LONG-TERM DEBT
Pacific Life borrows for short-term needs by issuing commercial paper.
Principal of $234.9 million and interest payable of $0.6 million was
outstanding as of December 31, 1998, bearing an average interest rate of
5.22%, and was repaid in January 1999. There was no commercial paper debt
outstanding as of December 31, 1997. Pacific Life has a revolving credit
facility available of $350 million as of December 31, 1998 and 1997. There
was no debt outstanding under the revolving credit facility as of December
31, 1998 and 1997.
PAM had bank borrowings outstanding of $60 million and $104 million as of
December 31, 1998 and 1997, respectively. The interest rate averaged 5.8%,
5.8% and 5.6% for the years ended December 31, 1998, 1997 and 1996,
respectively. Outstanding debt is due and payable in 1999 and subject to
renewal. The borrowing limit for PAM as of December 31, 1998 and 1997 was
$200 million.
Pacific Life has $150 million of long-term debt which consists of surplus
notes outstanding at an interest rate of 7.9% maturing on December 30,
2023. Interest is payable semiannually on June 30 and December 30. The
surplus notes may not be redeemed at the option of Pacific Life or any
holder of the surplus notes. The surplus notes are unsecured and
subordinated to all present and future senior indebtedness and policy
claims of Pacific Life. Each payment of interest on and the payment of
principal of the surplus notes may be made only with the prior approval of
the Insurance Commissioner of the State of California. Interest expense
amounted to $11.8 million for each of the years ended December 31, 1998,
1997 and 1996 and is included in net investment income on the accompanying
consolidated statements of operations.
10.INCOME TAXES
The Company accounts for income taxes using the liability method. The
deferred tax consequences of changes in tax rates or laws must be computed
on the amounts of temporary differences and carryforwards existing at the
date a new tax law is enacted. Recording the effects of a change involves
adjusting deferred tax liabilities and assets with a corresponding charge
or credit recognized in the provision for income taxes. The objective is
to measure a deferred tax liability or asset using the enacted tax rates
and laws expected to apply to taxable income in the periods in which the
deferred tax liability or asset is expected to be settled or realized.
The provision for income taxes is as follows:
<TABLE>
Years Ended December 31,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
Current $ 134.1 $ 127.9 $ 163.5
Deferred (20.6) (14.4) (49.8)
----------------------------
$ 113.5 $ 113.5 $ 113.7
============================
</TABLE>
31
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
Non deductible reserves $ 28.2 $ (27.6) $ (6.4)
Duration hedging 20.8 (2.6) (14.9)
Partnership income 20.8
Deferred policy acquisition costs (12.6) (18.0) 2.1
Investment valuation (24.5) 3.9 (7.3)
Policyholder reserves (29.5) 20.1 (28.5)
Other (2.6) 9.8 5.2
----------------------------
Deferred taxes from operations 0.6 (14.4) (49.8)
Release of subsidiary deferred taxes (21.2)
----------------------------
Deferred tax provision $ (20.6) $ (14.4) $ (49.8)
============================
</TABLE>
The Company's acquisition of a controlling interest in a subsidiary
allowed such subsidiary to be included in PMHC's consolidated income tax
return. That inclusion resulted in the release of certain deferred taxes.
A reconciliation of the provision for income taxes based on the prevailing
corporate statutory tax rate to the provision reflected in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $ 124.2 $ 101.3 $ 98.1
Equity tax (5.0) 5.0 16.3
Amortization of intangibles on equity
method investments 4.3 7.6 6.5
Non-taxable investment income (3.6) (2.6) (2.1)
Other (6.4) 2.2 (5.1)
----------------------------
Provision for income taxes $ 113.5 $ 113.5 $ 113.7
============================
</TABLE>
32
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The net deferred tax liability is comprised of the following tax effected
temporary differences:
<TABLE>
<CAPTION>
December 31,
1998 1997
----------------
(In Millions)
<S> <C> <C>
Policyholder reserves $ 254.3 $ 224.8
Investment valuation 44.7 20.2
Deferred compensation 33.7 25.9
Dividends 7.6 7.7
Non deductible reserves 5.9 34.1
Depreciation (2.4) (2.5)
Duration hedging (8.5) 12.3
Deferred policy acquisition costs (13.3) (25.9)
Partnership income (20.8)
Other (1.4) 3.8
----------------
Deferred taxes from operations 299.8 300.4
Deferred taxes assumed in acquisition of subsidiary 4.8
Issuance of partnership units by affiliate (74.9) (47.9)
Unrealized gain on securities available for sale (272.3) (307.8)
----------------
Net deferred tax liability $ (42.6) $ (55.3)
================
</TABLE>
33
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMPREHENSIVE INCOME
The Company displays comprehensive income and its components in the
accompanying consolidated statements of stockholder's equity and the note
herein. The Company's only component of other comprehensive income,
unrealized gain (loss) on securities available for sale, is shown net of
reclassification adjustments, as defined by SFAS No. 130, and net of
income tax in the accompanying consolidated statements of stockholder's
equity. The disclosure of the gross components of other comprehensive
income is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---------------------------
(In Millions)
<S> <C> <C> <C>
Calculation of Holding Gain (Loss):
-----------------------------------
Gross holding gain (loss) on securities
available for sale $ (13.4) $ 338.2 $ (75.7)
Tax (expense) benefit 4.5 (117.1) 26.5
---------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (8.9) $ 221.1 $ (49.2)
===========================
Calculation of Reclassification
Adjustment:
-------------------------------
Realized gain on sale of securities
available for sale $ 89.3 $ 38.9 $ 82.6
Tax expense (31.3) (13.8) (29.0)
---------------------------
Reclassification adjustment, net of tax $ 58.0 $ 25.1 $ 53.6
===========================
Amounts Reported in Other Comprehensive
Income:
---------------------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (8.9) $ 221.1 $ (49.2)
Less reclassification adjustment, net
of tax 58.0 25.1 53.6
---------------------------
Net unrealized gain (loss) recognized
in other comprehensive income $ (66.9) $ 196.0 $ (102.8)
===========================
</TABLE>
34
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. REINSURANCE
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger risks or,
in the case of a producer-owned reinsurance company, to diversify risk and
retain top producing agents. Amounts receivable from reinsurers for
reinsurance on future policy benefits, universal life deposits, and unpaid
losses is reported as an asset and included in other assets on the
accompanying consolidated statements of financial condition. All assets
associated with reinsured business remain with, and under the control of
the Company. Approximate amounts recoverable (payable) from (to)
reinsurers include the following amounts:
<TABLE>
<CAPTION>
December 31,
1998 1997
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(46.0) $(39.6)
Future policy benefits 108.9 92.2
Unpaid claims 12.5 14.0
Paid claims 24.3 10.2
</TABLE>
As of December 31, 1998, 79% of the reinsurance recoverables were from one
reinsurer, of which 100% is secured by payables to the reinsurer. To the
extent that the assuming companies become unable to meet their obligations
under these agreements, the Company remains contingently liable. The
Company does not anticipate nonperformance by the assuming companies.
Revenues and benefits are shown net of the following reinsurance
transactions:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-----------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance premiums $ 82.7 $ 70.7 $ 44.3
Assumed reinsurance included in insurance premiums 17.2 18.1 17.8
Ceded reinsurance netted against policy fees 65.0 77.5 71.0
Ceded reinsurance netted against net investment in-
come 203.3 204.9 192.5
Ceded reinsurance netted against interest credited 162.8 165.8 155.2
Ceded reinsurance netted against policy benefits 121.3 93.4 56.7
Assumed reinsurance included in policy benefits 17.7 12.7 9.9
</TABLE>
35
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION
The Company's six operating segments are Individual Insurance,
Institutional Products Group, Annuities, Group Employee Benefits, Broker-
Dealers and Investment Management. These segments have been identified
based on differences in products and services offered. All other activity
is included in Corporate and Other.
The Individual Insurance segment offers universal life, variable universal
life and other life insurance products to individuals, small businesses
and corporations through a network of distribution channels that include
branch offices, marketing organizations, national accounts and a national
producer group. The Institutional Products Group segment offers investment
and annuity products to pension fund sponsors and other institutional
investors primarily through its home office marketing team. The Annuities
segment offers variable and fixed annuities to individuals, small
businesses and qualified plans through financial institutions, National
Association of Securities Dealers ("NASD") firms, and regional and
national wirehouses.
The Group Employee Benefits segment offers group life, health and dental
insurance, and stop loss insurance products to corporate, government and
labor-management-negotiated plans. The group life, health and dental
insurance is distributed through a network of sales offices and the stop
loss insurance is distributed through a network of third party
administrators. The Broker-Dealers segment includes five NASD registered
firms that provide securities and affiliated insurance brokerage services
and investment advisory services through more than 3,100 registered
representatives. The Investment Management segment is primarily comprised
of the Company's investment in PIMCO Advisors (Note 1). PIMCO Advisors
offers a diversified range of investment products through separately
managed accounts, and institutional, retail and offshore funds.
Corporate and Other primarily includes investment income, expenses and
assets not attributable to the major segments and the operations of the
Company's reinsurance subsidiary located in the United Kingdom. Corporate
and Other also includes the elimination of intersegment revenues, expenses
and assets.
The Company uses the same accounting policies and procedures to measure
segment income and assets as it uses to measure its consolidated net
income and assets. Net investment income and capital gains are allocated
based on invested assets purchased and held as is required for transacting
the business of that segment. Overhead expenses are allocated based on
services provided. Interest expense is allocated based on the short-term
borrowing needs of the segment and is included in net investment income.
The income tax provision is allocated based on each segment's actual tax
liability.
Intersegment revenues include commissions paid by the Individual Insurance
segment and the Annuities segment for variable product sales to the
Broker-Dealers segment. Investment Management segment assets have been
reduced by an intersegment note payable of $110 million as of December 31,
1998. The related intersegment note receivable is included in Corporate
and Other segment assets.
The Company generates substantially all of its revenues and income from
customers located in the United States. Additionally, substantially all of
the Company's assets are located in the United States.
Depreciation expense and capital expenditures are not material and have
not been reported herein. The Company's significant non cash item is
interest credited to universal life, annuity and other investment contract
deposits and is disclosed herein.
36
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION (Continued)
Financial information for each of the business segments is as follows:
<TABLE>
<CAPTION>
Institutional Group
Individual Products Employee Broker- Investment Corporate
Insurance Group Annuities Benefits Dealers Management and Other Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External customers and (In Millions)
other revenue
December 31, 1998 $ 414.6 $ 43.3 $ 124.0 $521.2 $236.1 $ 17.1 $ 17.4 $ 1,373.7
December 31, 1997 379.2 61.6 83.3 480.6 154.0 21.8 3.2 1,183.7
December 31, 1996 335.4 36.8 41.4 431.7 82.2 22.2 5.7 955.4
Intersegment revenues
December 31, 1998 185.3 (185.3) -
December 31, 1997 143.3 (143.3) -
December 31, 1996 98.0 (98.0) -
Net investment income
December 31, 1998 565.7 565.5 88.6 23.1 0.9 8.0 42.0 1,293.8
December 31, 1997 485.2 509.6 149.4 24.9 0.8 6.2 49.2 1,225.3
December 31, 1996 404.1 465.5 149.6 21.9 0.8 4.8 40.6 1,087.3
Net realized capital
gains (losses)
December 31, 1998 3.4 (13.6) 4.6 1.7 4.0 38.6 38.7
December 31, 1997 9.8 12.8 0.6 2.0 20.8 39.3 85.3
December 31, 1996 5.7 5.0 (4.5) 2.3 1.1 34.4 44.0
Net income of equity
method investees
December 31, 1998 103.0 103.0
December 31, 1997 80.1 80.1
December 31, 1996 61.3 61.3
Total revenues
December 31, 1998 983.7 595.2 217.2 546.0 422.3 132.1 (87.3) 2,809.2
December 31, 1997 874.2 584.0 233.3 507.5 298.1 128.9 (51.6) 2,574.4
December 31, 1996 745.2 507.3 186.5 455.9 181.0 89.4 (17.3) 2,148.0
Segment profit (loss)
before income tax
provision
December 31, 1998 151.1 74.6 34.1 10.3 9.9 60.1 14.9 355.0
December 31, 1997 132.4 98.3 23.5 28.8 6.4 24.6 (24.5) 289.5
December 31, 1996 109.3 80.7 (16.5) 26.3 4.3 34.1 42.1 280.3
Income tax provision
(benefit)
December 31, 1998 52.6 21.2 11.3 2.9 4.5 2.1 18.9 113.5
December 31, 1997 55.8 33.9 9.4 9.1 2.7 10.1 (7.5) 113.5
December 31, 1996 44.8 27.5 (0.4) 6.2 1.8 21.5 12.3 113.7
Segment net income
(loss)
December 31, 1998 98.5 53.4 22.8 7.4 5.4 58.0 (4.0) 241.5
December 31, 1997 76.6 64.4 14.1 19.7 3.7 14.5 (17.0) 176.0
December 31, 1996 64.5 53.2 (16.1) 20.1 2.5 12.6 29.8 166.6
Interest credited on
universal life, annuity
and other investment
contract deposits
December 31, 1998 449.6 354.1 71.0 6.1 880.8
December 31, 1997 378.8 299.8 106.2 13.0 797.8
December 31, 1996 290.3 232.9 132.8 9.0 665.0
Segment assets
As of December 31, 1998 14,578.2 15,221.0 8,384.2 361.1 55.8 267.3 1,016.3 39,883.9
As of December 31, 1997 13,426.7 12,241.7 6,310.8 368.6 52.4 305.4 1,303.2 34,008.8
</TABLE>
37
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLANS
Pacific Life has defined benefit pension plans which cover all eligible
employees who have one year of continuous employment and have attained age
21. The full-benefit vesting period for all participants is five years.
Benefits for employees are based on years of service and the highest five
consecutive years of compensation during the last ten years of employment.
Pacific Life's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as may be determined appropriate. Contributions are intended to
provide not only for benefits attributed to employment to date but also
for those expected to be earned in the future. All such contributions are
made to a tax-exempt trust. Plan assets consist primarily of group annuity
contracts issued by Pacific Life, as well as mutual funds managed by an
affiliate of Pacific Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned during
the year $ 4.0 $ 3.6 $ 3.7
Interest cost on projected benefit
obligation 10.9 10.4 9.8
Expected return on plan assets (15.0) (12.8) (11.2)
Amortization of net obligations and
prior service cost (1.4) (1.4) (1.4)
----------------------------
Net periodic pension cost (benefit) $ (1.5) $ (0.2) $ 0.9
============================
</TABLE>
38
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
The following tables set forth the pension plans' reconciliation of
benefit obligation, plan assets and funded status for the years ended:
<TABLE>
December 31,
1998 1997
--------------
(In Millions)
<S> <C> <C>
Change in Benefit Obligation:
-----------------------------
Benefit obligation, beginning of year $157.9 $140.9
Service cost 4.0 3.6
Interest cost 10.9 10.4
Plan expense (0.3) (0.2)
Actuarial loss 11.9 10.1
Benefits paid (6.6) (6.9)
--------------
Benefit obligation, end of year $177.8 $157.9
==============
Change in Plan Assets:
----------------------
Fair value of plan assets, beginning of year $180.3 $154.2
Actual return on plan assets 21.9 33.2
Plan expense (0.3) (0.2)
Benefits paid (6.6) (6.9)
--------------
Fair value of plan assets, end of year $195.3 $180.3
==============
Funded Status Reconciliation:
-----------------------------
Funded status $ 17.5 $ 22.4
Unrecognized transition asset (3.6) (4.8)
Unrecognized prior service cost (1.0) (1.2)
Unrecognized actuarial gain (9.7) (14.7)
--------------
Prepaid pension cost $ 3.2 $ 1.7
==============
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1998 and 1997, the weighted average discount
rate used was 6.5% and 7.0%, respectively, and the rate of increase in
future compensation levels was 5.0% and 5.5%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1998 and 1997.
In connection with the merger of PCL into Pacific Life as discussed in
Note 4, Pacific Life assumed sponsorship of PCL's defined benefit pension
plan. This pension plan provides for retirement income benefits at age 65
with reduced benefits for early retirement. Effective December 31, 1997,
PCL's defined benefit plan merged into Pacific Life's plan. All benefits
associated with PCL's plan remain unchanged subsequent to the merger.
POSTRETIREMENT BENEFITS
Pacific Life sponsors a defined benefit health care plan and a defined
benefit life insurance plan (the "Plans") that provide postretirement
benefits for all eligible retirees and their dependents. Generally,
qualified employees may become eligible for these benefits if they reach
normal retirement age, have been covered under Pacific Life's policy as an
active employee for a minimum continuous period prior to the date retired,
and have an employment date before January 1, 1990. The Plans contain
cost-sharing features such as deductibles and
39
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
coinsurance, and require retirees to make contributions which can be
adjusted annually. Pacific Life's commitment to qualified employees who
retire after April 1, 1994 is limited to specific dollar amounts.
Pacific Life reserves the right to modify or terminate the Plans at any
time. As in the past, the general policy is to fund these benefits on a
pay-as-you-go basis.
The net periodic postretirement benefit cost for the years ended December
31, 1998, 1997 and 1996 is $0.7 million, $0.8 million and $1.4 million,
respectively. As of December 31, 1998 and 1997, the accumulated benefit
obligation is $19.3 million and $20.0 million, respectively. The fair
value of the plan assets as of December 31, 1998 and 1997 is zero. The
amount of accrued benefit cost included in other liabilities on the
accompanying consolidated statements of financial condition is $25.3
million and $26.0 million as of December 31, 1998 and 1997, respectively.
The Plans include both indemnity and HMO coverage. The assumed health care
cost trend rate used in measuring the accumulated benefit obligation for
indemnity coverage was 8% and 9% for 1998 and 1997, respectively, and is
assumed to decrease gradually to 3.5% in 2003 and remain at that level
thereafter. The assumed health care cost trend rate used in measuring the
accumulated benefit obligation for HMO coverage was 7% and 8% for 1998 and
1997, respectively, and is assumed to decrease gradually to 3% in 2003 and
remain at that level thereafter.
The amount reported is materially effected by the health care cost trend
rate assumptions. If the health care cost trend rate assumptions were
increased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1998 would be increased by 8.0%, and the aggregate of the
service and interest cost components of the net periodic benefit cost
would increase by 7.5%. If the health care cost trend rate assumptions
were decreased by 1%, the accumulated postretirement benefit obligation as
of December 31, 1998 would be decreased by 6.8%, and the aggregate of the
service and interest cost components of the net periodic benefit cost
would decrease by 6.5%.
The discount rate used in determining the accumulated postretirement
benefit obligation is 6.5% and 7.0% for 1998 and 1997, respectively.
OTHER PLANS
Pacific Life provides a voluntary Retirement Incentive Savings Plan
("RISP") pursuant to Section 401(k) of the Internal Revenue Code covering
all eligible employees of the Company. Effective October 1, 1997, Pacific
Life's RISP changed the matching percentage of each employee's
contributions from 50% to 75%, up to a maximum of 6% of eligible employee
compensation and restricted the matched investment to an Employee Stock
Ownership Plan ("ESOP") sponsored by Pacific LifeCorp. The ESOP was formed
at the time of the Conversion and is currently only available to the
participants of the RISP in the form of matching contributions.
Pacific Life also has a deferred compensation plan which permits certain
employees to defer portions of their compensation and earn a guaranteed
interest rate on the deferred amounts. The interest rate is determined
annually and is guaranteed for one year. The compensation which has been
deferred has been accrued and the primary expense, other than
compensation, related to this plan is interest on the deferred amounts.
The Company also has performance based incentive compensation plans for
its employees.
15. TRANSACTIONS WITH AFFILIATES
Pacific Life serves as the investment advisor for the Pacific Select Fund,
the investment vehicle provided to the Company's variable life and
variable annuity contractholders. Pacific Life charges fees based upon the
net asset value of the portfolios of the Pacific Select Fund, which
amounted to $42.1 million, $27.5 million and $14.3 million for the years
ended December 31, 1998, 1997 and 1996, respectively. In addition, Pacific
Life provides certain support services to the Pacific Select Fund for an
administration fee which is based on an
40
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. TRANSACTIONS WITH AFFILIATES (Continued)
allocation of actual costs. Such administration fees amounted to $232,000,
$165,000 and $108,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $16.9 million, $11.4 million and $6.2 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
Included in equity securities on the accompanying consolidated statements
of financial condition are investments in mutual funds and other
investments managed by PIMCO Advisors which amounted to $40.3 million and
$46.5 million as of December 31, 1998 and 1997, respectively.
Pacific Life provides certain support services to PIMCO Advisors. Charges
for these services are based on an allocation of actual costs and amounted
to $1.2 million, $1.2 million and $1.4 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
16. TERMINATION AND NON-COMPETITION AGREEMENTS
Effective November 15, 1994, in connection with the PIMCO Advisors
transaction (Note 1), termination and non-competition agreements were
entered into with certain former key employees of PAM's subsidiaries.
These agreements provide terms and conditions for the allocation of future
proceeds received from distributions and sales of certain PIMCO Advisors
units and other noncompete payments. When the amount of future obligations
to be made to a key employee is determinable, a liability for such amount
is established.
For the years ended December 31, 1998, 1997 and 1996, approximately $49.4
million, $85.8 million and $35.3 million, respectively, is included in
operating expenses on the accompanying consolidated statements of
operations related to the termination and non-competition agreements. This
includes payments of $43.1 million in 1997 to former key employees who
elected to sell to PAM's subsidiaries their rights to the future proceeds
from the PIMCO Advisors units.
17. COMMITMENTS
The Company has outstanding commitments to make investments primarily in
fixed maturities, mortgage loans, limited partnerships and other
investments as follows (In Millions):
<TABLE>
<CAPTION>
Years Ending December 31:
-------------------------
<S> <C>
1999 $172.7
2000-2003 202.1
2004 and thereafter 55.9
------
Total $430.7
======
</TABLE>
The Company leases office facilities under various non-cancelable
operating leases. Aggregate minimum future commitments as of December 31,
1998 through the term of the leases are approximately $37.5 million.
41
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. LITIGATION
The Company was named in civil litigation proceedings similar to other
litigation brought against many life insurers alleging misconduct in the
sale of products, sometimes referred to as market conduct litigation. The
class of plaintiffs included, with some exceptions, all persons who owned,
as of December 31, 1997 (or as of the date of policy termination, if
earlier), individual whole life, universal life or variable life insurance
policies sold by the Company on or after January 1, 1982. The Company has
settled this litigation pursuant to a final settlement agreement approved
by the Court in November 1998. The settlement agreement is currently being
implemented. The cost of the settlement has been included in the
accompanying consolidated statements of operations during the three years
ended December 31, 1998.
Further, the Company is a respondent in a number of other legal
proceedings, some of which involve allegations for extra-contractual
damages. In the opinion of management, the outcome of the foregoing
proceedings is not likely to have a material adverse effect on the
consolidated financial position or results of operations of the Company.
---------------------------------------------------------------------------
42
<PAGE>
Form No. 250-9A
