<PAGE>
Supplement Dated January 2, 2001 to Prospectus Dated May 1, 2000
for Pacific Select Variable Annuity, a variable annuity contract
issued by Pacific Life Insurance Company
This supplement changes the Prospectus to reflect the
following, and restates information contained in a
supplement dated October 2, 2000:
---------------------------------------------------------
Eleven new Variable The following new Variable Investment Options are added
Investment Options to the list on page 1 of the Prospectus.
are available
.Blue Chip .Strategic Value
.Aggressive Growth .Focused 30
.Financial Services .Capital Opportunities
.Health Sciences .Mid-Cap Growth
.Technology .Global Growth
.Telecommunications
---------------------------------------------------------
The Bond and Income The Bond and Income Variable Account terminated on
Investment Option September 22, 2000.
is no longer
available All references to the Bond and Income Investment
Option, Portfolio or Variable Account in the Prospectus
are removed.
Unless you instruct us otherwise, to the extent any
outstanding instruction you have on file with us
designates the Bond and Income Variable Account, the
instruction will be deemed an instruction for the
Managed Bond Variable Account. Instructions include,
but are not limited to, instructions for Purchase
Payment allocations, any transfer or exchange
instructions, including instructions under the
Portfolio Rebalancing, Dollar Cost Averaging, and Sweep
Programs, and Partial Withdrawal instructions.
---------------------------------------------------------
The new eleven The new eleven Variable Accounts invest in their
Variable Accounts corresponding Portfolios of the Fund. References to the
are added as 22 Variable Investment Options throughout the
Variable Investment Prospectus are changed to refer to 31 Variable
Options Investment Options or Subaccounts.
---------------------------------------------------------
The International Effective January 1, 2001, Lazard Asset Management is
Value Portfolio has the portfolio manager of the International Value
a new portfolio Portfolio.
manager
---------------------------------------------------------
A portfolio manager Mercury Asset Management US has changed its name to
has changed its Mercury Advisors.
name
<PAGE>
---------------------------------------------------------
AN OVERVIEW OF The following replaces the Other Expenses section on
PACIFIC SELECT page 7 of the Prospectus:
VARIABLE ANNUITY-
Fees and Expenses Other Expenses
Paid by the Pacific
Select Fund: Other The table below shows the advisory fee and Fund
Expenses is expenses as an annual percentage of each Portfolio's
replaced average daily net assets for the year 2000. To help
limit Fund expenses, effective July 1, 2000 we
contractually agreed to waive all or part of our
investment advisory fees or otherwise reimburse each
Portfolio for operating expenses (including
organizational expenses, but not including advisory
fees, additional costs associated with foreign
investing and extraordinary expenses) that exceed an
annual rate of 0.10% of its average daily net assets.
Such waiver or reimbursement is subject to repayment to
us to the extent such expenses fall below the 0.10%
expense cap. For each Portfolio, our right to repayment
is limited to amounts waived and/or reimbursed that
exceed the new 0.10% expense cap and, except for
Portfolios that started on or after October 2, 2000,
that do not exceed the previously established 0.25%
expense cap. Any amounts repaid to us will have the
effect of increasing such expenses of the Portfolio,
but not above the 0.10% expense cap. There is no
guarantee that we will continue to cap expenses after
December 31, 2001. In 2000, Pacific Life reimbursed
approximately $14,627 to the I-Net Tollkeeper
Portfolio, $36,874 to the Strategic Value Portfolio,
$34,687 to the Focused 30 Portfolio and $28,882 to the
Small-Cap Index Portfolio.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Less
Advisory Other 12b-1 Total adviser's Total net
Portfolio fee expenses amounts+ expenses reimbursement expenses
----------------------------------------------------------------------------------------
As an annual % of average daily net assets
<S> <C> <C> <C> <C> <C> <C>
Blue Chip/1/ 0.95 0.06 -- 1.01 -- 1.01
Aggressive Growth/1/ 1.00 0.06 -- 1.06 -- 1.06
Aggressive Equity/2/ 0.80 0.04 0.02 0.86 -- 0.86
Emerging Markets/2/ 1.10 0.20 -- 1.30 -- 1.30
Diversified Research/2/ 0.90 0.08 0.01 0.99 -- 0.99
Small-Cap Equity/2/ 0.65 0.05 -- 0.70 -- 0.70
International Large-Cap/2/ 1.05 0.13 -- 1.18 -- 1.18
Equity 0.65 0.04 -- 0.69 -- 0.69
I-Net Tollkeeper/2/ 1.50 0.13 -- 1.63 (0.02) 1.61
Financial Services/1/ 1.10 0.15 -- 1.25 (0.05) 1.20
Health Sciences/1/ 1.10 0.11 -- 1.21 (0.01) 1.20
Technology/1/ 1.10 0.08 -- 1.18 -- 1.18
Telecommunications/1/ 1.10 0.08 -- 1.18 -- 1.18
Multi-Strategy 0.65 0.04 -- 0.69 -- 0.69
Equity Income/2/ 0.65 0.04 0.01 0.70 -- 0.70
Strategic Value 0.95 0.51 -- 1.46 (0.41) 1.05
Growth LT 0.75 0.04 -- 0.79 -- 0.79
Focused 30 0.95 0.43 -- 1.38 (0.33) 1.05
Mid-Cap Value/2/ 0.85 0.04 0.12 1.01 -- 1.01
International Value 0.85 0.11 -- 0.96 -- 0.96
Capital Opportunities/1/ 0.80 0.06 -- 0.86 -- 0.86
Mid-Cap Growth/1/ 0.90 0.06 -- 0.96 -- 0.96
Global Growth/1/ 1.10 0.19 -- 1.29 -- 1.29
Equity Index 0.25 0.04 -- 0.29 -- 0.29
Small-Cap Index/2/ 0.50 0.13 -- 0.63 (0.02) 0.61
REIT 1.10 0.05 -- 1.15 -- 1.15
Government Securities/2/ 0.60 0.05 -- 0.65 -- 0.65
Managed Bond/2/ 0.60 0.05 -- 0.65 -- 0.65
Money Market 0.34 0.04 -- 0.38 -- 0.38
High Yield Bond 0.60 0.04 -- 0.64 -- 0.64
Large-Cap Value/2/ 0.85 0.05 0.06 0.96 -- 0.96
----------------------------------------------------------------------------------------
</TABLE>
/1/ Expenses are estimated. There were no actual
advisory fees or expenses for these Portfolios in
2000 because the Portfolios started after December
31, 2000.
/2/ Total adjusted net expenses for these Portfolios,
after deduction of an offset for custodian credits
and the 12b-1 recapture were: 0.84% for Aggressive
Equity Portfolio, 1.29% for Emerging Markets
Portfolio, 0.98% for Diversified Research
Portfolio, 0.69% for Small-Cap Equity Portfolio,
1.17% for International Large-Cap Portfolio, 1.60%
for I-Net Tollkeeper Portfolio, 0.69% for Equity
Income Portfolio, 0.89% for Mid-Cap Value
Portfolio, 0.60% for Small-Cap Index Portfolio,
0.62% for Government Securities Portfolio, 0.64%
for Managed Bond Portfolio, and 0.90% for Large-Cap
Value Portfolio.
+ The Fund has a brokerage enhancement 12b-1 plan
under which brokerage transactions, subject to best
price and execution, may be placed with certain
broker-dealers in return for credits, cash or other
compensation ("recaptured commissions"). While a
Portfolio pays the cost of brokerage when it buys
or sells a Portfolio security, there are no fees or
charges to the Fund under the plan. Recaptured
commissions may be used to promote and market Fund
shares and the distributor may therefore defray
expenses for distribution that it might otherwise
incur. The SEC staff requires that the amount of
recaptured commissions be shown as an expense in
the chart above.
2
<PAGE>
---------------------------------------------------------
AN OVERVIEW OF The Examples on page 8 of the Prospectus is replaced
PACIFIC SELECT with the following:
VARIABLE ANNUITY-
Examples is Different examples are presented below that show
replaced 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 $45,000 and a prorata
portion of the annual Maintenance Fee. Each example
shows expenses based upon allocation to each of the
Variable Accounts.
The examples below should not be considered a
representation of past or future expenses. Actual
expenses may be greater or lesser than those shown. The
5% return assumed in the examples is hypothetical and
should not be considered a representation of past or
future actual returns, which may be greater or lesser
than the assumed amount.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Contract not
Surrendered or
Annuitized and
Contract Surrendered Contract Annuitized Remains in Force at
at End of Time at End of Time End of Time
Period ($) Period* ($) Period ($)
---------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Blue Chip 79 122 159 280 79 77 132 280 25 77 132 280
---------------------------------------------------------------------------------------
Aggressive Growth 80 124 161 285 80 79 134 285 26 79 134 285
---------------------------------------------------------------------------------------
Aggressive Equity 77 117 150 263 77 72 123 263 23 72 123 263
---------------------------------------------------------------------------------------
Emerging Markets 82 130 172 307 82 85 145 307 28 85 145 307
---------------------------------------------------------------------------------------
Diversified Research 79 121 157 277 79 76 130 277 25 76 130 277
---------------------------------------------------------------------------------------
Small-Cap Equity 76 112 142 248 76 67 115 248 22 67 115 248
---------------------------------------------------------------------------------------
International Large-Cap 81 127 167 296 81 82 140 296 27 82 140 296
---------------------------------------------------------------------------------------
Equity 76 112 142 248 76 67 115 248 22 67 115 248
---------------------------------------------------------------------------------------
I-Net Tollkeeper 85 140 188 337 85 95 161 337 31 95 161 337
---------------------------------------------------------------------------------------
Financial Services 81 128 168 299 81 83 141 299 27 83 141 299
---------------------------------------------------------------------------------------
Health Sciences 81 128 168 299 81 83 141 299 27 83 141 299
---------------------------------------------------------------------------------------
Technology 81 127 167 297 81 82 140 297 27 82 140 297
---------------------------------------------------------------------------------------
Telecommunications 81 127 167 297 81 82 140 297 27 82 140 297
---------------------------------------------------------------------------------------
Multi-Strategy 76 112 142 248 76 67 115 248 22 67 115 248
---------------------------------------------------------------------------------------
Equity Income 76 112 142 248 76 67 115 248 22 67 115 248
---------------------------------------------------------------------------------------
Strategic Value 79 123 161 284 79 78 134 284 25 78 134 284
---------------------------------------------------------------------------------------
Growth LT 77 115 148 258 77 70 121 258 23 70 121 258
---------------------------------------------------------------------------------------
Focused 30 79 123 161 284 79 78 134 284 25 78 134 284
---------------------------------------------------------------------------------------
Mid-Cap Value 78 118 153 268 78 73 126 268 24 73 126 268
---------------------------------------------------------------------------------------
International Value 79 121 156 275 79 76 129 275 25 76 129 275
---------------------------------------------------------------------------------------
Capital Opportunities 78 118 151 265 78 73 124 265 24 73 124 265
---------------------------------------------------------------------------------------
Mid-Cap Growth 79 121 156 275 79 76 129 275 25 76 129 275
---------------------------------------------------------------------------------------
Global Growth 82 130 172 307 82 85 145 307 28 85 145 307
---------------------------------------------------------------------------------------
Equity Index 72 100 122 206 72 55 95 206 18 55 95 206
---------------------------------------------------------------------------------------
Small-Cap Index 75 110 138 238 75 65 111 238 21 65 111 238
---------------------------------------------------------------------------------------
REIT 80 126 166 294 80 81 139 294 26 81 139 294
---------------------------------------------------------------------------------------
Government Securities 75 110 139 240 75 65 112 240 21 65 112 240
---------------------------------------------------------------------------------------
Managed Bond 75 111 140 242 75 66 113 242 21 66 113 242
---------------------------------------------------------------------------------------
Money Market 73 103 127 215 73 58 100 215 19 58 100 215
---------------------------------------------------------------------------------------
High Yield Bond 75 111 139 241 75 66 112 241 21 66 112 241
---------------------------------------------------------------------------------------
Large-Cap Value 78 119 153 269 78 74 126 269 24 74 126 269
---------------------------------------------------------------------------------------
</TABLE>
* In this example, it is assumed that an Annuity Option
has been selected that provides for annuity payments
that continue for at least five years, in which case
the withdrawal charge would not be assessed if the
Contract was in force during the Accumulation Period
for at least two Contract Years.
3
<PAGE>
---------------------------------------------------------
YOUR INVESTMENT The chart on page 9 of the Prospectus YOUR INVESTMENT
OPTIONS: OPTIONS: Your Variable Investment Options is amended to
Your Variable add the following:
Investment Options
is amended
<TABLE>
<CAPTION>
Primary Investments Portfolio
Portfolio Objective (under normal circumstances) Manager
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Long-term growth of Equity securities of "blue chip" AIM
capital. Current companies--typically large companies
income is of that are well established in their
secondary importance. respective industries.
------------------------------------------------------------------------------------------------
Aggressive Growth Long-term growth of Equity securities of small- and AIM
capital. medium-sized growth companies.
------------------------------------------------------------------------------------------------
Financial Services Long-term growth of Equity securities in the financial INVESCO
capital. services sector. Such companies
include banks, insurance companies,
brokerage firms and other finance-
related firms.
------------------------------------------------------------------------------------------------
Health Sciences Long-term growth of Equity securities in the health INVESCO
capital. sciences sector. Such companies
include medical equipment or
supplies, pharmaceuticals, health
care facilities and other health
sciences-related firms.
------------------------------------------------------------------------------------------------
Technology Long-term growth of Equity securities in the technology INVESCO
capital. sector. Such companies include
biotechnology, communications,
computers, electronics, Internet
telecommunications, networking,
robotics, video and other
technology-related firms.
------------------------------------------------------------------------------------------------
Telecommunications Long-term growth of Equity securities in the INVESCO
capital. Current telecommunications sector. Such as
income is of companies that offer telephone
secondary importance. service, wireless communications,
satellite communications, television
and movie programming, broadcasting
and Internet access.
------------------------------------------------------------------------------------------------
Strategic Value Long-term growth of Equity securities with the potential Janus Capital
capital. for long-term growth of capital. Corporation
------------------------------------------------------------------------------------------------
Focused 30 Long-term growth of Equity securities selected for their Janus Capital
capital. growth potential. Corporation
------------------------------------------------------------------------------------------------
Capital Long-term growth of Equity securities with the potential MFS
Opportunities capital. for long-term growth of capital.
------------------------------------------------------------------------------------------------
Mid-Cap Growth Long-term growth of Equity securities of medium-sized MFS
capital. companies believed to have above-
average growth potential.
------------------------------------------------------------------------------------------------
Global Growth Capital appreciation. Equity securities of any size MFS
located within and outside of the
U.S.
------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
---------------------------------------------------------
ADDITIONAL The following replaces Telephone Transactions on page
INFORMATION: 38 of the Prospectus:
Telephone
Transactions Telephone and Electronic Transactions
is changed to You are automatically entitled to make certain
Telephone and transactions by telephone or, to the extent available,
Electronic in early 2001, electronically. You may also authorize
Transactions other people to make certain transaction requests by
telephone or to the extent available electronically by
so indicating on the application or by sending us
instructions in writing in a form acceptable to us. We
cannot guarantee that you or any other person you
authorize will always be able to reach us to complete a
telephone or electronic transaction; for example, all
telephone lines or our web-site may be busy during
certain periods, such as periods of substantial market
fluctuations or other drastic economic or market
change, or telephones or the internet may be out of
service during severe weather conditions or other
emergencies. Under these circumstances, you should
submit your request in writing (or other form
acceptable to us). Transaction instructions we receive
by telephone or electronically before 4:00 p.m. Eastern
time on any Business Day will usually be effective on
that day, and we will provide you confirmation of each
telephone or electronic transaction.
We have established procedures reasonably designed to
confirm that instructions communicated by telephone or
electronically are genuine. These procedures may
require any person requesting a telephone or electronic
transaction to provide certain personal identification
upon our request. We may also record all or part of any
telephone conversation with respect to transaction
instructions. We reserve the right to deny any
transaction request made by telephone or
electronically. You are authorizing us to accept and to
act upon instructions received by telephone or
electronically with respect to your Contract, and you
agree that, so long as we comply with our procedures,
neither we, any of our affiliates, nor the Fund, or any
of their directors, trustees, officers, employees or
agents will be liable for any loss, liability, cost or
expense (including attorneys' fees) in connection with
requests that we believe to be genuine. This policy
means that so long as we comply with our procedures,
you will bear the risk of loss arising out of the
telephone and electronic transaction privileges of your
Contract. If a Contract has Joint Owners, each Owner
We expect to make may individually make transaction requests by
the electronic telephone.
transaction and
delivery features Electronic Delivery Authorization
available in early Subject to availability, you may authorize us to
2001. Please ask provide prospectuses, statements and other information
your registered ("documents") electronically by so indicating on the
representative for application, or by sending us instructions in writing
more information. in a form acceptable to us to receive such documents
electronically. You must have Internet access to use
this service. While we impose no additional charge for
this service, there may be potential costs associated
with electronic delivery, such as on-line charges.
Documents will be available on our Internet Web site.
You may access and print all documents provided through
this service. As documents become available, we will
notify you of this by sending you an e-mail message
that will include instructions on how to retrieve the
document. If our e-mail notification is returned to us
as "undeliverable," we will contact you to obtain your
updated e-mail address. If we are unable to obtain a
valid e-mail address for you, we will send a paper copy
by regular U.S. mail to your address of record. You may
revoke your consent for electronic delivery at any time
and we will resume providing you with a paper copy of
all required documents; however, in order for us to be
properly notified, your revocation must be given to us
a reasonable time before electronic delivery has
commenced. We will provide you with paper copies at any
time upon request. Such request will not constitute
revocation of your consent to receive required
documents electronically.
5
<PAGE>
PACIFIC SELECT VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 2000 as restated and supplemented January 2, 2001
PACIFIC SELECT VARIABLE ANNUITY
PACIFIC SELECT VARIABLE ANNUITY SEPARATE ACCOUNT
----------------
Pacific Select Variable Annuity (the "Contract") is a variable annuity
contract offered by Pacific Life Insurance Company ("Pacific Life"). The Bond
and Income Variable Account terminated on September 22, 2000.
This Statement of Additional Information ("SAI") is not a Prospectus and
should be read in conjunction with the Contract's Prospectus, dated May 1,
2000, and any supplement thereto, which is available without charge upon
written or telephone request to Pacific Life. Terms used in this SAI have the
same meanings as in the Prospectus, and some additional terms are defined
particularly for this SAI.
----------------
Pacific Life Insurance Company
Annuities Division
Mailing Address: P.O. Box 7187
Pasadena, California 91109-7187
1-800-722-2333
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PERFORMANCE INFORMATION.................................................... 1
TAX DEFERRED ACCUMULATION.................................................. 6
DISTRIBUTION OF THE CONTRACT............................................... 7
Pacific Select Distributors, Inc......................................... 7
GENERAL INFORMATION AND HISTORY............................................ 8
Dollar Cost Averaging Option............................................. 8
Portfolio Rebalancing Option............................................. 8
Safekeeping of Assets.................................................... 9
Dividends................................................................ 9
Misstatements............................................................ 9
FINANCIAL STATEMENTS....................................................... 9
INDEPENDENT AUDITORS....................................................... 9
</TABLE>
i
<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, 1999, the Money Market Variable Account current yield was
4.15% and the effective yield was 4.24%.
Quotations of average annual total return for any Variable Account will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Contract over a period of one, five, and ten
years (or, if less, up to the life of the Variable Account), calculated
pursuant to the following formula: P(1 + T)n = ERV (where P = a hypothetical
initial payment of $1,000, T = the average annual total return, n = the number
of years, and ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period). All total return figures reflect
the deduction of the applicable contingent deferred sales charge, the
administrative charge, the maintenance fee, and the mortality and expense risk
charge. Performance information for Variable Accounts may also be advertised
based on the historical performance of the Fund Portfolio underlying the
Variable Account for periods beginning prior to the date each Variable Account
commenced operations. Any such performance calculation will be based on the
assumption that the Variable Account corresponding to the applicable Fund
Portfolio was in existence throughout the stated period and that the
contractual charges and expenses of the Variable Account during that period
were equal to those currently assessed under the Contract. Quotations of total
return may simultaneously be shown for the same or other periods that do not
take into account certain contractual charges such as the contingent deferred
sales charge, the administrative charge, and the maintenance fee.
Performance information for a Variable Account may be compared, in reports
and promotional literature, to 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
1
<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.
2
<PAGE>
The following table presents the annualized total return for each Variable
Account, for the periods ended December 31, 1999 and for the period from each
such Variable Account's commencement of operations through December 31, 1999.
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, 1999
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>
Aggressive Equity
4/1/96*................ 25.52 20.12 12.73 11.53 11.99 11.27
Emerging Markets
4/1/96*................ 51.36 45.96 1.86 0.39 0.32 (0.66)
Small-Cap Equity
8/16/90*............... 45.40 40.00 23.63 22.64 23.35 23.11 15.74 15.74
Equity 1/4/95*.......... 36.55 31.15 26.88 25.94 26.13 25.91
Multi-Strategy
9/25/90*............... 5.49 0.09 13.16 11.97 14.70 14.38 10.16 10.15
Equity Income 8/16/90*.. 11.62 6.22 20.10 19.05 21.50 21.25 13.45 13.45
Growth LT 1/4/94*....... 95.30 89.90 49.37 48.70 39.17 39.03 34.21 34.21
Mid-Cap Value 1/4/99*... 3.85 (1.68)
Equity Index 2/11/91*... 18.85 13.45 25.41 24.45 26.29 26.08 18.32 18.32
Small-Cap Index
1/4/99*................ 17.95 12.42
REIT 1/6/99*............ (1.65) (7.17)
International Value
8/16/90*............... 21.04 15.64 10.70 9.47 12.18 11.83 7.23 7.23
Government Securities
8/22/90*............... (3.38) (8.78) 3.93 2.52 5.93 5.50 6.06 6.06
Managed Bond 9/5/90*.... (3.34) (8.74) 4.07 2.66 6.33 5.90 6.65 6.65
Money Market 7/24/90*... 3.41 (1.99) 3.65 2.23 3.70 3.23 3.25 3.25
High Yield Bond
8/16/90*............... 1.41 (3.99) 3.37 1.94 7.27 6.86 9.03 9.03
Large-Cap Value
1/4/99*................ 10.06 4.53
</TABLE>
<TABLE>
<CAPTION>
Major Indices 1 year 3 years 5 years 10 years
------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
CS First Boston Global High Yield Bond....... 3.28 5.37 9.07 11.06
Lehman Brothers Aggregate Bond............... (0.83) 5.73 7.73 7.69
Lehman Brothers Government Bond.............. (2.25) 5.57 7.43 7.48
Lehman Brothers Government/Corporate Bond.... (2.15) 5.54 7.60 7.66
Morgan Stanley Capital International Europe,
Australasia & Far East...................... 27.30 16.06 13.15 7.33
Morgan Stanley Capital International Emerging
Markets Free................................ 63.70 0.91 (0.13) 8.58
NAREIT Equity................................ (4.62) (1.82) 8.09 9.14
Russell Mid-Cap.............................. 18.23 18.86 21.86 15.92
Russell 1000 Growth.......................... 33.16 34.07 32.41 20.32
Russell 2000 Small-Stock..................... 21.26 13.08 16.69 13.40
Russell 2500................................. 24.15 15.72 19.43 15.05
Standard & Poor's 500 Composite Stock Price.. 21.04 27.56 28.55 18.20
</TABLE>
-------
* Date Variable Account commenced operations.
** The performance of the Aggressive Equity, Equity Income, Multi-Strategy,
Equity, International Value, and Emerging Markets 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. Effective June 1, 1997 Morgan Stanley Asset Management
became the Portfolio Manager of the International Value 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 Portfolio;
prior to May 1, 1998 some of the investment policies of the Aggressive
Equity and Equity Portfolios differed. Performance of the Equity Portfolio
is based in part on the performance of the predecessor portfolio of Pacific
Corinthian Variable Fund, which began its first full year of operations in
1984, the assets of which were acquired by the Fund on December 31, 1994.
Effective January 1, 2000, Alliance Capital became the Portfolio Manager of
the Emerging Markets Portfolio and Mercury Advisors (formerly Mercury Asset
Management US) became the Portfolio Manager of the Equity Index and Small-
Cap Index Portfolios.
3
<PAGE>
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.
The Diversified Research, International Large-Cap, I-Net Tollkeeper,
Strategic Value, and Focused 30 Subaccounts started operations after December
31, 1999 and there is no historical value available for the Subaccounts.
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
Portfolios and January 4, 1999 in the case of the Mid-Cap Value, Small-Cap
Index, REIT, and Large-Cap Value Portfolios). Historical performance
information for the Equity 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.
4
<PAGE>
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, 1999
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>
Aggressive Equity....... 25.52 20.12 11.99 11.27
Emerging Markets........ 51.36 45.96 0.32 (0.66)
Small-Cap Equity........ 45.40 40.00 23.63 22.64 23.35 23.11 14.94 14.94 16.26 16.26
Equity.................. 36.55 31.15 26.88 25.94 25.79 25.58 16.08 16.08 15.62 15.62
Multi-Strategy.......... 5.49 0.09 13.16 11.97 14.70 14.38 9.88 9.88 10.44 10.44
Equity Income........... 11.62 6.22 20.10 19.05 21.50 21.25 13.05 13.05 13.64 13.64
Growth LT............... 95.30 89.90 49.37 48.70 39.17 39.03 34.20 34.19
Mid-Cap Value........... 3.85 (1.68)
Equity Index............ 18.85 13.45 25.41 24.45 26.29 26.08 18.32 18.32
Small-Cap Index......... 17.95 12.42
REIT.................... (1.65) (7.17)
International Value..... 21.04 15.64 10.70 9.47 12.18 11.83 6.72 6.72 8.46 8.46
Government Securities... (3.38) (8.78) 3.93 2.52 5.93 5.50 5.87 5.87 6.38 6.38
Managed Bond............ (3.34) (8.74) 4.07 2.66 6.33 5.90 6.44 6.44 6.91 6.91
Money Market............ 3.41 (1.99) 3.65 2.23 3.70 3.23 3.42 3.42 3.81 3.81
High Yield Bond......... 1.41 (3.99) 3.37 1.94 7.27 6.86 8.83 8.83 8.13 8.13
Large-Cap Value......... 10.06 4.53
</TABLE>
<TABLE>
<CAPTION>
Major Indices 1 year 3 years 5 years 10 years
------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
CS First Boston Global High Yield Bond....... 3.28 5.37 9.07 11.06
Lehman Brothers Aggregate Bond............... (0.83) 5.73 7.73 7.69
Lehman Brothers Government Bond.............. (2.25) 5.57 7.43 7.48
Lehman Brothers Government/Corporate Bond.... (2.15) 5.54 7.60 7.66
Morgan Stanley Capital International Europe,
Australasia & Far East...................... 27.30 16.06 13.15 7.33
Morgan Stanley Capital International Emerging
Markets Free................................ 63.70 0.91 (0.13) 8.58
NAREIT Equity................................ (4.62) (1.82) 8.09 9.14
Russell Mid-Cap.............................. 18.23 18.86 21.86 15.92
Russell 1000 Growth.......................... 33.16 34.07 32.41 20.32
Russell 2000 Small-Stock..................... 21.26 13.08 16.69 13.40
Russell 2500................................. 24.15 15.72 19.43 15.05
Standard & Poor's 500 Composite Stock Price.. 21.04 27.56 28.55 18.20
</TABLE>
--------
* The performance of the Aggressive Equity, Equity Income, Multi-Strategy,
Equity, and International Value 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. Effective June 1, 1997 Morgan Stanley Asset Management became the
Portfolio Manager of the International Value 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 Portfolio; prior to May 1, 1998 some of the
investment policies of the Aggressive Equity and Equity Portfolios
differed. Performance of the Equity Portfolio is based in part on the
performance of the predecessor portfolio 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 January
1, 2000, Alliance Capital became the Portfolio Managers of the Emerging
Markets Portfolio and Mercury Advisors (formerly Mercury Assets Management
US) became the Portfolio Manager of the Equity Index and Small-Cap Index
Portfolios.
5
<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 the beginning of the day
preceding 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%.
6
<PAGE>
Power of Tax Deferral
$10,000 investment at annual rates of 0%, 4% and 8% taxed @ 36%
[TAX DEFERRAL GRAPH APPEARS HERE]
Taxable Tax-Deferred
Investment Investment
---------- ------------
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
DISTRIBUTION OF THE CONTRACT
Pacific Select Distributors, Inc. (formerly known as Pacific Mutual
Distributors, Inc.)
Pacific Select Distributors, Inc. ("PSD"), a subsidiary of ours, acts as the
principal underwriter ("distributor") of the Contracts and offers the
Contracts on a continuous basis. PSD is registered as a broker-dealer with the
SEC and is a member of the National Association of Securities Dealers
("NASD"). We pay PSD for acting as principal underwriter under a distribution
agreement. We and PSD 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 PSD for 1999, 1998
and 1997 was $34,464,521, $39,235,795, and $76,763,607, 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.
7
<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.
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
8
<PAGE>
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).
FINANCIAL STATEMENTS
The statement of net assets of Pacific Select Variable Annuity Separate
Account as of December 31, 1999 and the related statement of operations for
the year then ended and statements of changes in net assets for each of the
two years in the period then ended are incorporated by reference in this
Statement of Additional Information from the Annual Report of Pacific Select
Variable Annuity Separate Account dated December 31, 1999. Pacific Life's
consolidated financial statements as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999 are set forth
beginning on the next page. These financial statements should be considered
only as bearing on the ability of Pacific Life to meet its obligations under
the Contracts and not as bearing on the investment performance of the assets
held in the Separate Account.
INDEPENDENT AUDITORS
The consolidated financial statements of Pacific Life as of December 31,
1999 and 1998 and for each of the three years in the period ended December 31,
1999 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein.
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, 1999 and 1998, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pacific Life Insurance
Company and Subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 2000
10
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $14,814.0 $13,804.7
Equity securities 295.2 547.5
Trading securities at estimated fair value 99.9 97.0
Mortgage loans 2,920.2 2,788.7
Real estate 236.0 172.7
Policy loans 4,258.5 4,003.2
Other investments 882.7 951.7
-------------------------------------------------------------------------------
TOTAL INVESTMENTS 23,506.5 22,365.5
Cash and cash equivalents 439.4 154.1
Deferred policy acquisition costs 1,446.1 899.8
Accrued investment income 287.2 259.3
Other assets 830.7 361.2
Separate account assets 23,613.1 15,844.0
-------------------------------------------------------------------------------
TOTAL ASSETS $50,123.0 $39,883.9
===============================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life and investment-type products $19,045.5 $17,973.0
Future policy benefits 4,386.0 2,480.5
Short-term and long-term debt 224.4 445.1
Other liabilities 939.2 813.3
Separate account liabilities 23,613.1 15,844.0
-------------------------------------------------------------------------------
TOTAL LIABILITIES 48,208.2 37,555.9
-------------------------------------------------------------------------------
Commitments and contingencies
Stockholder's Equity:
Common stock - $50 par value; 600,000 shares authorized,
issued and outstanding 30.0 30.0
Paid-in capital 139.9 126.2
Unearned ESOP shares (11.6)
Retained earnings 2,034.5 1,663.5
Accumulated other comprehensive income (loss) -
Unrealized gain (loss) on securities available for
sale, net (278.0) 508.3
-------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 1,914.8 2,328.0
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $50,123.0 $39,883.9
===============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
11
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Universal life and investment-type product policy
fees $ 653.8 $ 525.3 $ 431.2
Insurance premiums 483.9 537.1 526.4
Net investment income 1,473.3 1,413.6 1,325.4
Net realized investment gains 101.5 39.4 85.4
Commission revenue 234.3 220.1 146.6
Other income 144.7 112.5 97.9
-------------------------------------------------------------------------------
TOTAL REVENUES 3,091.5 2,848.0 2,612.9
-------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life and investment-
type products 904.4 880.8 797.8
Policy benefits paid or provided 734.4 757.0 712.6
Commission expenses 484.6 387.2 305.1
Operating expenses 453.4 468.0 507.9
-------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,576.8 2,493.0 2,323.4
-------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 514.7 355.0 289.5
Provision for income taxes 143.7 113.5 113.5
-------------------------------------------------------------------------------
NET INCOME $ 371.0 $ 241.5 $ 176.0
===============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
12
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Unearned Other
------------- Paid-in ESOP Retained Comprehensive
Shares Amount Capital Shares Earnings Income (Loss) Total
-----------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1997 $1,318.0 $ 379.2 $1,697.2
Comprehensive income:
Net income 176.0 176.0
Change in unrealized
gain on securities
available for sale,
net 196.0 196.0
--------
Total comprehensive
income 372.0
Issuance of partnership
units by affiliate $ 85.1 85.1
Initial member
capitalization of
Pacific Mutual Holding
Company (2.0) (2.0)
Issuance of common
stock 0.6 $30.0 35.0 (65.0)
Dividend paid to
Pacific LifeCorp (5.0) (5.0)
-----------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1997 0.6 30.0 120.1 1,422.0 575.2 2,147.3
Comprehensive income:
Net income 241.5 241.5
Change in unrealized
gain on securities
available for sale,
net (66.9) (66.9)
--------
Total comprehensive
income 174.6
Issuance of partnership
units by affiliate 6.1 6.1
-----------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1998 0.6 30.0 126.2 1,663.5 508.3 2,328.0
Comprehensive loss:
Net income 371.0 371.0
Change in unrealized
gain on securities
available for sale,
net (786.3) (786.3)
--------
Total comprehensive
loss (415.3)
Issuance of partnership
units by affiliate 10.6 10.6
Capital contribution 3.1 3.1
Purchase of ESOP note $(13.1) (13.1)
Allocation of unearned
ESOP shares 1.5 1.5
-----------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1999 0.6 $30.0 $139.9 $(11.6) $2,034.5 $(278.0) $1,914.8
=========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
13
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 371.0 $ 241.5 $ 176.0
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization on fixed maturity securities (77.8) (39.4) (26.6)
Depreciation and other amortization 20.5 26.0 38.3
Earnings of equity method investees (92.9) (99.0) (78.1)
Deferred income taxes (8.5) (20.6) (14.4)
Net realized investment gains (101.5) (39.4) (85.4)
Net change in deferred policy acquisition
costs (546.3) (171.9) (196.4)
Interest credited to universal life and in-
vestment-type products 904.4 880.8 797.8
Change in trading securities (2.9) (14.3) (18.3)
Change in accrued investment income (27.9) 3.1 (59.9)
Change in future policy benefits 58.1 (9.7) (16.3)
Change in other assets and liabilities 207.1 102.2 574.9
------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 703.3 859.3 1,091.6
------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (4,173.4) (4,330.5) (6,272.3)
Sales 2,333.8 2,209.3 2,224.1
Maturities and repayments 1,400.3 2,221.8 2,394.6
Repayments of mortgage loans 681.0 334.9 179.3
Proceeds from sales of mortgage loans and
real estate 24.4 43.3 104.4
Purchases of mortgage loans and real estate (886.3) (1,246.3) (643.7)
Distributions from partnerships 138.2 119.5 91.6
Change in policy loans (255.3) (129.7) (301.4)
Cash received from acquisitions of insurance
blocks of business 164.9 1,215.9
Other investing activity, net 255.6 (466.6) (70.8)
------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (316.8) (1,244.3) (1,078.3)
------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
14
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1999 1998 1997
-----------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,453.4 $ 4,007.0 $ 2,679.8
Withdrawals (4,322.3) (3,770.7) (2,667.3)
Net change in short-term and long-term
debt (220.7) 191.5 (16.5)
Purchase of ESOP note (13.1)
Allocation of unearned ESOP shares 1.5
Initial capitalization of Pacific Mutual
Holding Company (2.0)
Dividend paid to Pacific LifeCorp (5.0)
-----------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (101.2) 427.8 (11.0)
-----------------------------------------------------------------------------
Net change in cash and cash equivalents 285.3 42.8 2.3
Cash and cash equivalents, beginning of
year 154.1 111.3 109.0
-----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 439.4 $ 154.1 $ 111.3
=============================================================================
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisitions of an annuity and an insurance block of
business in 1999 and 1997, respectively, as discussed in Note 4, the
following assets and liabilities were assumed:
Fixed maturity securities $ 1,592.7
Cash and cash equivalents 164.9 $ 1,215.9
Policy loans 440.3
Other assets 100.4 43.4
--------- ---------
Total assets assumed $ 1,858.0 $ 1,699.6
========= =========
Policyholder account values $ 1,693.8
Annuity reserves $ 1,847.4
Other liabilities 10.6 5.8
--------- ---------
Total liabilities assumed $ 1,858.0 $ 1,699.6
========= =========
=============================================================================
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion in 1997, as discussed in Note 1, $65 million of
retained earnings was allocated for the issuance of 600,000 shares of common
stock with a par value totaling $30 million and $35 million to paid-in
capital.
=============================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 83.0 $ 127.9 $ 153.0
Interest paid $ 23.3 $ 24.0 $ 26.1
=============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
15
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Life Insurance Company ("Pacific Life") was established in 1868
and is organized under the laws of the State of California as a stock life
insurance company. Pacific Life is an indirect subsidiary of Pacific
Mutual Holding Company ("PMHC"), a mutual holding company, and a wholly
owned subsidiary of Pacific LifeCorp, an intermediate stock holding
company. PMHC and Pacific LifeCorp were organized pursuant to consent
received from the Insurance Department of the State of California and the
implementation of a plan of conversion to form a mutual holding company
structure in 1997 (the "Conversion"). As a result of the Conversion, $65
million of retained earnings was allocated for the issuance of 600,000
shares of common stock with a par value totaling $30 million and $35
million to paid-in capital.
Pacific Life and its subsidiaries and affiliates have primary business
operations which consist of life insurance, annuities, pension and
institutional products, group employee benefits, broker-dealer operations,
and investment management and advisory services. Pacific Life's primary
business operations provide a broad range of life insurance, asset
accumulation and investment products for individuals and businesses and
offer a range of investment products to institutions and pension plans.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Pacific Life
Insurance Company and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Life and its majority owned and controlled
subsidiaries. All significant intercompany transactions and balances have
been eliminated. Pacific Life prepares its regulatory financial statements
based on accounting practices prescribed or permitted by the Insurance
Department of the State of California. These consolidated financial
statements differ from those filed with regulatory authorities (Note 2).
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires that certain costs incurred in developing
internal use computer software be capitalized. Adoption of this accounting
standard did not have a material impact on the Company's consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires, among other things, that all derivatives be recognized in the
consolidated statements of financial condition as either assets or
liabilities and measured at estimated fair value. The corresponding
derivative gains and losses should be reported based upon the hedge
relationship, if such a relationship exists. Changes in the estimated fair
value of derivatives that are not designated as hedges or that do not meet
the hedge accounting criteria in SFAS No. 133 are required to be reported
in income. The Company is required to adopt SFAS No. 133 as of January 1,
2001. The Company is in the process of quantifying the impact of SFAS No.
133 on its consolidated financial statements.
During 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance
Risk." SOP 98-7 provides guidance on how to account for insurance and
reinsurance contracts that do not transfer insurance risk under a method
referred to as deposit accounting. SOP 98-7 is effective for fiscal years
beginning after June 15, 1999. The Company currently plans to adopt
16
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
SOP 98-7 on January 1, 2000. Adoption of this accounting standard is not
expected to have a material impact on the Company's consolidated financial
statements.
INVESTMENTS
Available for sale fixed maturity and equity securities are reported at
estimated fair value, with unrealized gains and losses, net of deferred
income taxes and adjustments related to deferred policy acquisition costs,
included as a separate component of equity on the accompanying
consolidated statements of financial condition. The cost of fixed maturity
and equity securities is adjusted for impairments in value deemed to be
other than temporary. Trading securities are reported at estimated fair
value with unrealized gains and losses included in net realized investment
gains on the accompanying consolidated statements of operations.
For mortgage-backed securities included in fixed maturity securities, the
Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities.
When estimates of prepayments change, the effective yield is recalculated
to reflect actual payments to date and anticipated future payments. The
net investment in the securities is adjusted to the amount that would have
existed had the new effective yield been applied since the acquisition of
the securities. This adjustment is reflected in net investment income on
the accompanying consolidated statements of operations.
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in net realized investment
gains on the accompanying consolidated statements of operations.
Derivative financial instruments are carried at estimated fair value.
Unrealized gains and losses of derivatives used to hedge securities
classified as available for sale are reflected in a separate component of
equity on the accompanying consolidated statements of financial condition,
similar to the accounting of the underlying hedged assets. Realized gains
and losses on derivatives used for hedging are deferred and amortized over
the average life of the related hedged assets or liabilities. Unrealized
gains and losses of other derivatives are included in net realized
investment gains on the accompanying consolidated statements of
operations.
Mortgage loans, net of valuation allowances, and policy loans are stated
at unpaid principal balances.
Real estate is carried at depreciated cost, net of writedowns, or, for
real estate acquired in satisfaction of debt, estimated fair value less
estimated selling costs at the date of acquisition if lower than the
related unpaid balance.
Partnership and joint venture interests in which the Company does not have
a controlling interest or a majority ownership are generally recorded
using the equity method of accounting and are included in other
investments on the accompanying consolidated statements of financial
condition.
The Company, through its wholly owned subsidiary Pacific Asset Management
LLC ("PAM"), has an approximate 33% beneficial ownership interest in PIMCO
Advisors L.P. ("PIMCO Advisors") as of December 31, 1999 and 1998. In
December 1997, PIMCO Advisors completed a transaction in which it acquired
the assets of Oppenheimer Capital, L.P., including its interest in
Oppenheimer Capital, by issuing approximately 33 million PIMCO Advisors
General and Limited Partner units. In connection with this transaction,
the Company increased its investment in PIMCO Advisors to reflect the
excess of the Company's pro rata share of PIMCO Advisors partners' capital
subsequent to this transaction over the carrying value of the Company's
investment in PIMCO Advisors. The net result of this transaction was to
directly increase stockholder's equity by $85.1 million. During 1999 and
1998, the Company increased its investment in PIMCO Advisors to reflect
its pro rata share of the increase to PIMCO Advisors partners' capital due
to the issuance of additional partnership units. For the years ended
December 31, 1999 and 1998, there was a direct increase to the Company's
stockholder's equity of $10.6 million and $6.1 million, respectively.
During 1998, the Company also acquired the beneficial ownership of
additional partnership units. Deferred taxes resulting from these
transactions have been included in the accompanying consolidated financial
statements.
17
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
On October 31, 1999, PAM entered into an Implementation and Merger
Agreement with Allianz of America, Inc. ("Allianz") and a number of other
parties in which Allianz will purchase 70% of the outstanding partnership
units of PIMCO Advisors. PAM is exchanging its interest in PIMCO Advisors
for a beneficial economic interest in a new class of PIMCO Advisors
partnership units with a cash distribution comprised of a fixed and
variable return. This transaction is anticipated to close during the first
half of 2000, subject to certain closing conditions and approvals.
In connection with this transaction, PAM has entered into a Continuing
Investment Agreement with Allianz with respect to its investment in PIMCO
Advisors. The investment in PIMCO Advisors held by PAM will be subject to
put and call options held by PAM and Allianz, respectively. The put option
gives PAM the right to require Allianz, on the last business day of each
calendar quarter, to purchase all of the investment in PIMCO Advisors held
by PAM. The put option price would be the distributions per unit amount,
as defined in the Continuing Investment Agreement, for the most recently
completed four calendar quarters multiplied by a factor of 14.0. The call
option gives Allianz the right to require PAM, on any January 31, April
30, July 31, or October 31, beginning on January 31, 2003, to sell its
investment in PIMCO Advisors to Allianz. The call option price would be
the distributions per unit, as defined in the Continuing Investment
Agreement, for the most recently completed four calendar quarters
multiplied by a factor of 14.0 if the call per unit value is at least $50.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid debt instruments with an
original maturity of three months or less.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business, principally commissions,
medical examinations, underwriting, policy issue and other expenses, all
of which vary with and are primarily related to the production of new
business, have been deferred. For universal life, annuity and other
investment-type products, such costs are generally amortized over the
expected life of the contract in proportion to the present value of
expected gross profits using the assumed crediting rate. Adjustments are
reflected in earnings or equity in the period the Company experiences
deviations in gross profit assumptions. Adjustments directly affecting
equity result from experience deviations due to changes in unrealized
gains and losses in investments classified as available for sale. For
traditional life insurance products, such costs are being amortized over
the premium-paying period of the related policies in proportion to premium
revenues recognized, using assumptions consistent with those used in
computing policy reserves. For the years ended December 31, 1999, 1998 and
1997, amortization of deferred policy acquisition costs included in
commission expenses amounted to $131.7 million, $73.0 million and
$50.2 million, respectively, and included in operating expenses amounted
to $55.4 million, $33.5 million and $29.4 million, respectively, on the
accompanying consolidated statements of operations.
UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS
Universal life and investment-type products, including guaranteed
investment contracts and funding agreements, are valued using the
retrospective deposit method and consist principally of deposits received
plus interest credited less accumulated assessments. Interest credited to
these policies primarily ranged from 4% to 8.4% during 1999, 1998 and
1997.
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions ranged from 4.5% to 9.3% for 1999, 1998 and
1997. Mortality, morbidity and withdrawal assumptions are generally based
on the Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for
18
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
participating business are provided for in the liability for future policy
benefits. Dividends to policyholders are included in policy benefits paid
or provided on the accompanying consolidated statements of operations.
Dividends are accrued based on dividend formulas approved by the Board of
Directors and reviewed for reasonableness and equitable treatment of
policyholders by an independent consulting actuary. As of December 31,
1999 and 1998, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized
when incurred.
Generally, receipts for universal life, annuities and other investment-
type products are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Commission revenue from Pacific Life's broker-dealer subsidiaries is
recorded on the trade date.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 5 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over periods ranging from 3 to 40 years. Depreciation of investment
real estate is included in net investment income on the accompanying
consolidated statements of operations. Depreciation and amortization of
certain other assets is included in operating expenses on the accompanying
consolidated statements of operations.
INCOME TAXES
Pacific Life is taxed as a life insurance company for income tax purposes
and is included in the consolidated income tax returns of PMHC. Prior to
1998, Pacific Life was subject to an equity tax calculated by a prescribed
formula that incorporated a differential earnings rate between stock and
mutual life insurance companies. In December 1998, the Internal Revenue
Service released Revenue Ruling 99-3 which exempts Pacific Life from this
tax for taxable years beginning in 1998. Deferred income taxes are
provided for timing differences in the recognition of revenues and
expenses for financial reporting and income tax purposes.
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in
accounts with individual investment objectives. The investment results of
separate account assets generally pass through to separate account
contract owners.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments, disclosed in Notes 5, 6
and 7, has been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented may not be indicative of the amounts
the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
significant effect on the estimated fair value amounts.
19
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
RISKS AND UNCERTAINTIES
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include, but are not
limited to, interest rate risk, investment market risk, credit risk and
legal and regulatory changes.
Interest rate risk is the potential for interest rates to change, which
can cause fluctuations in the value of investments. To the extent that
fluctuations in interest rates cause the duration of assets and
liabilities to differ, the Company may have to sell assets prior to their
maturity and realize losses. The Company controls its exposure to this
risk by, among other things, asset/liability matching techniques which
attempt to match the duration of assets and liabilities and utilization of
derivative instruments. Additionally, the Company includes contractual
provisions limiting withdrawal rights for certain of its products. A
substantial portion of the Company's liabilities are not subject to
surrender or can be surrendered only after deduction of a surrender charge
or a market value adjustment.
Credit risk is the risk that issuers of investments owned by the Company
may default or that other parties may not be able to pay amounts due to
the Company. The Company manages its investments to limit credit risk by
diversifying its portfolio among various security types and industry
sectors. The credit risk of financial instruments is controlled through
credit approval procedures, limits and ongoing monitoring. Real estate and
mortgage loan investment risks are limited by diversification of
geographic location and property type. Management does not believe that
significant concentrations of credit risk exist.
The Company is also exposed to credit loss in the event of nonperformance
by the counterparties to interest rate swap contracts and other derivative
securities. The Company manages this risk through credit approvals and
limits on exposure to any specific counterparty. However, the Company does
not anticipate nonperformance by the counterparties.
The Company is subject to various state and Federal regulatory
authorities. The potential exists for changes in regulatory initiatives
which can result in additional, unanticipated expense to the Company.
Existing Federal laws and regulations affect the taxation of life
insurance or annuity products, and insurance companies. There can be no
assurance as to what, if any, cases might be decided or future legislation
might be enacted, or if decided or enacted, whether such cases or
legislation would contain provisions with possible negative effects on the
Company's life insurance or annuity products.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1999
financial statement presentation.
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,
1999 1998
------------------
(In Millions)
<S> <C> <C>
Statutory capital and surplus $1,219.1 $1,157.4
Deferred policy acquisition costs 1,398.6 944.5
Deferred income taxes 304.5 307.1
Asset valuation reserve 232.1 298.7
Non admitted assets 83.3 40.4
Subsidiary equity 25.2 26.5
Surplus notes (149.6) (149.6)
Unrealized gain (loss) on securities available
for sale, net (278.0) 508.3
Insurance and annuity reserves (845.2) (654.4)
Other (75.2) (150.9)
------------------
Stockholder's equity as reported herein $1,914.8 $2,328.0
==================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 168.4 $ 187.6 $ 121.5
Deferred policy acquisition costs 379.2 177.3 160.4
Deferred income taxes (2.7) 17.9 41.2
Earnings of subsidiaries (27.5) (32.8) (40.6)
Insurance and annuity reserves (184.3) (145.1) (107.0)
Other 37.9 36.6 0.5
----------------------------
Net income as reported herein $ 371.0 $ 241.5 $ 176.0
============================
</TABLE>
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 the risk-based capital results as
determined by the formulas. Companies below minimum risk-based capital
requirements are classified within certain levels, each of which requires
specified corrective action. As of December 31, 1999 and 1998, Pacific
Life and Pacific Life & Annuity Company, formerly PM Group Life Insurance
Company, a wholly owned Arizona domiciled life insurance subsidiary of
Pacific Life, exceeded the minimum risk-based capital requirements.
CODIFICATION
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). The Codification, which is intended to
standardize regulatory accounting and reporting for the insurance
industry, is proposed to be effective January 1, 2001. However, statutory
accounting principles will continue to be established by individual state
laws and permitted practices and it is uncertain when, or if, the states
of California and Arizona will require adoption of Codification for the
preparation of statutory financial statements. The Company has not
finalized the quantification of the effects of Codification on its
statutory financial statements.
DIVIDEND RESTRICTIONS
Dividend payments by Pacific Life to Pacific LifeCorp in any 12-month
period cannot exceed the greater of 10% of statutory capital and surplus
as of the preceding year-end or the statutory net gain from operations for
the previous calendar year, without prior approval from the Insurance
Department of the State of California. Based on this limitation and 1999
statutory results, Pacific Life could pay $174.0 million in dividends in
2000 without prior approval. No dividends were paid during 1999 and 1998.
The maximum amount of ordinary dividends that can be paid by PL&A without
restriction cannot exceed the lesser of 10% of statutory surplus as
regards to policyholders, or the statutory net gain from operations. No
dividends were paid during 1999 and 1998.
PERMITTED PRACTICE
Net cash distributions received on PAM's investment in PIMCO Advisors are
recorded as income as permitted by the Insurance Department of the State
of California for statutory accounting purposes.
3. CLOSED BLOCK
In connection with the Conversion, an arrangement known as a closed block
(the "Closed Block") was established, for dividend purposes only, for the
exclusive benefit of certain individual life insurance policies that had
an experience based dividend scale for 1997. The Closed Block was designed
to give reasonable assurance to holders of Closed Block policies that
policy dividends will not change solely as a result of the Conversion.
Assets that support the Closed Block, which are primarily included in
fixed maturity securities, policy loans and accrued investment income,
amounted to $293.5 million and $311.6 million as of December 31, 1999 and
1998, respectively. Liabilities allocated to the Closed Block, which are
primarily included in future policy benefits amounted to $341.8 million
and $352.8 million as of December 31, 1999 and 1998, respectively. The
22
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK (Continued)
contribution to income from the Closed Block amounted to $3.8 million,
$5.1 million and $5.7 million and is primarily included in insurance
premiums, net investment income and policy benefits paid or provided for
the years ended December 31, 1999, 1998 and 1997, respectively.
4. ACQUISITIONS
Effective July 15, 1999, Pacific Life acquired a payout annuity block of
business from Confederation Life Insurance Company (U.S.) in
Rehabilitation, which is currently under rehabilitation ("Confederation
Life"). This block of business consists of approximately 16,000 annuitants
having reserves of $1.8 billion. The assets received as part of this
acquisition amounted to $1.6 billion in fixed maturity securities and $0.2
billion in cash.
The remaining cost of acquiring this annuity business, representing the
amount equal to the excess of the estimated fair value of the reserves
assumed over the estimated fair value of the assets acquired, amounted to
$74.5 million as of December 31, 1999, and is included in deferred policy
acquisition costs on the accompanying consolidated statement of financial
condition. Amortization of this asset for the year ended December 31, 1999
amounted to $0.4 million, and is included in commission expense on the
accompanying consolidated statement of operations.
On June 1, 1997, Pacific Life acquired a block of corporate-owned life
insurance ("COLI") policies from Confederation Life, which consisted of
approximately 38,000 policies having a face amount of insurance of
$8.6 billion and reserves of $1.7 billion. The assets received as part of
this acquisition amounted to $1.2 billion in cash and $0.4 billion in
policy loans. This block is primarily non leveraged COLI.
The remaining cost of acquiring this COLI business, representing the
amount equal to the excess of the estimated fair value of the reserves
assumed over the estimated fair value of the assets acquired, amounted to
$27.9 million and $36.5 million as of December 31, 1999 and 1998,
respectively, and is included in deferred policy acquisition costs on the
accompanying consolidated statements of financial condition. Amortization
of this asset for the years ended December 31, 1999, 1998 and 1997
amounted to $8.6 million, $7.7 million and $0.9 million, respectively, and
is included in commission expenses on the accompanying consolidated
statements of operations.
During 1999, Pacific Life acquired a 95% interest in Grayhawk Golf
Holdings, LLC, which owns 100% of a real estate investment property in
Arizona.
23
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities available for sale are shown
below. The estimated fair value of publicly traded securities is based on
quoted market prices. For securities not actively traded, estimated fair
values were provided by independent pricing services specializing in
"matrix pricing" and modeling techniques. The Company also estimates
certain fair values based on interest rates, credit quality and average
maturity or from securities with comparable trading characteristics.
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ----------------- Estimated
Cost Gains Losses Fair Value
--------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
As of December 31, 1999:
------------------------
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 107.7 $ 9.3 $ 1.0 $ 116.0
Obligations of states, political
subdivisions 642.0 13.0 27.7 627.3
Foreign governments 285.0 10.5 6.7 288.8
Corporate securities 8,725.0 220.3 387.4 8,557.9
Mortgage-backed and asset-backed
securities 5,323.8 33.7 251.1 5,106.4
Redeemable preferred stock 108.5 14.2 5.1 117.6
--------------------------------------
Total fixed maturity securities $15,192.0 $ 301.0 $ 679.0 $14,814.0
======================================
Total equity securities $ 269.3 $ 57.0 $ 31.1 $ 295.2
======================================
As of December 31, 1998:
------------------------
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 95.6 $ 25.1 $ 120.7
Obligations of states, political
subdivisions 481.9 91.3 $ 11.8 561.4
Foreign governments 253.1 28.3 4.3 277.1
Corporate securities 7,888.7 446.3 124.5 8,210.5
Mortgage-backed and asset-backed
securities 4,434.7 143.1 53.0 4,524.8
Redeemable preferred stock 104.0 11.3 5.1 110.2
--------------------------------------
Total fixed maturity securities $13,258.0 $ 745.4 $ 198.7 $13,804.7
======================================
Total equity securities $ 364.4 $ 202.6 $ 19.5 $ 547.5
======================================
</TABLE>
24
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (Continued)
The amortized cost and estimated fair value of fixed maturity securities
available for sale as of December 31, 1999, by contractual repayment date
of principal, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------------------
(In Millions)
<S> <C> <C>
Due in one year or less $ 566.5 $ 572.6
Due after one year through five years 3,324.0 3,366.5
Due after five years through ten years 2,995.9 2,921.4
Due after ten years 2,981.8 2,847.1
----------------------
9,868.2 9,707.6
Mortgage-backed and asset-backed securities 5,323.8 5,106.4
----------------------
Total $15,192.0 $14,814.0
======================
</TABLE>
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $1,030.3 $ 929.7 $ 940.2
Equity securities 14.6 13.5 10.2
Mortgage loans 205.6 174.6 129.5
Real estate 46.5 38.1 53.6
Policy loans 158.6 161.5 144.3
Other 131.7 203.2 156.2
--------------------------
Gross investment income 1,587.3 1,520.6 1,434.0
Investment expense 114.0 107.0 108.6
--------------------------
Net investment income $1,473.3 $1,413.6 $1,325.4
==========================
</TABLE>
25
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (Continued)
Net realized investment gain, including changes in valuation allowances,
are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities available for
sale:
Gross gain $ 89.3 $ 92.7 $ 56.3
Gross loss (72.9) (84.8) (31.1)
Equity securites available for sale:
Gross gain 109.0 40.9 36.1
Gross loss (52.0) (6.8) (6.2)
Mortgage loans on real estate 10.1 (10.7) (4.6)
Real estate 18.0 1.2 16.9
Other investments 6.9 18.0
----------------------------
Total $ 101.5 $ 39.4 $ 85.4
============================
</TABLE>
The change in gross unrealized gain on investments in available for sale
and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale securities:
Fixed maturity $ (924.7) $(229.5) $223.5
Equity (157.2) 63.1 85.7
--------------------------
Total $(1,081.9) $(166.4) $309.2
==========================
Trading securities $ 0.4 $ (2.5) $ (1.1)
==========================
</TABLE>
As of December 31, 1999 and 1998, investments in fixed maturity securities
with a carrying value of $12.6 million and $13.0 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements. One diversified financial security, rated AA, exceeds 10% of
total stockholder's equity as of December 31, 1999.
26
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities (Note 5) $15,109.2 $15,109.2 $14,352.2 $14,352.2
Trading securities 99.9 99.9 97.0 97.0
Mortgage loans 2,920.2 2,983.8 2,788.7 2,911.2
Policy loans 4,258.5 4,258.5 4,003.2 4,003.2
Cash and cash equivalents 439.4 439.4 154.1 154.1
Derivative instruments 43.5 43.5 176.1 176.1
Liabilities:
Guaranteed interest contracts 6,365.0 6,296.3 5,665.3 5,751.0
Deposit liabilities 544.9 533.7 599.9 626.7
Annuity liabilities 1,323.3 1,304.8 1,448.0 1,430.1
Short-term debt 60.0 60.0 295.5 295.5
Long-term debt 164.4 164.3 149.6 176.0
Derivative instruments 229.5 229.5 36.0 36.0
</TABLE>
27
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used to estimate the fair value
of these financial instruments as of December 31, 1999 and 1998:
TRADING SECURITIES
The estimated fair value of trading securities is based on quoted market
prices.
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The carrying amounts of policy loans are a reasonable estimate of their
fair values because interest rates are generally variable and based on
current market rates.
CASH AND CASH EQUIVALENTS
The carrying values approximate fair values due to the short-term
maturities of these instruments.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair value of fixed maturity guaranteed interest contracts
is estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of deposit liabilities with
no defined maturities is the amount payable on demand.
ANNUITY LIABILITIES
The estimated fair value of annuity liabilities approximates carrying
value and primarily includes policyholder deposits and accumulated
credited interest.
SHORT-TERM DEBT
The carrying amount of short-term debt is a reasonable estimate of its
fair value because the interest rates are variable and based on current
market rates.
LONG-TERM DEBT
The estimated fair value of surplus notes is based on market quotes. The
carrying amount of other long-term debt is a reasonable estimate of its
fair value because the interest on the debt is approximately the same as
current market rates.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Life has issued certain contracts to 401(k) plans totaling $1.7
billion as of December 31, 1999, pursuant to the terms of which the 401(k)
plan retains direct ownership and control of the assets related to these
contracts. Pacific Life agrees to provide benefit responsiveness in the
event that plan benefit requests exceed plan cash flows. In return for
this guarantee, Pacific Life receives a fee which varies by contract.
Pacific Life sets the investment guidelines to provide for appropriate
credit quality and cash flow matching.
28
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE INSTRUMENTS
Derivatives are financial instruments whose value or cash flows are
"derived" from another source, such as an underlying security. They can
facilitate total return and, when used for hedging, they achieve the
lowest cost and most efficient execution of positions. Derivatives can
also be used as leverage by using very large notional amounts or by
creating formulas that multiply changes in the underlying security. The
Company's approach is to avoid highly leveraged or overly complex
investments. The Company utilizes certain derivative financial instruments
to diversify its business risk and to minimize its exposure to
fluctuations in market prices, interest rates or basis risk as well as for
facilitating total return. Risk is limited through modeling derivative
performance in product portfolios for hedging and setting loss limits in
total return portfolios.
Derivatives used by the Company involve elements of credit risk and market
risk in excess of amounts recognized on the accompanying consolidated
financial statements. The notional amounts of these instruments reflect
the extent of involvement in the various types of financial instruments.
The estimated fair values of these instruments are based on dealer
quotations or internal price estimates believed to be comparable to dealer
quotations. These amounts estimate what the Company would have to pay or
receive if the contracts were terminated at that time. The Company
determines, on an individual counterparty basis, the need for collateral
or other security to support financial instruments with off balance sheet
counterparty risk.
Outstanding derivatives with off balance sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values
as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
----------------------------------------
Notional or Carrying Estimated Carrying Estimated
Contract Amounts Value Fair Value Value Fair Value
----------------- -------- ---------- -------- ----------
1999 1998 1999 1999 1998 1998
----------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Interest rate floors,
caps, options and
swaptions $1,003.0 $2,653.0 $ 5.0 $ 5.0 $ 67.9 $ 67.9
Interest rate swap
contracts 2,867.5 2,608.6 38.5 38.5 (23.3) (23.3)
Asset swap contracts 58.1 63.2 (3.6) (3.6) (3.6) (3.6)
Credit default and total
return swaps 2,061.9 649.6 (43.1) (43.1) (9.1) (9.1)
Financial futures
contracts 676.8 608.9
Foreign currency
derivatives 1,685.1 1,131.2 (182.8) (182.8) 108.2 108.2
----------------------------------------------------------
Total derivatives $8,352.4 $7,714.5 $(186.0) $(186.0) $140.1 $140.1
==========================================================
</TABLE>
29
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE INSTRUMENTS (Continued)
A reconciliation of the notional or contract amounts and discussion of the
various derivative instruments are as follows:
<TABLE>
<CAPTION>
Balance Terminations Balance
Beginning and End
of Year Acquisitions Maturities of Year
--------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1999:
------------------
Interest rate floors, caps,
options and swaptions $2,653.0 $ 670.9 $2,320.9 $1,003.0
Interest rate swap
contracts 2,608.6 1,226.2 967.3 2,867.5
Asset swap contracts 63.2 7.8 12.9 58.1
Credit default and total
return swaps 649.6 1,617.3 205.0 2,061.9
Financial futures contracts 608.9 5,586.8 5,518.9 676.8
Foreign currency
derivatives 1,131.2 874.0 320.1 1,685.1
December 31, 1998:
------------------
Interest rate floors, caps,
options and swaptions 2,730.0 160.6 237.6 2,653.0
Interest rate swap
contracts 2,026.1 960.8 378.3 2,608.6
Asset swap contracts 67.4 30.3 34.5 63.2
Credit default and total
return swaps 288.5 771.5 410.4 649.6
Financial futures contracts 214.1 4,108.4 3,713.6 608.9
Foreign currency
derivatives 207.0 959.4 35.2 1,131.2
</TABLE>
Interest Rate Floors, Caps, Options and Swaptions
The Company uses interest rate floors, caps, options and swaptions to
hedge against fluctuations in interest rates and to take positions in its
total return portfolios. Interest rate floor agreements entitle the
Company to receive the difference when the current rate of the underlying
index is below the strike rate. Interest rate cap agreements entitle the
Company to receive the difference when the current rate of the underlying
index is above the strike rate. Options purchased involve the right, but
not the obligation, to purchase the underlying securities at a specified
price during a given time period. Swaptions are options to enter into a
swap transaction at a specified price. The Company uses written covered
call options on a limited basis. Gains and losses on covered calls are
offset by gains and losses on the underlying position. Floors, caps and
options are reported as assets and options written are reported as
liabilities on the accompanying consolidated statements of financial
condition. Cash requirements for these instruments are generally limited
to the premium paid by the Company at acquisition. The purchase premium of
these instruments is amortized on a constant effective yield basis and
included as a component of net investment income on the accompanying
consolidated statements of operations over the term of the agreement.
Interest rate floors and caps, options and swaptions mature during the
years 2000 through 2017.
Interest Rate Swap Contracts
The Company uses interest rate swaps to manage interest rate risk and to
take positions in its total return portfolios. The interest rate swap
agreements generally involve the exchange of fixed and floating rate
interest payments or the exchange of floating to floating interest
payments tied to different indexes. Generally, no premium is paid to enter
into the contract and no principal payments are made by either party. The
amounts to
30
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE INSTRUMENTS (Continued)
be received or paid pursuant to these agreements are accrued and
recognized through an adjustment to net investment income on the
accompanying consolidated statements of operations over the life of the
agreements. The interest rate swap contracts mature during the years 2000
through 2021.
Asset Swap Contracts
The Company uses asset swap contracts to manage interest rate and equity
risk to better match portfolio duration to liabilities. Asset swap
contracts involve the exchange of upside equity potential for fixed income
streams. The amounts to be received or paid pursuant to these agreements
are accrued and recognized through an adjustment to net investment income
on the accompanying consolidated statements of operations over the life of
the agreements. The asset swap contracts mature during the years 2000
through 2005.
Credit Default and Total Return Swaps
The Company uses credit default and total return swaps to take advantage
of market opportunities. Credit default swaps involve the receipt of fixed
rate payments in exchange for assuming potential credit exposure of an
underlying security. Total return swaps involve the exchange of floating
rate payments for the total return performance of a specified index or
market. The amounts to be received or paid pursuant to these agreements
are accrued and recognized through an adjustment to net investment income
on the accompanying consolidated statements of operations over the life of
the agreements. Credit default and total return swaps mature during the
years 2000 through 2028.
Financial Futures Contracts
The Company uses exchange-traded financial futures contracts to hedge cash
flow timing differences between assets and liabilities and overall
portfolio duration. Assets and liabilities are rarely acquired or sold at
the same time, which creates a need to hedge their change in value during
the unmatched period. In addition, foreign currency futures may be used to
hedge foreign currency risk on non-U.S. dollar denominated securities.
Financial futures contracts obligate the holder to buy or sell the
underlying financial instrument at a specified future date for a set price
and may be settled in cash or by delivery of the financial instrument.
Price changes on futures are settled daily through the required margin
cash flows. The notional amounts of the contracts do not represent future
cash requirements, as the Company intends to close out open positions
prior to expiration.
Foreign Currency Derivatives
The Company enters into foreign exchange forward contracts and swaps to
hedge against fluctuations in foreign currency exposure. Foreign currency
derivatives involve the exchange of foreign currency denominated payments
for U.S. dollar denominated payments. Gains and losses on foreign exchange
forward contracts offset losses and gains, respectively, on the related
foreign currency denominated assets. The amounts to be received or paid
under the foreign currency swaps are accrued and recognized through an
adjustment to net investment income on the accompanying consolidated
statements of operations over the life of the agreements. Foreign currency
derivatives expire during the years 2000 through 2013.
31
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS
The detail of universal life and investment-type product liabilities is as
follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------
(In Millions)
<S> <C> <C>
Universal life $10,807.7 $10,218.0
Investment-type products 8,237.8 7,755.0
-------------------
$19,045.5 $17,973.0
===================
</TABLE>
The detail of universal life and investment-type product policy fees and
interest credited net of reinsurance ceded is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees:
Universal life $ 509.2 $ 439.9 $ 377.5
Investment-type products 144.6 85.4 53.7
--------------------------
Total policy fees $ 653.8 $ 525.3 $ 431.2
==========================
Interest credited:
Universal life $ 443.9 $ 440.8 $ 368.2
Investment-type products 460.5 440.0 429.6
--------------------------
Total interest credited $ 904.4 $ 880.8 $ 797.8
==========================
</TABLE>
32
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claim adjustment expenses,
which is included in future policy benefits on the accompanying
consolidated statements of financial condition, is summarized as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1999 1998
--------------
(In Millions)
<S> <C> <C>
Balance at January 1 $137.4 $140.5
Less reinsurance recoverables 0.1 0.7
--------------
Net balance at January 1 137.3 139.8
--------------
Incurred related to:
Current year 376.8 412.9
Prior years (33.8) (18.3)
--------------
Total incurred 343.0 394.6
--------------
Paid related to:
Current year 286.7 303.5
Prior years 77.1 93.6
--------------
Total paid 363.8 397.1
--------------
Net balance at December 31 116.5 137.3
Plus reinsurance recoverables 0.1 0.1
--------------
Balance at December 31 $116.6 $137.4
==============
</TABLE>
As a result of payment of prior years' estimated claims, the provision for
claims and claim adjustment expenses decreased by $33.8 million and $18.3
million for the years ended December 31, 1999 and 1998, respectively. The
reduction is primarily due to lower than anticipated settlement of claims
and reduced claim adjustment expenses.
33
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SHORT-TERM AND LONG-TERM DEBT
Pacific Life borrows for short-term needs by issuing commercial paper.
There was no commercial paper debt outstanding as of December 31, 1999.
Principal of $234.9 million and interest payable of $0.6 million was
outstanding as of December 31, 1998 bearing an average interest rate of
5.2%. As of December 31, 1999 and 1998, Pacific Life had a revolving
credit facility of $350 million. There was no debt outstanding under the
revolving credit facility as of December 31, 1999 and 1998.
PAM had bank borrowings outstanding of $60 million as of December 31, 1999
and 1998. The interest rate was 6.0%, 5.1% and 6.2% as of December 31,
1999, 1998 and 1997, respectively. Outstanding debt is due and payable in
2000 and subject to renewal. The borrowing limit for PAM as of December
31, 1999 and 1998 was $100 million and $200 million, respectively.
In connection with Pacific Life's acquisition of Grayhawk Golf Holdings,
LLC in 1999, the Company assumed a note payable with a maturity date of
May 22, 2008. The note bears a fixed rate of interest of 7.6%. The
outstanding balance as of December 31, 1999 was $14.8 million.
Pacific Life has $150 million of long-term debt which consists of surplus
notes outstanding at an interest rate of 7.9% maturing on December 30,
2023. Interest is payable semiannually on June 30 and December 30. The
surplus notes may not be redeemed at the option of Pacific Life or any
holder of the surplus notes. The surplus notes are unsecured and
subordinated to all present and future senior indebtedness and policy
claims of Pacific Life. Each payment of interest on and the payment of
principal of the surplus notes may be made only with the prior approval of
the Insurance Commissioner of the State of California. Interest expense
amounted to $11.8 million for each of the years ended December 31, 1999,
1998 and 1997 and is included in net investment income on the accompanying
consolidated statements of operations.
34
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The Company accounts for income taxes using the liability method. The
deferred tax consequences of changes in tax rates or laws must be computed
on the amounts of temporary differences and carryforwards existing at the
date a new tax law is enacted. Recording the effects of a change involves
adjusting deferred tax liabilities and assets with a corresponding charge
or credit recognized in the provision for income taxes. The objective is
to measure a deferred tax liability or asset using the enacted tax rates
and laws expected to apply to taxable income in the periods in which the
deferred tax liability or asset is expected to be settled or realized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Current $152.2 $ 134.1 $ 127.9
Deferred (8.5) (20.6) (14.4)
----------------------------
$143.7 $ 113.5 $ 113.5
============================
The sources of the Company's provision for deferred taxes are as follows:
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Policyholder reserves $ 50.9 $ (29.5) $ 20.1
Deferred policy acquisition
costs 20.0 (12.6) (18.0)
Non deductible reserves 4.0 28.2 (27.6)
Partnership income (25.6) 20.8
Investment valuation (28.0) (24.5) 3.9
Duration hedging (29.6) 20.8 (2.6)
Other (0.2) (2.6) 9.8
----------------------------
Deferred taxes from
operations (8.5) 0.6 (14.4)
Release of subsidiary
deferred taxes (21.2)
----------------------------
Deferred tax provision $ (8.5) $ (20.6) $ (14.4)
============================
</TABLE>
The Company's acquisition of a controlling interest in a subsidiary
allowed such subsidiary to be included in PMHC's consolidated income tax
return. That inclusion resulted in the release of certain deferred taxes
in 1998.
35
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (Continued)
A reconciliation of the provision for income taxes based on the prevailing
corporate statutory tax rate to the provision reflected in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Provision for income taxes at the
statutory rate $ 180.1 $ 124.2 $ 101.3
Amortization of intangibles on equity
method investments 2.0 4.3 7.6
Non taxable investment income (7.3) (3.6) (2.6)
Tax settlement (7.5)
Low income housing tax credits (19.2) (3.9)
Equity tax (5.0) 5.0
Other (4.4) (2.5) 2.2
----------------------------
Provision for income taxes $ 143.7 $ 113.5 $ 113.5
============================
</TABLE>
The net deferred tax asset (liability), included in other assets on the
accompanying consolidated statements of financial condition, is comprised
of the following tax effected temporary differences:
<TABLE>
<CAPTION>
December 31,
1999 1998
---------------
(In Millions)
<S> <C> <C>
Deferred tax assets
Policyholder reserves $203.4 $ 254.3
Investment valuation 72.7 44.7
Deferred compensation 35.4 33.7
Duration hedging 21.1 (8.5)
Postretirement benefits 9.0 8.9
Dividends 8.4 7.6
Partnership income 4.8 (20.8)
Non deductible reserves 1.9 5.9
Other 3.1 5.2
---------------
Total deferred tax assets 359.8 331.0
Deferred tax liabilities
Deferred policy acquisition costs 44.0 24.0
Depreciation 2.7 2.4
---------------
Total deferred tax liabilities 46.7 26.4
---------------
Net deferred tax asset from operations 313.1 304.6
Unrealized (gain) loss on securities 150.8 (272.3)
Issuance of partnership units by affiliate (81.1) (74.9)
---------------
Net deferred tax asset (liability) $382.8 $ (42.6)
===============
</TABLE>
36
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMPREHENSIVE INCOME
The Company displays comprehensive income and its components on the
accompanying consolidated statements of stockholder's equity and the note
herein. Other comprehensive income is shown net of reclassification
adjustments and net of income tax in the accompanying consolidated
statements of stockholder's equity. The disclosure of the gross components
of other comprehensive income is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Calculation of Holding Gain (Loss):
-----------------------------------
Gross holding gain (loss) on securities
available for sale $(1,179.7) $(53.8) $ 359.8
Deferred policy acquisition costs 43.9 (6.9) (3.1)
Tax (expense) benefit 397.7 21.1 (125.1)
--------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (738.1) $(39.6) $ 231.6
==========================
Calculation of Reclassification
Adjustment:
-------------------------------
Realized gain on sale of securities
available for sale $ 73.4 $ 42.0 $ 55.1
Tax expense (25.2) (14.7) (19.5)
--------------------------
Reclassification adjustment, net of tax $ 48.2 $ 27.3 $ 35.6
==========================
Amounts Reported in Other Comprehensive
Income:
---------------------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (738.1) $(39.6) $ 231.6
Less reclassification adjustment, net of
tax 48.2 27.3 35.6
--------------------------
Net unrealized gain (loss) recognized in
other comprehensive income (loss) $ (786.3) $(66.9) $ 196.0
==========================
</TABLE>
37
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. REINSURANCE
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger mortality
risks or, in the case of a producer-owned reinsurance company, to
diversify risk and retain top producing agents. Amounts receivable from
reinsurers for reinsurance of future policy benefits, universal life
deposits, and unpaid losses is reported as an asset and included in other
assets on the accompanying consolidated statements of financial condition.
All assets associated with business reinsured on a yearly renewable term
and modified coinsurance basis remain with, and under the control of the
Company. Approximate amounts recoverable (payable) from (to) reinsurers
include the following amounts:
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(55.3) $(46.0)
Future policy benefits 141.8 108.9
Unpaid claims 8.5 12.5
Paid claims 6.4 24.3
</TABLE>
As of December 31, 1999, 74% of the reinsurance recoverables were from one
reinsurer, of which 100% is secured by payables to the reinsurer. To the
extent that the assuming companies become unable to meet their obligations
under these agreements, the Company remains contingently liable. The
Company does not anticipate nonperformance by the assuming companies.
Revenues and benefits are shown net of the following reinsurance
transactions:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
--------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance
premiums $ 92.8 $ 82.7 $ 70.7
Assumed reinsurance included in insurance
premiums 13.9 17.2 18.1
Ceded reinsurance netted against policy fees 52.3 65.0 77.5
Ceded reinsurance netted against net invest-
ment income 211.9 203.3 204.9
Ceded reinsurance netted against interest
credited 110.5 162.8 165.8
Ceded reinsurance netted against policy bene-
fits 88.4 121.3 93.4
Assumed reinsurance included in policy bene-
fits 8.3 17.7 12.7
</TABLE>
38
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION
The Company's six operating segments are Life Insurance, Institutional
Products, Annuities, Group Insurance, Broker-Dealers and Investment
Management. These segments have been identified based on differences in
products and services offered. All other activity is included in Corporate
and Other.
The Life Insurance segment offers universal life, variable universal life
and other life insurance products to individuals, small businesses and
corporations through a network of distribution channels that include
branch offices, marketing organizations, national accounts and a national
producer group that has produced over 10% of the segment's in force
business. The Institutional Products segment offers investment and annuity
products to pension fund sponsors and other institutional investors
primarily through its home office marketing team. The Annuities segment
offers variable and fixed annuities to individuals, small businesses and
qualified plans through financial institutions, National Association of
Securities Dealers ("NASD") firms, and regional and national wirehouses.
The Group Insurance segment offers group life, health and dental
insurance, and stop loss insurance products to corporate, government and
labor-management-negotiated plans. The group life, health and dental
insurance is distributed through a network of sales offices and the stop
loss insurance is distributed through a network of third party
administrators. The Broker-Dealers segment includes five NASD registered
firms that provide securities and insurance brokerage services and
investment advisory services through approximately 3,200 registered
representatives. The Investment Management segment is primarily comprised
of the Company's investment in PIMCO Advisors (Note 1). PIMCO Advisors
offers a diversified range of investment products through separately
managed accounts, and institutional, retail and offshore funds.
Corporate and Other primarily includes investment income, expenses and
assets not attributable to the operating segments, and the operations of
the Company's reinsurance subsidiary located in the United Kingdom.
Corporate and Other also includes the elimination of intersegment
revenues, expenses and assets.
The Company uses the same accounting policies and procedures to measure
segment income and assets as it uses to measure its consolidated net
income and assets. Net investment income and investment gains are
allocated based on invested assets purchased and held as is required for
transacting the business of that segment. Overhead expenses are allocated
based on services provided. Interest expense is allocated based on the
short-term borrowing needs of the segment and is included in net
investment income. The income tax provision is allocated based on each
segment's actual tax liability.
Intersegment revenues include commissions paid by the Life Insurance
segment and the Annuities segment for variable product sales to the
Broker-Dealers segment. Investment Management segment assets have been
reduced by an intersegment note payable of $100.5 million and $110 million
as of December 31, 1999 and 1998, respectively. The related intersegment
note receivable is included in Corporate and Other segment assets.
The Company generates substantially all of its revenues and income from
customers located in the United States. Additionally, substantially all of
the Company's assets are located in the United States.
Depreciation expense and capital expenditures are not material and have
not been reported herein. The Company's significant non cash item
disclosed herein is interest credited to universal life and investment-
type products.
39
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION (Continued)
Financial information for each of the business segments is as follows:
<TABLE>
<CAPTION>
Life Institutional Group Broker- Investment Corporate
Insurance Products Annuities Insurance Dealers Management and Other Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External customers and (In Millions)
other revenue
December 31, 1999 $ 502.0 $ 39.1 $ 205.0 $478.4 $253.2 $ 14.9 $ 24.1 $ 1,516.7
December 31, 1998 431.9 43.2 124.0 521.2 236.1 17.0 21.6 1,395.0
December 31, 1997 395.6 61.4 83.3 480.6 154.0 21.2 6.0 1,202.1
Intersegment revenues
December 31, 1999 348.5 (348.5) -
December 31, 1998 185.3 (185.3) -
December 31, 1997 143.3 (143.3) -
Net investment income
excluding earnings of
equity method investees
December 31, 1999 580.2 645.1 78.3 23.4 0.9 8.3 44.2 1,380.4
December 31, 1998 586.5 565.5 88.6 23.1 0.9 8.0 42.0 1,314.6
December 31, 1997 507.2 509.6 149.4 24.9 0.8 6.2 49.2 1,247.3
Earnings of equity
method investees
December 31, 1999 (0.7) (1.2) (0.1) 107.9 (13.0) 92.9
December 31, 1998 0.1 103.1 (4.2) 99.0
December 31, 1997 0.2 80.7 (2.8) 78.1
Net realized investment
gains (losses)
December 31, 1999 12.6 26.8 0.1 (0.6) 9.9 52.7 101.5
December 31, 1998 4.1 (13.6) 4.6 1.7 4.0 38.6 39.4
December 31, 1997 9.9 12.8 0.6 2.0 20.8 39.3 85.4
Total revenues
December 31, 1999 1,094.1 709.8 283.3 501.2 602.6 141.0 (240.5) 3,091.5
December 31, 1998 1,022.5 595.2 217.2 546.0 422.3 132.1 (87.3) 2,848.0
December 31, 1997 912.7 584.0 233.3 507.5 298.1 128.9 (51.6) 2,612.9
Income (loss) before
provision for
income tax
December 31, 1999 178.4 111.9 73.2 30.4 11.9 62.6 46.3 514.7
December 31, 1998 151.1 74.6 34.1 10.3 9.9 60.1 14.9 355.0
December 31, 1997 132.4 98.3 23.5 28.8 6.4 24.6 (24.5) 289.5
Provision (benefit) for
income tax
December 31, 1999 54.4 30.7 24.0 10.1 5.2 11.3 8.0 143.7
December 31, 1998 52.6 21.2 11.3 2.9 4.5 2.1 18.9 113.5
December 31, 1997 55.8 33.9 9.4 9.1 2.7 10.1 (7.5) 113.5
Net income (loss)
December 31, 1999 124.0 81.2 49.2 20.3 6.7 51.3 38.3 371.0
December 31, 1998 98.5 53.4 22.8 7.4 5.4 58.0 (4.0) 241.5
December 31, 1997 76.6 64.4 14.1 19.7 3.7 14.5 (17.0) 176.0
Interest credited on
universal life and
investment-type
products
December 31, 1999 451.4 383.8 65.1 4.1 904.4
December 31, 1998 449.6 354.1 71.0 6.1 880.8
December 31, 1997 378.8 299.8 106.2 13.0 797.8
Assets
As of December 31, 1999 16,276.1 17,649.4 14,565.2 341.5 60.9 264.5 965.4 50,123.0
As of December 31, 1998 14,578.2 15,221.0 8,384.2 361.1 55.8 267.3 1,016.3 39,883.9
</TABLE>
40
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLANS
Pacific Life has defined benefit pension plans which cover all eligible
employees who have one year of continuous employment and have attained age
21. The full-benefit vesting period for all participants is five years.
Benefits for employees are based on years of service and the highest five
consecutive years of compensation during the last ten years of employment.
Pacific Life's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as may be determined appropriate. Contributions are intended to
provide not only for benefits attributed to employment to date but also
for those expected to be earned in the future. All such contributions are
made to a tax-exempt trust. Plan assets consist primarily of group annuity
contracts issued by Pacific Life, as well as mutual funds managed by an
affiliate of Pacific Life.
Components of the net periodic pension benefit are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned during
the year $ 4.6 $ 4.0 $ 3.6
Interest cost on projected benefit
obligation 11.5 10.9 10.4
Expected return on plan assets (16.3) (15.0) (12.8)
Amortization of net obligations and
prior service cost (1.4) (1.4) (1.4)
----------------------------
Net periodic pension benefit $ (1.6) $ (1.5) $ (0.2)
============================
</TABLE>
41
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
The following tables set forth the pension plans' reconciliation of
benefit obligation, plan assets and funded status for the years ended:
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------
(In Millions)
<S> <C> <C>
Change in Benefit Obligation:
-----------------------------
Benefit obligation, beginning of year $177.8 $157.9
Service cost 4.6 4.0
Interest cost 11.5 10.9
Plan expense (0.3) (0.3)
Actuarial (gain) loss (30.7) 11.9
Benefits paid (7.0) (6.6)
--------------
Benefit obligation, end of year $155.9 $177.8
==============
Change in Plan Assets:
----------------------
Fair value of plan assets, beginning of year $195.3 $180.3
Actual return on plan assets 23.6 21.9
Plan expense (0.3) (0.3)
Benefits paid (7.0) (6.6)
--------------
Fair value of plan assets, end of year $211.6 $195.3
==============
Funded Status Reconciliation:
-----------------------------
Funded status $ 55.7 $ 17.5
Unrecognized transition asset (47.7) (3.6)
Unrecognized prior service cost (2.4) (1.0)
Unrecognized actuarial gain (0.8) (9.7)
--------------
Prepaid pension cost $ 4.8 $ 3.2
==============
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1999 and 1998, the weighted average discount
rate used was 8.0% and 6.5%, respectively, and the rate of increase in
future compensation levels was 5.5% and 5.0%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1999 and 1998.
42
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
POSTRETIREMENT BENEFITS
Pacific Life sponsors a defined benefit health care plan and a defined
benefit life insurance plan (the "Plans") that provide postretirement
benefits for all eligible retirees and their dependents. Generally,
qualified employees may become eligible for these benefits if they reach
normal retirement age, have been covered under Pacific Life's policy as an
active employee for a minimum continuous period prior to the date retired,
and have an employment date before January 1, 1990. The Plans contain
cost-sharing features such as deductibles and coinsurance, and require
retirees to make contributions which can be adjusted annually. Pacific
Life's commitment to qualified employees who retire after April 1, 1994 is
limited to specific dollar amounts. Pacific Life reserves the right to
modify or terminate the Plans at any time. As in the past, the general
policy is to fund these benefits on a pay-as-you-go basis.
The net periodic postretirement benefit cost for the years ended December
31, 1999, 1998 and 1997 is $0.5 million, $0.7 million and $0.8 million,
respectively. As of December 31, 1999 and 1998, the accumulated benefit
obligation is $19.7 million and $19.3 million, respectively. The fair
value of the plan assets as of December 31, 1999 and 1998 is zero. The
amount of accrued benefit cost included in other liabilities on the
accompanying consolidated statements of financial condition is $24.4
million and $25.3 million as of December 31, 1999 and 1998, respectively.
The Plans include both indemnity and HMO coverage. The assumed health care
cost trend rate used in measuring the accumulated benefit obligation for
indemnity coverage was 8.0% for 1999 and 1998 and is assumed to decrease
gradually to 3.5% in 2003 and remain at that level thereafter. The assumed
health care cost trend rate used in measuring the accumulated benefit
obligation for HMO coverage was 7.0% for 1999 and 1998 and is assumed to
decrease gradually to 3.0% in 2003 and remain at that level thereafter.
The amount reported is materially effected by the health care cost trend
rate assumptions. If the health care cost trend rate assumptions were
increased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1999 would be increased by 8.0%, and the aggregate of the
service and interest cost components of the net periodic benefit cost
would increase by 10.1%. If the health care cost trend rate assumptions
were decreased by 1%, the accumulated postretirement benefit obligation as
of December 31, 1999 would be decreased by 7.0%, and the aggregate of the
service and interest cost components of the net periodic benefit cost
would decrease by 8.9%.
The discount rate used in determining the accumulated postretirement
benefit obligation is 8.0% and 6.5% for 1999 and 1998, respectively.
OTHER PLANS
Pacific Life provides a voluntary Retirement Incentive Savings Plan
("RISP") pursuant to Section 401(k) of the Internal Revenue Code covering
all eligible employees of the Company. Effective October 1, 1997, Pacific
Life's RISP changed the matching percentage of each employee's
contributions from 50% to 75%, up to a maximum of 6% of eligible employee
compensation and restricted the matched investment to an Employee Stock
Ownership ("ESOP"). ESOP contributions made by the Company amounted to
$5.4 million, $5.2 million and $1.1 million for the years ended December
31, 1999, 1998 and 1997, respectively, and are included in operating
expenses on the accompanying consolidated statements of operations.
The ESOP was formed at the time of the Conversion and is currently only
available to the participants of the RISP in the form of matching
contributions. Pacific LifeCorp issued 1.7 million shares of common stock
at
43
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
$12.50 per share to the ESOP ("ESOP Shares") on September 2, 1997, in
exchange for a promissory note in the amount of $21.2 million ("ESOP
Note"). Interest and principal payments made by the ESOP to Pacific
LifeCorp were funded by ESOP contributions from Pacific Life.
On July 27, 1999, Pacific Life loaned cash to the ESOP to pay off the ESOP
Note due Pacific LifeCorp. This loan is included in unearned ESOP shares
on the accompanying consolidated statement of stockholder's equity as of
December 31, 1999. The unearned ESOP shares account is reduced as ESOP
shares are released for allocation to participants through ESOP
contributions by Pacific Life. In addition, when the fair value of ESOP
shares being released for allocation to participants exceeds the original
issue price of those shares, paid-in capital is increased by this
difference and reflected as a capital contribution on the accompanying
consolidated statement of stockholder's equity as of December 31, 1999.
Pacific Life also has a deferred compensation plan which permits certain
employees to defer portions of their compensation and earn a guaranteed
interest rate on the deferred amounts. The interest rate is determined
annually and is guaranteed for one year. The compensation which has been
deferred has been accrued and the primary expense, other than
compensation, related to this plan is interest on the deferred amounts.
The Company also has performance-based incentive compensation plans for
its employees.
16. TRANSACTIONS WITH AFFILIATES
Pacific Life serves as the investment advisor for the Pacific Select Fund,
the investment vehicle provided to the Company's variable life and
variable annuity contractholders. Pacific Life charges fees based upon the
net asset value of the portfolios of the Pacific Select Fund, which
amounted to $69.7 million, $42.1 million and $27.5 million for the years
ended December 31, 1999, 1998 and 1997, respectively. In addition, Pacific
Life provides certain support services to the Pacific Select Fund for an
administration fee which is based on an allocation of actual costs. Such
administration fees amounted to $265,000, $232,000 and $165,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $7.3 million, $16.9 million and $11.4 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
Included in equity securities on the accompanying consolidated statements
of financial condition are investments in mutual funds and other
investments managed by PIMCO Advisors which amounted to $3.2 million and
$40.3 million as of December 31, 1999 and 1998, respectively.
Pacific Life provides certain support services to PIMCO Advisors. Charges
for these services are based on an allocation of actual costs and amounted
to $1.0 million, $1.2 million and $1.2 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
17. TERMINATION AND NON COMPETITION AGREEMENTS
The Company has termination and non competition agreements with certain
former key employees of PAM's subsidiaries. These agreements provide terms
and conditions for the allocation of future proceeds received from
distributions and sales of certain PIMCO Advisors units and other non
compete payments. When the amount of future obligations to be made to a
key employee is determinable, a liability for such amount is established.
For the years ended December 31, 1999, 1998 and 1997, approximately $53.6
million, $49.4 million and $85.8 million, respectively, is included in
operating expenses on the accompanying consolidated statements of
44
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. TERMINATION AND NON COMPETITION AGREEMENTS (Continued)
operations related to the termination and non competition agreements. This
includes payments of $43.1 million in 1997 to former key employees who
elected to sell to PAM's subsidiaries their rights to the future proceeds
from the PIMCO Advisors units.
In connection with the closing of the PIMCO Advisors transaction (Note 1),
the termination and non competition agreements with certain former key
employees of PAM's subsidiaries will be assumed by Allianz.
18. COMMITMENTS AND CONTINGENCIES
The Company has outstanding commitments to make investments primarily in
fixed maturity securities, mortgage loans, limited partnerships and other
investments as follows (In Millions):
<TABLE>
<CAPTION>
Years Ending December 31:
-------------------------
<S> <C>
2000 $437.0
2001 through 2004 210.8
2005 and thereafter 144.3
------
Total $792.1
======
</TABLE>
The Company leases office facilities under various non cancelable
operating leases. Aggregate minimum future commitments as of December 31,
1999 through the term of the leases are approximately $43.3 million.
Pacific Life has a contingent liability of approximately $23 million
related to the posting of an appeal bond in conjunction with one of its
investments. An unrelated third party has agreed to reimburse Pacific Life
for 50% of any losses incurred under the bond. In addition, Pacific Life
has given a commitment for additional capital funding, as may be required,
to certain of its subsidiaries.
Pacific Life was named in civil litigation proceedings similar to other
litigation brought against many life insurers alleging misconduct in the
sale of products, sometimes referred to as market conduct litigation. The
class of plaintiffs included, with some exceptions, all persons who owned,
as of December 31, 1997 (or as of the date of policy termination, if
earlier), individual whole life, universal life or variable life insurance
policies sold by Pacific Life on or after January 1, 1982. Pacific Life
has settled this litigation pursuant to a final settlement agreement
approved by the Court in November 1998. The settlement agreement was
implemented during 1999.
Further, the Company is a respondent in a number of other legal
proceedings, some of which involve allegations for extra-contractual
damages. In the opinion of management, the outcome of the foregoing
proceedings is not likely to have a material adverse effect on the
consolidated financial position or results of operations of the Company.
---------------------------------------------------------------------------
45
