<PAGE>
PROSPECTUSES FOR:
. INDIVIDUAL FLEXIBLE PREMIUM DEFERRED ANNUITY AND VARIABLE ACCUMULATION
CONTRACT, ADMINISTERED BY PACIFIC CORINTHIAN VARIABLE SEPARATE ACCOUNT OF
PACIFIC LIFE INSURANCE COMPANY
DATED OCTOBER 31, 1997
. PACIFIC SELECT FUND DATED MAY 1, 1997 AS SUPPLEMENTED
OCTOBER 31, 1997
PACIFIC CORINTHIAN
[LOGO OF PACIFIC CORINTHIAN] VARIABLE ANNUITY
Pacific Life Insurance
Company
<PAGE>
[LOGO OF PACIFIC CORINTHIAN]
PROSPECTUS
PACIFIC CORINTHIAN VARIABLE ANNUITY
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED ANNUITY
AND VARIABLE ACCUMULATION CONTRACT,
ADMINISTERED BY PACIFIC CORINTHIAN VARIABLE SEPARATE ACCOUNT OF
PACIFIC LIFE INSURANCE COMPANY
1-800-735-5535
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
ANNUITY SERVICE OFFICE MAILING ADDRESS:
P.O. BOX 9000, NEWPORT BEACH, CALIFORNIA 92658-9030
This Prospectus describes Pacific Corinthian Variable Annuity--an individual
flexible premium deferred annuity and variable accumulation contract
("Contract") administered by Pacific Life Insurance Company ("Pacific Life" or
the "Company", formerly "Pacific Mutual Life Insurance Company") which is
funded in part by the Pacific Corinthian Variable Separate Account of Pacific
Life ("Separate Account").
The Contract was originally issued by First Capital Life Insurance Company,
and, pursuant to a Plan of Rehabilitation of First Capital Life Insurance
Company--In Conservation, the Contract has been administered by Pacific
Corinthian Life Insurance Company since January 1, 1993, and as of October 30,
1997, is now administered by Pacific Life. This Prospectus has been prepared
for the purpose of facilitating transfers among the variable subaccounts
("Variable Accounts") of the Separate Account or to or from the Fixed Account
of Pacific Life, and the acceptance of new premiums under existing Contracts.
Pacific Life is responsible for payment of the benefits provided in the
Contract, including those benefits funded by Pacific Life's General Account.
Accordingly, Policyholders ("Contract Owners") will look to Pacific Life
instead of Pacific Corinthian to fulfill the terms of their Contracts.
During the Accumulation Period, the Contract provides that Contract Value may
accumulate based upon allocation to the Separate Account or to the Fixed
Account of Pacific Life. Contract Owners bear all of the investment risk for
amounts allocated to the Separate Account, and amounts allocated to the Fixed
Account are subject to guarantees of Pacific Life as described in "The Fixed
Account." The Contract provides for fixed annuity payments.
Amounts allocated to a Variable Account are invested at net asset value,
without a sales charge, in one of eleven portfolios of the Pacific Select Fund
(the "Fund"): the Money Market Portfolio, the Equity Portfolio, the Bond and
Income Portfolio, the Government Securities Portfolio, the Equity Income
Portfolio, the Multi-Strategy Portfolio, the Managed Bond Portfolio, the High
Yield Bond Portfolio, the Equity Index Portfolio, the International Portfolio,
and the Growth LT Portfolio.
This Prospectus sets forth certain information about the Contract and the
Separate Account that Contract Owners should know. A "Statement of Additional
Information" dated October 31, 1997 ("SAI") has been filed with the Securities
and Exchange Commission and can be obtained by calling or writing to Pacific
Life at the telephone number and address indicated above. The SAI is
incorporated by reference into this Prospectus. The Table of Contents for the
SAI appears in this prospectus on page 36.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS OF THE PACIFIC
SELECT FUND. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE
REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus Dated October 31, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Glossary of Special Terms.................................................. 3
Introduction--Some Questions and Answers About the Contract................ 5
Annual Separate Account and Fund Expenses.................................. 8
Pacific Life Insurance Company ............................................ 14
The Separate Account....................................................... 14
The Pacific Select Fund.................................................... 15
Charges and Expenses....................................................... 17
The Contract............................................................... 19
The Accumulation Period.................................................. 19
Payment Plans............................................................ 24
Voting Rights............................................................ 27
Federal Income Tax Status.................................................. 28
Other Information.......................................................... 34
Appendix:
The Fixed Account........................................................ 37
</TABLE>
2
<PAGE>
GLOSSARY OF SPECIAL TERMS
ACCUMULATION PERIOD--The period between the Contract Date and the Annuity
Date.
ACCUMULATION UNIT--An accounting unit of measure used to calculate the value
of a Contract Owner's interest in a Variable Account.
ACCUMULATION VALUE--The value of the Contract Owner's interest in a Variable
Account (or in the Fixed Account). The combined Accumulation Values credited to
the Contract equal the Contract Value.
ANNUITANT--The person designated to receive or the person who is actually
receiving annuity payments under an annuity contract. If joint Annuitants are
named in the Contract, "Annuitant" means both Annuitants unless otherwise
specified.
ANNUITY--A series of periodic payments made to an Annuitant for life or for a
certain period, or for life with a minimum number of payments guaranteed.
ANNUITY DATE--The date on which annuity payments are to begin.
BENEFICIARY--The person or persons designated to receive any benefits under
the Contract upon the death of the Annuitant. If no Beneficiary is designated,
then the Contract Owner (if living), or otherwise the estate of the Contract
Owner, shall have the rights of the Beneficiary.
CONTRACT--The individual flexible premium deferred annuity and variable
accumulation contract described in this Prospectus.
CONTRACT DATE--The Valuation Day on which the initial premium was credited to
the Contract.
CONTRACT OWNER--The person or entity with legal rights of ownership of the
Contract. The Annuitant is the Contract Owner, unless the Contract provides
otherwise. If the Contract has been absolutely assigned, the assignee is the
Contract Owner. A collateral assignee is not the Contract Owner.
CONTRACT VALUE--The combined Accumulation Values credited to the Contract.
CONTRACT YEAR--Each twelve-month period beginning with the Contract Date.
CONTRIBUTION YEAR--Each Contract Year in which a premium payment is made and
each succeeding year measured from the end of the Contract Year during which
such payment was made. For example, if a Contract Owner makes an initial
premium payment of $15,000 and then makes a subsequent premium payment of
$10,000 during the fourth (4th) Contract Year, the fifth (5th) Contract Year
will be the fifth (5th) Contribution Year for the purpose of the initial
premium payment and the second (2nd) Contribution Year with respect to the
subsequent $10,000 premium payment.
FIXED ACCOUNT--Pacific Life's General Account, to which Accumulated Value may
be allocated for accumulation subject to Pacific Life guarantees as described
under "The Fixed Account."
FIXED ACCOUNT ACCUMULATION VALUE--The value of the Contract Owner's interest
in the General Account pursuant to the Fixed Account accumulation option. (See
"The Fixed Account.")
GENERAL ACCOUNT--All assets of the Company other than those allocated to the
Separate Account or to any other segregated investment account of the Company.
MILESTONE DATE--In determining the death benefit proceeds after the fifth
contract anniversary, the Milestone Date is the fifth contract anniversary and
each fifth anniversary thereafter.
3
<PAGE>
MINIMUM GUARANTEED DEATH BENEFIT--After the fifth contract anniversary, the
minimum guaranteed death benefit equals the death benefit as of the next
previous Milestone Date, increased by premiums paid since that Milestone Date
and decreased by any withdrawals, net of any contingent deferred sales charge,
received since that Milestone Date. After the fifth anniversary, the death
benefit proceeds will be the Contract Value, or, if larger, the minimum
guaranteed death benefit. (See "Death Benefit".)
NONQUALIFIED PLAN--A retirement plan which does not qualify for special
federal tax treatment under the Internal Revenue Code of 1986, as amended (the
"Code"). Generally, an individual purchaser who does not purchase the Contract
in connection with an IRA, Keogh or similar plan is deemed to purchase in
connection with a Nonqualified Plan.
OWNER BENEFICIARY--With respect to Contracts issued after January 18, 1985,
the person named to receive the death benefit proceeds upon the Contract
Owner's death during the Accumulation Period. If there is no Owner Beneficiary,
the death benefit shall be paid to the joint owner, if any, otherwise to the
Annuitant.
PREMIUM--The amounts paid to the Company as consideration for the Contract.
QUALIFIED PLAN--A retirement plan which qualifies for special federal tax
treatment under Sections 401, 403(a), 403(b), 408 or 457 of the Code.
REHABILITATION PLAN--A plan for the rehabilitation of First Capital Life
Insurance Company ("FCL")--In Conservation proposed by the Company and approved
by the Insurance Commissioner of the State of California and by an order dated
July 1, 1992 of the Superior Court of the State of California for the County of
Los Angeles. The plan was effected in part through an Agreement in Connection
with the Rehabilitation of First Capital Life Insurance Company
("Rehabilitation Agreement"), which is between the Insurance Commissioner of
the State of California, as Conservator of FCL, and the Company. Pursuant to
the Rehabilitation Plan, the Separate Account was transferred intact to Pacific
Life on October 30, 1997, and the Contracts became the obligations of Pacific
Life on that date.
SEPARATE ACCOUNT--A segregated investment account, the assets of which are
maintained separately from the other assets of the Company. The Separate
Account funds the Contracts described in this Prospectus.
VALUATION DAY--Each day that the New York Stock Exchange is open for trading.
VALUATION PERIOD--The period between successive valuations of the
Accumulation Units of the Variable Accounts (generally the period between
business days).
VARIABLE ACCOUNT--One of the subaccounts into which the Separate Account is
divided. The assets of each Variable Account are invested in a specified Fund
Portfolio. There are eleven Variable Accounts currently available to Contract
Owners; the Company may establish additional Variable Accounts at any time.
4
<PAGE>
INTRODUCTION
SOME QUESTIONS AND ANSWERS ABOUT THE CONTRACT
1. HOW DOES THE MERGER BETWEEN PACIFIC CORINTHIAN LIFE INSURANCE COMPANY AND
PACIFIC LIFE INSURANCE COMPANY AFFECT THE RIGHTS OF OWNERS UNDER THE
CONTRACTS?
This Contract was originally issued by First Capital Life Insurance Company.
Pursuant to the Plan of Rehabilitation of First Capital Life Insurance
Company--In Conservation ("Rehabilitation Plan"), the assets and liabilities
under the Contract were assumed by Pacific Corinthian Life Insurance Company, a
wholly owned subsidiary of Pacific Life Insurance Company, which has
administered the Contracts since January 1, 1993. On October 30, 1997 and
pursuant to the Rehabilitation Plan, Pacific Corinthian merged into Pacific
Life, and, as of that date, Pacific Life administers the Contracts.
The Merger has not affected the terms of the Contracts, although Pacific Life
is making available certain additional rights under the Contracts. Contract
Owners are now permitted to transfer Accumulation Value in the Variable
Accounts to the Fixed Account, and from the Fixed Account to any of the
Variable Accounts. Transfers will continue to be permitted among the Variable
Accounts. In addition, Contract Owners may elect annuity options so that
annuity payments may be made over a period of less than seven years.
2. AFTER THE MERGER, WHAT INSURANCE COMPANY IS RESPONSIBLE FOR THE BENEFITS
PROVIDED IN THE CONTRACT?
As a result of the Merger, Pacific Life has assumed the assets and
liabilities, including policy-related liabilities, of Pacific Corinthian.
Effective October 30, 1997, Contract Owners look to Pacific Life for the
benefits provided in the Contract.
Pacific Life is a wholly-owned subsidiary of Pacific LifeCorp, a holding
company which, in turn, is a wholly-owned subsidiary of Pacific Mutual Holding
Company. For more information on Pacific Life, see the discussion in the
section headed "Pacific Life Insurance Company."
3. WHAT IS THE DIFFERENCE BETWEEN A FIXED ANNUITY AND A VARIABLE ANNUITY?
Under a fixed annuity, the contract value and the amount of each annuity
payment are guaranteed by the insurance company issuing the contract. The
investment risk as well as the mortality risk are borne by the insurance
company. The contract owner bears the risk that the insurance company will be
able to pay for the benefits provided for in the contract. Under a variable
annuity, the contract value and the annuity payments are based on investment
performance, so that the contract owner bears the investment risk while the
insurance company bears the mortality risk.
4. WHAT TYPE OF ANNUITY IS THE CONTRACT?
The Contract described by this Prospectus provides for accumulation both on a
variable basis and on a fixed basis during the Accumulation Period, and is a
fixed annuity after the Annuity Date.
With respect to accumulation on a variable basis, the Accumulation Value
varies during the Accumulation Period with the investment performance of the
Variable Account(s) to which the Accumulation Value is allocated. Thus, the
entire investment risk is borne by the Contract Owner. Accumulation Value in
the Fixed Account is subject to the guarantees described under "The Fixed
Account." For these amounts, the investment risk is borne by Pacific Life;
however, the Contract Owner bears the risk of Pacific Life's ability to pay the
amounts so guaranteed.
Following the Annuity Date, the monthly annuity payment under the Contract is
guaranteed in amount by Pacific Life, and the investment risk is borne by the
Company. The Company bears the mortality risk under the Contract. (See "Charge
for Mortality Risk and Expense Risk of the Separate Account.")
5. WHAT IS THE STATUS OF FUNDS ALLOCATED TO THE SEPARATE ACCOUNT?
The assets of the Separate Account are segregated from the assets of the
General Account and other separate accounts of Pacific Life, and are not
chargeable with liabilities arising out of any other business conducted by
Pacific Life.
5
<PAGE>
6. MAY A CONTRACT OWNER MAKE ADDITIONAL PREMIUM PAYMENTS UNDER THE CONTRACT?
Yes. Additional premium payments for allocation to the Separate Account or
the Fixed Account may be made.
7. MAY A NEW CONTRACT BE PURCHASED?
No. Pacific Life does not currently accept applications for the sale of new
Contracts.
8. WHAT EXPENSES ARE CHARGED TO THE CONTRACT?
A Contingent Deferred Sales Charge may be deducted upon partial or complete
withdrawal or upon annuitization of a Contract. In no event will the charge
imposed exceed 5% of the aggregate premium payments. (See "Contingent Deferred
Sales Charge".)
A charge equal to 1.19% per year of each Variable Account's average daily net
assets is accrued daily and paid quarterly in order to reimburse Pacific Life
for undertaking the mortality risk and expense risk in connection with amounts
subject to variable accumulation. (See "Charge for Mortality Risk and Expense
Risk of the Separate Account".)
The Separate Account bears certain of its operating expenses, subject to the
Company's guarantee that such expenses will not exceed .25% of any Variable
Account's average daily net assets annually. Pacific Life further guarantees
that the ordinary operating expenses of a Variable Account together with
certain operating expenses incurred by the Series of the Fund in which the
Variable Account invests will not exceed .60% of average daily net assets
annually (taking into account for any adjustment for Fund expenses in excess of
state expense limitations).
During the Accumulation Period, each Contract is assessed an annual contract
maintenance charge of $30. This charge, which is not guaranteed and may be
changed, is designed to reimburse the Company for the cost of administering the
Contracts. (See "Contract Maintenance Charge".)
Any premium taxes with respect to a Contract will be paid by the Company when
due and deducted from the Contract Value as of the Annuity Date, when the
Contract is annuitized.
Investment advisory fees and operating expenses of the Fund are paid by the
Fund. Fund expenses are not specified under the terms of the Policy, and they
may vary from year to year. (See Separate "Account and Fund Expenses".)
9. MAY THE CONTRACT OWNER WITHDRAW ALL OR A PORTION OF THE CONTRACT VALUE?
All or a portion of the Contract Value allocated to the Separate Account may
be withdrawn during the Accumulation Period, except that the minimum partial
withdrawal is $500, and no partial withdrawal may be made if it would result in
a remaining Contract Value of less than $500. (See "Transfers and
Withdrawals".) No withdrawals are permitted following the commencement of
annuity payments under Optional Payment Plans D, E, or F. (See "Optional
Payment Plans".) Withdrawal of Accumulation Value allocated to the Fixed
Account is subject to limitation as described in "The Fixed Account."
A Contingent Deferred Sales Charge may be imposed on a Contract Owner making
more than one partial withdrawal during a Contract Year, or withdrawing an
amount in excess of 10% of the Contract Value during a Contract Year. (See
"Contingent Deferred Sales Charge".)
A penalty tax may be imposed pursuant to the Code upon withdrawal of amounts
accumulated under the Contract. For federal income tax consequences of partial
or complete withdrawal, see "Federal Income Tax Status".
6
<PAGE>
10. HOW ARE THE AMOUNTS OF THE ANNUITY PAYMENTS DETERMINED?
The proceeds available on the Annuity Date will be the Contract Value less
reductions, if any, for Contingent Deferred Sales Charges or premium taxes. A
Contingent Deferred Sales Charge will be imposed on any amount attributable to
a premium payment in its fifth contribution year or less. (See "Contingent
Deferred Sales Charge".) The Variable Account Accumulation Values will be
transferred to the General Account. Thereafter, the Annuitant will receive
fixed monthly payments based on the amount of the proceeds and the annuity
tables provided under the Contract for the Payment Plan selected. (See
"Optional Payments Plans".)
There can be no assurance that the Contract Value during the Accumulation
Period or the aggregate amount of annuity payments after the Annuity Date will
equal or exceed the aggregate premium payments.
11. WHAT IF THE ANNUITANT DIES DURING THE ACCUMULATION PERIOD?
Upon the death of the Annuitant on or before the fifth contract anniversary
and before the Annuity Date, the Company will pay the Beneficiary or
Beneficiaries a death benefit equal to the greater of (1) the aggregate premium
payments less any reductions in the Contract Value due to withdrawals or (2)
the Contract Value next determined following receipt of due proof of death by
the Company at its home office. After the fifth contract anniversary, there is
a minimum guaranteed death benefit equal to the death benefit as of the next
previous Milestone Date, increased by any premiums paid since that Milestone
Date and decreased by any withdrawals, net of contingent deferred sales charge,
received since that Milestone Date. After the fifth anniversary, the death
benefit proceeds will be the Contract Value, or, if larger, the minimum
guaranteed death benefit. (See "Death Benefit".)
12. WHAT IF THE CONTRACT OWNER DIES DURING THE ACCUMULATION PERIOD?
With respect to Contracts issued after January 18, 1985, if the Contract
Owner dies on or before the fifth contract anniversary date and before the
Annuitant and prior to the Annuity Date, the Company will pay the Owner
Beneficiary or Owner Beneficiaries a minimum death benefit equal to the greater
of (1) the aggregate premium payment less any reductions in the Contract Value
due to withdrawals, or (2) the Contract Value next determined following receipt
of due proof of death by the Company at its home office. After the fifth
contract anniversary, there is a minimum guaranteed death benefit equal to the
death benefit as of the next previous Milestone Date, increased by any premiums
paid since that Milestone Date and decreased by any withdrawals, net of
Contingent Deferred Sales Charge, received since that Milestone Date. After the
fifth anniversary, the death benefit proceeds will be the Contract Value, or,
if larger, the minimum guaranteed death benefit. (See "Death Benefit".) If
there are joint Owners, upon the death of the first joint Owner, the survivor
will become the sole Owner.
13. WHAT ARE THE MORTALITY RISKS ASSUMED UNDER THE CONTRACT BY PACIFIC LIFE
INSURANCE COMPANY?
Under the Contract, the Company guarantees during the Accumulation Period the
death benefit and the minimum guaranteed death benefit as described above. The
Company further guarantees that annuity payments will not be affected by a
change in the mortality experience assumed in establishing its obligation to
provide annuity payments under the Contract.
14. WHAT IS THE NATURE OF THE SECURITY DESCRIBED IN THIS PROSPECTUS?
Because the Accumulation Values allocated to the Variable Accounts during the
Accumulation Period are based upon the changing net asset value of the shares
of the underlying Portfolios of the Fund, the Contract is a security under
Federal law and is registered under the Securities Act of 1933, as amended. The
Separate Account is registered with the Securities and Exchange Commission
("SEC" or the "Commission") under the Investment Company Act of 1940, as
amended, as a unit investment trust.
7
<PAGE>
15. HOW CAN CONTRACT INQUIRIES BE MADE?
Contract Owners may make any inquiries regarding the Contract by contacting
the Annuity Service Office of Pacific Life at the address and phone number
listed above.
16. WHAT WAS THE REHABILITATION PLAN?
The Rehabilitation Plan was a plan proposed by the Company for the
rehabilitation of First Capital Life Insurance Company--In Conservation, which
had been placed in conservation on May 14, 1991 by order of the Superior Court
of the State of California for the County of Los Angeles (the "Conservation
Court"). The Insurance Commissioner of the State of California, who was
appointed the Conservator of FCL by the Conservation Court, recommended the
Rehabilitation Plan to the Conservation Court, and the Court approved the Plan
by order dated July 1, 1992. The rehabilitation was effected in part through
an Agreement in Connection with the Rehabilitation of First Capital Life
Insurance Company ("Rehabilitation Agreement"), which was between the
Insurance Commissioner of the State of California, as Conservator of FCL, and
the Company. In addition, the Plan called for Pacific Corinthian, to assume
the life insurance policies and annuity contracts that had been issued by FCL,
as well as certain of FCL's assets and liabilities. This assumption was
completed on December 31, 1992. The Plan provides that Pacific Corinthian be
merged into Pacific Life on or about October 30, 1997 (the "Merger"), and the
Merger was completed on October 30, 1997. In connection with the Merger, the
assets and liabilities of Pacific Corinthian, including the Pacific Corinthian
Separate Account, the assets therein and the liabilities connected therewith,
became the assets and liabilities of Pacific Life. The Pacific Corinthian
Separate Account was transferred intact to Pacific Life as part of the Merger,
and continues operations as the Separate Account that funds the variable
interests under the contracts. The Contracts are now obligations of Pacific
Life.
ANNUAL SEPARATE ACCOUNT AND FUND EXPENSES
The purpose of the information presented below to assist investors in
understanding the various costs and expenses borne directly and indirectly by
Owners of the Contracts with Accumulated Value allocated to the Variable
Accounts. The table reflects contractual charges, expenses of the Separate
Account, and charges and expenses of the Fund. Expenses shown under "Contract
Owner Transaction Expenses" and "The Mortality Expense Risk Fees" are
specified under the terms of the Contract and are fixed. Expenses shown under
"Account Fees and Expenses" may vary, and expenses shown under "Fund Annual
Expenses After Expense Limitation" are estimated expenses of the Fund; Fund
expenses are not specified under the terms of the Contract and may vary from
year to year. The table does not reflect premium taxes that may be imposed by
various jurisdictions. See "Premium Taxes". The information contained in the
table is not generally applicable to amounts allocated to the Fixed Account
(although certain contractual charges also apply to this Account).
For a further description of a Contract's costs and expenses, see "Charges
and Expenses". For a more complete description of the Fund's costs and
expenses, see the Fund Prospectus, which accompanies this Prospectus.
8
<PAGE>
CONTRACT OWNER TRANSACTION EXPENSES
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge is imposed upon amounts attributable to
premium payments withdrawn in excess of 10% of the Contract Value during any
contract year. The charge decreases 1% each year and in no event will the
charge exceed 5% of the aggregate premium payments.
<TABLE>
<CAPTION>
CONTRIBUTION
YEAR OF PREMIUMS CHARGES
---------------- -------
<S> <C>
1 5%
2 4%
3 3%
4 2%
5 1%
6 and thereafter. 0%
</TABLE>
Annual contract maintenance charge--$30
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
<TABLE>
<CAPTION>
MORTALITY ACCOUNT TOTAL SEPARATE
EXPENSE RISK FEES AND ACCOUNT ANNUAL
FEES EXPENSES(1) EXPENSES
------------ ----------- --------------
<S> <C> <C> <C>
Variable Account I--Money Market Port-
folio.................. 1.19% 0.01% 1.20%
Variable Account II--Equity Portfolio.. 1.19% 0.01% 1.20%
Variable Account III--Bond and Income
Portfolio.............. 1.19% 0.01% 1.20%
Variable Account IV--Government Securi-
ties Portfolio......... 1.19% 0.01% 1.20%
Variable Account VII--Equity Income
Portfolio.............. 1.19% 0.01% 1.20%
Variable Account IX--Multi-Strategy
Portfolio.............. 1.19% 0.01% 1.20%
Variable Account X--Managed Bond Port-
folio.................. 1.19% 0.01% 1.20%
Variable Account XI--High Yield Bond
Portfolio.............. 1.19% 0.01% 1.20%
Variable Account XII--Equity Index
Portfolio.............. 1.19% 0.01% 1.20%
Variable Account XIII--International
Portfolio.............. 1.19% 0.01% 1.20%
Variable Account XIV--Growth LT Portfo-
lio.................... 1.19% 0.01% 1.20%
</TABLE>
FUND ANNUAL EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
ADVISORY AND TOTAL FUND
MANAGEMENT OTHER OPERATING
FEES EXPENSES EXPENSES(2)
------------ ----------- --------------
<S> <C> <C> <C>
Money Market Portfolio................. .40% .08% .48%
Equity Portfolio....................... .65% .08% .73%
Bond and Income Portfolio.............. .60% .09% .69%
Government Securities Portfolio........ .60% .10% .70%
Equity Income Portfolio................ .65% .08% .73%
Multi Strategy Portfolio............... .65% .11% .76%
Managed Bond Portfolio................. .60% .09% .69%
High Yield Bond Portfolio.............. .60% .10% .70%
Equity Index Portfolio................. .21% .08% .29%
International Portfolio................ .85% .21% 1.06%
Growth LT Portfolio.................... .75% .10% .85%
</TABLE>
9
<PAGE>
EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses per
$1,000 of initial premium assuming an initial
premium of $25,000, assuming (1) 5% annual
return and (2) redemption at the end of each
time period:
Variable Account I
- --Money Market................................ $65 $ 86 $107 $209
Variable Account II
- --Equity...................................... $67 $ 93 $120 $236
Variable Account III
- --Bond and Income............................. $67 $ 92 $118 $232
Variable Account IV
- --Government Securities....................... $67 $ 93 $118 $233
Variable Account VII
- --Equity Income............................... $67 $ 93 $120 $236
Variable Account IX
- --Multi Strategy.............................. $67 $ 94 $121 $239
Variable Account X
- --Managed Bond................................ $67 $ 92 $118 $232
Variable Account XI
- --High Yield Bond............................. $67 $ 93 $118 $233
Variable Account XII
- --Equity Index................................ $63 $ 80 $ 97 $189
Variable Account XIII
- --International............................... $70 $103 $137 $270
Variable Account XIV
- --Growth LT................................... $68 $ 97 $126 $248
You would pay the following expenses per
$1,000 of initial premium assuming an initial
premium of $25,000, assuming (1) 5% annual
return and (2) annuitization at the end of
each time period:
Variable Account I
- --Money Market................................ $65 $ 86 $107 $209
Variable Account II
- --Equity...................................... $67 $ 93 $120 $236
Variable Account III
- --Bond and Income............................. $67 $ 92 $118 $232
Variable Account IV
- --Government Securities....................... $67 $ 93 $118 $233
Variable Account VII
- --Equity Income............................... $67 $ 93 $120 $236
Variable Account IX
- --Multi Strategy.............................. $67 $ 94 $121 $239
Variable Account X
- --Managed Bond................................ $67 $ 92 $118 $232
Variable Account XI
- --High Yield Bond............................. $67 $ 93 $118 $233
Variable Account XII
- --Equity Index................................ $63 $ 80 $ 97 $189
Variable Account XIII
- --International............................... $70 $103 $137 $270
Variable Account XIV
- --Growth LT................................... $68 $ 97 $126 $248
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses per
$1,000 of initial premium assuming an initial
premium of $25,000, assuming (1) 5% annual
return and (2) no redemption of the Contract:
Variable Account I
- --Money Market................................ $18 $56 $ 97 $209
Variable Account II
- --Equity...................................... $21 $64 $110 $236
Variable Account III
- --Bond and Income............................. $20 $63 $108 $232
Variable Account IV
- --Government Securities....................... $20 $63 $108 $233
Variable Account VII
- --Equity Income............................... $21 $64 $110 $236
Variable Account IX
- --Multi-Strategy.............................. $21 $65 $111 $239
Variable Account X
- --Managed Bond................................ $20 $63 $108 $232
Variable Account XI
- --High Yield Bond............................. $20 $63 $108 $233
Variable Account XII
- --Equity Index................................ $16 $51 $ 87 $189
Variable Account XIII
- --International............................... $24 $74 $127 $270
Variable Account XIV
- --Growth LT................................... $22 $68 $116 $248
</TABLE>
- --------
(1) Based on the year ended December 31, 1996. See "Other Expenses" and
"Charges and Expenses".
(2) The expenses listed for the Fund Portfolios reflect current expenses for
the year ending December 31, 1996 adjusted to reflect a decrease in fees
for certain service providers for certain fund operating expenses. Actual
total expenses before the adjustment for the year ended December 31, 1996,
were: Money Market Portfolio--0.50%; Equity Portfolio--0.74%; Bond and
Income Portfolio--0.71%; Government Securities Portfolio--0.72%; Equity
Income Portfolio--0.75%; Multi-Strategy Portfolio--0.78%; Managed Bond
Portfolio--0.71%; High Yield Bond Portfolio--0.71%; Equity Index
Portfolio--0.31%; International Portfolio--1.07% and Growth LT Portfolio--
0.87%.
The purpose of this table is to assist the Contract Owner in understanding
the various costs and expenses that a Contract Owner will bear directly and
indirectly. The expenses of the Separate Account and the Fund, the underlying
investment vehicle, are included in the table. For additional information on
Separate Account expenses, including premium taxes payable on the Annuity Date,
see the section, "Charges and Expenses" of this Prospectus. A copy of the
prospectus for the Fund accompanies or precedes this Prospectus and contains
additional information on the Fund and its expenses.
On the Annuity Date, the proceeds attributable to the Variable Accounts are
transferred to the General Account of the Company. Thereafter, the Annuitant
will receive payments based upon the Contract proceeds, the Payment Plan
selected and the annuity tables in the contract. The Variable Account expenses
described in this table would not apply to annuity payments.
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or lesser than those shown. The
example assumes a $1,000 investment and a 5% annual rate of return. In
addition, the example reflects an average initial premium of approximately
$25,000 and a prorata portion of the annual maintenance charges. The assumed 5%
return is hypothetical and should not be considered a representation of past or
future actual returns, which may be greater or lesser than the assumed amount.
11
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables present financial highlights with respect to each
Variable Account of the Pacific Corinthian Variable Separate Account. The
information in the tables for the years or periods ended December 31, 1987
through 1996 is included in the Pacific Corinthian Variable Separate Account's
financial statements The information for the years or periods ended December
31, 1994 through 1996 were audited by Deloitte and Touche LLP, independent
auditors. The information for the years or periods ended December 31, 1987
through 1993 were audited by different independent auditors. The tables should
be read in conjunction with the Pacific Corinthian Variable Separate Account's
financial statements, which are in the Pacific Corinthian Variable Separate
Account's Annual Report dated as of December 31, 1996.
SELECTED ACCUMULATION UNIT* INFORMATION+
Selected accumulation unit information as of the year ended December 31st for
each period:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATION
UNIT VALUE AT
BEGINNING OF
PERIOD:
Variable Account
I--Money
Market......... $1.753 $1.681 $1.647 $1.628 $1.604 $1.541 $1.448 $1.345 $1.270
Variable Account
II--Equity..... $4.117 $3.366 $3.509 $3.044 $2.898 $2.263 $2.351 $1.829 $1.727
Variable Account
III--Bond and
Income......... $3.958 $2.996 $3.311 $2.798 $2.621 $2.136 $2.094 $1.810 $1.723
Variable Account
IV--Government
Securities..... $1.804 $1.538 $1.584 $1.479 $1.402 $1.224 $1.152 $1.031 $0.999
Variable Account
VII--Equity
Income......... $1.740 $1.338 $1.494 $1.389 $1.309 $1.080 $1.028 $1.000(c)
Variable Account
IX--Multi-
Strategy++..... $1.677 $1.355 $1.394 $1.280 $1.263 $1.046 $1.008 $1.000(c)
Variable Account
X--Managed
Bond........... $1.167 $1.000(e)
Variable Account
XI--High Yield
Bond........... $1.151 $1.000(f)
Variable Account
XII--Equity
Index.......... $1.334 $1.000(e)
Variable Account
XIII--
International.. $1.103 $1.000(d)
Variable Account
XIV--Growth LT. $1.306 $1.000(e)
- ------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION
UNIT VALUE AT
END OF PERIOD:
Variable Account
I--Money
Market......... $1.819 $1.753 $1.681 $1.647 $1.628 $1.604 $1.541 $1.448 $1.345
Variable Account
II--Equity..... $5.208 $4.117 $3.366 $3.509 $3.044 $2.898 $2.263 $2.351 $1.829
Variable Account
III--Bond and
Income......... $3.879 $3.958 $2.996 $3.311 $2.798 $2.621 $2.136 $2.094 $1.810
Variable Account
IV--Government
Securities..... $1.835 $1.804 $1.538 $1.584 $1.479 $1.402 $1.224 $1.152 $1.031
Variable Account
VII--Equity
Income......... $2.053 $1.740 $1.338 $1.494 $1.389 $1.309 $1.080 $1.028
Variable Account
IX--Multi-
Strategy++..... $1.865 $1.677 $1.355 $1.394 $1.280 $1.263 $1.046 $1.008
Variable Account
X--Managed
Bond........... $1.202 $1.167
Variable Account
XI--High Yield
Bond........... $1.266 $1.151
Variable Account
XII--Equity
Index.......... $1.612 $1.334
Variable Account
XIII--
International.. $1.328 $1.103
Variable Account
XIV--Growth LT. $1.520 $1.306
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1987
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ACCUMULATION
UNIT VALUE AT
BEGINNING OF
PERIOD:
Variable Account
I--Money
Market......... $1.210(a)
Variable Account
II--Equity..... $1.711(a)
Variable Account
III--Bond and
Income......... $1.769(a)
Variable Account
IV--Government
Securities..... $1.000(b)
Variable Account
VII--Equity
Income.........
Variable Account
IX--Multi-
Strategy++.....
Variable Account
X--Managed
Bond...........
Variable Account
XI--High Yield
Bond...........
Variable Account
XII--Equity
Index..........
Variable Account
XIII--
International..
Variable Account
XIV--Growth LT.
- ------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION
UNIT VALUE AT
END OF PERIOD:
Variable Account
I--Money
Market......... $1.270
Variable Account
II--Equity..... $1.727
Variable Account
III--Bond and
Income......... $1.723
Variable Account
IV--Government
Securities..... $0.999
Variable Account
VII--Equity
Income.........
Variable Account
IX--Multi-
Strategy++.....
Variable Account
X--Managed
Bond...........
Variable Account
XI--High Yield
Bond...........
Variable Account
XII--Equity
Index..........
Variable Account
XIII--
International..
Variable Account
XIV--Growth LT.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Balance of table and footnotes on next page.)
12
<PAGE>
(Continued from previous page.)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NUMBER OF
ACCUMULATION
UNITS
OUTSTANDING AT
END OF PERIOD:
Variable Account
I--Money
Market......... 3,299,125 3,371,947 4,854,157 5,509,003 6,843,695 10,299,671 31,308,091 33,886,239 37,173,015
Variable Account
II--Equity..... 17,691,032 19,004,171 21,655,973 24,107,346 26,687,310 36,873,827 78,671,563 101,955,442 128,437,748
Variable Account
III--Bond and
Income......... 8,418,032 9,619,803 11,329,001 13,036,249 15,302,617 22,642,515 50,717,710 71,309,683 89,321,253
Variable Account
IV--Government
Securities..... 756,267 1,101,310 1,466,345 1,657,615 1,758,324 2,719,819 4,972,484 2,918,530 1,680,292
Variable Account
VII--Equity
Income......... 10,099,851 11,737,786 16,013,336 5,084,404 5,092,161 6,155,320 10,131,006 4,659,556
Variable Account
IX--Multi-
Strategy++..... 9,682,862 11,026,979 14,528,472 17,701,484 20,903,707 27,842,901 39,928,927 16,900,702
Variable Account
X--Managed
Bond........... 39,109 106,463
Variable Account
XI--High Yield
Bond........... 67,250 67,350
Variable Account
XII--Equity
Index.......... 255,873 224,355
Variable Account
XIII--
International.. 509,025 316,969
Variable Account
XIV--Growth LT. 936,498 619,020
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1987
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
NUMBER OF
ACCUMULATION
UNITS
OUTSTANDING AT
END OF PERIOD:
Variable Account
I--Money
Market......... 48,228,153
Variable Account
II--Equity..... 182,282,075
Variable Account
III--Bond and
Income......... 114,959,885
Variable Account
IV--Government
Securities..... 222,746
Variable Account
VII--Equity
Income.........
Variable Account
IX--Multi-
Strategy++.....
Variable Account
X--Managed
Bond...........
Variable Account
XI--High Yield
Bond...........
Variable Account
XII--Equity
Index..........
Variable Account
XIII--
International..
Variable Account
XIV--Growth LT.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* An Accumulation Unit is the unit of measure used to calculate the value of a
Contract Owner's interests in a Variable Account during the Accumulation
Period.
+ On December 31, 1992, the Pacific Corinthian Variable Separate Account
assumed the assets and liabilities of the Shearson VIP Separate Account in
accordance with the Rehabilitation Plan and accordingly, the information
presented up to December 31, 1992 is for the Shearson VIP Separate Account,
the Separate Account's predecessor for accounting purposes. On October 30,
1997, Pacific Corinthian Life Insurance Company was merged into Pacific
Life. In connection with the Merger, the Pacific Corinthian Variable
Separate Account was transferred intact to Pacific Life.
++ On December 31, 1994, the Variable Account name was changed to the Multi-
Strategy Variable Account when the underlying investment changed from the
Balanced Variable Account of the Shearson VIP Fund to the Multi-Strategy
Portfolio of the Pacific Select Fund.
Dates Variable Accounts began operations:(a) 08/31/83, (b)10/05/87, (c)
10/17/89, (d) 01/19/95, (e) 01/20/95 and (f) 02/03/95.
13
<PAGE>
PACIFIC LIFE INSURANCE COMPANY
Pacific Life is a life insurance company that is domiciled in California.
Pacific Life's operations include both life insurance and annuity products as
well as financial and retirement services. As of the end of 1996, Pacific Life
had over $50.8 billion of individual life insurance in force and total
admitted assets of approximately $21.2 billion. Pacific Life has been ranked
according to admitted assets as the 22nd largest life insurance carrier in the
nation for 1996. Together with its subsidiaries and affiliated enterprises,
Pacific Life has total assets and funds under management of over $136 billion.
Pacific Life is authorized to conduct life insurance and annuity business in
the District of Columbia and all states except New York. Pacific Life's
principal offices are located at 700 Newport Center Drive, Newport Beach,
California 92660.
Pacific Life was originally organized on January 2, 1868, under the name
"Pacific Mutual Life Insurance Company of California" and reincorporated as
"Pacific Mutual Life Insurance Company" on July 22, 1936. On September 1,
1997, Pacific Life converted from a mutual life insurance company to a stock
life insurance company ultimately controlled by a mutual holding company and
was authorized by California regulatory authorities to change our name to
Pacific Life Insurance Company. As part of the process, we have applied for
authorization to do business as Pacific Life Insurance Company in all states
in which we do business. It may be necessary for us to use forms bearing the
name Pacific Mutual Life Insurance Company at some times and places and forms
bearing the name Pacific Life Insurance Company at other times and places
during the transition period. Any request received in proper order or any
transaction made on a form bearing either of these names will be honored.
Pacific Life is a subsidiary of Pacific LifeCorp, a holding company which,
in turn, is a subsidiary of Pacific Mutual Holding Company, a mutual holding
company. Under their respective charters, Pacific Mutual Holding Company must
always hold at least 51% of the outstanding voting stock of Pacific LifeCorp,
and Pacific LifeCorp must always own 100% of the voting stock of Pacific Life.
Owners of the Contracts and Pacific Life's annuity contracts and life
insurance policies have certain membership interests in Pacific Mutual Holding
Company, consisting principally of the right to vote on the election of the
Board of Directors of the mutual holding company and on other matters, and
certain rights upon liquidation or dissolution of the mutual holding company.
The principal underwriter for the Contracts is Pacific Mutual Distributors,
Inc. ("PMD"). PMD is registered as a broker-dealer with the SEC and is a
wholly-owned subsidiary of Pacific Mutual Life. PMD is located at 700 Newport
Center Drive, Newport Beach, California, 92660.
THE SEPARATE ACCOUNT
The Separate Account is registered with the U.S. Securities and Exchange
Commission as a unit investment trust. Such registration does not involve any
supervision by the Commission of the administration or investment practices or
policies of the Separate Account or of any of the Variable Accounts.
The Pacific Corinthian Variable Separate Account was previously established
by a resolution of the Board of Directors of Pacific Corinthian Life Insurance
Company ("Pacific Corinthian") adopted on July 22, 1992, as the successor to
the Shearson VIP Separate Account of First Capital Life Insurance Company--In
Conservation ("Shearson VIP Separate Account") established July 29, 1981. On
December 31, 1992 the assets and liabilities of the Shearson VIP Separate
Account were assumed by the Pacific Corinthian Variable Separate Account
pursuant to an Amended and Restated Assumption Reinsurance Agreement in
accordance with the Rehabilitation Plan of First Capital Life Insurance
Company--In Conservation. Pursuant to the Rehabilitation Plan, on October 30,
1997 Pacific Corinthian was merged into Pacific Life (the "Merger"). In
connection with the Merger, the assets and liabilities of Pacific Corinthian,
including the Pacific Corinthian Variable Separate Account, became the assets
and liabilities of Pacific Life. Under the Merger, the Pacific Corinthian
Variable Separate Account was transferred intact to Pacific Life and continues
to operate as the Separate Account.
14
<PAGE>
The Separate Account is divided into subaccounts referred to as Variable
Accounts. Each Variable Account invests in shares of a designated Portfolio of
the underlying Fund: the Money Market Portfolio (Variable Account I), the
Equity Portfolio (Variable Account II), the Bond and Income Portfolio (Variable
Account III), the Government Securities Portfolio (Variable Account IV), the
Equity Income Portfolio (Variable Account VII), the Multi-Strategy Portfolio
(Variable Account IX), the Managed Bond Portfolio (Variable Account X), the
High Yield Bond Portfolio (Variable Account XI), the Equity Index Portfolio
(Variable Account XII), the International Portfolio (Variable Account XIII),
and the Growth LT Portfolio (Variable Account XIV). The Board of Directors of
the Company may establish additional Variable Accounts within the Separate
Account at any time. Each Variable Account is administered and accounted for as
part of the general business of the Company, but the income and gains or losses
of each Variable Account, whether realized or not, are credited to or charged
against the assets held in that Variable Account, without regard to the income
or capital gains or losses of any other Variable Account or of Pacific Life.
The assets of the Separate Account are not chargeable with liabilities arising
out of any other business conducted by Pacific Life. However, all obligations
arising under the Contract, including the promise to make annuity payments, are
general corporate obligations of the Company, and all of the Company's assets
are available to meet its expenses and obligations under the Contract.
THE PACIFIC SELECT FUND
PACIFIC SELECT FUND
The Fund is an open-end, diversified management investment company of the
series type organized as a Massachusetts business trust on May 4, 1987. The
Fund currently offers eleven separate portfolios for purchase by the Separate
Account, each with its own investment objective or objectives and investment
policies.
Shares of each Portfolio currently are offered only to separate accounts of
Pacific Life to serve as the underlying investment medium for variable annuity
and variable life insurance contracts. However, shares of each Portfolio may be
offered in the future to other separate accounts established by Pacific Life or
sold to separate accounts of other affiliated or unaffiliated insurance
companies.
15
<PAGE>
THE INVESTMENT ADVISER AND PORTFOLIO MANAGERS
Pacific Life Insurance Company, located at 700 Newport Center Drive, Newport
Beach, California 92660, serves as Investment Adviser to each of the Portfolios
of the Fund. Pacific Life is registered with the Commission as an investment
adviser. Pacific Life manages the Money Market and High Yield Bond Portfolios,
for which Pacific Life formulates and implements continuing programs for the
purchase and sale of securities in compliance with the investment objective,
policies, and restrictions of each of these Portfolios, and is responsible for
the day-to-day decisions to buy and sell securities for these Portfolios. For
the other Portfolios, the Investment Adviser and the Fund have engaged other
firms to serve as Portfolio Managers under the supervision of Pacific Life.
The following chart summarizes some basic data about each Portfolio of the
Fund. There can be no assurance that any Portfolio will achieve its objective.
More detailed information is contained in the accompanying prospectus of the
Fund, including information on the risks associated with the investments and
investment techniques of each of the Portfolios.
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ CAREFULLY
BEFORE INVESTING.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
<C> <C> <S> <C>
Money Market Current income consistent Highest quality money Pacific Life
with preservation of capital market instruments.
- --------------------------------------------------------------------------------------------------------
High Yield Bond High level of current income Intermediate and long- Pacific Life
term, high-yielding,
lower and medium quality
(high risk) fixed-income
securities.
- --------------------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific Investment
consistent with prudent marketable debt Management Company
investment management securities. Will
normally maintain an
average portfolio
duration of 3-7 years.
- --------------------------------------------------------------------------------------------------------
Government Maximize total return U.S. Government Pacific Investment
Securities consistent with prudent securities including Management Company
investment management futures and options
thereon and high-grade
corporate debt
securities. Will
normally maintain an
average portfolio
duration of 3-7 years.
- --------------------------------------------------------------------------------------------------------
Growth LT Long-term growth of capital Common stock. Janus Capital Corporation
consistent with the
preservation of capital
- --------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Dividend paying common J.P. Morgan Investment
and income stock. Management Inc.
- --------------------------------------------------------------------------------------------------------
Multi-Strategy High total return Equity and fixed income J.P. Morgan Investment
securities. Management Inc.
- --------------------------------------------------------------------------------------------------------
Equity Capital appreciation Common stocks and Greenwich Street Advisors
securities convertible
into or exchangeable for
common stocks.
- --------------------------------------------------------------------------------------------------------
Bond and High level of current Investment grade debt Greenwich Street Advisors
Income income consistent with securities.
prudent investment
management and
preservation of capital
- --------------------------------------------------------------------------------------------------------
Equity Index Provide investment results Stocks included in the Bankers Trust Company
that correspond to the total S&P 500.
return performance of
common stocks publicly traded
in the U.S.
- --------------------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Morgan Stanley Asset
appreciation corporations domiciled Management Inc.
outside the United
States.
</TABLE>
16
<PAGE>
CHARGES AND EXPENSES
CONTINGENT DEFERRED SALES CHARGE: Except as set forth below, a Contingent
Deferred Sales Charge ("Charge") is imposed on the dollar amount of any partial
or complete withdrawal of amounts attributable to premium payments under the
Contract during the Accumulation Period and on annuitization. Where there is a
partial withdrawal, the Charge is deducted from the remaining balance in the
Account. Where there are insufficient funds in the Account to cover the Charge,
the Charge is deducted from the amount withdrawn. One partial withdrawal per
Contract Year will be exempt from any Charge being imposed, provided the amount
of such withdrawal does not exceed 10% of the Contract Value at the time of
such withdrawal. The amount of any withdrawal in excess of 10% of the Contract
Value, and the entire amount of the second or subsequent withdrawal in the same
Contract Year, may be subject to the Charge. After consideration for any
withdrawal amount exempt from the Charge, in no event will the Charge imposed
exceed 5% of the aggregate premium payments.
When imposed, the Charge is based on the Contribution Year of each premium
payment at the following rates:
<TABLE>
<CAPTION>
WITHDRAWAL
CONTRIBUTION YEAR OF PREMIUM CHARGE
---------------------------- ----------
<S> <C>
1.............................................................. 5%
2.............................................................. 4%
3.............................................................. 3%
4.............................................................. 2%
5.............................................................. 1%
6 and thereafter............................................... 0%
</TABLE>
No Charge is applied in the sixth Contribution Year and thereafter.
For purposes of determining the amount of any Charge, withdrawals will be
attributed to premium payments on a first-in, first-out basis, even if the
Contract Owner elects to redeem amounts allocated to an Account (including the
Fixed Account) other than the Account to which such premium payment was
allocated. Any charge will be apportioned among the Variable Accounts or the
Fixed Account in the same proportion as the withdrawal is allocated.
The following example illustrates the operation of the Charge: A Contract
Owner makes premium payments of $5,000 in the first Contract Year, $2,000 in
the second Contract Year and $4,000 in the third Contract Year. Based on the
investment performance of the Variable Accounts to which the Contract Value is
allocated, the Contract Value has grown to $14,500 by the middle of the fourth
Contract Year. In that event, the Contract Owner may make one withdrawal of an
amount up to $1,450 (10% of the current Contract Value of $14,500) during the
fourth year without imposition of the Charge.
EXAMPLE 1: If the Contract Owner should make a partial withdrawal in the
amount of $6,000 at that time, the Charge would be imposed as follows:
<TABLE>
<CAPTION>
BASIS OF RATE OF
CHARGE CHARGE EXPLANATION
-------- ------- -----------
<C> <C> <S>
$1,450 None (10% of current Contract Value)
$4,550 2% (excess applied against $5,000 premium
in Contract Year 1 at Contribution Year
4 rate)
</TABLE>
17
<PAGE>
EXAMPLE 2: If the Contract Owner should make a partial withdrawal in the
amount of $13,000 at that time, the Charge would be imposed as follows:
<TABLE>
<CAPTION>
BASIS OF RATE OF
CHARGE CHARGE EXPLANATION
-------- ------- -----------
<C> <C> <S>
$1,450 None (10% of current Contract Value)
$5,000 2% (excess applied against $5,000 premium
in Contract Year 1 at Contribution Year
4 rate)
$2,000 3% (excess applied against $2,000 premium
in Contract Year 2 at Contribution Year
3 rate)
$4,000 4% (excess applied against $4,000 premium
in Contract Year 3 at Contribution Year
2 rate)
$ 550 None (no Charge is imposed on an amount in
excess of aggregate premium received)
</TABLE>
The Charge also applies to any annuitization where the Contract Value
includes an amount attributable to a premium payment for which the sixth
Contribution Year has not yet been reached. The amount of the Charge will be
determined in the same manner as for a withdrawal. In no event will the Charge
be imposed on an annuitization if a Payment Plan offered under the Contract and
Prospectus is elected or if the proceeds are applied to purchase a Single
Premium Immediate Annuity then offered by the Company or an affiliate thereof
and the annuity payment period is five years or longer.
The proceeds of the Charge are intended for use by the Company to cover
certain expenses relating to the distribution of the Contracts, including any
commissions to sales personnel and other promotional expenses. Pacific Life may
realize a profit from this charge to the extent it is not needed to cover
distribution expenses.
CONTRACT MAINTENANCE CHARGE: The Company has primary responsibility for
administration of the Contract and the Separate Account. During the
Accumulation Period, the Company assesses a Contract Maintenance Charge from
each Contract on the Contract Date and on December 31 of each calendar year,
whether or not any premium payment has been made during the year. For the
calendar year in which a Contract initially is purchased, the Contract
Maintenance Charge will be prorated so that the Contract will be assessed only
for the number of days remaining in the calendar year after the Contract Date.
If a Contract is surrendered on a date other than December 31, there will be no
refund of any portion of the Contract Maintenance Charge.
This charge is designed to reimburse the Company for administrative expenses
related to the maintenance of each Contract, rather than the expense of
administration of the Separate Account.
At the present time, the Contract Maintenance Charge is $30 per calendar year
and is apportioned equally among the Accounts to which the Contract Value is
allocated. With respect to the Variable Accounts, the Charge is assessed by
cancelling Accumulation Units.
The Contract Maintenance Charge imposed during the Accumulation Period is not
guaranteed and may be changed in future years. However, with respect to
Contracts issued in Pennsylvania, the Company has undertaken that any Contract
Maintenance Charge imposed may not exceed $50.
The Company does not anticipate that it will make any profit on the Contract
Maintenance Charge.
CHARGE FOR MORTALITY RISK AND EXPENSE RISK OF THE SEPARATE ACCOUNT: A charge
equal to 1.19% per year of each Variable Account's net assets is accrued daily
and paid monthly in order to reimburse the Company for undertaking the
mortality risk under the Contract and for bearing certain expense risks of the
Separate Account. Of the total annual charge, approximately 1.00% is
attributable to the mortality risk and .19% is attributable to the expense
risk.
18
<PAGE>
The mortality risk borne by the Company under the Contract results from (1)
its guarantee that during the Accumulation Period on or before the fifth
contract anniversary the death benefit will be at least equal to the aggregate
premium payments received by the Company, less any reductions in the Contract
Value caused by withdrawals, and after the fifth contract anniversary the death
benefit proceeds will be the Contract Value, or, if larger, the minimum
guaranteed death benefit, and (2) its guarantee that annuity payments will not
be affected by a change in the death rate assumed in establishing its
obligation to provide annuity payments under the Contract.
The expense risk borne by the Company results from its guarantee that
ordinary expenses borne directly by the Separate Account will not exceed 0.25%
of average daily net assets on an annual basis. The Company further guarantees
that the ordinary operating expenses of a Variable Account together with the
operating expenses incurred by its underlying Fund Portfolio, exclusive of
advisory and management fees, interest, taxes, brokerage commissions,
transaction costs or extraordinary expenses, will not exceed 0.6% of average
daily net assets annually after consideration for any adjustment by the Fund's
Investment Adviser and Manager for Fund expenses in excess of state expense
limitations, except that additional custodial costs associated with holding
foreign securities and foreign taxes on dividends, interests and gains will
also be excluded with respect to the underlying International Portfolio of the
Fund.
Pacific Life may ultimately realize a profit from this charge to the extent
it is not needed to cover mortality and administrative expenses, but Pacific
Life may realize a loss to the extent the charge is not sufficient.
OTHER EXPENSES: The Separate Account bears its own expenses, including fees
and expenses for accounting and legal costs, data processing costs,
registration fees, and expenses of preparation and distribution to Contract
Owners of reports and prospectuses. Such expenses will be allocated among the
Variable Accounts based on their relative net assets, unless they do not relate
to all the Variable Accounts.
The deductions and expenses of the underlying Fund are paid out of the assets
of the Fund and are described in the Fund's prospectus and in the section,
"Annual Separate Account and Fund Expenses" in this Prospectus.
PREMIUM TAXES: Any premium taxes imposed by states or municipalities will be
paid by the Company when due. The dollar amount of any premium tax will be
deducted from the Contract Value at the Annuity Date if the Contract is
annuitized. Premium taxes currently imposed range from 0.5% to 3.5%.
THE CONTRACT
The Contract is a flexible premium deferred annuity and variable accumulation
contract. The Contract was previously made available in connection with either
a retirement plan qualified under Sections 401, 403(a), 403(b), 408 or 457 of
the Internal Revenue Code ("Qualified Plan") or an individual purchaser
("Nonqualified Plan").
A. THE ACCUMULATION PERIOD
VALUATION
VALUATION OF AN ACCUMULATION UNIT: The value of an Accumulation Unit will
vary depending upon the investment experience of shares of the corresponding
Fund Portfolio. The Accumulation Unit value also is affected by expenses of the
Variable Account. The value of an Accumulation Unit for a Variable Account on
any Valuation Day is the value of the Unit determined on the Valuation Day
immediately preceding that Valuation Day multiplied by the net investment
factor for the Valuation Period.
19
<PAGE>
For each Valuation Period, a gross investment rate is determined for each
Variable Account. This rate is equal to (a) the change in the value of the
underlying Fund Series' shares and, if applicable, the value of any shares
resulting from reinvestment of a dividend on a Fund Series' shares, divided by
(b) the value of the underlying Fund Series' shares at the beginning of the
Valuation Period. The gross investment rate for any Valuation Period may be
positive or negative.
A net investment rate for each Variable Account for the Valuation Period is
then determined by deducting from the gross investment rate the daily accrual
for the charge for mortality and expense risks payable to the Company and
direct expenses of the Separate Account.
The net investment factor for each Variable Account for the Valuation Period
is then determined by adding 1.0 to the net investment rate for the Valuation
Period. The net investment factor for the Valuation Period may be greater or
less than 1.0, with the result that the value of an Accumulation Unit of that
Variable Account may increase or decrease during the Valuation Period.
NET ASSET VALUE: The net assets of the Variable Accounts are valued at or
about 4:00 P.M., New York City time, on each Valuation Day.
ALLOCATION OF PREMIUMS, TRANSFERS AND WITHDRAWALS
ALLOCATION OF PREMIUMS: Additional premium payments under the Contracts may
be allocated among the Variable Accounts or the Fixed Account. The minimum
additional premium payment is $500 for a Nonqualified Plan and $50 for a
Qualified Plan. The premium payments are priced with regard to the applicable
Variable Account at the Accumulation Unit Value next determined following
receipt of the premium payment. A premium payment will be allocated in
accordance with the most recent allocation instructions received from the
Contract Owner. Contract Owners may change their premium payment allocation by
telephone if a properly completed and signed Telephone Authorization Form is on
file at the Company's Annuity Service Office. The Company reserves the right to
require that a Contract Owner's allocation to any particular Variable Account
or the Fixed Account meet a certain minimum amount.
TRANSFERS: Prior to the Annuity Date, the Contract Owner may transfer all or
a part of the Accumulation Value among the Variable Accounts and the Fixed
Account. Transfers may be made by wire if authorized by the Contract Owner on
the application or if a Telephone Authorization Form has been properly
completed, signed and is on file at the Company's Annuity Service Office. The
minimum partial transfer amount is $500. No partial transfer may be made if,
after such partial transfer, the remaining Accumulation Value would be less
than $500 in any Variable Account or $1,000 in the Fixed Account.
Each such transfer will be made at the Accumulation Unit value next
determined following receipt of written notice at the Annuity Service Office of
the Company. With respect to the Fixed Account, such transfers are limited to
only one during each Contract Year. The Company reserves the right to limit the
number and frequency of transfers between Variable Accounts, and to impose a
fee or charge on transfers. With regard to Contracts issued in Pennsylvania,
any fee or charge imposed on a transfer will not exceed $50.
WITHDRAWALS: Contract Owners may withdraw the Accumulation Value allocated to
the Separate Account at any time and receive 100% of the Accumulation Value in
the Variable Accounts, net of any applicable Contingent Deferred Sales Charge.
Withdrawal of Accumulation Value from the Fixed Account is subject to
limitations as described under "The Fixed Account".
Withdrawals are permitted while the Contract is in force during the
Annuitant's life, except that no withdrawal is permitted following the
commencement of annuity payments under Payment Plans D, E, or F (see "Optional
Payment Plans") and before the death of the Owner, provided that with respect
to Contracts originally issued after January 18, 1985, if there are joint
Owners and the joint Owners are husband and wife, then on the death of the
survivor thereof; further provided, if the joint Owners are not husband and
wife, then on the death of the first joint Owner.
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The Contract Owner may select the Variable Account or Accounts from which a
withdrawal is to be made, provided that no partial withdrawal of the
Accumulation Value in an Account may be made if, as a result, the Contract
would have a remaining Accumulation Value of less than $500 in any Variable
Account. In addition, the minimum partial withdrawal that can be made is $500.
Election to withdraw must be in writing and a dollar amount or percentage of
withdrawal to be allocated to the Variable Accounts or the Fixed Account should
be indicated, provided that an Accumulation Value of at least $500 remains in
any Variable Account ($1,000 in the Fixed Account) after any partial
withdrawal.
Payment upon withdrawal with respect to Accumulation Value in the Variable
Accounts generally will be made within seven days from the date the request is
received by the Company and will be based on the value next determined after
the request for full or partial withdrawal has been received. If the request is
received on a day other than a Valuation Day, the value will be determined on
the first Valuation Day after receipt of the request.
See "Federal Income Tax Status," for a discussion of the tax consequences of
withdrawal. Withdrawal may result in a Contingent Deferred Sales Charge being
imposed. (See "Contingent Deferred Sales Charge.")
DELAY OF PAYMENTS ON TRANSFER OR WITHDRAWAL: With respect to the Accumulation
Value in each Variable Account, the Company may suspend the right of transfer
or withdrawal or delay payment on transfer or withdrawal for more than seven
days only:
1. when the New York Stock Exchange is closed;
2. when trading on the New York Stock Exchange is restricted;
3. when an emergency exists as a result of which disposal of securities
held in the Variable Account is not reasonably practicable or it is not
reasonably practicable to determine the value of a Variable Account's net
assets; or
4. during any other period when the Securities and Exchange Commission,
by order, so requires for the protection of Contract Owners, provided that
applicable rules, regulations and orders of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (2) and
(3) exist.
TEXAS OPTIONAL RETIREMENT PROGRAM: Under the terms of the Optional Retirement
Program, if a participant makes the required contribution, the State of Texas
will contribute a specified amount to the participant's retirement account. If
a participant does not commence the second year of participation in the plan as
a "faculty member" as defined in Title 110B of the State of Texas Statutes, the
Company will return the State's contribution. If a participant does begin a
second year of participation, the employer's first year contributions will then
be applied as a purchase payment under the Qualified Contract, as will each
subsequent employer's contributions.
Title 8, Section 830.105 of the Texas Government Code restricts withdrawal of
contributions and earnings in a variable annuity contract in the Texas Optional
Retirement Program (ORP) prior to (1) termination of employment in all Texas
public institutions of higher education, (2) retirement, (3) death, or (4) the
participant's attainment of age 70 1/2. A participant in the Texas ORP will
not, therefore, be entitled to make full or partial withdrawals under a
Contract unless one of the foregoing conditions has been satisfied. Appropriate
certification must be submitted to redeem the participant's account. The value
of such Qualified Contract may, however, be transferred to other contracts or
other carriers during the period of participation in the Program.
CONSTRAINTS ON DISTRIBUTIONS FROM SECTION 403(B) ANNUITY CONTRACTS: Section
403(b) of the Code permits public school employees and employees of certain
types of charitable, educational, and
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scientific organizations specified in Section 501(c)(3) of the Code to purchase
annuity contracts, and, subject to certain limitations, exclude the amount of
purchase payments from gross income for tax purposes. Section 403(b) imposes
restrictions on certain distributions from tax-sheltered annuity contracts
meeting the requirements of Section 403(b), and applies to tax years beginning
on or after January 1, 1989.
Section 403(b) requires that distributions from Section 403(b) tax-sheltered
annuities that are attributable to employee contributions made after December
31, 1988 under a salary reduction agreement not begin before the employee
reaches age 59 1/2, separates from service, dies, becomes disabled, or incurs a
hardship. Furthermore, distributions of gains attributable to such
contributions accrued after December 31, 1988 may not be made on account of
hardship. Hardship, for this purpose, is generally defined as an immediate and
heavy financial need, such as paying for medical expenses, the purchase of a
residence, or paying certain tuition expenses that may only be met by the
distribution. Pacific Corinthian Life will not be responsible for monitoring
policy distributions prior to 59 1/2.
A participant in a Contract purchased as a tax-sheltered Section 403(b)
annuity contract will not, therefore, be entitled to exercise the right of
withdrawal, as described in this Prospectus, in order to receive his or her
Accumulation Value attributable to contributions under a salary reduction
agreement or any gains credited to such participant after December 31, 1988
under the Contract unless one of the above-described conditions has been
satisfied. A participant's Accumulation Value in a Contract may be able to be
transferred to certain other investment alternatives meeting the requirements
of Section 403(b) that are available under an employer's Section 403(b)
arrangements.
Pursuant to Revenue Ruling 90-24, a direct transfer between issuers of an
amount representing all or part of an individual's interest in a Section 403(b)
annuity or custodial account is not a distribution subject to tax or to
premature distribution penalty, provided the funds transferred continue after
the transfer to be subject to distribution requirements at least as strict as
those applicable to them before the transfer.
DEATH BENEFIT
If the Annuitant dies before the Annuity Date, a death benefit will be paid
to the Beneficiary. If joint Annuitants are named in the Contract, the death
benefit is payable only upon receipt of due proof of the death of both
Annuitants before the Annuity Date. Upon receipt of notice of death, the
Company will promptly send the Beneficiary a letter outlining the requirements
to process the claim and the payment options available. Death benefit proceeds
will be paid according to the payment option selected upon receipt by the
Company of due proof of death and selection of a payment option.
On or before the fifth contract anniversary, the amount of the death benefit
will be the greater of (1) the aggregate premium payments less any reductions
caused by previous withdrawals, or (2) the Contract Value next determined
following receipt of due proof of death by the Company at its home office.
After the fifth contract anniversary, the minimum guaranteed death benefit is
equal to the death benefit as of the next previous Milestone Date, increased by
any premiums paid since that Milestone Date and decreased by any withdrawals,
net of Contingent Deferred Sales Charge, received since that Milestone Date.
After the fifth contract anniversary, the death benefit proceeds will be the
Contract Value, or, if larger, the minimum guaranteed death benefit. If due
proof of death is received on a day other than a Valuation Day, the Contract
Value will be determined on the first Valuation Day after such receipt. (The
preceding provision is considered a "Stepped-Up" death benefit provision not
accepted for use in North Carolina.) The Contract Owner may, during the
lifetime of the Annuitant, elect to have all or a part of the death benefit
proceeds paid to the Beneficiary in a single sum or under one of the Optional
Payment Plans, provided that no Payment Plan may be selected unless the amount
of the death benefit proceeds applied to the Payment Plan exceeds $10,000.
Otherwise, the death benefit proceeds will be paid in cash. If the Contract
Owner has not made an election, the Beneficiary may do so after the death of
the Annuitant. (See "Payment Plans.")
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With respect to Contracts issued after January 18, 1985, if the Owner dies
before the Annuitant and prior to the Annuity Date, death benefit proceeds will
be paid to the Owner's Beneficiary upon receipt of due proof of the Owner's
death and instructions regarding payment. The term Owner means any owner. If
there are joint Owners, the term Owner means the first joint Owner to die
unless the joint Owners are husband and wife. If the joint Owners are husband
and wife and if the surviving spouse is the sole surviving joint tenant, the
term Owner refers to the survivor thereof. If the surviving spouse of the
deceased Owner is the Owner Beneficiary, or is the sole surviving joint tenant,
and if the deceased Owner was not the sole Annuitant, such spouse may choose to
continue this Contract in force on the same terms as before the Owner's death.
If there is no Owner Beneficiary, the death benefit proceeds shall be paid to
the joint Owner (if not a surviving spouse), if any, otherwise to the
Annuitant. Payment will be made either to the Owner Beneficiary or, if not
applicable, to the Beneficiary. If an Owner is not also an Annuitant, then, in
the event the deaths of the Owner and the Annuitant are under circumstances in
which it cannot be determined who died first, payment will be made to the
Annuitant's Beneficiary. If the Owner and the Annuitant are the same, payment
will be made to the Annuitant's Beneficiary.
If the Owner Beneficiary is the surviving spouse of the deceased Owner, he or
she may choose to receive a payment under any Payment Plan of the Contract that
could have been selected by the Owner. For any other Owner Beneficiary, only
those options may be chosen that provide for complete distribution of such
Owner's interest in the Contract:
1. within 5 years of the date of such Owner's death;
2. over the lifetime of the Owner Beneficiary; or
3. over a period that does not exceed the life expectancy of such Owner
Beneficiary, as defined by the Code and the Regulations adopted under the
Code.
Subparagraphs (2) and (3) apply only to individuals. All such payments must
start within one year of the date of such Owner's death. For purposes of these
required distribution rules, special provisions apply if the Owner is not an
individual (other than an Owner of a Contract under a Qualified Plan as defined
in Section 401 or 403 of the Code). The special provisions include a rule that
the so-called "primary annuitant" (the individual who is of primary importance
in determining the timing of payments under the annuity contract) will be
treated as the Owner and that a change in a primary annuitant will be treated
as the death of the Owner for purposes of determining the timing of required
distributions. No death benefit is payable in this situation. Rather, the
amount of the distribution will be (a) the Contract Value if the non-individual
Owner elects to maintain the Contract and reinvest the Contract Value into the
Contract in the same amount as immediately prior to the distribution, or (b)
the Contract Value less any Contract Maintenance Charge, and any reductions in
the Contract Value caused by withdrawals, if the non-individual Owner elects a
cash distribution. The amount of the distribution will be determined as of the
Valuation Day we receive, in proper form, the request to change the Primary
Annuitant and instructions regarding maintaining the Contract or cash
distribution.
On the death of any Owner after the Annuity Date, any guaranteed amounts
remaining unpaid will continue to be paid to the Annuitant pursuant to the
Payment Plan in force at the date of death. No death benefit will be paid if
the Owner dies after the Annuity Date. On the death of the Annuitant, any
unpaid benefit available will be paid to the Beneficiary of the Annuitant in
accordance with the "Payment Plan" section below.
If an election is not made within 60 days of our receipt of due proof of
death or, if earlier, 60 days (or shorter period as we permit) prior to the
first anniversary of the death, the single payment option will be deemed
elected, unless otherwise required by law. If the single payment option is
deemed elected, we will consider that deemed election as receipt of selection
of a payment option.
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ASSIGNMENTS
During the Accumulation Period, the Contract Owner may assign the Contract
while the Contract is in force during the Annuitant's lifetime. However, in the
event the Contract is issued under a Qualified Plan, it generally may not be
assigned, discounted, pledged as collateral for a loan or transferred. A
Collateral Assignment does not change ownership of the Contract. Amounts
payable under the Contract may not be assigned or encumbered and, to the extent
permitted by law, are not subject to levy, attachment or any other judicial
process for the payment of the payee's debts or obligations. No assignment of
any interest under the Contract is binding upon the Company until a written
assignment is received and recorded at the Company's home office; and the
Company assumes no responsibility with respect to the validity of any such
assignment. The assignment will go into effect when signed subject to any
payments made or other actions taken by the Company before the assignment is
recorded. An assignment of a Contract (including a collateral assignment) may
give rise to a taxable event.
CHANGE OF BENEFICIARY DESIGNATION
Subject to the rights of an irrevocable Beneficiary, the Contract Owner may
change or revoke a Beneficiary designation while the Contract is in force
during the Annuitant's lifetime by sending a written request to change or
revoke the Beneficiary designation in such form as the Company may require to
its home office. The change or revocation will not be binding on the Company
until it is received and recorded at its Annuity Service Office. The change
will go into effect when signed subject to any payments made or other actions
taken by the Company before the change is recorded.
CHANGE IN THE OPERATION OF THE SEPARATE ACCOUNT
If investment in the Fund or a Portfolio thereof is no longer possible or in
the opinion of the Company becomes inappropriate to the purpose of the
Contract, the Company may substitute another mutual fund (or portfolio) without
Contract Owners' consent. However, no such substitution will be made without
the necessary approval of the Securities and Exchange Commission.
At the Company's election and subject to the necessary vote by Contract
Owners, the Separate Account may be deregistered under the 1940 Act. In the
event registration is no longer required, deregistration of the Separate
Account requires an order by the Securities and Exchange Commission. In the
event of any such change in the operation of the Separate Account, the Company
may make appropriate endorsement to the Contract to reflect the change and take
such other action as may be necessary to effect such change.
MODIFICATION
Upon notice to the Contract Owner, or to payees during the Annuity Period,
the Company may modify the Contract, if such modification: (1) is necessary to
make the Contract comply with any applicable law or regulation issued by a
government agency to which the Company is subject; (2) is necessary to assure
that the Contract continues to qualify under the Internal Revenue Code or other
laws and regulations issued by a government agency relating to annuities or
variable annuities; (3) is necessary to reflect a change in the operation of
the Separate Account (see "Change in the Operation of the Separate Account,"
above); or (4) provides additional Variable Accounts. Any such modification may
require an order by the Securities and Exchange Commission. In the event of any
such modification, the Company may make an appropriate endorsement to the
Contract to reflect the change and take such action as may be necessary to
effect such change.
B. PAYMENT PLANS
ANNUITY DATE: The Contract Owner selects an Annuity Date at the time of
application. The Contract Owner may choose to annuitize at any time while the
Annuitant is living and while the Contract
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is in force. Moreover, with respect to Accumulation Value in the Separate
Account, the Annuity Date may not be deferred beyond the first day of the month
following the Annuitant's 85th birthday. In the case of joint Annuitants, the
birthdate of the younger Annuitant will be used to determine the latest Annuity
Date.
For Qualified Contracts issued in connection with this Prospectus under
retirement plans, reference should be made to the terms of the particular
retirement plan for any limitations or restrictions on the Annuity Date. Under
Qualified Plans, annuity payments generally must begin no later than April 1 of
the calendar year following the year in which the Annuitant reaches age 70 1/2.
The Contract Owner may, during the life of the Annuitant at any time prior to
the Annuity Date, elect one of the Payment Plans. For Contracts issued in
connection with Qualified Plans, the selection of a Payment Plan may be limited
under the terms of the particular Qualified Plan and applicable law. If there
are joint Annuitants, Plans D or E may not be elected. The Contract Owner may
change a Payment Plan by written notice received at the Annuity Service Office
of the Company prior to the Annuity Date.
If no Payment Plan has been elected, monthly payments will be made starting
on the Annuity Date in accordance with Plan D, with guaranteed payments for ten
years, if there is a single Annuitant. If joint Annuitants are named in the
Contract, payments will be made in accordance with Plan F. (See "Optional
Payments Plans.")
The Contract Owner may, during the life of the Annuitant, change the Annuity
Date, provided written notice is received by the Company at its Annuity Service
Office at least 45 days prior to the Annuity Date set forth in the Contract.
The date selected as the new Annuity Date must be after the date the written
notice requesting a change of Annuity Date is received by the Company at its
Annuity Service Office.
DETERMINATION OF ANNUITY PAYMENTS: The proceeds on the Annuity Date will be
the Contract Value less reductions, if any, for Contingent Deferred Sales
Charge and premium taxes. A Contingent Deferred Sales Charge will be imposed on
any amount attributable to a premium payment in its fifth Contribution Year or
less. However, no Contingent Deferred Sales Charge will be imposed if the
proceeds are applied under a Payment Plan currently offered under this
Prospectus or to the purchase of a Single Premium Immediate Annuity then
offered by the Company or an affiliate thereof and the payment period elected
is five years or longer. The total Contract proceeds will be applied to the
Payment Plan elected. The proceeds attributable to the Variable Account(s) will
be transferred to the General Account. Thereafter, the Annuitant will receive
fixed monthly payments based on the proceeds and the annuity tables set forth
in the Contract.
Annuity payments are paid as equal monthly installments, except that with the
Company's consent the frequency of payments may be changed. If the frequency of
payments is less than monthly, the dollar amount of each payment will be
greater than if payments were made on a monthly basis. The Company reserves the
right to pay such proceeds in one lump sum if the net amount is less than
$10,000. If the frequency of payments selected would result in a periodic
payment of less than $20, the Company reserves the right to change the
frequency of payments in order to avoid payments of less than $20.
PAYMENT PLANS APPLICABLE TO DEATH BENEFIT: During the life of the Annuitant,
the Contract Owner may choose a Payment Plan that will apply to the death
benefit proceeds upon the death of the Annuitant. This choice may be changed
during the life of the Annuitant. To choose or change a Payment Plan, a written
notice must be received at the Annuity Service Office of the Company.
If the Contract Owner has not chosen a Payment Plan prior to the Annuitant's
death, a Beneficiary may make this choice upon the Annuitant's death.
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A Payment Plan is available for death benefit proceeds only if the amount of
the proceeds applied to that Plan is at least $10,000. Death benefit proceeds
of less than $10,000 will be paid in cash.
RIGHT TO PURCHASE SINGLE PREMIUM LIFE ANNUITY: In addition to the Payment
Plans listed in this Prospectus, the Contract Owner may on the Annuity Date
make a written request to the Annuity Service Office of the Company to
surrender the Contract and use the proceeds to purchase any single premium
immediate life annuity then made available by the Company or an affiliated life
insurance company.
OPTIONAL PAYMENT PLANS: Subject to restrictions applicable to Qualified
Plans, any one of the following optional Payment Plans may be elected.
PLAN A. INTEREST
The proceeds may be left on deposit with the Company to earn interest. The
Contract Owner may choose when the payee is to receive payments, subject to the
approval of the Company. If the payee dies before all payments have been made,
the Beneficiary will be paid the unpaid sum left on deposit plus any unpaid
interest up to the date of the payee's death. This option generally is not
available to Contracts issued in connection with Qualified Plans.
PLAN B. FIXED INSTALLMENTS
Proceeds plus interest will be paid in equal installments. Payments will
continue until principal and interest are exhausted. The principal is the
amount of proceeds applied to this plan. If the payee dies before all payments
have been made, the Beneficiary will be paid the unpaid sum left on deposit
with the Company plus any interest up to the date of the payee's death. For
Contracts issued in connection with Qualified Plans, the amount of the
installments generally must satisfy minimum distribution rules.
This plan may be used only if the total amount paid each year is $60 or more
for each $1,000 of proceeds.
PLAN C. FIXED PERIOD
Proceeds plus interest will be paid in equal installments for the number of
years chosen. The period chosen may not exceed 25 years. Under Contracts issued
in connection with Qualified Plans, the period elected generally may be no
longer than the joint life expectancy of the Annuitant and Beneficiary in the
year the Annuitant reaches age 70 1/2.
The election of a longer period results in smaller payments than would be
made if a shorter period were chosen. The Contract provides that under certain
circumstances, if the payee dies before the guaranteed payments have been made,
the discounted value of the remaining unpaid payments will be paid in one sum
to the Beneficiary. The discounted value will be based on interest compounded
annually at 4% or such higher rate that was used to determine the payments.
PLAN D. LIFE INCOME WITH GUARANTEED PAYMENT PERIOD
Proceeds will be used to provide payments in equal installments for as long
as the payee lives. A guaranteed payment period for 10 or 20 years can be
chosen. This means that even if the payee dies during this period, payments
will continue to be made until the end of the period chosen. The election of a
20 year guaranteed payment period results in smaller payments than would be
paid if a 10 year guaranteed period were chosen. Under Contracts issued in
connection with Qualified Plans, the 20 year
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period will not be available if the joint life expectancy of the Annuitant and
Beneficiary is less than 20 years in the year the Annuitant reaches age 70 1/2.
The Contract provides that under certain circumstances, if the payee dies
before the guaranteed payments have been made, the discounted value of the
remaining unpaid guaranteed payments will be made in one sum to the
Beneficiary. The discounted value will be based on interest compounded annually
at 3.5% or such higher rate that was used to determine annuity payments.
PLAN E. INSTALLMENT REFUND
Proceeds will be used to provide payments in equal installments. Guaranteed
payments will continue until the sum of the payments equals the proceeds
applied. If the payee is still living at that time, payments will continue as
long as the payee lives. The Contract provides that under certain
circumstances, if the payee dies before the guaranteed payments have been made,
the discounted value of the remaining unpaid guaranteed payments will be paid
in one sum to the Beneficiary. The discounted value will be based on interest
compounded annually at 3.5% or such higher rate that was used to determine the
annuity payments.
PLAN F. JOINT AND SURVIVOR LIFE ANNUITY
Proceeds will be paid during the lifetimes of the joint Annuitants. Payment
of proceeds will continue as long as either Annuitant is living. After the
death of both Annuitants no further payments will be made. It would be possible
under this plan for only one annuity payment to be made if both payees died
before the due date of the second payment.
ANNUITY PAYMENT RATES: The Contract contains annuity payment rates for the
Payment Plans described in this Prospectus. The rates show the monthly payment
amount for each $1,000 of proceeds applied when this payment is based on the
minimum guaranteed interest rate. The minimum guaranteed interest rate for
Plans A, B and C is 4% per year, compounded annually, and for Plans D, E and F,
3.5% per year, compounded annually.
The annuity payment rates vary according to the Payment Plan elected and the
age of the payee. The mortality rate used to determine the annuity payment
rates for Payment Plans D, E and F is the A-1949 Mortality Table.
PROTECTION OF BENEFITS: Contract Owners considering assigning amounts under
Payment Plans, electing to receive a discounted lump sum cash settlement, or
transferring among Payment Plans should consult the Company's Annuity Service
Office to determine whether these measures are permitted for particular Payment
Plans.
INQUIRIES: If you have questions about the Contract, you may reach our
service representatives at 1-800-735-5535 between the hours of 7:00 a.m. and
5:00 p.m., Pacific time.
C. VOTING RIGHTS
Pacific Life is the legal owner of the shares of the Fund held by the
Variable Accounts of the Separate Account. In accordance with its view of
present applicable law, Pacific Life will exercise voting rights attributable
to the shares of each Portfolio of the Fund held in the Variable Accounts at
any regular and special meetings of the shareholders of the Fund on matters
requiring shareholder voting under the 1940 Act. Pacific Life will exercise
these voting rights based on instructions received from persons having the
voting interest in corresponding Variable Accounts of the Separate Account.
However, if the 1940 Act or any regulations thereunder should be amended, or if
the present interpretation thereof should
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change, and as a result Pacific Life determines that it is permitted to vote
the shares of the Fund in its own right, it may elect to do so.
The person having the voting interest under a Contract is the Owner. Unless
otherwise required by applicable law, the number of Fund shares of a particular
Portfolio as to which voting instructions may be given to us is determined by
dividing a Contract Owner's Accumulated Value in a Variable Account on a
particular date by the net asset value per share of that Portfolio as of the
same date. Fractional votes will be counted. The number of votes as to which
voting instructions may be given will be determined as of the date coincident
with the date established by the Fund for determining shareholders eligible to
vote at the meeting of the Fund. If required by the SEC, we reserve the right
to determine in a different fashion the voting rights attributable to the
shares of the Fund. Voting instructions may be cast in person or by proxy.
Voting rights attributable to the Contract Owner's Accumulated Value in a
Variable Account for which no timely voting instructions are received will be
voted by Pacific Life in the same proportion as the voting instructions that
are received in a timely manner for all Contracts participating in that
Variable Account. Pacific Life will also exercise the voting rights from assets
in each Variable Account that are not otherwise attributable to Contract
Owners, if any, in the same proportion as the voting instructions that are
received in a timely manner for all Contracts participating in that Variable
Account. If Pacific Life holds shares of a Portfolio in its General Account,
and/or if any of our non-insurance subsidiaries hold shares of a Portfolio,
such shares will be voted in the same proportion as votes cast by the Separate
Account and other separate accounts of Pacific Life, in the aggregate.
FEDERAL INCOME TAX STATUS
INTRODUCTION
The discussion contained herein is general in nature and is not intended as
tax advice. Any interested person should consult a competent tax adviser. The
discussion is limited to federal income tax laws and no attempt is made to
consider any applicable state or other tax laws. Moreover, the discussion
herein is based upon the Company's understanding of current federal income tax
laws as they are currently interpreted. No representation is made regarding the
likelihood of continuation of those federal income tax laws or of their current
interpretation by the Internal Revenue Service.
FEDERAL TAX STATUS OF THE COMPANY AND THE SEPARATE ACCOUNT
General
Pacific Life is taxed as a life insurance company under Part I, Subchapter L
of the Code. Because the Separate Account is not taxed as a separate entity and
its operations form a part of Pacific Life, Pacific Life will be responsible
for any Federal income taxes that become payable with respect to the income of
the Separate Account. However, each Variable Account will bear its allocable
share of such liabilities. Under current law, no item of dividend income,
interest income, or realized capital gain of the Variable Accounts will be
taxed to Pacific Life to the extent it is applied to increase reserves under
the Contracts.
Under the principles set forth in IRS Revenue Ruling 81-225 and Section
817(h) of the Code and regulations thereunder, Pacific Life believes that it
will be treated as the owner of the assets in the Separate Account for Federal
income tax purposes.
The Separate Account will invest its assets in a mutual fund that is intended
to qualify as a regulated investment company under Part I, Subchapter M of the
Code. If the requirements of the Code are met, the Fund generally will not be
taxed on amounts distributed on a timely basis to the Separate Account.
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Diversification Standards
Each Portfolio of the Fund will be required to adhere to regulations adopted
by the Treasury Department pursuant to Section 817(h) of the Code prescribing
asset diversification requirements for investment companies whose shares are
sold to insurance company separate accounts funding variable contracts. For
details on these diversification requirements, see "What is the Federal Income
Tax Status of the Fund" in the Fund's prospectus.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income and
gains from the separate account assets would be includable in the variable
contract owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor [i.e., the Contract Owner], rather than the insurance
company, to be treated as the owner of the assets in the account." This
announcement also stated that guidance would be issued by way of regulations or
rulings on the "extent to which policyholders may direct their investments to
particular subaccounts without being treated as owners of the underlying
assets." As of the date of this Prospectus, no such guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Contract Owner has additional flexibility in allocating premium
payments and Contract Values. These differences could result in a Contract
Owner being treated as the owner of the Contract's pro rata portion of the
assets of the Separate Account. In addition, we do not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. We therefore reserve the right to
modify the Contract, as deemed appropriate by us, to attempt to prevent a
Contract Owner from being considered the owner of the Contract's pro rata share
of the assets of the Separate Account. Moreover, in the event that regulations
are adopted or rulings are issued, there can be no assurance that the Portfolio
will be able to operate as currently described in the Prospectus, or that the
Fund will not have to change any Portfolio's investment objective or investment
policies.
FEDERAL TAX STATUS OF CONTRACT OWNERS
NONQUALIFIED PLANS: The Company believes that the Contract Owner generally
will not be subject to income tax on increases in the Contract Value until
payments or distributions are received under the Contract. Increases in the
value of a Contract attributable to sources other than the investment
performance of the Variable Accounts may be taxable to Contract Owners as those
amounts are credited to their Contracts. Income taxation of benefits received
under the Contract, whether received before or after the Annuity Date, is
determined under Section 72 of the Code.
(a) Distributions before the Annuity Date. A distribution by full or partial
surrender prior to the Annuity Date may subject the Contract Owner to income
tax. If the Contract is assigned or pledged as collateral for a loan, the
amount assigned or pledged will be treated as a distribution.
If the distribution is by full surrender, the Contract Owner is taxed on the
amount distributed less premiums paid, with such premiums reduced by any prior
partial surrenders which were not subject to income tax.
A distribution by partial surrender is deemed to come first from any
previously untaxed accumulation which is distributed. The previously untaxed
accumulation is the Contract Value, computed without
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adjustment for any applicable surrender penalty, less premiums paid, with such
premiums reduced by any prior partial surrenders which were not subject to
income tax.
A distribution attributable to a premium paid prior to August 14, 1982, will
be deemed to come first from principal, then from the untaxed accumulation. If
the Contract contains values attributable to premiums paid both prior to August
14, 1982, and after August 13, 1982, the order of distribution is as follows:
(1) pre-August 14, 1982 premiums; (2) untaxed accumulations attributable to
pre-August 14, 1982 premiums; (3) untaxed accumulations attributable to post-
August 13, 1982 premiums; and (4) post-August 13, 1982 premiums. Premiums paid
by means of a tax-free exchange of annuity contracts under Section 1035 of the
Code carry to the new annuity contract the original premium payment date or
dates for purposes of determining taxable distributions.
(b) Distributions after the Annuity Date. Where payments are received after
the Annuity Date pursuant to an annuity option (Payment Plans B, C, D, E, or
F), that portion of each payment which represents the Contract Owner's
investment in the Contract, as that term is defined in Section 72 of the Code,
is excluded from gross income for income tax purposes. To determine the
percentage of each payment which is excluded from taxable income, the
investment in the Contract, which is ordinarily the amount of premium payments
under the Contract less prior partial surrenders which were not subject to
income tax, is divided by the expected return under the Contract. The expected
return under the Contract in the case of Optional Payment Plans B or C is based
on the period of time that payments under the plan will be made. The expected
return under the Contract in the case of Optional Payment Plans D, E, or F is
based on the life expectancy of the Annuitant or Annuitants in the case of
joint Annuitants.
For annuities starting after December 31, 1986, the amount that may be
excluded from gross income is limited to the Contract Owner's investment in the
Contract. Once such investment has been recovered, the entire amount of each
remaining payment will be included in gross income. If, due to the death of the
Annuitant, payments cease before the full amount of the investment in the
Contract has been recovered, such unrecovered investment generally will be
allowed as a deduction to the Annuitant for his last taxable year.
If the Contract matures and if the Contract Owner elects to leave the
proceeds on deposit with the Company under Optional Payment Plan A, the
proceeds on maturity are taxed in the same manner as a full surrender and the
interest payments on the funds on deposit are included in the Contract Owner's
taxable income in the year the interest is received by the Contract Owner or
credited to the amount held on deposit.
(c) Death Benefits. The death benefit is taxable to the beneficiary as
ordinary income to the extent of gain in the Contract. Gain in the Contract is
equal to the death benefit less the premium paid with such premiums reduced by
prior non-taxable distributions.
(d) Penalty Tax. In certain circumstances, a taxable distribution from the
Contract will be subject to a penalty tax equal to ten (10) percent of the
taxable amount distributed.
The circumstances in which the penalty tax does not apply include the
following: distributions which are attributable to premiums paid ten (10) years
or more prior to the date of distribution if the Contract was issued prior to
January 19, 1985; distributions made on or after the death of the Contract
Owner; distributions made after the Contract Owner attains the age of fifty-
nine and one-half (59 1/2); distributions to a Contract Owner who has become
disabled; distributions made under Optional Payment Plans C, E, or F, provided
the distributions under such plans are substantially equal, are made not less
frequently than annually, and extend over the taxpayer's life or life
expectancy; and distributions attributable to premiums paid prior to August 14,
1982.
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(e) Non-Natural Holders. Subject to several exceptions, in the case of
Contracts held by non-natural persons such as certain trusts and corporations,
income on the Contract is taxed currently to the Contract Owner. The rule does
not apply where the contract is acquired by the estate of a decedent, where the
contract is held by certain types of retirement plans, where the contract is a
qualified funding asset for structured settlements, where the contract is
purchased on behalf of an employee upon termination of a qualified plan, and in
the case of a so-called immediate annuity. Code Section 457 (deferred
compensation) plans for employees of state and local governments and tax-exempt
organizations are not within the purview of the exceptions.
(f) Aggregation of Contracts. For contracts entered into on or after October
21, 1988, for purposes of determining the amount of any distribution under Code
Section 72(e) (amounts not received as annuities) that is includable in gross
income, all annuity contracts issued by the same insurer to the same contract
owner during any calendar year are to be aggregated and treated as one
contract. Thus, any amount received under any such contract prior to the
contract's annuity start date, such as a partial surrender, dividend, or loan,
will be taxable (and possibly subject to the 10% penalty tax) to the extent of
the combined income in all such contracts.
In addition, the Treasury Department has broad regulatory authority in
applying this provision to prevent avoidance of the purposes of this new rule.
It is possible that, under this authority, the Treasury Department may apply
this rule to amounts that are paid as annuities (on and after the annuity start
date) under annuity contracts issued by the same company to the same owner
during any calendar year. In this case, annuity payments could be fully taxable
(and possibly subject to the 10% penalty tax) to the extent of the combined
income in all such contracts and regardless of whether any amount would
otherwise have been excluded from income because of the "exclusion ratio" under
the contract.
(g) Gift of Annuity Contracts. Generally, gifts of non-tax qualified
contracts prior to the annuity start date will trigger tax on the gain on the
contract, with the donee getting a stepped-up basis for the amount included in
the donor's income. The 10% penalty tax and gift tax also may be applicable.
This provision does not apply to transfers between spouses or incident to a
divorce.
QUALIFIED PLANS: The Contract is designed for use with several types of
Qualified Plans. The tax rules applicable to participants in such Qualified
Plans vary according to type of plan and the terms and conditions of the plan
itself. Therefore, no attempt is made herein to provide more than general
information about the use of the Contract with the various types of Qualified
Plans. Participants under such Qualified Plans, as well as Contract Owners,
Annuitants and Beneficiaries, are cautioned that the rights of any person to
any benefits under such Qualified Plans may be subject to the terms and
conditions of the plans themselves or limited by applicable law, regardless of
the terms and conditions of the Contract issued in connection therewith.
The amounts that may be contributed to Qualified Plans are subject to
limitations that may vary depending on the type of plan. In addition, early
distributions from most Qualified Plans may be subject to penalty taxes, or in
the case of distributions of amounts contributed under salary reduction
agreements, could cause the plan to be disqualified. Furthermore, distributions
from most Qualified Plans are subject to certain minimum distribution rules.
Failure to comply with these rules could result in disqualification of the
Qualified Plan and or a penalty tax upon the participants equal to fifty (50)
percent of the undistributed minimum required amount. As a result, the minimum
distribution rules could limit the availability of certain annuity options to
participants and their beneficiaries.
Generally, distributions from a Contract under a Qualified Plan (other than a
Contract issued under a Section 457 Plan) before the Annuity Date are taxed in
the same manner as described in Paragraph (b) above with respect to
distributions after the Annuity Date under Nonqualified Plans. The amount of
the Contract pledged or assigned as collateral for a loan may be treated as a
distribution from the Contract under certain Qualified Plans. Generally, in the
case of most Contracts under Qualified Plans,
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the investment of the participant/beneficiary will be zero and distributions
before the Annuity Date will in such instances be fully taxable. The proceeds
of a full surrender of such a Contract may qualify for favorable tax treatment
as a "lump-sum distribution," subject to 5-year forward averaging for
distributions before December 31, 1999 (the Tax Reform Act of 1986 generally
eliminated 10-year forward averaging and phased out capital gain treatment).
However, early distribution of the proceeds of a Contract issued in connection
with certain Qualified Plans generally will be subject to a 10% penalty tax if
made before the participant reaches age 59 1/2 and not made on account of death
or disability, with certain exceptions. These exceptions include certain
distributions: (1) which are part of a series of substantially equal periodic
payments made (at least annually) for the life (or life expectancy) of the
participant or the joint lives (or joint life expectancies) of the participant
and a designated beneficiary, but in the case of a participant in a plan
qualified under section 401(a) of the Code or the owner of a 403(b) contract
only if the individual has separated from service; (2) also in the case of
corporate plans qualified under section 401(a) of the Code and 403(b)
contracts, made to an employee after termination of employment after reaching
age 55; (3) made to pay for certain medical expenses; or (4) in the case of
IRA's, made for certain qualifying expenditures for first-time homebuyers or
for qualified higher education expenses.
Generally, distributions of minimum amounts specified by the Code must
commence by April 1 of the calendar year following the calendar year in which
the participant reaches age 70 1/2; however, if a plan qualified under section
401(a) of the Code or a 403(b) contract so provides, no distributions are
required for individuals who are employed after age 70 1/2 (other then 5%
owners) until they retire. Additional distribution rules apply after the
applicant's death.
Generally, distributions after the Annuity Date are taxed in the same manner
as described in Paragraph (b) above with respect to Nonqualified Plans.
Distributions from certain retirement plans may also be subject to an excise
tax if the amount of such distributions exceeds certain threshold amounts
prescribed pursuant to the Code.
Following are brief descriptions of various types of Qualified Plans and of
the use of the Contract in connection therewith. Employees or other purchasers
of the Contract for use with any of the Qualified Plans described herein should
seek competent advice as to the suitability of the proposed plan document and
of the Contract to their specific needs.
(a) H.R. 10 Plans. The Self-Employed Individuals Tax Retirement Act of 1962,
as amended, which is commonly referred to as "H.R. 10," permits self-employed
individuals to establish Qualified Plans for themselves and their employees.
The tax law contains certain limitations with respect to such plans concerning
maximum permissible contributions, distribution dates, non-forfeitability of
interests and tax rates applicable to distributions. In order to establish such
a plan, a plan document, usually in prototype form pre-approved by the Internal
Revenue Service, is adopted and implemented by the employer.
The tax treatment of H.R. 10 plans is essentially the same as for corporate
plans. Some special restrictions apply to self-employed individuals who are
"owner-employees." An owner-employee is a sole proprietor or a partner who owns
more than 10% capital or a profit interest in a partnership.
(b) Simplified Employee Pension Plans. Section 408 of the Code permits
eligible employers to establish a retirement program known as a "Simplified
Employee Pension Plan." Such a plan may permit the purchase of the Contract to
provide benefits under the plan. In order to establish such a plan, a plan
document, usually in prototype form pre-approved by the Internal Revenue
Service, is adopted and implemented by the employer.
(c) Individual Retirement Accounts. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Account" ("IRA"). In some cases contributions to an IRA
may be made on a tax-deductible basis. IRAs are subject to limitations on the
amount which may be contributed, the persons who may be eligible, and on the
time when distributions may commence. In addition, distributions from certain
other types of Qualified Plans may be placed on a tax-deferred basis into an
IRA.
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(d) Corporate Pension and Profit-Sharing Plans. Sections 401(a) and 401(k) of
the Code permit corporate employers to establish various types of retirement
plans for employees. Such retirement plans may permit the purchase of the
Contract to provide benefits under the plans.
(e) Tax-Sheltered Annuities. Section 403(b) of the Code permits the purchase
of "tax-sheltered annuities" by public schools and certain charitable,
educational and scientific organizations described in Section 501(c) (3) of the
Code. These eligible employers may make contributions to the Contracts for the
benefit of their employees. Such contributions are not includible in the gross
income of the employee until the employee receives distributions from the
Contract. The amount of contributions to the tax-sheltered annuity is limited
to certain maximums imposed by the Code. Furthermore, the Code sets forth
additional restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. Any employee should obtain competent tax
advice as to the tax treatment and suitability of such an investment. For a
discussion of restrictions on distributions from Section 403(b) tax-sheltered
annuities, see "Constraints on Distributions from Section 403(b) Annuity
Contracts".
(f) Deferred Compensation Plans for State and Local Governments. Section 457
of the Code permits employees of a state or local government (or of certain
other tax-exempt entities) to defer compensation through an eligible government
plan. Contributions to a Contract in connection with an eligible government
plan are subject to limitations.
WITHHOLDING: With respect to Contracts used in connection with Nonqualified
Plans, with certain limited exceptions, withholding on annuity payments and
other distributions from the Contract is required. However, recipients of
annuity payments or other distributions are allowed to make an election not to
have federal income tax withheld, which is revocable at any time.
The withholding rate generally will be applied only against the taxable
portions of annuity payments or other distributions, and will be based upon the
nature of the distribution. Federal tax will be withheld from annuity payments
pursuant to the recipient's withholding certificate. If no withholding
certificate is filed with the Company, tax will be withheld from annuity
payments on the basis that the payee is married with three withholding
exemptions.
Distributions from a Qualified Plan (not including an individual retirement
annuity subject to Code Section 408) to an employee, surviving spouse, or
former spouse who is an alternate payee under a qualified domestic relations
order, in the form of a lump sum settlement or periodic annuity payments for a
fixed period of fewer than 10 years are subject to mandatory income tax
withholding of 20% of the taxable amount of the distribution, unless (1) the
distributee directs the transfer of such amounts in cash to another Qualified
Plan or an IRA; or (2) the payment is a minimum distribution required under the
Code. The taxable amount is the amount of the distribution less the amount
allocable to after-tax contributions. All other types of taxable distributions
are subject to withholding unless the distributee elects not to have
withholding apply.
OTHER CONSIDERATIONS: The above description of the Federal income tax
consequences of the different types of Qualified Plans which may be funded by
the Contract described in this Prospectus is only a brief summary and is not
intended as tax advice. The rules governing the provisions of Qualified Plan
distributions are extremely complex and often difficult to comprehend. Anything
less than full compliance with the applicable rules, all of which are subject
to change, may have adverse tax consequences. A prospective Contract Owner
considering adoption of a Qualified Plan and purchase of a Contract in
connection therewith should first consult a qualified and competent tax
adviser, with regard to the suitability of the Contract as an investment
vehicle for the Qualified Plan. We are not the Administrator of your Qualified
Plan. You should also consult with your tax advisor and/or administrator before
you withdraw any portion of your Contract Value.
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OTHER INFORMATION
REPORTS TO OWNERS
A statement will be sent quarterly to each Contract Owner setting forth a
summary of the transactions that occurred during the quarter, and indicating
the Contract Value and as of the end of each quarter. In addition, the
statement will indicate the allocation of Contract Value among the Fixed
Account and the Variable Accounts and any other information required by law.
Confirmations will also be sent out upon certain unscheduled transactions under
your contract. If you suspect an error on a confirmation or quarterly
statement, you must notify us in writing within 30 days from the date of the
first confirmation or statement on which the transaction appeared. When you
write, tell us your name, contract number and description of the error.
Each Contract Owner will also receive an Annual report containing financial
statements for the Separate Account and the Fund, the latter of which will
include a list of the portfolio securities of the Fund, as required by the 1940
Act, a semi-annual report containing financial statements for the Fund, and/or
such other reports as may be required by Federal securities laws.
TELEPHONE TRANSFER PRIVILEGES
You may request a transfer of Accumulated Value by telephone if an
authorization for telephone requests ("telephone authorization") is on file
with Pacific Life . All or part of any telephone conversation with respect to
transfer instructions may be recorded by Pacific Life. Telephone instructions
received by 1:00 P.M. Pacific time on any Valuation Date will be effected as of
the end of that Valuation Date in accordance with your instructions, (presuming
that the Free-Look Period has expired). Pacific Life reserves the right to deny
any telephone transfer request. If all telephone lines are busy (which might
occur, for example, during periods of substantial market fluctuations), you
might not be able to request transfers by telephone and would have to submit
written requests.
Pacific Life has established procedures to confirm that instructions
communicated by telephone are genuine. Under the procedures, any person
requesting a transfer by telephone must provide certain personal identification
as requested by Pacific Life, and Pacific Life will send a written confirmation
of all transfers requested by telephone within 7 days of the transfer. Upon
request in writing for telephone authorization, you authorize Pacific Life to
accept and act upon telephonic instructions for transfers involving your
Contract, and agree that neither Pacific Life, any of Pacific Life's
affiliates, nor Pacific Select Fund, nor any of the directors, trustees,
officers, employees or agents, will be liable for any loss, damages, cost, or
expense (including attorneys fees) arising out of any requests effected in
accordance with the telephone authorization and believed by Pacific Life to be
genuine, provided that Pacific Life has complied with its procedures. As a
result of this policy on telephone requests, you will bear the risk of loss
arising from the telephone transfer privileges.
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PERFORMANCE INFORMATION
Performance information for the Variable Accounts, 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 and historical
performance information for the Fund may appear in advertisements, reports, and
promotional literature to Owners.
Quotations of average annual total return for any Variable Account will be
expressed in terms of the average annual compounded rate of return on a
hypothetical investment in a Contract over a period of one, five, and ten years
(or, if less, up to the life of the Variable Account), and will reflect the
deduction of the applicable contingent deferred sales charge, the
administrative charge, the maintenance fee, the mortality and expense risk
charge, and the operating expenses of the Separate Account as shown in "Annual
Separate Account and Fund Expenses." Quotations of total return may
simultaneously be shown that do not take into account certain contractual
charges such as the contingent deferred sales charge, the administrative
charge, and the maintenance fee.
Performance information for any Variable Account reflects only the
performance of a hypothetical Contract under which Accumulated Value is
allocated to a Variable Account during a particular time period on which the
calculations are based. Performance information should be considered in light
of the investment objectives and policies, characteristics, and quality of the
Portfolio of the Fund in which the Variable Account invests, and the market
conditions during the given time period, and should not be considered as a
representation of what may be achieved in the future. For a description of the
methods used to determine yield and total return and of the usage of
performance and other related information for the Variable Accounts, see the
Statement of Additional Information.
Pacific Life may also provide you with reports on its rating as an insurance
company and on its claims-paying ability that are produced by rating agencies
and organizations.
SALES COMMISSIONS
Pacific Life and PMD pay sales commission directly to broker-dealers and
other expenses associated with premiums paid under the Contracts. Broker-
dealers may receive aggregate commission of up to 4.50% of aggregate premium
payments, and will be paid a persistency trail commission which will take into
account, among other things, the length of time premium payments have been held
under a Contract and Contract Values. A trail commission is not anticipated to
exceed 0.30%, on an annual basis, of the Contract Value considered in
connection with the trail commission. Pacific Life and PMD may also pay
override payments, expense allowances, bonuses, wholesaler fees and training
allowances. Registered representatives earn commissions from the broker-dealers
with which they are affiliated and such arrangements may vary. In addition,
registered representatives who meet specified production levels may qualify,
under sales incentive programs, to receive non-cash compensation such as
expense-paid trips, expense-paid educational seminars, and merchandise.
REGISTRATION STATEMENT
A Registration Statement under the 1933 Act has been filed with the SEC
relating to the Contracts described in this Prospectus. This Prospectus does
not include all the information included in the Registration Statement, certain
portions of which, including the Statement of Additional Information, have been
omitted pursuant to the rules and regulations of the SEC. The omitted
information may be obtained at the SEC's principal office in Washington, D.C.,
upon payment of the SEC's prescribed fees.
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FINANCIAL STATEMENTS
Audited financial statements of the Pacific Corinthian Variable Separate
Account as of December 31, 1996 and for each of the two years then ended, and
unaudited semi-annual financial statements as of June 30, 1997, are
incorporated by reference in the SAI from the Annual Report of the Pacific
Corinthian Variable Separate Account dated as of December 31, 1996 and the
Semi-Annual Report of the Pacific Corinthian Variable Separate Account dated as
of June 30, 1997, respectively. Audited consolidated financial statements of
Pacific Mutual Life as of December 31, 1996 and 1995, and for the three years
ended December 31, 1996, are contained in the SAI.
STATEMENT OF ADDITIONAL INFORMATION
The following list shows the contents of the Statement of Additional
Information:
Introduction
General Information and History
Services
Performance Information
Financial Statements
Independent Auditors' Report
Financial Statements of Pacific Mutual Life Insurance Company
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APPENDIX
THE FIXED ACCOUNT
Because of exemptive and exclusionary provisions, interests in the General
Account have not been registered under the Securities Act of 1933 ("1933 Act"),
nor is the General Account registered as an investment company under the 1940
Act. Accordingly, neither the General Account nor any interests therein are
generally subject to the provisions of the 1933 or 1940 Act. Disclosures
regarding the Fixed Account and the General Account, however, may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of statements made in prospectuses. The
Company has been advised that the staff of the Securities and Exchange
Commission has not reviewed disclosure relating to the Fixed Account.
Accumulation Values allocated to the Fixed Account are combined in the
General Account of the Company with all the general assets of the Company and
are invested in those assets chosen by the Company and allowed by applicable
law. The Company allocates the investment income of the General Account to the
contracts covered by the General Account in the amounts guaranteed in such
contracts. Immediately prior to the Annuity Date, a Contract's current
Accumulation Value of each Variable Account, less any Contingent Deferred Sales
Charge or premium taxes, if applicable, is transferred to the General Account,
and becomes a portion of assets of the General Account. Immediately prior to
the Annuity Date, the Accumulation Value of the Fixed Account is also subject
to a reduction for any Contingent Deferred Sales Charge or premium taxes, if
applicable.
Under the Fixed Account option, the Company allocates payment to its General
Account, guarantees the amounts, and pays a fixed interest rate. The guaranteed
minimum interest credited to the Fixed Account will be at the effective rate of
4% per year, compounded daily. The Company may declare excess interest to the
Fixed Account at its sole discretion. Excess interest, if any, on the Fixed
Account is guaranteed for the first Contract year. Thereafter, any excess
interest will be declared on January 1 of each year and guaranteed for one
year.
The Company guarantees that, at any time, the Contract Owner's Fixed Account
Accumulation Value will not be less than the premium payments and transfers
allocated to the Fixed Account less reductions for Contract Maintenance
Charges, less transfers and reductions due to withdrawals, including any
Contingent Deferred Sales Charge, plus interest at the effective rate of 4% per
year, compounded daily.
Accumulated Value that was allocated or transferred to the Fixed Account
during one year may be credited with a different rate of excess interest than
amounts allocated or transferred to the Fixed Account in another year.
Therefore, at any given time, various portions of your Accumulated Value
allocated to the Fixed Account may be earning interest at different rates, of
excess interest depending upon the year during which such portions were
originally allocated or transferred to the Fixed Account. We bear the
investment risk for the Accumulated Value allocated to the Fixed Account and
for paying interest at the Guaranteed or excess rates, as applicable, on
amounts allocated to the Fixed Account.
Premium payments may not be allocated to the Fixed Account if the Fixed
Account Accumulation Value would be less than $1,000 (beginning in the second
Contract Year for Qualified Plans). Only one transfer to the Fixed Account from
a Variable Account, or from the Fixed Account to a Variable Account is
permitted during a Contract Year. The Company reserves the right to charge a
fee on transfers. No partial transfer or partial withdrawal may be made if the
remaining Accumulation Value would be less than $1,000 in the Fixed Account.
Partial and full withdrawals from the Fixed Account may result in a Contingent
Deferred Sales Charge being imposed. (See "Contingent Deferred Sales Charge").
For purposes of determining the interest rates to be credited on remaining
balances in the Fixed Account, the source of each withdrawal or transfer from
the Fixed Account is determined on a first-in,
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first-out basis as follows: (1) the interest attributable to the earliest
premium payment or transfer applied to the Fixed Account; (2) the earliest
premium payment or transfer applied to the Fixed Account; and (3) the interest
attributable to and principal on each succeeding premium payment or transfer
applied to the Fixed Account in the order the premium payment or transfer was
received.
Unless the request for partial withdrawal specifies otherwise, withdrawals
will be made from each Variable Account in the same proportion that the
Contract Value in each Variable Account is allocated, with remaining amounts
withdrawn from the Fixed Account.
Contract Owners have no voting rights in the Separate Account with respect to
Fixed Account Accumulation Values.
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PROSPECTUS
Pacific Corinthian Variable Separate Account of
Pacific Life Insurance Company
700 Newport Center Drive
Newport Beach, California 92660, Telephone: (800) 735-5535
Annuity Service Office:
- ----------------------
P.O. Box 9000
Newport Beach, California 92658-9030
Principal Underwriter:
Pacific Mutual Distributors, Inc.
Member: NASD/SIPC
700 Newport Center Drive
P.O. Box 9000
Newport Beach, California 92660
Counsel:
- -------
Dechert Price & Rhoads
1500 K Street, N.W.
Suite 500
Washington, D.C. 20005
Prospectus dated October 31, 1997
[LOGO OF PACIFIC CORINTHIAN]
<PAGE>
[LOGO OF PACIFIC CORINTHIAN}
Distributed by:
[LOGO OF PACIFIC MUTUAL DISTRIBUTORS, INC.]
Pacific Mutual Distributors, Inc.
Member NASD & SIPC
700 NEWPORT CENTER DRIVE, NB-3
NEWPORT BEACH, CA 92660
1-800-800-7681
FORM 15-20386-00
<PAGE>
PACIFIC CORINTHIAN VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
October 31, 1997
----------------
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED ANNUITY
AND VARIABLE ACCUMULATION CONTRACT
----------------
ADMINISTERED BY
PACIFIC CORINTHIAN VARIABLE SEPARATE ACCOUNT OF
PACIFIC LIFE INSURANCE COMPANY
ADMINISTRATIVE OFFICES:
700 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
TELEPHONE: 1-800-735-5535
ANNUITY SERVICE OFFICE MAILING ADDRESS:
P.O. BOX 9000
NEWPORT BEACH, CALIFORNIA 92658-9030
----------------
This Statement of Additional Information ("SAI") is intended to supplement
the information provided to investors in the Prospectus dated October 31,
1997, of Pacific Corinthian Variable Separate Account of Pacific Life
Insurance Company (the "Separate Account") and has been filed with the
Securities and Exchange Commission as part of the Separate Account's
Registration Statement. Investors should note, however, that this SAI is not
itself a prospectus and should be read carefully in conjunction with the
Separate Account's Prospectus and retained for future reference. A copy of the
Separate Account's Prospectus may be obtained from Pacific Life Insurance
Company.
The contents of this SAI are incorporated by reference in the Prospectus in
their entirety.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction............................................................... 2
General Information and History............................................ 2
Services................................................................... 2
Performance Information.................................................... 3
Financial Statements....................................................... 5
Independent Auditors' Report............................................... 6
Financial Statements of Pacific Mutual Life Insurance Company.............. 7
</TABLE>
1
<PAGE>
INTRODUCTION
The Statement of Additional Information is designed to provide information
in addition to the information provided in the Prospectus. The information
contained herein is intended solely for investors who have read the Prospectus
and are interested in additional information regarding certain aspects of the
Separate Account's policies and operations. Captions in this Statement of
Additional Information generally correspond to like captions in the
Prospectus.
GENERAL INFORMATION AND HISTORY
For a description of the Individual Flexible Premium Deferred Annuity and
Variable Accumulation Contract (the "Contract"), Pacific Life Insurance
Company and its ownership structure, and the Pacific Corinthian Variable
Separate Account of Pacific Life Insurance Company (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 set forth in the Prospectus.
SERVICES
DISTRIBUTION AGREEMENT
Pursuant to a Distribution Agreement between the Company on behalf of itself
and the Separate Account and Pacific Mutual Distributors, Inc. ("PMD"), PMD
acts as Distributor of the Contract. PMD is an indirect, wholly-owned
subsidiary of Pacific Life. Smith Barney, Inc. (or its predecessors), the
previous distributor, was paid or accrued commissions for 1996, 1995 and 1994
in the amount of $7,752,675, $6,392,097, and $6,089,139, respectively.
CUSTODIAN
The Company, subject to applicable laws and regulations, is responsible for
custody of the securities of the Separate Account and is responsible for their
safekeeping.
2
<PAGE>
PERFORMANCE INFORMATION
Performance information for the Variable Accounts, 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, and
historical performance information for the Pacific Select Fund may appear in
advertisements, reports, and promotional literature to 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 annual
Contract Maintenance Charge 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. The current yield for the seven day period
ended June 30, 1997 was 3.83%. For the same period, the effective yield was
3.91%. Calculation of "effective yield" begins with the same "base period
return" used in the calculation of yield, which is then annualized to reflect
weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1) (To the power of 365/7)] - 1
Quotations of yield for the remaining Variable Accounts will be based on all
investment income per Accumulation Unit earned during a particular 30-day
period, less expenses accrued during the period ("net investment income"), and
will be computed by dividing net investment income by the value of the
Accumulation Unit on the last day of the period, according to the following
formula:
YIELD = 2[(a-b + 1)/6/ - 1]
---
cd
where
a= net investment income earned during the period by the
Portfolio attributable to shares owned by the Variable
Account,
b= expenses accrued for the period (net of reimbursements),
c= the average daily number of Accumulation Units outstanding
during the period that were entitled to receive dividends,
and
d= the maximum offering price per Accumulation Unit on the last
day of the period.
Quotations of average annual total return for any Variable Account will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Contract over a period of one, five, and ten
years (or, if less, up to the life of the Variable Account), calculated
pursuant to the following formula: P(1 + T)/n/ = ERV (where P = a hypothetical
initial payment of $1,000, T = the average annual total return, n = the number
of years, and ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period). All total return figures reflect
the deduction of the applicable contingent deferred sales charge, the
administrative charge, the maintenance fee, the mortality and expense risk
charge, and the operating expenses of the Separate Account as shown in the
Prospectus under "Annual Separate Account and Fund Expenses." Performance
information for Variable Accounts may also be advertised based on the
historical performance of the Fund Portfolio underlying the Variable Account
for periods beginning prior to the date each Variable Account commenced
operations. Any such performance calculation will be based on the assumption
that the Variable Account corresponding to the applicable Fund Portfolio was
in existence throughout the stated period and that the contractual charges and
expenses of the Variable Account during that period were equal to those
currently assessed under the Contract. Quotations of total return may
simultaneously be shown for the same or other periods that do not take into
account certain contractual charges such as the contingent deferred sales
charge, the administrative charge, and the maintenance fee.
Performance information for a Variable Account may be compared, in reports
and promotional literature, to the Standard & Poor's 500 Stock Index ("S&P
500"), the Dow Jones Industrial Average ("DJIA"), the Donoghue Money Market
Institutional Averages, the Lehman Brothers Government Corporate Index, the
Lehman Brothers Government Bond Index, the Salomon Brothers High Yield Bond
Indexes, the Morgan Stanley Capital International's EAFE Index or other
indices that measure performance of a pertinent group of securities so that
investors may compare a Variable Account's results with those of a group of
securities widely regarded by investors as representative of the securities
markets in general or representative of a particular type of security.
3
<PAGE>
Performance information may also be compared to (i) other groups of variable
annuity separate accounts or other investment products tracked by Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds and other investment companies by overall performance, investment
objectives, and assets, or tracked by other services, companies, publications
or persons who rank such investment companies on overall performance or other
criteria; and (ii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Contract. Unmanaged indices
may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
Performance information for any Variable Account reflects only the
performance of a hypothetical Contract under which an Owner's Accumulated
Value is allocated to a Variable Account during a particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies, characteristics and
quality of the Portfolio of the Fund in which the Variable Account invests,
and the market conditions during the given time period, and should not be
considered as a representation of what may be achieved in the future.
Reports and promotional literature may also contain other information
including (i) the ranking of any Variable Account derived from rankings of
variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services or by other rating services, companies,
publications, or other persons who rank separate accounts or other investment
products on overall performance or other criteria, (ii) the effect of tax-
deferred compounding on a Variable Account's investment returns, or returns in
general, which may be illustrated by graphs, charts, or otherwise, and which
may include a comparison, at various points in time, of the return from an
investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a taxable basis, and (iii)
our rating or a rating of our claims paying ability as determined by firms
that analyze and rate insurance companies and by nationally recognized
statistical rating organizations.
The following table presents the annualized total return based on
Accumulation Values and Full Withdrawal Values for each Variable Account of
Pacific Corinthian Variable Separate Account for the one year period ended
June 30, 1997 and for the period from each such Variable Account's
commencement of investment in the Pacific Select Fund through June 30, 1997.
The table is based on a Contract for which the average initial premium is
approximately $25,000. The Accumulated Value (AV) returns reflect all Separate
Account and current Contract charges except the withdrawal charge. The Full
Withdrawal Value (FWV) returns reflect all Separate Account and current
Contract charges including the withdrawal charge that would have been deducted
if the contract had been surrendered on June 30, 1997. The total returns do
not reflect any deduction of premium taxes. The withdrawal charges range from
a maximum of 5% on premiums age 1, to 1% on premiums Age 5 and over. The
information presented also includes data representing unmanaged market
indices. Returns assume 100% of the premium payment was allocated to the
Variable Account shown.
4
<PAGE>
THE RESULTS SHOWN IN THIS SECTION ARE NOT AN ESTIMATE OR GUARANTEE OF FUTURE
INVESTMENT PERFORMANCE.
ANNUALIZED RATES OF RETURN FOR PERIODS ENDED JUNE 30, 1997
ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
<TABLE>
<CAPTION>
BEGINNING
1 YEAR DATE*
-------------- ----------------
VARIABLE ACCOUNTS AV FWV AV FWV
- ----------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Variable Account I -- Money Market.............. 3.77% (0.03%) 3.91% 2.76%
Variable Account II -- Equity................... 15.76% 11.76% 25.40% 24.52%
Variable Account III -- Bond and Income......... 7.96% 4.07% 11.80% 10.75%
Variable Account IV -- Government Securities.... 6.07% 2.25% 8.00% 6.90%
Variable Account VII -- Equity Income........... 29.16% 25.16% 26.23% 25.35%
Variable Account IX -- Multi-Strategy........... 18.31% 14.31% 17.83% 16.86%
Variable Account X -- Managed Bond.............. 7.12% 3.26% 8.65% 7.53%
Variable Account XI -- High Yield Bond.......... 12.74% 8.74% 12.18% 11.10%
Variable Account XII -- Equity Index............ 32.88% 28.88% 30.81% 29.96%
Variable Account XIII -- International.......... 24.28% 20.28% 18.14% 17.16%
Variable Account XIV -- Growth LT............... 9.68% 5.73% 20.87% 19.92%
<CAPTION>
MAJOR INDICES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
EAFE............................................ 12.83 9.12 12.83 6.58
First Boston High Yield Bond.................... 14.67 12.36 11.60 11.62
LB Aggregate.................................... 8.16 8.53 7.12 8.82
LBG/Bond........................................ 7.40 7.94 6.97 8.47
LBG/C Bond...................................... 7.75 8.34 7.23 8.72
LBG/C LT Bond................................... 9.20 10.56 9.04 9.99
Russell 2500.................................... 20.10 22.31 18.61 12.75
Russell 2000.................................... 16.33 20.06 17.87 11.14
S & P 500....................................... 34.70 28.86 19.78 14.66
</TABLE>
- --------
* Prior to January 1, 1995, the Variable Accounts within Pacific Corinthian
Variable Annuity's Separate Account invested in corresponding Series of
Pacific Corinthian Variable Fund. On December 31, 1994, the Series' assets
of Pacific Corinthian Variable Fund were acquired by Pacific Select Fund for
shares of Pacific Select Fund. Pacific Select Fund performance figures are
the relevant basis for the returns in 1995 and going forward. Returns are
based on the following beginning dates for each Variable Account: Money
Market 1/3/95; Managed Bond 1/20/95; Government Securities 1/3/95; High
Yield Bond 2/3/95; Growth LT 1/20/95; Equity Income 1/3/95; Equity 1/3/95;
Bond and Income 1/3/95; Multi-Strategy 1/3/95; Equity Index 1/20/95; and
International 1/19/95. Performance of the Equity Portfolio and the Bond and
Income Portfolio is based on the performance of predecessor portfolios of
Pacific Corinthian Variable Fund, which began their first full year of
operations 1/1/84 and were acquired by the Fund on 12/31/94. Effective June
1, 1997 Morgan Stanley Asset Management Inc. became the Portfolio Manager of
the International Portfolio.
The rates of return and hypothetical values shown above represent past
performance and neither guarantee nor predict future investment results.
Actual rates of return and values will fluctuate. The value of accumulation
units, when redeemed, may be more or less than the original costs. Investment
in the Money Market Variable Account is neither insured nor guaranteed by the
U.S. Government.
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.
FINANCIAL STATEMENTS
The financial statements of Pacific Mutual Life Insurance Company are
presented in this Statement of Additional Information. The audited financial
statements of the Pacific Corinthian Variable Separate Account as of December
31, 1996, and for each of the two years then ended, and the unaudited semi-
annual financial statements of the Pacific Corinthian Variable Separate
Account as of June 30, 1997, are incorporated herein by reference from the
Annual Report of the Pacific Corinthian Variable Separate Account dated as of
December 31, 1996, and the Semi-Annual Report of the Pacific Corinthian
Variable Separate Account dated as of June 30, 1997, respectively.
5
<PAGE>
INDEPENDENT AUDITORS' REPORT
Pacific Mutual Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated statements of financial
position of Pacific Mutual Life Insurance Company and subsidiaries (the
"Company") as of December 31, 1996 and 1995, and the related
consolidated statements of operations and equity and cash flows for
each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Pacific Mutual Life
Insurance Company and subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company has adopted all applicable generally accepted accounting
principles relating to mutual life insurance companies for all periods
presented.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 1997
6
<PAGE>
FINANCIAL STATEMENTS OF PACIFIC MUTUAL LIFE INSURANCE COMPANY
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1996 1995
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at fair value:
Fixed maturity securities $12,193.8 $11,359.2
Equity securities 260.8 218.5
Short-term investments 66.1 103.3
Mortgage loans 1,477.3 1,346.2
Real estate 280.0 288.6
Policy loans 3,131.8 2,793.3
Other investments 208.0 214.6
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS 17,617.8 16,323.7
Cash and cash equivalents 109.0 286.1
Deferred policy acquisition costs 531.5 391.1
Accrued investment income 202.5 198.8
Other assets 462.4 416.5
Separate account assets 8,142.1 5,686.9
- -------------------------------------------------------------------------------
TOTAL ASSETS $27,065.3 $23,303.1
- -------------------------------------------------------------------------------
LIABILITIES AND EQUITY
Liabilities:
Universal life, annuity and other investment contract de-
posits $13,877.4 $12,719.4
Future policy benefits 2,442.0 2,378.9
Policyholders' dividends payable 64.5 65.3
Borrowings 120.5 83.0
Surplus notes 149.6 149.6
Other liabilities 572.0 586.6
Separate account liabilities 8,142.1 5,686.9
- -------------------------------------------------------------------------------
Total Liabilities 25,368.1 21,669.7
- -------------------------------------------------------------------------------
Commitments and contingencies
Equity:
Retained earnings 1,318.0 1,151.4
Unrealized gain on available for sale securities, net 379.2 482.0
- -------------------------------------------------------------------------------
Total Equity 1,697.2 1,633.4
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $27,065.3 $23,303.1
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
7
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Insurance premiums $ 465.4 $ 458.5 $ 455.9
Policy fees from universal life, annuity and
other investment contract deposits 348.6 309.0 280.0
Net investment income 1,063.0 1,022.3 933.6
Net realized capital gains (losses) 68.3 77.6 (2.1)
Investment management fees 14.1 12.9 144.6
Other income 188.6 139.4 203.6
- -------------------------------------------------------------------------------
TOTAL REVENUES 2,148.0 2,019.7 2,015.6
- -------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 653.2 654.2 638.6
Policy benefits paid or provided 664.7 668.5 590.2
Commission expenses 199.8 167.8 139.9
Operating expenses 350.0 308.3 433.8
- -------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 1,867.7 1,798.8 1,802.5
- -------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 280.3 220.9 213.1
Provision for income taxes 113.7 86.1 111.7
- -------------------------------------------------------------------------------
NET INCOME 166.6 134.8 101.4
Equity, beginning of year 1,633.4 809.3 942.8
Change in unrealized gain (loss) on available for
sale securities, net (102.8) 689.3 (234.9)
- -------------------------------------------------------------------------------
EQUITY, END OF YEAR $1,697.2 $1,633.4 $ 809.3
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
8
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 166.6 $ 134.8 $ 101.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization (1.4) (30.4) (28.3)
Deferred income taxes (49.7) (30.3) 26.2
Net realized capital (gains) losses (68.3) (77.6) 2.1
Deferred policy acquisition costs (140.4) 48.8 (126.5)
Interest credited to universal life, annuity
and other investment contract deposits 653.2 654.2 638.6
Change in accrued investment income (3.7) (16.1) 28.5
Change in future policy benefits 63.1 89.3 48.7
Change in policyholders' dividends payable (0.8) (0.5) (0.2)
Change in other assets and liabilities 169.7 172.9 (51.2)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 788.3 945.1 639.3
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale securities:
Purchases (4,525.0) (3,001.3) (4,376.9)
Sales 2,511.0 1,940.3 2,690.3
Maturities and repayments 1,184.7 926.9 1,220.4
Held to maturity securities:
Purchases (181.9) (415.0)
Sales 62.3
Maturities and repayments 111.0 202.2
Repayments of mortgage loans 220.4 267.7 399.1
Proceeds from sales of mortgage loans and real
estate 14.5 27.4 52.8
Purchases of mortgage loans and real estate (414.3) (244.7) (237.7)
Distributions from partnerships 78.8 49.0
Change in policy loans (338.5) (389.8) (349.7)
Change in short-term investments 37.2 (66.7) 129.0
Other investing activity, net (120.1) (121.1) 15.7
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,351.3) (620.9) (669.8)
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
9
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1996 1995 1994
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 2,105.0 $ 1,437.9 $ 1,355.0
Withdrawals (1,756.6) (1,774.2) (1,376.0)
Net change in borrowings 37.5 (43.8) 36.9
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING AC-
TIVITIES 385.9 (380.1) 15.9
- -------------------------------------------------------------------------------
Net change in cash and cash equivalents (177.1) (55.9) (14.6)
Cash and cash equivalents, beginning of year 286.1 342.0 356.6
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 109.0 $ 286.1 $ 342.0
- -------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMA-
TION
Federal income taxes paid $ 185.9 $ 96.9 $ 82.8
Interest paid $ 27.2 $ 23.3 $ 24.1
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
10
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Pacific Mutual Life Insurance Company ("Pacific Mutual Life") was
established in 1868 and is organized under the laws of the State of
California as a mutual life insurance company. Pacific Mutual Life
conducts business in every state except New York.
Pacific Mutual Life and its subsidiaries and affiliates have primary
business operations which consist of life insurance, annuities, pension
products, group employee benefits and investment management and advisory
services. These primary business operations provide a broad range of life
insurance, accumulation and investment products for individuals and
businesses and offer a range of investment products to institutions and
pension plans. Additionally, through its major subsidiaries and
affiliates, Pacific Mutual Life provides a variety of group employee
benefits, as well as investment management and advisory services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Pacific Mutual Life
Insurance Company and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Mutual Life and its wholly-owned
insurance subsidiaries, Pacific Corinthian Life Insurance Company ("PCL"-
Note 3), PM Group Life Insurance Company ("PM Group") and World-Wide
Holdings Limited, and its noninsurance subsidiaries, Pacific Financial
Asset Management Corporation ("PFAMCo"), Pacific Mutual Distributors,
Inc. ("PMD"), Pacific Mutual Realty Finance, Inc., Pacific Mezzanine
Associates, L.L.C. and MC Associates, LLC. All significant intercompany
transactions and balances have been eliminated. Pacific Mutual Life
prepares its regulatory financial statements based on accounting
practices prescribed or permitted by the Insurance Department of the
State of California. These consolidated financial statements differ from
those followed in reports to regulatory authorities (Note 2).
On December 21, 1995, Pacific Mutual Life completed a subsidiary
reorganization in which PFAMCo became a direct, wholly-owned subsidiary
of Pacific Mutual Life. Prior to the reorganization PFAMCo was a wholly-
owned, second-tier subsidiary of Pacific Mutual Life. The intermediate
company, Pacific Financial Holding Company ("PFHC"), and certain of its
assets and liabilities were merged into PFAMCo in connection with this
reorganization. The remaining assets were merged into Pacific Mutual Life
which consisted of investments in subsidiaries as follows: PFAMCo, PMD
and PM Group.
ACCOUNTING PRONOUNCEMENTS ADOPTED
Pacific Mutual Life has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts," and Interpretation No.
40, "Applicability of Generally Accepted Accounting Principles to Mutual
Life Insurance and Other Enterprises" (the "Interpretation") issued by
the Financial Accounting Standards Board. SFAS No. 120 and the
Interpretation require that mutual life insurance companies and their
insurance subsidiaries adopt all applicable authoritative GAAP
pronouncements in any general purpose financial statements that they may
issue. This differs from prior years when Pacific Mutual Life issued its
regulatory financial statements as general purpose financial statements.
The accompanying consolidated financial statements for 1996, 1995 and
1994 reflect the effects of implementing SFAS No. 120 and the
Interpretation.
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires that long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used
shall be assessed for recoverability if certain events or changes in
circumstances are present. An impairment loss shall be recognized if the
carrying amount of
11
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the asset exceeds the fair value of the asset. Adoption of this
accounting standard did not have a significant impact on the consolidated
financial position or consolidated results of operations of the Company.
On January 1, 1996, the Company also adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights." SFAS No. 122 requires that rights
acquired to service mortgage loans for others be recognized separately
from the mortgage loan asset. SFAS No. 122 also requires that capitalized
mortgage servicing rights be assessed for impairment based on the fair
value of those rights and any impairment should be recognized through a
valuation allowance. Adoption of this accounting standard did not have a
significant impact on the consolidated financial position or consolidated
results of operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This
statement provides consistent accounting standards for securitizations
and other transfers of financial assets, determines when financial assets
(liabilities) should be considered sold (settled) and removed from the
statement of financial position, and determines when related revenues and
expenses should be recognized. The Company currently plans to adopt SFAS
No. 125 beginning on January 1, 1997. The adoption is not expected to
have a significant impact on the consolidated financial position or
consolidated results of operations of the Company.
INVESTMENTS
Fixed maturity securities and equity securities are reported at fair
value, with unrealized gains and losses, net of deferred income tax and
adjustments to related deferred policy acquisition costs, included as a
separate component of equity on the accompanying consolidated statements
of financial position. Trading securities, which are included in short-
term investments, are reported at fair value with unrealized gains and
losses included in net realized capital gains (losses) on the
accompanying consolidated statements of operations.
For mortgage-backed securities included in fixed maturity securities the
Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since
the acquisition of the securities. This adjustment is reflected in net
investment income.
In the first and second quarter of 1995, Pacific Mutual Life sold two
securities from the held to maturity category. The amortized cost of the
securities was $62.3 million and a net after tax loss of $0.7 million was
realized on the sales. The securities were sold due to the significant
deterioration of the issuer's creditworthiness.
Beginning with the third quarter of 1995, Pacific Mutual Life transferred
approximately $1.5 billion of securities from the held to maturity
category to the available for sale category. This amount represented the
amortized cost of the securities at the date of transfer. The fair value
of those securities was approximately $1.6 billion, resulting in a net
after tax unrealized gain of $52.5 million, which was reflected as a
direct increase to equity. The change in classification was a result of a
change in management's intent with respect to these securities. In order
to have the flexibility to respond to changes in interest rates and to
take advantage of changes in the availability of and the yield on
alternative investments, management has determined that the
reclassification of these securities as available for sale was
appropriate.
12
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in revenues.
Short-term investments are carried at fair value and include all trading
securities.
Derivative financial instruments are carried at fair value. Unrealized
gains and losses of derivatives used to hedge securities classified as
available for sale are reflected in a separate component of equity,
similar to the accounting of the underlying hedged assets. Realized gains
and losses on derivatives used for hedging are deferred and amortized
over the average life of the related hedged assets or insurance
liabilities. Unrealized gains and losses of other derivatives are
reflected in operations.
Mortgage loans and policy loans are stated at unpaid principal balances.
Real estate is carried at depreciated cost, or for real estate acquired
in satisfaction of debt, estimated fair value less estimated selling
costs at the date of acquisition if lower than the related unpaid
balance.
On November 15, 1994, PFAMCo and five of its subsidiaries (Pacific
Investment Management Company and subsidiaries, Parametric Portfolio
Associates, Inc., Cadence Capital Management Corporation, NFJ Investment
Group, Inc. and Blairlogie Capital Management Limited) entered into an
agreement and plan of consolidation with Thomson Advisory Group L.P., a
Delaware limited partnership with publicly traded units, to merge into a
newly capitalized partnership named PIMCO Advisors L.P. ("PIMCO
Advisors"). Collectively, PFAMCo and various of its subsidiaries
beneficially own approximately 42% of the outstanding General and Limited
Partner units of PIMCO Advisors as of December 31, 1996 and 1995. This
investment, which is included in other investments on the accompanying
consolidated statements of financial position, is accounted for on the
equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid debt instruments with an
original maturity of three months or less.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business, principally commissions,
medical examinations, underwriting, policy issue and other expenses, all
of which vary with and are primarily related to the production of new
business, have been deferred. For universal life, annuity and other
investment contract products, such costs are generally amortized in
proportion to the present value of expected gross profits using the
assumed crediting rate. Adjustments are reflected in earnings or equity
in the period the Company experiences deviations in gross profit
assumptions. Adjustments directly affecting equity result from experience
deviations due to changes in unrealized gains and losses in investments
classified as available for sale. For life insurance products, such costs
are being amortized over the premium-paying period of the related
policies in proportion to premium revenues recognized, using assumptions
consistent with those used in computing policy reserves. For the years
ended December 31, 1996, 1995 and 1994, net amortization of deferred
policy acquisition costs included in operating expenses amounted to $70.0
million, $63.3 million and $44.2 million, respectively, on the
accompanying consolidated statements of operations and equity.
PRESENT VALUE OF FUTURE PROFITS
Included in other assets is $16.1 million and $38.4 million which
represents the present value of estimated future profits of acquired
business in connection with the rehabilitation of First Capital Life
Insurance Company ("FCL"-Note 3) as of December 31, 1996 and 1995,
respectively. The aforementioned future profits are discounted to
13
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provide an appropriate rate of return and are being amortized over the
rehabilitation plan period. Amortization for the years ended December 31,
1996, 1995 and 1994 amounted to $24.2 million, $17.1 million and $4.7
million, respectively. During 1996, the Company changed certain
assumptions regarding the estimated life which resulted in an increase in
amortization in 1996 of approximately $17.0 million.
UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Universal life, annuity and other investment contract deposits are valued
using the retrospective deposit method and consist principally of
deposits received plus interest credited less accumulated assessments.
Interest credited to these policies ranged from 4% to 8.4% during 1996,
1995 and 1994.
The following detail of universal life, annuity and other investment
contract deposits is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------------
(In Millions)
<S> <C> <C>
Universal life $ 7,562.5 $ 6,930.7
Annuity 2,459.3 2,426.6
Other investment contract deposits 3,855.6 3,362.1
-------------------
$13,877.4 $12,719.4
-------------------
</TABLE>
The following detail of universal life, annuity and other investment
contract deposits policy fees and interest credited is as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995 1994
--------------------
(In Millions)
<S> <C> <C> <C>
Policy fees
Universal life $318.4 $292.6 $267.1
Annuity 26.6 12.8 9.4
Other investment contract deposits 3.6 3.6 3.5
--------------------
Total policy fees $348.6 $309.0 $280.0
--------------------
Interest credited
Universal life $279.3 $258.6 $226.9
Annuity 131.9 125.2 120.7
Other investment contract deposits 242.0 270.4 291.0
--------------------
Total interest credited $653.2 $654.2 $638.6
--------------------
</TABLE>
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions range from 4.5% to 9.3% for 1996, 1995 and
1994. Mortality, morbidity and withdrawal assumptions are generally based
on the Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for participating business are provided for
in the liability for future policy benefits. Included in policy benefits
paid or provided on the accompanying consolidated statements of
operations and equity are dividends to policyholders.
14
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Dividends are provided based on dividend formulas approved by the Board
of Directors and reviewed for reasonableness and equitable treatment of
policyholders by an independent consulting actuary. As of December 31,
1996 and 1995, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
STATE GUARANTY FUND ASSESSMENTS
Insurance companies are subject to assessments by life and health
guaranty associations in most states in which they are licensed to do
business. These assessments are based on the volume and type of business
they sell in those states and may be partially recovered in some states
through a future reduction in premium taxes. Based on current information
available from the National Organization of Life and Health Guaranty
Association, the Company, as of December 31, 1996, has accrued in other
liabilities on the accompanying consolidated statements of financial
position an amount adequate for anticipated payments of known
insolvencies, net of estimated recoveries of premium tax offsets.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized
when incurred.
Generally, receipts for universal life, annuities and other investment
contracts are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Investment management fees are recorded as revenues during the period
such services are performed.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 15 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over varying periods ranging from 3 to 40 years. Depreciation of
investment real estate is included in net investment income on the
accompanying consolidated statements of operations and equity.
Depreciation and amortization of other assets is included in operating
expenses on the accompanying consolidated statements of operations and
equity.
FEDERAL INCOME TAXES
Pacific Mutual Life is taxed as a life insurance company for Federal
income tax purposes and files a consolidated Federal income tax return
with all its includable domestic subsidiaries. The amount of Federal
income tax expense includes an equity tax calculated by a prescribed
formula that incorporates a differential earnings rate between stock and
mutual life insurance companies. Deferred income taxes are provided for
timing differences in the recognition of revenues and expenses for
financial reporting and income tax purposes.
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in
accounts with individual investment objectives. The investment results of
separate account assets generally pass through to separate account
policyholders and contract owners.
15
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 5
and 6 have been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented may not be indicative of the amounts
the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
significant effect on the estimated fair value amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. STATUTORY RESULTS
The following are reconciliations of statutory surplus and statutory net
income for Pacific Mutual Life as calculated in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, to the amounts reported as equity and net
income included in the accompanying consolidated financial statements:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Millions)
<S> <C> <C>
Statutory surplus $ 815.2 $ 723.2
Deferred policy acquisition costs 542.0 411.9
Unrealized gain on available for sale
securities, net 379.2 482.0
Asset valuation reserve 209.4 191.4
Deferred income tax 174.6 129.2
Subsidiary equity 60.7 66.0
Non-admitted assets 22.8 22.5
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (340.4) (249.1)
Other (16.7) 5.9
------------------
Equity as reported herein $1,697.2 $1,633.4
------------------
</TABLE>
16
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995 1994
----------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $113.1 $ 85.1 $ 81.0
Deferred policy acquisition costs 111.2 76.4 59.4
Deferred income tax 70.9 31.5 (27.7)
Interest maintenance reserve 3.8 12.2 (7.7)
Net realized gain (loss) on trading
securities (11.6) 13.2 (2.0)
Earnings of subsidiaries (33.0) 5.9 20.7
Insurance and annuity reserves (91.3) (95.5) (28.2)
Other 3.5 6.0 5.9
----------------------
Net income as reported herein $166.6 $134.8 $101.4
----------------------
</TABLE>
RISK-BASED CAPITAL
Each insurance company's state of domicile imposes minimum risk-based
capital requirements that were developed by the National Association of
Insurance Commissioners ("NAIC"). The formulas for determining the amount
of risk-based capital specify various weighting factors that are applied
to financial balances or various levels of activity based on the
perceived degree of risk. Regulatory compliance is determined by a ratio
of a company's regulatory total adjusted capital, as defined by the NAIC,
to its authorized control level risk-based capital, as defined by the
NAIC. Companies below specific trigger points or ratios are classified
within certain levels, each of which requires specified corrective
action. As of December 31, 1996 and 1995, the Company's ratios exceeded
the minimum risk-based capital requirements.
DIVIDENDS
Dividends to Pacific Mutual Life from its insurance subsidiaries are
subject to regulatory restrictions and approvals. The maximum amount of
dividends that can be paid by PM Group cannot exceed the lesser of 10% of
surplus as regards to policyholders, or the net statutory gain from
operations, without prior approval from the Insurance Commissioner of the
State of Arizona. During 1996, 1995 and 1994, PM Group received approval
to pay extraordinary dividends in excess of these limitations. PM Group
paid dividends of $25 million, $25 million and $20 million for the years
ended December 31, 1996, 1995 and 1994 of which $18 million, $17.2
million and $12.4 million, respectively, were considered extraordinary.
In accordance with the terms of the rehabilitation agreement (Note 3),
PCL is precluded from paying any dividends during the rehabilitation
period without the prior consent of the Insurance Department of the State
of California. No such dividends have been paid.
3. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
Pursuant to a five-year rehabilitation agreement approved by a California
Superior Court and the Insurance Department of the State of California in
July 1992, Pacific Mutual Life, through its wholly-owned subsidiary, PCL,
will facilitate the rehabilitation of FCL. In accordance with the five-
year rehabilitation agreement, insurance policies of FCL were
restructured and substantially all the assets and certain liabilities of
FCL were assumed by PCL on December 31, 1992, pursuant to an assumption
reinsurance agreement and asset purchase agreement and have been
accounted for as a purchase transaction.
17
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY (CONTINUED)
The rehabilitation agreement provides for the holders of restructured
policies to share in a substantial percentage of the unallocated
statutory surplus of PCL at the end of the rehabilitation period.
Policyholders have the option to surrender their restructured policies
with reduced benefits during this five-year period. During the
rehabilitation plan period, PCL is prohibited from issuing new insurance
policies. PCL will merge into Pacific Mutual Life, with Pacific Mutual
Life as the surviving entity, within thirty days following September 30,
1997, the end of the rehabilitation period.
In the event PCL is unable to pay contract benefits, Pacific Mutual Life
is obligated to contribute funds to pay those benefits in accordance with
the rehabilitation agreement.
4. ACQUISITION OF INSURANCE BLOCK OF BUSINESS
In 1996, Pacific Mutual Life signed a definitive agreement to acquire a
block of corporate-owned life insurance ("COLI") policies from
Confederation Life Insurance Company (U.S.) in Rehabilitation, which is
currently under rehabilitation. This block consists of approximately
40,000 policies, having a face amount of $9 billion and reserves of $1.7
billion. This block is primarily non-leveraged COLI. The transaction is
expected to close during the first half of 1997.
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities are shown below. The
estimated fair value of publicly traded securities is based on quoted
market prices. For securities not actively traded, estimated fair values
were provided by independent pricing services specializing in "matrix
pricing" and modeling techniques. The Company also estimates certain fair
values based on interest rates, credit quality and average maturity or
from securities with comparable trading characteristics.
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Amortized ---------------- Fair
Cost Gains Losses Value
-------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Available for Sale Securities
As of December 31, 1996:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 297.9 $ 11.2 $ 0.3 $ 308.8
Obligations of states, political
subdivisions and foreign
governments 638.1 46.2 1.0 683.3
Corporate securities 6,848.3 506.3 91.9 7,262.7
Mortgage-backed and asset-backed
securities 3,753.6 98.0 19.4 3,832.2
Redeemable preferred stock 102.5 6.4 2.1 106.8
-------------------------------------
Total Fixed Maturity Securities $11,640.4 $668.1 $114.7 $12,193.8
-------------------------------------
Equity Securities $ 229.6 $ 40.8 $ 9.6 $ 260.8
-------------------------------------
</TABLE>
18
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Amortized ---------------- Fair
Cost Gains Losses Value
-------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Available for Sale Securities
As of December 31, 1995:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 378.4 $ 33.4 $ 411.8
Obligations of states, political
subdivisions and foreign
governments 625.1 70.7 $ 3.3 692.5
Corporate securities 6,179.1 537.1 45.0 6,671.2
Mortgage-backed and asset-backed
securities 3,366.9 138.6 12.0 3,493.5
Redeemable preferred stock 89.4 3.1 2.3 90.2
-------------------------------------
Total Fixed Maturity Securities $10,638.9 $782.9 $62.6 $11,359.2
-------------------------------------
Equity Securities $ 192.3 $ 32.2 $ 6.0 $ 218.5
-------------------------------------
</TABLE>
The amortized cost and estimated fair values of fixed maturity securities
as of December 31, 1996, by contractual repayment date of principal, are
shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------------------
(In Millions)
<S> <C> <C>
Available for Sale:
Due in one year or less $ 1,482.3 $ 1,489.0
Due after one year through five years 2,830.0 3,042.3
Due after five years through ten years 1,907.4 1,991.7
Due after ten years 1,667.1 1,838.6
--------------------
7,886.8 8,361.6
Mortgage-backed and asset-backed securities 3,753.6 3,832.2
--------------------
Total $11,640.4 $12,193.8
--------------------
</TABLE>
Proceeds from sales of all available for sale securities during 1996,
1995 and 1994 were $2.5 billion, $1.9 billion and $2.7 billion,
respectively. Gross gains of $89.3 million, $58.0 million and $56.0
million and gross losses of $29.9 million, $32.3 million and $70.8
million were realized on those sales during 1996, 1995 and 1994,
respectively.
19
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 831.6 $ 808.1 $ 741.3
Equity securities 17.8 7.3 8.9
Mortgage loans 107.9 112.9 136.3
Real estate 51.3 43.2 37.2
Policy loans 113.0 105.2 89.0
Other 48.9 47.1 3.3
--------------------------
Gross investment income 1,170.5 1,123.8 1,016.0
Investment expense 107.5 101.5 82.4
--------------------------
Net investment income $1,063.0 $1,022.3 $ 933.6
--------------------------
</TABLE>
The change in gross unrealized gain (loss) on investments in available
for sale and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
-------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale and trading securi-
ties:
Fixed maturity $(169.1) $1,039.3 $(320.6)
Equity 6.5 17.2 (29.7)
-------------------------
Total $(162.6) $1,056.5 $(350.3)
-------------------------
</TABLE>
As of December 31, 1996 and 1995, investments in fixed maturity
securities with a carrying value of $19.6 million and $20.5 million,
respectively, were on deposit with state insurance departments to satisfy
regulatory requirements.
No investment, aggregated by issuer, exceeded 10% of total equity as of
December 31, 1996.
The Company has no non-income producing fixed maturity securities,
mortgage loans, real estate or other long-term investments as of December
31, 1996.
20
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities (Note 5) $12,454.6 $12,454.6 $11,577.7 $11,577.7
Mortgage loans 1,477.3 1,533.9 1,346.2 1,535.1
Policy loans 3,131.8 3,131.8 2,793.3 2,793.3
Cash and cash equivalents 109.0 109.0 286.1 286.1
Derivative financial
instruments:
Interest rate floors and
caps, options and
swaptions 59.3 59.3 39.4 39.4
Interest rate swap
contracts 1.0 1.0 2.4 2.4
Credit and total return
swaps 1.1 1.1 1.0 1.0
Liabilities:
Guaranteed interest
contracts 2,948.3 3,056.1 2,375.9 2,459.3
Deposit liabilities 799.6 800.6 876.3 899.4
Annuity liabilities 2,459.4 2,459.4 2,427.2 2,427.2
Surplus notes 149.6 157.5 149.6 157.7
Derivative financial
instruments:
Options written 1.5 1.5 1.5 1.5
Asset swap contracts 12.5 12.5 3.5 3.5
Foreign currency
derivatives 4.3 4.3 5.0 5.0
</TABLE>
The following methods and assumptions were used to estimate the fair
value of these financial instruments as of December 31, 1996 and 1995:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flow, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The carrying amounts of policy loans are a reasonable estimate of their
fair values.
CASH AND CASH EQUIVALENTS
The carrying amounts of these items are a reasonable estimate of their
fair values.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose value or cash flows are
"derived" from another source, such as an underlying security. They can
facilitate total return and, when used for hedging, they achieve the
lowest cost and most efficient execution of positions. Derivatives can
also be used to leverage by using very large notional amounts or by
creating formulas that multiply changes in the underlying security. The
Company's approach is to avoid highly leveraged or overly complex
investments. The Company utilizes certain derivative financial
instruments to diversify its business risk and to minimize its exposure
to fluctuations in market prices, interest rates or basis risk as well as
for facilitating total return. Risk is limited through modeling
derivative performance in product portfolios for hedging and setting loss
limits in total return portfolios.
21
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
Derivatives used by the Company involve elements of credit risk and
market risk in excess of amounts recognized in the accompanying
consolidated financial statements. The notional amounts of these
instruments reflect the extent of involvement in the various types of
financial instruments. The estimated fair values of these instruments are
based on quoted market prices, dealer quotations or internal price
estimates believed to be comparable to dealer quotations. These amounts
estimate what the Company would have to pay or receive if the contracts
were terminated. The Company determines, on an individual counterparty
basis, the need for collateral or other security to support financial
instruments with off-balance sheet counterparty risk.
A reconciliation of the notional or contract amounts and discussion of
the various derivative instruments is as follows:
<TABLE>
<CAPTION>
Balance Balance
Beginning Terminations End
of Year Acquisitions and Maturities of Year
----------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1996:
Interest rate floors and
caps, options and
swaptions $2,159.6 $3,075.0 $ 371.4 $4,863.2
Interest rate swap
contracts 619.6 620.9 252.2 988.3
Asset swap contracts 20.0 15.3 5.3 30.0
Credit and total return
swaps 146.1 307.2 96.8 356.5
Financial futures
contracts 310.1 3,358.9 3,059.8 609.2
Foreign currency
derivatives 15.4 43.1 17.1 41.4
December 31, 1995:
Interest rate floors and
caps, options and
swaptions 1,950.9 1,126.6 917.9 2,159.6
Interest rate swap
contracts 370.5 339.0 89.9 619.6
Asset swap contracts 30.0 10.0 20.0
Credit and total return
swaps 116.3 99.8 70.0 146.1
Financial futures
contracts 137.6 1,877.0 1,704.5 310.1
Foreign currency
derivatives 35.2 19.8 15.4
</TABLE>
Interest Rate Floors and Caps, Options and Swaptions
----------------------------------------------------
The Company uses interest rate floors and caps, options and swaptions to
hedge against fluctuations in interest rates and in its total return
portfolios. Interest rate floor agreements entitle the Company to receive
the differential, if below, between the specified rate and the current
value of the underlying index. Interest rate cap agreements entitle the
Company to receive the differential, if above, between the specified rate
and the current value of the underlying index. Options purchased involve
the right, but not the obligation, to purchase the underlying securities
at a specified price during a given time period. Swaptions are options to
enter into a swap transaction at a specified price. The Company uses
written covered call options on a limited basis. Gains and losses on
covered calls are offset by gains and losses on the underlying position.
Options and floors are reported as assets and options written are
reported as liabilities in the consolidated statements of financial
position. Cash requirements for these instruments are generally limited
to the premium paid by the Company at acquisition. The purchase premium
of these instruments is amortized on a constant effective yield basis and
included as a component of net investment income over the term of the
agreement. Interest rate floors and caps, options and swaptions mature
during fiscal years 1997 through 2007.
22
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
Interest Rate Swap Contracts
----------------------------
The Company uses interest rate swaps to manage interest rate risk. The
interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments or the exchange of floating to floating
interest payments tied to different indexes. Generally, no premium is
paid to enter into the contract and no principal payments are made by
either party. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. The interest rate swap contracts mature during fiscal
years 1997 through 2026.
Asset Swap Contracts
--------------------
The Company uses asset swap contracts to manage interest rate and equity
risk to better match portfolio duration to liabilities. Asset swap
contracts involve the exchange of upside equity potential for preferred
cash flow streams. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. The asset swap contracts mature during fiscal years
1998 through 2000.
Credit and Total Return Swaps
-----------------------------
The Company uses credit and total return swaps to take advantage of
market opportunities. Credit swaps involve the receipt of floating or
fixed rate payments in exchange for assuming potential credit losses of
an underlying security. Total return swaps involve the exchange of
floating rate payments for the total return performance of a specified
index or market. The amounts to be received or paid pursuant to these
agreements are accrued and recognized in the consolidated statements of
operations through an adjustment to net investment income over the life
of the agreements. Credit and total return swaps mature during fiscal
years 1997 through 2013.
Financial Futures Contracts
---------------------------
The Company uses exchange-traded financial futures contracts to hedge
cash flow timing differences between assets and liabilities and overall
portfolio duration. Assets and liabilities are rarely acquired or sold at
the same time, which creates a need to hedge their change in value during
the unmatched period. In addition, foreign currency futures may be used
to hedge foreign currency risk on non U.S. dollar denominated securities.
Financial futures contracts obligate the holder to buy or sell the
underlying financial instrument at a specified future date for a set
price and may be settled in cash or delivery of the financial instrument.
Price changes on futures are settled daily through the daily margin cash
flows. The notional amounts of the contracts do not represent future cash
requirements, as the Company intends to close out open positions prior to
expiration.
Foreign Currency Derivatives
----------------------------
The Company enters into foreign exchange forward contracts and swaps to
hedge against fluctuations in foreign currency exposure. Foreign currency
derivatives involve the exchange of foreign currency denominated payments
for U.S. dollar denominated payments. Gains and losses on foreign
exchange forward contracts offset currency gains and losses on the
related assets. The amounts to be received or paid under the foreign
currency swaps are accrued and recognized in the consolidated statements
of operations through an adjustment to net investment income over the
life of the agreements. Foreign currency derivatives expire during fiscal
years 1997 through 2006.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair values of fixed maturity guaranteed interest contracts
are estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of deposit liabilities
with no defined maturities is the amount payable on demand.
23
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
ANNUITY LIABILITIES
The fair value of annuity liabilities approximates carrying value and
primarily includes policyholder deposits and accumulated credited
interest.
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Mutual Life has issued PRO GIC and Diversifier GIC contracts to
plan sponsors totaling $1.1 billion as of December 31, 1996, pursuant to
the terms of which the plan sponsor retains direct ownership and control
of the assets related to these contracts. Pacific Mutual Life agrees to
provide benefit responsiveness in the event that plan benefit requests
exceed plan cash flows. In return for this guarantee, Pacific Mutual Life
receives a fee which varies by contract. Pacific Mutual Life sets the
investment guidelines to provide for appropriate credit quality and cash
flow matching.
7. CONCENTRATION OF CREDIT RISK
The Company manages its investments to limit credit risk by diversifying
its portfolio among various security types and industry sectors. The
credit risk of financial instruments is controlled through credit
approvals, limits and monitoring procedures. Real estate and mortgage
loan investments are diversified by geographic location and property
type. Management believes that significant concentrations of credit risk
do not exist.
The Company is exposed to credit loss in the event of nonperformance by
the counterparties to interest rate swap contracts and other derivative
securities. However, the Company does not anticipate nonperformance by
the counterparties.
8. BORROWINGS
Pacific Mutual Life borrows for short-term needs by issuing commercial
paper. There were no commercial paper borrowings outstanding as of
December 31, 1996 and 1995. Pacific Mutual Life has a revolving credit
facility available of $250 million as of December 31, 1996 and 1995.
There were no borrowings under the revolving credit facility outstanding
as of December 31, 1996 and 1995.
PFHC had the ability to borrow up to $50 million from certain banks at
variable rates of interest. On December 21, 1995, outstanding loans
totaling $37 million were transferred to PFAMCo (Note 1). The borrowing
limit as of December 31, 1996 and 1995 was $150 million and $100 million,
respectively. The interest rate averaged 5.6%, 6.1% and 4.6% for the
years ended December 31, 1996, 1995 and 1994, respectively. The balance
outstanding as of December 31, 1996 and 1995 totaled $95.5 million and
$53 million, respectively. Outstanding borrowings are due and payable in
1997 and are subject to renewal.
During 1992, PFHC entered into a credit agreement with a group of banks
for borrowings of $45 million. Proceeds of this note were paid to PCL in
connection with the issuance of a certificate of contribution by PCL
(Note 3). On December 31, 1996 and 1995, the applicable interest rate was
6.2% and 6.5%, respectively. The outstanding balance of $25 million as of
December 31, 1996 was prepaid per the terms of the agreement on January
27, 1997.
24
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SURPLUS NOTES
Pacific Mutual Life has $150 million of Surplus Notes outstanding at an
interest rate of 7.9% maturing on December 30, 2023. Interest is payable
semiannually on June 30 and December 30. The Surplus Notes may not be
redeemed at the option of Pacific Mutual Life or any holder of the Notes.
The Surplus Notes are unsecured and subordinated to all present and
future senior indebtedness and policy claims of Pacific Mutual Life. Each
payment of interest on and the payment of principal of the Surplus Notes
may be made only with the prior approval of the Insurance Commissioner of
the State of California. Interest expense amounted to $11.8 million for
the years ended December 31, 1996, 1995 and 1994 and is included in net
investment income in the accompanying consolidated statements of
operations and equity.
10. INCOME TAXES
As required by SFAS No. 109, "Accounting for Income Taxes," the Company
accounts for income taxes using the liability method. Under SFAS No. 109,
the deferred tax consequences of changes in tax rates or laws must be
computed on the amounts of temporary differences and carryforwards
existing at the date a new law is enacted. Recording the effects of the
change involves adjusting deferred tax liabilities and assets with a
corresponding charge or credit recognized in the provision for income
taxes. The objective is to measure a deferred tax liability or asset
using the enacted tax rates and laws expected to apply to taxable income
in the periods in which the deferred tax liability or asset is expected
to be settled or realized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995 1994
----------------------
(In Millions)
<S> <C> <C> <C>
Current $163.5 $116.4 $ 85.5
Deferred (49.8) (30.3) 26.2
----------------------
$113.7 $ 86.1 $111.7
----------------------
</TABLE>
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
----------------------
(In Millions)
<S> <C> <C> <C>
Deferred policy acquisition costs $ 2.1 $ (6.0) $ (5.0)
Interest in advance 2.0 2.9 25.4
Investment valuation (7.3) 8.1 11.4
Reserves (28.5) (28.7) 7.1
Other (18.1) (6.6) (12.7)
----------------------
$(49.8) $(30.3) $ 26.2
----------------------
</TABLE>
25
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes based on the
prevailing corporate tax rate to the provision reflected in the
consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $ 98.1 $77.3 $ 74.6
Equity tax-current year 16.3 36.1
Amortization of intangibles on equity
method investments 6.5 6.5
Non-taxable investment income (2.1) (2.1) (4.7)
Equity tax-recomputation of prior years (17.3)
Other 12.2 4.4 5.7
---------------------------
$113.7 $86.1 $111.7
---------------------------
</TABLE>
The net deferred tax asset (liability) included in other assets on the
accompanying consolidated statement of financial position was comprised
of the tax effects of the following temporary differences:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------
(In Millions)
<S> <C> <C>
Reserves $ 244.9 $ 216.4
Deferred compensation 27.6 25.4
Investment valuation 24.0 16.7
Postretirement benefits 9.8 9.4
Dividends 9.6 10.4
Interest in advance 1.7 3.6
Depreciation (9.8) (10.0)
Deferred policy acquisition costs (43.9) (41.8)
Other 22.1 6.1
------------------
Deferred taxes from operations 286.0 236.2
Unrealized gain on available for sale securities (204.5) (259.6)
------------------
Net deferred tax asset (liability) $ 81.5 $ (23.4)
------------------
</TABLE>
11. REINSURANCE
The Company accounts for reinsurance transactions utilizing SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration And Long-
Duration Contracts." SFAS No. 113 establishes the conditions required for
a contract with a reinsurer to be accounted for as reinsurance and
prescribes accounting and reporting standards for those contracts.
Amounts receivable from reinsurers for reinsurance on future policy
benefits, universal life deposits, and unpaid losses is reported as an
asset and included in other assets on the accompanying consolidated
statements of financial position.
26
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. REINSURANCE (CONTINUED)
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger risks
or, in the case of the producer-owned reinsurance company, to diversify
risk and retain top producing agents. All assets associated with
reinsured business remain with, and under the control of the Company.
Approximate amounts recoverable (payable) from (to) reinsurers include
the following amounts:
<TABLE>
<CAPTION>
December 31,
1996 1995
---------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(35.9) $(42.7)
Future policy benefits 90.0 87.7
Unpaid claims 4.6 7.8
Paid claims 8.4 7.9
</TABLE>
As of December 31, 1996, 85% of the reinsurance recoverables were from
one reinsurer, of which 100% is secured by payables to the reinsurer. To
the extent that the assuming companies become unable to meet their
obligations under these agreements, the Company remains contingently
liable. The Company does not anticipate nonperformance by the assuming
companies.
Revenues and benefits are shown net of the following reinsurance
transactions:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
--------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance
premiums $ 44.3 $ 29.2 $ 26.0
Assumed reinsurance included in insurance
premiums 17.8 15.6 20.2
Ceded reinsurance netted against policy fees 71.0 66.5 66.7
Ceded reinsurance netted against net invest-
ment
income 192.5 176.6 151.0
Ceded reinsurance netted against interest
credited 155.2 140.0 119.9
Ceded reinsurance netted against policy ben-
efits 56.7 51.4 45.4
Assumed reinsurance included in policy bene-
fits 9.9 14.5 16.8
</TABLE>
27
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT INFORMATION
The operations of the Company have been classified into four business
segments as follows: Individual Life Insurance and Annuities, Pensions,
Group Employee Benefits and Corporate and Other. These segments are based
on the organization of the Company and are generally distinguished by the
products offered. The Corporate and Other segment generally includes the
assets and operations that do not support the other segments such as
certain non-life insurance related subsidiary operations. Depreciation
expense and capital expenditures are not material and have not been
reported. Revenues, income before income taxes and assets by segment are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-----------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Individual Life Insurance and Annuities $ 962.1 $ 927.0 $ 795.9
Pensions 507.3 513.9 464.0
Group Employee Benefits 454.2 419.3 423.7
Corporate and Other 224.4 159.5 332.0
-----------------------------
$ 2,148.0 $ 2,019.7 $ 2,015.6
-----------------------------
Income before income taxes:
Individual Life Insurance and Annuities $ 92.0 $ 102.3 $ 94.8
Pensions 80.7 53.3 34.3
Group Employee Benefits 24.7 25.2 36.5
Corporate and Other 82.9 40.1 47.5
-----------------------------
$ 280.3 $ 220.9 $ 213.1
-----------------------------
<CAPTION>
December 31,
1996 1995 1994
-----------------------------
(In Millions)
<S> <C> <C> <C>
Assets:
Individual Life Insurance and Annuities $15,484.4 $12,953.2 $10,912.3
Pensions 8,097.2 7,592.5 6,497.9
Group Employee Benefits 344.4 329.8 341.3
Corporate and Other 3,139.3 2,427.6 1,954.3
-----------------------------
$27,065.3 $23,303.1 $19,705.8
-----------------------------
</TABLE>
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLAN
Pacific Mutual Life provides a qualified noncontributory defined benefit
pension plan which covers all eligible employees who have one year of
continuous employment and have attained age 21. The full-benefit vesting
period for all participants is five years.
Benefits for employees are based on years of service and the highest five
consecutive years of compensation during the last ten years of
employment. Pacific Mutual Life's funding policy is to contribute amounts
to the plan sufficient to meet the minimum funding requirements set forth
in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as may be determined appropriate. Contributions are
intended to provide not only for benefits attributed to employment to
date but also for those expected to be earned in the future. All
28
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
such contributions are made to a tax-exempt trust. Plan assets consist
primarily of group annuity contracts issued by Pacific Mutual Life, as
well as participating units of a real estate trust and mutual funds
managed by an indirect subsidiary of Pacific Mutual Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
-----------------------
(In Millions)
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 3.7 $ 2.8 $ 3.2
Interest cost on projected benefit obligation 9.4 8.8 8.5
Actual return on plan assets (19.7) (24.1) 0.6
Amortization of net obligations and prior
service cost 8.0 14.0 (11.4)
-----------------------
Net periodic pension cost $ 1.4 $ 1.5 $ 0.9
-----------------------
</TABLE>
The following table sets forth the Plan's funded status and
amounts recognized on Pacific Mutual Life's consolidated
statements of financial position:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------------
(In Millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 114.4 $ 115.8
Nonvested benefits 1.2 0.8
----------------
Accumulated benefit obligation 115.6 116.6
Effect of projected future compensation increases 18.5 19.5
----------------
Projected benefit obligation 134.1 136.1
Plan assets at fair value (141.2) (125.6)
----------------
Plan assets (in excess) less than projected benefit
obligation (7.1) 10.5
Unrecognized net gain (loss) 2.5 (15.5)
Unrecognized transition asset 6.0 7.2
Unrecognized prior service cost 2.2 2.5
----------------
Accrued pension cost $ 3.6 $ 4.7
----------------
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1996 and 1995, the weighted average
discount rate used was 7.5% and 7%, respectively, and the rate of
increase in future compensation levels was 6% for both years. The
expected long-term rate of return on plan assets was 8.5% in 1996 and
1995.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE PLANS
Pacific Mutual Life sponsors a defined benefit health care plan and a
defined benefit life insurance plan ("the Plans") that provide
postretirement benefits for all eligible retirees and their dependents.
Generally, qualified employees may become eligible for these benefits if
they reach normal retirement age, have been covered under Pacific Mutual
Life's policy as an active employee for a minimum continuous period prior
to the date retired, and have an employment date before January 1, 1990.
The Plans contain cost-sharing features such as deductibles and
coinsurance, and require retirees to make contributions which can be
adjusted annually. Pacific Mutual Life's
29
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
commitment to qualified employees who retire after April 1, 1994 is
limited to specific dollar amounts. Pacific Mutual Life reserves the
right to modify or terminate the Plans at any time. As in the past, the
general policy is to fund these benefits on a pay-as-you-go basis. The
amount of benefits paid under the programs during 1996, 1995 and 1994 was
approximately $1.6 million, $1.7 million and $1.7 million, respectively.
Components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995 1994
-------------------
(In Millions)
<S> <C> <C> <C>
Service cost $ 0.2 $ 0.2 $ 0.2
Interest cost 1.5 1.9 1.8
Amortization (0.3) (0.3) (0.3)
-------------------
Net periodic postretirement benefit cost $ 1.4 $ 1.8 $ 1.7
-------------------
</TABLE>
The following table sets forth the Plan's funded status and amounts
recorded in other liabilities on the accompanying consolidated statements
of financial position:
<TABLE>
<CAPTION>
December 31,
1996 1995
-----------
(In Millions)
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $17.3 $20.9
Fully eligible active plan participants 2.0 1.7
Other active plan participants 2.5 2.3
-----------
Total accumulated postretirement obligation 21.8 24.9
Fair value of plan assets -- --
-----------
Unfunded accumulated postretirement obligation 21.8 24.9
Unrecognized net gain 3.7 0.4
Prior service cost 1.3 1.6
-----------
Accrued postretirement benefit liability $26.8 $26.9
-----------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 9% for 1996 and 10% for 1995 and is assumed to
decrease gradually to 4% in 2003 and remain at that level thereafter. The
amount reported is materially effected by the health care cost trend rate
assumptions. If the health care cost trend rate assumptions were
increased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1996 and 1995 would be increased by 11.5% and 10.9%,
respectively. The effect of this change would increase the aggregate of
the service and interest cost components of the net periodic benefit cost
by 12.3%, 11.4% and 13.6% for 1996, 1995 and 1994, respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7.5% and 7% for 1996 and 1995, respectively.
OTHER PLANS
Pacific Mutual Life has a voluntary Retirement Incentive Savings Plan
pursuant to Section 401(k) of the Internal Revenue Code covering all
eligible employees of the Company. Pacific Mutual Life matches 50% of
each employees' contributions, up to a maximum of six percent of eligible
compensation.
30
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLAN, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
Pacific Mutual Life also has a deferred compensation plan which permits
certain employees to defer portions of their compensation and earn a
guaranteed interest rate on the deferred amounts. The interest rate is
determined annually and is guaranteed for one year. The compensation
which has been deferred has been accrued and the primary expense, other
than compensation, related to this plan is interest on the deferred
amounts.
The Company also has performance based incentive compensation plans for
its employees.
14. TRANSACTIONS WITH AFFILIATES
Pacific Mutual Life serves as the investment advisor for the Pacific
Select Fund, the investment vehicle provided to the Company's variable
life and variable annuity contractholders. Pacific Mutual Life charges
fees based upon the net asset value of the portfolios of the Pacific
Select Fund, which amounted to $14.3 million, $6.5 million and $3.0
million for the years ended December 31, 1996, 1995 and 1994,
respectively. In addition, Pacific Mutual Life entered into an agreement
with the Pacific Select Fund on October 1, 1995, to provide certain
support services for an administration fee which is based on an
allocation of actual costs. Such administration fees amounted to $108,000
and $28,550 for the years ended December 31, 1996 and 1995, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $6.2 million, $5.0 million and $0.4 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
Included in equity securities on the accompanying consolidated statements
of financial position are investments in mutual funds and other
investments managed by PIMCO Advisors which amounted to $110.6 million
and $77.6 million as of December 31, 1996 and 1995, respectively.
Pacific Mutual Life provides certain support services to PIMCO Advisors.
Charges for these services are based on an allocation of actual costs and
amounted to $1.4 million, $1.9 million and $0.2 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
15. SUBSIDIARY PROFIT-SHARING PLANS AND OTHER COMPENSATION PLANS
Prior to the PIMCO Advisors transaction (Note 1), certain of PFAMCo's
direct subsidiaries had nonqualified profit-sharing plans (the "Profit-
Sharing Plans") covering certain key employees ("Key Employees") and
other employees. The Profit-Sharing Plans provided for awards based on
the profitability of the respective subsidiary, as defined in the
employment agreements. Such profitability was primarily based on income
before income taxes and before profit-sharing. The awards ranged from 40%
to 80% of such amounts depending on the level of profitability. The
profit-sharing awards were fully vested as of the PIMCO Advisors
transaction date of November 15, 1994.
In addition, Key Employees of certain indirect subsidiaries participated
in long-term incentive plans that provided compensation under the Profit-
Sharing Plans for a specified period of time subsequent to their
termination of employment. These plans were terminated as of the PIMCO
Advisors transaction date.
Effective November 15, 1994, termination and non-competition agreements
were entered into with certain Key Employees. These agreements provide
terms and conditions for the allocation of future proceeds from
distributions and sales of certain PIMCO Advisors units and other
noncompete payments. When the amount of future payments to be made to a
Key Employee is determinable, a liability for such amount is established
and is included in other liabilities in the consolidated statements of
financial position.
For the years ended December 31, 1996, 1995 and 1994, approximately $35.3
million, $28.6 million and $166.9 million, respectively, is included in
operating expenses in the consolidated statements of operations related
to the above agreements.
31
<PAGE>
Pacific Mutual Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. INVESTMENT COMMITMENTS
The Company has outstanding commitments to make investments in fixed
maturities and other investments as follows (In Millions):
<TABLE>
<CAPTION>
Years Ending December 31:
-------------------------
<S> <C>
1997 $193.1
1998-2001 109.0
2002 and thereafter 19.5
------
Total $321.6
------
</TABLE>
17. LITIGATION
The Company is a respondent in a number of legal proceedings, some of
which involve extra-contractual damages. In the opinion of management,
the outcome of these proceedings is not likely to have a material adverse
effect on the consolidated financial position of the Company.
--------------------------------------------------------------------------
32
<PAGE>
FORM 15-20885-00
