<PAGE>
May 1, 1997 The Penn Insurance and Annuity Company
Philadelphia, PA
Pennant
Profile Of Pia Variable Annuity Account I
This profile is a summary of some of the more important points that you should
consider and know before purchasing the Contract. The Contract is more fully
described in the prospectus which accompanies this Profile. Please read the
prospectus carefully.
1. The Annuity Contract
------------------------------------------
The Contract offered in this prospectus is a combination variable and
fixed annuity contract between you, the owner, and The Penn Insurance and
Annuity Company. The Contract provides a means for you to invest in one or
more of the available investment funds listed in Section 4, and/or one or
more of the fixed interest accounts guaranteed and funded by The Penn
Insurance and Annuity Company through its general account.
You determine (1) the amount and frequency of purchase payments, (2) the
investment funds, (3) transfers between the investment funds, (4) the type
of annuity to be paid after the accumulation period, (5) the beneficiary to
whom death benefits are to be paid, and (6) the amount and frequency of
withdrawals.
Purchase payments and investment gains allocated to the variable
accounts vary up and down with the investment experience of the underlying
investment funds. The investment risk is high or low, depending on the
variable account selected. Refer to section 8 to see calendar year
performance of the investment funds which will show you the range of
historical returns.
2. Annuity Payments
------------------------------------------
You may choose (1) an annuity for a specified number of years, (2) a
life annuity, (3) a life annuity with payments guaranteed for 10 or 20
years, (4) a joint and survivor life annuity or (5) another form of an
annuity that we may agree upon. You may select any one of these as a
variable annuity (except for a specified number of years), a fixed annuity,
or a combination of both.
3. Purchase
------------------------------------------
The Contract may be purchased by individuals, corporations and other
business associations. It may be purchased under retirement plans that
qualify for special tax treatment under the Internal Revenue Code
(Qualified Plan), or as a Non-Qualified Plan. The minimum initial purchase
payment is $5,000 for all Non-Qualified Plans and $2,000 for Qualified
Plans. For both Plans, the minimum subsequent purchase payment is $250.
4. Investment Options
------------------------------------------
<TABLE>
<S> <C> <C>
Independence Capital T. Rowe Price Associates, Inc. Neuberger & Berman Management
Management, Inc. Flexibly Managed Fund Incorporated
Growth Equity Fund High Yield Bond Fund AMT Limited Maturity Bond Portfolio
Quality Bond Fund AMT Balanced Portfolio
Money Market Fund American Century Investment AMT Partners Portfolio
Management, Inc.
OpCap Advisors VP Capital Appreciation Portfolio Fidelity Investments
Value Equity Fund VIP Equity Income Portfolio
Small Capitalization Fund ICMI/Robertson Stephens VIP Growth Portfolio
Emerging Growth Fund VIP II Asset Manager Portfolio
Morgan Stanley Asset Management VIP II Index 500 Portfolio
Emerging Markets Equity (Int'l) Portfolio Vontobel USA, Inc.
International Equity Fund
</TABLE>
<PAGE>
5. Expenses
------------------------------------------
Each year we deduct a contract administration charge of the lesser of
$30 or 2% of the variable account value, unless the variable account value is
greater than $50,000. We deduct a daily mortality and expense risk charge equal
to an annual rate of 1.25% of the daily net asset value of the variable account
and a daily administration charge equal to an annual rate of 0.15% of the daily
net asset value of the variable account. The investment funds underlying the
variable accounts also incur expenses, which range from 0.28% to 1.75% of the
fund's average daily value.
A contingent deferred sales charge may be deducted if you make a full or
partial withdrawal. No deferred sales charge will be made on the portion of the
first withdrawal of each contract year that does not exceed 15% of total
purchase payments. The following table shows the schedule of the contingent
deferred sales charge that will apply:
<TABLE>
<CAPTION>
---------------------------------------------------------
Number of Full Contract
Years Since Purchase Payment Applicable Charge
---------------------------------------------------------
<S> <C>
1 6.0%
2 5.0%
3 4.0%
4 3.0%
5 2.0%
6 1.0%
7 and later No Charge
---------------------------------------------------------
</TABLE>
The following table is designed to help you understand the charges in
your Contract. The column "Total Annual Charges" shows the annual percentage
charge for contract administration (which is represented as .05%), insurance
charges and investment charges. The next columns show you two examples of the
charges, in dollars, you would pay under your Contract. The examples assume that
you invested $1,000 in a Contract which earns 5% annually and that you withdraw
your money at the end of the applicable period. The premium tax is assumed to be
0% in both examples.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Examples
Total Annual
Total Total Expenses at the
Annual Annual Total End of:
Insurance Portfolio Annual
Fund Charges Charges Charges 1 year 10 Years
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Equity 1.45% 0.80% 2.25% $75 $255
Value Equity 1.45 0.78 2.23 75 259
Flexibly Managed 1.45 0.77 2.22 75 258
Small Capitalization 1.45 0.99 2.44 77 279
Emerging Growth 1.45 1.15 2.60 84 349
International Equity 1.45 1.17 2.62 79 302
Quality Bond 1.45 0.77 2.22 75 252
High Yield Bond 1.45 0.84 2.29 76 266
Money Market 1.45 0.73 2.18 74 248
VP Capital Appreciation 1.45 1.00 2.45 77 279
AMT Limited Maturity Bond 1.45 0.78 2.23 75 254
AMT Balanced 1.45 1.09 2.54 78 283
AMT Partners 1.45 0.95 2.40 76 272
VIP Equity Income 1.45 0.56 2.01 73 239
VIP Growth 1.45 0.67 2.12 74 249
VIP II Asset Manager 1.45 0.73 2.18 75 258
VIP II Index 500 1.45 0.28 1.73 70 202
Emerging Markets Equtiy(Int'l) 1.45 1.75 3.20 84 349
----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
6. Taxes
--------------------------------
Your gains under the Contract are not taxed until you take them out. If
you take money out, earnings come out first and are taxed as income. If you
are younger than 59 1/2 when you take money out, you may be charged a 10%
federal tax penalty on the earnings. Payments during the income phase are
considered partly a return of your original investment. That part of each
payment is not taxable as income.
7. Withdrawals
--------------------------------
You may withdraw all or part of your money at any time during the
accumulation phase. Once in each contract year on or after the last day of
the first contract year you may withdraw up to 15% of the total purchase
payments free of the contingent deferred sales charge. A premature
withdrawal charge may be deducted from the money earned on the fixed
interest accounts if you take the money prior to maturity of your fixed
interest account.
8. Performance
--------------------------------
The value of your Contract will fluctuate depending upon the investment
performance of the fund(s) you choose. The following chart shows total
returns for each fund for the time periods shown. These numbers reflect the
insurance company charges and the investment charges of the fund, but do
not reflect any withdrawal charges, which would reduce the performance if
they were applied. Past performance is no guarantee of future results.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Calendar Year
Fund 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Independence Capital
Growth Equity 18.22% 24.83% -9.32% 10.96% 4.55% 32.86% -12.38% 29.34% 5.38% 3.82%
Quality Bond 2.82 18.64 -6.49 10.25 5.22 14.01 6.44 11.33 0.53 n/a
OpCap Advisors
Value Equity 23.58 35.73 1.61 5.69 13.38 25.87 -9.37 11.36 20.94 n/a
Small Capitalization 18.25 n/a n/a n/a n/a n/a n/a n/a n/a n/a
T. Rowe Price
Flexibility Managed 14.85 20.70 2.77 14.28 8.12 19.88 -2.26 19.44 10.72 21.84
High Yield Bond 12.43 14.95 -8.51 18.26 14.33 35.10 -1.99 -1.99 10.13 -2.11
ICMI/Robertson Stephens
Emerging Growth n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Vontobel
International Equity 15.37 12.36 -7.51 36.40 n/a n/a n/a n/a n/a n/a
American Century
VP Captial
Appreciation -5.54 29.46 -2.41 8.94 -2.58 39.89 -2.67 27.00 -8.40 n/a
Neuberger & Berman
AMT Limited Maturity
Bond 3.00 9.56 -1.40 5.30 3.86 9.79 6.81 9.23 0.23
AMT Balanced 5.54 22.22 -4.57 5.13 6.70 20.96 0.52 n/a n/a n/a
AMT Partners 28.32 35.16 n/a n/a n/a n/a n/a n/a n/a n/a
Fidelity Investments
VIP Equity Income 12.84 32.56 5.14 16.80 15.41 29.57 -16.51 15.67 14.44 -2.55
Vip Growth 13.26 33.68 -1.26 17.87 7.94 43.45 -13.01 29.64 7.72 2.18
VIP II Asset Manager 13.17 15.49 -7.26 19.71 10.30 20.85 5.23 n/a n/a n/a
VIP II Index 500 21.52 35.87 0.07 8.68 n/a n/a n/a n/a n/a n/a
Morgan Stanley
Emerging Markets
Equity (Int'l) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
</TABLE>
<PAGE>
9. DEATH BENEFIT
--------------------------------
If you die prior to the Annuity Date we will pay the beneficiary the
greatest of (1) the Contract Value for the period that proof of death is
received, (2) the sum of the Fixed Account Value (if any) on the date that
proof of death is received and the net purchase payments and transfers
allocated to the Separate Account, or (3) if the contract owner dies before
age 80, an enhanced death benefit.
If you die after the Annuity Date, the beneficiary may elect to have the
payments continue for the specified or guaranteed period of to receive in
lump sum the present value of the remaining payments.
10. OTHER INFORMATION
--------------------------------
Free Look. If you cancel your Contract within 10 days after receiving it
---------
(or whatever period is required in your state), we will send your money
back without assessing a withdrawal charge. You will receive whatever your
Contract is worth on the day we receive your request. This may be more or
less than your original payment.
No Probate. In most cases, when you die, the person you choose as your
----------
beneficiary will receive the death benefit without going through probate.
Systematic Withdrawals. You can arrange to have up to 15% of the total
----------------------
purchase payments automatically sent to you on a modal basis while your
Contract is still in the accumulation phase. Of course, you'll have to pay
taxes on money you receive.
Disability and Medically Related Surrenders. Under certain circumstances,
-------------------------------------------
you will have the ability to withdraw your money free from the contingent
deferred sales charge if you become disabled.
Dollar Cost Averaging. You can arrange to have a regular amount of money
---------------------
automatically invested in the investment funds monthly or quarterly.
Automatic Asset Rebalancing. You can elect to have your investments
---------------------------
automatically rebalanced on a quarterly basis to maintain a specified
percentage allocation among your selected investment funds, which will not
include the fixed interest accounts.
11. INQUIRIES
--------------------------------
If you need more information, please contact us at:
The Penn Insurance and Annuity Company
Customer Service Group
Philadelphia, PA 19172
215-956-9177
<PAGE>
PENNANT
Prospectuses
PIA Variable Annuity Account I
May 1, 1997
Penn Series Funds, Inc.
May 1, 1997
Investment Advisers:
T. Rowe Price Associates, Inc.
OpCap Advisors
Independence Capital Management, Inc.
Vontobel USA, Inc.
Roberston Stephens Investment Management, Inc.
American Century Variable Portfolios, Inc.
May 1, 1997
Investment Adviser:
American Century Investment Management, Inc.
Neuberger & Berman Advisers Management Trust
May 1, 1997
Investment Adviser:
Neuberger & Berman Management Incorporated
Fidelity Investments'
Variable Insurance Products Fund
Variable Insurance Products Fund II
April 30, 1997
Investment Adviser:
Fidelity Management & Research Company
Morgan Stanley Universal Funds, Inc.
May 1, 1997
Investment Adviser:
Morgan Stanley Asset Management
<PAGE>
No offering is made hereby in any jurisdiction in which such offering may
not lawfully be made.
No person is authorized to make any representations in connection with
this offering other than those representations contained in the Prospectuses.
<PAGE>
PROSPECTUS -- MAY 1, 1997
INDIVIDUAL VARIABLE AND FIXED ANNUITY CONTRACT -- FLEXIBLE PURCHASE PAYMENTS
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
THE PENN INSURANCE AND ANNUITY COMPANY [LOGO OF PENNANT APPEARS HERE]
PHILADELPHIA, PENNSYLVANIA 19172 . TELEPHONE (215) 956-9177
- -------------------------------------------------------------------------------
This prospectus describes a combination variable and fixed annuity contract
offered by The Penn Insurance and Annuity Company (the "Company"). Through PIA
Variable Annuity Account I (the "Separate Account"), you may allocate amounts
invested under the Contract among one or more of the following funds:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FUNDS MANAGERS
- --------------------------------------------------------------------------------------------
<S> <C>
PENN SERIES FUNDS, INC.
Growth Equity Fund Independence Capital Management, Inc.
(a subsidiary of The Penn Mutual Life Insurance Company)
Value Equity Fund OpCap Advisors
Small Capitalization Fund OpCap Advisors
Emerging Growth Fund Independence Capital Management, Inc. /
Robertson Stephens Investment Management, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
International Equity Fund Vontobel USA, Inc. (a subsidiary of Vontobel Holding Ltd.)
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Money Market Fund Independence Capital Management, Inc.
- --------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
Capital Appreciation Portfolio American Century Investment Management, Inc.
- --------------------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Balanced Portfolio Neuberger & Berman Management Incorporated
Limited Maturity Bond Portfolio Neuberger & Berman Management Incorporated
Partners Fund Portfolio Neuberger & Berman Management Incorporated
- --------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCT FUND
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- --------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio Fidelity Management and Research Company
Index 500 Portfolio Fidelity Management and Research Company
- --------------------------------------------------------------------------------------------
MORGAN STANLEY UNIVERSAL FUNDS, INC.
Emerging Markets Equity
(International) Portfolio Morgan Stanley Asset Management Inc.
- --------------------------------------------------------------------------------------------
</TABLE>
In addition, you may also invest in fixed interest options in the Fixed Ac-
count. The fixed interest options are funded through and are backed by the
Company's general account.
For many persons, a combination variable and fixed annuity contract may be an
attractive long-term investment vehicle. Its benefits include the manner in
which earnings on accumulated funds are taxed, the availability of multiple in-
vestment options, and the provision of annuity and death benefit guarantees.
The Contract is not intended as a short-term investment vehicle. Early with-
drawals of purchase payments from the Contract may be subject to a contingent
deferred sales charge of up to 6%, and withdrawals by an owner before age 59
1/2 may be subject to a 10% additional income tax.
For contracts sold in some states, not all Funds or fixed interest options
are available. Also, in some states, the number of years during which purchase
payments may be made to the Company is limited.
A Contract may be returned within ten days of receipt for a full refund of
the Contract Value (or purchase payments, if required under applicable law).
Longer free look periods apply in some states.
This prospectus sets forth concisely the information a prospective investor
should know before investing. It should be retained for future reference.
A statement of additional information dated the same as this prospectus has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. It is available, at no charge by writing The Penn Insur-
ance and Annuity Company, Customer Service Group, Philadelphia, PA 19172. Or,
you can call (215) 956-9177. The table of contents of the statement of addi-
tional information is at the end of this prospectus.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR
EACH APPLICABLE FUND.
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.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS CONTENTS
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
SPECIAL TERMS.............................................................. 3
- --------------------------------------------------------------------------------
EXPENSES................................................................... 4
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES.............................................. 5
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION............................................ 6
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY..................................... 10
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT....................................................... 10
Penn Series Funds, Inc................................................... 10
American Century Variable Portfolios, Inc................................ 11
Neuberger & Berman Advisers Management Trust............................. 11
Fidelity Investments' Variable Insurance Products Fund................... 11
Fidelity Investments' Variable Insurance Products Fund II................ 11
Morgan Stanley Universal Funds, Inc. .................................... 12
Voting Rights............................................................ 12
- --------------------------------------------------------------------------------
THE CONTRACT............................................................... 12
Purchases................................................................ 13
Accumulation Units....................................................... 13
Annuity Payments......................................................... 13
Death Benefit............................................................ 14
Transfers................................................................ 14
Dollar Cost Averaging................................................... 15
Automatic Rebalancing................................................... 15
Withdrawals.............................................................. 15
Systematic Withdrawals.................................................. 15
403(b) Withdrawals...................................................... 15
Deferment of Payments and Transfers...................................... 15
Charges.................................................................. 16
Administration Charges.................................................. 16
Mortality and Expense Risk Charge....................................... 16
Contingent Deferred Sales Charge........................................ 16
Free Withdrawals........................................................ 16
Premium Taxes........................................................... 17
Performance Information.................................................. 17
- --------------------------------------------------------------------------------
THE FIXED INTEREST OPTIONS................................................. 17
General Information...................................................... 18
Loans Under Section 403(b) Contracts..................................... 18
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 19
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS............................... 21
- --------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL TERMS
As used in this prospectus, the following terms have the indicated meanings:
ACCUMULATION UNIT: A unit of measure used to compute the Variable Account
Value under the Contract prior to the Annuity Date.
ANNUITANT: The person during whose life annuity payments are made.
ANNUITY DATE: The date on which annuity payments start.
ANNUITY UNIT: A unit of measure used to calculate the amount of each
variable annuity payment.
BENEFICIARY: The person(s) named by the Contract Owner to receive the death
benefit payable upon the death of the Contract Owner or Annuitant.
CONTRACT: The combination variable and fixed annuity Contract described in
this prospectus.
CONTRACT OWNER: The person specified in the Contract as the Contract Owner.
CONTRACT VALUE: The sum of the Variable Account Value and the Fixed Account
Value.
FIXED ACCOUNT VALUE: The value of amounts held under the Contract in all
fixed interest options.
SEPARATE ACCOUNT: PIA Variable Annuity Account I, a separate account of The
Penn Insurance and Annuity Company that is registered as a unit investment
trust under the Investment Company Act of 1940.
VARIABLE ACCOUNT VALUE: The value of amounts held under the Contract in all
subaccounts of the Separate Account.
VALUATION PERIOD: The period from one valuation of Separate Account assets
to the next. Valuation is performed on each day the New York Stock Exchange
is open for trading.
WE: A reference to "we" or "us" denotes The Penn Insurance and Annuity
Company.
YOU: A reference to "you" denotes the Contract Owner or prospective Contract
Owner.
3
<PAGE>
- -------------------------------------------------------------------------------
EXPENSES
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments................................... None
Maximum Contingent Deferred Sales Charge..... 6% of purchase payments withdrawn*
Exchange Fee.............................................................. None
MAXIMUM ANNUAL CONTRACT ADMINISTRATION CHARGE............................. $30
SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF VARIABLE ACCOUNT VALUE)
Mortality and Expense Risk Charge......................................... 1.25%
Contract Administration Charge............................................ 0.15%
-----
Total Separate Account Annual Expenses.................................... 1.40%
</TABLE>
- -----------------------
*See Charges in this prospectus for information on the decline in the percent-
age charge over time and free withdrawals.
- -------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.**
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
ADMINISTRATIVE
MANAGEMENT AND CORPORATE TOTAL
FEES (AFTER SERVICES FEES ACCOUNTING OTHER FUND
WAIVER) (AFTER WAIVER) FEES EXPENSES EXPENSES
----------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity........... 0.50% 0.15% 0.08% 0.07% 0.80%
Value Equity............ 0.50% 0.15% 0.07% 0.06% 0.78%
Small Capitalization.... 0.50% 0.15% 0.27% 0.07% 0.99%
Emerging Growth......... 0.80% 0.15% 0.07% 0.13% 1.15%
Flexibly Managed........ 0.50% 0.15% 0.06% 0.06% 0.77%
Int'l Equity............ 0.75% 0.15% 0.09% 0.18% 1.17%
Quality Bond............ 0.45% 0.15% 0.08% 0.09% 0.77%
High Yield Bond......... 0.50% 0.15% 0.08% 0.11% 0.84%
Money Market............ 0.40% 0.15% 0.08% 0.10% 0.73%
</TABLE>
- -----------------------
** The expenses presented are for the last fiscal year, except expenses for
the Emerging Growth Fund, a new Fund, are estimated. In the absence of vol-
untary fee waivers by the investment adviser, the total expenses of the
Growth Equity and Quality Bond Funds would have been 0.81% and 0.78% re-
spectively. In the absence of fee waivers by the investment adviser and ad-
ministrator of the Fund, the total expenses of the Money Market and Small
Capitalization Funds would have been 0.74% and 1.06%, respectively.
- -------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT 12B-1 OTHER TOTAL FUND
FEES FEES EXPENSES EXPENSES
---------- ----- -------- ----------
<S> <C> <C> <C> <C>
Capital Appreciation....................... 1.00% None None 1.00%
</TABLE>
- -------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST***
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT,
ADVISORY AND
ADMINISTRATION OTHER TOTAL FUND
FEES EXPENSES EXPENSES
-------------- -------- ----------
<S> <C> <C> <C>
Limited Maturity Bond........................ 0.65% 0.13% 0.78%
Balanced..................................... 0.85% 0.24% 1.09%
Partners Fund................................ 0.84% 0.11% 0.95%
</TABLE>
- -----------------------
*** Neuberger & Berman Advisers Management Trust (the "Trust") is divided into
portfolios ("Portfolios"), each of which invests all of its net investable
assets in a corresponding series ("Series") of Advisers Managers Trust.
Expenses in the table reflect expenses of the Portfolios and include each
Portfolio's pro rata portion of the operating expenses of each Portfolio's
corresponding Series. The Portfolios pay Neuberger & Berman Management
Inc. ("NBMI") an administration fee based on the Portfolio's net asset
value. Each Portfolio's corresponding Series pays NBMI a management fee
based on the Series' average daily net assets. Accordingly, this table
combines management fees at the Series level and administration fees at
the Portfolio's level in a unified fee rate. Total Annual Expenses for
each portfolio have been restated based upon current administration fees
for the Portfolio and management fees for its corresponding Series. See
"Expenses" in the Trust's Prospectus.
4
<PAGE>
- -------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND++
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEES EXPENSES EXPENSES
---------- -------- ----------
<S> <C> <C> <C>
Equity-Income.................................... 0.51% 0.05% 0.56%
Growth........................................... 0.61% 0.06% 0.67%
</TABLE>
- -----------------------
++ The expenses presented are for the last fiscal year. A portion of the bro-
kerage commissions the fund paid was used to reduce its expenses. Without
this reduction, total expenses would have been 0.58% for the Equity Income
Portfolio and 0.69% for the Growth Portfolio.
- -------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES EXPENSES
---------- -------- ----------
<S> <C> <C> <C>
++Asset Manager.................................. 0.64% 0.09% 0.73%
+++Index 500..................................... 0.13% 0.15% 0.28%
</TABLE>
- -----------------------
++ The expenses presented are for the last fiscal year. A portion of the bro-
kerage commissions the fund paid was used to reduce its expenses. Without
this reduction, total expenses would have been 0.74% for the Asset Manager
Portfolio.
+++ The expenses presented are for the last fiscal year. In the absence of
voluntary fee waivers by the investment adviser, total expenses would have
been 0.43% for the Index 500 Portfolio.
- -------------------------------------------------------------------------------
MORGAN STANLEY UNIVERSAL FUNDS, INC.
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES EXPENSES
---------- -------- ----------
<S> <C> <C> <C>
Emerging Markets Equity (International).......... 1.25% 0.50% 1.75%
</TABLE>
- -------------------------------------------------------------------------------
The purpose of the foregoing table is to assist you in understanding the
various costs and expenses that you will bear directly and indirectly. The
table shows Contract expenses and underlying fund expenses. See the
prospectuses of Penn Series Funds, Inc., American Century Variable Portfolios,
Inc., Neuberger & Berman Advisers Management Trust, Fidelity Investments'
Variable Insurance Products Fund, Fidelity Investments' Variable Insurance
Products Fund II and Morgan Stanley Universal Funds, Inc. for additional
information on fund expenses.
Premium taxes may be applicable, but are not reflected in the tables above
or the examples below. See Charges in this prospectus.
- -------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES
The following examples illustrate the cumulative dollar amount of all the
above expenses that would be incurred on each $1,000 invested.
If you make a single purchase payment and surrender your Contract at the end
of the applicable period, you would pay the following expenses on each $1,000
invested, assuming a 5% annual return on assets.
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Money Market Fund.................... $74 $104 $135 $248
Penn Series Quality Bond Fund.................... $75 $105 $137 $252
Penn Series High Yield Bond Fund ................ $76 $109 $144 $266
Penn Series Growth Equity Fund................... $75 $106 $138 $255
Penn Series Value Equity Fund.................... $75 $107 $140 $259
Penn Series Flexibly Managed Fund................ $75 $107 $140 $258
Penn Series International Equity Fund............ $79 $120 $161 $302
Penn Series Small Capitalization Fund............ $77 $113 $150 $279
Penn Series Emerging Growth...................... $84 $134 $185 $349
American Century Capital Appreciation Portfolio.. $77 $113 $150 $279
Neuberger & Berman Limited Maturity Bond
Portfolio....................................... $75 $106 $138 $254
Neuberger & Berman Balanced Portfolio............ $78 $114 $152 $283
Neuberger & Berman Partners Portfolio............ $76 $111 $147 $272
Fidelity's Equity Income Portfolio............... $73 $102 $131 $239
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Fidelity's Growth Portfolio...................... $74 $104 $135 $249
Fidelity's Asset Manager Portfolio............... $75 $107 $140 $258
Fidelity's Index 500............................. $70 $ 91 $113 $202
Morgan Stanley Emerging Markets Equity
(International) Portfolio....................... $84 $134 $185 $349
</TABLE>
If you make a single purchase payment and either you do not surrender your
Contract or you annuitize your Contract at the end of the period,* you would
pay the following expenses on each $1,000 invested, assuming a 5% annual return
on assets:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Money Market Fund........................... $22 $67 $115 $248
Penn Series Quality Bond Fund........................... $22 $68 $117 $252
Penn Series High Yield Bond Fund........................ $24 $72 $124 $266
Penn Series Growth Equity Fund.......................... $22 $69 $119 $255
Penn Series Value Equity Fund........................... $23 $70 $121 $259
Penn Series Flexibly Managed Fund....................... $23 $70 $120 $258
Penn Series International Equity Fund................... $27 $83 $142 $302
Penn Series Small Capitalization Fund................... $25 $76 $131 $279
Penn Series Emerging Growth............................. $32 $98 $166 $349
American Century Capital Appreciation Portfolio......... $25 $76 $131 $279
Neuberger & Berman Limited Maturity Bond Portfolio...... $22 $69 $118 $254
Neuberger & Berman Balanced Portfolio................... $25 $78 $133 $283
Neuberger & Berman Partners Portfolio................... $24 $74 $127 $272
Fidelity's Equity Income Portfolio...................... $21 $65 $111 $239
Fidelity's Growth Portfolio............................. $22 $67 $116 $249
Fidelity's Asset Manager Portfolio...................... $23 $70 $120 $258
Fidelity's Index 500.................................... $17 $54 $ 93 $202
Morgan Stanley Emerging Markets Equity (International)
Portrfolio............................................. $32 $98 $166 $349
</TABLE>
- -----------------------
* You may not annuitize your Contract until after the second Contract anniver-
sary.
The examples are based upon fund data for the fiscal year ended December 31,
1996.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EX-
PENSES UNDER YOUR CONTRACT; ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN.
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
The following tables show Accumulation Unit values and the number of Accumu-
lation Units outstanding for each of the subaccounts of the Separate Account
for the specified periods. The financial data included in the tables should be
read in conjunction with the financial statements and the related notes in-
cluded in the Statement of Additional Information.
- --------------------------------------------------------------------------------
PENN SERIES GROWTH EQUITY FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(A)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period .................. $11.747 $10.000
Accumulation Unit Value, end of period......................... $13.873 $11.747
Number of Accumulation Units outstanding, end of period........ 140,629 13,923
- -------------------------------------------------------------------------------
</TABLE>
(a)For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995.
6
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES VALUE EQUITY FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(A)
------- -------
<S> <C> <C>
Accumulation Unit Value beginning of period.................... $12.640 $10.000
Accumulation Unit Value, end of period......................... $15.604 $12.640
Number of Accumulation Units outstanding, end of period........ 916,524 177,701
- -------------------------------------------------------------------------------
</TABLE>
(a)For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995.
- --------------------------------------------------------------------------------
PENN SERIES FLEXIBLY MANAGED FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995(A)
--------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period.................. $11.649 $10.000
Accumulation Unit Value, end of period........................ $13.367 $11.649
Number of Accumulation Units outstanding, end of period....... 2,989,155 591,562
- --------------------------------------------------------------------------------
</TABLE>
(a) For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995.
- --------------------------------------------------------------------------------
PENN SERIES INTERNATIONAL EQUITY FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(A)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period................... $11.880 $10.000
Accumulation Unit Value, end of period......................... $13.688 $11.880
Number of Accumulation Units outstanding, end of period........ 525,885 54,604
- -------------------------------------------------------------------------------
</TABLE>
(a) For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995.
- --------------------------------------------------------------------------------
PENN SERIES QUALITY BOND FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(A)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period................... $11.229 $10.000
Accumulation Unit Value, end of period......................... $11.531 $11.229
Number of Accumulation Units outstanding, end of period........ 275,302 64,152
- -------------------------------------------------------------------------------
</TABLE>
(a) For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995.
- --------------------------------------------------------------------------------
PENN SERIES HIGH YIELD BOND FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(A)
------- -------
<S> <C> <C>
Accumulation Unit Value beginning of period.................... $10.967 $10.000
Accumulation Unit Value end of period.......................... $12.315 $10.967
Number of Accumulation Units outstanding, end of period........ 290,291 57,255
- -------------------------------------------------------------------------------
</TABLE>
(a) For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995.
7
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES SMALL CAPITALIZATION FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(A)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period................... $11.145 $10.000
Accumulation Unit Value, end of period......................... $13.161 $11.145
Number of Accumulation Units outstanding, end of period........ 353,352 55,394
- -------------------------------------------------------------------------------
</TABLE>
(a) For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995.
- --------------------------------------------------------------------------------
PENN SERIES MONEY MARKET FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(A)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period................... $10.310 $10.000
Accumulation Unit Value, end of period......................... $10.673 $10.310
Number of Accumulation Units outstanding, end of period........ 609,075 186,641
- -------------------------------------------------------------------------------
</TABLE>
(a) For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995
- --------------------------------------------------------------------------------
AMERICAN CENTURY CAPITAL APPRECIATION PORTFOLIO SUBACCOUNT (A)
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(B)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period................... $12.817 $10.000
Accumulation Unit Value, end of period......................... $12.092 $12.817
Number of Accumulation Units outstanding, end of period........ 314,124 71,869
- -------------------------------------------------------------------------------
</TABLE>
(a) TCI Growth Portfolio Subaccount prior to May 1, 1997
(b) For the period March 1, 1995 (date subaccount was established) through De-
cember 31,1995
- --------------------------------------------------------------------------------
NEUBERGER & BERMAN LIMITED MATURITY BOND PORTFOLIO SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(A)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period................... $10.690 $10.000
Accumulation Unit Value, end of period......................... $10.995 $10.690
Number of Accumulation Units outstanding, end of period........ 214,093 51,495
- -------------------------------------------------------------------------------
</TABLE>
(a) For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995
- --------------------------------------------------------------------------------
NEUBERGER & BERMAN BALANCED PORTFOLIO SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(A)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period................... $11.653 $10.000
Accumulation Unit Value, end of period......................... $12.282 $11.653
Number of Accumulation Units outstanding, end of period........ 228,709 69,633
- -------------------------------------------------------------------------------
</TABLE>
(a) For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995
8
<PAGE>
- --------------------------------------------------------------------------------
FIDELITY INVESTMENT'S EQUITY INCOME FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995(A)
--------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period.................. $12.600 $10.000
Accumulation Unit Value, end of period........................ $14.199 $12.600
Number of Accumulation Units outstanding, end of period....... 1,134,707 246,915
- --------------------------------------------------------------------------------
</TABLE>
(a) For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' GROWTH FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995(A)
--------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period.................. $13.077 $10.000
Accumulation Unit Value, end of period........................ $14.791 $13.077
Number of Accumulation Units outstanding, end of period....... 1,007,942 223,746
- --------------------------------------------------------------------------------
</TABLE>
(a) For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' ASSET MANAGER FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(A)
------- -------
<S> <C> <C>
Accumulation Unit Value, beginning of period.................... $11.475 $10.000
Accumulation Unit Value, end of period.......................... $12.968 $11.475
Number of Accumulation Units outstanding, end of period......... 196,768 51,476
- --------------------------------------------------------------------------------
</TABLE>
(a) For the period March 1, 1995 (date subaccount was established) through De-
cember 31, 1995.
The financial statements of the Separate Account for the year ended December
31, 1996 are included in the statement of additional information referred to on
the cover page of this prospectus.
In advertisements of the Contracts, Penn Mutual may provide information on
total return performance and on annual changes in accumulation unit values. We
may also provide information on "yields" and "effective yields" on investments
in the Money Market Fund subaccount.
Information on total return performance will include average annual rates of
total return for one, five and ten year periods, or lesser periods depending on
how long the subaccount has been in existence. Average annual total return fig-
ures will show the average annual rates of increase or decrease in investments
in the subaccounts, assuming a $1,000 investment at the beginning of the peri-
od, withdrawal of the investment at the end of the period, and the deduction of
all applicable charges. We may also show average annual rates of total return,
assuming other amounts invested at the beginning of the period and no with-
drawal at the end of the period. Average annual total return figures which as-
sume no withdrawal at the end of the period will reflect all recurring charges,
but will not reflect the contingent deferred sales charge (if applicable, the
contingent deferred sales charge would reduce the amount that may be withdrawn
under the Contracts).
The "yield" on an investment in the Money Market Fund subaccount refers to
the income generated by the investment over a 7-day period. This income is then
annualized. That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the
subaccount is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
9
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
The Penn Insurance and Annuity Company (the "Company") is a Delaware stock life
insurance company. The Company is a wholly-owned subsidiary of The Penn Mutual
Life Insurance Company ("Penn Mutual"), a Pennsylvania mutual life insurance
company that has been in the life insurance business since 1847. The Company is
licensed to sell insurance and annuities in 47 states and the District of
Columbia. The Company's financial statements appear in the statement of
additional information.
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
PIA Variable Annuity Account I was established as a separate account of the
Company on July 13, 1994. The Separate Account is registered with the
Securities and Exchange Commission as a unit investment trust under the
Investment Company Act of 1940.
The Separate Account is divided into subaccounts for investment in shares of
different mutual funds. Income, gains and losses, realized or unrealized, of a
subaccount are credited to or charged against the subaccount without regard to
any other income, gains or losses of the Company. Assets equal to the reserves
and other contract liabilities with respect to each subaccount are not charge-
able with liabilities arising out of any other business of the Company. The
Company is obligated to pay all benefits and make all payments provided under
the Contracts.
Amounts allocated or transferred to the Separate Account under the Contracts
are invested, at the direction of the Contract Owner, in one or more funds of
Penn Series Funds, Inc., American Century Variable Portfolios, Inc., Neuberger
& Berman Advisers Management Trust, Fidelity Investments' Variable Insurance
Products Fund, Fidelity Investments' Variable Insurance Products Fund II and
Morgan Stanley Universal Funds, Inc.
The mutual funds have shareholders other than the Separate Account. Shares of
Penn Series Funds, Inc. are also sold to Penn Mutual and other separate ac-
counts of Penn Mutual that fund benefits under variable annuity and variable
life insurance contracts. Shares of American Century Variable Portfolios, Inc.,
Neuberger & Berman Advisers Management Trust, Fidelity Investments' Variable
Insurance Products Fund, Fidelity Investments' Variable Insurance Products Fund
II and Morgan Stanley Universal Funds, Inc. are sold to variable annuity and
variable life separate accounts of Penn Mutual, such accounts of other insur-
ance companies and, in the case of Neuberger & Berman Advisers Management
Trust, directly to qualified pension and retirement plans. Each mutual fund
will monitor events to identify any material conflicts that might arise between
the Separate Account and its other shareholders. See the accompanying prospec-
tuses of the funds for information on their monitoring for conflicts.
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.:
GROWTH EQUITY FUND - seeks long term growth of capital and increase of future
income by investing primarily in common stocks of well established growth
companies;
VALUE EQUITY FUND - seeks to maximize total return (capital appreciation and
income) primarily by investing in equity securities of companies believed to be
undervalued considering such factors as assets, earnings, growth potential and
cash flows;
SMALL CAPITALIZATION FUND - seeks capital appreciation through investment in
a diversified portfolio of securities consisting primarily of equity securities
of companies with market capitalizations under $1 billion;
EMERGING GROWTH FUND - seeks capital appreciation by investing primarily in
common stocks of emerging growth companies with above-average growth prospects.
FLEXIBLY MANAGED FUND - seeks to maximize total return (capital appreciation
and income) by investing in common stocks, other equity securities, corporate
debt securities, and/or short term reserves, in proportions considered appro-
priate in light of the availability of attractively valued individual securi-
ties and current and expected economic and market conditions;
INTERNATIONAL EQUITY FUND - seeks to maximize capital appreciation by
investing in a carefully selected diversified portfolio consisting primarily of
equity securities. The investments will consist principally of equity
securities of European and Pacific Basin countries;
QUALITY BOND FUND - seeks the highest income over the long term consistent
with the preservation of principal through investment primarily in marketable
investment grade debt securities;
10
<PAGE>
HIGH YIELD BOND FUND - seeks high current income by investing primarily in a
diversified portfolio of long term high-yield/high-risk fixed income securities
in the medium to lower quality ranges; capital appreciation is a secondary
objective; such securities, which are commonly referred to as "junk" bonds,
generally involve greater risks of loss of income and principal than higher
rated securities (see accompanying Penn Series prospectuses);
MONEY MARKET FUND - seeks to preserve capital, maintain liquidity and achieve
the highest possible level of current income consistent therewith, by investing
in high quality money market instruments; an investment in the Fund is neither
insured nor guaranteed by the U.S. Government and there can be no assurance
that the fund will be able to maintain a stable net asset value of $1.00 per
share.
Independence Capital Management, Inc., Horsham, Pennsylvania is investment
adviser to the Growth Equity, Quality Bond and Money Market Funds. OpCap Advi-
sors, New York, New York, is investment adviser to the Value Equity and Small
Capitalization Funds. T. Rowe Price Associates, Baltimore, Maryland, is invest-
ment adviser to the Flexibly Managed and High Yield Bond Funds. Vontobel USA,
Inc., New York, New York, is investment adviser to the International Equity
Fund. Independence Capital Management, Inc. is also investment adviser, and
Robertson Stephens Investment Management, Inc., San Francisco, California, is
investment sub-adviser, to the Emerging Growth Fund. Morgan Stanley Asset Man-
agement Inc. is investment adviser to the Emerging Markets Equity (Internation-
al) Portfolio.
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.:
CAPITAL APPRECIATION PORTFOLIO - seeks capital growth by investing primarily
in common stocks believed to have better-than-average prospects for apprecia-
tion.
American Century Investment Management, Inc., Kansas City, Missouri, is in-
vestment adviser to the Capital Appreciation Portfolio.
- --------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST:
LIMITED MATURITY BOND PORTFOLIO - seeks highest current income consistent
with low risk to principal and liquidity, primarily by investing in a diversi-
fied portfolio of limited maturity debt securities. A secondary objective is
capital appreciation.
BALANCED PORTFOLIO - seeks long-term capital growth and reasonable current
income without undue risk to principal through investment of a portion of its
assets in common stock and a portion in debt securities.
PARTNERS PORTFOLIO - seeks capital growth by investing primarily in common
stocks of established companies, using the value oriented investment approach.
Neuberger & Berman reserves the right to make changes in the investment objec-
tive, but will notify shareholders thirty days in advance of any proposed mate-
rial change.
Neuberger & Berman Management Incorporated, New York, New York, is investment
adviser to the Limited Maturity Bond Portfolio, the Balanced Portfolio and the
Partners Portfolio.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND:
EQUITY-INCOME PORTFOLIO - seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities, the fund will
also consider the potential for capital appreciation. The fund's goal is to
achieve a yield which exceeds the composite yield on the securities comprising
the Standard & Poor's 500 Composite Stock Price Index.
GROWTH PORTFOLIO - seeks to achieve capital appreciation. The fund normally
purchases common stocks, although its investments are not restricted to any one
type of security. Capital appreciation may also be found in other types of se-
curities, including bonds and preferred stocks.
Fidelity Management & Research Company, Boston, Massachusetts, is investment
adviser to the Equity-Income Portfolio and the Growth Portfolio.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II:
ASSET MANAGER PORTFOLIO - seeks high total return with reduced risk over the
long-term by allocating its assets among domestic and foreign stocks, bonds and
short-term fixed income investments.
INDEX 500 PORTFOLIO - seeks to match the total return of the S&P 500 while
keeping expenses low. The S&P 500 is an index of 500 common stocks, most of
which trade on the New York Stock Exchange.
11
<PAGE>
Fidelity Management & Research Company, Boston, Massachusetts, is investment
adviser to the Asset Manager Portfolio and the Index 500 Portfolio.
- --------------------------------------------------------------------------------
MORGAN STANLEY UNIVERSAL FUNDS, INC.:
EMERGING MARKETS EQUITY (INTERNATIONAL) PORTFOLIO - seeks long term capital
appreciation by investing primarily in equity securities of emerging market
country issuers. The Portfolio will focus on economies which are developing
strongly and in which the markets are becoming more sophisticated.
Morgan Stanley Asset Management Inc., New York, New York, is investment ad-
viser to the Emerging Markets Equity (International) Portfolio.
- --------------------------------------------------------------------------------
FOR MORE INFORMATION ON THE MUTUAL FUNDS IN WHICH THE SUBACCOUNTS INVEST, SEE
THE PROSPECTUSES FOR PENN SERIES FUNDS, INC., AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC., NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST, FIDELITY
INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND, FIDELITY INVESTMENTS' VARIABLE
INSURANCE PRODUCTS FUND II, AND MORGAN STANLEY UNIVERSAL FUNDS, INC. YOU SHOULD
READ THE PROSPECTUSES FOR THE FUNDS IN WHICH YOU ARE INTERESTED BEFORE
INVESTING.
- --------------------------------------------------------------------------------
VOTING RIGHTS
Under the Investment Company Act of 1940 as currently interpreted, Contract
Owners have the right to instruct the Company as to the voting of the shares of
the mutual funds held in the subaccounts of the Separate Account pursuant to
the Contracts. The number of shares of a fund for which voting instructions may
be given prior to the Contract Annuity Date is determined by dividing the
Contract Owner's interest in the applicable subaccount of the Separate Account
by the net asset value per share of the fund. The number of shares of a fund
for which voting instructions may be given after the Contract Annuity Date is
determined by dividing the reserve allocated to the applicable subaccount by
the net asset value per share of the fund. Should the applicable law, or
interpretations thereof, change so as to permit us to vote shares of the mutual
funds in our own right, we may elect to do so. Further, we reserve the right to
modify the manner in which we calculate the weight to be given to pass-through
voting instructions where such a change is necessary to comply with federal law
or interpretations thereof.
- --------------------------------------------------------------------------------
THE CONTRACT
The Contract described in this prospectus is a combination variable and fixed
annuity contract. The Contract provides for investment, through subaccounts of
the Separate Account, in one or more of the available funds of Penn Series
Funds, Inc., American Century Variable Portfolios, Inc., Neuberger & Berman Ad-
visers Management Trust, Fidelity Investments' Variable Insurance Products
Fund, Fidelity Investments' Variable Insurance Products Fund II and Morgan
Stanley Universal Funds, Inc. It also provides for investment in one or more
fixed interest accounts. The fixed interest accounts are guaranteed and funded
by the Company through its general account. See THE FIXED INTEREST OPTIONS in
this prospectus.
As the Contract Owner, you determine, within Contract limits (1) the amount
and frequency of the purchase payments to be made to the Company, (2) the in-
vestment options to which the purchase payments are to be allocated, (3) trans-
fers among investment options, (4) the form of annuity to be paid after the ac-
cumulation period and the person to whom it is to be paid, (5) the beneficiary
to whom death benefits are to be paid, and (6) the amount and frequency of
withdrawals from the Contract Value. Currently, for Contracts sold in Oregon,
New Jersey and Washington, purchase payments may be made only during the first
three contract years.
During the variable annuity payout period, you (or the beneficiary in the
event of your death or the Annuitant's death) may transfer Annuity Unit values
among subaccounts of the Separate Account.
Upon the earlier of the death of the Contract Owner (other than a trustee) or
Annuitant prior to the Annuity Date, the beneficiary may elect to receive a
death benefit in a lump sum or in the form of an annuity. A spousal beneficiary
may elect to become the Owner of the Contract.
The Contract may be amended at any time to conform to applicable laws or gov-
ernmental regulations. If, in our judgment, investment in any of the mutual
funds becomes inappropriate to the purposes of the Contract, we may, with ap-
proval of the Securities and Exchange Commission and the governing state insur-
ance department, substitute another fund for existing and future investments.
12
<PAGE>
Contract Owner inquiries may be made by writing The Penn Insurance and Annu-
ity Company, Customer Service Group, Philadelphia, PA 19172. Or, you can call
(215) 956-9177.
- --------------------------------------------------------------------------------
PURCHASES
To purchase a Contract, your completed application, together with a check for
the first purchase payment, should be forwarded to our administrative office.
Normally, a completed application form received at our administrative office
will be accepted within two business days. If an incomplete application is not
completed and acted upon within five business days, the purchase payment will
be returned to you unless you request that we retain it while you complete the
application. All subsequent purchase payments are sent directly to our adminis-
trative office.
The minimum initial purchase payment is $5,000 for all non-qualified
contracts and $2,000 for individual retirement annuities under Section 408 of
the Internal Revenue Code and for tax deferred annuities under Section 403(b)
of the Code. For all Contracts, the minimum subsequent purchase payment that
will be accepted is $250. We may, in our discretion, reduce the minimum
requirements for initial and subsequent purchase payments. We will accept total
purchase payments under your Contract of up to $1 million. Total purchase
payments in excess of $1 million require our prior approval.
Purchase payments allocated to the Separate Account are credited in the form
of Accumulation Units of the subaccount selected. The number of Accumulation
Units credited is determined by dividing the purchase payment allocated to the
Separate Account by the value of the Accumulation Unit at the end of the valua-
tion period in which the purchase payment is received at our administrative of-
fice or, in a case of the first purchase payment, is accepted by us.
The principal underwriter of the Contract (under federal securities laws) is
Hornor, Townsend & Kent, Inc., 600 Dresher Road, Horsham, PA 19044, a wholly-
owned subsidiary of Penn Mutual.
- --------------------------------------------------------------------------------
ACCUMULATION UNITS
For each subaccount of the Separate Account the value of an Accumulation Unit
will be $10 when the subaccount commences operation. The value of an
Accumulation Unit may increase or decrease from one valuation period to the
next.
The value of an Accumulation Unit for a valuation period is determined by
multiplying the value of an Accumulation Unit for the prior valuation period by
the net investment factor for the subaccount for the current valuation period.
The net investment factor is a measure of (1) investment performance of mu-
tual fund shares held in the subaccount, (2) any taxes on income or gains from
investments held in the subaccount and (3) the mortality and expense risk
charge at an annual rate of 1.25% and contract administration charge at an an-
nual rate of 0.15% assessed against the subaccount. Under current law, no taxes
are levied against income or gain from investments held in a subaccount.
- --------------------------------------------------------------------------------
ANNUITY PAYMENTS
You may choose one of the following forms of annuity: (1) an annuity for a
specified number of years, (2) a life annuity, (3) a life annuity with payments
guaranteed for 10 or 20 years, (4) a joint and survivor life annuity or (5)
such other form of annuity as we may agree upon. You may select any one of
these forms of annuity as a variable annuity (except for a specified number of
years), a fixed annuity, or a combination of both.
The level of the variable annuity payments is determined by various factors,
including the amount accumulated and applied under the Contract to the variable
annuity, the form of annuity chosen, the expected duration of the annuity
period, the performance of the applicable investment options, and the annuity
purchase rates and charges specified in the Contract.
The variable annuity purchase rates assume an annual net investment return of
3%. If the annual net investment return during the annuity payout period is
greater than 3%, the level of the annuity payment increases. If the annual net
investment return is less than 3%, the level of the annuity payments decreases.
The level of fixed annuity payments under a Contract is determined by various
factors, including the amount accumulated and applied under the Contract to the
fixed annuity, the form of annuity chosen, the expected duration of the annuity
period, and current annuity purchase rates for single premium nonparticipating
fixed annuity contracts issued by the Company.
Unless you specify otherwise, you or such other person you designate will re-
ceive a life annuity with payments guaranteed for 10 years, except for tax de-
ferred annuities under Section 403(b) of the Code and pension or profit sharing
plans under Section 401 of the Code. Annuitants under those Contracts will re-
ceive a joint and survivor annuity. Unless you specify otherwise, the annuity
will be split between fixed and variable in the same proportions as the Con-
tract Value on the Annuity Date.
13
<PAGE>
Unless you specify otherwise, the Annuity Date will be the later of (1) the
first day of the next month after the Annuitant's 85th birthday or (2) 10 years
after the contract date, unless state law requires an earlier Annuity Date. The
Annuity Date under the Contract may not be earlier than the second contract an-
niversary and must be on the first day of a month.
You may change the Annuity Date or annuity option by giving written notice at
our administrative office at least 30 days prior to the current Annuity Date.
If the Contract Value of a Contract is less than $5,000, we may elect to pay
such amount in a lump sum in place of an annuity. Annuity payments are gener-
ally monthly, starting with the Annuity Date, but may also be made quarterly,
semiannually or annually at your request. However, if any payment would be less
than $50, we may change the frequency of annuity payments so that payments are
at least $50 each.
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DEATH BENEFIT
If the Contract Owner or the Annuitant dies prior to the Annuity Date, we
will pay the beneficiary the greater of (1) the Contract Value for the valua-
tion period in which proof of death and any other required information needed
to make payment is received at our administrative office; or (2) the sum of the
Fixed Account Value on the date the above information is received at our admin-
istrative office and the net purchase payments and transfers allocated to the
Separate Account (i.e., all purchase payments and transfers to the Separate Ac-
count minus all prior withdrawals and transfers made from the Separate Ac-
count). The death benefit generally will be paid within 7 days after the Com-
pany has sufficient information to make the payment. For a discussion of the
tax treatment of a death benefit, see FEDERAL INCOME TAX CONSIDERATIONS in this
prospectus.
If the Contract Owner dies before the age of 80 and if permitted by state
law, an enhanced death benefit will be paid to the beneficiary, if it is
greater than the Contract Value as of the receipt of proof of death and the
necessary information to make a death benefit payment. The enhanced death bene-
fit is the sum of: (1) the Fixed Account Value, and (2) the net purchase pay-
ments allocated to the Separate Account (as defined in the previous paragraph)
plus interest accumulated at an annual interest rate of 5% through the Contract
Owner's attained age 69, and interest accumulated at an annual interest rate of
3% for years subsequent to attained age 70.
If the beneficiary is the Contract Owner's surviving spouse, the surviving
spouse has the right to become the Contract Owner rather than receive the death
benefit.
Within one year of the date of death, the beneficiary may elect to receive
the death benefit in single sum or in the form of an annuity. If payment is to
be received in a single sum, it must be paid within five years of the date of
death (until paid out, the death benefit will be allocated to subaccounts of
the Separate Account and/or fixed interest options as directed by the benefi-
ciary). If an annuity is selected, payments must commence within one year of
the date of death and must be made over the beneficiary's life or over a period
not longer than the beneficiary's life expectancy. If an election is not made
within one year of the date of death, the death benefit will be paid to the
beneficiary in a single sum.
If the Annuitant dies on or after the Annuity Date and the annuity is for a
specified number of years or for life with payments guaranteed for 10 or 20
years, the beneficiary may elect to have the payments continue for the speci-
fied or guaranteed period or to receive in lump sum the present value of the
remaining payments.
You may designate a beneficiary in your application. You may change the bene-
ficiary at any time before your death or the death of the Annuitant, whichever
occurs first.
- --------------------------------------------------------------------------------
TRANSFERS
Prior to the Annuity Date, you may transfer amounts from one subaccount of
the Separate Account to another subaccount of the Separate Account. Within cer-
tain additional limitations stated in the Contract, you may also transfer
amounts from the subaccounts of the Separate Account to a fixed interest option
of the Fixed Account prior to the Annuity Date. Transfers may be made from the
Fixed Account to the Variable Account or to another fixed interest option
within the Fixed Account only at the completion of the interest period or
within the 25 days thereafter.
After the Annuity Date and during an annuity payout period, you may transfer
amounts (upon which the annuity payments are based) from one subaccount of the
Separate Account to another. Upon your death or the death of the Annuitant, a
beneficiary who is receiving annuity payments may transfer amounts among the
subaccounts of the Separate Account.
The minimum amount that may be transferred is $250 or, if less, the amount
held in the subaccount or fixed interest option. In the case of partial trans-
fers, the amount remaining in the subaccount or fixed interest option must be
at least $250.
14
<PAGE>
A written request for transfer (or, if authorized in writing, a telephone
request for transfer) must be received at our administrative office and all
other administrative requirements for transfer must be met to make the
transfer. The Separate Account and the Company will not be liable for following
transfer instructions communicated by telephone that we reasonably believe to
be genuine. We require certain personal identifying information to process a
telephone transfer.
DOLLAR COST AVERAGING: If you have a Contract Value of at least $10,000, you
may elect to have flat dollar amounts ($100 minimum) transferred monthly or
quarterly from one source account to other accounts ($50 minimum per account).
These transfers may be made only from one of the following accounts: Money Mar-
ket Subaccount, Limited Maturity Bond Subaccount, Quality Bond Subaccount, or
One Year Fixed Interest Option. The dollar cost averaging term may run from 12
to 60 months, or until you give notice of a change in allocation or cancella-
tion of the feature.
AUTOMATIC REBALANCING: You may elect to have your investments in subaccounts
of the Separate Account automatically rebalanced. We will transfer funds under
your Contract on a quarterly (calendar) basis among the subaccounts to maintain
a specified percentage allocation among your selected variable investment op-
tions. Dollar cost averaging and automatic rebalancing may not be in effect at
the same time.
- --------------------------------------------------------------------------------
WITHDRAWALS
Prior to the Annuity Date and prior to the earlier of the death of the Con-
tract Owner and Annuitant, you may withdraw all or part of your Contract Value.
Withdrawals will be based on values at the end of the valuation period in which
a proper written request for withdrawal (and the Contract, in case of a full
withdrawal) is received at our administrative office. Payment will normally be
made within seven days of receipt of the written request and the Contract, if
required. A withdrawal may result in certain tax consequences, including an ad-
ditional 10% tax under certain circumstances. For a discussion of the tax
treatment of withdrawals, see FEDERAL INCOME TAX CONSIDERATIONS in this pro-
spectus.
The minimum withdrawal is $500 or, at the time of the first withdrawal in
each Contract Year, 15% of total purchase payments if less. A partial with-
drawal may be made from a subaccount of the Separate Account only if the amount
remaining in the subaccount is at least $250. If you request a partial with-
drawal without specifying allocation of the withdrawal among investment op-
tions, it will be taken pro rata from the variable subaccounts; if the partial
withdrawal exhausts your Variable Account Value, then any remaining withdrawal
will be taken from the fixed interest options beginning with the One Year Fixed
Interest Option and continuing with the other fixed interest options in order
of ascending duration.
SYSTEMATIC WITHDRAWALS: You may make a request for a systematic withdrawal if
there is no previous withdrawal in the current contract year. The maximum value
of a systematic withdrawal request is 15% of total purchase payments at the
time of the request. A level systematic withdrawal will begin one modal period
after the date of receipt of the request. The systematic withdrawals may be
made on a monthly, quarterly, semiannual or annual basis. The minimum Contract
Value that is eligible for a systematic withdrawal is $25,000, and the minimum
amount of each withdrawal payment is $50. Payments can be made of either a
fixed dollar amount or of a fixed percentage of purchase payments. The latter
option provides a convenient way to take advantage of the ability to withdraw a
limited percentage of purchase payments without incurring a contingent deferred
sales charge. See FREE WITHDRAWALS below. For a discussion of the tax treatment
of withdrawals, see FEDERAL INCOME TAX CONSIDERATIONS in this prospectus.
403(B) WITHDRAWALS: With respect to Contracts qualifying under Section 403(b)
of the Internal Revenue Code, there are certain restrictions on withdrawals.
Withdrawals may be made only if the Contract Owner is over the age of 59 1/2,
leaves the employment of the employer, dies, or becomes disabled as defined in
the Code. Withdrawals (other than withdrawals attributable to income earned on
purchase payments) may also be possible in the case of hardship as defined in
the Code. The restrictions do not apply to transfers among subaccounts and may
also not apply to transfers to other investments qualifying under Section
403(b). For a discussion of the tax treatment of withdrawals under Section
403(b) Contracts, see FEDERAL INCOME TAX CONSIDERATIONS in this prospectus.
- --------------------------------------------------------------------------------
DEFERMENT OF PAYMENTS AND TRANSFERS
We reserve the right to defer a withdrawal, a transfer of values or annuity
payments funded by the Separate Account if (a) the New York Stock Exchange is
closed (other than customary weekend and holiday closings); (b) trading on the
Exchange is restricted; (c) an emergency exists such that it is not reasonably
practical to dispose of securities held in the Separate Account or to determine
the value of its assets; or (d) the Securities and Exchange Commission by order
so permits for the protection of investors. Conditions described in (b) and (c)
will be decided by, or in accordance with rules of, the Commission.
15
<PAGE>
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CHARGES
ADMINISTRATION CHARGES: Charges are assessed to reimburse us for the expenses
we incur in administering the Contract and the Separate Account. First, on each
Contract Anniversary prior to the Annuity Date (and any other date the Variable
Account Value is reduced to zero through withdrawal or transfer), we deduct
from the Variable Account Value a contract administration charge of $30 or, if
less, 2% of the Variable Account Value. We will not, however, deduct this
charge if the Variable Account Value is greater than $50,000. The charge is
made by canceling Accumulation Units credited to the Contract, with the charge
allocated pro rata among the subaccounts comprising the Variable Account Value.
Second, we deduct from the Separate Account a daily administration charge equal
to an effective annual rate of 0.15% of the daily net asset value of the
Separate Account. These administration charges are guaranteed not to increase
and are intended to cover our average anticipated administration expenses over
the periods the Contracts are in force.
MORTALITY AND EXPENSE RISK CHARGE: We deduct a daily mortality and expense
risk charge equal to an effective annual rate of 1.25% of the daily net asset
value of the Separate Account. This charge is to compensate us for the mortali-
ty-related guarantees we make under the Contract (e.g., the death benefit and
the guarantee that the annuity factors will never be decreased even if mortal-
ity experience is substantially different than originally assumed), and for the
risk that our administration charges will be insufficient to cover administra-
tion expenses over the life of the Contracts. The mortality and expense risk
charge is assessed during both the accumulation and variable annuity pay-out
phases of the Contract.
CONTINGENT DEFERRED SALES CHARGE: A contingent deferred sales charge may be
deducted in the event of full or partial withdrawal from the Contract Value
prior to the Annuity Date. This charge is made to cover sales expenses that we
have incurred. Sales expenses which are not covered by the deferred sales
charge are paid from the surplus of the Company, which may include proceeds
from the mortality and expense risk charge.
A contingent deferred sales charge, if applicable, will be imposed only on a
withdrawal of a purchase payment in cases where the purchase payment was made
within seven years of the date of the withdrawal. The following table shows the
schedule of the contingent deferred sales charge that will be applied to with-
drawal of a purchase payment, after allowing for the free withdrawals which are
described in the next subsection. Purchase payments will be treated as with-
drawn on a first-in, first-out basis.
<TABLE>
<CAPTION>
NUMBER OF FULL CONTRACT
YEARS SINCE PURCHASE PAYMENT APPLICABLE CHARGE
<S> <C>
0 6%
------------------------------------------------
1 6%
------------------------------------------------
2 5%
------------------------------------------------
3 4%
------------------------------------------------
4 3%
------------------------------------------------
5 2%
------------------------------------------------
6 1%
------------------------------------------------
7+ 0%
------------------------------------------------
</TABLE>
The contingent deferred sales charge may be reduced on Contracts sold to a
trustee, employer or similar party pursuant to a retirement plan or to a group
of individuals, if such sales are expected to involve reduced sales expenses.
The amount of reduction will depend upon such factors as the size of the group,
any prior or existing relationship with the purchaser or group, the total
amount of purchase payments and other relevant factors that might tend to re-
duce expenses incurred in connection with such sales. The reduction will not be
unfairly discriminatory to any Contract Owner.
FREE WITHDRAWALS:
Seven-Year-Old Purchase Payments. You may withdraw any purchase payment which
---------------------------------
was made more than 7 years before the withdrawal without incurring a contingent
deferred sales charge.
15% Withdrawals. On the last day of the first contract year and once each
----------------
contract year thereafter, you may withdraw, without incurring a contingent de-
ferred sales charge, 15% of total purchase payments. You may take the 15% free
withdrawal on a single sum basis or systematically, but not both. The 15% free
withdrawal amount will be applied to purchase payments on a first-in, first-out
basis. With respect to any withdrawal in excess of the 15% free withdrawal in a
contract year, the contingent deferred sales charge schedule set forth above
will apply to the remainder of the purchase payments so withdrawn
16
<PAGE>
on a first-in, first-out basis. This 15% free withdrawal applies only to the
first withdrawal request made in a contract year (after the first contract
year) and the amount is not cumulative from year to year.
Medically Related Withdrawal. Subject to applicable state law, after the
-----------------------------
first contract year and before the Annuity Date, you may withdraw, without in-
curring a contingent deferred sales charge, up to the lesser of $500,000 or
your Contract Value if certain medically related contingencies occur. This free
withdrawal is available if you are (1) first confined in a nursing home or hos-
pital while this Contract is in force and remain confined for at least 90 days
in a row or (2) first diagnosed as having a fatal illness (an illness expected
to result in death within 2 years for 80% of diagnosed cases) while this Con-
tract is in force. The precise terms and conditions of this benefit are set
forth in the Contract. It is not available if your age at issue is greater than
75. The medically related contingencies that must be met for free withdrawal
vary in some states.
Disability Related Withdrawal. You may withdraw, without incurring a contin-
------------------------------
gent deferred sales charge, part or all of your Contract Value if you (you or
the Annuitant for qualified Contracts) become totally disabled as defined in
the Contract.
Other Withdrawals. There is no contingent deferred sales charge imposed upon
------------------
minimum distributions under qualified contracts which are required by the In-
ternal Revenue Code.
PREMIUM TAXES:
Some states and municipalities impose premium taxes on purchase payments re-
ceived by insurance companies. Generally, any premium taxes payable will be de-
ducted upon annuitization, although we reserve the right to deduct such taxes
when due in jurisdictions that impose such taxes on purchase payments. Current-
ly, state premium taxes on purchase payments range from 0% to 3 1/2%.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
The Company may advertise total return performance and annual changes in ac-
cumulation unit values. We may also provide information on "yields" and "effec-
tive yields" on investments in the Money Market Fund subaccount.
Information on total return performance will include average annual rates of
total return for one, five and ten year periods, or lesser periods depending on
how long the underlying fund portfolio has been in existence. Such figures are
based on the hypothetical assumption that the Separate Account invested in the
underlying portfolios from the date those portfolios were first available to
other insurance company separate accounts. Average annual total return figures
will show the average annual rates of increase or decrease in investments in
the subaccounts, assuming a hypothetical $1,000 investment at the beginning of
the period, withdrawal of the investment at the end of the period, and the de-
duction of all applicable fund and Contract charges. We may also show average
annual rates of total return, assuming other amounts invested at the beginning
of the period and no withdrawal at the end of the period. Average annual total
return figures which assume no withdrawals at the end of the period will re-
flect all recurring charges, but will not reflect the contingent deferred sales
charge (if applicable, the contingent deferred sales charge would reduce the
amount that may be withdrawn under the Contracts).
The "yield" on an investment in the Money Market Fund subaccount refers to
the income generated by the investment over a 7-day period. This income is then
annualized. That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly, but, when annualized, the income earned by an investment in the
subaccount is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed rein-
vestment.
- --------------------------------------------------------------------------------
THE FIXED INTEREST OPTIONS
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE COMPANY'S
GENERAL ACCOUNT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND
THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE GENERAL ACCOUNT AND ANY INTERESTS HELD IN
THE GENERAL ACCOUNT ARE THEREFORE NOT SUBJECT TO THE PROVISIONS OF THESE ACTS.
HENCE THIS PROSPECTUS GENERALLY DISCUSSES ONLY THE VARIABLE PORTION OF THE
CONTRACT. THE COMPANY HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND
EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING
TO THE FIXED ACCOUNT. DISCLOSURE REGARDING THE FIXED ACCOUNT, HOWEVER, MAY BE
SUBJECT TO GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS
RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN THIS
PROSPECTUS.
17
<PAGE>
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GENERAL INFORMATION
Subject to the laws of your state, you may allocate or transfer all or part
of the amount credited to your Contract to one or more of the following fixed
interest options in the Fixed Account: (1) the One Year Fixed Interest Option;
(2) the Three Year Fixed Interest Option; (3) the Five Year Fixed Interest Op-
tion; and (4) the Seven Year Fixed Interest Option. We periodically declare an
effective annual interest rate applicable to allocations to the various fixed
interest options. For each amount allocated to the One Year Fixed Interest Op-
tion, the Three Year Fixed Interest Option, the Five Year Fixed Interest Option
or the Seven Year Fixed Interest Option, we credit interest at an effective an-
nual interest rate declared by us in the month in which the allocation is made.
The declared rate of interest will apply through the end of the 12-month, 36-
month, 60-month or 84-month period, as applicable, which begins on the first
day of the calendar month in which the allocation is made. We guarantee an ef-
fective annual rate of interest on allocations to all fixed interest options of
not less than 3%. In addition, we guarantee that the rate credited in the One
Year Fixed Interest Option will at least equal the increase in the cost of liv-
ing as calculated by the Company; the Company uses for this purpose a six-month
average of the relative change by month in the Consumer Price Index published
by the Bureau of Labor Statistics.
You may transfer amounts in the Fixed Account to subaccounts of the Separate
Account or to another fixed interest option within the Fixed Account, subject
to the conditions and limitations in the fixed account provisions of your
Contract. A premature withdrawal charge in an amount specified in the Contract
will be deducted from the interest earned on any amount that is withdrawn from
the Three Year Fixed Interest Option, the Five Year Fixed Interest Option or
the Seven Year Fixed Interest Option prior to the expiration of the period for
which the interest rate is guaranteed. Amounts not withdrawn or reallocated
within 25 days after the end of an interest period are rolled over and treated
as a new allocation to the same fixed interest option. The premature withdrawal
charge is not applicable to amounts withdrawn to effect an annuity or to meet
the minimum distribution requirement under the tax laws. Nor will the premature
withdrawal charge be applied to amounts withdrawn due to the death, total
disability, or defined medical confinement or terminal illness of the owner or
annuitant, as specified in the Contract. In no event will the premature
withdrawal charge be greater than the total amount of interest credited to the
applicable fixed interest option. In accordance with state law, we may defer a
withdrawal or transfer from the Fixed Account for up to six months if we
reasonably determine that investment conditions are such that an orderly sale
of assets in the Company's general account is not feasible.
- --------------------------------------------------------------------------------
LOANS UNDER SECTION 403(B) CONTRACTS
Subject to compliance with applicable state law, Contract Owners qualifying
under Section 403(b) of the Code may be able to borrow against a portion of the
amount credited under their Contract, provided the loan privilege has been ap-
proved in the applicable state. The loan will be made from the general account
of the Company. Because this prospectus generally is limited to describing the
variable portion of the Contract, you should review the Contract loan endorse-
ment or consult your Company representative for a complete description of the
terms of the loan privilege, including minimum and maximum loan amounts, repay-
ment terms, and restrictions on prepayments. The following paragraphs describe
how exercise of the loan privilege may relate to the Variable Account Value.
First, at the time a Contract loan is made and in accordance with your
direction, an amount equal to the initial loan amount will be transferred from
the Contract's investment options to an account in the Company's general
account called the "Restricted Account." Amounts transferred from investment
options to the Restricted Account will not participate in the investment
experience of those investment options. Amounts transferred to the Restricted
Account will generally earn interest at a rate 2 1/2 percentage points less
than the rate of interest charged on the loan.
Second, on your Contract Anniversary, the accrued interest in the Restricted
Account will be transferred to your investment options in accordance with your
current payment allocation instructions.
Third, loan repayments, which are due quarterly, will result in the transfer
of an amount equal to the principal portion of the repayment from the Re-
stricted Account to the Money Market subaccount. You may then transfer amounts
from the Money Market subaccount to the other investment options offered under
the Contract.
Fourth, if a payment or the entire loan is in default as defined in the
Contract, the Company will report the amount of the default to the Internal
Revenue Service as a taxable distribution and, if you are then under age 59
1/2, as a premature distribution. Subject to restrictions in Section 403(b) of
the Code, the amount of any missed payment, plus interest, or the entire loan
balance, plus interest, if the entire loan is in default, plus any applicable
contingent deferred sales charge, will be withdrawn by us from your investment
options in accordance with your direction in the Loan Request and Agreement. We
will use the net proceeds from the withdrawal to repay the loan. If a
withdrawal is restricted under the Code, the outstanding loan
18
<PAGE>
balance will continue to accrue interest and the amount due will be withdrawn
when a withdrawal becomes permissible. Thus, when an event takes place which
makes withdrawal from the Contract permissible under the Code, such as
attainment of age 59 1/2, disability, or death, we will check the Contract to
determine if there is an outstanding loan balance for which one or more
payments have been missed. If so, we will withdraw from your investment
options, in accordance with your direction in the Loan Request and Agreement,
funds necessary to pay the overdue amount, plus any applicable contingent
deferred sales charge. While a loan balance is outstanding, any withdrawal or
death benefit proceeds must first be used to pay the loan.
Loans are subject to the terms of your Contract, your Section 403(b) plan and
the Code, and, in the case of plans subject to the Employee Retirement Income
Security Act of 1974, the ERISA regulations on plan loans, all of which may
impose restrictions. The Company reserves the right to suspend, modify or
terminate the availability of loans. Where there is a plan fiduciary, it is the
responsibility of the fiduciary to ensure that any Contract loans comply with
plan qualification requirements, including ERISA.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS
The following brief discussion of federal income tax considerations is based on
the law in effect on the date of this prospectus, which may be changed by
legislative, judicial or administration action. The summary is general in
nature and does not consider any applicable state or local tax laws. For
further information, you should consult qualified tax counsel.
Under current law, no federal income taxes are imposed on increases in the
value of a Contract until distribution occurs, either in the form of a with-
drawal or death benefit or as annuity payment under an annuity option.
For a withdrawal or death benefit, the taxable portion is generally the
amount in excess of the cost basis of the Contract. Amounts withdrawn by the
Contract owner or received as a death benefit by the designated beneficiary are
treated first as taxable income to the extent of the excess of the Contract
Value over the purchase payments made under the Contract. Such taxable portion
is taxed at ordinary income tax rates. Designation of a beneficiary who is ei-
ther 37 1/2 years younger than the Contract Owner or a grandchild of the Con-
tract Owner may have Generation Skipping Transfer Tax consequences under Sec-
tion 2601 of the Internal Revenue Code.
For annuity payments, the taxable portion is generally determined by a for-
mula that establishes the ratio of the cost basis of the Contract (as adjusted
for any refund feature) to the expected return under the Contract. The taxable
portion, which is the amount of the annuity payment in excess of the cost ba-
sis, is taxed at ordinary income tax rates.
An additional income tax of 10% may be imposed on the taxable portion of an
early withdrawal or distribution unless one of several exceptions apply. There
will be no additional income tax on early withdrawals which are part of a
series of substantially equal periodic payments (not less frequently than
annually) made for life (or life expectancy) of the taxpayer or the joint lives
(or joint life expectancies) of the taxpayer and a beneficiary, or on
withdrawals made on or after age 59 1/2. There also will be no additional tax
on distributions made after death or on withdrawals attributable to total and
permanent disability. Further, there will be no additional tax on distributions
within certain other exceptions to the general rule.
The transfer of a Contract may result in the transferor incurring tax. If the
transfer is for less than adequate consideration the taxable portion would be
the Contract Value at the time of transfer over the investment in the Contract
at such time. This rule does not apply to transfers between spouses or to
transfers incident to a divorce.
Subject to certain exceptions, a Contract must be held by or on behalf of a
natural person in order to be treated as an annuity contract under federal in-
come tax law and to be accorded the tax treatment described in the preceding
paragraphs. If a contract is not treated as an annuity contract for federal in-
come tax purposes, the income on the Contract is treated as ordinary income re-
ceived or accrued by the Contract Owner during the taxable year.
Section 817(h) of the Code provides that the investments of a separate ac-
count underlying a variable annuity contract which is not purchased under a
qualified retirement plan or certain other types of plans (or the investments
of a mutual fund, the shares of which are owned by the variable annuity sepa-
rate account) must be "adequately diversified" in order for the Contract to be
treated as an annuity contract for tax purposes. The Treasury Department has
issued regulations prescribing such diversification requirements. The Separate
Account, through each of the available funds of the Penn Series Funds, Inc.,
American Century Variable Portfolios, Inc., Neuberger & Berman Advisers Manage-
ment Trust, Variable Insurance Products Fund, Variable Insurance Products
Fund II, and Morgan Stanley Universal Funds, Inc. intends to comply with those
requirements. The requirements are briefly discussed in the accompanying pro-
spectuses for the underlying funds.
The Treasury Department has indicated that in regulations or revenue rulings
under Section 817(d) (relating to the definition of a variable contract), it
will provide guidance on the extent to which contract owners may direct their
investments to particular subaccounts without being treated as owners of the
underlying shares. It is possible that when such regulations or rulings are
issued, the Contracts may need to be modified to comply with them.
19
<PAGE>
The Contracts may be used in connection with retirement plans that qualify
for special tax treatment under the Code. The plans include individual retire-
ment annuities qualified under Section 408(b) of the Code (referred to as
IRAs), tax deferred annuities qualified under Section 403(b) of the Code, pen-
sion or profit sharing plans for self-employed individuals qualified under Sec-
tion 401 of the Code (referred to as H.R. 10 or Keogh plans) and corporate pen-
sion or profit sharing plans qualified under Section 401 of the Code, or annu-
ity plans qualified under Section 403(a) of the Code. Special provisions are
required in some Contracts for qualification under the Code.
For some types of qualified retirement plans, there may be no cost basis in
the Contract. In this case, the total payments received may be taxable. Before
purchasing a contract under a qualified retirement plan, the tax law provisions
applicable to the particular plan should be considered.
Generally, under a nonqualified annuity or individual retirement annuity
qualified under Section 408(b), unless the Contract Owner elects to the
contrary, any amounts that are received under the Contract that the Company
believes are includable in gross income for tax purposes will be subject to
withholding to meet federal income tax obligations. The same treatment will
apply to distributions from a qualified plan or Section 403(b) annuity that are
payable as an annuity for the life or life expectancy of one or more
individuals, or for a period of at least 10 years, or are required minimum
distributions. Other distributions from a qualified plan or a Section 403(b)
annuity are subject to mandatory withholding, unless an election is made to
receive the distribution as a direct rollover to another eligible retirement
plan.
20
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
VARIABLE ANNUITY PAYMENTS................................................... B-2
First Variable Annuity Payments........................................... B-2
Subsequent Variable Annuity Payments...................................... B-2
Annuity Units............................................................. B-2
Value of Annuity Units.................................................... B-2
Net Investment Factor..................................................... B-2
Assumed Interest Rate..................................................... B-3
Valuation Period.......................................................... B-3
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PERFORMANCE DATA............................................................ B-4
Average Annual Total Return .............................................. B-4
Annual Changes in Accumulation Unit Values................................ B-7
Yields (Money Market Fund)................................................ B-7
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ADMINISTRATION AND RECORDKEEPING SERVICES................................... B-8
DISTRIBUTION OF CONTRACTS AND CERTIFICATES ................................. B-8
CUSTODIAN .................................................................. B-8
INDEPENDENT ACCOUNTANTS..................................................... B-8
LEGAL MATTERS .............................................................. B-8
FINANCIAL STATEMENTS........................................................ B-9
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE>
The Penn Insurance and Annuity Company
Philadelphia, PA 19172
- ------------------------------------------------
PI 1339 5/97
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1997
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
[LOGO OF PENNANT APPEARS HERE]
THE PENN INSURANCE AND ANNUITY COMPANY
PHILADELPHIA, PENNSYLVANIA 19172 . TELEPHONE (215) 956-9177
- --------------------------------------------------------------------------------
This statement of additional information is not a prospectus. It should be read
in conjunction with the current prospectus for PIA Variable Annuity Account I,
dated May 1, 1997. To obtain a prospectus you may write to The Penn Insurance
and Annuity Company, Customer Service Group, Philadelphia, PA 19172. Or you may
call (215) 956-9177. Terms used in this statement of additional information
have the same meaning as the prospectus.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
VARIABLE ANNUITY PAYMENTS................................................... B-2
First Variable Annuity Payments........................................... B-2
Subsequent Variable Annuity Payments...................................... B-2
Annuity Units............................................................. B-2
Value of Annuity Units.................................................... B-2
Net Investment Factor..................................................... B-2
Assumed Interest Rate..................................................... B-3
Valuation Period.......................................................... B-3
- --------------------------------------------------------------------------------
PERFORMANCE DATA............................................................ B-4
Average Annual Total Return............................................... B-4
Annual Changes in Accumulation Unit Values................................ B-7
Yields (Money Market Fund)................................................ B-7
- --------------------------------------------------------------------------------
ADMINISTRATION AND RECORDKEEPING SERVICES................................... B-8
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS................................................... B-8
- --------------------------------------------------------------------------------
CUSTODIAN................................................................... B-8
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS..................................................... B-8
- --------------------------------------------------------------------------------
LEGAL MATTERS............................................................... B-8
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS........................................................ B-9
- --------------------------------------------------------------------------------
</TABLE>
B-1
<PAGE>
- -------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS
- -------------------------------------------------------------------------------
FIRST VARIABLE ANNUITY PAYMENT
When a variable annuity is effected, we will first deduct applicable premium
taxes, if any, from the Contract Value. The dollar amount of the first monthly
annuity payment will be determined by applying the net Contract Value to the
annuity table set forth in the contract for the annuity option chosen. The
annuity tables show the amount of the first monthly income payment under each
annuity option for each $1,000 of value applied, based on the Annuitant's age
at the Annuity Date. The annuity tables are based on the 1983 Individual
Annuity Mortality Tables with interest at 3%.
- -------------------------------------------------------------------------------
SUBSEQUENT VARIABLE ANNUITY PAYMENTS
The dollar amount of subsequent variable annuity payments will vary in
accordance with the investment experience of the subaccount(s) of the Separate
Account applicable to the annuity. Each subsequent variable annuity payment
will equal the number of annuity units credited, multiplied by the value of
the annuity unit for the valuation period. The Company guarantees that the
amount of each subsequent annuity payment will not be affected by variations
in expense or mortality experience.
- -------------------------------------------------------------------------------
ANNUITY UNITS
For each subaccount selected, the number of annuity units is the amount of
the first annuity payment allocated to the subaccount divided by the value of
an annuity unit for the subaccount on the Annuity Date. The number of your
annuity units will not change as a result of investment experience.
- -------------------------------------------------------------------------------
VALUE OF ANNUITY UNITS
The value of an annuity unit for each subaccount was arbitrarily set at $10
when the subaccount was established. The value may increase or decrease from
one valuation period to the next. For a valuation period, the value of an
annuity unit for a subaccount is the value of an annuity unit for the
subaccount for the last prior valuation period multiplied by the net
investment factor for the subaccount for the valuation period. The result is
then multiplied by a factor to neutralize an assumed interest rate of 3% built
into the annuity tables.
- -------------------------------------------------------------------------------
NET INVESTMENT FACTOR
For any subaccount the net investment factor for a valuation period is
determined by dividing (a) by (b) and subtracting (c):
WHERE (A) IS:
The net asset value per share of the mutual fund held in the subaccount, as
of the end of the valuation period
plus
The per share amount of any dividend or capital gain distributions by the
mutual fund if the "ex-dividend" date occurs in the valuation period
plus or minus
A per share charge or credit, as we may determine as of the end of the
valuation period, for provision for taxes (if applicable).
WHERE (B) IS:
The net asset value per share of the mutual fund held in the subaccount as
of the end of the last prior valuation period
plus or minus
The per share charge or credit for provision for taxes as of the end of the
last prior valuation period (if applicable).
WHERE (C) IS:
The sum of the mortality and expense risk charge and the daily
administration charge. On an annual basis, the sum of such charges equals
1.40% of the daily net asset value of the subaccount.
B-2
<PAGE>
- --------------------------------------------------------------------------------
ASSUMED INTEREST RATE
A 3% assumed annual interest rate is included in the annuity tables in the
contracts. A higher assumption would mean a higher first annuity payment but
more slowly rising or more rapidly falling subsequent payments. A lower
assumption would have the opposite effect. If the actual net investment rate is
3% on an annual basis, annuity payments will be level.
- --------------------------------------------------------------------------------
VALUATION PERIOD
Valuation period is the period from one valuation of underlying fund assets
to the next. Valuation is performed each day the New York Stock Exchange is
open for trading.
B-3
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE DATA
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
Although the Separate Account was not available until the effective date of
this registration statement, the returns calculated below reflect a
hypothetical return as if the Separate Account had invested in the underlying
funds for the indicated periods.
- --------------------------------------------------------------------------------
TABLE 1
Table 1 shows the average annual rates of total return on hypothetical
investments of $1,000, through the Separate Account, in funds of Penn Series
Funds, Inc., American Century Variable Portfolios, Inc., Neuberger and Berman
Advisers Management Trust, Variable Insurance Products Fund and Variable
Insurance Products Fund II for the periods ended December 31, 1996 and assume
withdrawal of the investments at the end of the period.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------
FIVE TEN FROM
ONE YEAR YEARS YEARS INCEPTION
INCEPTION ENDED ENDED ENDED THROUGH
FUND (MANAGER) DATE* 12/31/96 12/31/96 12/31/96 12/31/96
- -------------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
(Independence Capital)......... 06/01/83 12.00% 8.66% 10.35% 10.22%
Value Equity (a)
(OpCap)........................ 03/17/87 16.76% 14.50% N/A 11.59%
Small-Cap Fund
(OpCap)........................ 03/01/95 11.87% N/A N/A 12.67%
Flexibly Managed (a)
(T. Rowe Price)................ 07/31/84 8.30% 10.98% 13.03% 13.24%
International Equity (a)
(Vontobel)..................... 11/01/92 9.09% N/A N/A 11.92%
Quality Bond (a)
(Independence Capital)......... 03/17/87 -2.65% 5.17% N/A 6.55%
High Yield Bond (a)
(T. Rowe Price)................ 08/06/84 6.46% 9.24% 7.86% 8.84%
Capital Appreciation Portfolio
(b)
(American Century Investment
Management)................... 11/20/87 -10.65% 4.09% N/A 9.09%
Balanced Portfolio (c)
(Neuberger & Berman)........... 02/28/89 -0.09% 6.05% N/A 8.58%
Limited Maturity Bond Portfolio
(c)
(Neuberger & Berman)........... 09/10/84 -2.45% 3.44% 5.15% 6.76%
Partners Portfolio (c)
(Neuberger & Berman)........... 03/22/94 21.60% N/A N/A 18.52%
Equity-Income Portfolio (d)
(Fidelity Investments)......... 10/09/86 6.55% 15.47% 11.79% 11.47%
Growth Portfolio (d)
(Fidelity Investments)......... 10/09/86 6.89% 12.79% 13.25% 12.92%
Asset Manager Portfolio (e)
(Fidelity Investments)......... 09/06/89 7.15% 9.25% N/A 10.07%
Index 500 (e)
(Fidelity Investments)......... 08/27/92 15.16% N/A N/A 15.10%
</TABLE>
- -------
* Represents the date the underlying fund was established.
(a)Penn Series Funds, Inc.
(b)American Century Variable Portfolios, Inc.
(c)Neuberger and Berman Advisers Management Trust
(d)Variable Insurance Products Fund
(e)Variable Insurance Products Fund II
B-4
<PAGE>
The average annual rates of total return shown in Table 1 are computed by
finding the average annual compounded rates of return over the periods shown
that would equate the initial amount invested to the withdrawal value, in
accordance with the following formula: P(1 + T)n = ERV. In the formula, P is a
hypothetical investment payment of $1,000; T is the average annual total
return; n is the number of years; and ERV is the withdrawal value at the end of
the periods shown. The $30 annual contract administration charge is reflected
assuming an anticipated average Contract Value and assuming that the Contract
Value is allocated equally across all available subaccounts by an average
contract owner.
- --------------------------------------------------------------------------------
TABLE 2
Table 2 below shows the average annual rates of return on hypothetical
initial investments of $1,000, through the Separate Account, in funds of the
Penn Series Funds, Inc., American Century Variable Portfolios, Inc., Neuberger
and Berman Advisers Management Trust, Variable Insurance Products Fund and
Variable Insurance Products Fund II for the periods ended December 31, 1996 and
assumes the investments are not withdrawn at the end of the period.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------
FIVE TEN FROM
ONE YEAR YEARS YEARS INCEPTION
INCEPTION ENDED ENDED ENDED THROUGH
FUND (MANAGER) DATE* 12/31/96 12/31/96 12/31/96 12/31/96
- -------------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
(Independence Capital)......... 06/01/83 18.03% 9.03% 10.35% 10.22%
Value Equity (a)
(OpCap)........................ 03/17/87 23.06% 14.89% N/A 11.59%
Small-Cap Fund
(OpCap)........................ 03/01/95 17.89% N/A N/A 15.92%
Flexibly Managed (a)
(T. Rowe Price)................ 07/31/84 14.15% 11.36% 13.03% 13.24%
International Equity (a)
(Vontobel)..................... 11/01/92 14.97% N/A N/A 12.61%
Quality Bond (a)
(Independence Capital)......... 03/17/87 2.59% 5.53% N/A 6.55%
High Yield Bond (a)
(T. Rowe Price)................ 08/06/84 12.19% 9.61% 7.86% 8.84%
Captial Appreciation
Portfolio(b)
(American Century Investment
Management)................... 11/20/87 -5.83% 4.45% N/A 9.09%
Balanced Portfolio (c)
(Neuberger & Berman)........... 02/28/89 5.29% 6.42% N/A 8.58%
Limited Maturity Bond Portfolio
(c)
(Neuberger & Berman)........... 09/10/84 2.79% 3.80% 5.15% 6.76%
Partners Portfolio (c)
(Neuberger & Berman)........... 03/22/94 28.15% N/A N/A 20.39%
Equity-Income Portfolio (d)
(Fidelity Investments)......... 10/09/86 12.30% 15.87% 11.79% 11.49%
Growth Portfolio (d)
(Fidelity Investments)......... 10/09/86 12.66% 13.18% 13.25% 12.92%
Asset Manager Portfolio (e)
(Fidelity Investments)......... 09/06/89 12.91% 9.63% N/A 10.07%
Index 500 (e)
(Fidelity Investments)......... 08/27/92 21.36% N/A N/A 15.79%
</TABLE>
- -------
* Represents the date the underlying fund was established.
(a)Penn Series Funds, Inc.
(b)American Century Variable Portfolios, Inc.
(c)Neuberger and Berman Advisers Management Trust
(d)Variable Insurance Products Fund
(e)Variable Insurance Products Fund II
B-5
<PAGE>
- --------------------------------------------------------------------------------
TABLE 3
Table 3 below shows the average annual rates of return on hypothetical
initial investments of $10,000, through the Separate Account, in funds of the
Penn Series Funds, Inc., American Century Variable Portfolios, Inc., Neuberger
and Berman Advisers Management Trust, Variable Insurance Products Fund, and
Variable Insurance Products Fund II for the periods ended December 31, 1996 and
assumes the investments are not withdrawn at the end of the period.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------
FIVE TEN FROM
ONE YEAR YEARS YEARS INCEPTION
INCEPTION ENDED ENDED ENDED THROUGH
FUND (MANAGER) DATE* 12/31/96 12/31/96 12/31/96 12/31/96
- -------------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)
(Independence Capital)......... 06/01/83 18.08% 9.08% 10.39% 10.25%
Value Equity (a)
(OpCap)........................ 03/17/87 23.40% 15.18% N/A 11.84%
Small-Cap Fund
(OpCap)........................ 03/01/95 18.06% N/A N/A 16.09%
Flexibly Managed (a)
(T. Rowe Price)................ 07/31/84 14.68% 11.82% 13.34% 13.52%
International Equity (a)
(Vontobel)..................... 11/01/92 15.20% N/A N/A 12.83%
Quality Bond (a)
(Independence Capital)......... 03/17/87 2.67% 5.61% N/A 6.61%
High Yield Bond (a)
(T. Rowe Price)................ 08/06/84 12.27% 9.68% 7.92% 8.89%
Capital Appreciation Portfolio
(b)
(American Century Investment
Management)................... 11/20/87 -5.68% 4.60% N/A 9.21%
Balanced Portfolio (c)
(Neuberger & Berman)........... 02/28/89 5.38% 6.50% N/A 8.65%
Limited Maturity Bond Portfolio
(c)
(Neuberger & Berman)........... 09/10/84 2.84% 3.84% 5.19% 6.79%
Partners Portfolio (c)
(Neuberger & Berman)........... 03/22/94 28.30% N/A N/A 20.54%
Equity-Income Portfolio (d)
(Fidelity Investments)......... 10/09/86 12.64% 16.14% 12.05% 11.75%
Growth Portfolio (d)
(Fidelity Investments)......... 10/09/86 13.05% 13.51% 13.51% 13.19%
Asset Manager Portfolio (e)
(Fidelity Investments)......... 09/06/89 12.99% 9.69% N/A 10.14%
Index 500 (e)
(Fidelity Investments)......... 08/27/92 21.51% N/A N/A 15.93%
</TABLE>
- -------
* Represents the date the underlying fund was established.
(a)Penn Series Funds, Inc.
(b)American Century Variable Portfolios, Inc.
(c)Neuberger and Berman Advisers Management Trust
(d)Variable Insurance Products Fund
(e)Variable Insurance Products Fund II
The average annual rates of total return shown in Tables 2 and 3 are computed
by finding the average annual compounded rates of return over the periods shown
that would equate the initial amount invested to the Contract Value at the end
of the periods shown, in accordance with the following formula: P(1 + T)n = FV.
In the formula, P is a hypothetical investment of $1,000 in Table 2 and $10,000
in Table 3; T is the average annual total return; n is the number of years; and
FV is the Contract Value at the end of the periods shown. The $30 annual
contract administrative charge is reflected assuming an anticipated average
Contract Value and assuming that the average Contract Value is allocated
equally across all available subaccounts by an average contract owner. The
average annual rates of total returns reflect all recurring charges, but do not
reflect the contingent deferred sales charge ranging from 6% to 1% which, if
applicable, would reduce the amount that may be withdrawn under the Contract.
B-6
<PAGE>
- --------------------------------------------------------------------------------
ANNUAL CHANGES IN ACCUMULATION UNIT VALUES
- --------------------------------------------------------------------------------
TABLE 4
Table 4 shows the changes in values of accumulation units issued for each of
the Funds of the Penn Series Funds, Inc., American Century Variable Portfolios,
Inc. and Neuberger and Berman Advisers Management Trust for each of the
calendar years 1995 and 1996 for which the investment option was offered.
Accumulation unit values do not reflect the $30 annual contract or account
administration charge or the contingent deferred sales charge that may be
applicable to a withdrawal from the Contract.
<TABLE>
<CAPTION>
ANNUAL RATE OF CHANGE IN
ACCUMULATION UNIT VALUES
------------------------
FUND (MANAGER) 1996 1995
- -------------- ------------ ------------
<S> <C> <C>
Growth Equity(a)................................... 18.10% 11.75%
(Independence Capital Management)
Value Equity (a)................................... 23.45% 12.64%
(OpCap)
Small Capitalization (a)........................... 18.09% 11.15%
(OpCap)
Flexibly Managed (a)............................... 14.75% 11.65%
(T. Rowe Price Associates, Inc.)
International Equity (a)........................... 16.90% 11.71%
(Vontobel USA, Inc.)
Quality Bond (a)................................... 2.69% 11.23%
(Independence Capital Management, Inc.)
High Yield Bond (a)................................ 12.29% 10.97%
(T. Rowe Price Associates, Inc.)
Money Market (a)................................... 3.52% 10.31%
(Independence Capital Management, Inc.)
Capital Appreciation Portfolio (b)................. -5.66% 12.82%
(AmericanCenturyInvestment Management, Inc.)
Balanced Portfolio (c)............................. 5.40% 11.65%
(Neuberger & Berman)
Limited Maturity Bond (c).......................... 2.85% 10.69%
(Neuberger & Berman)
Equity Income (d).................................. 12.69% 12.60%
(Fidelity Investors Research)
Growth (d)......................................... 13.11% 13.08%
(Fidelity Investors Research)
Asset Manager (e).................................. 13.01% 11.48%
(Fidelity Investors Research)
</TABLE>
- -------
(a)Penn Series Funds, Inc.
(b)American Century Variable Portfolios, Inc.
(c)Neuberger and Berman Advisers Management Trust
(d)Fidelity Investments' Variable Insurance Products Fund
(e)Fidelity Investments' Variable Insurance Products Fund II
- --------------------------------------------------------------------------------
YIELDS (MONEY MARKET FUND)
From time to time, advertisements and sales literature may quote the current
or effective yield of the Money Market subaccount.
The "yield" and "effective yield" of the Money Market Fund subaccount for the
seven days ended December 31, 1996 were 2.98% and 3.02%, respectively.
The yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical preexisting account having a balance of
one accumulation unit of the subaccount at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from contract owner
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7) with
B-7
<PAGE>
the resulting figure carried to at least the nearest hundredth of 1%. The
hypothetical charge reflects deductions from contract owners' accounts in
proportion to the length of the base period. The $30 annual contract
administrative charge is reflected assuming an anticipated average Contract
Value and assuming that the average Contract Value is allocated equally across
all available subaccounts by an average contract owner.
The effective yield is obtained by taking the base period return as computed
above, and then compounding the base period return by adding 1, raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula: Effective Yield = [(base period return +
1)/365/7/] -1.
The yields do not reflect the contingent deferred sales charge ranging from
6% to 1%. The deferred sales charge may or may not be applicable to a
withdrawal from a Contract, depending on when the withdrawal is made.
THE YIELDS ON AMOUNTS HELD IN THE MONEY MARKET SUBACCOUNT NORMALLY WILL
FLUCTUATE ON A DAILY BASIS. THEREFORE, THE STATED YIELDS FOR ANY GIVEN PERIOD
ARE NOT AN INDICATION OR REPRESENTATION OF FUTURE YIELDS.
--------------------------------
THE PERFORMANCE INFORMATION SET FORTH ABOVE IS FOR PAST PERFORMANCE OF THE
FUNDS, ASSUMING THE SEPARATE ACCOUNT HAD INVESTED IN THE FUNDS FROM THEIR
INCEPTION, AND IS NOT AN INDICATION OR REPRESENTATION OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES
The Company performs all data processing, recordkeeping and other related
services with respect to the Contracts and the Separate Accounts.
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS
Hornor, Townsend & Kent, Inc., a wholly owned subsidiary of Penn Mutual,
serves as principal underwriter of the Contracts. The address of Hornor,
Townsend & Kent, Inc. is 600 Dresher Road, Horsham, PA 19044. For 1996, the
Company paid Hornor, Townsend & Kent, Inc. underwriting commissions of
$115,189.71.
The Contracts will be distributed by Hornor, Townsend & Kent, Inc. through
broker-dealers. Total commissions on purchase payments made under the Contract
will not exceed 6 1/2% and trailer commissions based on a percentage of
Contract Value may be paid. The offering of the Contracts is continuous, and
the Company does not anticipate discontinuing the offering of the Contract,
although we reserve the right to do so.
- --------------------------------------------------------------------------------
CUSTODIAN
The Company is custodian of the assets held in the Separate Account.
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
The statement of assets and liabilities of the PIA Variable Annuity Account
I--Pennant as of December 31, 1996, and the related statement of operations for
the year ended December 31, 1996 and statements of changes in net assets for
the year ended December 31, 1996 and the period from March 1, 1995
(commencement of operations) to December 31, 1995 and the statutory statements
of financial condition of The Penn Insurance and Annuity Company (wholly-owned
subsidiary of The Penn Mutual Life Insurance Co.) as of December 31, 1996 and
1995, and the related statutory statements of operations, surplus and cash
flows for the three years in the period ended December 31, 1996 included in
this statement of additional information have been audited by Coopers & Lybrand
L.L.P., independent accountants. The reports and the financial statements have
been included upon the authority of said firm as experts in accounting and
auditing.
- --------------------------------------------------------------------------------
LEGAL MATTERS
Morgan, Lewis & Bockius LLP of Philadelphia, Pennsylvania, has provided
advice on certain matters relating to the federal securities laws and the
offering of the Contracts.
B-8
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The financial statements of the Separate Account and PIA are set forth on the
following pages. The financial statements of PIA should be distinguished from
the financial statements of the Separate Account and should be considered only
as bearing upon the PIA's ability to meet its obligations under the contracts.
B-9
<PAGE>
- -----------------------------------------------------
THIS PAGE LEFT INTENTIONALLY BLANK
B-10
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PENN INSURANCE AND ANNUITY COMPANY
AND CONTRACT OWNERS OF
PIA VARIABLE ANNUITY ACCOUNT I--PENNANT:
We have audited the accompanying statement of assets and liabilities of the PIA
Variable Annuity Account I -- Pennant [comprising, respectively, Money Market
Fund, Quality Bond Fund, High Yield Bond Fund, Growth Equity Fund, Value Equity
Fund, Flexibly Managed Fund, Small Capitalization Fund, International Equity
Fund, Balanced Portfolio, Limited Maturity Bond Portfolio, Capital Appreciation
Portfolio (formerly TCI Growth Portfolio) Equity Income Portfolio, Growth
Portfolio, and Asset Manager Portfolio] as of December 31, 1996, and the
related statement of operations for the year then ended, and the statements of
changes in net assets for the year then ended, and the period from March 1,
1995 (commencement of operations) to December 31, 1995. These financial
statements are the responsibility of the management of PIA Variable Annuity
Account I -- Pennant. 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. Our
procedures included confirmation of securities owned as of December 31, 1996 by
correspondence with the transfer agents. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of PIA Variable Annuity Account I
- -- Pennant as of December 31, 1996, the results of its operations for the year
then ended and its changes in net assets for the year then ended, and the
period from March 1, 1995 (commencement of operations) to December 31, 1995 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 7, 1997
B-11
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I - PENNANT
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONEY MARKET QUALITY BOND HIGH YIELD GROWTH EQUITY VALUE EQUITY
TOTAL FUND+ FUND+ BOND FUND+ FUND+ FUND+
------------ ------------ ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT IN COMMON
STOCK
Number of shares....... 6,439,409 317,555 401,355 90,939 740,468
Identified cost........ $120,313,780 $6,439,409 $3,252,896 $3,608,351 $2,028,822 $13,335,520
ASSETS AND LIABILITIES:
Investments at value... $123,818,302 $6,439,409 $3,175,549 $3,576,077 $1,951,545 $14,305,846
Dividends receivable... 23,767 23,767 0 0 0 0
Due (to) from The Penn
Insurance and Annuity
Company............... (3,258) 36,883 (1,116) (1,213) (657) (4,833)
------------ ---------- ---------- ---------- ---------- -----------
NET ASSETS:
Net assets.............. $123,838,811 $6,500,059 $3,174,433 $3,574,864 $1,950,888 $14,301,013
============ ========== ========== ========== ========== ===========
Variable annuity accumu-
lation units........... 609,075 275,302 290,291 140,629 916,524
Accumulation unit val-
ues.................... $ 10.67 $ 11.53 $ 12.31 $ 13.87 $ 15.60
- --------------------------------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I - PENNANT
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1996
<CAPTION>
MONEY MARKET QUALITY BOND HIGH YIELD GROWTH EQUITY VALUE EQUITY
TOTAL FUND+ FUND+ BOND FUND+ FUND+ FUND+
------------ ------------ ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.............. $ 2,571,806 $ 205,870 $ 197,082 $ 258,939 $ 8,634 $ 157,643
EXPENSE:
Mortality and expense
risk charges.......... 996,483 59,958 35,358 25,846 10,798 107,878
------------ ---------- ---------- ---------- ---------- -----------
Net investment income
(loss)................ 1,575,323 145,703 161,724 233,093 (2,164) 49,765
------------ ---------- ---------- ---------- ---------- -----------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from redemption of
fund shares........... 15,807 0 2,695 1,786 2,878 393
Capital gains distribu-
tions................. 3,695,481 0 0 0 191,675 588,656
------------ ---------- ---------- ---------- ---------- -----------
Net realized gains .... 3,711,288 0 2,695 1,786 194,553 589,049
Net change in
unrealized apprecia-
tion (depreciation) of
investments........... 3,418,393 0 (68,697) 5,814 (60,566) 978,790
------------ ---------- ---------- ---------- ---------- -----------
Net realized and
unrealized gains
(losses) on
investments........... 7,129,681 0 (66,002) 7,600 133,987 1,567,839
------------ ---------- ---------- ---------- ---------- -----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULT-
ING FROM OPERATIONS... $ 8,705,004 $ 145,912 $ 95,722 $ 240,693 $ 131,823 $ 1,617,604
============ ========== ========== ========== ========== ===========
</TABLE>
- -------
+ Investment in Penn Series Funds, Inc.
++ Investment in Newberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
The accompanying notes are an integral part of these financial statements.
B-12
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL LIMITED
MANAGED CAPITALIZATION INTERNATIONAL BALANCED MATURITY BOND
FUND+ FUND+ EQUITY FUND+ PORTFOLIO++ PORTFOLIO++
- ----------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
2,132,887 371,261 461,282 176,501 167,602
$39,636,827 $4,412,700 $7,095,334 $2,818,813 $2,384,306
$39,970,310 $4,651,904 $7,200,610 $2,809,896 $2,354,807
0 0 0 0 0
(13,842) (1,583) (2,437) (951) (794)
- ----------- ---------- ---------- ---------- ----------
$39,956,468 $4,650,321 $7,198,173 $2,808,945 $2,354,013
=========== ========== ========== ========== ==========
2,989,155 353,352 525,885 228,709 214,093
$ 13.37 $ 13.16 $ 13.69 $ 12.28 $ 11.00
- ----------------------------------------------------------------------------------
<CAPTION>
FLEXIBLY SMALL LIMITED
MANAGED CAPITALIZATION INTERNATIONAL BALANCED MATURITY BOND
FUND+ FUND+ EQUITY FUND+ PORTFOLIO++ PORTFOLIO++
- ----------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
$ 1,289,292 $ 25,077 $ 237,789 $ 25,158 $ 127,744
307,844 32,749 51,216 26,708 26,896
- ----------- ---------- ---------- ---------- ----------
981,448 (7,672) 186,573 (1,550) 100,848
- ----------- ---------- ---------- ---------- ----------
(378) 699 (657) 1,146 5,295
1,681,884 171,265 316,770 139,905 0
- ----------- ---------- ---------- ---------- ----------
1,681,506 171,964 316,113 141,051 5,295
515,156 239,195 75,846 (20,603) (41,435)
- ----------- ---------- ---------- ---------- ----------
2,196,662 411,159 391,959 120,448 (36,140)
- ----------- ---------- ---------- ---------- ----------
$ 3,178,110 $ 403,487 $ 578,532 $ 118,898 $ 64,708
=========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-13
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I - PENNANT
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1996 (CONT'D.)
<TABLE>
<CAPTION>
CAPITAL
APPRECIATION EQUITY-INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT IN COMMON
STOCK
Number of shares....... 371,088 766,365 478,908 150,771
Identified cost........ $4,129,318 $14,725,428 $14,103,919 $2,342,136
ASSETS AND LIABILITIES:
Investments at value... $3,799,945 $16,116,657 $14,913,195 $2,552,552
Dividends receivable... 0 0 0 0
Due (to) from The Penn
Insurance and Annuity
Company............... (1,471) (5,519) (4,854) (871)
---------- ----------- ----------- ----------
NET ASSETS:
Net assets............. $3,798,474 $16,111,138 $14,908,341 $2,551,681
========== =========== =========== ==========
Variable annuity accu-
mulation units........ 314,124 1,134,707 1,007,942 196,768
Accumulation unit val-
ues................... $ 12.09 $ 14.20 $ 14.79 $ 12.97
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I - PENNANT
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1996 (CONT'D.)
<CAPTION>
CAPITAL
APPRECIATION EQUITY-INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.............. $ 0 $ 5,848 $ 9,451 $ 23,279
EXPENSE:
Mortality and expense
risk charges.......... 34,186 133,245 122,771 21,030
---------- ----------- ----------- ----------
Net investment income
(loss)................ (34,186) (127,397) (113,320) 2,249
---------- ----------- ----------- ----------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON IN-
VESTMENTS:
Realized gains (losses)
from redemption of
fund shares........... 963 823 (53) 217
Capital gains distribu-
tions................. 179,861 167,629 238,641 19,195
---------- ----------- ----------- ----------
Net realized gains..... 180,824 168,452 238,588 19,412
Net change in
unrealized apprecia-
tion (depreciation) of
investments........... (347,536) 1,191,851 777,104 173,474
---------- ----------- ----------- ----------
Net realized and
unrealized gains
(losses) on invest-
ments................. (166,712) 1,360,303 1,015,692 192,886
---------- ----------- ----------- ----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $ (200,898) $ 1,232,906 $ 902,372 $ 195,135
========== =========== =========== ==========
</TABLE>
- -------
+ Investment in Penn Series Funds, Inc.
++ Investment in Newberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997).
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
The accompanying notes are an integral part of these financial statements.
B-14
<PAGE>
- -----------------------------------------------------
THIS PAGE LEFT INTENTIONALLY BLANK
B-15
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I - PENNANT
STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
PERIOD OF MARCH 1, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY MARKET QUALITY BOND HIGH YIELD
TOTAL FUND+ FUND+ BOND FUND+
------------------------- ------------------------ --------------------- --------------------
1996 1995 1996 1995 1996 1995 1996 1995
------------ ----------- ----------- ----------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 1,575,323 $ 311,547 $ 145,912 $ 19,878 $ 161,724 $ 36,970 $ 233,093 $ 53,798
Net realized gain
(loss) from investment
transactions.......... 3,711,288 382,361 0 0 2,695 251 1,786 100
Net change in
unrealized
appreciation
(depreciation) of
investments........... 3,418,393 86,124 0 0 (68,697) (8,650) 5,814 (38,089)
------------ ----------- ----------- ----------- ----------- -------- ---------- --------
Net increase (decrease)
in net assets resulting
from operations........ 8,705,004 780,032 145,912 19,878 95,722 28,571 240,693 15,809
------------ ----------- ----------- ----------- ----------- -------- ---------- --------
VARIABLE ANNUITY ACTIVI-
TIES:
Purchase payments under
variable annuity
contracts............. 109,076,182 21,438,030 11,766,041 2,982,737 4,014,585 756,991 3,257,266 589,034
Surrender benefits..... (688,028) 0 (32,079) 0 (16,374) 0 (19,834) 0
Net transfers.......... (14,062,219) 562,648 (7,241,862) (1,078,058) (1,122,806) (65,223) (449,170) 25,706
Contract administration
charges............... (13,544) (425) (518) (30) (350) (6) (317) 0
Annuity benefits....... (1,928,380) (30,489) (61,612) (350) (516,677) 0 (81,701) (2,622)
------------ ----------- ----------- ----------- ----------- -------- ---------- --------
Net increase in net
assets derived from
annuity activities..... 92,384,011 21,969,764 4,429,970 1,904,299 2,358,378 691,762 2,706,244 612,118
------------ ----------- ----------- ----------- ----------- -------- ---------- --------
Total increase in net
assets................ 101,089,015 22,749,796 4,575,882 1,924,177 2,454,100 720,333 2,946,937 627,927
NET ASSETS:
Beginning of period.... 22,749,796 0 1,924,177 0 720,333 0 627,927 0
------------ ----------- ----------- ----------- ----------- -------- ---------- --------
END OF PERIOD.......... $123,838,811 $22,749,796 $ 6,500,059 $ 1,924,177 $ 3,174,433 $720,333 $3,574,864 $627,927
============ =========== =========== =========== =========== ======== ========== ========
</TABLE>
- -------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997.)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
The accompanying notes are an integral part of these financial statements.
B-16
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH EQUITY VALUE EQUITY FLEXIBLY MANAGED SMALL CAPITALIZATION
FUND+ FUND+ FUND+ FUND+
- --------------------- ----------------------- ----------------------- -----------------------
1996 1995 1996 1995 1996 1995 1996 1995
- ---------- -------- ----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (2,164) $ 200 $ 49,765 $ 22,723 $ 981,448 $ 173,659 $ (7,672) $ 2,459
194,553 20,551 589,049 114,332 1,681,506 234,228 171,964 12,282
(60,566) (16,711) 978,790 (8,464) 515,156 (181,674) 239,195 9
- ---------- -------- ----------- ---------- ----------- ---------- ----------- ---------
131,823 4,040 1,617,604 128,591 3,178,110 226,213 403,487 14,750
- ---------- -------- ----------- ---------- ----------- ---------- ----------- ---------
1,879,023 145,157 11,131,936 1,864,128 31,724,973 6,004,397 3,865,977 520,095
(1,444) 0 (65,906) 0 (258,353) 0 (11,107) 0
(218,969) 14,361 (394,988) 254,805 (1,157,006) 671,116 (170,367) 84,113
(142) 0 (1,463) (45) (4,084) (134) (483) (3)
(2,961) 0 (232,319) (1,330) (418,180) (10,584) (54,544) (1,597)
- ---------- -------- ----------- ---------- ----------- ---------- ----------- ---------
1,655,507 159,518 10,437,260 2,117,558 29,887,350 6,664,795 3,629,476 602,608
- ---------- -------- ----------- ---------- ----------- ---------- ----------- ---------
1,787,330 163,558 12,054,864 2,246,149 33,065,460 6,891,008 4,032,963 617,358
163,558 0 2,246,149 0 6,891,008 0 617,358 0
- ---------- -------- ----------- ---------- ----------- ---------- ----------- ---------
$1,950,888 $163,558 $14,301,013 $2,246,149 $39,956,468 $6,891,008 $4,650,321 $617,358
========== ======== =========== ========== =========== ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-17
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I - PENNANT
STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
PERIOD OF MARCH 1, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1995
(CONT'D.)
<TABLE>
<CAPTION>
CAPITAL
INTERNATIONAL BALANCED LIMITED MATURITY APPRECIATION
EQUITY FUND+ PORTFOLIO++ BOND PORTFOLIO++ PORTFOLIO+++
------------------- -------------------- --------------------- --------------------
1996 1995 1996 1995 1996 1995 1996 1995
---------- -------- ---------- -------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 186,573 $ 11,505 $ (1,550) $ (3,044) $ 100,848 $ (1,802) $ (34,186) $ (3,426)
Net realized gain
(loss) from investment
transactions.......... 316,113 21 141,051 120 5,295 146 180,824 (78)
Net change in
unrealized
appreciation
(depreciation) of
investments........... 75,846 29,429 (20,603) 11,684 (41,435) 11,936 (347,536) 18,162
---------- -------- ---------- -------- ----------- -------- ---------- --------
Net increase (decrease)
in net assets resulting
from operations........ 578,532 40,955 118,898 8,760 64,708 10,280 (200,898) 14,658
---------- -------- ---------- -------- ----------- -------- ---------- --------
VARIABLE ANNUITY ACTIVI-
TIES:
Purchase payments under
variable annuity
contracts............. 6,480,324 562,944 2,287,512 744,910 3,179,899 584,013 3,313,766 851,970
Surrender benefits..... (16,812) 0 (15,249) 0 (21,881) 0 (29,264) 0
Net transfers.......... (395,700) 48,183 (364,312) 59,538 (1,384,520) (43,455) (195,208) 57,677
Contract administration
charges............... (515) (3) (584) 0 (204) 0 (558) (45)
Annuity benefits....... (96,239) (3,496) (28,754) (1,774) (34,487) (340) (10,505) (3,119)
---------- -------- ---------- -------- ----------- -------- ---------- --------
Net increase in net
assets derived from
annuity activities..... 5,971,058 607,628 1,878,613 802,674 1,738,807 540,218 3,078,231 906,483
---------- -------- ---------- -------- ----------- -------- ---------- --------
Total increase in net
assets................ 6,549,590 648,583 1,997,511 811,434 1,803,515 550,498 2,877,333 921,141
NET ASSETS:
Beginning of period.... 648,583 0 811,434 0 550,498 0 921,141 0
---------- -------- ---------- -------- ----------- -------- ---------- --------
END OF PERIOD.......... $7,198,173 $648,583 $2,808,945 $811,434 $ 2,354,013 $550,498 $3,798,474 $921,141
========== ======== ========== ======== =========== ======== ========== ========
</TABLE>
- -------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997.)
++++ Investment in Fidelity Investments' Variable Insurance Products Funds I
and II.
The accompanying notes are an integral part of these financial statements.
B-18
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
- ------------------------ -------------------------- -----------------------
1996 1995 1996 1995 1996 1995
- ----------- ---------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
$ (127,397) $ 12,367 $ (113,320) $ (10,704) $ 2,249 $ (3,036)
168,452 191 238,588 111 19,412 106
1,191,851 199,378 777,104 32,172 173,474 36,942
- ----------- ---------- ----------- ---------- ---------- --------
1,232,906 211,936 902,372 21,579 195,135 34,012
- ----------- ---------- ----------- ---------- ---------- --------
12,524,113 2,621,032 11,793,923 2,667,181 1,856,844 543,441
(86,153) 0 (104,034) 0 (9,538) 0
(465,915) 279,515 (434,169) 240,417 (67,227) 13,953
(1,784) (44) (2,059) (70) (483) (45)
(203,041) (1,427) (173,601) (3,198) (13,759) (652)
- ----------- ---------- ----------- ---------- ---------- --------
11,767,220 2,899,076 11,080,060 2,904,330 1,765,837 556,697
- ----------- ---------- ----------- ---------- ---------- --------
13,000,126 3,111,012 11,982,432 2,925,909 1,960,972 590,709
3,111,012 0 2,925,909 0 590,709 0
- ----------- ---------- ----------- ---------- ---------- --------
$16,111,138 $3,111,012 $14,908,341 $2,925,909 $2,551,681 $590,709
=========== ========== =========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-19
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I - PENNANT
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NOTE 1.
The significant accounting policies of PIA Variable Annuity Account I -
Pennant (Account I) are as follows:
GENERAL - Account I was established by The Penn Insurance and Annuity
Company (PIA) under the provisions of the Delaware Insurance Law. PIA has
structured Account I as a unit investment trust registered under the
Investment Company Act of 1940. Account I offers a combination fixed and
variable annuity contract. Account I offers units to variable annuity
contractholders to provide for the accumulation of value and for the
payment of annuities. The preparation of the accompanying financial
statements requires management to make estimates and assumptions that
affect the reported values of assets and liabilities as of December 31,
1996 and the reported amounts from operations and contract transactions
during 1996. Actual results could differ from those estimates.
INVESTMENTS - Assets of Account I are invested in shares of Penn Series
Funds, Inc. (Penn Series): Money Market, Quality Bond, High Yield Bond,
Growth Equity, Value Equity, Flexibly Managed, International Equity and
Small Capitalization Funds; Neuberger and
- --------------------------------------------------------------------------------
NOTE 2.
For the year ended December 31, 1996 and the period of March 1, 1995
(commencement of operations) to December 31, 1995 share transactions of
Account I were as follows:
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD
MARKET FUND+ BOND FUND+ BOND FUND+
----------------------- -------------------- --------------------
1996 1995 1996 1995 1996 1995
----------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........ 10,282,841 2,926,149 370,651 71,618 352,468 71,558
Shares received from re-
investment of:
Net investment income. 205,661 20,254 19,708 3,898 29,062 6,638
Capital gains distri-
bution............... 0 0 0 0 0 0
----------- ---------- ---------- -------- ---------- --------
Total shares acquired... 10,488,502 2,946,403 390,359 75,516 381,530 78,196
Shares redeemed......... (6,031,688) (963,808) (143,163) (5,157) (54,589) (3,782)
----------- ---------- ---------- -------- ---------- --------
Net increase in shares
owned.................. 4,456,814 1,982,595 247,196 70,359 326,941 74,414
Shares owned beginning
of period.............. 1,982,595 0 70,359 0 74,414 0
----------- ---------- ---------- -------- ---------- --------
Shares owned end of pe-
riod................... 6,439,409 1,982,595 317,555 70,359 401,355 74,414
=========== ========== ========== ======== ========== ========
Cost of shares acquired. $10,488,502 $2,946,403 $3,986,768 $782,534 $3,432,734 $699,733
=========== ========== ========== ======== ========== ========
Proceeds from shares re-
deemed................. $ 6,031,688 $ 963,808 $1,465,728 $ 53,662 $ 492,310 $ 33,692
=========== ========== ========== ======== ========== ========
<CAPTION>
INTERNATIONAL BALANCED LIMITED MATURITY
EQUITY FUND+ PORTFOLIO++ BOND PORTFOLIO++
----------------------- -------------------- --------------------
1996 1995 1996 1995 1996 1995
----------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........ 397,567 44,056 143,911 47,329 210,617 39,251
Shares received from re-
investment of:
Net investment income. 15,233 1,001 1,649 0 9,484 0
Capital gains distri-
bution............... 20,293 0 9,168 0 0 0
----------- ---------- ---------- -------- ---------- --------
Total shares acquired... 433,093 45,057 154,728 47,329 220,101 39,251
Shares redeemed......... (16,642) (226) (24,550) (1,006) (89,930) (1,820)
----------- ---------- ---------- -------- ---------- --------
Net increase in shares
owned.................. 416,451 44,831 130,178 46,323 130,171 37,431
Shares owned beginning
of period.............. 44,831 0 46,323 0 37,431 0
----------- ---------- ---------- -------- ---------- --------
Shares owned end of pe-
riod................... 461,282 44,831 176,501 46,323 167,602 37,431
=========== ========== ========== ======== ========== ========
Cost of shares acquired. $ 6,739,747 $ 622,422 $2,404,027 $817,479 $3,066,457 $564,630
=========== ========== ========== ======== ========== ========
Proceeds from shares re-
deemed................. $ 263,036 $ 3,162 $ 384,261 $ 17,697 $1,226,113 $ 26,108
=========== ========== ========== ======== ========== ========
</TABLE>
The cost of shares redeemed is determined on a last-in, first-out basis.
- -------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust
+++ Investment in American Century Variable Portfolios, Inc. (TCI Growth
Portfolio changed to Capital Appreciation Portfolio as of May 1, 1997.)
++++ Investment in Fidelity Investments' Insurance Product Funds I and II.
B-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1., CONT'D.
Berman Advisers Management Trust (AMT): Limited Maturity Bond and Balanced
Portfolios; American Century Variable Portfolios, Inc. (American Century):
Capital Appreciation Portfolio; Fidelity Investments' Variable Insurance
Product (Fidelity): Equity-Income, Growth, and Asset Manager Portfolios.
Penn Series, AMT, American Century and Fidelity are open-end diversified
investment companies. The shares are carried at market value as determined
by the underlying net asset value of the respective Funds. Dividend income
is recorded on the ex-dividend date. Investment transactions are accounted
for on a trade date basis.
Federal Income Taxes - PIA is taxed under federal law as a life insurance
company. Account I is part of PIA's total operations and is not taxed
separately. Under existing federal law, no taxes are payable on investment
income and realized gains of Account I.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH VALUE FLEXIBLY SMALL CAPITALIZATION
EQUITY FUND+ EQUITY FUND+ MANAGED FUND+ FUND+
- ----------------------- ----------------------- ----------------------- -----------------------
1996 1995 1996 1995 1996 1995 1996 1995
- ----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
87,775 10,560 572,530 131,244 1,634,579 373,372 311,668 55,344
402 31 8,160 1,931 68,799 11,390 2,001 426
8,932 1,012 30,469 7,014 89,748 13,456 13,697 1,120
- ----------- --------- ----------- ---------- ----------- ---------- ----------- ---------
97,109 11,603 611,159 140,189 1,793,126 398,218 327,366 56,890
(14,349) (3,424) (8,687) (2,193) (56,349) (2,108) (12,444) (551)
- ----------- --------- ----------- ---------- ----------- ---------- ----------- ---------
82,760 8,179 602,472 137,996 1,736,777 396,110 314,922 56,339
8,179 0 137,996 0 396,110 0 56,339 0
- ----------- --------- ----------- ---------- ----------- ---------- ----------- ---------
90,939 8,179 740,468 137,996 2,132,887 396,110 371,261 56,339
=========== ========= =========== ========== =========== ========== =========== =========
$2,164,719 $ 252,011 $11,237,711 $2,290,813 $33,613,754 $7,109,671 $ 3,945,543 $ 623,629
=========== ========= =========== ========== =========== ========== =========== =========
$ 319,074 $ 72,031 $ 157,626 $ 35,919 $ 1,050,538 $ 35,781 $ 151,010 $ 6,173
=========== ========= =========== ========== =========== ========== =========== =========
<CAPTION>
CAPITAL APPRECIATION EQUITY-INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
- ----------------------- ----------------------- ----------------------- -----------------------
1996 1995 1996 1995 1996 1995 1996 1995
- ----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
295,733 76,984 612,447 162,829 378,280 101,293 115,146 42,510
16,825 0 310 1,291 340 0 1,542 0
0 0 8,888 0 8,590 0 1,271 0
- ----------- --------- ----------- ---------- ----------- ---------- ----------- ---------
312,558 76,984 621,645 164,120 387,210 101,293 117,959 42,510
(17,870) (584) (16,755) (2,645) (8,522) (1,073) (4,605) (5,093)
- ----------- --------- ----------- ---------- ----------- ---------- ----------- ---------
294,688 76,400 604,890 161,475 378,688 100,220 113,354 37,417
76,400 0 161,475 0 100,220 0 37,417 0
- ----------- --------- ----------- ---------- ----------- ---------- ----------- ---------
371,088 76,400 766,365 161,475 478,908 100,220 150,771 37,417
=========== ========= =========== ========== =========== ========== =========== =========
$3,421,152 $ 910,433 $12,146,093 $2,958,084 $11,470,781 $2,925,304 $ 1,862,667 $ 627,916
=========== ========= =========== ========== =========== ========== =========== =========
$ 196,004 $ 7,130 $ 333,741 $ 46,023 $ 261,057 $ 31,167 $ 74,623 $ 74,146
=========== ========= =========== ========== =========== ========== =========== =========
</TABLE>
B-21
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I - PENNANT
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NOTE 3.
Operations are charged for mortality and expense risks assumed by PIA and
for administering the separate account at an annual rate of 1.25% and 0.15%
respectively, of the average account value of Account I.
As reimbursement for expenses incurred in administering the contract, PIA
receives $30 per year for each annuity contract prior to the contract's
anniversary date. The $30 charge is waived on certain contracts.
If a policy is surrendered within the first 7 years, a contingent deferred
sales charge will be assessed. This charge will be deducted before any
surrender proceeds are paid. See original contract documents for specific
charges assessed.
B-22
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
THE PENN INSURANCE AND ANNUITY COMPANY
WILMINGTON, DELAWARE
We have audited the accompanying statutory statements of financial condition of
The Penn Insurance and Annuity Company (a wholly-owned subsidiary of The Penn
Mutual Life Insurance Company) as of December 31, 1996 and 1995 and the related
statutory statements of operations, changes in capital and surplus and cash
flows for the three years in the period ended December 31, 1996. These
statutory 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.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware (SAP), which
practices differ from generally accepted accounting principles (GAAP). The
effects on the financial statements of the variances between SAP and GAAP are
described in Note 1 to the financial statements.
In our report dated January 26, 1996, we expressed our opinion that the 1995
and 1994 financial statements, prepared using SAP, presented fairly, in all
material respects, the financial position of The Penn Insurance and Annuity
Company as of December 31, 1995, and the results of its operations, and its
cash flows for the two years then ended in conformity with GAAP. As described
in Note 1 to the financial statements, financial statements of wholly-owned
stock life insurance subsidiaries of mutual life insurance companies issued or
reissued after 1996, which are prepared in accordance with SAP, are no longer
considered to be presented in conformity with GAAP. Accordingly, our present
opinion on the 1995 and 1994 financial statements as presented herein is
different from that expressed in our previous report.
In our opinion, because of the effects of the matter discussed in the second
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with GAAP, the financial position of The Penn Insurance
and Annuity Company as of December 31, 1996 and 1995, or the results of its
operations or its cash flows for the three years in the period ended December
31, 1996.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial condition of The Penn Insurance and
Annuity Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the three years in the period ended December
31, 1996, on the basis of accounting described in Note 1.
As discussed in Note 2 to the financial statements, during 1995, the Company
changed its accounting method for certain components of the federal income tax
expense.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 28, 1997
B-23
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C>
ASSETS
Bonds..................................................... $ 562,231 $413,987
Stocks
Preferred................................................ 3,577 3,577
Common--affiliated....................................... 495 1,940
Mortgage loans............................................ 11,190 90,395
Real estate............................................... 3,041 5,087
Policy loans.............................................. 246,729 234,442
Cash and short-term investments........................... 35,385 22,722
---------- --------
Total Cash and Invested Assets........................... 862,648 772,150
Investment income due and accrued......................... 20,224 14,257
Other assets.............................................. 910 10,016
Separate account assets................................... 143,346 28,216
---------- --------
TOTAL ASSETS............................................. $1,027,128 $824,639
========== ========
LIABILITIES
Reserves and funds for payment of future life and annuity
benefits................................................. $ 768,876 $708,720
Policy claims in process.................................. 3,973 3,623
Interest maintenance reserve.............................. 890 1,744
Asset valuation reserve................................... 3,966 5,436
Other liabilities......................................... 23,975 11,299
Separate account liabilities.............................. 143,346 28,216
---------- --------
TOTAL LIABILITIES........................................ 945,026 759,038
---------- --------
CAPITAL AND SURPLUS
Common stock, $2 par value; 1,000 shares authorized, is-
sued and outstanding..................................... 2,000 2,000
Capital contributed in excess of par value................ 103,369 103,369
Accumulated deficit....................................... (23,267) (39,768)
---------- --------
TOTAL CAPITAL AND SURPLUS................................ 82,102 65,601
---------- --------
TOTAL LIABILITIES AND CAPITAL AND SURPLUS............... $1,027,128 $824,639
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-24
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C>
INCOME
Premium and annuity considerations.................... $190,527 $ 78,904 $35,916
Net investment income................................. 64,571 58,898 50,515
Other income.......................................... 5,987 34,940 2,461
-------- -------- -------
TOTAL INCOME......................................... 261,085 172,742 88,892
-------- -------- -------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries...... 55,594 48,029 44,456
Increase in reserves and funds for the payment of fu-
ture life and annuity benefits....................... 60,155 66,086 18,728
Commissions........................................... 9,690 5,398 5,008
Operating expenses.................................... 8,396 6,330 5,718
Net transfers to separate accounts.................... 100,281 27,388 --
-------- -------- -------
TOTAL BENEFITS AND EXPENSES.......................... 234,116 153,231 73,910
-------- -------- -------
INCOME FROM OPERATIONS BEFORE FEDERAL INCOME TAXES... 26,969 19,511 14,982
Federal income tax expense............................ 9,614 7,644 4,292
-------- -------- -------
INCOME FROM OPERATIONS............................... 17,355 11,867 10,690
Net realized capital losses, net of taxes............. 1,438 1,591 4,646
-------- -------- -------
NET INCOME........................................... $ 15,917 $ 10,276 $ 6,044
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-25
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C>
COMMON STOCK
Beginning of year................................ $ 2,000 $ 2,000 $ 2,000
-------- -------- --------
END OF YEAR...................................... 2,000 2,000 2,000
-------- -------- --------
CAPITAL CONTRIBUTED IN EXCESS OF PAR VALUE
Beginning of year................................ 103,369 103,369 103,369
-------- -------- --------
END OF YEAR...................................... 103,369 103,369 103,369
-------- -------- --------
ACCUMULATED DEFICIT
Beginning of year................................ (39,768) (48,846) (59,087)
Net income....................................... 15,917 10,276 6,044
Change in non-admitted assets.................... 619 (71) 117
Change in asset valuation reserve................ 1,470 767 2,505
Change in net unrealized capital gains and loss-
es.............................................. (1,505) 123 774
Change in accounting method...................... -- (2,017) --
Other............................................ -- -- 801
-------- -------- --------
END OF YEAR...................................... (23,267) (39,768) (48,846)
-------- -------- --------
TOTAL CAPITAL AND SURPLUS........................ $ 82,102 $ 65,601 $ 56,523
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-26
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C>
CASH PROVIDED
Net cash from operations:
Premium and annuity considerations............. $190,541 $78,404 $35,640
Net investment income.......................... 58,076 60,655 51,409
Other income................................... 23,310 37,000 3,414
-------- ------- -------
271,927 176,059 90,463
Benefits to policyholders...................... 54,341 48,225 42,330
Commissions.................................... 9,747 5,312 4,915
Operating expenses and taxes................... 17,441 13,488 11,222
Transfers to separate accounts................. 104,991 27,388 --
Net increase in policy loans................... 11,651 33,911 10,391
-------- ------- -------
NET CASH FROM OPERATIONS....................... 73,756 47,735 21,605
-------- ------- -------
Investments sold, matured or repaid:
Bonds.......................................... 165,045 73,341 76,309
Stocks......................................... -- 7,270 27,169
Mortgage loans................................. 71,902 11,317 11,866
Real estate.................................... 2,849 753 1,538
-------- ------- -------
Total investments sold, matured or repaid..... 239,796 92,681 116,882
Taxes on realized investment gains.............. 630 (373) 89
Other cash provided............................. 10,208 674 28
-------- ------- -------
TOTAL CASH PROVIDED............................ 324,390 140,717 138,604
-------- ------- -------
CASH APPLIED
Cost of investments acquired:
Bonds.......................................... 311,166 99,407 115,155
Stocks......................................... -- 1 25,005
Mortgage loans................................. 561 20,459 2,554
-------- ------- -------
Total cost of investments acquired............ 311,727 119,867 142,714
Other cash applied.............................. -- 286 61
-------- ------- -------
TOTAL CASH APPLIED............................. 311,727 120,153 142,775
-------- ------- -------
Net change in cash and short-term investments... 12,663 20,564 (4,171)
CASH AND SHORT-TERM INVESTMENTS:
Beginning of year.............................. 22,722 2,158 6,329
-------- ------- -------
END OF YEAR.................................... $ 35,385 $22,722 $ 2,158
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-27
<PAGE>
- -------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF DOLLARS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
The Penn Insurance and Annuity Company (the "Company"), is a wholly owned
subsidiary of The Penn Mutual Life Insurance Company ("Penn Mutual"). The
Company currently concentrates primarily in the sale of individual annuity
products, both fixed and variable. The Company sells its products through Penn
Mutual's distribution systems, which consist of a network of career agents,
independent agents and independent marketing organizations. Additionally, it
has a significant amount of universal life insurance business in force,
although the Company no longer sells these products. The Company is licensed
to do business in forty-seven states and the District of Columbia.
BASIS OF PRESENTATION
The financial statements of the Company have been prepared in conformity with
accounting principles prescribed or permitted by the Insurance Department of
the State of Delaware (SAP). Prescribed SAP include state laws, regulations,
and general administrative rules, as well as a variety of publications of the
National Association of Insurance Commissioners (NAIC). Permitted SAP
encompass all accounting practices which are not prescribed. These principles
were considered to be in conformity with generally accepted accounting
principles (GAAP) prior to the issuance of Financial Accounting Standards
Board Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises," (FIN No. 40) and
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." Effective for fiscal years
beginning after December 15, 1995, in accordance with FIN No. 40, the
financial statements of mutual life insurance companies which are prepared on
the basis of SAP can no longer be described as prepared in conformity with
GAAP. Therefore, as required by generally accepted auditing standards, the
opinion expressed by our independent accountants on the 1995 and 1994
financial statements is different from that expressed in their previous
report.
In financial statements prepared in conformity with SAP, the accounting
treatment of certain items is different than for financial statements issued
in conformity with GAAP. Significant differences include:
. Policy acquisition costs, such as commissions and other costs incurred in
connection with acquiring new and renewal business, are expensed when in-
curred; under GAAP, such costs are deferred and amortized over the ex-
pected premium paying period.
. Premiums for universal life and investment-type products are recognized
as revenue when due; under GAAP, they are accounted for as deposits and
excluded from revenue.
. Policy reserves are based on statutory mortality and interest require-
ments and without consideration of withdrawals and are reported net of
reinsurance reserve credits; under GAAP, the reserves are based on ex-
pected investment yield, mortality and withdrawals and are reported gross
of reinsurance reserve credits. Changes in reserves on account of change
in valuation basis during the year are charged directly to surplus rather
than reflected in the net gain from operations, as is the case under
GAAP.
. No provision is made for deferred income taxes; under GAAP, deferred
taxes result from temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements.
. An asset valuation reserve (AVR) is established as a liability to offset
potential investment losses and changes in the AVR are charged or cred-
ited to surplus; under GAAP, reserves are established for invested assets
based on evaluation of impairment and are recorded through realized
gains/(losses).
. An interest maintenance reserve (IMR) is established as a liability to
capture gains and losses, net of tax, on the sale of fixed maturities re-
sulting from changes in the general level of interest rates; no such re-
serve is required under GAAP.
. Investments in bonds and preferred stocks are generally carried at amor-
tized cost; under GAAP, investments in bonds and preferred stocks, other
than those classified as held to maturity, are carried at fair value.
. Certain assets, designated as nonadmitted, are excluded from assets by a
direct charge to surplus; under GAAP, such assets are carried on the
statement of financial condition with appropriate valuation allowances.
B-28
<PAGE>
- -------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
. In accordance with Delaware Insurance Laws and Regulations, the Company's
subsidiary is not consolidated for statutory filing purposes; under GAAP,
majority-owned subsidiaries are consolidated.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period.
VALUATION OF INVESTMENTS
Bonds and stocks are carried in the accompanying statements of financial
condition at values prescribed by the NAIC. In general, bonds are stated at
amortized cost, preferred stocks at cost and common stocks at market value.
The Company's wholly-owned subsidiary, Penn Assurance and Reinsurance Co.,
Ltd. (PAR), is carried on the equity basis. Changes in PAR's equity are
charged or credited directly to capital and surplus. Real estate is carried at
cost less encumbrances and accumulated depreciation. Real estate acquired
through foreclosure is recorded at the lower of cost or market value at the
time of foreclosure. Real estate is depreciated using the straight-line
method. Mortgage loans are carried at the unpaid principal amount, less any
unamortized discount. Policy loans are carried at the unpaid principal balance
less amounts unsecured by cash surrender values. Cash and short-term
investments include cash on deposit and securities purchased with a maturity
date of less than one year. Short-term investments are valued at cost, which
approximates market. Certain assets which are considered to be non-admitted
for statutory purposes have been excluded from the Statements of Financial
Condition by a direct charge to capital and surplus.
Financial instruments utilized to hedge the Company's assets are recorded
using a valuation method consistent with the valuation method of the assets
hedged. Gains and losses on financial futures contracts used as hedges against
interest rate fluctuations are deferred and recognized in the Statements of
Operations over the remaining life of the hedged securities. Changes in the
market value of financial futures contracts used as hedges against market
fluctuations of equity securities are reported as unrealized gains or losses.
They are recognized as realized gains or losses when the hedged securities are
sold.
Statutory accounting principles require insurance companies to hold an Asset
Valuation Reserve (AVR) and an Interest Maintenance Reserve (IMR). The purpose
of the AVR is to maintain consistent and prescribed valuation reserves for
invested assets. Changes in the AVR are recorded directly to capital and
surplus. The purpose of the IMR is to defer recognition of realized gains and
losses which result from interest rate movements and to amortize these gains
and losses into income over the original expected life of the investment sold.
Amortization of gains and losses included in the IMR are reflected as a
component of net investment income.
Realized gains and losses are determined on the specific identification method
and are presented in the Statements of Operations net of taxes and excluding
net gains and losses transferred to the IMR. Unrealized gains and losses are
accounted for as direct increases or decreases in capital and surplus.
RESERVES AND FUNDS FOR THE PAYMENT OF FUTURE LIFE AND ANNUITY BENEFITS
Reserves and funds for the payment of future life and annuity benefits are
developed using actuarial methods based on statutory mortality and interest
requirements. Reserves for life insurance are computed principally on a
modified preliminary term or CRVM methods using the 1958 and 1980
Commissioners' Standard Ordinary Mortality Tables and assumed interest rates
ranging from 4% to 6%. Reserves for annuity contracts were based principally
on the 1949, 1971 and 1983 Individual Annuity Mortality Tables and assumed
interest rates ranging from 4.5% to 13.25%. Policy claims in process include
provisions for payments to be made on reported claims and claims incurred but
not reported. Any adjustments that are made to the reserve balances are
reflected in the Statements of Operations in the year in which such
adjustments are made. All policies are non-participating.
REVENUE AND RELATED EXPENSE RECOGNITION
Premiums are recognized as income over the premium payment period of the
related policies. Annuity considerations are recognized as income as they are
received. Premium and annuity considerations are recorded net of reinsurance
premiums. Benefits are reported net of the amounts received from reinsurers.
Commissions and other expenses related to the acquisition of new policies are
charged to operations as incurred.
B-29
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its parent,
Penn Mutual. The federal income tax provision or benefit is recorded to the
extent the Company's results increase or decrease the consolidated tax
liability of Penn Mutual. The resulting tax liability or receivable is paid to
or received from Penn Mutual. The provision for federal income taxes is
computed in accordance with the section of the Internal Revenue Code applicable
to life insurance companies and is based on income which is currently taxable.
In accordance with statutory accounting practices, no deferred taxes are
provided for temporary differences between pre-tax accounting income and
taxable income.
SEPARATE ACCOUNTS
Separate Account assets and liabilities represent segregated funds administered
and invested by the Company primarily for the benefit of variable annuity and
pension contractholders. The value of the assets in the Separate Accounts
reflects the actual investment performance of the respective accounts and is
not guaranteed by the Company. The carrying value for Separate Account assets
and liabilities approximates the estimated fair value of the underlying assets.
NOTE 2 - ACCOUNTING CHANGE:
The Company's parent, Penn Mutual, is required by the Internal Revenue Code
(IRC) to include the Differential Earnings Amount (DEA) in each year's taxable
income. This amount, which is allocated to the Company by Penn Mutual, is
computed by multiplying the Company's average taxable equity base by a rate
that represents the difference between stock and mutual companies' earnings
rates. Under the IRC, the enacted DEA rate for the current year is an Internal
Revenue Service (IRS) estimate and is recomputed in the following year to
reflect the actual industry results.
Prior to 1995, the Company recorded its portion of the federal income tax
expense for the DEA based on the enacted IRS rates for the current year along
with any adjustment to the DEA related to the recomputation of the prior year's
estimate. The portion of the Company's federal income tax expense associated
with the DEA was recorded directly to surplus.
In 1995, the Company changed its method of accounting for the DEA to record the
tax based on management's best estimate of the final DEA rates. The impact of
this accounting change resulted in a $2,017 direct charge to surplus in 1995.
In addition, in 1995 the Company began recording the portion of its federal
income tax expense associated with the DEA in the Statements of Operations.
NOTE 3 - INVESTMENTS:
DEBT SECURITIES
The following summarizes the statement value and estimated fair value of the
Company's investment in debt securities as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
United States Government............. $ 3,670 $ 85 $ -- $ 3,755
Other governmental units............. 10,075 477 -- 10,552
Public utility....................... 20,415 245 147 20,513
Industrial and other................. 309,689 4,836 2,417 312,108
Mortgage and other asset-backed secu-
rities.............................. 218,382 2,165 884 219,663
-------- ------ ------ --------
TOTAL............................... $562,231 $7,808 $3,448 $566,591
======== ====== ====== ========
</TABLE>
B-30
<PAGE>
- -------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
United States Government............. $ 3,376 $ 173 $ -- $ 3,549
Other governmental units............. 4,718 544 -- 5,262
Public utility....................... 26,355 844 3 27,196
Industrial and other................. 301,111 12,354 231 313,234
Mortgage and other asset-backed secu-
rities.............................. 78,427 1,148 1,186 78,389
-------- ------- ------ --------
TOTAL............................... $413,987 $15,063 $1,420 $427,630
======== ======= ====== ========
</TABLE>
The following summarizes the statement value and estimated fair value of the
Company's investment in debt securities as of December 31, 1996, by
contractual maturity.
<TABLE>
<CAPTION>
STATEMENT ESTIMATED
VALUE FAIR VALUE
--------- ----------
<S> <C> <C>
Maturity:
Within one year........................................... $ 23,893 $ 23,970
After one year through five years......................... 158,766 160,625
After five years through ten years........................ 108,761 110,253
After ten years through twenty years...................... 25,151 24,555
After twenty years........................................ 27,278 27,525
Mortgage and other asset-backed securities................ 218,382 219,663
-------- --------
TOTAL.................................................... $562,231 $566,591
======== ========
</TABLE>
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage and other asset-backed securities consist of
commercial and residential mortgage pass-through holdings and securities
backed by credit card receivables, auto loans, home equity and manufactured
housing loans. These securities follow a structured principal repayment
schedule and are of high credit quality. These securities are rated investment
grade, other than $5,552 in commercial mortgage-backed securities retained
from the securitization of the Company's commercial mortgage loan portfolio.
The mortgage and other asset-backed securities portfolio is represented
separately in the maturity schedule due to the potential for prepayment. The
weighted average life of this portfolio is 5.5 years.
During 1996, 1995 and 1994, proceeds from dispositions of investments in debt
securities amounted to $165,045, $73,341 and $76,309, respectively. The gross
gains realized on those dispositions were $2,138, $2,307 and $205 and gross
losses realized on those dispositions were $363, $133 and $799 during 1996,
1995 and 1994, respectively. Net realized losses, net of taxes, transferred to
the IMR for 1996 were $570. Net realized gains, net of taxes, transferred to
the IMR were $1,413 for 1995. Net realized losses, net of taxes, transferred
to the IMR for 1994 were $70. Amortization of the IMR included in net
investment income amounted to $284 and $33 in 1996 and 1995, respectively.
Amortization of the IMR deducted from net investment income amounted to $36 in
1994.
The Company's investment portfolio of debt securities is comprised
predominantly of investment grade securities. As of December 31, 1996 and
1995, debt securities totaling $22,746 and $10,081, respectively, were
classified by the NAIC as less than investment grade. The Company held no debt
securities which were non-income producing for the preceding twelve months as
of December 31, 1996 and 1995.
MORTGAGE LOANS
On August 29, 1996, in conjunction with its parent, the Company securitized
the majority of its mortgage loan portfolio, by transferring mortgage loans
with a principal value of $65,852 and a book value of $65,821 to a trust which
qualifies as a REMIC (Real Estate Mortgage Investment Conduit) under the
Internal Revenue Code. The trust issued sixteen classes of Commercial Mortgage
Pass-Through Certificates with a total par value of $65,651. The certificates
evidence the entire beneficial ownership
B-31
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
interest in the trust. The cash flow from the mortgages will be used to repay
the certificates over an average life of 4.28. The actual date on which the
principal amount of the notes may be paid in full could be substantially
earlier or later based on the performance of the mortgages. The cash flows of
the assets of the trust will be the sole source of payments on the notes. The
Company has not guaranteed these certificates or the mortgage loans held by the
trust. As a result of this transaction, the Company recognized a loss of $2,354
upon the transfer of the mortgages to the trust, representing the difference
between the fair market value of the certificates and the book value of the
mortgage loans transferred to the trust. This loss was deferred through the
Interest Maintenance Reserve (IMR), net of related taxes, and will be amortized
into income over the remaining life of the mortgages sold.
Included in the Company's bond portfolio are the highest quality classes of
certificates with a par value of $60,071 and a fair market value of $61,683 at
the time of the securitization, which the Company retained. The Company sold
the lowest rated classes of certificates with a par value of $5,581 and a fair
market value of $2,086.
The mortgage loans which were not included in the securitization were retained
by the Company and had a book value of $19,075 and an estimated fair value of
$16,400 on the date of the securitization. Loans the Company intends to dispose
of within a period of 6 to 24 months were written down to their estimated net
realizable value. These loans had a book value of $16,389 and an estimated net
realizable value of $13,668, which resulted in a credit-related realized loss
of $2,721. The Company intends to hold mortgage loans with a book value of
$2,686 on the date of the securitization through their remaining terms. The
Company has discontinued the origination of commercial mortgage loans.
The following summarizes the statement value of mortgage loans by property type
and geographic concentration as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
PROPERTY TYPE
Retail.......................................................... $ -- $28,391
Office buildings................................................ 11,190 20,586
Dwellings....................................................... -- 22,110
Other........................................................... -- 19,308
------- -------
TOTAL.......................................................... $11,190 $90,395
======= =======
GEOGRAPHIC CONCENTRATION
Northeast....................................................... $ 5,884 $17,068
West............................................................ -- 28,534
Midwest......................................................... 5,306 33,680
South........................................................... -- 11,113
------- -------
TOTAL.......................................................... $11,190 $90,395
======= =======
</TABLE>
The Company's investments included $2,663 of mortgage loans delinquent over 60
days and no mortgage loans which were non-income producing for the preceding
twelve months as of December 31, 1996. The Company's investments did not
include any mortgage loans delinquent over 60 days as of December 31, 1995. As
of December 31, 1996 and 1995, there were no restructured mortgage loans in the
mortgage loan portfolio. Restructured mortgage loans include commercial loans
for which the basic terms, such as interest rate, amortization, maturity date,
or collateral have been changed as a result of actual or anticipated
delinquency. Restructures do not include mortgages refinanced prior to or upon
maturity at or above current market terms.
REAL ESTATE
The Company's investments include $3,041 and $5,087 of foreclosed real estate
as of December 31, 1996 and 1995, respectively.
B-32
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
NOTE 4 - RESERVES AND FUNDS FOR THE PAYMENT OF FUTURE LIFE AND ANNUITY
BENEFITS:
The following summarizes the withdrawal characteristics of the Company's
reserves and deposit funds as of December 31, 1996.
<TABLE>
<CAPTION>
STATEMENT
VALUE
---------
<S> <C>
Total policyholders' reserves and funds, including separate account
liabilities......................................................... $912,222
Amounts not subject to discretionary withdrawal...................... (65,900)
--------
Amounts subject to discretionary withdrawal......................... $846,322
========
</TABLE>
Of the total reserves and deposit funds which are subject to discretionary
withdrawal, $398,971, which is net of applicable policy loans, may be withdrawn
without the policyholder incurring surrender charges or market value
adjustments to the funds.
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table summarizes the Company's investment in financial
instruments as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
STATEMENT ESTIMATED STATEMENT ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Bonds................................ $562,231 $566,592 $413,987 $427,630
Equity securities
Non-redeemable preferred stocks...... 3,577 3,973 3,577 3,973
Mortgage loans
Commercial........................... 11,190 11,297 90,234 90,529
Residential.......................... -- -- 161 163
Separate account assets............... 143,346 143,346 28,216 28,216
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities................. 41,727 43,040 21,777 22,767
Separate account liabilities.......... 143,346 143,346 28,216 28,216
</TABLE>
The estimated fair values for the Company's investments in debt and equity
securities are based on quoted market prices, where available. In situations
where market prices are not readily available, primarily private placements,
fair values are estimated using a formula pricing method based on fair values
of securities with similar characteristics. The fair value of currently
performing mortgage loans is estimated by discounting the cash flows associated
with the investments, using an interest rate currently offered for similar
loans to borrowers with similar credit ratings. Loans with similar credit
quality, characteristics and time to maturity are aggregated for purposes of
estimating fair value. Assumptions regarding credit risk, cash flows and
discount rates are determined using the available market and borrower-specific
information. The estimated fair value for non-performing loans is based on the
estimated fair value of the underlying real estate, which is based on recent
appraisals or other estimation techniques. The statement values of policy loans
and cash and short-term investments approximate their fair values. The
resulting estimated fair values may not be indicative of the value negotiated
in an actual sale.
The Company is exposed to interest rate risk on its interest sensitive
products. The Company's investment strategy is designed to minimize interest
risk by managing the duration of both assets and liabilities and anticipated
cash flows of the Company's assets and liabilities.
The fair value of the Company's liabilities for individual annuities is
estimated by discounting the cash flows associated with the contracts, using an
interest rate currently offered for similar contracts with maturities similar
to those remaining for the contracts being valued.
B-33
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Currently, disclosure of estimated fair values is not required for all the
Company's assets and liabilities. Therefore, presentation of the estimated fair
value of a significant portion of assets without a corresponding valuation of
liabilities associated with insurance contracts can be misinterpreted. The
continuing management of the relationship between the maturities of the
Company's investments and the amounts due under insurance contracts reduces the
Company's exposure to changing interest rates.
NOTE 6 - FEDERAL INCOME TAXES:
The provision for federal income taxes differs from the normal relationship of
federal income tax to pre-tax income principally due to the mutual company DEA,
treatment of policy acquisition costs and differences in policy reserve
valuation methods.
NOTE 7 - REINSURANCE:
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. The Company remains primarily liable as the
direct insurer on all risks reinsured, and performs due diligence to ensure
that amounts due from reinsurers are collectable. The table below includes the
reinsurance amounts recorded in the accompanying financial statements, which
are presented net of reinsurance activity.
<TABLE>
<CAPTION>
ASSUMED CEDED TO
GROSS FROM OTHER OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996:
Life insurance in-force............ $3,235,176 $3,063,179 $3,466,292 $2,832,063
Premium and annuity considerations. 195,811 18,650 23,934 190,527
Reserves and funds for the payment
of future life and annuity bene-
fits.............................. 526,157 245,580 2,861 768,876
DECEMBER 31, 1995:
Life insurance in-force............ $3,427,165 $3,226,701 $3,638,470 $3,015,396
Premium and annuity considerations. 81,965 19,826 22,887 78,904
Reserves and funds for the payment
of future life and annuity bene-
fits.............................. 466,707 244,689 2,676 708,720
</TABLE>
During 1994, the Company had gross premiums of $57,429, assumed premiums of
$19,625 and ceded premiums of $41,138.
The Company assumes and cedes certain risks under reinsurance agreements with
Penn Mutual. Net life insurance in-force assumed from Penn Mutual totaled
$327,897 and $342,694 as of December 31, 1996 and 1995, respectively. The
Company maintained reserves related to these policies of $243,426 and $242,691,
as of December 31, 1996 and 1995, respectively. Net premium and annuity
considerations assumed in connection with these agreements were $7,160 and
$8,799 in 1996 and 1995, respectively. Net premium and annuity considerations
ceded in 1994 were $10,069.
The Company's intercompany yearly renewable term (YRT) reinsurance treaty with
Penn Mutual, which covers certain universal life insurance products, was
modified in 1995 to provide an experience refund to be paid to the Company by
Penn Mutual in the amount of 75% of any reinsurance gain that is generated on
the products covered by the reinsurance agreement. As a result of the change to
this reinsurance treaty, $4,461 and $2,257 was received by the Company from
Penn Mutual as an experience rating refund in 1996 and 1995, respectively.
During 1995, the Company recaptured its single premium immediate annuity
business which it had previously ceded entirely to Penn Mutual. The transaction
resulted in the transfer of approximately $31,000 of invested assets and
policyholder liabilities from Penn Mutual to the Company.
NOTE 8 - RELATED PARTIES:
Penn Mutual has undertaken to provide sufficient financial support so that the
Company will have adequate capital and surplus as required by applicable laws
to meet its obligations to its policyholders under the terms of the Company's
policies and contracts.
B-34
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Under the terms of an expense allocation agreement, the Company reimbursed Penn
Mutual for services and facilities provided on behalf of the Company, including
direct and allocated expenses. For 1996, 1995 and 1994, the total expenses
incurred under this agreement were $8,915, $6,738 and $5,391, respectively.
During 1996, the Company took part in an intercompany sale of securities with
Penn Mutual. The Company sold $98,000 of securities to Penn Mutual in exchange
for securities with a fair market value of $27,000 and $71,000 in cash. The
resulting gain of $499 was deferred into the IMR and will be amortized into
income over the remaining life of the securities.
State insurance laws limit the amount of dividends that the Company may pay to
Penn Mutual.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
The Company is a respondent in a number of proceedings, some of which involve
extra-contractual damage in addition to other damages. In addition, insurance
companies are subject to assessments, up to statutory limits, by state guaranty
funds for losses of policyholders of insolvent insurance companies. In the
opinion of management, the outcome of the proceedings and assessments are not
likely to have a material adverse effect on the financial position of the
Company.
The Company, in the ordinary course of business, extends commitments relating
to its investment activities. As of December 31, 1996, the Company had no
outstanding commitments relating to these investment activities.
B-35
