<PAGE>
PROSPECTUS
PIA VARIABLE ANNUITY ACCOUNT I
MAY 1, 1999
PENNANT
A Flexible Premium Variable and
Fixed Annuity
PENN SERIES FUNDS, INC.
May 1, 1999
INVESTMENT ADVISERS:
T. Rowe Price Associates, Inc.
OpCap Advisors
Independence Capital Management, Inc.
Vontobel USA, Inc.
RS Investment Management, Inc.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
May 1, 1999
INVESTMENT ADVISER:
American Century Investment Management, Inc.
NEUBERGER BERMAN
ADVISERS MANAGEMENT TRUST
May 1, 1999
INVESTMENT ADVISER:
Neuberger Berman Management Incorporated
FIDELITY INVESTMENTS'
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
April 30, 1999
INVESTMENT ADVISER:
Fidelity Management & Research Company
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS
May 1, 1999
INVESTMENT ADVISER:
Morgan Stanley Dean Witter Investment Management
<PAGE>
The Penn Insurance and Annuity Company
Philadelphia, PA 19172
- --------------------------------------------------------------------------------
MAY 1, 1999
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.
- -------------------------------------------------------------------------------
1. THE ANNUITY CONTRACTS
- --------------------------------------------------------------------------------
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 provide a means for you to invest in one or more of the
available Funds listed in Section 4, or one or more of the fixed interest
accounts guaranteed and funded by Penn Insurance and Annuity through its general
account.
You determine (1) the amount and frequency of payments to make, (2) which
Funds will be used, (3) transfers between the 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
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 minimum initial purchase payment is $5,000 for all non-qualified
contracts and $2,000 for qualified contracts. For all Contracts, the minimum
subsequent purchase payment is $250.
Please read the prospectus carefully.
4. INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
INDEPENDENCE CAPITAL ICMI/ ROBERTSON STEPHENS FIDELITY INVESTMENTS
MANAGEMENT, INC. Emerging Growth Fund VIP Equity Income Portfolio
Growth Equity Fund VIP Growth Portfolio
Quality Bond Fund T. ROWE PRICE ASSOCIATES, INC. VIP II Asset Manager Portfolio
Money Market Fund Flexibly Managed Fund VIP II Index 500 Portfolio
High Yield Bond Fund
OPCAP ADVISORS VONTOBEL USA, INC.
Value Equity Fund AMERICAN CENTURY INVESTMENT International Equity Fund
Small Capitalization Fund MANAGEMENT, INC.
VP Capital Appreciation Portfolio
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT NEUBERGER BERMAN MANAGEMENT
Emerging Markets Equity (Int'l) Portfolio INCORPORATED
AMT Limited Maturity Bond Portfolio
AMT Balanced Portfolio
AMT Partners Portfolio
</TABLE>
<PAGE>
5. EXPENSES
- --------------------------------------------------------------------------------
Each year we deduct a contract administration charge of $30, 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 Separate Account. In addition, we deduct a daily administration
charge equal to an annual rate of 0.15% of the daily net asset value of the
Separate Account. There are also expenses deducted from the underlying Funds,
ranging 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. The following table shows the schedule of the contingent
deferred sales charge that will apply:
NUMBER OF FULL CONTRACT
YEARS SINCE PURCHASE PAYMENT APPLICABLE CHARGE
---------------------------- -----------------
1 6.0%
2 5.0%
3 4.0%
4 3.0%
5 2.0%
6 1.0%
7 and later No Charge
The following chart 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 TOTAL TOTAL ANNUAL
ANNUAL ANNUAL TOTAL EXPENSES AT END OF:
INSURANCE PORTFOLIO ANNUAL
FUND CHARGES CHARGES CHARGES 1 YEAR 10 YEARS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Equity 1.45% 0.76% 2.21% $75 $254
Value Equity 1.45% 0.76% 2.21% 75 254
Flexibly Managed 1.45% 0.76% 2.21% 76 260
Small Capitalization 1.45% 0.82% 2.21% 79 293
Emerging Growth 1.45% 1.15% 2.59% 75 254
International Equity 1.45% 1.08% 2.53% 78 286
Quality Bond 1.45% 0.77% 2.22% 75 255
High Yield Bond 1.45% 0.82% 2.27% 76 260
Money Market 1.45% 0.72% 2.17% 75 250
Capital Appreciation 1.45% 1.00% 2.45% 77 278
Limited Maturity Bond 1.45% 0.76% 2.21% 75 254
Balanced 1.45% 1.03% 2.48% 78 281
Partners 1.45% 0.84% 2.29% 76 262
Equity Income 1.45% 0.57% 2.02% 73 234
Growth 1.45% 0.66% 2.11% 74 243
Asset Manager 1.45% 0.63% 2.08% 74 240
Index 500 1.45% 0.28% 1.73% 70 203
Emerging Markets Equity 1.45% 1.75% 3.20% 84 350
</TABLE>
<PAGE>
6. TAXES
- --------------------------------------------------------------------------------
Your earnings 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.
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.
<PAGE>
<TABLE>
<CAPTION>
CALENDAR YEAR
FUND 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Independence Capital
Growth Equity 39.70% 24.98% 18.08% 24.68% -9.42% 10.85% 4.46% 32.86% -12.38% 29.54%
Quality Bond 8.64 6.52 2.67 18.46 -6.63 10.09 5.06 14.01 6.44 11.33
OpCap Advisors
Value Equity 8.06 23.20 23.40 35.55 1.48 5.57 13.24 25.87 -9.37 11.36
Small Capitalization -10.42 21.30 18.06 n/a n/a n/a n/a n/a n/a n/a
T. Rowe Price
Flexibly Managed 4.62 13.99 14.68 20.57 2.67 14.17 8.02 19.88 -2.26 19.44
High Yield Bond 3.34 14.17 12.27 14.78 -8.64 18.09 14.16 35.10 -10.31 -1.99
ICMI/ Robertson Stephens
Emerging Growth 33.82 n/a n/a n/a n/a n/a n/a n/a n/a n/a
Vontobel
International Equity 17.20 8.85 15.20 12.21 -7.63 36.19 n/a n/a n/a n/a
American Century
VP Capital Appreciation -3.52 -4.62 -5.68 29.26 -2.57 8.77 -2.74 39.89 -2.67 27.00
Neuberger Berman
AMT Limited Maturity Bond 2.94 5.25 2.84 9.38 -1.56 5.12 3.69 9.79 6.81 9.23
AMT Balanced 10.62 17.78 5.38 22.03 -4.72 4.55 6.53 20.96 0.52 n/a
AMT Partners 2.76 29.59 28.32 35.16 n/a n/a n/a n/a n/a n/a
Fidelity Investments
VIP Equity Income 10.08 26.29 12.64 32.36 4.96 16.63 15.24 29.57 -16.51 15.67
VIP Growth 37.55 21.72 13.05 33.47 -1.43 17.69 7.78 43.45 -13.01 29.64
VIP II Asset Manager 13.45 18.97 12.99 15.32 -7.42 19.53 10.13 20.85 5.23 n/a
VIP II Index 500 26.54 31.14 21.52 35.87 0.07 8.68 n/a n/a n/a n/a
Morgan Stanley
Emerging Markets Equity -25.23 -1.10 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 or 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 Funds monthly or quarterly, theoretically
giving you a lower average cost per unit over time than a single one time
purchase.
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 Funds
11. INQUIRIES
- --------------------------------------------------------------------------------
If you need more information, please contact us at:
The Penn Insurance and Annuity Company
Customer Service Group
Philadelphia, PA 19172
1-800-523-0650
<PAGE>
THE PENN INSURANCE
AND ANNUITY COMPANY
Philadelphia, PA 19172
PI1339 5/99
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS -- MAY 1, 1999
INDIVIDUAL VARIABLE AND FIXED ANNUITY CONTRACT -- FLEXIBLE PURCHASE PAYMENTS
- --------------------------------------------------------------------------------
PENNANT
PIA VARIABLE ANNUITY ACCOUNT I
THE PENN INSURANCE AND ANNUITY COMPANY
PHILADELPHIA, PENNSYLVANIA 19172 o TELEPHONE (800) 523-0650
- --------------------------------------------------------------------------------
This prospectus describes an individual variable and fixed annuity contract
offered by The Penn Insurance and Annuity Company ("PIA"). Please read it
carefully and save it for future reference.
The Contract is an agreement between you and PIA. You agree to make one or more
payments to us and we agree to make annuity and other payments to you at a
future date. The Contract
o has a variable component, which means that your Variable Account Value and
any variable payout will be based upon investment experience.
o has a fixed component, which means that your Fixed Account Value and any
fixed payout will be based on purchase payments accumulated with interest
at a rate of not less than 3%.
o is tax-deferred, which means that you will not pay taxes until we begin to
make annuity payments to you or you take money out.
o allows you to choose to receive your annuity payments over different
periods of time.
Under the variable component of the Contract, you may direct us to invest your
payments in one or more of the following Funds through PIA Variable Annuity
Account I (the "Separate Account").
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
PENN SERIES FUNDS, INC. MANAGER
<S> <C>
Growth Equity Fund Independence Capital Management, Inc. (a wholly owned
subsidiary of The Penn Mutual Life Insurance Company)
Value Equity Fund OpCap Advisors
Small Capitalization Fund OpCap Advisors
Emerging Growth Fund RS Investment Management, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
International Equity Fund Vontobel USA, Inc.
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. MANAGER
Capital Appreciation Portfolio American Century Investment Management, Inc.
- ---------------------------------------------------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST MANAGER
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 MANAGER
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
- ---------------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II MANAGER
Asset Manager Portfolio Fidelity Management and Research Company
Index 500 Portfolio Fidelity Management and Research Company
- ---------------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. MANAGER
Emerging Markets Equity (International) Portfolio Morgan Stanley Dean Witter Investment Management Inc.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
A PROSPECTUS FOR EACH OF THESE FUNDS ACCOMPANIES THIS PROSPECTUS.
Under the fixed component of the Contract, you may direct us to invest in one or
more options in our Fixed Interest Account.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS
A CRIME FOR ANYONE TO TELL YOU OTHERWISE.
<PAGE>
THE CONTRACT IS NOT SUITABLE FOR SHORT-TERM INVESTMENT. YOU MAY PAY A DEFERRED
SALES CHARGE ON EARLY WITHDRAWALS OF UP TO 6%. IF YOU WITHDRAW MONEY BEFORE AGE
59 1/2, YOU MAY PAY A 10% ADDITIONAL INCOME TAX. THE CONTRACT IS NOT A BANK
DEPOSIT AND IS NOT FEDERALLY INSURED.
YOU MAY RETURN YOUR CONTRACT WITHIN TEN DAYS OF RECEIPT FOR A FULL REFUND OF THE
CONTRACT VALUE (OR PURCHASE PAYMENTS, IF REQUIRED BY LAW). LONGER FREE LOOK
PERIODS APPLY IN SOME STATES.
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.
You may obtain a Statement of Additional Information from us free of charge by
writing The Penn Insurance and Annuity Company, Customer Service Group,
Philadelphia, PA 19172. Or, you can call us at (800) 523-0650. The Statement of
Additional Information contains more information about the Contract. It is filed
with the Securities and Exchange Commission and we incorporate it by reference
into this Prospectus. The table of contents of the Statement of Additional
Information is at the end of this Prospectus.
The Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains this Prospectus, the Statement of Additional Information, material
incorporated by reference, and other information regarding registrants that file
electronically with the Commission.
2
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PROSPECTUS CONTENTS
<S> <C>
GLOSSARY ............................................................................................................. 4
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES ............................................................................................................. 5
- ------------------------------------------------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES ........................................................................................ 7
- ------------------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION ...................................................................................... 8
- ------------------------------------------------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY ...............................................................................13
- ------------------------------------------------------------------------------------------------------------------------
YEAR 2000 ............................................................................................................13
THE SEPARATE ACCOUNT .................................................................................................14
Accumulation Units...............................................................................................14
Voting Instructions..............................................................................................14
Investment Options in the Separate Account.......................................................................14
Penn Series Funds, Inc. .....................................................................................14
American Century Variable Portfolios, Inc. ..................................................................15
Neuberger Berman Advisers Management Trust...................................................................15
Fidelity Investments' Variable Insurance Products Fund.......................................................16
Fidelity Investments' Variable Insurance Products Fund II....................................................16
Morgan Stanley Dean Witter Universal Funds, Inc. ............................................................16
- ------------------------------------------------------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNT ...........................................................................................17
- ------------------------------------------------------------------------------------------------------------------------
THE CONTRACT .........................................................................................................17
How Do I Purchase a Contract?....................................................................................18
What Types of Annuity Payments May I Choose?.....................................................................18
Variable Annuity Payments....................................................................................18
Fixed Annuity Payments.......................................................................................18
Other Information............................................................................................18
What Are the Death Benefits Under My Contract?...................................................................19
Enhanced Death Benefit.......................................................................................19
Choosing a Lump Sum or Annuity...............................................................................19
May I Transfer Money Among Subaccounts and the Fixed Interest Accounts?..........................................19
Before the Annuity Date......................................................................................19
After the Annuity Date.......................................................................................19
Dollar Cost Averaging........................................................................................20
Automatic Rebalancing........................................................................................20
May I Withdraw Any of My Money?..................................................................................20
Systematic Withdrawals.......................................................................................20
403(b) Withdrawals...........................................................................................21
Deferment of Payments and Transfers..............................................................................21
What Charges Do I Pay?...........................................................................................21
Administration Charges.......................................................................................21
Mortality and Expense Risk Charge............................................................................21
Contingent Deferred Sales Charge.............................................................................22
Free Withdrawals.............................................................................................22
Premium Taxes................................................................................................23
- ------------------------------------------------------------------------------------------------------------------------
PERFORMANCE INFORMATION ..............................................................................................23
- ------------------------------------------------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST OPTIONS ....................................................................23
General Information..............................................................................................23
Loans Under Section 403(b) Contracts.............................................................................24
- ------------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS ....................................................................................24
Withdrawals and Death Benefits...................................................................................24
Annuity Payments.................................................................................................24
Early Withdrawals................................................................................................25
Transfers........................................................................................................25
Separate Account Diversification.................................................................................25
Qualified Plans..................................................................................................25
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS .................................................................................................26
- ------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS .........................................................................26
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
GLOSSARY
- --------------------------------------------------------------------------------
As used in this prospectus, the following terms have the indicated
meanings:
ACCUMULATION PERIOD: A period that begins with your first purchase payment
and ends on the Annuity Date.
ACCUMULATION UNIT: A unit of measure used to compute the Variable Account
Value under the Contract prior to the Annuity Date.
ADMINISTRATIVE OFFICE: A reference to our administrative office means The
Penn Insurance and Annuity Company, Administrative Office, 600 Dresher
Road, Horsham, Pennsylvania 19044.
ANNUITANT: The person during whose life annuity payments are made.
ANNUITY DATE: The date on which annuity payments start.
ANNUITY PAYOUT PERIOD: The period of time, starting on the Annuity Date,
during which we make annuity payments.
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 named in the Contract as the Contract Owner.
CONTRACT VALUE: The sum of the Variable Account Value and the Fixed
Interest Account Value.
FIXED INTEREST ACCOUNT VALUE: The value of amounts held under the Contract
in all options in the Fixed Interest Account.
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 OR US: "we" or "us" means The Penn Insurance and Annuity Company, also
referred to in this Prospectus as PIA or the Company.
YOU: "you" means the Contract Owner or prospective Contract Owner.
4
<PAGE>
EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES
<S> <C>
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 WHAT CHARGES DO I PAY? IN THIS PROSPECTUS FOR INFORMATION ON THE
DECLINE IN THE CHARGE OVER TIME AND FREE WITHDRAWALS
** YOU PAY $30 OR 2% OF YOUR VARIABLE ACCOUNT VALUE, WHICHEVER IS LESS. YOU DO
NOT PAY THIS CHARGE IF YOUR CONTRACT VALUE IS MORE THAN $50,000.
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC. (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
ADMINISTRATIVE
MANAGEMENT AND CORPORATE TOTAL
FEES SERVICES FEES ACCOUNTING OTHER FUND
(AFTER WAIVER) (AFTER WAIVER) FEES EXPENSES EXPENSES
-------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity .......................... 0.45% 0.15% 0.07% 0.09% 0.76%
Value Equity ........................... 0.50% 0.15% 0.06% 0.05% 0.76%
Small Capitalization ................... 0.50% 0.15% 0.08% 0.09% 0.82%
Emerging Growth (b) .................... 0.80% 0.15% 0.10% 0.10% 1.15%
Flexibly Managed ...................... 0.50% 0.15% 0.05% 0.06% 0.76%
International Equity ................... 0.75% 0.15% 0.08% 0.10% 1.08%
Quality Bond ........................... 0.45% 0.15% 0.08% 0.09% 0.77%
High Yield Bond ........................ 0.50% 0.15% 0.08% 0.09% 0.82%
Money Market ........................... 0.40% 0.15% 0.08% 0.09% 0.72%
</TABLE>
- --------------------
(A) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR.
(B) THE TOTAL EXPENSES OF THE EMERGING GROWTH FUND WOULD HAVE BEEN 1.21%. IF
THE INVESTMENT ADVISER AND ADMINISTRATOR OF THAT FUND HAD NOT WAIVED PART
OF THEIR FEES.
5
<PAGE>
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEES 12B-1 FEES EXPENSES EXPENSES
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Capital Appreciation ............................... 1.00% None None 1.00%
</TABLE>
- --------------------------------------------------------------------------------
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST (A)
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% 0.11% 0.76%
Balanced .............................................. 0.85% 0.18% 1.03%
Partners Fund ......................................... 0.80% 0.04% 0.84%
</TABLE>
- -----------------------
(A) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST (THE "TRUST") IS DIVIDED INTO
PORTFOLIOS ("PORTFOLIOS"). EACH PORTFOLIO INVESTS IN A CORRESPONDING SERIES
("SERIES") OF THE TRUST. THIS TABLE SHOWS THE CURRENT EXPENSES PAID BY EACH
PORTFOLIO AND THE PORTFOLIO'S SHARE OF THE CURRENT EXPENSES OF ITS SERIES.
SEE "EXPENSES" IN THE TRUST'S PROSPECTUS.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES EXPENSES
---------- -------- -----------
<S> <C> <C> <C>
Equity-Income .............................................. 0.50% 0.07% 0.57%
Growth ..................................................... 0.60% 0.06% 0.66%
</TABLE>
- ------------------------------
(A) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR. SOME OF THE BROKERAGE
COMMISSIONS PAID BY THE FUND REDUCED THE EXPENSES SHOWN IN THIS TABLE.
WITHOUT THIS REDUCTION, TOTAL EXPENSES WOULD HAVE BEEN 0.58% FOR THE EQUITY
INCOME PORTFOLIO AND 0.68% 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 (a) ...................................... 0.55% 0.08% 0.63%
Index 500 (b) .......................................... 0.24% 0.04% 0.28%
</TABLE>
- ---------------------
(A) THE EXPENSES PRESENTED ARE FOR THE LAST FISCAL YEAR. SOME OF THE BROKERAGE
COMMISSIONS PAID BY THE FUND REDUCED THE EXPENSES SHOWN IN THIS TABLE.
WITHOUT THIS REDUCTION, TOTAL EXPENSES WOULD HAVE BEEN 0.64% FOR THE ASSET
MANAGER PORTFOLIO.
(B) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR. IF THE FUND'S INVESTMENT
ADVISER HAD NOT VOLUNTARILY WAIVED PART OF ITS FEE, TOTAL EXPENSES WOULD
HAVE BEEN 0.35% FOR THE INDEX 500 PORTFOLIO.
6
<PAGE>
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
Please review these tables carefully. They show the expenses that you pay
directly and indirectly when you purchase a Contract. Your expenses include
Contract expenses and the expenses of the Funds that you select. 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 Dean Witter Universal Funds, Inc. for additional
information on Fund expenses.
You also may pay premium taxes. These tables and the examples that follow
do not show the effect of premium taxes. SEE WHAT CHARGES DO I PAY? in this
Prospectus.
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES
The following examples show the total expenses that you would pay on each
$1,000 invested.
You would pay the following expenses on each $1,000 invested (assuming a
5% annual return) if you make a single purchase payment and surrender your
Contract after the number of years shown:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund ................................................. $75 $104 $136 $254
Penn Series Value Equity Fund .................................................. $75 $104 $136 $254
Penn Series Small Capitalization Fund .......................................... $76 $106 $139 $260
Penn Series Emerging Growth Fund ............................................... $79 $116 $155 $293
Penn Series Flexibly Managed Fund .............................................. $75 $104 $136 $254
Penn Series International Equity Fund .......................................... $78 $114 $152 $286
Penn Series Quality Bond Fund .................................................. $75 $104 $136 $255
Penn Series High Yield Bond Fund ............................................... $76 $106 $139 $260
Penn Series Money Market Fund .................................................. $75 $103 $134 $250
American Century Capital Appreciation Portfolio ................................ $77 $111 $148 $278
Neuberger Berman Limited Maturity Bond Portfolio ............................... $75 $104 $136 $254
Neuberger Berman Balanced Portfolio ............................................ $78 $112 $149 $281
Neuberger Berman Partners Portfolio ............................................ $76 $106 $140 $262
Fidelity's Equity Income Portfolio ............................................ $73 $98 $126 $234
Fidelity's Growth Portfolio .................................................... $74 $101 $131 $243
Fidelity's Asset Manager Portfolio ............................................. $74 $100 $129 $240
Fidelity's Index 500 ........................................................... $70 $89 $111 $203
Morgan Stanley Emerging Markets Equity (International) Portfolio ............... $84 $133 $184 $350
</TABLE>
7
<PAGE>
You would pay the following expenses by the end of the year shown
(assuming a 5% annual return) if you make a single purchase payment and either
you do not surrender your Contract or you annuitize your Contract after the
number of years shown:*
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
----- ------ ------ -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund ................................................ $22 $69 $118 $254
Penn Series Value Equity Fund .................................................. $22 $69 $118 $254
Penn Series Small Capitalization Fund .......................................... $23 $71 $121 $260
Penn Series Emerging Growth Fund ............................................... $26 $81 $138 $293
Penn Series Flexibly Managed Fund .............................................. $22 $69 $118 $254
Penn Series International Equity Fund .......................................... $26 $79 $134 $286
Penn Series Quality Bond Fund ................................................. $22 $69 $119 $255
Penn Series High Yield Bond Fund ............................................... $23 $71 $121 $260
Penn Series Money Market Fund .................................................. $22 $68 $116 $250
American Century Capital Appreciation Portfolio ................................ $22 $69 $118 $254
Neuberger Berman Limited Maturity Bond Portfolio ............................... $25 $77 $132 $281
Neuberger Berman Balanced Portfolio ............................................ $21 $66 $113 $243
Neuberger Berman Partners Portfolio ............................................ $23 $71 $122 $262
Fidelity's Equity Income Portfolio ............................................. $20 $63 $108 $234
Fidelity's Growth Portfolio .................................................... $21 $65 $111 $240
Fidelity's Asset Manager Portfolio ............................................. $21 $65 $111 $240
Fidelity's Index 500 .......................................................... $17 $54 $93 $203
Morgan Stanley Emerging Markets Equity (International) Portfolio ............... $32 $98 $167 $350
</TABLE>
- -----------------------
* YOU MAY NOT ANNUITIZE YOUR CONTRACT UNTIL AFTER THE SECOND CONTRACT
ANNIVERSARY.
The examples are based upon fund data for the fiscal year ended December 31,
1998.
THESE ARE ONLY EXAMPLES. YOUR EXPENSES MAY BE MORE OR LESS THAN WHAT IS SHOWN.
- --------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION
The following tables show Accumulation Unit values and the number of
Accumulation 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 included 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,
-------------------------------------------
1998 1997 1996 1995(A)
------- ------- ------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ........................ $17.339 $13.873 $11.747 $10.000
Accumulation Unit Value, end of period ............................. $24.222 $17.339 $13.873 $11.747
Number of Accumulation Units outstanding, end of period ............. 569,824 403,911 140,629 13,923
</TABLE>
- -------------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995
8
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES VALUE EQUITY FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995(A)
---------- --------- ------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period .................... $19.230 $15.604 $12.640 $10.000
Accumulation Unit Value, end of period .......................... $20.780 $19.230 $15.604 $12.640
Number of Accumulation Units outstanding, end of period ......... 2,077,252 1,768,950 916,524 177,701
</TABLE>
- --------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
PENN SERIES SMALL CAPITALIZATION FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996 1995(A)
------- ------- ------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ..................... $15.966 $13.161 $11.145 $10.000
Accumulation Unit Value, end of period ........................... $14.301 $15.966 $13.161 $11.145
Number of Accumulation Units outstanding, end of period .......... 786,502 673,274 353,352 55,394
</TABLE>
- --------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
PENN SERIES EMERGING GROWTH FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997(A)
------- --------
<S> <C> <C>
Accumulation Unit Value, beginning of period ................................... $13.793 $10.000
Accumulation Unit Value, end of period ........................................ $18.457 $13.793
Number of Accumulation Units outstanding, end of period ....................... 347,843 184,859
</TABLE>
- -----------------------
(A) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
PENN SERIES FLEXIBLY MANAGED FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995(A)
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ...................... $15.245 $13.367 $11.649 $10.000
Accumulation Unit Value, end of period ............................ $15.948 $15.245 $13.367 $11.649
Number of Accumulation Units outstanding, end of period ........... 5,522,285 4,704,147 2,989,155 591,562
</TABLE>
- ------------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
9
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES INTERNATIONAL EQUITY FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996 1995(A)
------- ------- ------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ......................... $14.902 $13.688 $11.880 $10.000
Accumulation Unit Value, end of period .............................. $17.465 $14.902 $13.688 $11.880
Number of Accumulation Units outstanding, end of period .............. 998,105 880,235 525,885 54,604
</TABLE>
- ---------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
PENN SERIES QUALITY BOND FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996 1995(A)
------- ------- ------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ........................ $12.284 $11.531 $11.229 $10.000
Accumulation Unit Value, end of period ............................... $13.344 $12.284 $11.531 $11.229
Number of Accumulation Units outstanding, end of period .............. 757,765 432,962 275,302 64,152
</TABLE>
- ------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
PENN SERIES HIGH YIELD BOND FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996 1995(A)
------- ------- ------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ....................... $14.060 $12.315 $10.967 $10.000
Accumulation Unit Value, end of period ............................ $14.530 $14.060 $12.315 $10.967
Number of Accumulation Units outstanding, end of period ........... 806,706 596,879 290,291 57,255
</TABLE>
- ---------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
PENN SERIES MONEY MARKET FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995(A)
--------- ------- ------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ........................ $11.066 $10.673 $10.310 $10.000
Accumulation Unit Value, end of period .............................. $11.461 $11.066 $10.673 $10.310
Number of Accumulation Units outstanding, end of period ............. 1,143,557 709,094 609,075 186,641
</TABLE>
- -----------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
10
<PAGE>
- --------------------------------------------------------------------------------
AMERICAN CENTURY CAPITAL APPRECIATION PORTFOLIO SUBACCOUNT (A)
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997(A) 1996 1995(B)
------- ------- ------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ......................... $11.536 $12.092 $12.817 $10.000
Accumulation Unit Value, end of period ............................... $11.130 $11.536 $12.092 $12.817
Number of Accumulation Units outstanding, end of period .............. 278,560 319,882 314,124 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
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
NEUBERGER BERMAN LIMITED MATURITY BOND PORTFOLIO SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996 1995(A)
------- ------- ------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period .......................... $11.573 $10.995 $10.690 $10.000
Accumulation Unit Value, end of period ................................ $11.914 $11.573 $10.995 $10.690
Number of Accumulation Units outstanding, end of period ............... 319,947 270,171 214,093 51,495
</TABLE>
- --------------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
NEUBERGER BERMAN BALANCED PORTFOLIO SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996 1995(A)
------- ------- ------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ............................ $14.467 $12.282 $11.653 $10.000
Accumulation Unit Value, end of period .................................. $16.003 $14.467 $12.282 $11.653
Number of Accumulation Units outstanding, end of period ................. 380,135 299,996 228,709 69,633
</TABLE>
- ------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
NEUBERGER BERMAN PARTNERS PORTFOLIO SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997(A)
------- --------
<S> <C> <C>
Accumulation Unit Value, beginning of period .............................. $12.399 $10.000
Accumulation Unit Value, end of period .................................... $12.741 $12.399
Number of Accumulation Units outstanding, end of period ................... 677,892 280,205
</TABLE>
- -------------------
(A) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
11
<PAGE>
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' EQUITY INCOME FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995(A)
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ....................... $17.937 $14.199 $12.600 $10.000
Accumulation Unit Value, end of period ............................ $19.744 $17.937 $14.199 $12.600
Number of Accumulation Units outstanding, end of period ............ 1,974,265 1,658,212 1,134,707 246,915
</TABLE>
- -----------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' GROWTH FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995(A)
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ..................... $18.010 $14.791 $13.077 $10.000
Accumulation Unit Value, end of period ............................ $24.773 $18.010 $14.791 $13.077
Number of Accumulation Units outstanding, end of period ........... 1,557,325 1,360,867 1,007,942 223,746
</TABLE>
- ------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' ASSET MANAGER FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996 1995(A)
------- ------- ------- --------
<S> <C> <C> <C> <C>
Accumulation Unit Value, beginning of period ...................... $15.428 $12.968 $11.475 $10.000
Accumulation Unit Value, end of period ............................ $17.504 $15.428 $12.968 $11.475
Number of Accumulation Units outstanding, end of period ............ 346,777 290,902 196,768 51,476
</TABLE>
- --------------------------
(A) FOR THE PERIOD MARCH 1, 1995 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1995.
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' INDEX 500 FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997(A)
--------- --------
<S> <C> <C>
Accumulation Unit Value, beginning of period ............................. $12.150 $10.000
Accumulation Unit Value, end of period ................................... $15.375 $12.150
Number of Accumulation Units outstanding, end of period ................. 1,051,390 352,855
</TABLE>
- ------------------------
(A) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
12
<PAGE>
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER EMERGING MARKETS EQUITY (INTERNATIONAL)
FUND SUBACCOUNT
VALUES OF AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997(A)
------- --------
<S> <C> <C>
Accumulation Unit Value, beginning of period ........................... $8.966 $10.000
Accumulation Unit Value, end of period ................................. $6.703 $8.966
Number of Accumulation Units outstanding, end of period ................. 217,260 110,227
</TABLE>
- ---------------------
(A) FOR THE PERIOD MAY 1, 1997 (DATE SUBACCOUNT WAS ESTABLISHED) THROUGH
DECEMBER 31, 1997.
The financial statements of the Separate Account for the year ended
December 31, 1998 are included in the statement of additional information
referred to on the cover page of this prospectus.
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
THE PENN INSURANCE AND ANNUITY COMPANY. PIA is a Delaware stock life
insurance company. It 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. Penn Insurance is
licensed to sell insurance and annuities in 47 states and the District of
Columbia.
We are located at 600 Dresher Road, Horsham, PA 19044. Our mailing address
is Philadelphia, PA 19172. We issue and are liable for all benefits and payments
under the Contract.
- --------------------------------------------------------------------------------
YEAR 2000
The services we provide, as well as services provided by other companies,
organizations and governmental entities generally, depend on the smooth
functioning of computer systems. Many computer systems in use today cannot
recognize the Year 2000, and may return to 1900 or some other date after
December 31, 1999. If not corrected, these systems could fail or create
erroneous results. We began addressing the Year 2000 problem actively in 1996.
The effort involves assessing all of our computers, computer programs, and
related equipment, making necessary changes, and assuring that all systems
process dates correctly. We believe that we have designed and implemented an
efficient process for identifying what needs to be changed. Although we cannot
give assurance that we will have no Year 2000 problem, we expect our computer
systems to perform satisfactorily in the Year 2000.
PIA and the mutual funds that serve as investment options for the Separate
Account have relationships with investment advisers, broker-dealers, transfer
agents, custodians, and other service providers. We are contacting the funds and
their vendors and service providers to obtain reasonable assurances that such
service providers have taken appropriate measures to address the Year 2000
problem. Where practicable, we will assess and attempt to mitigate risks that
the organizations upon which we depend are not Year 2000 compliant. We cannot,
however, give assurance that failure of these firms to complete adequate
preparations in a timely manner will not have an adverse effect on the
Contracts.
The Year 2000 Information and Readiness Disclosure Act passed by Congress
in 1998 encourages businesses and other organizations to provide information
about the readiness of their computer systems. The Act also provides certain
protections to these organizations against potential liability for what they say
about their readiness. We specifically designate the information about our
readiness as readiness disclosure under the protections of the Act.
13
<PAGE>
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
Penn Insurance established PIA VARIABLE ANNUITY ACCOUNT I (the "Separate
Account") on July 13, 1994. The Separate Account is registered with the
Securities and Exchange Commission as a unit investment trust and is a "separate
account" within the meaning of the federal securities laws. The Separate Account
is divided into subaccounts that invest in shares of different mutual funds.
o The income, gains and losses of PIA do not have any effect on the
income, gains or losses of the Separate Account or any subaccount.
o The Separate Account and its subaccounts are not responsible for the
liabilities of any other business of PIA.
- --------------------------------------------------------------------------------
ACCUMULATION UNITS
Your assets in the Separate Account are held as Accumulation Units of the
subaccounts that you select. We value Accumulation Units on each day the New
York Stock Exchange is open. When you invest in or transfer money to a
subaccount, you receive the Accumulation Unit price next computed after we
receive your purchase payment or transfer request at our administrative office.
In the case of the your first purchase payment, you receive the price next
computed after we accept your application to purchase a Contract.
The value of an Accumulation Unit is $10 when a subaccount begins
operation. The value of an Accumulation Unit may vary, and is determined by
multiplying its last computed value by the net investment factor for the
subaccount for the current valuation period. The net investment factor measures
(1) investment performance of 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 annual rate of 0.15% assessed against the subaccount.
- --------------------------------------------------------------------------------
VOTING INSTRUCTIONS
You have the right to tell us how to vote proxies for the Fund shares in
which your purchase payments are invested. If the law changes and permits us to
vote the Fund shares, we may do so.
If you are a Contract Owner, we determine the number of Fund shares that
you may vote by dividing your interest in a subaccount by the net asset value
per share of the Fund. If you are receiving annuity payments, we determine the
number of Fund shares that you may vote by dividing the reserve allocated to the
subaccount by the net asset value per share of the Fund. We change these
procedures whenever we are required to do so by law.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS IN THE SEPARATE ACCOUNT
The Separate Account currently has subaccounts that invest in the
following Funds:
- --------------------------------------------------------------------------------
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;
14
<PAGE>
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
appropriate in light of the availability of attractively valued individual
securities 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;
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 each of the Funds. OpCap Advisors, New York, New York, is investment
sub-adviser to the Value Equity and Small Capitalization Funds. T. Rowe Price
Associates, Baltimore, Maryland, is investment sub-adviser to the Flexibly
Managed and High Yield Bond Funds. Vontobel USA, Inc., New York, New York, is
investment sub-adviser to the International Equity Fund. RS Investment
Management, Inc., San Francisco, California, is investment sub-adviser to the
Emerging Growth Fund.
- --------------------------------------------------------------------------------
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
appreciation.
American Century Investment Management, Inc., Kansas City, Missouri, is
investment 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
diversified 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
objective, but will notify shareholders thirty days in advance of any proposed
material 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.
15
<PAGE>
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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 securities, 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.
Fidelity Management & Research Company, Boston, Massachusetts, is
investment adviser to the Asset Manager Portfolio and the Index 500 Portfolio.
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER 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 Dean Witter Investment Management Inc., New York, New York,
is investment adviser to the Emerging Markets Equity (International) Portfolio.
SHARES OF PENN SERIES ARE SOLD TO OTHER VARIABLE LIFE AND VARIABLE ANNUITY
SEPARATE ACCOUNTS OF PIA AND PENN MUTUAL. SHARES OF AMERICAN CENTURY VARIABLE
PORTFOLIO, INC., NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST, FIDELITY
INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS
FUND II AND MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. ARE OFFERED NOT
ONLY TO VARIABLE ANNUITY AND VARIABLE LIFE SEPARATE ACCOUNTS OF PENN MUTUAL, BUT
ALSO TO SUCH ACCOUNTS OF OTHER INSURANCE COMPANIES UNAFFILIATED WITH PENN MUTUAL
AND, IN THE CASE OF NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST AND MORGAN
STANLEY DEAN WITTER UNIVERSAL FUNDS, INC., DIRECTLY TO QUALIFIED PENSION AND
RETIREMENT PLANS. FOR MORE INFORMATION ON THE POSSIBLE CONFLICTS INVOLVED WHEN
THE SEPARATE ACCOUNT INVESTS IN FUNDS OFFERED TO OTHER SEPARATE ACCOUNTS, SEE
THE FUND PROSPECTUSES.
READ THE PROSPECTUSES OF THESE FUNDS BEFORE INVESTING.
16
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THE FIXED INTEREST ACCOUNT
Interests in our general account are not registered under the Securities
Act of 1933 and the general account is not registered as an investment company
under the Investment Company Act of 1940. The general account and any interests
held in the general account are not subject to the provisions of these Acts.
This Prospectus generally discusses only the variable portion of the Contract.
The staff of the Securities and Exchange Commission has not reviewed the
disclosure in this Prospectus relating to the Fixed Interest Accounts.
Disclosure regarding the Fixed Interest Accounts, 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. See MORE
INFORMATION ABOUT THE FIXED INTEREST ACCOUNT.
- --------------------------------------------------------------------------------
THE CONTRACT
A combination variable and fixed annuity contract may be an attractive
long-term investment vehicle for many people. Our Contract allows you to invest
in:
o the Separate Account, through which you may invest in one or more of the
available Funds of Penn Series Funds, Inc., American Century Variable
Portfolio, Inc., Neuberger Berman Advisers Management Trust, Fidelity
Investments' Variable Insurance Products Fund, Fidelity Investments'
Variable Insurance Products Fund II and Morgan Stanley Dean Witter
Universal Funds, Inc. See THE SEPARATE ACCOUNT in this Prospectus.
o one or more options in our Fixed Interest Account. The Fixed Interest
Account is guaranteed and funded by PIA through its general account. See
THE FIXED INTEREST ACCOUNT and MORE INFORMATION ABOUT THE FIXED INTEREST
ACCOUNT in this Prospectus.
You decide, within Contract limits,
o how often you make a purchase payment and how much you invest;
o the Funds and/or options in our Fixed Interest Account in which your
purchase payments are invested;
o whether or not to transfer money among the available Funds and Fixed
Interest Account options;
o the type of annuity that we pay and who receives it;
o the Beneficiary or Beneficiaries to whom we pay death benefits; and
o the amount and frequency of withdrawals from the Contract Value.
Your Contract has
o an Accumulation Period, during which you make one or more purchase
payments and we invest your payments as you tell us; and
o an Annuity Payout Period, during which we make annuity payments to you.
Your Payout Period begins on your Annuity Date, which may not be earlier
than your second Contract anniversary.
We may amend your Contract at any time to comply with legal requirements.
State law may require us to obtain your approval for any Contract amendment. We
may, with approval of the Securities and Exchange Commission and the governing
state insurance department, substitute another mutual fund for any of the Funds
currently available.
For Contracts sold in Oregon, New Jersey and Washington, you may make
purchase payments only during the first three Contract years.
You may contact us by writing The Penn Insurance and Annuity Company,
Customer Service Group, Philadelphia, PA 19172. Or, you may call (800) 523-0650.
17
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HOW DO I PURCHASE A CONTRACT?
Our representative will assist you in completing an application and
sending it, together with a check for your first purchase payment, to our
administrative office. All subsequent purchase payments should be sent to the
administrative office. We usually accept an application to purchase a Contract
within two business days after we receive it. If you send us an incomplete
application, we will return your purchase payment to you within five business
days unless you ask us to keep it while you complete the application.
The minimum 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.
The principal underwriter of the Contracts is Hornor, Townsend & Kent,
Inc., 600 Dresher Road, Horsham, PA 19044, a wholly-owned subsidiary of Penn
Mutual.
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WHAT TYPES OF ANNUITY PAYMENTS MAY I CHOOSE?
You may choose: (1) an annuity for a set 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) any other form of annuity that we may
agree upon. You may choose a variable annuity (except for a set number of
years), a fixed annuity, or a combination of both.
You may choose a person other than yourself to be the Annuitant.
VARIABLE ANNUITY PAYMENTS. The size of your variable annuity payments will
vary depending upon the performance of the investment options that you choose
for the Annuity Payout Period. Your payments also will depend on the size of
your investment, the type of annuity you choose, the expected length of the
annuity period, and the annuity purchase rates and charges in your 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%, your annuity payments will increase. If the annual net
investment return is less than 3%, your payments will decrease.
FIXED ANNUITY PAYMENTS. The size of your fixed annuity payments will not
change. The size of these payments is determined by a number of factors,
including the size of your investment, the form of annuity chosen, the expected
length of the annuity period, and a guaranteed 3% rate of return.
OTHER INFORMATION. Unless you tell us otherwise:
o you or the person you designate will receive a life annuity with
payments guaranteed for 10 years. Tax deferred annuities under Section
403(b) of the Code and pension or profit sharing plans under Section
410 of the Code will receive a joint and survivor annuity.
o the annuity will be split between fixed and variable in the same
proportions as your Contract Value on the Annuity Date.
o your annuity payments will begin on 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 must be on the first day of a
month and may not be earlier than your second contract anniversary.
You may change the Annuity Date or your annuity option by giving us
written notice at our administrative office at least 30 days prior to the
current Annuity Date. If your Contract Value is less than $5,000, we may pay you
in a lump sum. We usually make annuity payments monthly, starting with the
Annuity Date, but we will pay you quarterly, semiannually or annually, if you
prefer. If necessary, we will adjust the frequency of your payments so that
payments are at least $50 each. For information on the treatment of annuity
payments, see FEDERAL INCOME TAX CONSIDERATIONS in this Prospectus.
18
<PAGE>
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What Are the Death Benefits Under My Contract?
You may designate a Beneficiary in your application. If you fail to
designate a Beneficiary, your Beneficiary will be your estate. You may change
the Beneficiary at any time before your death or the death of the Annuitant,
whichever occurs first.
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 as of the date on
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 Interest
Account Value on the date the above information is received at our
administrative office and the net purchase payments and transfers allocated to
the Separate Account (I.E., all purchase payments and transfers to the Separate
Account minus all prior withdrawals and transfers made from the Separate
Account). We generally pay the death benefit within 7 days after we have
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.
ENHANCED DEATH BENEFIT. 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 benefit is the sum of: (1) the Fixed Account Value, and (2) the
net purchase payments 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 your surviving spouse, he or she may become the
Contract Owner rather than receive the death benefit.
CHOOSING A LUMP SUM OR ANNUITY. Your Beneficiary has one year from your
date of death to choose to receive the death benefit in lump sum or in the form
of an annuity.
o If he or she chooses a lump 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 Beneficiary).
o 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.
o 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 lump 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 specified
or guaranteed period or to receive in lump sum the present value of the
remaining payments.
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MAY I TRANSFER MONEY AMONG SUBACCOUNTS AND THE FIXED INTEREST ACCOUNTS?
BEFORE THE ANNUITY DATE. You may transfer amounts from one subaccount of
the Separate Account to another subaccount of the Separate Account. Within
Contract limits, you also may transfer from the subaccounts of the Separate
Account to a fixed interest option of the Fixed Interest Account. You may
transfer from the Fixed Interest Account to the Variable Account or to another
fixed interest option in the Fixed Interest Account only at the completion of
the interest period or within 25 days thereafter.
AFTER THE ANNUITY DATE. You may transfer amounts 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.
o Transfers will be based on values at the end of the valuation period in
which the transfer request is received at our administrative office.
19
<PAGE>
o The minimum amount that may be transferred is $250 or, if less, the
amount held in the subaccount or Fixed Interest Account option. In the
case of partial transfers, the amount remaining in the subaccount or
Fixed Interest Account option must be at least $250.
o A transfer request must be received at our administrative office and
all other administrative requirements for transfer must be met to make
the transfer. Neither we nor the Separate Account will be liable for
following instructions communicated by telephone that we reasonably
believe to be genuine. We require certain personal identifying
information to process a request for transfer made over the telephone.
DOLLAR COST AVERAGING. Dollar cost averaging is a way to invest in which
securities are purchased at regular intervals in fixed dollar amounts so that
the cost of the securities gets averaged over time and possibly over market
cycles. If your Contract Value is at least $10,000, you can have a flat dollar
amount ($100 minimum) transferred monthly or quarterly from one account to other
accounts ($50 minimum per account) to achieve dollar cost averaging. These
transfers may be made only from one of the following accounts: Money Market
Subaccount, Limited Maturity Bond Subaccount, Quality Bond Subaccount, or the
One Year Fixed Interest Option. You may do this for from 12 to 60 months or
until you tell us to change or cancel the dollar cost averaging.
AUTOMATIC REBALANCING. Automatic Rebalancing is a way to transfer money
from those subaccounts that have increased in value to those subaccounts that
have decreased in value. Over time, this may help you to sell high and buy low,
although there can be no assurance of this. 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 options.
Dollar cost averaging and automatic rebalancing may not be in effect at
the same time.
For transfers other than dollar cost averaging and automatic rebalancing,
we reserve the right to charge a transfer fee, although we have no present
intention of doing so.
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MAY I WITHDRAW ANY OF MY MONEY?
Before the Annuity Date and the death of the Contract Owner or Annuitant,
you may withdraw all or part of your Contract Value. We base your withdrawal on
your Contract Value next determined after we receive a proper written request
for withdrawal at our administrative office (and the Contract, in case of a full
withdrawal). We normally will pay you within seven days. You may pay tax when
you make a withdrawal, including an additional 10% tax under certain
circumstances. See FEDERAL INCOME TAX CONSIDERATIONS.
o The minimum withdrawal is $500. If it is your first withdrawal in a
Contract Year, the minimum withdrawal is 15% of total purchase payments
if less.
o You may make a partial withdrawal only if the amount remaining in the
subaccount is at least $250.
o If you do not tell us otherwise, the withdrawal 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 a fixed interest account beginning with the One Year Fixed
Interest Option and continuing with the other fixed interest options in
the order of ascending duration.
SYSTEMATIC WITHDRAWALS. If your Contract Value is at least $25,000 and you
have not made a withdrawal in the current contract year, you can make systematic
withdrawals. These are regular payments that we make to you on a monthly,
quarterly, semiannual or annual basis. It is a convenient way for you to
withdraw a limited percentage of purchase payments without incurring a
contingent deferred sales charge. The total amount that you withdraw in a
Contract Year cannot exceed 15% of total purchase payments at the time of the
request. The minimum amount of each withdrawal payment is $50.
Payments can be either a fixed dollar amount or a fixed percentage of
purchase payments. Your payments will begin on the next withdrawal date after we
receive your request. See FREE WITHDRAWALS below. For information on the tax
treatment of withdrawals, see FEDERAL INCOME TAX CONSIDERATIONS in this
Prospectus.
20
<PAGE>
403(b) WITHDRAWALS. There are restrictions on withdrawals from Contracts
qualifying under Section 403(b) of the Code. Generally, 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
information on the tax treatment of withdrawals under Section 403(b) Contracts,
see FEDERAL INCOME TAX CONSIDERATIONS in this Prospectus.
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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.
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WHAT CHARGES DO I PAY?
The following discussion explains the Contract charges that you pay. You
also indirectly pay expenses of the Funds that you select as investment options
in the Separate Account. See the prospectuses of the Funds for information on
Fund expenses.
ADMINISTRATION CHARGES:
These charges reimburse us for administering the Contract and the Separate
Account.
o We deduct from your Variable Account Value an annual contract
administration charge that is the lesser of $30 or 2% of your Variable
Account Value. You will not pay this charge if your Variable Account
Value is more than $50,000. To pay this charge, we cancel Accumulation
Units credited to your Contract, pro rata among the subaccounts in
which you invest. We assess this charge on each Contract anniversary
and on any other date that your Variable Account Value is reduced to
zero by withdrawal or transfer.
o We deduct from the net asset value of the Separate Account a daily
administration charge that will not exceed an effective annual rate of
0.15%.
For transfers among investment options other than under dollar cost
averaging and automatic rebalancing, we reserve the right to charge a transfer
fee, although we have no present intention of doing so.
MORTALITY AND EXPENSE RISK CHARGE:
We deduct from the net asset value of the Separate Account a daily
mortality and expense risk charge equal to an effective annual rate of 1.25%.
This charge compensates us for the mortality-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 mortality experience is substantially different
than originally assumed), and for the risk that our administration charges will
be insufficient to cover administration expenses over the life of the Contracts.
The mortality and expense risk charge is paid during both the accumulation and
variable annuity pay-out phases of the Contract.
21
<PAGE>
CONTINGENT DEFERRED SALES CHARGE:
This charge pays for our sales expenses. Sales expenses that 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.
You pay this charge only if you withdraw a purchase payment within seven
years of the effective date of payment. The following table shows the schedule
of the contingent deferred sales charge that will be applied to withdrawal of a
purchase payment, after allowing for the free withdrawals which are described in
the next subsection. Purchase payments will be treated as withdrawn 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 reduce
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
deferred 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 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
incurring 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
hospital 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 Contract 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
contingent 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
Internal Revenue Code.
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<PAGE>
PREMIUM TAXES:
Some states and municipalities impose premium taxes on purchase payments
received by insurance companies. Generally, any premium taxes payable will be
deducted upon annuitization, although we reserve the right to deduct such taxes
when due in jurisdictions that impose such taxes on purchase payments.
Currently, state premium taxes on purchase payments range from 0% to 3 1/2%.
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PERFORMANCE INFORMATION
We may advertise total return performance and annual changes in
accumulation unit values.
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 Fund has been available through a subaccount of the Separate
Account. 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 deduction of all applicable fund
and Contract charges. We may also show average annual rates of total return,
assuming investment on the inception date of the underlying Funds, 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 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).
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MORE INFORMATION ABOUT THE FIXED INTEREST OPTIONS
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 Option; 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 Option, 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 annual 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 effective 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 living 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.
23
<PAGE>
LOANS UNDER SECTION 403(b) CONTRACTS
If your Contract qualifies under Section 403(b) of the Code, and if state
law permits, you may be able to borrow against money that you have invested in a
Fixed Interest Account. Review your Contract loan endorsement or consult our
representative for a complete description of the terms of the loan privilege,
including minimum and maximum loan amounts, repayment terms, and restrictions on
prepayments.
When you borrow, an amount equal to your loan will be transferred, as
collateral, from your Separate Account subaccounts to an account in our general
account called the "Restricted Account." Amounts transferred to the Restricted
Account generally earn interest at a rate of 2 1/2 percentage points less than
the rate of interest that we charge you on the loan. On your Contract
Anniversary, the accrued interest in the Restricted Account will be transferred
to your Separate Account subaccounts in accordance with your current payment
allocation instructions.
Loan repayments are due quarterly. When you repay part of your loan, we
transfer an amount equal to the principal portion of the repayment from the
Restricted 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.
If you are in default, we must report 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 that may be subject to a 10% penalty. We will repay the
loan by withdrawing the amount in default, plus interest and any applicable
contingent deferred sales charge, from your Separate Account subaccounts in
accordance with your Loan Request and Agreement. If Section 403(b) prevents us
from doing this, your outstanding loan balance will continue to accrue interest
and the amount due will be withdrawn when a withdrawal becomes permissible.
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. We reserve 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 is a general summary of some federal income tax
considerations. It is based on the law in effect on the date of this Prospectus,
which may change, and does not address state or local tax laws. For further
information, you should consult qualified tax counsel.
You pay no federal income tax on increases in the value of your Contract
until money is distributed to you or your beneficiary as a withdrawal, death
benefit or an annuity payment.
WITHDRAWALS AND DEATH BENEFITS. You may pay tax on a withdrawal, and your
beneficiary may pay tax on a death benefit. The taxable portion of these
payments generally will be the amount by which the payment exceeds your cost.
Thus, you or your Beneficiary generally will have taxable income to the extent
that your Contract Value exceeds your purchase payments. Ordinary income tax
rates apply. If you designate a Beneficiary who is either 37 1/2 years younger
than you or your grandchild, you may obtain Generation Skipping Transfer Tax
treatment under Section 2601 of the Code.
ANNUITY PAYMENTS. The taxable portion of an annuity payment generally is
determined by a formula 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 basis, is taxed at ordinary income tax rates.
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
income 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
income tax purposes, the income on the Contract is treated as ordinary income
received or accrued by the Contract Owner during the taxable year.
24
<PAGE>
EARLY WITHDRAWALS. 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. Generally, there will be no additional income tax on
o early withdrawals that 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;
o withdrawals made on or after age 59 1/2;
o on distributions made after death;
o withdrawals attributable to total and permanent disability.
TRANSFERS. You may pay tax if you transfer your Contract to someone else.
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.
SEPARATE ACCOUNT DIVERSIFICATION. Section 817(h) of the Code provides that
the investments of a separate account 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 separate 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 Management 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 prospectuses 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.
QUALIFIED PLANS. The Contracts may be used in connection with retirement
plans that qualify for special tax treatment under the Code. The plans include
individual retirement annuities qualified under Section 408(b) of the Code
(referred to as IRAs), tax deferred annuities qualified under Section 403(b) of
the Code, pension or profit sharing plans for self-employed individuals
qualified under Section 401 of the Code (referred to as H.R. 10 or Keogh plans)
and corporate pension or profit sharing plans qualified under Section 401 of the
Code, or annuity 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
mandatory 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.
This general summary of federal income tax does not address every issue
that may affect you. You should consult qualified tax counsel.
25
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of the Company at December 31, 1998,
and for the year then ended appear in the Statement of Additional Information.
The consolidated financial statements of the Company should be considered only
as bearing upon the Company's ability to meet its obligations under the
Contracts.
The financial statements of the Separate Account at December 31, 1998
appear in the Statement of Additional Information.
- -------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS
- -------------------------------------------------------------------
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-3
Average Annual Total Return .................. B-3
Annual Changes in Accumulation Unit Values ... B-8
- -------------------------------------------------------------------
ADMINISTRATION AND RECORDKEEPING SERVICES ......... B-9
- -------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS AND CERTIFICATES ........ B-9
- -------------------------------------------------------------------
CUSTODIAN ........................................ B-9
- -------------------------------------------------------------------
INDEPENDENT AUDITORS .............................. B-9
- -------------------------------------------------------------------
LEGAL MATTERS ..................................... B-9
- -------------------------------------------------------------------
FINANCIAL STATEMENTS .............................. B-9
- -------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
THIS PAGE LEFT INTENTIONALLY BLANK
27
<PAGE>
- --------------------------------------------------------------------------------
THIS PAGE LEFT INTENTIONALLY BLANK
28
<PAGE>
PART B
Information Required in a Statement
of Additional Information
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1999
- --------------------------------------------------------------------------------
LOGO
PIA VARIABLE ANNUITY ACCOUNT I
THE PENN INSURANCE AND ANNUITY COMPANY
PHILADELPHIA, PENNSYLVANIA 19172 O TELEPHONE (800) 523-0650 PENNANT
- --------------------------------------------------------------------------------
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
(the "Separate Account"), dated May 1, 1999. To obtain a prospectus you may
write to The Penn Insurance and Annuity Company (the "Company"), Customer
Service Group, Philadelphia, PA 19172. Or you may call (800) 523-0650. Terms
used in this statement of additional information have the same meaning as the
prospectus.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS ................................................. B-
First Variable Annuity Payments .......................................... B-
Subsequent Variable Annuity Payments ..................................... B-
Annuity Units ............................................................ B-
Value of Annuity Units ................................................... B-
Net Investment Factor .................................................... B-
Assumed Interest Rate .................................................... B-
Valuation Period ......................................................... B-
- --------------------------------------------------------------------------------
PERFORMANCE DATA .......................................................... B-
Average Annual Total Return .............................................. B-
Annual Changes in Accumulation Unit Values ............................... B-
- --------------------------------------------------------------------------------
ADMINISTRATION AND RECORDKEEPING SERVICES ................................. B-
- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS ................................................. B-
- --------------------------------------------------------------------------------
CUSTODIAN ................................................................. B-
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS ...................................................... B-
- --------------------------------------------------------------------------------
LEGAL MATTERS ............................................................. B-
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS ...................................................... B-
- --------------------------------------------------------------------------------
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.
PERFORMANCE DATA
AVERAGE ANNUAL TOTAL RETURN
The performance data in the following tables include average annual total
return of subaccounts of the Separate Account computed in accordance with the
standard formula and limitations prescribed by the Securities and Exchange
Commission and average annual total return and cumulative total return
information based upon different hypothetical assumptions.
B-3
<PAGE>
Table 1 Average Annual Total Return On $1,000 Investment -- Computed as
Prescribed by the SEC
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- -------------- ----------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a) 3/1/95 25.83% N/A N/A 32.47%
(Independence Capital)
Value Equity (a) 3/1/95 20.58% N/A N/A 2.16%
(OpCap)
Small-Cap Fund 3/1/95 8.70% N/A N/A (15.09%)
(OpCap)
Emerging Growth Fund (a) 5/1/97 39.86% N/A N/A 26.92%
(RS Investment Management)
Flexibly Managed (a) 3/1/95 12.36% N/A N/A (1.24%)
(T. Rowe Price)
International Equity (a) 3/1/95 15.11% N/A N/A 10.97%
(Vontobel)
Quality Bond (a) 3/1/95 7.71% N/A N/A 3.01%
(Independence Capital)
High Yield Bond (a) 3/1/95 10.09% N/A N/A (2.05%)
(T. Rowe Price)
Capital Appreciation (b) 3/1/95 2.78% N/A N/A (8.48%)
(American Century Investment Management)
Balanced Portfolio (c) 3/1/95 12.89% N/A N/A 4.79%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 3/1/95 4.27% N/A N/A (2.64%)
(Neuberger Berman)
Partners Fund Portfolio (c) 5/1/97 13.48% N/A N/A (2.83%)
(Neuberger Berman)
Equity-Income Portfolio (d) 3/1/95 19.28% N/A N/A 4.35%
(Fidelity Investments)
Growth Portfolio (d) 3/1/95 26.59% N/A N/A 30.47%
(Fidelity Investments)
Asset Manager Portfolio (e) 3/1/95 15.63% N/A N/A 7.60%
(Fidelity Investments)
Index 500 (e) 5/1/97 28.61% N/A N/A 20.01%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 5/1/97 (23.40%) N/A N/A (29.08%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS FIRST OFFERED THROUGH A SUBACCOUNT OF THE
SEPARATE ACCOUNT.
(A) PENN SERIES FUNDS, INC.
(B) AMERICAN CENTURY INVESTMENT MANAGEMENT
(C) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(D) VARIABLE INSURANCE PRODUCTS FUND
(E) VARIABLE INSURANCE PRODUCTS FUND II
(F) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC
B-4
<PAGE>
Table 2 Average Annual Total Return On $1,000 Investment -- Assumes No
Contingent Deferred Sales Charge and Investment on Inception Date of the
Underlying Fund
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- -------------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a) 06/01/83 12.79% 14.99% 18.32% 39.59%
(Independence Capital)
Value Equity (a) 03/17/87 12.20% 12.87% 17.43% 7.67%
(OpCap)
Small-Cap Fund 03/01/95 9.69% N/A N/A (10.52%)
(OpCap)
Emerging Growth Fund (a) 05/01/97 44.32% N/A N/A 33.75%
(RS Investment Management)
Flexibly Managed (a) 07/31/84 12.70% 11.01% 10.69% 4.09%
(T. Rowe Price)
International Equity (a) 11/01/92 12.69% N/A 8.56% 16.95%
(Vontobel)
Quality Bond (a) 03/17/87 6.72% 7.41% 5.55% 8.55%
(Independence Capital)
High Yield Bond (a) 08/06/84 8.79% 8.24% 6.69% 3.22%
(T. Rowe Price)
Capital Appreciation (b) 11/20/87 6.67% 7.12% 1.75% (3.56%)
(American Century Investment Management)
Balanced Portfolio (c) 02/28/89 9.63% N/A 9.73% 10.43%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 09/10/84 6.20% 5.05% 3.41% 2.61%
(Neuberger Berman)
Partners Fund Portfolio (c) 03/22/94 18.10% N/A N/A 2.41%
(Neuberger Berman)
Equity-Income Portfolio (d) 10/09/86 12.69% 13.86% 16.88% 9.97%
(Fidelity Investments)
Growth Portfolio (d) 10/09/86 15.68% 17.70% 19.98% 37.48%
(Fidelity Investments)
Asset Manager Portfolio (e) 09/06/89 11.36% N/A 10.18% 13.38%
(Fidelity Investments)
Index 500 (e) 08/27/92 19.79% N/A 22.28% 26.46%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 10/01/96 (13.53%) N/A N/A (25.27%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(A) PENN SERIES FUNDS, INC.
(B) AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
(C) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(D) VARIABLE INSURANCE PRODUCTS FUND
(E) VARIABLE INSURANCE PRODUCTS FUND II
(F) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-5
<PAGE>
Table 3 Average Annual Total Return On $10,000 Investment -- Assumes No
Contingent Deferred Sales Charge and Investment on the Inception Date of
Underlying Fund
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/98 12/31/98 12/31/98 12/31/98
- -------------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Growth Equity (a) 06/01/83 12.84% 15.05% 18.41% 39.69%
(Independence Capital)
Value Equity (a) 03/17/87 12.44% 13.12% 17.69% 8.02%
(OpCap)
Small-Cap Fund 03/01/95 9.76% N/A N/A (10.43%)
(OpCap)
Emerging Growth Fund (a) 05/01/97 44.38% N/A N/A 33.81%
(RS Investment Management)
Flexibly Managed (a) 07/31/84 12.92% 11.32% 11.09% 4.56%
(T. Rowe Price)
International Equity (a) 11/01/92 12.87% N/A 8.77% 17.17%
(Vontobel)
Quality Bond (a) 03/17/87 6.77% 7.46% 5.62% 8.63%
(Independence Capital)
High Yield Bond (a) 08/06/84 8.85% 8.32% 6.79% 3.33%
(T. Rowe Price)
Capital Appreciation (b) 11/20/87 6.70% 7.15% 1.79% (3.52%)
(American Century Investment Management)
Balanced Portfolio (c) 02/28/89 9.74% N/A 9.88% 10.60%
(Neuberger Berman)
Limited Maturity Bond Portfolio (c) 09/10/84 6.39% 5.28% 3.69% 2.91%
(Neuberger Berman)
Partners Fund Portfolio (c) 03/22/94 18.35% N/A N/A 2.72%
(Neuberger Berman)
Equity-Income Portfolio (d) 10/09/86 12.75% 13.93% 16.95% 10.06%
(Fidelity Investments)
Growth Portfolio (d) 10/09/86 15.72% 17.74% 20.03% 37.54%
(Fidelity Investments)
Asset Manager Portfolio (e) 09/06/89 11.41% N/A 10.24% 13.44%
(Fidelity Investments)
Index 500 (e) 08/27/92 19.85% N/A 22.34% 26.53%
(Fidelity Investments)
Emerging Markets Equity (International) (f) 10/01/96 (13.49%) N/A N/A (25.24%)
(Morgan Stanley Dean Witter)
</TABLE>
- -----------
* DATE THE UNDERLYING FUND WAS ESTABLISHED.
(A) PENN SERIES FUNDS, INC.
(B) AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
(C) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
(D) VARIABLE INSURANCE PRODUCTS FUND
(E) VARIABLE INSURANCE PRODUCTS FUND II
(F) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-6
<PAGE>
Average annual total returns 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 computation assumes that the contract or account adminstration
charge is allocated equally across all available subaccounts by an average
Contract Owner or Participant and that the Contract Value or Participant's
Variable Account Value is of average size. The returns are computed according
to the formula assumptions prescribed by the SEC. The returns are based upon
hypothetical assumptions which are not prescribed by the SEC.
Average annual rates of total return 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 account 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. The computations assume that no
withdrawals were made at the end of the periods, and therefore do not reflect
the contract's contingent deferred sales charge of 1% for withdrawals made
within one year of the purchase payment. The returns also show investment
performance from the inception date of the Fund, which may predate the date the
Separate Account began investing in the Fund.
B-7
<PAGE>
- --------------------------------------------------------------------------------
Annual Rate of Change in Accumulation Unit Values
Table 4 Annual Rate of Change in Accumulation Unit Values
Table 4 shows the changes in values of accumulation units for each
subaccount of the Separate Account for each of the calendar years 1995 through
1998 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) 1998 1997 1996 1995
- -------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Growth Equity 39.70% 24.98% 18.10% 11.75%
(Independence Capital Management)
Value Equity (a) 8.06% 23.24% 23.45% 12.64%
(OpCap Advisors)
Small Capitalization (a) (10.42%) 21.31% 18.09% 11.15%
(OpCap Advisors)
Emerging Growth Fund (a) 33.82% 37.93% N/A N/A
(RS Investment Management)
Flexibly Managed (a) 4.62% 14.05% 14.75% 11.65%
(T. Rowe Price Associates)
International Equity (a) 17.20% 8.87% 16.90% 11.71%
(Vontobel USA)
Quality Bond (a) 8.64% 6.53% 2.69% 11.23%
(Independence Capital Management)
High Yield Bond (a) 3.34% 14.17% 12.29% 10.97%
(T. Rowe Price Associates)
Money Market (a) 3.56% 3.68% 3.52% 10.31%
(Independence Capital Management)
Capital Appreciation (b) (3.52%) (4.60%) (5.66%) 12.82%
(American Century Investment Management)
Balanced Portfolio (c) 10.62% 17.79% 5.40% 11.65%
(Neuberger Berman)
Limited Maturity Bond (c) 2.94% 5.26% 2.85% 10.69%
(Neuberger Berman)
Partners Fund Portfolio (c) 2.76% 23.99% N/A N/A
(Neuberger Berman)
Equity Income (d) 10.08% 26.33% 12.69% 12.60%
(Fidelity Investors Research)
Growth (d) 37.55% 21.76% 13.11% 13.08%
(Fidelity Investors Research)
Asset Manager (e) 13.45% 18.97% 13.01% 11.48%
(Fidelity Investors Research)
Index 500 (e) 26.54% 21.50% N/A N/A
(Fidelity Investors Research)
Emerging Markets Equity (International) (f) (25.23%) (10.34%) N/A N/A
(Morgan Stanley Dean Witter)
</TABLE>
(A) PENN SERIES FUNDS, INC.
(B) AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
(C) NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST.
(D) FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND.
(E) FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II.
(F) MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
B-8
<PAGE>
The performance information set forth above is for past performance of the
Funds, assuming the subaccounts of the Separate Account had invested in the
Funds from the date the underlying Fund was first available through a
subaccount of the Separate Account or the date the underlying Fund was
established. The performance information 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 1998, 1997,
1996 and 1995, the Company paid Hornor, Townsend & Kent, Inc. underwriting
commissions of $251,816, $138,545, $115,190 and $25,447.
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 61/2% 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 AUDITORS LLP
Ernst & Young LLP serve as independent auditors of The Penn Insurance and
Annuity Company and PIA Variable Annuity Account I. Their offices are located
at 2001 Market Street, Suite 4000, Philadelphia, PA.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of the Company at December 31, 1998,
and for the year then ended appear in the Statement of Additional Information.
The consolidated financial statements of the Company should be considered only
as bearing upon the Company's ability to meet its obligations under the
Contracts.
The financial statements of the Separate Account at December 31, 1998
appear in the Statement of Additional Information.
B-9
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Penn Insurance and Annuity Company and Contract Owners of PIA Variable
Annuity Account I
We have audited the accompanying statement of assets and liabilities of the PIA
Annuity Account I (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, Emerging
Growth Fund, Balanced Portfolio, Limited Maturity Bond Portfolio, Partners
Portfolio, Capital Appreciation Portfolio, Equity Income Portfolio, Growth
Portfolio, Asset Manager Portfolio, Index 500 Portfolio, Emerging Markets
Equity Portfolio) as of December 31, 1998, and the related statement of
operations and statements of changes in net assets for each of the periods
indicated therein. These financial statements are the responsibility of the
management of PIA Variable Annuity Account I. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1998,
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 audit provides 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 each of the respective
portfolios constituting the PIA Variable Annuity Account I at December 31,
1998, the results of their operations for the changes in their net assets for
each of the periods indicted therein, in conformity with generally accepted
accounting principles.
Philadelphia, Pennsylvania ERNST & YOUNG LLP
April 2, 1999
B-10
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
TOTAL MARKET FUND+ BOND FUND+ BOND FUND+ FUND+
--------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT IN COMMON STOCK
Number of Shares .................... 13,069,065 972,644 1,275,913 447,170
Cost ................................ $314,492,322 $13,069,065 $10,204,265 $12,065,286 $11,567,843
ASSETS:
Investments at market value ......... $338,067,174 $13,069,065 $10,115,502 $11,725,642 $13,808,610
Dividends receivable ................ 51,399 51,399 -- -- --
LIABILITIES:
Due to The Penn Insurance and Annuity
Company ............................ 159,089 17,479 3,587 4,553 6,476
------------ ----------- ----------- ----------- -----------
NET ASSETS .......................... $337,959,484 $13,102,985 $10,111,915 $11,721,089 $13,802,134
============ =========== =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
TOTAL MARKET FUND+ BOND FUND+ BOND FUND+ FUND+
--------------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................... $ 6,235,964 $528,135 $ 449,042 $ 910,966 $ 9,430
EXPENSE:
Mortality and expense risk charges .......... 4,161,875 153,379 105,577 146,238 145,540
----------- -------- --------- ---------- -----------
Net investment income (loss) ................ 2,074,089 374,756 343,465 764,728 (136,110)
----------- -------- --------- ---------- -----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses) from redemption of
fund shares ................................ (435,018) -- 6,226 (17,094) (36,789)
Capital gains distributions ................. 21,727,912 -- 292,434 -- 1,468,416
----------- -------- --------- ---------- -----------
Net realized gains (losses) from investment
transactions ............................... 21,292,894 -- 298,660 (17,094) 1,431,627
Net change in unrealized appreciation/
depreciation of investments ................ 5,557,756 -- (36,035) (474,406) 2,167,911
----------- -------- --------- ---------- -----------
Net realized and unrealized gains (losses) on
investments ................................ 26,850,650 -- 262,625 (491,500) 3,599,538
----------- -------- --------- ---------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .................. $28,924,739 $374,756 $ 606,090 $ 273,228 $ 3,463,428
=========== ======== ========= ========== ===========
</TABLE>
- -----------
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENT IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-11
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE EQUITY MANAGED CAPITALIZATION INTERNATIONAL GROWTH BALANCED
FUND+ FUND+ FUND+ EQUITY FUND+ FUND+ PORTFOLIO++
- -------------- -------------- ---------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1,928,714 4,811,928 878,409 948,817 368,512 372,501
$39,733,637 $92,424,369 $11,607,918 $15,385,221 $5,322,655 $5,866,684
$43,183,898 $88,106,397 $11,252,426 $17,439,257 $6,423,163 $6,086,665
-- -- -- -- -- --
17,962 34,694 4,293 7,316 3,148 3,280
----------- ----------- ----------- ----------- ---------- ----------
$43,165,936 $88,071,703 $11,248,133 $17,431,941 $6,420,015 $6,083,385
=========== =========== =========== =========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE EQUITY MANAGED CAPITALIZATION INTERNATIONAL GROWTH BALANCED
FUND+ FUND + FUND+ EQUITY FUND+ FUND+ PORTFOLIO++
- -------------- --------------- ---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$ 539,199 $ 2,481,409 $ 70,610 $ 161,765 $ -- $ 103,437
563,881 1,167,337 154,774 222,196 65,707 72,958
----------- ------------ ----------- ----------- ----------- ----------
(24,682) 1,314,072 (84,164) (60,431) (65,707) 30,479
----------- ------------ ----------- ----------- ----------- ----------
(216,842) (61,741) (43,756) 21,855 86,492 (4,584)
3,523,876 8,840,034 183,261 563,801 1,272 726,519
----------- ------------ ----------- ----------- ----------- ----------
3,307,034 8,778,293 139,505 585,656 87,764 721,935
(748,979) (6,788,985) (1,431,774) 1,857,070 1,305,485 (198,018)
----------- ------------ ----------- ----------- ----------- ----------
2,558,055 1,989,308 (1,292,269) 2,442,726 1,393,249 523,917
----------- ------------ ----------- ----------- ----------- ----------
$ 2,533,373 $ 3,303,380 ($ 1,376,433) $ 2,382,295 $ 1,327,542 $ 554,396
=========== ============ =========== =========== =========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-12
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
LIMITED CAPITAL
MATURITY BOND PARTNERS APPRECIATION EQUITY INCOME
PORTFOLIO++ PORTFOLIO++ PORTFOLIO+++ PORTFOLIO++++
--------------- --------------- ----------------- ------------------
<S> <C> <C> <C> <C>
INVESTMENT IN COMMON STOCK
Number of Shares .................... 277,292 456,445 343,880 1,534,095
Identified Cost ..................... $3,890,069 $8,946,237 $3,840,797 $31,991,328
ASSETS:
Investments at market value ......... $3,832,173 $8,640,498 $3,101,813 $38,996,687
Dividends receivable ................ -- -- -- --
LIABILITIES:
Due to (from) The Penn Insurance and
Annuity Company ................... 20,439 3,523 1,421 17,058
---------- ---------- ---------- -----------
NET ASSETS ........................... $3,811,734 $8,636,975 $3,100,392 $38,979,629
========== ========== ========== ===========
</TABLE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998 (CONT'D.)
<TABLE>
<CAPTION>
LIMITED CAPITAL
MATURITY BOND PARTNERS APPRECIATION EQUITY INCOME
PORTFOLIO++ PORTFOLIO++ PORTFOLIO+++ PORTFOLIO++++
--------------- --------------- ----------------- ------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ...................................... $ 196,155 $ 17,520 $ -- $ 428,228
EXPENSE:
Mortality and expense risk charges ............. 46,348 92,149 45,339 502,947
--------- ---------- --------- -----------
Net investment income (loss) ................... 149,807 (74,629) (45,339) (74,719)
--------- ---------- --------- -----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses) from redemption of
fund shares .................................. 1,639 (12,095) (33,398) (7,746)
Capital gains distributions .................... -- 551,895 174,995 1,523,990
--------- ---------- --------- -----------
Net realized gains (losses) from investment
transactions ................................. 1,639 539,800 141,597 1,516,244
Net change in unrealized
appreciation/depreciation of investments ..... (57,775) (437,909) (212,450) 1,714,500
--------- ---------- --------- -----------
Net realized and unrealized gains (losses)
on investments ............................... (56,136) 101,891 (70,853) 3,230,744
--------- ---------- --------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .................... $ 93,671 $ 27,262 ($ 116,192) $ 3,156,025
========= ========== ========= ===========
</TABLE>
- -----------
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENT IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUNDS
I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-13
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO+++++
- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C>
859,908 334,387 114,495 204,836
$27,341,290 $5,381,264 $13,805,228 $2,049,166
$38,584,062 $6,072,466 $16,172,469 $1,456,381
-- -- -- --
4,183 2,527 7,150 --
----------- ---------- ----------- ----------
$38,579,879 $6,069,939 $16,165,319 $1,456,381
=========== ========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
GROWTH ASSET MANAGER INDEX 500 MARKETS EQUITY
PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO+++++
- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C>
$ 126,122 $ 148,199 $ 57,734 $ 8,013
446,228 77,665 137,250 16,362
----------- --------- ----------- ---------
(320,106) 70,534 (79,516) (8,349)
----------- --------- ----------- ---------
(79,701) 3,720 (38,418) (2,786)
3,299,098 444,598 133,723 --
----------- --------- ----------- ---------
3,219,397 448,318 95,305 (2,786)
6,926,573 156,671 2,165,015 (349,138)
----------- --------- ----------- ---------
10,145,970 604,989 2,260,320 (351,924)
----------- --------- ----------- ---------
$ 9,825,864 $ 675,523 $ 2,180,804 ($ 360,273)
=========== ========= =========== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-14
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997
<TABLE>
<CAPTION>
TOTAL
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ................ $ 2,074,089 $ 2,320,612
Net realized gains (losses) from
investment transactions .................... 21,292,894 10,346,335
Net change in unrealized appreciation/
depreciation of investments ................ 5,557,756 14,512,578
------------- -------------
Net increase (decrease) in net assets
resulting from operations ................... 28,924,739 27,179,525
------------- -------------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments ........................... 135,541,358 125,425,903
Surrender benefits .......................... (9,362,238) (3,712,589)
Net Transfers ............................... (51,060,966) (29,870,283)
Contract administration charges ............. (88,251) (55,707)
Annuity benefits ............................ (5,347,245) (3,453,573)
------------- -------------
Net increase (decrease) in net assets
resulting from variable annuity
activities .................................. 69,682,658 88,333,751
------------- -------------
Total increase (decrease) in net assets ..... 98,607,397 115,513,276
NET ASSETS:
Beginning of year ........................... 239,352,087 123,838,811
------------- -------------
END OF YEAR ................................. $ 337,959,484 $ 239,352,087
============= =============
MONEY MARKET FUND+ QUALITY BOND FUND+
---------------------------------- ------------------------------
1998 1997 1998 1997
---------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ................ $ 374,756 $ 269,877 $ 343,465 $ 240,364
Net realized gains (losses) from
investment transactions .................... -- -- 298,660 2,792
Net change in unrealized appreciation/
depreciation of investments ................ -- -- (36,035) 24,619
-------------- -------------- ------------ ----------
Net increase (decrease) in net assets
resulting from operations ................... 374,756 269,877 606,090 267,775
-------------- -------------- ------------ ----------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments ........................... 23,596,049 15,006,343 6,843,131 2,584,557
Surrender benefits .......................... (788,184) (184,822) (200,330) (68,783)
Net Transfers ............................... (17,700,923) (13,635,983) (2,275,495) (554,711)
Contract administration charges ............. (2,014) (1,353) (1,315) (991)
Annuity benefits ............................ (222,746) (108,074) (178,470) (83,976)
-------------- -------------- ------------ ----------
Net increase (decrease) in net assets
resulting from variable annuity
activities .................................. 4,882,182 1,076,111 4,187,521 1,876,096
-------------- -------------- ------------ ----------
Total increase (decrease) in net assets ..... 5,256,938 1,345,988 4,793,611 2,143,871
NET ASSETS:
Beginning of year ........................... 7,846,047 6,500,059 5,318,304 3,174,433
-------------- -------------- ------------ ----------
END OF YEAR ................................. $ 13,102,985 $ 7,846,047 $ 10,111,915 $5,318,304
============== ============== ============ ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND+
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) .................. $ 764,728 $ 570,823
Net realized gains (losses) from
investment transactions ...................... (17,094) 3,996
Net change in unrealized appreciation/
depreciation of investments .................. (474,406) 167,037
------------ -------------
Net increase (decrease) in net assets
resulting from operations ..................... 273,228 741,856
------------ -------------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments ............................. 4,945,705 5,569,185
Surrender benefits ............................ (296,671) (294,894)
Net Transfers ................................. (1,392,476) (1,032,502)
Contract administration charges ............... (2,027) (942)
Annuity benefits .............................. (199,055) (165,182)
------------ -------------
Net increase (decrease) in net assets
resulting from variable annuity
activities .................................... 3,055,476 4,075,665
------------ -------------
Total increase (decrease) in net assets ....... 3,328,704 4,817,521
NET ASSETS:
Beginning of year ............................. 8,392,385 3,574,864
------------ -------------
END OF YEAR ................................... $ 11,721,089 $ 8,392,385
============ =============
GROWTH EQUITY FUND+ VALUE EQUITY FUND+
----------------------------- -------------------------------
1998 1997 1998 1997
-------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .................. ($ 136,110) ($ 36,637) ($ 24,682) $ 49,629
Net realized gains (losses) from
investment transactions ...................... 1,431,627 697,348 3,307,034 1,838,047
Net change in unrealized appreciation/
depreciation of investments .................. 2,167,911 150,133 (748,979) 3,228,914
----------- --------- ----------- ------------
Net increase (decrease) in net assets
resulting from operations ..................... 3,463,428 810,844 2,533,373 5,116,590
----------- --------- ----------- ------------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments ............................. 5,526,230 4,823,066 12,733,300 16,717,687
Surrender benefits ............................ (158,570) (62,363) (1,585,043) (398,755)
Net Transfers ................................. (1,856,756) (474,697) (4,001,865) (1,391,344)
Contract administration charges ............... (2,169) (829) (12,702) (7,184)
Annuity benefits .............................. (173,262) (43,676) (517,363) (321,771)
----------- --------- ----------- ------------
Net increase (decrease) in net assets
resulting from variable annuity
activities .................................... 3,335,473 4,241,501 6,616,327 14,598,633
----------- --------- ----------- ------------
Total increase (decrease) in net assets ....... 6,798,901 5,052,345 9,149,700 19,715,223
NET ASSETS:
Beginning of year ............................. 7,003,233 1,950,888 34,016,236 14,301,013
----------- --------- ----------- ------------
END OF YEAR ................................... $13,802,134 $7,003,233 $43,165,936 $ 34,016,236
=========== =========== =========== ============
</TABLE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENT IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI PORTFOLIOS,
INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. AS OF
MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS
FUNDS I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-15
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
FLEXIBLY MANAGED FUND+
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) .................. $ 1,314,072 $ 1,207,433
Net realized gains (losses) from
investment transactions ...................... 8,778,293 4,106,617
Net change in unrealized appreciation/
depreciation of investments .................. (6,788,985) 2,137,531
------------ ------------
Net increase (decrease) in net assets
resulting from operations ..................... 3,303,380 7,451,581
------------ ------------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments ............................. 23,480,763 29,495,872
Surrender benefits ............................ (2,309,819) (939,438)
Net Transfers ................................. (6,076,934) (2,878,761)
Contract administration charges ............... (25,948) (16,941)
Annuity benefits .............................. (2,012,397) (1,356,123)
------------ ------------
Net increase (decrease) in net assets
resulting from variable annuity
activities .................................... 13,055,665 24,304,609
------------ ------------
Total increase (decrease) in net assets ....... 16,359,045 31,756,190
NET ASSETS:
Beginning of year ............................. 71,712,658 39,956,468
------------ ------------
END OF YEAR ................................... $ 88,071,703 $ 71,712,658
============ ============
SMALL
CAPITALIZATION FUND+ INTERNATIONAL EQUITY FUND+
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .................. ($ 84,164) ($ 59,981) ($ 60,431) $ 247,402
Net realized gains (losses) from
investment transactions ...................... 139,505 633,914 585,656 438,429
Net change in unrealized appreciation/
depreciation of investments .................. (1,431,774) 837,078 1,857,070 91,691
----------- ---------- ----------- ------------
Net increase (decrease) in net assets
resulting from operations ..................... (1,376,433) 1,411,011 2,382,295 777,522
----------- ---------- ----------- ------------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments ............................. 4,140,766 5,634,761 4,528,945 7,093,961
Surrender benefits ............................ (314,301) (76,804) (465,457) (290,294)
Net Transfers ................................. (1,814,570) (790,037) (1,883,029) (1,488,312)
Contract administration charges ............... (4,050) (2,673) (5,841) (3,915)
Annuity benefits .............................. (132,547) (77,311) (242,420) (169,687)
----------- ---------- ----------- ------------
Net increase (decrease) in net assets
resulting from variable annuity
activities .................................... 1,875,298 4,687,936 1,932,198 5,141,753
----------- ---------- ----------- ------------
Total increase (decrease) in net assets ....... 498,865 6,098,947 4,314,493 5,919,275
NET ASSETS:
Beginning of year ............................. 10,749,268 4,650,321 13,117,448 7,198,173
----------- ---------- ----------- ------------
END OF YEAR ................................... $11,248,133 $10,749,268 $17,431,941 $ 13,117,448
=========== =========== =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMERGING GROWTH
PORTFOLIO+ BALANCED PORTFOLIO+
------------------------------ -----------------------------
1998 1997* 1998 1997
--------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ................... ($ 65,707) ($ 9,423) $ 30,479 $ 2,703
Net realized gains (losses) from
investment transactions ....................... 87,764 192,904 721,935 140,597
Net change in unrealized appreciation/
depreciation of investments ................... 1,305,485 (204,977) (198,018) 426,917
------------ --------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations ...................... 1,327,542 (21,496) 554,396 570,217
------------ --------- ---------- ----------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments .............................. 4,314,103 2,824,448 2,016,921 1,776,553
Surrender benefits ............................. (188,033) (6,836) (186,582) (130,016)
Net Transfers .................................. (1,518,437) (228,570) (519,208) (622,920)
Contract administration charges ................ (1,117) (84) (1,402) (1,210)
Annuity benefits ............................... (63,712) (17,793) (120,808) (61,501)
------------ --------- ---------- ----------
Net increase (decrease) in net assets
resulting from variable annuity
activities ..................................... 2,542,804 2,571,165 1,188,921 960,906
------------ --------- ---------- ----------
Total increase (decrease) in net assets ........ 3,870,346 2,549,669 1,743,317 1,531,123
NET ASSETS:
Beginning of year .............................. 2,549,669 -- 4,340,068 2,808,945
------------ --------- ---------- ----------
END OF YEAR .................................... $ 6,420,015 $2,549,669 $6,083,385 $4,340,068
============ =========== ========== ==========
LIMITED MATURITY
BOND PORTFOLIO+
--------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ................... $ 149,807 $ 97,920
Net realized gains (losses) from
investment transactions ....................... 1,639 3,589
Net change in unrealized appreciation/
depreciation of investments ................... (57,775) 29,378
------------- -------------
Net increase (decrease) in net assets
resulting from operations ...................... 93,671 130,887
------------- -------------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments .............................. 2,008,024 1,893,653
Surrender benefits ............................. (170,172) (78,555)
Net Transfers .................................. (1,161,255) (1,089,130)
Contract administration charges ................ (751) (576)
Annuity benefits ............................... (84,586) (83,489)
------------- -------------
Net increase (decrease) in net assets
resulting from variable annuity
activities ..................................... 591,260 641,903
------------- -------------
Total increase (decrease) in net assets ........ 684,931 772,790
NET ASSETS:
Beginning of year .............................. 3,126,803 2,354,013
------------- -------------
END OF YEAR .................................... $ 3,811,734 $ 3,126,803
============= =============
</TABLE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENT IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI PORTFOLIOS,
INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. AS OF
MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS
FUNDS I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-16
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
PARTNERS CAPITAL APPRECIATION
PORTFOLIO++ PORTFOLIO+++
---------------------------- ------------------------------
1998 1997* 1998 1997
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .................. ($ 74,629) ($ 12,490) ($ 45,339) ($ 50,683)
Net realized gains (losses) from
investment transactions ...................... 539,800 (1,352) 141,597 120,709
Net change in unrealized appreciation/
depreciation of investments .................. (437,909) 132,170 (212,450) (197,160)
--------- --------- --------- ------------
Net increase (decrease) in net assets
resulting from operations ..................... 27,262 118,328 (116,192) (127,134)
--------- --------- --------- ------------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments ............................. 6,316,324 3,513,547 553,025 1,520,996
Surrender benefits ............................ (240,149) (14,660) (179,038) (117,546)
Net Transfers ................................. (848,706) (120,660) (808,187) (1,357,196)
Contract administration charges ............... (1,341) (71) (1,423) (1,692)
Annuity benefits .............................. (90,589) (22,310) (37,839) (25,856)
--------- --------- --------- ------------
Net increase (decrease) in net assets
resulting from variable annuity
activities .................................... 5,135,539 3,355,846 (473,462) 18,706
--------- --------- --------- ------------
Total increase (decrease) in net assets ....... 5,162,801 3,474,174 (589,654) (108,428)
NET ASSETS:
Beginning of year ............................. 3,474,174 -- 3,690,046 3,798,474
--------- --------- --------- ------------
END OF YEAR ................................... $8,636,975 $3,474,174 $3,100,392 $ 3,690,046
========== ========== ==========
============
EQUITY INCOME
PORTFOLIO++++
-------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) .................. ($ 74,719) ($ 42,703)
Net realized gains (losses) from
investment transactions ...................... 1,516,244 1,460,789
Net change in unrealized appreciation/
depreciation of investments .................. 1,714,500 3,899,630
----------- -----------
Net increase (decrease) in net assets
resulting from operations ..................... 3,156,025 5,317,716
----------- -----------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments ............................. 10,030,814 11,205,598
Surrender benefits ............................ (802,060) (461,859)
Net Transfers ................................. (2,449,472) (1,885,293)
Contract administration charges ............... (10,107) (7,231)
Annuity benefits .............................. (688,303) (537,337)
----------- -----------
Net increase (decrease) in net assets
resulting from variable annuity
activities .................................... 6,080,872 8,313,878
----------- -----------
Total increase (decrease) in net assets ....... 9,236,897 13,631,594
NET ASSETS:
Beginning of year ............................. 29,742,732 16,111,138
----------- -----------
END OF YEAR ................................... $38,979,629 $29,742,732
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH
PORTFOLIO++++
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) .................. ($ 320,106) ($ 178,353)
Net realized gains (losses) from
investment transactions ...................... 3,219,397 472,789
Net change in unrealized appreciation/
depreciation of investments .................. 6,926,573 3,506,923
----------- -----------
Net increase (decrease) in net assets
resulting from operations ..................... 9,825,864 3,801,359
----------- -----------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments ............................. 10,112,920 8,080,441
Surrender benefits ............................ (896,947) (464,697)
Net Transfers ................................. (4,615,292) (1,589,438)
Contract administration charges ............... (11,574) (8,502)
Annuity benefits .............................. (344,414) (218,182)
----------- -----------
Net increase (decrease) in net assets
resulting from variable annuity
activities .................................... 4,244,693 5,799,622
----------- -----------
Total increase (decrease) in net assets ....... 14,070,557 9,600,981
NET ASSETS:
Beginning of year ............................. 24,509,322 14,908,341
----------- -----------
END OF YEAR ................................... $38,579,879 $24,509,322
=========== ===========
ASSET MANAGER INDEX 500
PORTFOLIO++++ PORTFOLIO++++
------------------------------ -----------------------------
1998 1997 1998 1997*
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) .................. $ 70,534 $ 42,396 ($ 79,516) ($ 18,044)
Net realized gains (losses) from
investment transactions ...................... 448,318 234,747 95,305 303
Net change in unrealized appreciation/
depreciation of investments .................. 156,671 324,115 2,165,015 202,226
---------- ---------- ----------- ---------
Net increase (decrease) in net assets
resulting from operations ..................... 675,523 601,258 2,180,804 184,485
---------- ---------- ----------- ---------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments ............................. 1,443,285 1,898,036 11,906,022 4,226,105
Surrender benefits ............................ (195,034) (102,809) (339,940) (10,032)
Net Transfers ................................. (213,530) (320,483) (1,763,815) (93,068)
Contract administration charges ............... (1,882) (1,403) (2,179) (80)
Annuity benefits .............................. (126,596) (138,107) (102,850) (20,133)
---------- ---------- ----------- ---------
Net increase (decrease) in net assets
resulting from variable annuity
activities .................................... 906,243 1,335,234 9,697,238 4,102,792
---------- ---------- ----------- ---------
Total increase (decrease) in net assets ....... 1,581,766 1,936,492 11,878,042 4,287,277
NET ASSETS:
Beginning of year ............................. 4,488,173 2,551,681 4,287,277 --
---------- ---------- ----------- ---------
END OF YEAR ................................... $6,069,939 $4,488,173 $16,165,319 $4,287,277
========== ========== =========== ==========
</TABLE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENT IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI PORTFOLIOS,
INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. AS OF
MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS
FUNDS I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-17
<PAGE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENTS OF CHANGES IN NET ASSETS -- FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997 (CONT'D)
<TABLE>
<CAPTION>
EMERGING MARKETS
PORTFOLIO++++
-----------------------------
1998 1997*
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ............... ($ 8,349) $ 379
Net realized gains (losses) from
investment transactions .................. (2,786) 117
Net change in unrealized appreciation/
depreciation of investments .............. (349,138) (243,647)
--------- ----------
Net increase (decrease) in net assets
resulting from operations .................. (360,273) (243,151)
--------- ----------
VARIABLE ANNUITY ACTIVITIES:
Purchase payments .......................... 1,045,031 1,561,094
Surrender benefits ......................... (45,908) (9,426)
Net Transfers .............................. (161,016) (317,178)
Contract administration charges ............ (409) (30)
Annuity benefits ........................... (9,288) (3,065)
--------- ----------
Net increase (decrease) in net assets
resulting from variable annuity
activities ................................. 828,410 1,231,395
--------- ----------
Total increase (decrease) in net assets..... 468,137 988,244
NET ASSETS:
Beginning of year .......................... 988,244 --
--------- ----------
END OF YEAR ................................ $1,456,381 $ 988,244
========== ==========
</TABLE>
- -----------
* FOR THE PERIOD FROM MAY 1, 1997 (DATE FUND BECAME AVAILABLE FOR INVESTMENT
TO CONTRACT OWNERS) TO DECEMBER 31, 1997.
+ INVESTMENT IN PENN SERIES FUNDS, INC.
++ INVESTMENT IN NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
+++ INVESTMENT IN AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. (TCI PORTFOLIOS,
INC.'S NAME CHANGED TO AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. AS OF
MAY 1, 1997)
++++ INVESTMENT IN FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS
FUNDS I AND II
+++++ INVESTMENT IN MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
B-18
<PAGE>
PIA VARIABLE ANNUITY ACCOUNT I
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1998
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of Penn Insurance and Annuity Variable
Annuity Account I (Account I) are as follows:
GENERAL -- Account I was established by The Penn Insurance and Annuity
Company (PIA) under the provisions of the Pennsylvania Insurance Law. Account I
is registered under the Investment Company Act of 1940, as amended, as a unit
investment trust. Account I offers units to variable annuity contract owners 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, 1998 and the reported amounts from operations
and annuity activities during 1998 and 1997. Actual results could differ with
those estimates. Certain 1997 amounts have been reclassified to conform with
1998 presentation.
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, Small
Capitalization and Emerging Growth Funds; Neuberger Berman Advisers Management
Trust (AMT): Limited Maturity Bond, Balanced and Partners Portfolios; American
Century Variable Portfolios, Inc. (ACI): Capital Appreciation Portfolio;
Fidelity Investments' Variable Insurance Products (Fidelity): Equity Income,
Growth, Asset Manager and Index 500 Portfolios; and Morgan Stanley Dean Witter
Universal Funds, Inc. (Morgan Stanley): Emerging Markets Equity Portfolio. Penn
Series, AMT, ACI, Fidelity and Morgan Stanley are open-end diversified
management investment companies. The investment in shares of these funds or
portfolios are carried at market value as determined by the underlying net
asset value of the respective funds or portfolios. 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.
DIVERSIFICATION REQUIREMENTS -- Under the provisions of Section 817(h) of
the Internal Revenue Code, a variable annuity contract other than a contract
issued in connection with certain types of employee benefit plans will not be
treated as an annuity contract for federal tax purposes for any period for
which the investments of the segregated asset account on which the contract is
based are not adequately diversified. The Code provides that the "adequately
diversified" requirement may be met if the underlying investments satisfy
either a statutory safe harbor test or diversification requirements set forth
in regulations issued by the Secretary of Treasury. The Internal Revenue
Service has issued regulations under 817(h) of the Code. PIA believes that
Account I satisfies the current requirements of the regulations, and it intends
that Account I will continue to meet such requirements.
B-19
<PAGE>
NOTE 2. PURCHASES AND SALES OF INVESTMENTS
The following table shows aggregate cost of shares purchased and proceeds
from sales of each fund or portfolio for the year ended December 31, 1998:
Purchases Sales
-------------- --------------
Money Market Fund .......................... $ 19,368,931 $14,109,123
Quality Bond Fund .......................... 6,396,190 1,571,598
High Yield Bond Fund ....................... 5,137,625 1,316,758
Growth Equity Fund ......................... 6,046,452 1,374,908
Value Equity Fund .......................... 13,723,781 3,605,069
Flexibly Managed Fund ...................... 29,234,402 6,023,862
International Equity Fund .................. 4,076,359 1,639,369
Small Capitalization Fund .................. 3,607,094 1,633,312
Emerging Growth Fund ....................... 3,845,280 1,364,864
Balanced Portfolio ......................... 2,552,092 604,784
Limited Maturity Bond Portfolio ............ 1,955,899 1,195,840
Partners Portfolio ......................... 6,264,530 649,677
Capital Appreciation Portfolio ............. 593,361 937,315
Equity Income Portfolio .................... 9,791,491 2,256,762
Growth Portfolio ........................... 10,862,053 3,643,923
Asset Manager Portfolio .................... 1,868,755 446,799
Index 500 Portfolio ........................ 11,360,878 1,595,682
Emerging Markets Equity Portfolio .......... 1,067,509 247,838
------------ -----------
Total ...................................... $137,752,682 $44,217,483
============ ===========
NOTE 3. CONTRACT CHARGES
Operations are charged for mortality and expense risks assumed by PIA and
for administering at an annual rate of 1.25% and 0.15% respectively, of the
average value of Account I. As reimbursement for expenses incurred in
administering the contract, PIA receives $30 per year from each annuity
contract prior to the contract's date of maturity. The $30 charge is waived on
certain contracts.
If a policy is surrendered within the first 7 years, a contingent deferred
sales charge may be assessed. This charge will be deducted before any surrender
proceeds are paid. See original contract documents for special charges
assessed.
B-20
<PAGE>
Note 4. Unit Values
As of December 31, 1998, the accumulation units and accumulation unit
values are as follows:
Accumulation Accumulated
Units Unit Value
-------------- ------------
Pennant Variable Annuity Contract
Money Market Fund ......................... 1,143,557 $ 11.46
Quality Bond Fund ......................... 757,765 $ 13.34
High Yield Bond Fund ...................... 806,706 $ 14.53
Growth Equity Fund ........................ 569,824 $ 24.22
Value Equity Fund ......................... 2,077,252 $ 20.78
Flexibly Managed Fund ..................... 5,522,285 $ 15.95
International Equity Fund ................. 998,105 $ 17.47
Small Capitalization Fund ................. 786,502 $ 14.30
Emerging Growth Fund ...................... 347,843 $ 18.46
Balanced Portfolio ........................ 380,135 $ 16.00
Limited Maturity Bond Portfolio ........... 319,947 $ 11.91
Partners Portfolio ........................ 677,892 $ 12.74
Capital Appreciation Portfolio ............ 278,560 $ 11.13
Equity Income Portfolio ................... 1,974,265 $ 19.74
Growth Portfolio .......................... 1,557,325 $ 24.77
Asset Manager Portfolio ................... 346,777 $ 17.50
Index 500 Portfolio ....................... 1,051,390 $ 15.38
Emerging Markets Equity Portfolio ......... 217,260 $ 6.70
B-21
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
THE PENN INSURANCE AND ANNUITY COMPANY
WILMINGTON, DELAWARE
We have audited the accompanying balance sheets of The Penn Insurance and
Annuity Company (a wholly-owned subsidiary of The Penn Mutual Life Insurance
Company) as of December 31, 1998 and 1997, and the related income statements,
statements of changes in stockholder's equity and statements of cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of the
Company for the year ended December 31, 1996 were audited by other auditors
whose report dated January 31, 1997 expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Penn Insurance and Annuity
Company as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 29, 1999
B-22
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------------------------
(in thousands, except per share amount)
<S> <C> <C>
ASSETS
Debt securities, at fair value .................................... $ 690,583 $ 659,215
Equity securities, at fair value .................................. 66 702
Mortgage loan on real estate ...................................... 2,153 2,403
Real estate, net of accumulated depreciation ...................... -- 2,916
Policy loans ...................................................... 270,611 253,886
Short-term investments ............................................ 948 2,741
----------- -----------
TOTAL INVESTMENTS ................................................ 964,361 921,863
Cash and cash equivalents ......................................... 4,226 1,510
Investment income due and accrued ................................. 21,730 21,019
Deferred acquisition costs ........................................ 86,706 93,007
Amounts recoverable from reinsurers ............................... 6,655 5,066
Other assets ...................................................... 64 5,302
Separate account assets ........................................... 371,872 290,539
----------- -----------
TOTAL ASSETS ..................................................... $ 1,455,614 $ 1,338,306
=========== ===========
LIABILITIES
Reserves for payment of future policy benefits .................... $ 85,808 $ 73,493
Other policyholder funds .......................................... 784,466 770,762
Accrued income tax payable:
Current .......................................................... 1,807 251
Deferred ......................................................... 25,250 23,225
Other liabilities ................................................. 13,955 14,179
Separate account liabilities ...................................... 371,872 290,539
----------- -----------
TOTAL LIABILITIES ................................................ 1,283,158 1,172,449
----------- -----------
STOCKHOLDER'S EQUITY
Common stock, $2 par value; 1,000 shares authorized, issued,
and outstanding .................................................. 2,000 2,000
Additional paid-in capital ........................................ 93,369 103,369
Retained earnings ................................................. 63,561 52,266
Accumulated other comprehensive income - unrealized gains ......... 13,526 8,222
----------- -----------
TOTAL STOCKHOLDER'S EQUITY ....................................... 172,456 165,857
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ..................... $ 1,455,614 $ 1,338,306
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-23
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations ....................... $ 16,284 $ 29,761 $ 25,882
Policy fee income ........................................ 23,893 20,207 19,344
Net investment income .................................... 65,837 62,542 62,783
Net realized capital gains ............................... 1,729 106 2,311
Other income ............................................. 6,557 4,905 5,507
-------- -------- --------
TOTAL REVENUE ........................................... 114,300 117,521 115,827
-------- -------- --------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries ......... 55,587 53,112 51,575
Increase in liability for future policy benefits ......... 13,167 25,596 22,468
General expenses ......................................... 6,706 7,517 8,596
Amortization of deferred acquisition costs ............... 9,923 2,640 6,773
-------- -------- --------
TOTAL BENEFITS AND EXPENSES ............................. 85,383 88,865 89,412
-------- -------- --------
Income Before Income Taxes ............................... 28,917 28,656 26,415
Federal income taxes/(benefit):
Current ................................................. 11,453 7,975 8,983
Deferred ................................................ (831) 3,166 592
-------- -------- --------
NET INCOME ............................................. $ 18,295 $ 17,515 $ 16,840
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-24
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Additional Other Total
Common Paid-In Retained Comprehensive Stockholder's
FOR THE YEARS ENDED DECEMBER 31, Stock Capital Earnings Income Equity
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 .................... $ 2,000 $ 103,369 $ 17,911 $ 5,478 $ 128,758
Net income for 1996 .......................... -- -- 16,840 -- 16,840
Other comprehensive income, net of tax:
Unrealized depreciation of securities,
net of reclassification adjustment ......... -- -- -- (3,343) (3,343)
------- --------- -------- -------- ---------
Comprehensive Income ......................... 13,497
------- --------- -------- -------- ---------
BALANCE AT DECEMBER 31, 1996 .................. 2,000 103,369 34,751 2,135 142,255
Net income for 1997 .......................... -- -- 17,515 -- 17,515
Other comprehensive income, net of tax:
Unrealized appreciation of securities,
net of reclassification adjustment ......... -- -- -- 6,087 6,087
------- --------- -------- -------- ---------
Comprehensive Income ......................... 23,602
------- --------- -------- -------- ---------
BALANCE AT DECEMBER 31, 1997 .................. 2,000 103,369 52,266 8,222 165,857
Net income for 1998 .......................... -- -- 18,295 -- 18,295
Other comprehensive income, net of tax:
Unrealized appreciation of securities,
net of reclassification adjustment ......... -- -- -- 5,304 5,304
------- --------- -------- -------- ---------
Comprehensive Income ......................... 23,599
Dividend paid to Penn Mutual ................. -- -- (7,000) -- (7,000)
Return of capital to Penn Mutual ............. -- (10,000) -- -- (10,000)
------- --------- -------- -------- ---------
BALANCE AT DECEMBER 31, 1998 .................. $ 2,000 $ 93,369 $ 63,561 $ 13,526 $ 172,456
======= ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-25
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................. $ 18,295 $ 17,515 $ 16,840
Adjustments to reconcile net income to net cash provided by operations:
Capitalization of policy acquisition costs ............................ (6,496) (7,196) (7,527)
Amortization of deferred acquisition costs ............................ 9,923 2,640 6,773
Policy fees on universal life and investment contracts ................ (26,722) (23,228) (19,344)
Interest credited on universal life and investment contracts .......... 38,520 38,468 38,366
Realized capital gains ................................................ (1,729) (106) (2,311)
(Increase)/decrease in accrued investment income ...................... (711) (795) (5,967)
(Increase)/decrease in amounts due from reinsurers .................... (1,589) (135) 884
Increase in future policy benefit reserves ............................ 12,315 25,571 21,213
Increase/(decrease) in federal income taxes payable ................... 725 (1,377) 907
Other, net ............................................................ 4,411 (13,241) 13,961
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 46,942 38,116 63,795
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of investments:
Debt securities available for sale .................................... 295,710 142,773 118,240
Real estate investments ............................................... 3,450 -- 2,849
Equity securities ..................................................... 1,286 3,747 --
Mortgage loans ........................................................ -- -- 159
Maturity and other principal repayments:
Debt securities available for sale .................................... 74,315 69,239 46,805
Mortgage loans ........................................................ 150 5,527 11,015
Cost of investments acquired:
Debt securities available for sale .................................... (387,885) (299,645) (236,556)
Equity securities ..................................................... (644) -- --
Mortgage loans ........................................................ -- (75) (561)
Real estate ........................................................... (12) (236) (229)
(Increase)/decrease in short-term investments ......................... 1,793 30,674 (12,559)
Increase in policy loans, net ......................................... (16,725) (7,157) (12,287)
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES ............................... (28,562) (55,153) (83,124)
---------- ---------- ----------
</TABLE>
- continued -
The accompanying notes are an intergral part of these financial statements.
B-26
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits for universal life and investment contracts ......... $ 116,022 $ 166,741 $ 153,713
Withdrawals from universal life and investment contracts ..... (72,187) (35,060) (29,269)
Transfers to separate accounts ............................... (42,499) (115,104) (105,011)
Return of capital/dividends to Penn Mutual ................... (17,000) -- --
--------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................. (15,664) 16,577 19,433
--------- ---------- ----------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS .............................................. 2,716 (460) 104
CASH AND CASH EQUIVALENTS
Beginning of the year ....................................... 1,510 1,970 1,866
--------- ---------- ----------
End of the year ............................................. $ 4,226 $ 1,510 $ 1,970
========= ========== ==========
</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, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
The Penn Insurance and Annuity Company (the "Company") was founded in 1980
and commenced business in 1981 as 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.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. The preparation of financial
statements requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and notes to the financial
statements.
NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. The initial application of SFAS No.
130, requires the restatement of prior year financials to reflect the
components of comprehensive income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to
be recognized in the statement of financial position as either assets or
liabilities and measured at fair value. The corresponding derivative gains and
losses should be reported based on hedge relationships that exist. Changes in
the fair value of derivatives that are not designated as hedges or that do not
meet the hedge accounting criteria in SFAS No. 133, are required to be reported
in earnings. SFAS No. 133 is effective for fiscal years beginning after June
15, 1999. Adoption of SFAS No. 133 is not expected to have a material effect on
the Company's financial condition or results of operations.
INVESTMENTS
Debt securities (bonds, notes, redeemable preferred stocks and
mortgage-backed securities) which might be sold prior to maturity are
classified as available for sale. These securities are carried at fair value,
with the change in unrealized gains and losses reported in other comprehensive
income. Interest on debt securities is credited to income as it is earned. Debt
securities are amortized using the scientific method. These assumptions are
consistent with the current interest rate and economic environments. The
retrospective adjustment method is used to value all securities.
Equity securities are classified as available for sale and carried at fair
value. Dividends on equity securities are credited to income on their
ex-dividend dates.
The Company regularly evaluates the carrying value of debt and equity
securities based on current economic conditions, past credit loss experience
and other circumstances of the investee. A decline in a security's fair value
that is deemed to be other than temporary is treated as a realized loss and a
reduction in the cost basis of the security.
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and valuation allowances. Valuation allowances on
impaired loans are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the collateral
value if the loan is collateral dependent. However, if foreclosure is or
becomes probable, the measurement method used is collateral value.
Real estate held for sale is carried at the lower of depreciated cost or
fair value less selling costs. Valuation reserves are established for
properties held for sale when the fair value less estimated selling costs is
below depreciated cost.
Policy loans are carried at the unpaid principal balances.
B-28
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Short-term investments include securities purchased with a maturity date,
at date of purchase, of 90 days to less than one year. Short-term investments
are valued at cost.
Realized gains and losses are determined by specific identification and
are included in income on the trade date, net of amortization of deferred
acquisition costs. Unrealized gains and losses, net of appropriate taxes and
amortization of deferred acquisition costs, are accounted for as a separate
component of other comprehensive income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments
and other debt securities with a maturity of 90 days or less when purchased.
DEFERRED ACQUISITION COSTS
Costs of acquiring new insurance and annuity contracts, which vary with
and are primarily related to the production of new business, have been deferred
to the extent that such costs are deemed recoverable from future gross profits.
Such costs include commissions, certain costs of policy issuance and
underwriting, and certain variable agency expenses.
Deferred acquisition costs related to universal life insurance policies
and annuity products, without mortality risk, that include significant
surrender charges, are being amortized over the lesser of the estimated or
actual contract life in proportion to estimated gross profits arising
principally from interest, mortality, expense margins and surrender charges.
The effects on amortization of deferred acquisition costs of revisions to
estimated gross profits are reflected in earnings in the period such estimated
gross profits are revised. Deferred acquisition costs are reviewed to determine
that the unamortized portion of such costs is still recoverable from future
estimated gross profits. Certain costs and expenses reported in the income
statements are net of amounts deferred.
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.
INSURANCE LIABILITIES AND REVENUE RECOGNITION
RIDERS ON UNIVERSAL LIFE POLICIES AND LIFE CONTINGENT ANNUITY PRODUCTS
Future policy benefits include reserves for riders on universal life
insurance policies and life contingent annuity products and are established in
amounts adequate to meet the estimated future obligations of the policies in
force. Liabilities for these riders are unearned cost of insurance charges
using statutory assumptions for investment yields and mortality. Interest rate
assumptions used in the calculation of the liabilities for universal life
riders ranged from 3.5% to 4.5%. Premiums are recognized as income when due.
Death and surrender benefits are reported in expense as incurred.
Liabilities for the life contingent annuity products are computed by
estimating future benefits and expenses. Assumptions are based on Company
experience projected at the time of policy issue, with provision for adverse
deviations. Interest rate assumptions range from 5.09% to 13.25%. Premiums are
recognized in income as they are received. Death and surrender benefits are
reported in expense as incurred.
UNIVERSAL LIFE AND OTHER ANNUITY PRODUCTS
Other policyholder funds represent liabilities for universal life and
investment-type annuity products. The liabilities for these products are based
on the contract account value which consists of deposits received from
customers and investment earnings on the account value, less administrative and
expense charges. The liability for universal life products is also reduced by
mortality charges. Liabilities for the non-life contingent annuity products are
computed by estimating future benefits and expenses. Assumptions are based on
Company experience projected at the time of policy issue. Interest rate
assumptions range from 3.0% to 7.85%.
B-29
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
Contract charges assessed against account value for universal life and
investment-type annuities are reflected as policy fee income in revenue.
Interest credited to account values and universal life benefit claims in excess
of fund values are reflected as benefit expense.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its
parent, Penn Mutual. Federal income taxes are charged or credited to operations
based upon amounts estimated to be payable or recoverable as a result of
taxable operations for the current year. Deferred income tax assets and
liabilities are established to reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. These deferred tax
assets or liabilities are measured by using the enacted tax rates expected to
apply to taxable income in the period in which the deferred tax liabilities or
assets are expected to be settled or realized.
REINSURANCE
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company has set its retention limit for
acceptance of risk on life insurance policies at various levels up to $100 with
over one-half of its life insurance in force ceded to Penn Mutual.
Insurance liabilities are reported before the effects of reinsurance.
Reinsurance receivables (including amounts related to insurance liabilities)
are reported as assets. Estimated reinsurance receivables are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts.
2. INVESTMENTS:
DEBT SECURITIES
The following tables summarize the Company's investment in debt
securities. All debt securities are classified as available for sale and are
carried at estimated fair value. Amortized cost is net of cumulative writedowns
for other than temporary declines in value of $461 as of December 31, 1998. The
Company did not write down any securities for other than temporary declines in
value as of December 31, 1997.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 4,940 $ 165 $ -- $ 5,105
Foreign governments ................................... 4,828 548 -- 5,376
Corporate securities .................................. 374,947 21,940 1,173 395,714
Mortgage and other asset-backed securities ............ 276,845 8,190 647 284,388
-------- ------- ------ --------
TOTAL ............................................... $661,560 $30,843 $1,820 $690,583
======== ======= ====== ========
December 31, 1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
U.S. Treasury securities and U.S. Government and agency
securities ........................................... $ 30,172 $ 1,894 $ -- $ 32,066
Foreign governments ................................... 4,788 495 -- 5,283
Corporate securities .................................. 343,315 10,722 333 353,704
Mortgage and other asset-backed securities ............ 261,453 6,761 52 268,162
-------- ------- ---- --------
TOTAL ............................................... $639,728 $19,872 $385 $659,215
======== ======= ==== ========
</TABLE>
B-30
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following tables summarize the amortized cost and estimated fair value
of debt securities as of December 31, 1998 by contractual maturity.
Amortized Estimated
Cost Fair Value
----------- -----------
Years to Maturity:
One or less ........................................ $ 37,029 $ 38,553
After one through five ............................. 97,391 101,034
After five through ten ............................. 80,625 86,459
After ten .......................................... 169,670 180,149
Mortgage and other asset-backed securities ......... 276,845 284,388
-------- --------
TOTAL ............................................ $661,560 $690,583
======== ========
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 are presented
separately in the maturity schedule due to the potential for prepayment. The
weighted average life of these securities is 5.5 years.
At December 31, 1998, the Company held $284,388 in mortgage and other
asset-backed securities. The structured securities portfolio consists of
commercial and residential mortgage pass-through holdings totaling $238,381 and
securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $46,007. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $209,652 are rated AAA and include $1,713 of interest only
tranches that were retained from the securitization of the Company's mortgage
loan portfolio.
At December 31, 1998, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $112,450, representing 17%
of the total debt portfolio.
Proceeds during 1998, 1997 and 1996 from sales of available-for-sale
securities were $295,710, $142,773 and $118,240. Gross gains and gross losses
realized on those sales were $7,459 and $4,775, respectively, during 1998,
$1,653 and $921, respectively, during 1997 and $2,138 and $363, respectively,
for 1996.
The Company's investment portfolio of debt securities is predominantly
comprised of investment grade securities. At December 31, 1998 and 1997, debt
securities with amortized cost totaling $19,401 and $15,302, respectively, were
less than investment grade. At December 31, 1998, the Company held securities
with a carrying value of $1,261 which are to be restructured pursuant to
commenced negotiations. At December 31, 1997, the Company did not hold any
securities which were either in default as to principal and/or interest
payments, were to be restructured pursuant to commenced negotiations or were in
situations where the borrowers went into bankruptcy subsequent to acquisition.
The Company did not hold any debt securities which were non-income producing
for the preceding twelve months as of December 31, 1998 and 1997.
At December 31, 1998 and 1997, the Company held no debt securities with
restructured or modified terms.
EQUITY SECURITIES
During 1998 and 1997, the proceeds from the sales of equity securities
amounted to $1,286 and $3,747, respectively. The gross gains on those sales
were $206 and $177 for 1998 and 1997, respectively. There were no sales of
equity securities during 1996.
MORTGAGE LOANS
On August 29, 1996, in conjunction with its parent, the Company
securitized the majority of its mortgage loan portfolio by transferring the
loans to a trust which qualifies as a REMIC (Real Estate Mortgage Investment
Conduit) under the Internal Revenue Code. Prior to transferring the loans with
a principal value of $65,852 and a book value of $65,821, the loans were
written down to a fair market value of $63,466, and a related reserve of $2,355
was released. 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 interest in the trust. The cash flow
from the mortgages will be used to repay the
B-31
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
certificates over an average life of 4.28 years. The actual date on which the
principal amount of the notes may be paid in full could be substantially
earlier or later based on 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.
The Company retained 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. As of December 31, 1998, the par value and fair value of these
securities was $38,703 and $39,959, respectively. As of December 31, 1997, the
par value and fair value of these securities was $47,891 and $50,169,
respectively. 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 and were
retained by the Company had a book value of $19,075 with a related reserve of
$2,971 and an estimated fair value of $16,354 on the date of the
securitization. Loans which 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. The writedown of $2,721 was fully offset by a release in mortgage
loss reserve. As of December 31, 1998 and 1997, the Company did not hold any of
these loans. The Company intends to hold mortgage loans with a book value of
$2,686 on the date of the securitization through their remaining terms. As of
December 31, 1998 and 1997, the Company held $2,353 and $2,503, respectively,
of these loans. The Company discontinued the origination of commercial mortgage
loans in 1996.
Mortgage loans as of December 31, 1998 and 1997 consisted of a loan on an
office building in the state of New York. The carrying value of the mortgage
loan was $2,353 and $2,503 and the valuation allowance was $(200) as of
December 31, 1998 and 1997. The mortgage loan was not impaired or delinquent.
REAL ESTATE
The Company had no real estate holdings at December 31, 1998. The Company
had real estate held for sale with a carrying value of $2,916 net of a
valuation reserve of $235 at December 31, 1997.
OTHER
Investments on deposit with regulatory authorities as required by law were
$3,620 at December 31, 1998 and 1997.
As of December 31, 1998 and 1997, the Company's investments included
$39,959 and $50,169, respectively, of the tranches retained from the 1996
securitization of the Company's commercial mortgage loan portfolio. These
investments represented 23% and 30% of stockholder's equity as of December 31,
1998 and 1997, respectively.
3. INVESTMENT INCOME AND CAPITAL GAINS:
The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.
1998 1997 1996
---------- ---------- ----------
Debt securities ..................... $47,385 $43,915 $35,009
Equity securities ................... 6 362 265
Mortgage loans ...................... 277 1,130 8,257
Real estate ......................... 273 781 932
Policy loans ........................ 18,622 17,777 18,346
Short-term investments .............. 578 709 2,207
------- ------- -------
Gross investment income ............. 67,141 64,674 65,016
Less: Investment expenses .......... 1,304 2,132 2,233
------- ------- -------
Investment income, net .............. $65,837 $62,542 $62,783
======= ======= =======
B-32
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
The following table summarizes net realized capital gains/(losses) on
investments for the year ended December 31. Net realized capital gains/(losses)
include changes in valuation allowances of $135, $792 and $4,949 during 1998,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Debt securities ..................................... $ 2,223 $ 732 $1,775
Equity securities ................................... 206 177 --
Mortgage loans ...................................... (100) (1,432) (17)
Real estate ......................................... 569 692 553
Amortization of deferred acquisition costs .......... (1,169) (63) --
-------- -------- ------
Realized gains ...................................... $ 1,729 $ 106 $2,311
======== ======== ======
</TABLE>
The following table summarizes the change in unrealized gains and losses
for investments carried at fair value which are reflected in other
comprehensive income for the year ended December 31.
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ------------
<S> <C> <C> <C>
Unrealized gains/(losses):
Debt securities ................................ $9,536 $15,127 $ (9,283)
Equity securities .............................. (200) (265) 69
------ ------- --------
9,336 14,862 (9,214)
------ ------- --------
Less:
Deferred policy acquisition costs .............. 1,175 5,497 (4,051)
Deferred income taxes .......................... 2,857 3,278 (1,820)
------ ------- --------
Net change in unrealized gains/(losses) ......... $5,304 $ 6,087 $ (3,343)
====== ======= ========
</TABLE>
The following table sets forth the reclassification adjustment required to
avoid double-counting in comprehensive income items that are included as part
of net income for a period that also had been part of other comprehensive
income in earlier periods:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ------------
<S> <C> <C> <C>
RECLASSIFICATION ADJUSTMENTS
Unrealized holding gains/(losses) arising during period .............. $6,481 $6,819 $ (2,701)
Reclassification adjustment for gains included in net income ......... 1,177 732 642
------ ------ --------
Unrealized gains/(losses) on investments, net of reclassification
adjustment .......................................................... $5,304 $6,087 $ (3,343)
====== ====== ========
</TABLE>
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of $1,434,
$829 and $920, respectively, and $1,487, $808 and $1,066, respectively,
relating to the effects of such amounts on deferred acquisition costs.
B-33
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
4. FAIR VALUE INFORMATION:
The following table summarizes the carrying value and estimated fair value
of the Company's financial instruments as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Available for sale ...................... $690,583 $690,583 $659,215 $659,215
Equity securities
Common stock ............................ 66 66 -- --
Non-redeemable preferred stocks ......... -- -- 702 702
Mortgage loans ............................ 2,153 2,361 2,403 2,523
Policy loans .............................. 270,611 270,611 253,886 253,886
Cash and cash equivalents ................. 4,226 4,226 1,510 1,510
Short-term investments .................... 948 948 2,741 2,741
Separate account assets ................... 371,872 371,872 290,539 290,539
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities .................... $ 62,912 $ 65,889 $ 59,333 $ 61,791
Other policyholder funds ................ 721,554 721,554 711,429 711,429
-------- -------- -------- --------
Total policyholder funds .................. 784,466 787,443 770,762 773,220
Separate account liabilities .............. 371,872 371,872 290,539 290,539
</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 estimated fair value of
currently performing mortgage loans is estimated by discounting the cash flows
associated with the investment, 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 discounted cash flow analysis. 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 estimated
fair value of policy loans is calculated by discounting estimated future cash
flows using interest rates currently being offered for similar loans. Loans
with similar characteristics are aggregated for purposes of the calculations.
The carrying values of cash, cash equivalents, and short-term investments
approximate their fair values. The statement values of other policyholder funds
and separate account liabilities approximate their fair values.
The fair values of the Company's liabilities for individual annuities are
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. The statement values of
other policyholder funds and separate account liabilities approximate their
fair values.
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
estimated fair values of liabilities under all of the Company's contracts are
considered in the overall management of interest rate risk. 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.
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 durations and anticipated cash flows of the Company's
assets and liabilities.
B-34
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
In the normal course of business, the Company loans securities under
arrangements in which collateral is obtained in amounts greater than the
current market value of loaned securities. This collateral is held in the form
of cash, cash equivalents or securities issued or guaranteed by the United
States Government. The Company is at risk to the extent the value of loaned
securities exceeds the value of the collateral obtained. The Company controls
this risk by requiring collateral of the highest quality and requiring that
additional collateral be deposited when the market value of loaned securities
increases in relation to the collateral held or the value of the collateral
held decreases in relation to the value of the loaned securities. The Company
had loaned securities outstanding of $4,832 and $12,275 as of December 31, 1998
and 1997, respectively.
5. INCOME TAXES:
The Company follows the asset and liability method of accounting for
income taxes whereby current and deferred tax assets and liabilities are
recognized utilizing currently enacted tax laws and rates. Deferred taxes are
adjusted to reflect tax rates at which future tax liabilities or assets are
expected to be settled or realized.
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. The significant temporary
differences that give rise to the deferred tax assets and liabilities at
December 31 relate to the following:
1998 1997
---------- ----------
DEFERRED TAX ASSETS
Future policy benefits ................... $10,430 $10,003
Allowances for investment losses ......... 231 117
Other .................................... 1,619 2,819
------- -------
Total deferred tax asset ................ 12,280 12,939
------- -------
DEFERRED TAX LIABILITIES
Deferred acquisition costs ............... 28,600 30,094
Unrealized investment gains .............. 7,247 4,390
Other .................................... 1,683 1,680
------- -------
Total deferred tax liability ............ 37,530 36,164
------- -------
NET DEFERRED TAX LIABILITY ................ $25,250 $23,225
======= =======
The federal income taxes attributable to net income are different from the
amounts determined by multiplying net income before federal income taxes by the
expected federal income tax rate. The difference between the amount of tax at
the U.S. federal income tax rate of 35% and the tax provision is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Tax expense at 35% ................................ $ 10,121 $ 10,030 $ 9,245
Increase (decrease) in income taxes resulting from:
Differential earnings amount ..................... 785 1,073 845
Other ............................................ (284) 38 (515)
-------- -------- -------
Federal income tax expense ........................ $ 10,622 $ 11,141 $ 9,575
======== ======== =======
</TABLE>
As a wholly-owned subsidiary of a mutual life insurance company, the
Company is subject to Internal Revenue Code provisions which require mutual,
but not stock, life insurance companies to include the Differential Earnings
Amount (DEA) in each year's taxable income. This amount is computed by
multiplying the Company's average taxable equity base by a prescribed rate,
which is intended to reflect the difference between stock and mutual companies'
earnings rates.
The Internal Revenue Service has examined Penn Mutual's income tax returns
through the year 1994. Management believes that an adequate provision has been
made for any potential assessments.
6. REINSURANCE:
The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. Reinsurance permits recovery of a portion
of losses from reinsurers, although the Company remains primarily liable as the
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<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
direct insurer on all risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of present reinsurers to ensure that amounts due from reinsurers are
collectible. The table below highlights the amounts shown in the accompanying
financial statements.
<TABLE>
<CAPTION>
Assumed Ceded to
Gross from Other Other
Amount Companies Companies Amount
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Life Insurance in Force ......... $3,173,518 $2,780,712 $3,004,492 $2,949,738
Premiums ........................ 16,284 -- -- 16,284
Benefits ........................ 56,200 5,728 6,341 55,587
Reserves ........................ 630,967 239,307 3,016 867,258
DECEMBER 31, 1997:
Life Insurance in Force ......... $3,319,653 $2,910,310 $3,249,025 $2,980,938
Premiums ........................ 29,761 -- -- 29,761
Benefits ........................ 55,221 4,945 7,051 53,112
Reserves ........................ 604,209 240,046 3,371 840,884
</TABLE>
During 1996, the Company had gross premiums of $25,743 and gross benefits
of $14,788, assumed benefits of $5,428 and ceded benefits of $7,091.
The Company assumes and cedes certain risks under reinsurance agreements
with Penn Mutual. Net life insurance in-force assumed from Penn Mutual totaled
$377,815 and $351,009 as of December 31, 1998 and 1997, respectively. The
Company maintained reserves related to these policies of $238,310 and $239,005
as of December 31, 1998 and 1997, respectively. Net premium and annuity
considerations assumed in connection with these agreements were $6,470 and
$7,009 in 1998 and 1997, respectively. Net premium and annuity considerations
assumed in 1996 were $7,160.
The Company's intercompany Yearly Renewable Term (YRT) reinsurance treaty
with its parent, Penn Mutual, which covers certain universal life insurance
products, provides for 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, $5,202, $3,832 and
$4,461 was received by the Company from Penn Mutual as an experience rating
refund in 1998, 1997 and 1996, respectively.
7. RELATED PARTY TRANSACTIONS:
The Company's parent 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 obligation to its policyholders under the terms
of the Company's policies and contracts.
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 1998, 1997 and 1996, the total
expenses incurred under this agreement were $7,606, $8,245 and $8,915,
respectively.
State insurance laws limit the amount of dividends that the Company may
pay to Penn Mutual.
8. COMMITMENTS AND CONTINGENCIES:
The Company and its parent are respondents in a number of proceedings,
some of which involve extracontractual 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, 1998 and 1997, the
Company had no outstanding commitments relating to these investment activities.
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<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)
9. STATUTORY INFORMATION:
State insurance regulatory authorities prescribe or permit statutory
accounting practices for calculating net income and capital and surplus which
differ in certain respects from generally accepted accounting principles
(GAAP). The significant differences relate to deferred acquisition costs, which
are charged to expenses as incurred; federal income taxes, which reflect
amounts that are currently taxable; and benefit reserves, which are determined
using prescribed mortality, morbidity and interest assumptions, and which, when
considered in light of the assets supporting these reserves, adequately provide
for obligations under policies and contracts. In addition, the recording of
impairments in the value of investments under statutory accounting principles
generally lags recognition under GAAP.
The Company's statutory capital and surplus at December 31, 1998 and 1997
was $101,798 and $100,812, respectively. The Company's net income, determined
in accordance with statutory accounting practices, for the years ended December
31, 1998, 1997 and 1996 was $19,382, $16,747 and $15,917, respectively.
10. YEAR 2000 (UNAUDITED):
The services provided by the Company depend on the smooth functioning of
computer systems. Many computer systems in use today cannot recognize the Year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated earlier in this century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. Failure of computer systems could affect pricing, account services, and
the handling of investment transactions, among other things. Penn Mutual
provides all computer services and administration for the Company. Penn Mutual
is providing all Year 2000 analysis, remediation and testing services for the
Company. Penn Mutual began preparing for the Year 2000 actively in 1996. The
effort involves assessing all computers, computer programs and related
equipment, making necessary changes and ensuring that all systems process dates
correctly. Penn Mutual believes that it has designed and implemented an
efficient process for identifying what needs to be changed and is working to
correct and test systems that research shows will be affected by dates in the
Year 2000 and beyond. Penn Mutual expects its computer systems to be Year 2000
compliant.
The Company has relationships with vendors and other service producers
that are not affiliated with the Company. As part of its plan Penn Mutual is
contacting vendors and service providers to obtain assurances that such service
providers have taken appropriate measures to address the Year 2000 issue. Penn
Mutual will assess and attempt to mitigate risks where outside service
providers are not Year 2000 ready. However, there is no assurance that the
failure of outside service providers to complete adequate preparations in a
timely manner, which results in systems interruptions or other consequences,
will not have an adverse effect, directly or indirectly, on the Company.
The cost of addressing the Year 2000 issue is significant but not material
to the Company's financial condition or results of operations. The Company will
continue to incur costs in addressing the Year 2000, but does not anticipate
that the costs will be material going forward.
The foregoing statements are designated Year 2000 Readiness Disclosure
within the meaning of The Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271,S.2392).
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