<PAGE>
Prospectus -- May 1, 2000
Individual Variable and Fixed Annuity Contract -- Flexible Purchase Payments
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PENNANT
PIA VARIABLE ANNUITY ACCOUNT I
THE PENN INSURANCE AND ANNUITY COMPANY
Philadelphia, Pennsylvania 19172 o Telephone (800) 523-0650
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This prospectus describes an individual variable and fixed annuity contract
offered by The Penn Insurance and Annuity Company ("PIA"or the "Company").
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>
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<S> <C>
Penn Series Funds, Inc. Manager
Money Market Fund Independence Capital Management, Inc.
Limited Maturity Bond Fund Independence Capital Management, Inc.
Quality Bond Fund Independence Capital Management, Inc.
High Yield Bond Fund T. Rowe Price Associates, Inc.
Flexibly Managed Fund T. Rowe Price Associates, Inc.
Growth Equity Fund Independence Capital Management, Inc.
Large Cap Value Fund Putnam Investment Management, Inc.
Index 500 Fund Wells Capital Management Incorporated
Mid Cap Growth Fund Turner Investment Partners, Inc.
Mid Cap Value Fund Neuberger Berman Management Inc.
Emerging Growth Fund RS Investment Management, Inc.
Small Cap Value Fund Royce & Associates, Inc.
International Equity Fund Vontobel USA, Inc.
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Neuberger Berman Advisors Management Trust Manager
Balanced Portfolio Neuberger Berman Management Inc.
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Fidelity Investments' Variable Insurance Products Fund Manager
Equity-Income Portfolio Fidelity Management and Research Company
Growth Portfolio Fidelity Management and Research Company
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Fidelity Investments' Variable Insurance Products Fund II Manager
Asset Manager Portfolio Fidelity Management and Research Company
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Morgan Stanley's The Universal Institutional Funds, Inc. Manager
Emerging Markets Equity (International) Portfolio Morgan Stanley Asset Management
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</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.
<PAGE>
<TABLE>
<CAPTION>
PROSPECTUS CONTENTS
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<S> <C>
GLOSSARY........................................................................................................5
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EXPENSES........................................................................................................6
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EXAMPLES OF FEES AND EXPENSES...................................................................................8
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CONDENSED FINANCIAL INFORMATION.................................................................................9
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THE PENN INSURANCE AND ANNUITY COMPANY.........................................................................15
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THE SEPARATE ACCOUNT...........................................................................................15
Accumulation Units................................................................................16
Voting Instructions...............................................................................16
Investment Options in the Separate Account....................................................... 16
Penn Series Funds, Inc. .....................................................................16
Neuberger Berman Advisers Management Trust...................................................17
Fidelity Investments' Variable Insurance Products Fund.......................................18
Fidelity Investments' Variable Insurance Products Fund II....................................18
Morgan Stanley's The Universal Institutional Funds, Inc. ....................................18
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THE FIXED INTEREST ACCOUNT.....................................................................................18
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THE CONTRACT...................................................................................................19
How Do I Purchase a Contract?.....................................................................20
What Types of Annuity Payments May I Choose?......................................................20
Variable Annuity Payments....................................................................20
Fixed Annuity Payments.......................................................................20
Other Information............................................................................20
What Are the Death Benefits Under My Contract?....................................................21
Enhanced Death Benefit.......................................................................21
Choosing a Lump Sum or Annuity...............................................................21
May I Transfer Money Among Subaccounts and the Fixed Interest Accounts?...........................22
Before the Annuity Date......................................................................22
After the Annuity Date.......................................................................22
General Rules................................................................................22
Dollar Cost Averaging........................................................................22
Automatic Rebalancing........................................................................22
May I Withdraw Any of My Money?...................................................................23
Systematic Withdrawals.......................................................................23
403(b) Withdrawals...........................................................................23
Deferment of Payments and Transfers...............................................................23
What Charges Do I Pay?............................................................................24
Administration Charges.......................................................................24
Mortality and Expense Risk Charge............................................................24
Contingent Deferred Sales Charge.............................................................24
Free Withdrawals.............................................................................25
Premium Taxes................................................................................26
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PERFORMANCE INFORMATION........................................................................................26
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MORE INFORMATION ABOUT THE FIXED INTEREST OPTIONS..............................................................26
General Information...............................................................................26
Loans Under Section 403(b) Contracts..............................................................27
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FEDERAL INCOME TAX CONSIDERATIONS..............................................................................27
Withdrawals and Death Benefits....................................................................27
Annuity Payments..................................................................................28
Early Withdrawals.................................................................................28
Transfers.........................................................................................28
Separate Account Diversification..................................................................28
Qualified Plans...................................................................................29
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FINANCIAL STATEMENTS...........................................................................................29
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STATEMENT OF ADDITIONAL INFORMATION CONTENTS...................................................................30
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</TABLE>
<PAGE>
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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.
1
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<TABLE>
<CAPTION>
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EXPENSES
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<S> <C>
Contract Owner Transaction Expenses
Sales Load Imposed on Purchase Payments..................................................................... None
Maximum Contingent Deferred Sales Charge.......................................6% of purchase payments withdrawn*
Exchange Fee.................................................................................................None
Maximum Annual Contract Administration Charge...............................................................$30**
Separate Account Annual Expenses (as a percentage of Variable Account Value)
Mortality and Expense Risk Charge...........................................................................1.25%
Contract Administration Charge............................................................................. 0.15%
------
Total Separate Account Annual Expenses......................................................................1.40%
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* 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.
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</TABLE>
<TABLE>
<CAPTION>
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Penn Series Funds, Inc.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management Administrative Total
Fees and Corporate Accounting Other Fund
(after waiver) Service Fees Fees Expenses Expenses
-------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Money Market (1). . . . . . . 0.20% 0.15% 0.08% 0.08% 0.51%
Limited Maturity Bond(1). 0.30% 0.15% 0.08% 0.03% 0.56%
Quality Bond(1). . . . . . . . . .0.35% 0.15% 0.08% 0.10% 0.68%
High Yield Bond(2). . . . . . 0.50% 0.15% 0.08% 0.09% 0.82%
Flexibly Managed(1). . . . . 0.60% 0.15% 0.05% 0.06% 0.86%
Growth Equity(1). . . . . . . 0.65% 0.15% 0.06% 0.05% 0.91%
Large Cap Value(1). . . . . . . 0.60% 0.15% 0.06% 0.05% 0.86%
Index 500 Fund(1). . . . . . 0.07% 0.09% 0.06% 0.03% 0.25%(3)
Mid Cap Growth Fund(1). 0.70% 0.15% 0.08% 0.07% 1.00%
Mid Cap Value Fund(1). . 0.55% 0.15% 0.08% 0.08% 0.86%
Emerging Growth(2). . . . . 0.73% 0.15% 0.07% 0.09% 1.04%
Small Cap Value(1). . . . . . 0.85% 0.15% 0.08% 0.09% 1.17%
International Equity(1). . . 0.85% 0.15% 0.08% 0.10% 1.18%
</TABLE>
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(1) The expenses are estimates provided by the Funds' investment adviser.
(2) The expenses are for the last fiscal year.
(3) The total expenses for the Index 500 Fund are estimated to be 0.31% if the
Fund's administrator does not waive part of its Administrative and Corporate
Services Fee.
2
<PAGE>
<TABLE>
<CAPTION>
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Neuberger Berman Advisers Management Trust (a)
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management,
Advisory and
Administration Other Total Fund
Fees Expenses Expenses
-------------- -------- -----------
<S> <C> <C> <C>
Balanced........................................................... 0.85% 0.18% 1.03%
</TABLE>
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(a) Neuberger Berman Advisers Management Trust (the "Trust") is divided into
portfolios (each a "Portfolio"). Each Portfolio invests in a corresponding
series ("Series") of the Trust. This table shows the current expenses paid by
the Balanced Portfolio and the Portfolio's share of the current expenses of its
Series. See "Expenses" in the Trust's Prospectus.
<TABLE>
<CAPTION>
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Fidelity Investments' Variable Insurance Products Fund (a)
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
<S> <C> <C> <C>
Equity-Income.............................................. 0.49% 0.07% 0.56%
Growth..................................................... 0.59% 0.06% 0.65%
</TABLE>
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(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 0.57% for the Equity Income
Portfolio and 0.66% for the Growth Portfolio.
<TABLE>
<CAPTION>
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Fidelity Investments' Variable Insurance Products Fund II
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management Fee Other Total Fund
(After Waiver) Expenses Expenses
--------------- -------- -----------
<S> <C> <C> <C>
Asset Manager (a)............................................ 0.54% 0.08% 0.62%
</TABLE>
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(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 0.63% for the Asset Manager
Portfolio.
<TABLE>
<CAPTION>
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Morgan Stanley's The Universal Institutional Funds, Inc.
Underlying Fund Annual Expenses (as a % of portfolio average net assets)
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
<S> <C> <C> <C>
Emerging Markets Equity (International)...................... 1.25% 0.50% 1.75%
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</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., Neuberger Berman Advisers Management
Trust, Fidelity Investments' Variable Insurance Products Fund, Fidelity
Investments' Variable Insurance Products Fund II and Morgan Stanley's The
Universal Institutional Funds, Inc. for additional information on Fund expenses.
3
<PAGE>
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.
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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 Money Market Fund*....................................... $73 $97 $123 $229
Penn Series Limited Maturity Bond Fund*(a)........................... $73 $98 $126 $234
Penn Series Quality Bond Fund*....................................... $74 $102 $132 $247
Penn Series High Yield Bond Fund**................................... $76 $106 $139 $261
Penn Series Flexibly Managed Fund*................................... $76 $107 $141 $265
Penn Series Growth Equity Fund*...................................... $77 $109 $144 $270
Penn Series Large Cap Value Fund*(b)................................. $76 $107 $141 $265
Penn Series Index 500 Fund*(c)....................................... $70 $89 $110 $201
Penn Series Mid Cap Growth Fund*..................................... $77 $111 $148 $279
Penn Series Mid Cap Value Fund*(d)................................... $76 $107 $141 $265
Penn Series Emerging Growth Fund**................................... $78 $113 $150 $283
Penn Series Small Cap Value Fund*(e)................................. $79 $116 $157 $296
Penn Series International Equity Fund*............................... $79 $117 $157 $297
Neuberger Berman Balanced Portfolio**................................ $78 $112 $150 $282
Fidelity's Equity Income Portfolio**................................. $73 $99 $126 $235
Fidelity's Growth Portfolio**........................................ $74 $101 $131 $245
Fidelity's Asset Manager Portfolio**................................. $74 $100 $130 $241
Morgan Stanley Emerging Markets Equity (International) Portfolio**... $84 $133 $185 $351
</TABLE>
You would pay the following expenses on each $1,000 invested by the end of the
year shown (assuming a 5% annual return) if you do not surrender your Contract
or if you annuitize your Contract:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Money Market Fund*....................................... $20 $62 $106 $229
Penn Series Limited Maturity Bond Fund*(a)........................... $20 $63 $108 $234
Penn Series Quality Bond Fund*....................................... $22 $67 $114 $247
Penn Series High Yield Bond Fund**................................... $23 $71 $122 $261
Penn Series Flexibly Managed Fund*................................... $23 $72 $124 $265
Penn Series Growth Equity Fund*...................................... $24 $74 $126 $270
Penn Series Large Cap Value Fund*(b)................................. $23 $72 $124 $265
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Index 500 Fund*(c)....................................... $17 $54 $92 $201
Penn Series Mid Cap Growth Fund*..................................... $25 $76 $131 $279
Penn Series Mid Cap Value Fund*(d)................................... $23 $72 $124 $265
Penn Series Emerging Growth Fund**................................... $25 $78 $133 $283
Penn Series Small Cap Value Fund*(e)................................. $27 $82 $139 $296
Penn Series International Equity Fund*............................... $27 $82 $140 $297
Neuberger Berman Balanced Portfolio**................................ $25 $77 $132 $282
Fidelity's Equity Income Portfolio**................................. $20 $63 $109 $235
Fidelity's Growth Portfolio**........................................ $21 $66 $113 $245
Fidelity's Asset Manager Portfolio**................................. $21 $65 $112 $241
Morgan Stanley Emerging Markets Equity (International) Portfolio**... $32 $99 $167 $351
</TABLE>
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* These examples are based upon estimates of Fund expenses provided by the
Funds' investment adviser.
** These examples are based upon Fund data for the fiscal year ended December
31, 1999.
(a) Neuberger Berman Limited Maturity Bond Fund Portfolio Subaccount prior to
May 1, 2000.
(b) Penn Series Value Equity Fund Subaccount prior to May 1, 2000.
(c) Fidelity Investments' Index 500 Fund Subaccount prior to May 1, 2000.
(d) Neuberger Berman Partners Portfolio Subaccount prior to May 1, 2000.
(e) Penn Series Small Capitalization Fund Subaccount prior to May 1, 2000.
These are only examples. Your expenses may be more or less than what is
shown.
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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.
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PENN SERIES MONEY MARKET FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............... $11.461 $11.066 $10.673 $10.310 $10.000
Accumulation Unit Value,
end of period ..................... $11.831 $11.461 $11.066 $10.673 $10.310
Number of Accumulation Units
outstanding, end of period ........ 1,436,416 1,143,557 709,094 609,075 186,641
</TABLE>
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(a) For the period March 1, 1995 (date subaccount was established) through
December 31, 1995.
5
<PAGE>
<TABLE>
<CAPTION>
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PENN SERIES QUALITY BOND FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period............... $13.344 $12.284 $11.531 $11.229 $10.000
Accumulation Unit Value, end of
period............................. $13.159 $13.344 $12.284 $11.531 $11.229
Number of Accumulation Units
outstanding, end of period......... 727,944 757,765 432,962 275,302 64,152
</TABLE>
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(a) For the period March 1, 1995 (date subaccount was established) through
December 31, 1995.
<TABLE>
<CAPTION>
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PENN SERIES LIMITED MATURITY BOND FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(b)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............... $11.914 $11.573 $10.995 $10.690 $10.000
Accumulation Unit Value, end of
period ............................ $11.922 $11.914 $11.573 $10.995 $10.690
Number of Accumulation Units
outstanding, end of period ........ 261,083 319,947 270,171 214,093 51,495
</TABLE>
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(a) Neuberger Berman Limited Maturity Bond Portfolio Subaccount prior to May 1,
2000.
(b) For the period March 1, 1995(date subaccount was established) through
December 31, 1995.
<TABLE>
<CAPTION>
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PENN SERIES HIGH YIELD BOND FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period................ $14.530 $14.060 $12.315 $10.967 $10.000
Accumulation Unit Value,
end of period...................... $14.936 $14.530 $14.060 $12.315 $10.967
Number of Accumulation Units
outstanding, end of period......... 815,877 806,706 596,879 290,291 57,255
</TABLE>
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(a) For the period March 1, 1995 (date subaccount was established) through
December 31, 1995.
6
<PAGE>
<TABLE>
<CAPTION>
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PENN SERIES FLEXIBLY MANAGED FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period................ $15.948 $15.245 $13.367 $11.649 $10.000
Accumulation Unit Value,
end of period...................... $16.855 $15.948 $15.245 $13.367 $11.649
Number of Accumulation Units
outstanding, end of period......... 4,769,665 5,522,285 4,704,147 2,989,155 591,562
</TABLE>
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(a) For the period March 1, 1995 (date subaccount was established) through
December 31, 1995.
<TABLE>
<CAPTION>
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PENN SERIES GROWTH EQUITY FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............... $24.222 $17.339 $13.873 $11.747 $10.000
Accumulation Unit Value,
end of period ..................... $32.030 $24.222 $17.339 $13.873 $11.747
Number of Accumulation Units
outstanding, end of period ........ 777,680 569,824 403,911 140,629 13,923
</TABLE>
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(a) For the period March 1, 1995 (date subaccount was established) through
December 31, 1995.
<TABLE>
<CAPTION>
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PENN SERIES LARGE CAP VALUE FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995(b)
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .............. $20.780 $19.230 $15.604 $12.640 $10.000
Accumulation Unit Value,
end of period .................... $20.327 $20.780 $19.230 $15.604 $12.640
Number of Accumulation Units
outstanding, end of period ....... 1,925,809 2,077,252 1,768,950 916,524 177,701
</TABLE>
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(a) Penn Series' Value Equity Fund Subaccount prior to May 1, 2000.
(b) For the period March 1, 1995 (date subaccount was established) through
December 31, 1995.
7
<PAGE>
<TABLE>
<CAPTION>
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PENN SERIES INDEX 500 FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
---------------------------------------
1999 1998 1997(b)
---------------------------------------
<S> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............... $15.375 $12.150 $10.000
Accumulation Unit Value,
end of period ..................... $18.271 $15.375 $12.150
Number of Accumulation Units
outstanding, end of period ........ 1,684,923 1,051,390 352,855
</TABLE>
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(a) Fidelity Investments' Index 500 Fund Subaccount prior to May 1, 2000.
(b) For the period May 1, 1997 (date subaccount was established) through
December 31, 1997.
<TABLE>
<CAPTION>
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PENN SERIES MID CAP GROWTH FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(b)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............... $11.130 $11.536 $12.092 $12.817 $10.000
Accumulation Unit Value,
end of period ..................... $18.057 $11.130 $11.536 $12.092 $12.817
Number of Accumulation Units
outstanding, end of period ........ 229,819 278,560 319,882 314,124 71,869
</TABLE>
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(a) American Century Capital Appreciation Portfolio Subaccount prior to May 1,
2000.
(b) For the period March 1, 1995 (date subaccount was established) through
December 31, 1995.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PENN SERIES MID CAP VALUE FUND SUBACCOUNT(a)
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
---------------------------------------
1999 1998 1997(b)
---------------------------------------
<S> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............... $12.741 $12.399 $10.000
Accumulation Unit Value,
end of period ..................... $13.490 $12.741 $12.399
Number of Accumulation Units
outstanding, end of period ........ 727,365 677,892 280,205
</TABLE>
- -----------------------------------
(a) Neuberger Berman Partners Portfolio Subaccount prior to May 1, 2000.
(b) For the period May 1, 1997 (date subaccount was established) through
December 31, 1997.
8
<PAGE>
<TABLE>
<CAPTION>
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PENN SERIES EMERGING GROWTH FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
---------------------------------------
1999 1998 1997(a)
---------------------------------------
<S> <C> <C> <C>
Accumulation Unit Value,
beginning of period .............. $18.457 $13.793 $10.000
Accumulation Unit Value,
end of period .................... $51.877 $18.457 $13.793
Number of Accumulation Units 515,665 347,843 184,859
outstanding, end of period .......
</TABLE>
- -----------------------------------
(a) For the period May 1, 1997 (date subaccount was established) through
December 31, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PENN SERIES SMALL CAP VALUE FUND SUBACCOUNT (a)
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995(b)
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period .............. $14.301 $15.966 $13.161 $11.145 $10.000
Accumulation Unit Value,
end of period .................... $13.915 $14.301 $15.966 $13.161 $11.145
Number of Accumulation Units 712,259 786,502 673,274 353,352 55,394
outstanding, end of period .......
</TABLE>
- ----------------------------------
(a) Penn Series Small Capitalization Fund Subaccount prior to May 1, 2000.
(b) For the period March 1, 1995 (date subaccount was established) through
December 31, 1995.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PENN SERIES INTERNATIONAL EQUITY FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............... $17.465 $14.902 $13.688 $11.880 $10.000
Accumulation Unit Value,
end of period ..................... $25.093 $17.465 $14.902 $13.688 $11.880
Number of Accumulation Units 979,901 998,105 880,235 525,885 54,604
outstanding, end of period ........
</TABLE>
- -----------------------------------
(a) For the period March 1, 1995 (date subaccount was established) through
December 31, 1995.
9
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NEUBERGER BERMAN BALANCED PORTFOLIO SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............... $16.003 $14.467 $12.282 $11.653 $10.000
Accumulation Unit Value,
end of period ..................... $21.078 $16.003 $14.467 $12.282 $11.653
Number of Accumulation Units
outstanding, end of period......... 375,371 380,135 299,996 228,709 69,633
</TABLE>
- -----------------------------------
(a) For the period March 1, 1995 (date subaccount was established) through
December 31, 1995.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' EQUITY INCOME FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............... $19.744 $17.937 $14.199 $12.600 $10.000
Accumulation Unit Value,
end of period ..................... $20.702 $19.744 $17.937 $14.199 $12.600
Number of Accumulation Units
outstanding, end of period ........ 1,986,847 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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' GROWTH FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period................ $24.773 $18.010 $14.791 $13.077 $10.000
Accumulation Unit Value,
end of period...................... $33.574 $24.773 $18.010 $14.791 $13.077
Number of Accumulation Units
outstanding, end of period......... 1,791,053 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.
10
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS' ASSET MANAGER FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995(a)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation Unit Value,
beginning of period................ $17.504 $15.428 $12.968 $11.475 $10.000
Accumulation Unit Value,
end of period...................... $19.175 $17.504 $15.428 $12.968 $11.475
Number of Accumulation
Units outstanding, end of period.... 462,939 346,777 290,902 196,768 51,476
</TABLE>
- -----------------------------------
(a) For the period March 1, 1995 (date subaccount was established) through
December 31, 1995.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY EMERGING MARKETS EQUITY (INTERNATIONAL) FUND SUBACCOUNT
Values of an Accumulation Unit Outstanding Throughout Each Period
Year Ended December 31,
---------------------------------------
1999 1998 1997(a)
---------------------------------------
<S> <C> <C> <C>
Accumulation Unit Value,
beginning of period ............... $ 6.703 $ 8.966 $10.000
Accumulation Unit Value,
end of period ..................... $12.943 $ 6.703 $ 8.966
Number of Accumulation Units
outstanding, end of period ........ 235,834 217,260 110,227
</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, 1999 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. PIA 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.
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
PIA 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.
11
<PAGE>
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.:
Money Market Fund -- seeks to preserve capital, maintain liquidity and
achieve the highest possible level of current income consistent with these
objectives, 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.
Limited Maturity Bond Fund -- seeks highest available current income
consistent with liquidity and low risk to principal through investment primarily
in marketable investment grade debt securities; total return is secondary.
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
12
<PAGE>
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.
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.
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.
Large Cap Value Fund (formerly, "Value Equity Fund") -- seeks to
maximize total return (capital appreciation and income) primarily by investing
in equity securities of companies believed to be undervalued.
Index 500 Fund -- 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.
Mid Cap Growth Fund -- seeks to maximize capital appreciation by
investing primarily in common stocks of U.S. companies with medium market
capitalizations (i.e., between $1 billion and $8 billion) that have strong
earnings growth potential.
Mid Cap Value -- seeks to achieve growth of capital by investing
primarily in U.S. companies with market medium capitalizations that are
undervalued.
Emerging Growth Fund -- seeks capital appreciation by investing
primarily in common stocks of emerging growth companies with above-average
growth prospects.
Small Cap Value Fund (formerly, "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 $1.5 billion.
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.
Independence Capital Management, Inc., Horsham, Pennsylvania is
investment adviser to each of the Funds. Putnam Investment Management, Inc.,
Boston, Massachusetts, is investment sub-adviser to the Large Cap Value Fund. T.
Rowe Price Associates, Baltimore, Maryland, is investment sub-adviser to the
Flexibly Managed and High Yield Bond Funds. Wells Capital Management
Incorporated, San Francisco, California, is investment sub-adviser to the Index
500 Fund. Turner Investment Partners, Inc., Berwyn, Pennsylvania is sub- adviser
to the Mid Cap Growth Fund. Neuberger Berman Management Inc., New York, New
York, is investment sub-adviser to the Mid Cap Value Fund. Royce & Associates,
Inc., New York, New York, is investment sub- adviser to the Small Cap Value
Fund. 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.
Neuberger Berman Advisers Management Trust:
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.
13
<PAGE>
Neuberger Berman Management Inc., New York, New York, is investment
adviser to the Balanced Portfolio.
Fidelity Investments' Variable Insurance Products Fund:
Equity-Income Portfolio -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the fund will also consider the potential for capital appreciation. The fund's
goal is to achieve a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's 500 Composite Stock Price Index.
Growth Portfolio -- seeks to achieve capital appreciation. The fund
normally purchases common stocks, although its investments are not restricted to
any one type of security. Capital appreciation may also be found in other types
of 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.
Fidelity Management & Research Company, Boston, Massachusetts, is
investment adviser to the Asset Manager Portfolio.
Morgan Stanley's The Universal Institutional 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 that are
developing strongly and in which the markets are becoming more sophisticated.
Morgan Stanley Asset Management, 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 Penn Mutual and its subsidiary, The Penn Insurance
and Annuity Company. Shares of Neuberger Berman Advisers Management Trust,
Fidelity Investments' Variable Insurance Products Fund and Variable Insurance
Products Fund II and Morgan Stanley's The Universal Institutional 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's The Universal Institutional 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.
- --------------------------------------------------------------------------------
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
14
<PAGE>
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.,
Neuberger Berman Advisers Management Trust, Fidelity
Investments' Variable Insurance Products Fund, Fidelity
Investments' Variable Insurance Products Fund II and Morgan
Stanley's The Universal Institutional 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.
15
<PAGE>
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
16
<PAGE>
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.
- --------------------------------------------------------------------------------
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.
17
<PAGE>
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.
- --------------------------------------------------------------------------------
May I Transfer Money Among Subaccounts and the Fixed Interest Accounts?
Before the Annuity Date. You may transfer your Contract Value from
among subaccounts of the Separate Account and a fixed interest option of the
Fixed Interest Account.
o The minimum amount that may be transferred is $250 or, if
less, the amount held in the subaccount or Fixed Interest
Account. In the case of partial transfers, the amount
remaining in the subaccount or Fixed Interest Account must be
at least $250.
o You may transfer from the Fixed Interest Account only at the
completion of the interest period or within 25 days
thereafter.
After the Annuity Date. You or the Beneficiary (upon your death or the
death of the Annuitant) may transfer amounts among subaccounts of the Separate
Account.
o The minimum amount that may be transferred is $250 or, if
less, the amount held in the subaccount. In the case of
partial transfers, the amount remaining in the subaccount or
Fixed Interest Account option must be at least $250.
o Transfers are currently limited to the four subaccounts
selected at the time of annuitization.
General Rules. Transfers will be based on values at the end of the
valuation period in which the transfer request is received at our administrative
office. A transfer request must be received at our administrative office, and
all other administrative requirements must be met, to make the transfer. We will
not 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. For
transfers other than dollar cost averaging and automatic rebalancing, we reserve
the right to charge a fee, although we have no present intention of doing so.
The Contract is not designed for individuals and professional market timing
organizations that use programmed and frequent transfers amount investment
options. We therefore reserve the right to change our telephone transaction
policies and procedures at any time to restrict the use of telephone transfers
for market timing and to otherwise restrict market timing when we believe it is
in the interest of all of our Contract Owners to do so.
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
18
<PAGE>
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.
- --------------------------------------------------------------------------------
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.
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.
19
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
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.
20
<PAGE>
Number of Full Contract
Years Since Purchase Payment Applicable Charge
- --------------------------------------------------------------------------------
0 6%
- --------------------------------------------------------------------------------
1 6%
- --------------------------------------------------------------------------------
2 5%
- --------------------------------------------------------------------------------
3 4%
- --------------------------------------------------------------------------------
4 3%
- --------------------------------------------------------------------------------
5 2%
- --------------------------------------------------------------------------------
6 1%
- --------------------------------------------------------------------------------
7+ 0%
- --------------------------------------------------------------------------------
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.
21
<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%.
- --------------------------------------------------------------------------------
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).
- --------------------------------------------------------------------------------
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
22
<PAGE>
distribution requirement under the tax laws. Nor will the premature withdrawal
charge be applied to amounts withdrawn due to the death, total disability, or
defined medical confinement or terminal illness of the owner or annuitant, as
specified in the Contract. In no event will the premature withdrawal charge be
greater than the total amount of interest credited to the applicable fixed
interest option. In accordance with state law, we may defer a withdrawal or
transfer from the Fixed Account for up to six months if we reasonably determine
that investment conditions are such that an orderly sale of assets in the
Company's general account is not feasible.
- --------------------------------------------------------------------------------
Loans Under Section 403(b) Contracts
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
23
<PAGE>
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.
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., Neuberger Berman Advisers
Management Trust, Variable Insurance Products Fund, Variable Insurance Products
Fund II, and Morgan Stanley's The Universal Institutional 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.
24
<PAGE>
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.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of the Company and the financial
statements of the Separate Account at December 31, 1999 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.
25
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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-4
Average Annual Total Return..........................................................................B-4
Annual Rate of Change in Accumulation Unit Values....................................................B-8
- -------------------------------------------------------------------------------------------------------------------
ADMINISTRATION AND RECORDKEEPING SERVICES.....................................................................B-9
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS.....................................................................................B-9
- -------------------------------------------------------------------------------------------------------------------
CUSTODIAN.....................................................................................................B-9
- -------------------------------------------------------------------------------------------------------------------
INDEPENDENT AUDITORS..........................................................................................B-9
- -------------------------------------------------------------------------------------------------------------------
LEGAL MATTERS.................................................................................................B-9
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS..........................................................................................B-9
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 2000
- --------------------------------------------------------------------------------
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,
dated May 1, 2000. 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-2
First Variable Annuity Payments...................................B-2
Subsequent Variable Annuity Payments..............................B-2
Annuity Units.....................................................B-2
Value of Annuity Units............................................B-2
Net Investment Factor.............................................B-2
Assumed Interest Rate.............................................B-3
Valuation Period..................................................B-3
- ------------------------------------------------------------------------------
PERFORMANCE DATA...........................................................B-4
Average Annual Total Return.......................................B-4
Annual Rate of Change in Accumulation Unit Values.................B-8
- ------------------------------------------------------------------------------
ADMINISTRATION AND RECORDKEEPING SERVICES..................................B-9
- ------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS..................................................B-9
- ------------------------------------------------------------------------------
CUSTODIAN..................................................................B-9
- ------------------------------------------------------------------------------
INDEPENDENT AUDITORS.......................................................B-9
- ------------------------------------------------------------------------------
LEGAL MATTERS..............................................................B-9
- ------------------------------------------------------------------------------
FINANCIAL STATEMENTS.......................................................B-9
- ------------------------------------------------------------------------------
<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).
B-2
<PAGE>
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.
- --------------------------------------------------------------------------------
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>
<CAPTION>
Table 1 Average Annual Total Return On $1,000 Investment - Computed as Prescribed by the SEC
Average Annual Total Return
---------------------------------------------------------
From Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager) Date* 12/31/99 12/31/99 12/31/99 12/31/99
- -------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C>
Quality Bond (a)......................... 3/1/1995 5.20% N/A N/A -6.50%
(Independence Capital)
High Yield Bond (a)...................... 3/1/1995 7.97% N/A N/A -2.56%
(T. Rowe Price)
Flexibly Managed (a)..................... 3/1/1995 10.38% N/A N/A -0.23%
(T. Rowe Price)
Growth Equity (a)........................ 3/1/1995 26.45% N/A N/A 25.38%
(Independence Capital)
Large Cap Value (a)(f)................... 3/1/1995 14.90% N/A N/A -7.57%
(Putnam)
Emerging Growth Fund (a)................. 5/1/1997 82.28% N/A N/A 166.67%
(RS Investment Management)
Small Cap Value Fund (a)(f).............. 3/1/1995 6.42% N/A N/A -7.76%
(Royce)
International Equity (a)................. 3/1/1995 20.11% N/A N/A 36.10%
(Vontobel)
Balanced Portfolio (b)................... 3/1/1995 15.89% N/A N/A 24.81%
(Neuberger Berman)
Equity-Income Portfolio (c).............. 3/1/1995 15.53% N/A N/A -0.60%
(Fidelity Investments)
Growth Portfolio (c)..................... 3/1/1995 27.71% N/A N/A 28.55%
(Fidelity Investments)
Asset Manager Portfolio (d).............. 3/1/1995 13.74% N/A N/A 3.89%
(Fidelity Investments)
Emerging Markets Equity (International)(e)
(Morgan Stanley).................... 5/1/1997 8.12% N/A N/A 82.28%
</TABLE>
- ----------
* Date the underlying fund was first offered through a subaccount of the
Separate Account. Performance information is not shown for subaccounts which
began investing in new funds on the date of this prospectus.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
B-4
<PAGE>
Table 2 Average Annual Total Return On $1,000 Investment - Assumes No
Contingent Deferred Sales Charge and Investment on the 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** 12/31/99 12/31/99 12/31/99 12/31/99
- -------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Quality Bond (a)................................ 3/17/1987 6.07% 6.11% 6.71% -1.47%
(Independence Capital)
High Yield Bond (a)............................. 8/6/1984 8.42% 8.77% 9.25% 2.68%
(T. Rowe Price)
Flexibly Managed (a)............................ 7/31/1984 12.34% 9.62% 11.37% 5.16%
(T. Rowe Price)
Growth Equity (a)............................... 6/1/1983 13.90% 15.22% 27.64% 32.13%
(Independence Capital)
Large Cap Value (a)(f).......................... 3/17/1987 11.06% 11.41% 16.60% -2.58%
(Putnam)
Emerging Growth Fund (a)........................ 5/1/1997 85.27% N/A N/A 181.01%
(RS Investment Management)
Small Cap Value Fund (a)(f)..................... 3/1/1995 6.99% N/A N/A -2.80%
(Royce)
International Equity (a)........................ 11/2/1992 16.56% N/A 18.63% 43.43%
(Vontobel)
Balanced Portfolio (b).......................... 2/28/1989 11.49% 10.94% 17.01% 31.53%
(Neuberger Berman)
Equity-Income Portfolio (c)..................... 10/9/1986 12.10% 12.74% 16.73% 4.74%%
(Fidelity Investments)
Growth Portfolio (c)............................ 10/9/1986 17.09% 18.21% 27.87% 35.46%
(Fidelity Investments)
Asset Manager Portfolio (d)..................... 9/6/1989 11.18% 11.52% 13.96% 9.48%
(Fidelity Investments)
Emerging Markets Equity (International) (e)..... 10/1/1996 10.54% N/A N/A 92.08%
(Morgan Stanley)
</TABLE>
- --------------------
* Prior to May 1, 2000, the Limited Maturity Bond, Index 500, Mid Cap Growth
and Mid Cap Value Fund had no assets. Accordingly, no performance
information is presented.
** Date the underlying fund was established
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
B-5
<PAGE>
<TABLE>
<CAPTION>
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
Average Annual Total Return
-----------------------------------------------
From Ten Five One
Inception Years Years Year
Inception Through Ended Ended Ended
Fund (Manager)* Date** 12/31/99 12/31/99 12/31/99 12/31/99
- -------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Quality Bond (a)................................ 3/17/1987 6.11% 6.17% 6.77% -1.40%
(Independence Capital)
High Yield Bond (a)............................. 8/6/1984 8.45% 8.84% 9.33% 2.78%
(T. Rowe Price)
Flexibly Managed (a)............................ 7/31/1984 12.45% 9.95% 11.73% 5.63%
(T. Rowe Price)
Growth Equity (a)............................... 6/1/1983 13.93% 15.29% 27.71% 32.23%
(Independence Capital)
Large Cap Value (a)(f).......................... 3/17/1987 11.22% 11.66% 16.83% -2.22%
(Putnam)
Emerging Growth Fund (a)........................ 5/1/1997 85.32% N/A N/A 181.07%
(RS Investment Management)
Small Cap Value Fund (a)(f)..................... 3/1/1995 7.06% N/A N/A -2.71%
(Royce)
International Equity (a)........................ 11/2/1992 16.73% N/A 18.81% 43.65%
(Vontobel)
Balanced Portfolio (b).......................... 2/28/1989 11.60% 11.07% 17.13% 31.69%
(Neuberger Berman)
Equity-Income Portfolio (c)..................... 10/9/1986 12.41% 12.81% 16.79% 4.84%
(Fidelity Investments)
Growth Portfolio (c)............................ 10/9/1986 17.11% 18.25% 27.91% 35.52%
(Fidelity Investments)
Asset Manager Portfolio (d)..................... 9/6/1989 11.22% 11.56% 14.01% 9.54%
(Fidelity Investments)
Emerging Markets Equity (International) (e)..... 10/1/1996 10.59% N/A N/A 92.11%
(Morgan Stanley)
</TABLE>
- --------------------
* Prior to May 1, 2000, the Limited Maturity Bond, Index 500, Mid Cap Growth
and Mid Cap Value Fund had no assets. Accordingly, no performance
information is presented.
** Date the underlying fund was established
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
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 administration 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.
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.
- --------------------------------------------------------------------------------
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
1999 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.
B-7
<PAGE>
<TABLE>
<CAPTION>
Annual Rate of Change in
Accumulation Unit Values
---------------------------------------------------------
Fund (Manager)* 1999 1998 1997 1996 1995
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Money Market (a) 3.23% 3.56% 3.68% 3.52% 10.31%
(Independence Capital)
Quality Bond (a) -1.39% 8.64% 6.53% 2.69% 11.23%
(Independence Capital)
High Yield Bond (a) 2.79% 3.34% 14.17% 12.29% 10.97%
(T. Rowe Price)
Flexibly Managed (a) 5.68% 4.62% 14.05% 14.75% 11.65%
(T. Rowe Price)
Growth Equity(a) 32.24% 39.70% 24.98% 18.10% 11.75%
(Independence Capital)
Large Cap Value(a)(f) -2.18% 8.06% 23.24% 23.45% 12.64%
(Putnam)
Emerging Growth(a) 181.07% 33.82% 37.93% N/A N/A
(RS Investment Management)
Small Cap Value Fund(a)(f) -2.70% -10.42% 21.31% 18.09% 11.15%
(Royce)
International Equity (a) 43.68% 17.20% 8.87% 16.90% 11.71%
(Vontobel)
Balanced(b) 31.71% 10.62% 17.79% 5.40% 11.65%
(Neuberger Berman)
Equity Income(c) 4.85% 10.08% 26.33% 12.69% 12.60%
(Fidelity Investors)
Growth(c) 35.53% 37.55% 21.76% 13.11% 13.08%
(Fidelity Investors)
Asset Manager(d) 9.55% 13.45% 18.97% 13.01% 11.48%
(Fidelity Investors)
Emerging Markets Equity 93.09% -25.23% -10.34% N/A N/A
(International) (e)
(Morgan Stanley)
</TABLE>
- -----------------------------------------
* Performance information is not shown for subaccounts which began investing
in new funds on the date of this prospectus.
(a) Penn Series Funds, Inc.
(b) Neuberger Berman Advisers Management Trust
(c) Variable Insurance Products Fund
(d) Variable Insurance Products Fund II
(e) The Universal Institutional Funds, Inc.
(f) Prior to May 1, 2000, the Penn Series Large Cap Value Fund Subaccount was
the Penn Series Value Equity Fund Subaccount and the Penn Series Small Cap
Value Fund Subaccount was the Penn Series Small Capitalization Fund
Subaccount, and the Funds in which the Subaccounts invested were managed by
OpCap Advisors.
-----------------------------------------
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.
B-8
<PAGE>
- --------------------------------------------------------------------------------
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 The Penn
Mutual Life Insurance Company, serves as principal underwriter of the Contracts.
The address of Hornor, Townsend & Kent, Inc. is 600 Dresher Road, Horsham, PA
19044. For 1999, 1998 and 1997, the Company paid Hornor, Townsend & Kent, Inc.
underwriting commissions of $67,731, $251,816 and $138,545.
The Contracts will be distributed by Hornor, Townsend & Kent, Inc.
through broker-dealers. Total commissions on purchase payments made under the
Contract will not exceed 6 1/2% and trailer commissions based on a percentage of
Contract Value may be paid. The offering of the Contracts is continuous, and the
Company does not anticipate discontinuing the offering of the Contract, although
we reserve the right to do so.
- --------------------------------------------------------------------------------
CUSTODIAN
The Company is custodian of the assets held in the Separate Account.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
Ernst & Young LLP serve as independent auditors of the 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.
B-9
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The consolidated financial statements of the Company and the financial
statements of the Separate Account at December 31, 1999 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.
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Quality High Yield Growth
Total Market Fund+ Bond Fund+ Bond Fund+ Equity Fund+
------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Investment in Common Stock
Number of Shares ................................... 16,904,443 921,599 1,272,737 601,975
Cost ............................................... $332,673,519 $16,904,443 $9,673,390 $12,047,344 $16,620,183
Assets:
Investments at Market Value ........................ $413,614,709 $16,904,443 $9,584,627 $12,192,816 $24,927,771
Dividends receivable ............................... 70,890 70,890 -- -- --
Liabilities:
Due to (from) the Penn Insurance and Annuity Company 258,720 (22,357) 5,698 7,195 18,642
------------ ----------- ---------- ----------- -----------
Net Assets ......................................... $413,426,879 $16,997,690 $9,578,929 $12,185,621 $24,909,129
============ =========== ========== =========== ===========
</TABLE>
- -----------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Money Quality High Yield Growth
Total Market Fund+ Bond Fund+ Bond Fund+ Equity Fund+
------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends ........................................ $ 2,060,097 $599,250 $ -- $ -- $ --
Expense:
Mortality and expense risk charges ............... 5,239,237 183,028 149,845 174,265 275,688
------------ ----------- ---------- ----------- -----------
Net investment income (loss) ..................... (3,179,140) 416,222 (149,845) (174,265) (275,688)
------------ ----------- ---------- ----------- -----------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares ...................................... 785,422 -- 16,169 21,045 21,947
Capital gains distributions ...................... 6,413,790 -- -- -- --
------------ ----------- ---------- ----------- -----------
Net realized gains (losses) from investment
transactions ................................ 7,199,212 -- 16,169 21,045 21,947
Net change in unrealized appreciation/depreciation
of investments .............................. 57,366,338 -- -- 485,116 6,066,821
------------ ----------- ---------- ----------- -----------
Net realized and unrealized gains (losses) on
investments ................................. 64,565,550 -- 16,169 506,161 6,088,768
------------ ----------- ---------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations ............................. $61,386,410 $416,222 $(133,676) $ 331,896 $5,813,080
============ =========== ========== =========== ===========
</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-10
<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>
1,763,544 4,099,945 784,621 918,870 538,916 379,045
$35,987,806 $79,192,456 $10,172,702 $14,834,803 $ 9,721,173 $ 5,965,375
$39,168,307 $80,440,931 $ 9,917,611 $24,607,350 $26,773,329 $ 7,918,259
-- -- -- -- -- --
23,070 47,999 6,194 18,268 22,310 6,355
- ----------- ----------- ----------- ----------- ----------- -----------
$39,145,237 $80,392,932 $ 9,911,417 $24,589,082 $26,751,019 $ 7,911,904
=========== =========== =========== =========== =========== ===========
</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>
$ -- $ -- $ -- $ -- $ -- $ 100,693
576,650 1,172,711 140,616 280,604 211,501 92,184
- ----------- ----------- ----------- ----------- ----------- -----------
(576,650) (1,172,711) (140,616) (280,604) (211,501) 8,509
- ----------- ----------- ----------- ----------- ----------- -----------
26,847 198,598 (283,836) 278,489 220,898 70,303
-- -- -- -- -- 149,175
- ----------- ----------- ----------- ----------- ----------- -----------
26,847 198,598 (283,836) 278,489 220,898 219,478
(269,760) 5,566,447 100,401 7,718,511 15,951,648 1,732,903
- ----------- ----------- ----------- ----------- ----------- -----------
(242,913) 5,765,045 (183,435) 7,997,000 16,172,546 1,952,381
- ----------- ----------- ----------- ----------- ----------- -----------
$ (819,563) $ 4,592,334 $ (324,051) $ 7,716,396 $15,961,045 $ 1,960,890
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-11
<PAGE>
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1999 (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....................................... 235,228 499,871 279,873 1,600,750
Cost................................................... $3,310,275 $9,802,290 $3,164,335 $33,649,256
Assets:
Investments at Market Value............................ $3,114,413 $9,817,469 $4,153,316 $41,155,283
Dividends receivable................................... - - - -
Liabilities:
Due to the Penn Insurance and Annuity Company......... 1,887 5,492 3,423 24,028
----------- ---------- ----------- ----------
Net Assets............................................ $3,112,526 $9,811,977 $4,149,893 $41,131,255
=========== ========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
PIA VARIABLE ANNUITY ACCOUNT I
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999 (CONT'D)
<TABLE>
<CAPTION>
Limited Capital
Maturity Bond Partners Appreciation Equity Income
Portfolio++ Portfolio++ Portfolio+++ Portfolio++++
--------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends.............................................. $ 205,774 $ 106,433 $ - $ 585,291
Expense:
Mortality and expense risk charges..................... 50,314 127,469 45,404 570,262
--------- --------- --------- --------
Net investment income (loss).......................... 155,460 (21,036) (45,404) 15,029
--------- --------- --------- --------
Realized and Unrealized Gains (Losses) on
Investments:
Realized gains (losses) from redemption of fund
shares........................................... (12,768) 38,417 (55,761) 152,802
Capital gains distributions........................... - 185,101 - 1,293,801
--------- --------- --------- --------
Net realized gains (losses) from investment
transactions.................................... (12,768) 223,518 (55,761) 1,446,603
Net change in unrealized appreciation/depreciation
of investments.................................. (137,966) 320,918 1,727,965 500,668
--------- --------- --------- --------
Net realized and unrealized gains (losses) on
investments.................................... (150,734) 544,436 1,672,204 1,947,271
--------- --------- --------- ---------
Net increase (decrease) in net assets resulting
from operations............................... $ 4,726 $ 523,400 $1,626,800 $1,962,300
========= ========= ========== ==========
</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-12
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Emerging
Growth Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio++++ Portfolio+++++
-------------- -------------- -------------- ---------------
<S> <C> <C> <C>
1,095,492 476,856 184,013 219,618
$37,462,504 $7,853,610 $24,102,374 $2,209,200
$60,175,370 $8,902,892 $30,805,637 $3,054,885
- - - -
41,901 26,030 20,183 2,402
----------- ---------- ----------- ----------
$60,133,469 $8,876,862 $30,785,454 $3,052,483
=========== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Emerging
Growth Asset Manager Index 500 Markets Equity
Portfolio++++ Portfolio++++ Portfolio++++ Portfolio+++++
-------------- -------------- -------------- ---------------
<S> <C> <C> <C>
$ 69,854 $ 216,589 $ 175,764 $ 449
695,969 112,237 349,856 30,634
----------- ---------- ------------ -----------
(626,115) 104,352 (174,092) (30,185)
----------- ---------- ------------ -----------
45,201 5,451 (8,092) 49,712
4,392,098 274,346 119,269 -
------------ ---------- ------------ -----------
4,437,299 279,797 111,177 49,712
11,470,094 358,080 4,336,022 1,438,470
----------- ---------- ------------ -----------
15,907,393 637,877 4,447,199 1,488,182
----------- ---------- ------------ -----------
$ 15,281,278 $ 742,229 $ 4,273,107 $ 1,457,997
============ ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-13
<PAGE>
PIA VARIABLE ANNUITY ACCOUNT I
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Total Money Market Fund+ Quality Bond Fund+
---------------------- ---------------------- ------------------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)............. ($3,179,140) $ 2,074,089 $ 416,222 $ 374,756 ($149,845) $ 343,465
Net realized gains (losses) from
investment transactions............... 7,199,212 21,292,894 0 0 16,169 298,660
Net change in unrealized appreciation/
depreciation of investments........... 57,366,338 5,557,756 0 0 0 (36,035)
------------ ------------ ----------- ----------- ---------- -----------
Net increase (decrease) in net assets
resulting from operations............. 61,386,410 28,924,739 416,222 374,756 (133,676) 606,090
------------ ------------ ----------- ----------- ---------- -----------
Variable Annuity Activities:
Purchase payments........................ 113,724,187 135,541,358 19,792,759 23,596,049 3,757,603 6,843,131
Surrender benefits....................... (19,755,751) (9,362,238) (2,699,595) (788,184) (512,339) (200,330)
Net Transfers ........................... (73,227,156) (51,060,966) (13,292,408) (17,700,923) (3,380,378) (2,275,495)
Contract administration charges.......... (112,070) (88,251) (3,065) (2,014) (2,039) (1,315)
Annuity benefits......................... (6,548,225) (5,347,245) (319,208) (222,746) (262,157) (178,470)
------------ ------------ ----------- ----------- ---------- -----------
Net increase in net assets resulting
from variable annuity activities ........ 14,080,985 69,682,658 3,478,483 4,882,182 (399,310) 4,187,521
------------ ------------ ----------- ----------- ---------- -----------
Total increase (decrease) in net assets.. 75,467,395 98,607,397 3,894,705 5,256,938 (532,986) 4,793,611
Net Assets:
Beginning of year ........................ 337,959,484 239,352,087 13,102,985 7,846,047 10,111,915 5,318,304
------------ ------------ ----------- ----------- ---------- -----------
End of year .............................. $413,426,879 $337,959,484 $16,997,690 $13,102,985 $9,578,929 $10,111,915
============ ============ =========== =========== ========== ===========
High Yield Bond Fund+ Growth Equity Fund+ Value Equity Fund+
-------------------------- -------------------------- -----------------------
1999 1998 1999 1998 1999 1998
------------ ------------ ----------- ----------- ---------- -----------
Operations:
Net investment income (loss) .......... ($174,265) $764,728 ($275,688) ($136,110) ($576,650) ($24,682)
Net realized gains (losses) from
investment transactions .......... 21,045 (17,094) 21,947 1,431,627 26,847 3,307,034
Net change in unrealized appreciation/
depreciation of investments ...... 485,116 (474,406) 6,066,821 2,167,911 (269,760) (748,979)
------------ ------------ ----------- ----------- ---------- -----------
Net increase (decrease) in net assets
resulting from operations ........ 331,896 273,228 5,813,080 3,463,428 (819,563) 2,533,373
------------ ------------ ----------- ----------- ---------- -----------
Variable Annuity Activities:
Purchase payments ..................... 3,175,845 4,945,705 8,694,462 5,526,230 6,869,696 12,733,300
Surrender benefits .................... (620,006) (296,671) (567,134) (158,570) (2,059,395) (1,585,043)
Net Transfers ......................... (2,103,929) (1,392,476) (2,534,038) (1,856,756) (7,368,392) (4,001,865)
Contract administration charges ....... (2,906) (2,027) (4,311) (2,169) (13,579) (12,702)
Annuity benefits ...................... (316,368) (199,055) (295,064) (173,262) (629,466) (517,363)
------------ ------------ ----------- ----------- ---------- -----------
Net increase in net assets resulting
from variable annuity activities ...... 132,636 3,055,476 5,293,915 3,335,473 (3,201,136) 6,616,327
------------ ------------ ----------- ----------- ---------- -----------
Total increase (decrease) in
net assets ...................... 464,532 3,328,704 11,106,995 6,798,901 (4,020,699) 9,149,700
Net Assets:
Beginning of year ........................ 11,721,089 8,392,385 13,802,134 7,003,233 43,165,936 34,016,236
------------ ------------ ----------- ----------- ---------- -----------
End of year .............................. $12,185,621 $11,721,089 $24,909,129 $13,802,134 $39,145,237 $43,165,936
============ ============ =========== =========== ========== ===========
</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-14
<PAGE>
<TABLE>
<CAPTION>
Small Partners
Flexibly Managed Fund+ Capitalization Fund+ International Equity Fund+ Portfolio++
---------------------------- ---------------------------- ----------------------------- ----------------------------
1999 1998 1999 1998 1999 1998 1999 1998
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
($1,172,711) $1,314,072 ($140,616) ($84,164) ($280,604) ($60,431) ($21,036) ($74,629)
198,598 8,778,293 (283,836) 139,505 278,489 585,656 223,518 539,800
5,566,447 (6,788,985) 100,401 (1,431,774) 7,718,511 1,857,070 320,918 (437,909)
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
4,592,334 3,303,380 (324,051) (1,376,433) 7,716,396 2,382,295 523,400 27,262
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
10,002,127 23,480,763 2,656,252 4,140,766 3,547,156 4,528,945 2,890,771 6,316,324
(3,201,174) (2,309,819) (689,681) (314,301) (841,309) (465,457) (659,899) (240,149)
(17,007,087) (6,076,934) (2,882,560) (1,814,570) (3,018,586) (1,883,029) (1,472,824) (848,706)
(27,768) (25,948) (3,591) (4,050) (6,302) (5,841) (2,656) (1,341)
(2,037,203) (2,012,397) (93,085) (132,547) (240,214) (242,420) (103,790) (90,589)
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
(12,271,105) 13,055,665 (1,012,665) 1,875,298 (559,255) 1,932,198 651,602 5,135,539
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
(7,678,771) 16,359,045 (1,336,716) 498,865 7,157,141 4,314,493 1,175,002 5,162,801
88,071,703 71,712,658 11,248,133 10,749,268 17,431,941 13,117,448 8,636,975 3,474,174
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
$80,392,932 $88,071,703 $9,911,417 $11,248,133 $24,589,082 $17,431,941 $9,811,977 $8,636,975
=========== ============ =========== ============ ============ ============ =========== ===========
Limited Maturity Growth
Emerging Growth Fund+ Balanced Portfolio++ Bond Portfolio++ Portfolio++++
----------------------------- ---------------------------- ---------------------------- -----------------------------
1999 1998 1999 1998 1999 1998 1999 1998
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
($211,501) ($65,707) $8,509 $30,479 $155,460 $149,807 ($626,115) ($320,106)
220,898 87,764 219,478 721,935 (12,768) 1,639 4,437,299 3,219,397
15,951,648 1,305,485 1,732,903 (198,018) (137,966) (57,775) 11,470,094 6,926,573
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
15,961,045 1,327,542 1,960,890 554,396 4,726 93,671 15,281,278 9,825,864
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
8,280,831 4,314,103 1,170,901 2,016,921 874,539 2,008,024 14,667,934 10,112,920
(594,105) (188,033) (206,192) (186,582) (583,921) (170,172) (2,269,792) (896,947)
(3,148,175) (1,518,437) (1,004,274) (519,208) (901,160) (1,161,255) (5,610,367) (4,615,292)
(3,845) (1,117) (1,731) (1,402) (886) (751) (15,530) (11,574)
(164,747) (63,712) (91,075) (120,808) (92,506) (84,586) (499,933) (344,414)
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
4,369,959 2,542,804 (132,371) 1,188,921 (703,934) 591,260 6,272,312 4,244,693
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
20,331,004 3,870,346 1,828,519 1,743,317 (699,208) 684,931 21,553,590 14,070,557
6,420,015 2,549,669 6,083,385 4,340,068 3,811,734 3,126,803 38,579,879 24,509,322
----------- ------------ ----------- ------------ ------------ ------------ ----------- -----------
$26,751,019 $6,420,015 $7,911,904 $6,083,385 $3,112,526 $3,811,734 $60,133,469 $38,579,879
=========== ============ =========== ============ ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-15
<PAGE>
PIA VARIABLE ANNUITY ACCOUNT I
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 (CONT'D)
Capital Appreciation Equity Income Emerging Markets
Portfolio+++ Portfolio++++ Portfolio+++++
---------------------------- -------------------------- -----------------------
1999 1998 1999 1998 1999 1998
------------ ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss) ............. ($45,404) ($45,339) $15,029 ($74,719) ($30,185) ($8,349)
Net realized gains (losses) from
investment transactions ............. (55,761) 141,597 1,446,603 1,516,244 49,712 (2,786)
Net change in unrealized appreciation/
depreciation of investments ......... 1,727,965 (212,450) 500,668 1,714,500 1,438,470 (349,138)
------------ ----------- ----------- ----------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations ........... 1,626,800 (116,192) 1,962,300 3,156,025 1,457,997 (360,273)
------------ ----------- ----------- ----------- ---------- ----------
Variable Annuity Activities:
Purchase payments ........................ 688,204 553,025 7,213,584 10,030,814 912,298 1,045,031
Surrender benefits ....................... (414,900) (179,038) (2,085,627) (802,060) (85,523) (45,908)
Net Transfers ............................ (818,812) (808,187) (4,178,053) (2,449,472) (676,960) (161,016)
Contract administration charges .......... (1,199) (1,423) (11,295) (10,107) (670) (409)
Annuity benefits ......................... (30,592) (37,839) (749,283) (688,303) (11,040) (9,288)
------------ ----------- ----------- ----------- ---------- ----------
Net increase in net assets resulting
from variable annuity activities ......... (577,299) (473,462) 189,326 6,080,872 138,105 828,410
------------ ----------- ----------- ----------- ---------- ----------
Total increase (decrease) in net assets . 1,049,501 (589,654) 2,151,626 9,236,897 1,596,102 468,137
Net Assets:
Beginning of year ........................... 3,100,392 3,690,046 38,979,629 29,742,732 1,456,381 988,244
------------ ----------- ----------- ----------- ---------- ----------
End of year ................................. $4,149,893 $3,100,392 $41,131,255 $38,979,629 $3,052,483 $1,456,381
============ =========== =========== =========== ========== ==========
Asset Manager Index 500
Portfolio++++ Portfolio++++
---------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
Operations:
Net investment income (loss) ............. $104,352 $70,534 ($174,092) ($79,516)
Net realized gains (losses) from
investment transactions ............. 279,797 448,318 111,177 95,305
Net change in unrealized appreciation/
depreciation of investments ......... 358,080 156,671 4,336,022 2,165,015
------------ ----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations ........... 742,229 675,523 4,273,107 2,180,804
------------ ----------- ----------- -----------
Variable Annuity Activities:
Purchase payments ........................ 3,317,427 1,443,285 15,211,798 11,906,022
Surrender benefits ....................... (354,305) (195,034) (1,310,854) (339,940)
Net Transfers ............................ (691,043) (213,530) (3,138,110) (1,763,815)
Contract administration charges .......... (2,364) (1,882) (8,333) (2,179)
Annuity benefits ......................... (205,021) (126,596) (407,473) (102,850)
------------ ----------- ----------- -----------
Net increase in net assets resulting
from variable annuity activities ......... 2,064,694 906,243 10,347,028 9,697,238
------------ ----------- ----------- -----------
Total increase (decrease) in net assets . 2,806,923 1,581,766 14,620,135 11,878,042
Net Assets:
Beginning of year ........................... 6,069,939 4,488,173 16,165,319 4,287,277
------------ ----------- ----------- -----------
End of year ................................. $8,876,862 $6,069,939 $30,785,454 $16,165,319
============ =========== =========== ===========
</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-16
<PAGE>
PIA VARIABLE ANNUITY ACCOUNT I
- -------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1999
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, 1999 and the reported amounts from
operations and annuity activities during 1999 and 1998. Actual results could
differ with those estimates.
Investments - Assets of Account I are invested in shares of Penn
Series Funds, Inc. (Penn Series): Money Market, Quality Bond, High Yield Bond,
Growth Equity, Value Equity, Flexibly Managed, International Equity, 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-17
<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,
1999:
Purchases Sales
--------- -----
Money Market Fund ..................... $12,932,273 $9,096,895
Quality Bond Fund ..................... 2,993,803 3,524,678
High Yield Bond Fund .................. 2,264,330 2,282,272
Growth Equity Fund .................... 7,200,328 2,147,989
Value Equity Fund ..................... 3,919,167 7,664,997
Flexibly Managed Fund ................. 3,524,456 16,756,370
Small Capitalization Fund ............. 1,657,548 3,092,763
International Equity Fund ............. 2,362,141 2,912,558
Emerging Growth Fund .................. 6,968,514 2,569,996
Balanced Portfolio .................... 1,209,077 1,110,386
Limited Maturity Bond Portfolio ....... 945,220 1,525,014
Partners Portfolio .................... 2,681,531 1,825,478
Capital Appreciation Portfolio ........ 514,335 1,190,781
Equity Income Portfolio ............... 5,896,538 4,238,610
Growth Portfolio ...................... 14,294,863 4,173,648
Asset Manager Portfolio ............... 3,326,240 853,894
Index 500 Portfolio ................... 12,530,980 2,233,834
Emerging Markets Equity Portfolio ..... 844,619 684,585
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-18
<PAGE>
Note 4. Unit Values
As of December 31, 1999, the accumulation units and accumulation unit
values are as follows:
Accumulation Accumulated
Pennant Variable Annuity Contract Units Unit Value
----- ----------
Money Market Fund ............................. 1,436,416 $11.83
Quality Bond Fund ............................. 727,944 $13.16
High Yield Bond Fund .......................... 815,877 $14.94
Growth Equity Fund ............................ 777,680 $32.03
Value Equity Fund ............................. 1,925,809 $20.33
Flexibly Managed Fund ......................... 4,769,665 $16.86
Small Capitalization Fund ..................... 712,259 $13.92
International Equity Fund ..................... 979,901 $25.09
Emerging Growth Fund .......................... 515,665 $51.88
Balanced Portfolio ............................ 375,371 $21.08
Limited Maturity Bond Portfolio ............... 261,083 $11.92
Partners Portfolio ............................ 727,365 $13.49
Capital Appreciation Portfolio ................ 229,819 $18.06
Equity Income Portfolio ....................... 1,986,847 $20.70
Growth Portfolio .............................. 1,791,053 $33.57
Asset Manager Portfolio ....................... 462,939 $19.18
Index 500 Portfolio ........................... 1,684,923 $18.27
Emerging Markets Equity Portfolio ............. 235,834 $12.94
B-19
<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 and Emerging Markets
Equity Portfolio) as of December 31, 1999 and the related statement of
operations for the year then ended and the statements of changes in net assets
for each of the two years in the period then ended. The 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 audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. 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, 1999, by
correspondence with the transfer agents. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
portfolios constituting the PIA Variable Annuity Account I at December 31, 1999,
the results of their operations for the year then ended and the changes in their
net assets for each of the two years in the period then ended, in conformity
with accounting principles generally accepted in the United States.
Ernst & Young LLP
Philadelphia, Pennsylvania
April 4, 2000
B-20
<PAGE>
The Penn Insurance and Annuity Company
Balance Sheets
<TABLE>
<CAPTION>
As of December 31, 1999 1998
------------------------------------------------------------------------------------------
(in thousands, except per share amount)
<S> <C> <C>
ASSETS
Debt securities, at fair value $ 641,903 $ 690,583
Policy loans 287,349 270,611
Short-term investments 1,379 948
Other invested assets 7,804 2,219
---------- ----------
Total investments 938,435 964,361
Cash and cash equivalents 3,205 4,226
Investment income due and accrued 21,882 21,730
Deferred acquisition costs 95,435 86,706
Other assets 4,782 6,719
Separate account assets 429,655 371,872
---------- ----------
Total Assets $1,493,394 $1,455,614
========== ==========
LIABILITIES
Reserves for payment of future policy benefits $ 90,451 $ 85,808
Other policyholder funds 789,649 784,466
Accrued income tax payable 15,256 27,057
Other liabilities 17,244 13,955
Separate account liabilities 429,655 371,872
---------- ----------
Total Liabilities 1,342,255 1,283,158
---------- ----------
STOCKHOLDER'S EQUITY
Common stock, $2.5 par value in 1999, $2.0 par value in 1998;
1,000 shares authorized, issued, and outstanding 2,500 2,000
Additional paid-in capital 92,869 93,369
Retained earnings 67,354 63,561
Accumulated other comprehensive income/(loss)
unrealized gains/(losses) (11,584) 13,526
---------- ----------
Total Stockholder's Equity 151,139 172,456
---------- ----------
Total Liabilities and Stockholder's Equity $1,493,394 $1,455,614
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-21
<PAGE>
The Penn Insurance and Annuity Company
Income Statements
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations $ 8,401 $ 16,284 $ 29,761
Policy fee income 25,057 23,893 20,207
Net investment income 67,653 65,837 62,542
Net realized capital gains/(losses) (1,796) 1,729 106
Other income 4,664 6,557 4,905
----------- ----------- -----------
Total Revenue 103,979 114,300 117,521
----------- ----------- -----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries 56,777 55,587 53,112
Increase in liability for future policy benefits 5,267 13,167 25,596
General expenses 7,967 6,706 7,517
Amortization of deferred acquisition costs 12,681 9,923 2,640
----------- ----------- -----------
Total Benefits and Expenses 82,692 85,383 88,865
----------- ----------- -----------
Income Before Income Taxes 21,287 28,917 28,656
Federal income taxes/(benefit):
Current 8,841 11,453 7,975
Deferred (1,347) (831) 3,166
----------- ----------- -----------
Total income tax expense 7,494 10,622 11,141
----------- ----------- -----------
NET INCOME $ 13,793 $ 18,295 $ 17,515
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-22
<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
Stock Capital Earnings Income/(Loss) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 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
Net income for 1999 - - 13,793 - 13,793
Other comprehensive loss, net of tax:
Unrealized depreciation of securities,
net of reclassification adjustment - - - (25,110) (25,110)
-----------------
Comprehensive Loss (11,317)
Dividend paid to Penn Mutual - - (10,000) - (10,000)
Change of par value of common stock 500 (500) - - -
----------- ------------- ------------ ----------------- -----------------
Balance at December 31, 1999 $ 2,500 $ 92,869 $ 67,354 $ (11,584) $ 151,139
=========== ============= ============ ================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-23
<PAGE>
The Penn Insurance and Annuity Company
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 13,793 $ 18,295 $ 17,515
Adjustments to reconcile net income to net cash provided by operations
Capitalization of policy acquisition costs (2,684) (6,496) (7,196)
Amortization of deferred acquisition costs 12,681 9,923 2,640
Policy fees on universal life and investment contracts (21,961) (26,722) (23,228)
Interest credited on universal life and investment contracts 37,877 38,520 38,468
Net realized capital (gains)/losses 1,796 (1,729) (106)
(Increase)/decrease in investment income due and accrued (152) (711) (795)
Increase in reserves for payment of future policy benefits 4,643 12,315 25,571
Increase/(decrease) in accrued income tax payable 1,720 725 (1,377)
Other, net 4,847 2,822 (13,376)
------------ ------------ ------------
Net cash provided by operating activities 52,560 46,942 38,116
------------ ------------ ------------
Cash Flows from Investing Activities
Sales of investments:
Debt securities available for sale 156,100 295,710 142,773
Real estate investments - 3,450 -
Equity securities 245 1,286 3,747
Maturity and other principal repayments:
Debt securities available for sale 60,445 74,315 69,239
Mortgage loans 2,353 150 5,527
Cost of investments acquired:
Debt securities available for sale (222,066) (387,885) (299,645)
Equity securities (179) (644) -
Mortgage loans - - (75)
Real estate - (12) (236)
Other invested assets (8,410) - -
(Increase)/decrease in short-term investments (431) 1,793 30,674
Increase in policy loans, net (16,738) (16,725) (7,157)
------------ ------------ ------------
Net cash used by investing activities (28,681) (28,562) (55,153)
------------ ------------ ------------
</TABLE>
- continued -
The accompanying notes are an integral part of the financial statements.
B-24
<PAGE>
The Penn Insurance and Annuity Company
Statements of Cash Flows - Continued
<TABLE>
<CAPTION>
As of December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Deposits for universal life and investment contracts $ 79,900 $ 116,022 $ 166,741
Withdrawals from universal life and investment contracts (78,463) (72,187) (35,060)
Transfers to separate accounts (16,337) (42,499) (115,104)
Return of capital/dividends to Penn Mutual (10,000) (17,000) -
----------- ---------- ------------
Net cash provided by financing activities (24,900) (15,664) 16,577
----------- ---------- ------------
Net increase/(decrease) in cash and cash equivalents (1,021) 2,716 (460)
Cash and cash equivalents
Beginning of the year 4,226 1,510 1,970
----------- ---------- ------------
End of the year $ 3,205 $ 4,226 $ 1,510
=========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-25
<PAGE>
- --------------------------------------------------------------------------------
THE PENN INSURANCE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 1999, 1998 and 1997
(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-eight states and the
District of Columbia.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States. 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, 1999, the Company adopted Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance for determining when and how to measure
assets and liabilities associated with guaranty fund and other insurance related
assessments. The Company also adopted SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" which gives guidance
on accounting for the costs related to developing, obtaining, modifying and/or
implementing internal use software. The adoption of SOP 97-3 and SOP 98-1 did
not have a material effect on the Company's financial condition or results of
operations.
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,
required the restatement of prior year financials to reflect the components of
comprehensive income.
In June 1998, the FASB issued Statement of Financial Accounting Standards No
(SFAS). 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 earning. In June 1999, the FASB issued
SFAS No. 137 which defers the effective date for implementation of SFAS No. 133
to fiscal years beginning after June 15, 2000. 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. Prepayment assumptions for loan-backed
and structured securities were obtained from broker dealer survey values or
internal estimates. These assumptions are consistent with the current interest
rate and economic environments. The retrospective adjustment method is used to
value all such 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.
B-26
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
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.
Policy loans are carried at the unpaid principal balances.
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.
Other invested assets primarily include venture capital limited partnerships
which are carried at fair value.
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.
B-27
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
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%.
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 $1,376 and $461 as of December 31, 1999 and
1998, respectively.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------
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 $ 3,539 $ 4 $ 65 $ 3,478
Foreign governments 4,872 197 - 5,069
Corporate securities 366,841 3,405 19,438 350,808
Mortgage and other asset-backed securities 290,143 448 8,043 282,548
--------------- --------------- -------------- --------------
Total $ 665,395 $ 4,054 $ 27,546 $ 641,903
=============== =============== ============== ==============
</TABLE>
B-28
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
<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
=============== =============== ============== ==============
</TABLE>
The following table summarizes the amortized cost and estimated fair value of
debt securities as of December 31, 1999 by contractual maturity.
<TABLE>
<CAPTION>
Amortized Estimated
Years to maturity: Cost Fair Value
--------------- ---------------
<S> <C> <C>
One or less $ 51,849 $ 50,766
After one through five 48,682 48,768
After five through ten 72,179 72,895
After ten 202,542 186,926
Mortgage and other asset-backed securities 290,143 282,548
--------------- ---------------
Total $ 665,395 $ 641,903
=============== ===============
</TABLE>
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage and other asset-backed securities are presented
separately in the maturity schedule due to the potential for prepayment. The
weighted average life of these securities is 5.8 years.
At December 31, 1999, the Company held $282,548 in mortgage and other
asset-backed securities. The structured securities portfolio consists of
commercial and residential mortgage pass-through holdings totaling $209,721 and
securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $72,826. These securities follow a
structured principal repayment schedule and are of high credit quality. As of
December 31, 1999 and 1998, the Company's investments included $31,125 and
$39,959, respectively, of the tranches retained from the 1996 securitization of
the Company's commercial mortgage loan portfolio. These investments represented
21% and 23% of stockholder's equity as of December 31, 1999 and 1998,
respectively. Securities totaling $197,979 are rated AAA and include $1,396 of
interest only tranches.
At December 31, 1999, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $82,427, representing 13%
of the total debt portfolio.
Proceeds during 1999, 1998 and 1997 from sales of available-for-sale securities
were $155,497, $295,710 and $142,773. Gross gains and gross losses realized on
those sales were $1,162 and $2,992 respectively, during 1999, $7,459 and $4,775,
respectively, during 1998 and $1,653 and $921, respectively, for 1997.
The Company's investment portfolio of debt securities is predominantly comprised
of investment grade securities. At December 31, 1999 and 1998, debt securities
with amortized cost totaling $31,449 and $19,401, respectively, were less than
investment grade. At December 31, 1999 and 1998, the Company held securities
with a carrying value of $0 and $1,261,
B-29
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
respectively, which were to be restructured pursuant to commenced negotiations.
The Company did not hold any debt securities which were non-income producing for
the preceding twelve months as of December 31, 1999 and 1998.
Equity Securities
During 1999, 1998 and 1997, the proceeds from the sales of equity securities
amounted to $246, $1,286 and $3,747, respectively. The gross gains on those
sales were $0, $206 and $177 for 1999, 1998 and 1997, respectively.
Mortgage Loans
At December 31, 1999, the Company had no mortgage loans. Mortgage loans as of
December 31, 1998 consisted of a loan on an office building in the state of New
York with a carrying value of $2,353 and the valuation allowance of $(200). The
mortgage loan was not impaired or delinquent.
Other
Investments on deposit with regulatory authorities as required by law were
$3,618 and $3,620 at December 31, 1999 and 1998, 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.
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Debt securities $ 47,795 $ 47,385 $ 43,915
Equity securities 2 6 362
Mortgage loans 132 277 1,130
Real estate - 273 781
Policy loans 19,830 18,622 17,777
Short-term investments 399 578 709
Other invested assets 395 - -
------------- ------------- -------------
Gross investment income 68,553 67,141 64,674
Less: Investment expense 900 1,304 2,132
------------- ------------- -------------
Investment income, net $ 67,653 $ 65,837 $ 62,542
============= ============= =============
</TABLE>
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 $200, $135 and $792 during 1999, 1998
and 1997, respectively.
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Debt securities $ (2,745) $ 2,223 $ 732
Equity securities - 206 177
Mortgage loans 200 (100) (1,432)
Real estate - 569 692
Amortization of deferred acquisition costs 749 (1,169) (63)
------------- ------------- -------------
Net realized capital gains/(losses) $ (1,796) $ 1,729 $ 106
============= ============= =============
</TABLE>
B-30
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
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>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Unrealized gains/(losses):
Debt securities $(52,515) $ 9,536 $ 15,127
Equity securities - (200) (265)
Other invested assets (605) - -
------------- ------------- -------------
(53,120) 9,336 14,862
------------- ------------- -------------
Less:
Deferred policy acquisition costs (14,488) 1,175 5,497
Deferred income taxes (13,522) 2,857 3,278
------------- ------------- -------------
Net change in unrealized gains/(losses) $(25,110) $ 5,304 $ 6,087
============= ============= =============
</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>
Reclassification Adjustments 1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Unrealized holding gains/(losses) arising
during period $(23,223) $ 6,481 $ 6,819
Reclassification adjustment for gains included
in net income 1,887 1,177 732
------------- -------------- -------------
Unrealized gains/(losses) on investments, net
of reclassification adjustment $(25,110) $ 5,304 $ 6,087
============= ============== =============
</TABLE>
Reclassification adjustments reported in the above table for the years ended
December 31, 1999, 1998 and 1997 are net of income tax expense of $1,016, $1,434
and $829, respectively, and $1,166, $1,487 and $808, respectively, relating to
the effects of such amounts on deferred acquisition costs.
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, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------------------------------ ---------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Financial Assets:
Debt securities, available for sale $641,903 $641,903 $ 690,583 $ 690,583
Policy loans 287,349 287,349 270,611 270,611
Cash and cash equivalents 3,205 3,205 4,226 4,226
Short-term investments 1,379 1,379 948 948
Other invested assets 7,804 7,804 2,219 2,427
Separate account assets 429,655 429,655 371,872 371,872
</TABLE>
B-31
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------------ ---------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Financial Liabilities:
Investment-type contracts
Individual annuities $ 60,363 $ 61,865 $ 62,912 $ 65,889
Other policyholder funds 3,198 3,198 3,367 3,367
-------- -------- --------- ---------
Total policyholder funds 63,561 65,063 66,279 69,256
Separate account liabilities 429,655 429,655 371,872 371,872
</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 estimated fair values for the venture capital limited
partnerships are based on values determined by the partnerships' managing
general partners.
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.
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 $2,800 and $4,832 as of December 31, 1999 and 1998,
respectively.
B-32
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
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:
1999 1998
---------- ---------
Deferred tax assets
Future policy benefits $ 9,193 $ 10,430
Allowances for investment losses 482 231
Unrealized investment losses 6,275 -
Other 1,041 1,619
---------- ---------
Total deferred tax asset 16,991 12,280
---------- ---------
Deferred tax liabilities
Deferred acquisition costs 25,882 28,600
Unrealized investment gains - 7,247
Other 1,490 1,683
---------- ---------
Total deferred tax liability 27,372 37,530
---------- ---------
Net deferred tax liability $ 10,381 $ 25,250
Tax currently payable 4,875 1,807
---------- ---------
Accrued income tax payable $ 15,256 $ 27,057
========== =========
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>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Tax expense at 35% $ 7,450 $ 10,121 $ 10,030
Increase/(decrease) in income taxes resulting
from:
Differential earnings amount - 785 1,073
Other 44 (284) 38
------------- ------------- -------------
Federal income tax expense $ 7,494 $ 10,622 $ 11,141
============= ============= =============
</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 and is currently examining years 1995 through 1997.
Management believes that an adequate provision has been made for any potential
assessments.
B-33
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
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
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 Net
Amount Companies Companies Amount
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
December 31, 1999:
Life Insurance in Force $ 3,073,326 $ 2,603,241 $ 2,787,282 $ 2,889,285
Premiums 8,401 - - 8,401
Benefits 58,770 6,890 8,883 56,777
Reserves 650,236 229,864 3,289 876,811
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
</TABLE>
During 1997, the Company had gross premiums of $29,761 and gross benefits of
$55,221, assumed benefits of $4,945 and ceded benefits of $7,051.
The Company assumes and cedes certain risks under reinsurance agreements with
Penn Mutual. Net life insurance in-force assumed from Penn Mutual totaled
$347,777 and $377,815 as of December 31, 1999 and 1998, respectively. The
Company maintained reserves related to these policies of $228,903 and $238,310
as of December 31, 1999 and 1998, respectively. Net premium and annuity
considerations assumed in connection with these agreements were $5,107, $6,470
and $7,009 in 1999, 1998 and 1997, respectively.
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, $2,562, $5,033 and $3,832 was
received by the Company from Penn Mutual as an experience rating refund in 1999,
1998 and 1997, 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 1999, 1998 and 1997, the total expenses
incurred under this agreement were $6,766, $7,606 and $8,245, respectively.
State insurance laws limit the amount of dividends that the Company may pay to
Penn Mutual.
B-34
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES:
- ----------------------------------
The Company and its parent are respondents in a number of proceedings, some of
which involve extra-contractual damage in addition to other damages. In
addition, insurance companies are subject to assessments, up to statutory
limits, by state guaranty funds for losses of policyholders of insolvent
insurance companies. In the opinion of management, the outcome of the
proceedings and assessments are not likely to have a material adverse effect on
the financial position of the Company.
The Company, in the ordinary course of business, extends commitments relating to
its investment activities. As of December 31, 1999, the Company had outstanding
commitments totaling $9,574 relating to these investment activities. The fair
value of these commitments approximates the face amount.
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, 1999 and 1998 was
$108,918 and $101,798, respectively. The Company's net income, determined in
accordance with statutory accounting practices, for the years ended December 31,
1999, 1998 and 1997 was $18,354, $19,382 and $16,747, respectively.
The National Association of Insurance Commissioners has released a comprehensive
guide to Statutory Accounting Principles, Accounting Practices and Procedures
Manual - version effective January 1, 2001, (Codification) to provide a
consistent basis of statutory accounting effective for years ending December 31,
2001. The Company does not expect the adoption of Codification to have a
material effect on its statutory capital and surplus.
10. STOCKHOLDER'S EQUITY:
- -------------------------
During 1999 the Company increased the par value of its common stock from $2 per
share to $2.5 per share in order to meet certain states minimum capital
requirements. Accordingly, $500 was transferred from additional paid in capital
to common stock.
B-35
<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, 1999 and 1998, and the related income statements,
statements of changes in stockholder's equity and statements of cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 28, 2000
B-36
