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PACIFIC VALUE PROSPECTUS MAY 1, 1999
<S> <C>
Pacific Value is an individual flexible premium deferred variable annuity
contract issued by Pacific Life Insurance Company.
This Prospectus provides information you should know before buying a Contract.
This Contract is not available in all It's accompanied by a current Prospectus for the Pacific Select Fund, the Fund
states. This Prospectus is not an offer in that provides the underlying Portfolios for the Variable Investment Options
any state or jurisdiction where we're not offered under the Contract. The Variable Investment Options are funded by
legally permitted to offer the Contract. Separate Account A of Pacific Life. Please read both Prospectuses carefully,
and keep them for future reference.
The Contract is described in detail in
this Prospectus and its Statement of Here's a list of all the Investment Options available under your Contract:
Additional Information (SAI). The Pacific
Select Fund is described in its Prospectus VARIABLE INVESTMENT OPTIONS
and its SAI. No one has the right to Money Market Mid-Cap Value
describe the Contract or the Pacific High Yield Bond Equity
Select Fund any differently than they Managed Bond Bond and Income
have been described in these documents. Government Securities Equity Index
Aggressive Equity Small-Cap Index
You should be aware that the Securities Growth LT REIT
and Exchange Commission (SEC) has not Equity Income International
reviewed the Contract and does not Multi-Strategy Emerging Markets
guarantee that the information in this Large-Cap Value
Prospectus is accurate or complete. It's a
criminal offense to say otherwise. FIXED OPTION
Fixed
This Contract is not a deposit or obligation
of, or guaranteed or endorsed by, any bank. You'll find more information about the Contract and Separate Account A in the
It's not federally insured by the Federal SAI dated May 1, 1999. The SAI has been filed with the SEC and is considered to
Deposit Insurance Corporation, the Federal be part of this Prospectus because it's incorporated by reference. You'll find
Reserve Board, or any other government a table of contents for the SAI on page 50 of this Prospectus. You can get a
agency. Investment in a Contract involves copy of the SAI without charge by calling or writing to Pacific Life. You can
risk, including possible loss of principal. also visit the SEC's website at www.sec.gov, which contains the SAI, material
incorporated into this Prospectus by reference, and other information about
registrants that file electronically with the SEC.
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YOUR GUIDE TO THIS PROSPECTUS
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An Overview of Pacific Value 3 Pacific Life and the Separate Account 27
- ------------------------------------------------------ Pacific Life 27
Your Investment Options 10 Separate Account A 28
Your Variable Investment Options 10 Financial Highlights 29
Variable Investment Option Performance 11 ------------------------------------------------------
Your Fixed Option 11 Federal Tax Status 30
- ------------------------------------------------------ Taxes Payable by Contract Owners: General Rules 30
Purchasing Your Contract 11 Qualified Contracts 32
How to Apply for Your Contract 11 Loans 33
Purchasing an Optional Death Benefit Rider 12 Withholding 35
Making Your Purchase Payments 12 Impact of Federal Income Taxes 36
Credit Enhancements 12 Taxes on Pacific Life 36
- ------------------------------------------------------ ------------------------------------------------------
How Your Payments Are Allocated 13 Additional Information 36
Choosing Your Investment Options 13 Voting Rights 36
Investing in Variable Investment Options 13 Changes to Your Contract 37
When Your Investment is Effective 13 Changes to All Contracts 38
Transfers 14 Inquiries and Submitting Forms and Requests 38
- ------------------------------------------------------ Telephone Transactions 39
Charges, Fees and Deductions 15 Timing of Payments and Transactions 40
Withdrawal Charge 15 Confirmations, Statements and Other Reports to
Premium Taxes 16 Contract Owners 40
Waivers and Reduced Charges 17 Replacement of Life Insurance or Annuities 40
Mortality and Expense Risk Charge 17 Financial Statements 40
Administrative Fee 18 Preparation for the Year 2000 41
Expenses of the Fund 18 ------------------------------------------------------
- ------------------------------------------------------ The General Account 41
Retirement Benefits and Other Payouts 18 General Information 41
Selecting Your Annuitant 18 Guarantee Terms 42
Annuitization 18 Withdrawals and Transfers 42
Choosing Your Annuity Date ("Annuity Start Date") 18 ------------------------------------------------------
Default Annuity Date and Options 19 Terms Used in This Prospectus 43
Choosing Your Annuity Option 20 ------------------------------------------------------
Your Annuity Payments 21 Contents of the Statement of Additional Information 45
Death Benefits 21 ------------------------------------------------------
- ------------------------------------------------------ Appendix A: State Law Variations 46
Withdrawals 25 ------------------------------------------------------
Optional Withdrawals 25 Where to Go for More Information Back Cover
Tax Consequences of Withdrawals 26
Right to Cancel ("Free Look") 26
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AN OVERVIEW OF PACIFIC VALUE
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This overview tells you some key things you should know about your Contract.
It's designed as a summary only - please read this Prospectus, your Contract
and the Statement of Additional Information for more detailed information.
Some states have different rules about how annuity contracts are described or
administered. The terms of your Contract, or of any endorsement or supplement,
prevail over what's in this Prospectus.
In this Prospectus, you and your mean the Contract Owner or Policyholder.
Pacific Life, we, us and our refer to Pacific Life Insurance Company. Contract
means a Pacific Value variable annuity contract, unless we state otherwise.
--------------------------------------------------------------------------------
Pacific Value Basics Pacific Value is an annuity contract between you and Pacific Life Insurance
Company.
An annuity contract may be appropriate This Contract is designed for long-term financial planning. It allows you to
if you're looking for retirement income invest money on a tax-deferred basis for retirement or other goals, and to
or you want to meet other long-term receive income in a variety of ways, including a series of income payments for
financial objectives. life or for a specified period of years.
This Contract may not be the right one Non-Qualified and Qualified Contracts are available. You buy a Non-Qualified
for you, however, if you need to Contract with "after-tax" dollars. You buy a Qualified Contract under a
withdraw money for short-term needs, qualified retirement or pension plan, or an individual retirement annuity or
because withdrawal charges and tax account (IRA), or form thereof.
penalties for early withdrawal may
apply. Pacific Value is a variable annuity, which means that the value of your
Contract fluctuates depending on the performance of the Investment Options you
You should consider the Contract's choose. The Contract allows you to choose how often you make Purchase Payments
investment and income benefits, as and how much you add each time. The Contract provides a death benefit if the
well as its costs. first Owner or last Annuitant dies during the accumulation phase.
Your Right to Cancel
During the right to cancel period, you have the right to cancel your Contract
and return it to us or to your registered representative for a refund. The
amount refunded may be more or less than the Purchase Payments you've made,
depending on the state where you signed your application and the kind of
Contract you buy. If you signed your application in a state that requires us to
refund Purchase Payments, we'll hold any Purchase Payments allocated to the
Variable Investment Options in the Money Market Investment Option until the
free look transfer date.
3
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AN OVERVIEW OF PACIFIC VALUE
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The Accumulation Phase During the accumulation phase, you can put money in your Contract by making
Purchase Payments, and choose Investment Options to allocate them to. You can
The Investment Options you choose also take money out of your Contract by making a withdrawal. The accumulation
and how they perform will affect the phase begins on your Contract Date and continues until your Annuity Date.
value of your Contract during the
accumulation phase, as well as the Purchase Payments
amount of your annuity payments during Your initial Purchase Payment must be at least $10,000 for a Non-Qualified
the income phase if you choose a Contract and at least $2,000 for a Qualified Contract. Additional Purchase
variable annuitization payout. Payments must be at least $250 for a Non-Qualified Contract and $50 for a
Qualified Contract.
Credit Enhancement
We'll add an amount called a Credit Enhancement to the value of your Contract
each time you make a Purchase Payment, and on your first Contract Anniversary
date if you qualify.
Investment Options
You can ask your registered You can choose from 17 Variable Investment Options (also called Subaccounts),
representative to help you choose each of which invests in a corresponding Portfolio of the Pacific Select Fund.
the right Investment Options for We're the investment adviser for the Pacific Select Fund. We oversee the
your goals and risk tolerance. management of all the Fund's Portfolios and manage two of the Portfolios
directly. We've retained other portfolio managers to manage the other
You'll find more about the Investment Portfolios. The value of each Portfolio will fluctuate with the value of the
Options starting on page 10. investments it holds, and returns are not guaranteed.
You can also choose the Fixed Option that earns a guaranteed rate of interest
of at least 3% annually.
We allocate your Purchase Payments to the Investment Options you choose. The
value of your Contract will fluctuate during the accumulation phase depending
on the Investment Options you've chosen. You bear the investment risk of any
Variable Investment Options you choose.
Transferring among Investment Options
You'll find more about transfers You can transfer among Investment Options any time until your Annuity Date
starting on page 14. without paying any current income tax. You can also make automatic transfers by
enrolling in our dollar cost averaging, portfolio rebalancing or earnings sweep
programs. Some restrictions apply to transfers to and from the Fixed Option.
Withdrawals
You'll find more about withdrawals You can make full and partial withdrawals to supplement your income or for
starting on page 25. other purposes. You can withdraw a certain amount each year without paying a
withdrawal charge, but you may pay a withdrawal charge if you withdraw Purchase
Payments that are less than eight years old. Some restrictions apply to making
withdrawals from the Fixed Option.
In general, you may have to pay tax on withdrawals or other distributions from
your Contract. If you're under age 59 1/2, a 10% federal penalty tax may also
apply to withdrawals.
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The Income Phase The income phase of your Contract begins on your Annuity Date. Generally, you
can choose to surrender your Contract and receive a single payment or you can
You'll find more about annuitization annuitize your Contract and receive a series of income payments.
starting on page 18.
You can choose fixed or variable annuity payments, or a combination of both,
for life or for a specified period of years. You can choose monthly, quarterly,
semiannual or annual payments. We'll make the income payments to your
designated payee.
If you choose variable annuity payments, the amount of the payments will
fluctuate depending on the performance of the Variable Investment Options you
choose. After your Annuity Date, if you choose variable annuity payments, you can
exchange Subaccount Annuity Units among the Variable Investment Options up to four
times in any 12-month period.
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The Death Benefit The Contract provides a death benefit if the first Owner or last surviving
Annuitant dies during the accumulation phase. Death benefit proceeds are
You'll find more about the death benefit payable when we receive proof of death and payment instructions. Who we pay a
starting on page 21. death benefit to, and how we calculate the amount of the death benefit depend
on who dies first and the type of Contract you own.
Optional Riders
These riders are not available in all The Stepped-Up Death Benefit Rider and Premier Death Benefit Rider offer the
states. potential for a larger death benefit. You can only buy one of the riders and
you can only buy it when you buy your Contract. You cannot buy both riders and
you cannot buy a rider after you buy your Contract.
5
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AN OVERVIEW OF PACIFIC VALUE
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This section of the overview explains the fees and expenses associated with
your Pacific Value Contract.
For information about how Separate . Contract Expenses are expenses that we deduct from your Contract. These
Account A and Fund Expenses affect expenses are fixed under the terms of your Contract. Premium taxes or other
accumulation units, see Financial taxes may also apply to your Contract. We generally charge premium taxes when
Highlights on page 30. you annuitize your Contract, but there may be other times when we charge them
to your Contract instead. Please see your Contract for details.
. Separate Account A Annual Expenses are expenses that we deduct from the assets
of each Variable Investment Option. They are guaranteed not to increase under
the terms of your Contract.
. Fees and Expenses Paid by the Pacific Select Fund affect you indirectly if you
choose a Variable Investment Option because they reduce Portfolio returns.
They can vary from year to year. They are not fixed and are not part of the
terms of your Contract.
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Contract Expenses Sales charge on Purchase Payments none
Maximum withdrawal charge, as a percentage of Purchase Payments 7.0%/1/
Withdrawal transaction fee none/2/
Transfer fee none/3/
Annual Fee none
------------------------------------------------------------------------------------
Separate Account A Annual Expenses Without With Stepped-Up With Premier
(as a percentage of the average daily Rider Death Benefit Rider Death Benefit Rider
Account Value) ------------------------------------------------------------------------------------
Mortality and Expense Risk Charge/4/ 1.25% 1.25% 1.25%
Administrative Fee/4/ 0.15% 0.15% 0.15%
Death Benefit Rider Charge/5/ none 0.20% 0.35%
----- ----- -----
Total Separate Account A Annual
Expenses 1.40% 1.60% 1.75%
----- ----- -----
/1/ The withdrawal charge may not apply or may be reduced under certain
circumstances. See WITHDRAWALS, and CHARGES, FEES AND DEDUCTIONS.
/2/ In the future, we may charge a fee of up to $15 for any withdrawal over 15
that you make in a Contract Year. See WITHDRAWALS - Optional Withdrawals.
/3/ In the future, we may charge a fee of up to $15 for any transfer over 15
that you make in a Contract Year. See HOW YOUR PAYMENTS ARE ALLOCATED -
Transfers.
/4/ This is an annual rate. The daily rate is calculated by dividing the annual
rate by 365.
/5/ If you buy the Stepped-Up Death Benefit Rider or the Premier Death Benefit
Rider, we add this charge to the Mortality and Expense Risk Charge until
your Annuity Date. See CHARGES, FEES AND DEDUCTIONS.
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Fees and Expenses Paid by The Pacific Select Fund pays advisory fees and other expenses. These are
the Pacific Select Fund deducted from the assets of the Fund's Portfolios and may vary from year to
year. They are not fixed and are not part of the terms of your Contract. If you
You'll find more about the Pacific Select choose a Variable Investment Option, these fees and expenses affect you
Fund starting on page 10, and in the indirectly because they reduce Portfolio returns.
Fund's Prospectus, which accompanies this
Prospectus. Advisory Fee
Pacific Life is the investment adviser to the Fund. The Fund pays an advisory
fee to us for these services. The table below shows the advisory fee as an
annual percentage of each Portfolio's average daily net assets.
Other Expenses
The table also shows expenses the Fund paid in 1998 as an annual percentage of
each Portfolio's average daily net assets. To help limit Fund expenses, we've
agreed to waive all or part of our investment advisory fees or otherwise
reimburse each Portfolio for expenses (not including advisory fees, additional
costs associated with foreign investing and extraordinary expenses) that exceed
0.25% of its average daily net assets. We do this voluntarily, but do not
guarantee that we'll continue to do so after December 31, 2000. No
reimbursement was necessary for 1998.
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Portfolio Advisory Fee Other Expenses Total Expenses
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Money Market/1/ 0.37% 0.06% 0.43%
High Yield Bond/1/ 0.60% 0.06% 0.66%
Managed Bond 0.60% 0.06% 0.66%
Government Securities 0.60% 0.06% 0.66%
Aggressive Equity 0.80% 0.09% 0.89%
Growth LT 0.75% 0.05% 0.80%
Equity Income/1/ 0.65% 0.05% 0.70%
Multi-Strategy/1/ 0.65% 0.06% 0.71%
Large-Cap Value/2/ 0.85% 0.06% 0.91%
Mid-Cap Value/2/ 0.85% 0.06% 0.91%
Equity 0.65% 0.06% 0.71%
Bond and Income 0.60% 0.10% 0.70%
Equity Index 0.16% 0.05% 0.21%
Small-Cap Index/2/ 0.50% 0.06% 0.56%
REIT/2/ 1.10% 0.06% 1.16%
International 0.85% 0.15% 1.00%
Emerging Markets 1.10% 0.36% 1.46%
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/1/ Total net expenses for these Portfolios in 1998, after deduction of an
offset for custodian credits, were: 0.42% for Money Market Portfolio, 0.65% for
High Yield Bond Portfolio, 0.69% for Equity Income Portfolio, and 0.70% for
Multi-Strategy Portfolio.
/2/ Expenses are estimated. There were no actual advisory fees or other expenses
for these Portfolios in 1998 because the Portfolios started on January 4, 1999.
7
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<CAPTION>
AN OVERVIEW OF PACIFIC VALUE
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Examples The following table shows the expenses you would pay on each $1,000 you
invested if, at the end of each period, you: annuitized your Contract,
surrendered your Contract and withdrew the Contract Value, or did not annuitize
or surrender, but left the money in your Contract.
These examples assume that the Investment Options have an annual return of 5%.
without rider reflects the expenses you would pay if you did not buy the
optional Stepped-Up Death Benefit Rider (SDBR) or Premier Death Benefit Rider
(PDBR).
with SDBR reflects expenses you would pay if you bought the optional Stepped-Up
Death Benefit Rider.
with PDBR reflects expenses you would pay if you bought the optional Premier
Death Benefit Rider.
These examples do not show past or future expenses. Your actual expenses in any
year may be more or less than those shown here.
--------------------------------------------------------------------------------
Expenses if you did
not annuitize or
Expenses if you Expenses if you surrender, but left
annuitized surrendered the money in your
your Contract ($) your Contract ($) Contract ($)
--------------------------------------------------------------------------------
Variable
Account 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr
--------------------------------------------------------------------------------
Money Market
without rider 82 58 99 214 82 121 144 214 19 58 99 214
with SDBR 84 64 109 235 84 127 154 235 21 64 109 235
with PDBR 85 68 117 251 85 131 162 251 22 68 117 251
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High Yield Bond
without rider 84 65 111 239 84 128 156 239 21 65 111 239
with SDBR 86 71 121 259 86 134 166 259 23 71 121 259
with PDBR 87 75 128 274 87 138 173 274 24 75 128 274
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Managed Bond
without rider 84 65 111 239 84 128 156 239 21 65 111 239
with SDBR 86 71 121 259 86 134 166 259 23 71 121 259
with PDBR 87 75 128 274 87 138 173 274 24 75 128 274
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Government Securities
without rider 84 65 111 239 84 128 156 239 21 65 111 239
with SDBR 86 71 121 259 86 134 166 259 23 71 121 259
with PDBR 87 75 128 274 87 138 173 274 24 75 128 274
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Aggressive Equity
without rider 86 71 122 262 86 134 167 262 23 71 122 262
with SDBR 88 77 132 282 88 140 177 282 25 77 132 282
with PDBR 90 82 140 297 90 145 185 297 27 82 140 297
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Growth LT
without rider 85 69 118 253 85 132 163 253 22 69 118 253
with SDBR 87 75 128 273 87 138 173 273 24 75 128 273
with PDBR 89 79 135 288 89 142 180 288 26 79 135 288
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Expenses if you did
not annuitize or
Expenses if you Expenses if you surrender, but left
annuitized surrendered the money in your
your Contract ($) your Contract ($) Contract ($)
-----------------------------------------------------------------------------
Variable
Account 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr
-----------------------------------------------------------------------------
Equity Income
without rider 84 66 113 243 84 129 158 243 21 66 113 243
with SDBR 86 72 123 263 86 135 168 263 23 72 123 263
with PDBR 88 76 130 278 88 139 175 278 25 76 130 278
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Multi-Strategy
without rider 84 66 113 244 84 129 158 244 21 66 113 244
with SDBR 86 72 123 264 86 135 168 264 23 72 123 264
with PDBR 88 77 131 279 88 140 176 279 25 77 131 279
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Large-Cap Value
without rider 86 72 123 264 86 135 168 264 23 72 123 264
with SDBR 88 78 133 284 88 141 178 284 25 78 133 284
with PDBR 90 83 141 299 90 146 186 299 27 83 141 299
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Mid-Cap Value
without rider 86 72 123 264 86 135 168 264 23 72 123 264
with SDBR 88 78 133 284 88 141 178 284 25 78 133 284
with PDBR 90 83 141 299 90 146 186 299 27 83 141 299
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Equity
without rider 84 66 113 244 84 129 158 244 21 66 113 244
with SDBR 86 72 123 264 86 135 168 264 23 72 123 264
with PDBR 88 77 131 279 88 140 176 279 25 77 131 279
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Bond and Income
without rider 84 66 113 243 84 129 158 243 21 66 113 243
with SDBR 86 72 123 263 86 135 168 263 23 72 123 263
with PDBR 88 76 130 278 88 139 175 278 25 76 130 278
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Equity Index
without rider 79 51 88 191 79 114 133 191 16 51 88 191
with SDBR 81 57 98 212 81 120 143 212 18 57 98 212
with PDBR 83 61 106 228 83 124 151 228 20 61 106 228
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Small-Cap Index
without rider 83 61 106 228 83 124 151 228 20 61 106 228
with SDBR 85 68 116 249 85 131 161 249 22 68 116 249
with PDBR 86 72 123 264 86 135 168 264 23 72 123 264
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REIT
without rider 89 80 136 289 89 143 181 289 26 80 136 289
with SDBR 91 86 146 308 91 149 191 308 28 86 146 308
with PDBR 92 90 153 323 92 153 198 323 29 90 153 323
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International
without rider 87 75 128 273 87 138 173 273 24 75 128 273
with SDBR 89 81 138 293 89 144 183 293 26 81 138 293
with PDBR 91 85 145 307 91 148 190 307 28 85 145 307
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Emerging Markets
without rider 92 89 151 318 92 152 196 318 29 89 151 318
with SDBR 94 94 160 337 94 157 205 337 31 94 160 337
with PDBR 95 99 168 351 95 162 213 351 32 99 168 351
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YOUR INVESTMENT OPTIONS
You may choose among the seventeen different Variable Investment Options and
the Fixed Option.
Your Variable Investment Options
Each Variable Investment Option invests in a separate Portfolio of the Fund.
For your convenience, the following chart summarizes some basic data about each
Portfolio. This chart is only a summary. For more complete information on each
Portfolio, including a discussion of the Portfolio's investment techniques and
the risks associated with its investments, see the accompanying Fund
Prospectus. No assurance can be given that a Portfolio will achieve its
investment objective. YOU SHOULD READ THE FUND PROSPECTUS CAREFULLY BEFORE
INVESTING.
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Primary Investments
Portfolio Objective (under normal circumstances) Portfolio Manager
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Money Market Current income consistent Highest quality money market Pacific Life
with preservation of instruments believed to have
capital. limited credit risk.
- ------------------------------------------------------------------------------------------------------
High Yield High level of current Fixed income securities with Pacific Life
Bond income. lower and medium-quality credit
ratings and intermediate to long
terms to maturity.
- ------------------------------------------------------------------------------------------------------
Managed Bond Maximize total return Medium and high-quality fixed Pacific Investment
consistent with prudent income securities with varying Management Company
investment management. terms to maturity.
- ------------------------------------------------------------------------------------------------------
Government Maximize total return Fixed income securities that are Pacific Investment
Securities consistent with prudent issued or guaranteed by the U.S. Management Company
investment management. government, its agencies or
government-sponsored enterprises.
- ------------------------------------------------------------------------------------------------------
Aggressive Capital appreciation. Equity securities of small Alliance Capital
Equity emerging-growth companies and Management L.P.
medium-sized companies.
- ------------------------------------------------------------------------------------------------------
Growth LT Long-term growth of capital Equity securities of a large Janus Capital
consistent with the number of companies of any size. Corporation
preservation of capital.
- ------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Equity securities of large and J.P. Morgan
and income. medium-sized dividend-paying U.S. Investment Management
companies. Inc.
- ------------------------------------------------------------------------------------------------------
Multi-Strategy High total return. A mix of equity and fixed income J.P. Morgan
securities. Investment Management
Inc.
- ------------------------------------------------------------------------------------------------------
Large-Cap Long-term growth of capital. Equity securities of large U.S. Salomon Brothers
Value Current income is of companies. Asset Management Inc
secondary importance.
- ------------------------------------------------------------------------------------------------------
Mid-Cap Value Capital appreciation. Equity securities of medium-sized Lazard Asset
U.S. companies believed to be Management
undervalued.
- ------------------------------------------------------------------------------------------------------
Equity Capital appreciation. Equity securities of large U.S. Goldman Sachs
Current income is of growth-oriented companies. Asset Management
secondary importance.
- ------------------------------------------------------------------------------------------------------
Bond and Total return and income A wide range of fixed income Goldman Sachs
Income consistent with prudent securities with varying terms to Asset Management
investment management. maturity, with an emphasis on
long-term bonds.
- ------------------------------------------------------------------------------------------------------
Equity Index Investment results that Equity securities of companies Bankers Trust
correspond to the total that are included in the Standard Company
return of common stocks & Poor's 500 Composite Stock
publicly traded in the U.S. Price Index.
- ------------------------------------------------------------------------------------------------------
Small-Cap Investment results that Equity securities of companies Bankers Trust
Index correspond to the total that are included in the Russell Company
return of an index of small 2000 Small Stock Index.
capitalization companies.
- ------------------------------------------------------------------------------------------------------
REIT Current income and long-term Equity securities of real estate Morgan Stanley Asset
capital appreciation. investment trusts. Management
- ------------------------------------------------------------------------------------------------------
International Long-term capital Equity securities of companies of Morgan Stanley Asset
appreciation. any size located in developed Management
countries outside of the U.S.
- ------------------------------------------------------------------------------------------------------
Emerging Long-term growth of capital. Equity securities of companies Blairlogie Capital
Markets that are located in countries Management
that are generally regarded as
"emerging market" countries.
- ------------------------------------------------------------------------------------------------------
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The Investment Adviser
We are the investment adviser for the Fund. We and the Fund have retained other
portfolio managers, supervised by us, for fifteen of the Portfolios.
Variable Investment Option Performance
Historical performance information can help you understand how investment
performance can affect your investment in the Variable Investment Options.
Although the Subaccounts were established January 2, 1996 and have no
historical performance prior to that date, each Subaccount will be investing in
shares of a Portfolio of the Fund, and the majority of these Portfolios do have
historical performance data which covers a longer period. Performance data
include total returns for each Subaccount, current and effective yields for the
Money Market Subaccount, and yields for the other fixed income Subaccounts.
Calculations are in accordance with standard formulas prescribed by the SEC
which are described in the SAI. Yields do not reflect any charge for premium
taxes and/or other taxes; this exclusion may cause yields to show more
favorable performance. Total returns may or may not reflect withdrawal charges,
Annual Fees or any charge for premium and/or other taxes; data that do not
reflect these charges may show more favorable performance.
The SAI presents some hypothetical performance data. The SAI also presents some
performance benchmarks, based on unmanaged market indices, such as the Standard
& Poor's 500 Composite Stock Price Index (S&P 500), and on "peer groups," which
use other managed funds with similar investment objectives. These benchmarks
may give you a broader perspective when you examine hypothetical or actual
Subaccount performance.
In addition, we may provide you with reports both as an insurance company and
as to our claims paying ability that are produced by rating agencies and
organizations.
Your Fixed Option
The Fixed Option offers you a guaranteed minimum interest rate on the amount
you allocate to this Option. Amounts you allocate to this Option, and your
earnings credited are held in our General Account. For more detailed
information about this Option, see THE GENERAL ACCOUNT section in this
Prospectus.
PURCHASING YOUR CONTRACT
How to Apply for Your Contract
To purchase a Contract, fill out an application and submit it along with your
initial Purchase Payment to Pacific Life Insurance Company at P.O. Box 100060,
Pasadena, California 91189-0060. If your application and payment are complete
when received, or once they have become complete, we will issue your Contract
within two Business Days. If some information is missing from your application,
we may delay issuing your Contract while we obtain the missing information;
however, we will not hold your initial Purchase Payment for more than five
Business Days without your permission.
You may also purchase a Contract by exchanging your existing contract. You must
submit all contracts to be exchanged when you submit your application. Call
your representative, or call us at 1-800-722-2333, if you are interested in
this option.
We reserve the right to reject any application or Purchase Payment for any
reason, subject to any applicable nondiscrimination laws and to our own
standards and guidelines. The maximum age of a Contract Owner, including Joint
owners and Contingent Owners, for which a Contract will be issued is 80. The
Contract Owner's age is calculated as of his or her age last birthday. If the
sole Contract Owner or sole Annuitant named in the application for a Contract
dies prior to our issuance of a Contract, then the application for the Contract
and/or any Contract issued shall be deemed null and void; and any premiums we
receive, including any proceeds received in connection with an exchange or
transfer, will be returned to the applicant/Owner or the applicant/Owner's
estate.
11
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Purchasing an Optional Death Benefit Rider
You may purchase either the Stepped-Up Death Benefit Rider (the "SDBR") or
Premier Death Benefit Rider (the "PDBR") (subject to state availability) at the
time your application is completed. You may not purchase both Riders nor may
you purchase a SDBR or PDBR after the Contract Date.
If you select one of these Riders, the SDBR or PDBR, as applicable, will remain
in effect until the earlier of: (a) the full withdrawal of the amount available
for withdrawal under the Contract; (b) when death benefit proceeds become
payable under the Contract; (c) any termination of the Contract in accordance
with the provisions of the Contract; or (d) the Annuity Date. The SDBR or PDBR
may not otherwise be cancelled. The SDBR or PDBR may only be purchased if the
age of each Annuitant is 75 or younger on the Contract Date.
Making Your Purchase Payments
Making Your Initial Payment
Your initial Purchase Payment must be at least $10,000 if you are buying a Non-
Qualified Contract, and at least $2,000 if you are buying a Qualified Contract.
You may pay this entire amount when you submit your application, or you may
choose our pre-authorized checking plan ("PAC"), which allows you to pay in
equal monthly installments over one year (at least $800 per month for Non-
Qualified Contracts, and at least $150 per month for Qualified Contracts). If
you choose PAC, you must make your first installment payment when you submit
your application. Further requirements for PAC are discussed in the PAC form.
You must obtain our consent before making an initial or additional Purchase
Payment that will bring your aggregate Purchase Payments over $1,000,000.
Making Additional Payments
You may choose to invest additional amounts in your Contract at any time. Each
additional Purchase Payment above the initial Purchase Payment requirements
must be at least $250 for Non-Qualified Contracts and $50 for Qualified
Contracts. In certain states additional payments are limited. See APPENDIX A:
STATE LAW VARIATIONS.
Forms of Payment
Your initial and additional Purchase Payments may be sent by personal or bank
check or by wire transfer. You may also make additional PAC Purchase Payments
via electronic funds transfer. All checks must be drawn on U.S. funds. If you
make Purchase Payments by check other than a cashier's check, your payment of
any withdrawal proceeds and any refund during your "free look" period may be
delayed until your check has cleared.
Credit Enhancements
We will add a Credit Enhancement to your Contract Value at the time each
Purchase Payment is applied to the Contract and on the first Contract
Anniversary, if applicable. The amount of a Credit Enhancement is determined as
a percentage of each Purchase Payment applied to the Contract. The Credit
Enhancement will be allocated among Investment Options in the same proportion
that the applicable Purchase Payment is allocated. The amount returned if the
Contract Owner exercises his or her right to return the Contract during your
Right to Cancel period will be reduced by any Credit Enhancements applied.
The Credit Enhancement with respect to each Purchase Payment will be based on
total Purchase Payments made into this Contract less total withdrawals,
including any withdrawal charges, from this Contract as of the date the
Purchase Payment is applied. The Credit Enhancement as a percentage of the
Purchase Payment is set forth below:
<TABLE>
<CAPTION>
Credit
Total Purchase Payments Less Total Withdrawals Enhancement
---------------------------------------------- -----------
<S> <C>
Less than $100,000....................................... 3.0%
At least $100,000 but less than $2,500,000............... 4.0%
$2,500,000 or more....................................... 5.0%
</TABLE>
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On the first Contract Anniversary we will calculate the total Purchase Payments
applied to the Contract, less total withdrawals, including any withdrawal
charges, from the Contract during the first Contract Year. If the result is at
least $100,000, all prior Purchase Payments that received a 3.0% Credit
Enhancement will receive an additional 1% Credit Enhancement on the first
Contract Anniversary. This additional 1% Credit Enhancement will not apply to
those first Year Purchase Payments that received a 4.0% or 5.0% Credit
Enhancement. The additional 1% Credit Enhancement will be allocated among
Investment Options according to your most recent allocation instructions in
effect as of the first Contract Anniversary.
HOW YOUR PAYMENTS ARE ALLOCATED
Choosing Your Investment Options
You may allocate your Purchase Payments among the seventeen Subaccounts and the
Fixed Option. Allocations of your initial Purchase Payment to the Investment
Options you selected will be effective either on your Contract Date or on your
Free Look Transfer Date. See WITHDRAWALS--Right to Cancel ("Free Look"). Each
additional Purchase Payment will be allocated to the Investment Options
according to your allocation instructions in your application, or most recent
instructions, if any, subject to the terms described in the WITHDRAWALS--Right
to Cancel ("Free Look") section. We reserve the right to require that your
allocation to any particular Investment Option must be at least $500. We also
reserve the right to transfer any remaining Account Value that is not at least
$500 to your other Investment Options on a prorata basis relative to your most
recent allocation instructions. If your Contract is issued in exchange for
another annuity contract or a life insurance contract, our administrative
procedures may vary depending on the state in which your Contract is delivered.
If your initial Purchase Payment is received from multiple sources, we will
consider them all your initial Purchase Payment.
Investing in Variable Investment Options
Each time we allocate your investment, and any Credit Enhancement, to a
Variable Investment Option, your Contract is credited with a number of
"Subaccount Units" in that Subaccount. The number of Subaccount Units credited
is equal to the amount you have allocated to that Subaccount, including any
Credit Enhancement, divided by the "Unit Value" of one Unit of that Subaccount.
Example: you allocate $600 to the Government Securities Subaccount. At the
end of the Business Day on which your allocation is effective, the value of
one Unit in the Government Securities Subaccount is $15. As a result, 40
Subaccount Units are credited to your Contract for your $600.
Your Variable Account Value Will Change
After we credit your Contract with Subaccount Units, the value of those Units
will usually fluctuate. This means that, from time to time, your investment
allocated to the Variable Investment Options may be worth more or less than the
original allocations to which those amounts can be attributed. Fluctuations in
Subaccount Unit Value will not change the number of Units credited to your
Contract.
Subaccount Unit Values will vary in accordance with the investment performance
of the corresponding Portfolio. For example, the value of Units in the Managed
Bond Subaccount will change to reflect the performance of the Managed Bond
Portfolio (including that Portfolio's investment income, its capital gains and
losses, and its expenses). Subaccount Unit Values are also adjusted to reflect
the Administrative Fee and applicable Risk Charge imposed on the Separate
Account.
We calculate the value of all Subaccount Units on each Business Day. The SAI
contains a detailed discussion of these calculations.
When Your Investment is Effective
The day your allocation is effective determines the Unit Value at which
Subaccount Units are attributed to your Contract. In the case of transfers or
withdrawals, the effective day determines the Unit Value at which affected
Subaccount Units are debited and/or credited under your Contract. The Unit
Value at which purchase, transfer and withdrawal transactions are credited or
debited is the value of the Subaccount Units next calculated after your
transaction is effective. Your Variable Account Value begins to reflect the
investment performance results of your new allocations on the day after your
transaction is effective.
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<PAGE>
Your initial Purchase Payment is usually effective on the day we issue your
Contract. Any additional allocation is effective on the day we receive your
Purchase Payment in proper form. See ADDITIONAL INFORMATION--Inquiries and
Submitting Forms and Requests.
Transfers
Once your Payments are allocated to the Investment Options you selected, you
may transfer your Account Value from any Investment Option to any other
Investment Option. Certain restrictions apply to the Fixed Option. See THE
GENERAL ACCOUNT--Withdrawals and Transfers. Transfer requests are generally
effective on the Business Day we receive them in proper form. If your Contract
is delivered in a state that requires refund of Purchase Payments under your
Right to Cancel, we generally may prohibit transfers until 15 days after your
Contract Date. See WITHDRAWALS--Right to Cancel ("Free Look").
No transfer fee is currently imposed for transfers among the Investment
Options, but we reserve the right to impose a transaction fee for transfers in
the future; a fee of up to $15 per transfer may apply to transfers in excess of
15 in any Contract Year. Transfers under the dollar cost averaging and earnings
sweep options (but not the portfolio rebalancing option described below) are
counted toward your total transfers in a Contract Year. Any such fee would be
charged against your Investment Options proportionately, based on your relative
Account Value in each immediately after the transfer.
If your transfer request results in your having a remaining Account Value in an
Investment Option that is less than $500 immediately after such transfer, we
may transfer that Account Value to your other Investment Options on a pro rata
basis, relative to your most recent allocation instructions.
Exchanges of Annuity Units in any Subaccount(s) to any other Subaccount(s)
after the Annuity Date are limited to four in any twelve-month period. See THE
GENERAL ACCOUNT--Withdrawals and Transfers in the Prospectus and THE CONTRACTS
AND THE SEPARATE ACCOUNT in the SAI.
Automatic Transfer Options
We offer three automatic transfer options: dollar cost averaging, portfolio
rebalancing and earnings sweep. There is no charge for these options, although
transfers under the dollar cost averaging and earnings sweep options are
counted towards your total transfers in a Contract Year.
Dollar Cost Averaging
Dollar cost averaging is a method in which you buy securities in a series of
regular purchases instead of in a single purchase. This allows you to average
the securities' prices over time, and may permit a "smoothing" of abrupt peaks
and drops in price. Prior to your Annuity Date, you may use dollar cost
averaging to transfer amounts, over time, from any Investment Option with an
Account Value of at least $5,000 to one or more Variable Investment Options.
Each transfer must be for at least $250. Detailed information appears in the
SAI.
Portfolio Rebalancing
You may instruct us to maintain a specific balance of Variable Investment
Options under your Contract (e.g., 30% in the Equity Index Subaccount, 40% in
the Managed Bond Subaccount, and 30% in the Growth LT Subaccount) prior to your
Annuity Date. Periodically, we will "rebalance" your values in the elected
Subaccounts to the percentages you have specified. Rebalancing may result in
transferring amounts from a Subaccount earning a relatively higher return to
one earning a relatively lower return. The Fixed Option is not available for
rebalancing. Detailed information appears in the SAI.
Earnings Sweep
You may instruct us to make automatic periodic transfers of your earnings from
the Money Market Subaccount or from the Fixed Option to one or more Variable
Investment Options (other than the Money Market Subaccount). Detailed
information appears in the SAI.
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<PAGE>
CHARGES, FEES AND DEDUCTIONS
Withdrawal Charge
No sales charge is imposed on any Purchase Payment. Your Purchase Payments may,
however, be subject to a withdrawal charge; this charge may apply to amounts
you withdraw under your Contract prior to the Annuity Date, depending on the
length of time each Purchase Payment has been invested and on the amount you
withdraw. No withdrawal charge is imposed on: (i) death benefit proceeds,
except as provided under the Amount of the Death Benefit: Death of a Contract
Owner Section; (ii) amounts converted after the first Contract Anniversary to a
life contingent Annuity Option or an Annuity Option with a period certain of at
least seven years; (iii) withdrawals by Owners to meet the minimum distribution
rules for Qualified Contracts as they apply to amounts held under the Contract;
or, (iv) subject to medical evidence satisfactory to us, after the first
Contract Anniversary, full or partial withdrawals if the Annuitant has been
diagnosed with a medically determinable condition that results in a life
expectancy of twelve (12) months or less.
Free Withdrawals
During a Contract Year, you may withdraw free of withdrawal charge amounts up
to your "Eligible Purchase Payments". Qualified plans have special restrictions
on withdrawals. See Special Restrictions Under Qualified Plans on page 29.
Eligible Purchase Payments include 10% of all Purchase Payments that have an
"age" of less than eight years, plus 100% of all Purchase Payments that have an
"age" of eight years or more. Once all Purchase Payments have been deemed
withdrawn, any withdrawal will be deemed a withdrawal of your Earnings and will
be free of the withdrawal charge. For those Contracts issued to a Charitable
Remainder Trust (CRT), the amount available for withdrawal free of withdrawal
charges during a Contract Year includes all Eligible Purchase Payments plus all
Earnings even if all Purchase Payments have not been deemed withdrawn.
Example: You make an initial Purchase Payment of $10,000 in Contract Year 1,
and make additional Purchase Payments of $1,000 and $6,000 in Contract Year
2. With Earnings (Credit Enhancements included), your Contract Value in
Contract Year 3 is $19,000. In Contract Year 3, you may withdraw $1,700 free
of the withdrawal charge (your total Purchase Payments were $17,000, so 10%
of that equals $1,700). After this withdrawal, your Contract Value is
$17,300. In Contract Year 4, you may withdraw another $1,700 (10% of the
total Purchase Payments of $17,000) free of any withdrawal charge.
How the Charge is Determined
The amount of the charge depends on how long each Purchase Payment was held
under your Contract. Each Purchase Payment you make is considered to have a
certain "age," depending on the length of time since that Purchase Payment was
effective. A Purchase Payment is "age one" from the day it is effective until
your next Contract Anniversary; beginning on that Contract Anniversary, your
Payment will have an "age of two" for a full Contract Year and increases in age
on each Contract Anniversary. When you withdraw an amount subject to the
withdrawal charge, the "age" of the Purchase Payments you withdraw determines
the level of withdrawal charge as follows:
<TABLE>
<CAPTION>
Withdrawal
Charge as a
percentage
"Age" of Payment of the amount
in Years withdrawn
---------------- -------------
<S> <C>
1......................................... 7%
2......................................... 7%
3......................................... 7%
4......................................... 7%
5......................................... 5%
6......................................... 5%
7......................................... 4%
8 or more................................. 0%
</TABLE>
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<PAGE>
We calculate your withdrawal charge by assuming your withdrawal is applied to
Purchase Payments first and in the order your Purchase Payments were received.
The withdrawal charge will be deducted proportionally among all Investment
Options from which your withdrawal occurs. See THE GENERAL ACCOUNT--Withdrawals
and Transfers.
We pay sales commissions and other expenses associated with the promotion and
sales of the Contracts to broker-dealers. The withdrawal charge is designed to
reimburse us for these costs, although we expect that our actual expenses will
be greater than the amount of the withdrawal charge. Broker-dealers may receive
aggregate commissions of up to 6.25% of your aggregate Purchase Payments.
Under certain circumstances and in exchange for lower initial commissions,
certain sellers of Contracts may be paid a persistency trail commission which
will take into account, among other things, the length of time Purchase
Payments have been held under a Contract, and Account Values. A trail
commission is not anticipated to exceed 1.00%, on an annual basis, of the
Account Values considered in connection with the trail commission. We may also
pay override payments, expense allowances, bonuses, wholesaler fees and
training allowances. Registered representatives earn commissions from the
broker-dealers with which they are affiliated and such arrangements may vary.
In addition, registered representatives who meet specified production levels
may qualify, under sales incentive programs adopted by us, to receive non-cash
compensation such as expense-paid trips, expense-paid educational seminars, and
merchandise.
Withdrawal Enhancements
We reserve the right, in our sole discretion, to calculate your withdrawal
charge on more favorable terms to you than as otherwise described in the
preceding paragraph. These Withdrawal Enhancements may include an acceleration
of the day on which the "age" of any Purchase Payment(s) is considered to occur
or a waiver of some or all of the withdrawal charge in the event the Guaranteed
Interest Rate is less than a specified rate. Although we retain the discretion
to add a Withdrawal Enhancement, once it is added, it is binding on us and
effective for any specified period we have designated. In the event of any
Withdrawal Enhancement, we will notify the Owner within thirty (30) days of the
effective date of the Withdrawal Enhancement.
Transfers
Transfers of all or part of your Account Value from one Investment Option to
another are not considered a withdrawal of an amount from your Contract, so no
withdrawal charge is imposed at the time of transfer. See HOW YOUR PAYMENTS ARE
ALLOCATED--Transfers and THE GENERAL ACCOUNT--Withdrawals and Transfers.
Premium Taxes
Depending on your state of residence (among other factors), a tax may be
imposed on your Purchase Payments at the time your payment is made, at the time
of a partial or full withdrawal, at the time any death benefit proceeds are
paid, at the Annuity Date or at such other time as taxes may be imposed. Tax
rates ranging from 0% to 3.5% are currently in effect, but may change in the
future. Some local jurisdictions also impose a tax.
If we pay any taxes attributable to Purchase Payments ("premium taxes") on your
behalf, we will impose a similar charge against your Contract Value. We
normally will charge you when you annuitize some or all of your Contract Value.
We reserve the right to impose this charge for applicable premium taxes when
you make a full or partial withdrawal, at the time any death benefit proceeds
are paid, or when those taxes are incurred by us. For these purposes, "premium
taxes" include any state or local premium or retaliatory taxes and, where
approval has been obtained, federal premium taxes and any federal, state or
local income, excise, business or any other type of tax (or component thereof)
measured by or based upon, directly or indirectly, the amount of Purchase
Payments we have received. We will base this charge on the Contract Value, the
amount of the transaction, the aggregate amount of Purchase Payments we receive
under your Contract, or any other amount, that in our sole discretion we deem
appropriate.
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<PAGE>
We may also charge the Separate Account or your Contract Value for taxes
attributable to the Separate Account or the Contract, including income taxes
attributable to the Separate Account or to our operations with respect to the
Contract, or taxes attributable, directly or indirectly, to Purchase Payments.
Currently, we do not impose any such charges.
Waivers and Reduced Charges
We may agree to reduce or waive the withdrawal charge, or credit additional
amounts under our Contracts, in situations where selling and/or maintenance
costs associated with the Contracts are reduced, such as the sale of several
Contracts to the same Owner(s), sales of large Contracts, sales of Contracts in
connection with a group or sponsored arrangement or mass transactions over
multiple Contracts.
We will only reduce or waive such charges or credit additional amounts on any
Contract where expenses associated with the sale of the Contract and/or costs
associated with administering and maintaining the Contract are reduced. Any
additional amounts will be added to a Contract when we apply Purchase Payments.
We reserve the right to terminate waiver, reduced charge and crediting programs
at any time, including for issued Contracts.
With respect to additional amounts as described above, you will not keep any
amounts credited if you return your Contract during the Free Look period as
described under WITHDRAWALS--Right to Cancel ("Free Look").
Mortality and Expense Risk Charge
We assess a charge against the assets of each Subaccount to compensate for
certain mortality and expense risks that we assume under the Contracts (the
"Risk Charge"). The risk that an Annuitant will live longer (and therefore
receive more annuity payments) than we predict through our actuarial
calculations at the time the Contract is issued is "mortality risk." We also
bear mortality risk in connection with death benefits payable under the
Contracts. The risk that the expense charges and fees under the Contracts and
Separate Account are less than our actual administrative and operating expenses
is called "expense risk."
This Risk Charge is assessed daily at an annual rate equal to 1.25% of each
Subaccount's assets; this charge may not be increased for the duration of your
Contract.
The Risk Charge will stop at the Annuity Date if you select a fixed annuity;
the base Risk Charge, but not any increase in the Risk Charge for an optional
Death Benefit Rider, will continue after the Annuity Date if you choose any
variable annuity, even though we do not bear mortality risk if your Annuity
Option is Period Certain Only.
We will realize a gain if the Risk Charge exceeds our actual cost of expenses
and benefits, and will suffer a loss if such actual costs exceed the Risk
Charge. Any gain will become part of our General Account; we may use it for any
reason, including covering sales expenses on the Contracts.
Increase in Risk Charge If an Optional Death Benefit Rider Is Purchased
We increase your Risk Charge by an annual rate equal to .20% of each
Subaccount's assets if you purchase the Stepped-Up Death Benefit Rider (the
"SDBR") or .35% if you purchase the Premier Death Benefit Rider (the "PDBR").
The total Risk Charge annual rate will be 1.45% if the SDBR is purchased or
1.60% if the PDBR is purchased. Any increase in your Risk Charge will not
continue after the Annuity Date. See PURCHASING YOUR CONTRACT--Purchasing an
Optional Death Benefit Rider.
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<PAGE>
Administrative Fee
We charge an Administrative Fee as compensation for costs we incur in operating
the Separate Account and issuing and administering the Contracts, including
processing applications and payments, and issuing reports to you and to
regulatory authorities.
The Administrative Fee is assessed daily at an annual rate equal to .15% of the
assets of each Subaccount. This fee is guaranteed not to increase for the life
of your Contract. A relationship will not necessarily exist between the actual
administrative expenses attributable to a particular Contract and the
Administrative Fee paid in respect of that particular Contract. The
Administrative Fee will continue after the Annuity Date if you choose any
variable annuity.
Expenses of the Fund
Your Variable Account Value reflects advisory fees and other expenses incurred
by the various Portfolios of the Fund, net of any applicable waivers and/or
reimbursements. These fees and expenses may vary. The Fund is governed by its
own Board of Trustees, and your Contract does not fix or specify the level of
expenses of any Portfolio. The Fund's fees and expenses are described in detail
in the Fund's Prospectus and in its SAI.
RETIREMENT BENEFITS AND OTHER PAYOUTS
Selecting Your Annuitant
When you submit the application for your Contract, you must choose a sole
Annuitant or two Joint Annuitants. We will send the annuity payments to the
payee that you designate. If you are buying a Qualified Contract, you must be
the sole Annuitant; if you are buying a Non-Qualified Contract you may choose
yourself and/or another person. Whether you choose to have a sole or two Joint
Annuitants, you may choose a Contingent Annuitant; more information on these
options is provided in the SAI. You will not be able to add or change a sole or
Joint Annuitant after your Contract is issued; however, if you are buying a
Qualified Contract, you may add a Joint Annuitant on the Annuity Date. You will
be able to add or change a Contingent Annuitant until your Annuity Date or the
death of your sole Annuitant or both Joint Annuitants, whichever occurs first;
however, once your Contingent Annuitant has become the Annuitant under your
Contract, no additional Contingent Annuitant may be named. No Annuitant
(Primary, Joint or Contingent) may be named upon or after reaching his or her
81st birthday. We reserve the right to require proof of age or survival of the
Annuitant(s).
Annuitization
You may choose both your Annuity Date and your Annuity Option. At the Annuity
Date, you may elect to annuitize some or all of your Net Contract Value, less
any applicable charge for premium taxes and/or other taxes, (the "Conversion
Amount"), as long as such Conversion Amount annuitized is at least $10,000,
subject to any state exceptions. (See APPENDIX A: STATE LAW VARIATIONS). If you
annuitize only a portion of this available Contract Value, you may have the
remainder distributed, less any applicable charge for premium taxes and/or
other taxes, and any applicable withdrawal charge. Any such distribution will
be made to you in a single sum if the remaining Conversion Amount is less than
$10,000 on your Annuity Date. Distributions under your Contract may have tax
consequences. You should consult a qualified tax adviser for information on
annuitization.
Choosing Your Annuity Date ("Annuity Start Date")
You should choose your Annuity Date when you submit your application or we will
apply a default Annuity Date to your Contract.
You may change your Annuity Date by notifying us, in proper form, at least ten
Business Days prior to the earlier of your current Annuity Date or your new
Annuity Date.
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Your Annuity Date cannot be earlier than your first Contract Anniversary and
must occur on or before a certain date: If you have a sole Annuitant, your
Annuity Date cannot be later than his or her 95th birthday. However, to meet
IRS minimum distribution rules, your Annuity Date may need to be earlier. If
you have Joint Annuitants and a Non-Qualified Contract, your Annuity Date
cannot be later than your younger Joint Annuitant's 95th birthday. Different
requirements may apply in some states. If your Contract is a Qualified
Contract, you may also be subject to additional restrictions. Adverse federal
tax consequences may result if you choose an Annuity Date that is prior to an
Annuitant's attained age 59 1/2. See FEDERAL TAX STATUS.
You should carefully review the Annuity Options with your financial tax
adviser, and, for Contracts used in connection with a Qualified Plan, reference
should be made to the terms of the particular plan and the requirements of the
Code for pertinent limitations respecting annuity payments and other matters.
For instance, under requirements for retirement plans that qualify under
Section 401 or 408 of the Code, annuity payments generally must begin no later
than April 1 of the calendar year following the year in which the Annuitant
reaches age 70 1/2. However, if a plan qualified under Section 401(a) of the
Code or a 403(b) contract so provides, no distributions are required for
individuals who are employed after age 70 1/2 (other than 5% owners) until they
retire. If a plan is qualified under Section 408A of the Code, no minimum
distributions are required at any time.
For retirement plans that qualify under Section 401 or 408 of the Code, the
period elected for receipt of annuity payments under Annuity Options 2 and 4
(a) generally may be no longer than the joint life expectancy of the Annuitant
and Beneficiary in the year that the Annuitant reaches age 70 1/2, and (b) must
be shorter than such joint life expectancy if the Beneficiary is not the
Annuitant's spouse and is more than 10 years younger than the Annuitant. Under
Option 3, if the secondary or other Annuitant is not the Annuitant's spouse and
is more than 10 years younger than the Annuitant, the 66 2/3% and 100%
elections specified below may not be available. The restrictions on options for
retirement plans that qualify under Sections 401 and 408 also apply to a
retirement plan that qualifies under Section 403(b) with respect to amounts
that accrued after December 31, 1986.
If you annuitize only a portion of your Net Contract Value on your Annuity
Date, you may, at that time, have the option to elect not to have the remainder
of your Contract Value distributed, but instead to continue your Contract with
that remaining Contract Value (a "continuing Contract"). If this option is
available, you would then choose a second Annuity Date for your continuing
Contract, and all references in this Prospectus to your "Annuity Date" would,
in connection with your continuing Contract, be deemed to refer to that second
Annuity Date. This option may not be available, or may be available only for
certain types of Contracts. You should be aware that some or all of the
payments received before the second Annuity Date may be fully taxable. We
recommend that you call your tax adviser for more information if you are
interested in this option.
Default Annuity Date and Options
If you have a Non-Qualified Contract and you do not choose an Annuity Date when
you submit your application, your Annuity Date will be your Annuitant's 95th
birthday or your younger Joint Annuitant's 95th birthday, whichever applies;
however some states' laws may require a different Annuity Date. Certain
Qualified Plans may require annuitization to occur at an earlier age.
If you have not specified an Annuity Option or do not instruct us otherwise, at
your Annuity Date your Net Contract Value, less any charges for premium taxes
and/or other taxes, will be annuitized (if this net amount is at least $10,000)
as follows: the net amount from your Fixed Option will be converted into a
fixed-dollar annuity and the net amount from your Variable Account Value will
be converted into a variable-dollar annuity directed to the Subaccounts
proportionate to your Account Value in each. If you have a Non-Qualified
Contract, or if you have a Qualified Contract and are not married, your default
Annuity Option will be Life with a ten year Period Certain. If you have a
Qualified Contract and you are married, your default Annuity Option will be
Joint and Survivor Life with survivor payments of 50%; your spouse will
automatically be named your Joint Annuitant.
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Choosing Your Annuity Option
You may make three basic decisions about your annuity payments. First, you may
choose whether you want those payments to be a fixed-dollar amount and/or a
variable-dollar amount. Second, you may choose the form of annuity payments
(see Annuity Options below). Third, you may decide how often you want annuity
payments to be made (the "frequency" of the payments). You may not change these
selections after the Annuity Date.
Fixed and Variable Annuities
You may choose a fixed annuity (i.e., with fixed-dollar amounts), a variable
annuity (i.e., with variable-dollar amounts), or you may choose both,
converting one portion of the net amount you annuitize into a fixed annuity and
another portion into a variable annuity.
If you select a fixed annuity, each periodic annuity payment received will be
equal to the initial annuity payment, unless you select a joint and survivor
life annuity with reduced survivor payments and the Primary Annuitant dies. Any
net amount you convert to a fixed annuity will be held in our General Account,
(but not under the Fixed Option).
If you select a variable annuity, you may choose as many Variable Investment
Options as you wish; the amount of the periodic annuity payments will vary with
the investment results of the Variable Investment Options selected. After the
Annuity Date, Annuity Units may be exchanged among available Variable
Investment Options up to four times in any twelve-month period. How your
Contract converts into a variable annuity is explained in more detail in THE
CONTRACTS AND THE SEPARATE ACCOUNT in the SAI.
Annuity Options
Four Annuity Options are currently available under the Contracts, although
additional options may become available in the future.
1. Life Only. Periodic payments are made to the designated payee during the
Annuitant's lifetime. Payments stop when the designated payee dies.
2. Life with Period Certain. Periodic payments are made to the designated
payee during the Annuitant's lifetime, with payments guaranteed for a
specified period. You may choose to have payments guaranteed for anywhere
from 7 through 30 years (in full years only). If the Annuitant dies
before the guaranteed payments are completed, the Owner receives the
remainder of the guaranteed payments, if living; otherwise the
Beneficiary, if living; otherwise the Owner's estate.
3. Joint and Survivor Life. Periodic payments are made during the lifetime
of the Primary Annuitant. After the death of the Primary Annuitant,
periodic payments are based on the life of the secondary Annuitant named
in the election if and so long as such secondary Annuitant lives. You may
choose to have the payments to the surviving secondary Annuitant equal
50%, 66 2/3% or 100% of the original amount payable made during the
lifetime of the Primary Annuitant (you must make this election when you
choose your Annuity Option). If you elect a reduced payment based on the
life of the secondary Annuitant, fixed annuity payments will be equal to
50% or 66 2/3% of the original fixed payment payable during the lifetime
of the Primary Annuitant; variable annuity payments will be determined
using 50% or 66 2/3%, as applicable, of the number of Annuity Units for
each Subaccount credited to the Contract. Payments stop when both
Annuitants have died.
4. Period Certain Only. Periodic payments are made to the designated payee
over a specified period. You may choose to have payments continue for
anywhere from 7 through 30 years (in full years only). If the Annuitant
dies before the guaranteed payments are completed, we pay the Owner the
remainder of the guaranteed payments, if living; otherwise the
Beneficiary, if living; otherwise the Owner's estate.
For Contracts issued in connection with a Qualified Plan, please refer to the
discussion above under "Choosing Your Annuity Date". If your Contract was
issued in connection with a Qualified Plan subject to Title I of the Employee
Retirement Income Security Act of 1974 ("ERISA"), your spouse's consent may be
required when you seek any distribution under your Contract, unless your
Annuity Option is Joint and Survivor Life with survivor payments of at least
50%, and your spouse is your Joint Annuitant.
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Frequency of Payments
You may choose to have annuity payments made monthly, quarterly, semiannually,
or annually. The amount of a variable payment will be determined in each period
on the date corresponding to your Annuity Date, and payment will be made on the
next succeeding day.
Your initial annuity payment must be at least $250. Depending on the net amount
you annuitize, this requirement may limit your options regarding the period
and/or frequency of annuity payments.
Your Annuity Payments
Amount of the First Payment
Your Contract contains tables that we use to determine the amount of the first
annuity payment under your Contract, taking into consideration the annuitized
portion of your Net Contract Value at the Annuity Date. This amount will vary,
depending on the annuity period and payment frequency you select; this amount
will be larger in the case of shorter Period Certain annuities and smaller for
longer Period Certain annuities. Similarly, this amount will be greater for a
Life Only annuity than for a Joint and Survivor Life annuity, because we will
expect to make payments for a shorter period of time on a Life Only annuity. If
you do not choose the Period Certain Only annuity, this amount will also vary
depending on the age of the Annuitant(s) on the Annuity Date and, for some
Contracts in some states, the sex of the Annuitant(s).
For fixed annuity payments, the guaranteed income factors in our tables are
based on an annual interest rate of 3% and the 1983a Annuity Mortality Table
with the ages set back 10 years. If you elect a fixed annuity, fixed annuity
payments will be based on the periodic income factors in effect for your
Contract on the Annuity Date which are at least the guaranteed income factors
under the Contract.
For variable annuity payments, the tables are based on an assumed annual
investment return of 5% and the 1983a Annuity Mortality Table with the ages set
back 10 years. If you elect a variable annuity, your initial variable annuity
payment will be based on the applicable variable annuity income factors in our
tables. You may choose any other annuity option we may offer on the option's
effective date. A higher assumed investment return would mean a larger first
variable annuity payment, but subsequent payments would increase only when
actual net investment performance exceeds the higher assumed rate and would
fall when actual net investment performance is less than the higher assumed
rate. A lower assumed rate would mean a smaller first payment and a more
favorable threshold for increases and decreases. If the actual net investment
performance is a constant 5% annually, annuity payments will be level. The
assumed investment return is explained in more detail in the SAI under THE
CONTRACTS AND THE SEPARATE ACCOUNT.
Death Benefits
Death benefit proceeds may be payable on proof of death before the Annuity Date
of the Annuitant or of any Contract Owner while the Contract is in force. The
amount of the death benefit proceeds will be paid according to the Death
Benefit Proceeds section below.
The "Notice Date" is the day on which we receive proof (in proper form) of
death and instructions regarding payment of death benefit proceeds.
Death Benefit Proceeds
Death benefit proceeds will be payable upon receipt, in proper form, of proof
of death and instructions regarding payment of death proceeds. Such proceeds
will equal the amount of the death benefit reduced by any charges for premium
taxes and/or other taxes and any Contract Debt. The death benefit proceeds will
be payable in a single sum, as an Annuity Option under this Contract or towards
the purchase of any Annuity Option we then offer, or in accordance with IRS
regulations (see Death of Owner Distribution Rules). Any such Annuity Option is
subject to all restrictions (including minimum amount requirements) as are
other annuities under this Contract; in addition, there may be legal
requirements that limit the recipient's Annuity Options and
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the timing of any payments. A recipient should consult a qualified tax adviser
before electing to receive an annuity.
Additional provisions apply if your Contract names a Joint or Contingent Owner
or Annuitant, or if the Beneficiary, Joint Owner, or Contingent Owner is your
spouse. Further information about these provisions is contained in the SAI.
Death of Owner Distribution Rules
If an Owner of a Non-Qualified Contract dies before the Annuity Date, any death
benefit proceeds under this Contract must begin distribution within five years
after the Owner's death. In order to satisfy this requirement, the designated
recipient must receive a lump sum payment or elect to receive an annuity for
life or over a period that does not exceed the life expectancy of the
designated recipient with annuity payments that start within one year after the
Owner's death. If an election to receive an annuity is not made within 60 days
of our receipt of proof in proper form of the Owner's death or, if earlier, 60
days (or shorter period as we permit) prior to the first anniversary of the
Owner's death, the lump sum option will be deemed elected, unless otherwise
required by law. If the lump sum option is deemed elected, we will consider
that deemed election as receipt of instructions regarding payment of death
benefit proceeds. If a Non-Qualified Contract has Joint Owners, this
requirement applies to the first Owner to die.
If the Owner was not an Annuitant but was a Joint Owner and there is a
surviving Joint Owner, that surviving Joint Owner is the designated recipient;
if no Joint Owner survives but a Contingent Owner is named in the Contract and
is living, he or she is the designated recipient, otherwise the designated
recipient is the Beneficiary; if no Beneficiary is living, the designated
recipient is the Owner's estate.
If the Owner was an Annuitant, the designated recipient is the Joint Owner, if
living; otherwise the Contingent Owner, if living; otherwise the Beneficiary;
if no Beneficiary is living, the designated recipient is the Owner's estate. A
sole designated recipient who is the Owner's spouse may elect to become the
Owner (and sole Annuitant if the deceased Owner had been the Annuitant) and
continue the Contract until the earliest of the spouse's death, the death of
the Annuitant, or the Annuity Date. A Joint or Contingent Owner who is the
designated recipient but not the Owner's spouse may not continue the Contract,
but may purchase a new Contract.
If you are a non-individual Owner of a Contract other than a Contract issued
under a Qualified Plan as defined in Section 401 or 403 of the Code, the
Primary Annuitant will be treated as the Owner of the Contract for purposes of
these Distribution Rules. If there is a change in the Primary Annuitant prior
to the Annuity Date, such change will be treated as the death of the Owner. The
amount of the death benefit in this situation will be (a) the Contract Value if
the non-individual Owner elects to maintain the Contract and reinvest the
Contract Value into the Contract in the same amount as immediately prior to the
distribution, or (b) the Contract Value less any withdrawal and/or transaction
fee, any charges for withdrawals, and/or premium taxes and/or other taxes, if
the non-individual Owner elects a cash distribution. The amount of the death
benefit will be determined as of the Business Day we receive, in proper form,
the request to change the Primary Annuitant and instructions regarding
maintaining the Contract or cash distribution.
The Contract incorporates all applicable provisions of Code Section 72(s) and
any successor provision, as deemed necessary by us to qualify the Contract as
an annuity contract for federal income tax purposes, including the requirement
that, if the Owner dies before the Annuity Date, any death benefit proceeds
under the Contract shall be distributed within five years of the Owner's death
(or such other period that we offer and that is permitted under the Code or
such shorter period as we may require).
Qualified Plan Death of Annuitant Distribution Rules
Under Internal Revenue Service regulations, if the Contract is owned under a
Qualified Plan as defined in Section 401, 403, 408, or 408A of the Code and the
Annuitant dies before the commencement of distributions, the payment of any
death benefit must be made to the designated recipient no later than December
31 of the
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calendar year in which the fifth anniversary of the Annuitant's death falls. In
order to satisfy this requirement, generally the designated recipient must
receive a lump sum payment by this date or elect to receive the Annuitant's
interest in the Contract in equal or substantially equal installments over a
period not exceeding the lifetime or life expectancy of the designated
recipient. If the designated recipient elects the installment payment option,
the Internal Revenue Service regulations provide that payments must begin no
later than December 31 of the calendar year which follows the calendar year in
which the Annuitant died. However, (except in the case of a Roth IRA) if the
designated recipient is the spouse of the Annuitant at the time of the
Annuitant's death ("surviving spouse"), then, under the regulations, payments
under the installment payment option must begin no later than December 31 of
the calendar year in which the Annuitant would have reached age 70 1/2.
Under our administrative procedures, payments must commence no later than the
first anniversary of the death of the Annuitant; unless the designated
recipient is the surviving spouse. If the surviving spouse elects to continue
the contract and not do an eligible rollover to an IRA in his or her name, then
he or she will be subject to the five year rule. However, the surviving spouse
may waive the five year requirement and elect to take distributions over his or
her life expectancy, and if the surviving spouse elects to defer the
commencement of installment payments beyond the first anniversary of the
Annuitant's death, the surviving spouse will be deemed to continue the
Contract. In this instance, the surviving spouse may continue the contract
until the later of: (a) December 31 of the year following the year the
Annuitant died; or (b) December 31 of the year in which the Annuitant would
have turned 70 1/2. Further, under our administrative procedures, if the
installment payment (annuity) option election is not received by us in good
order within 60 days of (or shorter period as we permit) our receipt of proof
in proper form of the Annuitant's death or, if earlier, before the sixtieth day
preceding (1) the first anniversary of the Annuitant's death or (2) the date on
which the Annuitant would have attained age 70 1/2, the lump sum option will be
deemed by us to have been elected, unless otherwise required by law. If the
lump sum option is deemed elected, we will treat that deemed election as
receipt of instructions regarding payment of death benefit proceeds.
If the Annuitant dies after the commencement of distributions but before the
Annuitant's entire interest in the Contract (other than a Roth IRA) has been
distributed, the remaining interest in the Contract must be distributed to the
designated recipient at least as rapidly as under the distribution method in
effect at the time of the Annuitant's death.
Death Benefit Amounts
The Death Benefit Amount as of any day (prior to the Annuity Date) is equal to
the greater of (a) your Contract Value as of that day, or (b) your aggregate
Purchase Payments reduced by an amount for each withdrawal, which is calculated
by multiplying the aggregate Purchase Payments received prior to each
withdrawal by the ratio of the amount of each withdrawal, including any
withdrawal charge, to the Contract Value immediately prior to each withdrawal.
We calculate the Death Benefit Amount as of the Notice Date.
Optional Stepped-Up Death Benefit Rider
If, at the time your application is completed, you purchase the Stepped-Up
Death Benefit Rider (the "SDBR") (subject to state availability), a Guaranteed
Minimum Death Benefit is added to your Contract as follows:
The Guaranteed Minimum Death Benefit Amount is calculated only when death
benefit proceeds become payable as a result of the death of the Annuitant prior
to the Annuity Date, and is determined as follows:
First, we calculate what the Death Benefit Amount would have been as of your
first Contract Anniversary and each subsequent Contract Anniversary that occurs
while the Annuitant is living and before the Annuitant reaches his or her 81st
birthday (each of these Contract Anniversaries is a "Milestone Date").
We then adjust the Death Benefit Amount for each Milestone Date by: (i) adding
the aggregate amount of any Purchase Payments received by us since that
Milestone Date; and (ii) subtracting an amount for each withdrawal that has
occurred since that Milestone Date, which is calculated by multiplying the
Death Benefit Amount by the ratio of the amount of each withdrawal that has
occurred since that Milestone Date, including any withdrawal charge, to the
Contract Value immediately prior to the withdrawal.
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The highest of these adjusted Death Benefit Amounts for each Milestone Date, as
of the Notice Date, is your Guaranteed Minimum Death Benefit Amount if you
purchase the SDBR. Calculation of any Guaranteed Minimum Death Benefit is only
made once death benefit proceeds become payable under your Contract.
Optional Premier Death Benefit Rider
If, at the time your application is completed, you purchase the Premier Death
Benefit Rider (the "PDBR") (subject to state availability), the Death Benefit
Amounts stated above are replaced with the following:
The Death Benefit Amount as of any day (prior to the Annuity Date) is equal to
the greater of (a) your Contract Value as of that day, or (b) your Purchase
Payments less any withdrawals, including withdrawal charges, increased at an
effective annual rate of 6% to that day (and subject to a maximum of two times
the aggregate Purchase Payments less any withdrawals, including withdrawal
charges). The 6% effective annual rate of growth will take into account the
timing of when each Purchase Payment and withdrawal occurred by applying a
daily factor of 1.00015965 to each day's balance. The 6% effective annual rate
of growth will stop accruing as of the earlier of: (i) the Contract Anniversary
before the date the Annuitant reaches his or her 81st birthday; (ii) the date
of death of the sole Annuitant; or (iii) the Annuity Date.
The Guaranteed Minimum Death Benefit Amount is calculated only when death
benefit proceeds become payable as a result of the death of the sole Annuitant
prior to the Annuity Date, and is determined as follows:
First, we calculate what the Death Benefit Amount would have been as of the
quarterly anniversary following the Contract Date and as of each subsequent
quarterly anniversary that occurs while the Annuitant is living and up to and
including the Contract Anniversary following the Annuitant's 65th birthday.
Quarterly anniversaries are measured from the Contract Date. After the Contract
Anniversary following the Annuitant's 65th birthday, we calculate what the
Death Benefit Amount would have been as of each Contract Anniversary that
occurs while the Annuitant is living and before the Annuitant reaches his or
her 81st birthday. Each quarterly anniversary and each Contract Anniversary in
which a Death Benefit Amount is calculated is referred to as a "Milestone
Date." We then adjust the Death Benefit Amount for each Milestone Date by: (i)
adding the aggregate amount of any Purchase Payments received by us since that
Milestone Date; and (ii) subtracting an amount for each withdrawal that has
occurred since that Milestone Date, which is calculated by multiplying the
Death Benefit Amount by the ratio of the amount of each withdrawal that has
occurred since that Milestone Date, including any withdrawal charge, to the
Contract Value immediately prior to the withdrawal.
The highest of these adjusted Death Benefit Amounts as of the Notice Date is
your Guaranteed Minimum Death Benefit if the PDBR is purchased. Calculations of
any Guaranteed Minimum Death Benefit are made only once death benefit proceeds
become payable under your Contract.
The Amount of the Death Benefit: Death of Annuitant
If the sole Annuitant dies prior to the Annuity Date, the death benefit will be
equal to the Death Benefit Amount as of the Notice Date. If you purchase the
SDBR, the death benefit will be equal to the greater of (a) the Death Benefit
Amount as of the Notice Date or (b) the "Guaranteed Minimum Death Benefit
Amount" as provided under the SDBR as of the Notice Date. If you purchase the
PDBR, the death benefit will be equal to the greater of (a) the Death Benefit
Amount as provided under the PDBR as of the Notice Date or (b) the "Guaranteed
Minimum Death Benefit Amount" as provided under the PDBR as of the Notice Date.
The following procedures apply in the event of death of an Annuitant who is not
also a Contract Owner: If your Contract names Joint Annuitants and only one
Joint Annuitant dies, the surviving Joint Annuitant becomes your sole Annuitant
and the death benefit is not yet payable. If your sole Annuitant dies (or if no
Joint Annuitant survives) and your Contract names a surviving Contingent
Annuitant, he or she becomes the sole Annuitant and the death benefit proceeds
are not yet payable. If there is no surviving Joint or Contingent Annuitant,
the death benefit proceeds are payable to the Owner, if living; if not to the
Beneficiary, if living; if not, to the Owner's estate.
If both the Owner and Annuitant die simultaneously, the death benefit proceeds
will be paid to the Beneficiary, if living; if not, to the Owner's estate.
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The Amount of the Death Benefit: Death of a Contract Owner
If a Contract Owner who is not the Annuitant dies before the Annuity Date, the
amount of the death benefit will be equal to your Contract Value as of the
Notice Date and will be paid in accordance with the Death Benefit Proceeds
section. The death benefit proceeds will be paid to the Joint Owner, if living;
if not, to the Contingent Owner, if living; if not, to the Beneficiary, if
living; if not, to the Owner's estate. See THE GENERAL ACCOUNT--Withdrawals and
Transfers.
If a Contract Owner who is the Annuitant dies before the Annuity Date, the
amount of the death benefit will be determined in accordance with the Death of
Annuitant section above, and will be paid in accordance with the Death Benefit
Proceeds section. The death benefit proceeds will be paid to the Beneficiary if
living; if not, to the Owner's estate. Joint and/or Contingent Owners and/or
Annuitants will not be considered in determining the recipient of death benefit
proceeds.
If both you and the Annuitant(s) are non-individual persons, no death benefit
will be payable, and any distribution will be treated as a withdrawal and
subject to any applicable withdrawal fee, withdrawal charge, and charge for
premium taxes and/or other taxes.
WITHDRAWALS
Optional Withdrawals
You may, on or prior to your Annuity Date, withdraw all or a portion of the
amount available under your Contract while the Annuitant is living and your
Contract is in force. You may surrender your Contract and make a full
withdrawal at any time. Except as provided below, beginning 30 days after your
Contract Date, you also may make partial withdrawals from your Investment
Options at any time. You may request to withdraw a specific dollar amount or a
specific percentage of an Account Value or your Net Contract Value. You may
choose to make your withdrawal from specified Investment Options; if you do not
specify Investment Options, your withdrawal will be made from all of your
Investment Options proportionately. Each partial withdrawal must be for $500 or
more, except pre-authorized withdrawals, which must be at least $250. If your
partial withdrawal from an Investment Option would leave a remaining Account
Value in that Investment Option of less than $500, we have the right, at our
option, to transfer that remaining amount to your other Investment Options on a
proportionate basis relative to your most recent allocation instructions. If
your partial withdrawal leaves you with a Net Contract Value of less than
$1,000 ($500 in Maryland, New Jersey and Texas), we have the right, at our
option, to terminate your Contract and send you the withdrawal proceeds
described in the next section below. Partial withdrawals from the Fixed Option
in any Contract Year are subject to restrictions. See GENERAL ACCOUNT--
Withdrawals and Transfers.
Amount Available for Withdrawal
The amount available for withdrawal is your Net Contract Value at the end of
the Business Day on which your withdrawal request is effective, less any
applicable withdrawal charge, withdrawal transaction fee, and any charge for
premium taxes and/or other taxes. The amount we send to you (your "withdrawal
proceeds") will also reflect any required or requested federal and state income
tax withholding. See FEDERAL TAX STATUS and THE GENERAL ACCOUNT--Withdrawals
and Transfers.
You assume investment risk on investments in the Subaccounts; as a result, the
amount available to you for withdrawal from any Subaccount may be more or less
than the total Purchase Payments you have allocated to that Subaccount.
Withdrawal Transaction Fees
There is currently no transaction fee for partial withdrawals. However, we
reserve the right to impose a withdrawal transaction fee in the future of up to
$15 for each partial withdrawal (including pre-authorized partial withdrawals)
in excess of 15 in any Contract Year. Any such fee would be charged against
your Investment Options proportionately based on your Account Value in each
immediately after the withdrawal.
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Pre-Authorized Withdrawals
If your Contract Value is at least $5,000, you may select the pre-authorized
withdrawal option, and you may choose monthly, quarterly, semiannual or annual
withdrawals. Each withdrawal must be for at least $250. Each pre-authorized
withdrawal is subject to federal income tax on its taxable portion and may be
subject to a penalty tax of 10% or more if you have not reached age 59 1/2. See
FEDERAL TAX STATUS and THE GENERAL ACCOUNT--Withdrawals and Transfers.
Additional information and options are set forth in the SAI and in the Pre-
Authorized Withdrawal section of your application.
Special Requirements for Full Withdrawals
If you wish to withdraw the entire amount available under your Contract, you
must either return your Contract to us or sign and submit to us a "lost
Contract affidavit."
Special Restrictions Under Qualified Plans
Individual Qualified Plans may have additional rules regarding withdrawals from
a Contract purchased under such a Plan. In general, if your Contract was issued
under certain Qualified Plans, you may not withdraw amounts attributable to
contributions made pursuant to a salary reduction agreement (as defined in
Section 402(g)(3)(A) of the Code) or to transfers from a custodial account (as
defined in Section 403(b)(7) of the Code) except in cases of your
(a) separation from service, (b) death, (c) disability as defined in Section
72(m)(7) of the Code, (d) reaching age 59 1/2, or (e) hardship as defined for
purposes of Section 401(k) of the Code.
These limitations do not affect certain rollovers or exchanges between
Qualified Plans, and do not apply to rollovers from these Qualified Plans to an
individual retirement account or individual retirement annuity. In the case of
tax sheltered annuities, these limitations do not apply to certain salary
reduction contributions made, and investment results earned, prior to dates
specified in the Code.
Hardship withdrawals under the exception provided above are restricted to
amounts attributable to salary reduction contributions, and do not include
investment results; this additional restriction does not apply to salary
reduction contributions made, and investment results earned, prior to dates
specified in the Code.
Certain distributions, including rollovers, may be subject to mandatory
withholding of 20% for federal income tax and to a penalty tax of 10% or more
if the distribution is not transferred directly to the trustee of another
Qualified Plan, or to the custodian of an individual retirement account or
issuer of an individual retirement annuity. See FEDERAL TAX STATUS.
Distributions may also trigger withholding for state income taxes. The tax and
ERISA rules relating to Contract withdrawals are complex. We are not the
administrator of any Qualified Plan. You should consult your tax adviser and/or
your plan administrator before you withdraw any portion of your Contract Value.
Effective Date of Withdrawal Requests
Withdrawal requests are normally effective on the Business Day we receive them
in proper form. If you make Purchase Payments by check and submit a withdrawal
request immediately afterwards, payment of your withdrawal proceeds may be
delayed until your check clears.
Tax Consequences of Withdrawals
Withdrawals, including pre-authorized withdrawals, will generally have federal
income tax consequences, which could include tax penalties. You should consult
with a tax adviser before making any withdrawal or selecting the pre-authorized
withdrawal option. See FEDERAL TAX STATUS.
Right to Cancel ("Free Look")
You may return your Contract for cancellation and a full refund during your
"Free Look period." Your Free Look period is usually the 10-day period
beginning on the day you receive your Contract, but may vary if required by
state law. For more information, see APPENDIX A: STATE LAW VARIATIONS. If you
return your
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Contract, it will be canceled and treated as void from your Contract Date. You
will then receive a refund of your Contract Value, as of the end of the
Business Day on which we receive your Contract for cancellation, plus a refund
of any amounts that may have been deducted as Contract fees and charges, and
minus the Contract Value attributable to any Credit Enhancement or any
additional amount credited as described in CHARGES, FEES AND DEDUCTIONS--
Waivers and Reduced Charges. This means you will not keep any amounts that we
add as a credit or any gains or losses on the amounts credited (but if the
credited amounts and gains on such amounts exceed the withdrawal charge
percentage on your Contract, we will refund the amount of the excess). We have
applied to the Securities and Exchange Commission for an exemptive order to
change the amount you would receive if you return your Contract during the Free
Look Period. We can't be sure that the SEC will grant this order, but if it is
granted, you would not receive any amounts that we add as a credit or Contract
fees and charges deducted from those amounts, but you would keep the gains or
losses on the credited amounts. Thus, an Owner who returns a Contract within
the Free Look period bears only the investment risk on amounts attributable to
Purchase Payments.
Some states' laws require us to refund your Purchase Payments instead of your
Contract Value. If your Contract is delivered in one of these states (the
"delivery state"), the Purchase Payments you have allocated to any Subaccount
will usually be allocated to the Money Market Subaccount during your free look
period. In such cases, we will transfer your Contract Value in the Money Market
Subaccount to your chosen Variable Investment Options at the end of the 15th
calendar day after your Contract Date (your "Free Look Transfer Date"). We
reserve the right to extend your Free Look Transfer Date by the number of days
in excess of ten days that the delivery state allows you to return your
Contract to us pursuant to your "free look" right.
If your Contract is issued in exchange for another annuity contract or a life
insurance policy, our administrative procedures may vary, depending on the
state in which your contract is delivered.
PACIFIC LIFE AND THE SEPARATE ACCOUNT
Pacific Life
We are a life insurance company that is based in California. Along with our
subsidiaries and affiliates, our operations include life insurance, annuities,
pension and institutional products, group employee benefits, broker-dealer
operations and any investment and advisory services. As of the end of 1998, we
had $89.6 billion of individual life insurance in force and total admitted
assets of approximately $37.6 billion. We have been ranked according to
admitted assets as the 18th largest life insurance carrier in the nation based
on December 31, 1998 assets. The Pacific Life family of companies has total
assets and funds under management of $290 billion as of December 31, 1998. We
are authorized to conduct life insurance and annuity business in the District
of Columbia and all states except New York. Our principal office is located at
700 Newport Center Drive, Newport Beach, California 92660.
We were originally organized on January 2, 1868, under the name "Pacific Mutual
Life Insurance Company of California" and reincorporated as "Pacific Mutual
Life Insurance Company" on July 22, 1936. On September 1, 1997, we converted
from a mutual life insurance company to a stock life insurance company
ultimately controlled by a mutual holding company and were authorized by
California regulatory authorities to change our name to Pacific Life Insurance
Company. Pacific Life is a subsidiary of Pacific LifeCorp, a holding company,
which, in turn, is a subsidiary of Pacific Mutual Holding Company, a mutual
holding company. Under their respective charters, Pacific Mutual Holding
Company must always hold at least 51% of the outstanding voting stock of
Pacific LifeCorp, and Pacific LifeCorp must always own 100% of the voting stock
of Pacific Life. Owners of Pacific Life's annuity contracts and life insurance
policies have certain membership interests in Pacific Mutual Holding Company,
consisting principally of the right to vote on the election of the Board of
Directors of the mutual holding company and on other matters, and certain
rights upon liquidation or dissolutions of the mutual holding company.
Our subsidiary, Pacific Mutual Distributors, Inc. ("PMD"), serves as the
principal underwriter (distributor) for the Contracts. PMD is located at 700
Newport Center Drive, Newport Beach, California 92660. We and PMD
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enter into selling agreements with broker-dealers, under which such broker-
dealers act as agents of us and PMD in the sale of the Contracts.
We may provide you with reports of our ratings both as an insurance company and
as to our claims-paying ability with respect to our General Account assets. The
SAI presents more details about these ratings.
Separate Account A
Separate Account A was established on September 7, 1994 as a separate account
of ours, and is registered with the SEC under the 1940 Act, as a type of
investment company called a "unit investment trust."
Obligations arising under your Contract are our general corporate obligations.
We are also the legal owner of the assets in the Separate Account. Assets of
the Separate Account attributed to the reserves and other liabilities under the
Contract and other contracts issued by us that are supported by the Separate
Account may not be charged with liabilities arising from any of our other
business; any income, gain or loss (whether or not realized) from the assets of
the Separate Account are credited to or charged against the Separate Account
without regard to our other income, gain or loss.
We may invest money in the Separate Account in order to commence its operations
and for other purposes, but not to support contracts other than variable
annuity contracts. A portion of the Separate Account's assets may include
accumulations of charges we make against the Separate Account and investment
results of assets so accumulated. These additional assets are ours and we may
transfer them to our General Account at any time; however, before making any
such transfer, we will consider any possible adverse impact the transfer might
have on the Separate Account. Subject to applicable law, we reserve the right
to transfer our assets in the Separate Account to our General Account.
The Separate Account is not the sole investor in the Fund. Investment in the
Fund by other separate accounts in connection with variable annuity and
variable life insurance contracts may create conflicts. See the accompanying
Prospectus and the SAI for the Fund for more information.
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FINANCIAL HIGHLIGHTS
The table below is designed to help you understand how the Variable Investment
Options have performed. It shows the value of a Subaccount Unit at the
beginning and end of each period, as well as the number of Subaccount Units at
the end of each period. A Subaccount Unit is also called an Accumulation Unit.
The information in the table for the period ended December 31, 1998 is included
in the financial statements of Separate Account A which have been audited by
Deloitte & Touche LLP, independent auditors. You should read the table in
conjunction with the financial statements for Separate Account A, which are
included in its annual report dated as of December 31, 1998. The information is
for periods before the Contract was available and the Units and Unit Values do
not support the Contract; but relates to other variable annuity Contracts.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Money Market/1/
Subaccount Unit Value at beginning of period $10.75 $10.36 $10.00
Subaccount Unit Value as of December 31 $11.16 $10.75 $10.36
Number of Subaccount Units outstanding at end
of period 14,823,792 3,041,495 1,478,808
- -----------------------------------------------------------------------------
High Yield Bond/1/
Subaccount Unit Value at beginning of period $11.83 $10.96 $10.00
Subaccount Unit Value as of December 31 $11.95 $11.83 $10.96
Number of Subaccount Units outstanding at end
of period 7,396,859 2,702,260 630,637
- -----------------------------------------------------------------------------
Managed Bond/1/
Subaccount Unit Value at beginning of period $11.14 $10.27 $10.00
Subaccount Unit Value as of December 31 $11.99 $11.14 $10.27
Number of Subaccount Units outstanding at end
of period 16,897,325 4,434,069 742,041
- -----------------------------------------------------------------------------
Government Securities/1/
Subaccount Unit Value at beginning of period $10.95 $10.14 $10.00
Subaccount Unit Value as of December 31 $11.80 $10.95 $10.14
Number of Subaccount Units outstanding at end
of period 4,543,208 1,506,839 673,682
- -----------------------------------------------------------------------------
Aggressive Equity/2/
Subaccount Unit Value at beginning of period $10.92 $10.67 $10.00
Subaccount Unit Value as of December 31 $12.19 $10.92 $10.67
Number of Subaccount Units outstanding at end
of period 5,808,703 1,711,363 387,987
- -----------------------------------------------------------------------------
Growth LT/1/
Subaccount Unit Value at beginning of period $12.71 $11.61 $10.00
Subaccount Unit Value as of December 31 $19.84 $12.71 $11.61
Number of Subaccount Units outstanding at end
of period 10,966,264 3,826,332 950,317
- -----------------------------------------------------------------------------
Equity Income/1/
Subaccount Unit Value at beginning of period $14.78 $11.66 $10.00
Subaccount Unit Value as of December 31 $18.10 $14.78 $11.66
Number of Subaccount Units outstanding at end
of period 14,764,834 4,189,318 743,123
- -----------------------------------------------------------------------------
Multi-Strategy/1/
Subaccount Unit Value at beginning of period $13.01 $11.03 $10.00
Subaccount Unit Value as of December 31 $15.17 $13.01 $11.03
Number of Subaccount Units outstanding at end
of period 8,073,603 1,830,504 294,936
- -----------------------------------------------------------------------------
Equity/1/
Subaccount Unit Value at beginning of period $14.68 $12.59 $10.00
Subaccount Unit Value as of December 31 $18.85 $14.68 $12.59
Number of Subaccount Units outstanding at end
of period 6,695,038 1,983,738 453,223
- -----------------------------------------------------------------------------
Bond and Income/1/
Subaccount Unit Value at beginning of period $11.23 $9.79 $10.00
Subaccount Unit Value as of December 31 $12.07 $11.23 $9.79
Number of Subaccount Units outstanding at end
of period 4,739,580 975,740 154,590
- -----------------------------------------------------------------------------
Equity Index/1/
Subaccount Unit Value at beginning of period $15.69 $11.97 $10.00
Subaccount Unit Value as of December 31 $19.88 $15.69 $11.97
Number of Subaccount Units outstanding at end
of period 15,518,412 4,460,482 757,175
- -----------------------------------------------------------------------------
International/1/
Subaccount Unit Value at beginning of period $12.76 $11.84 $10.00
Subaccount Unit Value as of December 31 $13.29 $12.76 $11.84
Number of Subaccount Units outstanding at end
of period 15,066,242 5,292,436 1,312,817
- -----------------------------------------------------------------------------
Emerging Markets/2/
Subaccount Unit Value at beginning of period $9.28 $9.57 $10.00
Subaccount Unit Value as of December 31 $6.70 $9.28 $9.57
Number of Subaccount Units outstanding at end
of period 3,975,851 1,342,086 240,607
</TABLE>
- --------------------------------------------------------------------------------
/1/ This Subaccount began operations on January 2, 1996.
/2/ This Subaccount began operations on April 17, 1996.
29
<PAGE>
FEDERAL TAX STATUS
The following summary of federal income tax consequences is based on our
understanding of current tax laws and regulations, which may be changed by
legislative, judicial or administrative action. The summary is general in
nature and is not intended as tax advice. Moreover, it does not consider any
applicable state or local tax laws. We do not make any guarantee regarding the
tax status, federal, state or local, of any Contract or any transaction
involving the Contracts. Accordingly, you should consult a qualified tax
adviser for complete information and advice before purchasing a Contract.
The following rules generally do not apply to variable annuity contracts held
by or for non-natural persons (e.g., corporations) unless such an entity holds
the contract as nominee for a natural person. If a contract is not owned or
held by a natural person or a nominee for a natural person, the contract
generally will not be treated as an "annuity" for tax purposes, meaning that
the contract owner will be taxed currently on annual increases in Contract
Value at ordinary income rates unless some other exception applies.
Section 72 of the Code governs the taxation of annuities in general, and we
designed the Contracts to meet the requirements of Section 72 of the Code. We
believe that, under current law, the Contract will be treated as an annuity for
federal income tax purposes if the Contract Owner is a natural person or a
nominee for a natural person, and that we (as the issuing insurance company),
and not the Contract Owner(s), will be treated as the owner of the investments
underlying the Contract. Accordingly, generally no tax should be payable by you
as a Contract Owner as a result of any increase in Contract Value until you
receive money under your Contract. You should, however, consider how amounts
will be taxed when you do receive them. The following discussion assumes that
your Contract will be treated as an annuity for federal income tax purposes.
Section 817(h) of the Code provides that the investments underlying a variable
annuity must satisfy certain diversification requirements. Details on these
diversification requirements appear in the Fund's SAI. We believe the
underlying Variable Investment Options for the Contract meet these
requirements. In connection with the issuance of temporary regulations relating
to diversification requirements under Section 817(h), the Treasury Department
announced that such regulations do not provide guidance concerning the extent
to which you may direct your investments to particular divisions of a separate
account. Such guidance may be included in regulations or revenue rulings under
Section 817(d) relating to the definition of a variable contract. Because of
this uncertainty, we reserve the right to make such changes as we deem
necessary or appropriate to ensure that your Contract continues to qualify as
an annuity for tax purposes. Any such changes will apply uniformly to affected
Contract Owners and will be made with such notice to affected Contract Owners
as is feasible under the circumstances.
Taxes Payable by Contract Owners: General Rules
These general rules apply to Non-Qualified Contracts. As discussed below,
however, tax rules may differ for Qualified Contracts and you should consult a
qualified tax adviser if you are purchasing a Qualified Contract.
Distributions of net investment income or capital gains that each Subaccount
receives from its corresponding Portfolio are automatically reinvested in such
Portfolio unless we, on behalf of the Separate Account, elect otherwise. As
noted above, you will be subject to federal income taxes on the investment
income from your Contract only when it is distributed to you.
Multiple Contracts
All Non-Qualified contracts that are issued by us, or our affiliates, to the
same Owner during any calendar year are treated as one contract for purposes of
determining the amount includible in gross income under Code Section 72(e).
Further, the Treasury Department has specific authority to issue regulations
that prevent the avoidance of Section 72(e) through the serial purchase of
contracts or otherwise.
30
<PAGE>
Taxes Payable on Withdrawals
Amounts you withdraw before annuitization, including amounts withdrawn from
your Contract Value in connection with partial withdrawals for payment of any
charges and fees, will be treated first as taxable income to the extent that
your Contract Value exceeds the aggregate of your Purchase Payments (reduced by
non-taxable amounts previously received), and then as non-taxable recovery of
your Purchase Payments.
The assignment or pledge of (or agreement to assign or pledge) the value of the
Contract for a loan will be treated as a withdrawal subject to these rules.
Moreover, all annuity contracts issued to you in any given calendar year by us
and any of our affiliates are treated as a single annuity contract for purposes
of determining whether an amount is subject to tax under these rules. The Code
further provides that the taxable portion of a withdrawal or other distribution
may be subject to a penalty tax equal to 10% of that taxable portion unless the
withdrawal is: (1) made on or after the date you reach age 59 1/2, (2) made by
a Beneficiary after your death, (3) attributable to your becoming disabled, or
(4) in the form of level annuity payments under a lifetime annuity.
Taxes Payable on Annuity Payments
A portion of each annuity payment you receive under a Contract generally will
be treated as a partial recovery of Purchase Payments (as used here, "Purchase
Payments" means the aggregate Purchase Payments less any amounts that were
previously received under the Contract but not included in income) and will not
be taxable. (In certain circumstances, subsequent modifications to an
initially-established payment pattern may result in the imposition of a penalty
tax.) The remainder of each annuity payment will be taxed as ordinary income.
However, after the full amount of aggregate Purchase Payments has been
recovered, the full amount of each annuity payment will be taxed as ordinary
income. Exactly how an annuity payment is divided into taxable and non-taxable
portions depends on the period over which annuity payments are expected to be
received, which in turn is governed by the form of annuity selected and, where
a lifetime annuity is chosen, by the life expectancy of the Annuitant(s) or
payee(s). Such a payment may also be subject to a penalty tax.
Should the death of a Contract Owner cause annuity payments to cease before
Purchase Payments have been fully recovered, an Annuitant (or in certain cases
the Beneficiary) is allowed a deduction on the final tax return for the
unrecovered Purchase Payments; however, if any remaining annuity payments are
made to a Beneficiary, the Beneficiary will recover the balance of the Purchase
Payments as payments are made. A lump sum payment taken in lieu of remaining
monthly annuity payments is not considered an annuity payment for tax purposes.
The portion of any lump sum payment to a Beneficiary in excess of aggregate
unrecovered Purchase Payments would be subject to income tax. Such a lump sum
payment may also be subject to a penalty tax.
If a Contract Owner dies before annuity payments begin, certain minimum
distribution requirements apply. If a Contract Owner dies after the Annuity
Date, the remaining interest in the Contract must be distributed at least as
rapidly as under the method of distribution in effect on the date of death.
Generally, the same tax rules apply to amounts received by the Beneficiary as
those set forth above, except that the early withdrawal penalty tax does not
apply. Thus, any annuity payments or lump sum withdrawal will be divided into
taxable and non-taxable portions. If the Contract Owner or Annuitant dies and
within sixty days after the date on which a lump sum death benefit first
becomes payable the designated recipient elects to receive annuity payments in
lieu of the lump sum death benefit, then the designated recipient will not be
treated for tax purposes as having received the lump sum death benefit in the
tax year it first becomes payable. Rather, in that case, the designated
recipient will be taxed on the annuity payments as they are received.
Any amount payable upon the Contract Owner's death, whether before or after the
Annuity Date, will be included in the estate of the Contract Owner for federal
estate tax purposes. In addition, designation of a Beneficiary who either is 37
1/2 or more years younger than a Contract Owner or is a grandchild of a
Contract Owner may have Generation Skipping Transfer Tax consequences under
section 2601 of the Code.
Generally, gifts of non-tax qualified contracts prior to the annuity start date
will trigger tax on the gain on the contract, with the donee getting a stepped-
up basis for the amount included in the donor's income. The 10% penalty tax and
gift tax also may be applicable. This provision does not apply to transfers
between spouses or incident to a divorce.
31
<PAGE>
Qualified Contracts
The Contracts are available to a variety of Qualified Plans. Tax restrictions
and consequences for Contracts under each type of Qualified Plan differ from
each other and from those for Non-Qualified Contracts. In addition, individual
Qualified Plans may have terms and conditions that impose additional rules.
Therefore, no attempt is made herein to provide more than general information
about the use of the Contract with the various types of Qualified Plans.
Participants under such Qualified Plans, as well as Contract Owners, Annuitants
and Beneficiaries, are cautioned that the rights of any person to any benefits
under such Qualified Plans may be subject to the terms and conditions of the
Plans themselves or limited by applicable law, regardless of the terms and
conditions of the Contract issued in connection therewith.
The following is only a general discussion about types of Qualified Plans for
which the Contracts are available. We are not the administrator of any
Qualified Plan. The plan administrator and/or custodian, whichever is
applicable, (but not us) is responsible for all Plan administrative duties
including, but not limited to, notification of distribution options,
disbursement of Plan benefits, compliance regulatory requirements and federal
and state tax reporting of income/distributions from the Plan to Plan
participants and, if applicable, Beneficiaries of Plan participants and IRA
contributions from Plan participants. Our administrative duties are limited to
administration of the Contract and any disbursements of any Contract benefits
to the Owner, Annuitant, or Beneficiary of the Contract, as applicable. Our tax
reporting responsibility is limited to federal and state tax reporting of
income/distributions to the applicable payee and IRA contributions from the
Owner of a Contract, as recorded on our books and records. The Qualified Plan
(the plan administrator or the custodian) is required to provide us with
information regarding individuals with signatory authority on the Contract(s)
owned. If you are purchasing a Qualified Contract, you should consult with your
plan administrator and/or a qualified tax adviser. You should also consult with
your tax adviser and/or plan administrator before you withdraw any portion of
your contract value.
Individual Retirement Annuities ("IRAs")
Recent federal tax legislation has expanded the type of IRAs available to
individuals for tax deferred retirement savings: In addition to "traditional"
IRAs established under Code Section 408, there are Roth IRAs governed by Code
Section 408A and SIMPLE IRAs established under Code Section 408(p).
Contributions to each of these types of IRAs are subject to differing
limitations. In addition, distributions from each type of IRA are subject to
differing restrictions. The following is a very general description of each
type of IRA and other Qualified Plans:
Traditional IRAs
- ----------------
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when
distributions must commence. Depending upon the circumstances of the
individual, contributions to a traditional IRA may be made on a deductible or
non-deductible basis. Failure to make mandatory distributions may result in
imposition of a 50% penalty tax on any difference between the required
distribution amount and the amount actually distributed. A 10% penalty tax is
imposed on the amount includable in gross income from distributions that occur
before you attain age 59 1/2 and that are not made on account of death or
disability, with certain exceptions. These exceptions include distributions
that are part of a series of substantially equal periodic payments made over
your life (or life expectancy) or the joint lives (or joint life expectancies)
of you and your Joint Annuitant. Distributions of minimum amounts specified by
the Code must commence by April 1 of the calendar year following the calendar
year in which you attain age 70 1/2. Additional distribution rules apply after
your death.
You may rollover funds from certain existing Qualified Plans (such as proceeds
from existing insurance policies, annuity contracts or securities) into your
traditional IRA if those funds are in cash; this will require you to liquidate
any value accumulated under the existing Qualified Plan. Mandatory withholding
of 20% may apply to any rollover distribution from your existing Qualified Plan
if the distribution is not transferred directly to your Traditional IRA; to
avoid this withholding you should have cash transferred directly from the
insurance company or plan trustee to your traditional IRA. Similar limitations
and tax penalties apply to tax sheltered annuities, government plans, 401(k)
plans, and pension and profit-sharing plans.
32
<PAGE>
SIMPLE IRAs
- -----------
The Small Business Job Protection Act of 1996 created a new retirement plan,
the Savings Incentive Match Plan for Employees of Small Employers ("SIMPLE
Plans"). Depending upon the type of SIMPLE Plan, employers may deposit the plan
contributions into a single trust or into SIMPLE individual retirement
annuities ("SIMPLE IRAs") established by each participant. Like other Qualified
Plans, a 10% penalty tax is imposed on certain distributions that occur before
you attain age 59 1/2. In addition, the penalty tax is increased to 25% for
amounts received during the 2-year period beginning on the date any individual
first participated in any qualified salary reduction arrangement maintained by
the individual's employer under Code Section 408(p)(2). Contributions to a
SIMPLE IRA may be either salary deferral contributions or employer
contributions. Distributions from a SIMPLE IRA may be rolled over to another
SIMPLE IRA tax free or may be eligible for tax free rollover to a traditional
IRA after a required two year period. A distribution from a SIMPLE IRA,
however, is never eligible to be rolled over to a retirement plan qualified
under Code Section 401 or a Section 403(b) annuity contract.
Roth IRAs
- ---------
Section 408A of the Code permits eligible individuals to establish a Roth IRA.
Contributions to a Roth IRA are not deductible, but withdrawals of amounts
contributed and the earnings thereon that meet certain requirements are not
subject to federal income tax. In general, Roth IRAs are subject to limitations
on the amount that may be contributed and the persons who may be eligible to
contribute and are subject to certain required distribution rules on the death
of the Contract Owner. Unlike a traditional IRA, Roth IRAs are not subject to
minimum required distribution rules during the Contract Owner's lifetime.
Generally, however, the amount remaining in a Roth IRA must be distributed by
the end of the fifth year after the death of the Contract Owner. Beginning in
1998, the owner of a traditional IRA may convert a traditional IRA into a Roth
IRA under certain circumstances. The conversion of a traditional IRA to a Roth
IRA will subject the amount of the converted traditional IRA to federal income
tax. Anyone considering the purchase of a Qualified Contract as a Roth IRA or a
"conversion" Roth IRA should consult with a qualified tax adviser.
Tax Sheltered Annuities ("TSAs")
Section 403(b) of the Code permits public school systems and certain tax-exempt
organizations to adopt annuity plans for their employees; Purchase Payments
made on Contracts purchased for these employees are excludable from the
employees' gross income (subject to maximum contribution limits). Distributions
under these Contracts must comply with certain limitations as to timing, or
result in tax penalties.
Government Plans
Section 457 of the Code permits employees of a state or local government (or of
certain other tax-exempt entities) to defer compensation through an eligible
government plan. Contributions to a Contract in connection with an eligible
government plan are subject to limitations.
401(k) Plans; Pension and Profit-Sharing Plans
Deferred compensation plans may be established by an employer for certain
eligible employees under Sections 401(a) and 401(k) of the Code. Contributions
to these plans are subject to limitations.
Loans
Certain Owners of Qualified Contracts may borrow against their Contracts;
otherwise loans from us are not permitted. If yours is a Qualified Contract
issued under Section 401 or 403 of the Code and the terms of your Qualified
Plan permit, you may request a loan from us, using your Contract Value as your
only security.
Tax and Legal Matters
The tax and ERISA rules relating to Contract loans are complex and in many
cases unclear. For these reasons, and because the rules vary depending on the
individual circumstances of each Contract, we urge you to consult with a
qualified tax adviser prior to effecting any loan transaction under your
Contract.
33
<PAGE>
Generally interest paid on your loan under a 401 plan or 403(b) tax-sheltered
annuity will be considered non-deductible "personal interest" under Section
163(h) of the Code, to the extent the loan comes from and is secured by your
pre-tax contributions, even if the proceeds of your loan are used to acquire
your principal residence.
We may change these loan provisions to reflect changes in the Code or
interpretations thereof.
Loan Procedures
Your loan request must be submitted on our Loan Agreement Form. You may submit
a loan request at any time after your first Contract Anniversary and before
your Annuity Date; however, before requesting a new loan, you must wait thirty
days after the last payment of a previous loan. If approved, your loan will
usually be effective as of the end of the Business Day on which we receive all
necessary documentation in proper form. We will normally forward proceeds of
your loan to you within seven calendar days after the effective date of your
loan. There is a loan administration fee of $500, unless state law requires
otherwise. As of the date of this prospectus, we currently waive this fee.
In order to secure your loan, on the effective date of your loan, we will
transfer an amount equal to the principal amount of your loan into an account
called the "Loan Account." To make this transfer, we will transfer amounts
proportionately from your Investment Options based on your Account Value in
each Investment Option.
As your loan is repaid, a portion, corresponding to the amount of the repayment
of any amount then held as security for your loan, will be transferred from the
Loan Account back into your Investment Options relative to your current
allocation instructions.
Loan Terms
You may have only one loan outstanding at any time. The minimum loan amount is
$1,000, subject to certain state limitations. Your Contract Debt at the
effective date of your loan may not exceed the lesser of:
. 50% of your Contract Value; and
. $50,000 less your highest outstanding Contract Debt during the 12-month
period immediately preceding the effective date of your loan.
You should refer to the terms of your particular Qualified Plan for any
additional loan restrictions. If you have other loans outstanding pursuant to
other Qualified Plans, the amount you may borrow may be further restricted. We
are not responsible for making any determinations (including loan amounts
permitted) or any interpretations with respect to your Qualified Plan.
You will be charged interest on your Contract Debt at an annual rate, set at
the time the loan is made, equal to the higher of (a) Moody's Corporate Bond
Yield Average-Monthly Average Corporates (the "Moody's Rate"), as published by
Moody's Investors Service, Inc., or its successor, for the most recently
available calendar month, or (b) 5%. In the event that the Moody's Rate is no
longer available, we may substitute a substantially similar average rate,
subject to compliance with applicable state regulations. The amount held in the
Loan Account to secure your loan will earn a return equal to an annual rate
that is two percentage points lower than the annual rate of interest charged on
your Contract Debt. Interest charges accrue on your Contract Debt daily,
beginning on the effective date of your loan. Interest earned on the Loan
Account Value accrue daily beginning on the day following the effective date of
the loan, and those earnings will be transferred once a year to your Investment
Options in accordance with your current allocation instructions.
Repayment Terms
Your loan, including principal and accrued interest, generally must be repaid
in quarterly installments. An installment will be due in each quarter on the
date corresponding to the effective date of your loan, beginning with the first
such date following the effective date of your loan.
Example: On May 1, we receive your loan request, and your loan is effective.
Your first quarterly payment will be due on August 1.
34
<PAGE>
Adverse tax consequences may result if you fail to meet the repayment
requirements for your loan. You must repay principal and interest of any loan
in substantially equal payments over the term of the loan. Generally, the term
of the loan will be five years from the effective date of the loan; however, if
you have certified to us that your loan proceeds are to be used to acquire a
principal residence for yourself, you may request a loan term of 30 years. In
either case, however, you must repay your loan prior to your Annuity Date. If
you elect to annuitize (or withdraw) your Net Contract Value while you have an
outstanding loan, we will deduct any Contract Debt from your Contract Value at
the time of the annuitization (or withdrawal) to repay the Contract Debt.
You may prepay your entire loan at any time; if you do so, we will bill you for
any unpaid interest that has accrued through the date of payoff. Your loan will
be considered repaid only when the interest due has been paid. Subject to any
necessary approval of state insurance authorities, while you have Contract Debt
outstanding, we will treat all payments you send us as Purchase Payments unless
you specifically indicate that your payment is a loan repayment or include your
loan stub with your payment. To the extent allowed by law, any loan repayments
in excess of the amount then due will be refunded to you, unless such amount is
sufficient to pay the balance of your loan. Repayments we receive that are less
than the amount then due will be returned to you, unless otherwise required by
law.
If we have not received your full payment by its due date, we will declare the
entire remaining loan balance in default. At that time, we will send written
notification of the amount needed to bring the loan back to a current status.
You will have sixty (60) days from the date on which the loan was declared in
default (the "grace period") to make the required payment.
If the required payment is not received by the end of the grace period, the
defaulted loan balance plus accrued interest and any withdrawal charge will be
withdrawn from your Contract Value, if amounts under your Contract are eligible
for distribution. In order for an amount to be eligible for distribution from a
Qualified Plan you must meet one of six triggering events. They are: attainment
of age 59 1/2; separation from service; death; disability; plan termination;
and financial hardship. If those amounts are not eligible for distribution, the
defaulted loan balance plus accrued interest and any withdrawal charge will be
considered a Deemed Distribution and will be withdrawn when such Contract
Values become eligible. In either case, the Distribution or the Deemed
Distribution will be considered a currently taxable event, and may be subject
to federal tax withholding, the withdrawal charge and the federal early
withdrawal penalty tax.
If there is a Deemed Distribution under your Contract and to the extent allowed
by law, any future withdrawals will first be applied as repayment of the
defaulted Contract Debt, including accrued interest and charges for applicable
taxes. Any amounts withdrawn and applied as repayment of Contract Debt will
first be withdrawn from your Loan Account, and then from your Investment
Options on a proportionate basis relative to the Account Value in each
Investment Option. If you have an outstanding loan that is in default, the
defaulted Contract Debt will be considered a withdrawal for the purpose of
calculating any Death Benefit Amount and/or Guaranteed Minimum Death Benefit.
The terms of any such loan are intended to qualify for the exception in Code
Section 72(p)(2) so that the distribution of the loan proceeds will not
constitute a distribution that is taxable to you. To that end, these loan
provisions will be interpreted to ensure and maintain such tax qualification,
despite any other provisions to the contrary. We reserve the right to amend
your Contract to reflect any clarifications that may be needed or are
appropriate to maintain such tax qualification or to conform any terms of our
loan arrangement with you to any applicable changes in the tax qualification
requirements. We will send you a copy of any such amendment. If you refuse such
an amendment, it may result in adverse tax consequences to you.
Withholding
Unless you elect to the contrary, any amounts you receive under your Contract
that are attributable to investment income will be subject to withholding to
meet federal and state income tax obligations. The rate of withholding on
annuity payments made to you will be determined on the basis of the withholding
information you provide to us with your application. If you do not provide us
with required withholding information, we will withhold, from every withdrawal
from your Contract and from every annuity payment to you, the
35
<PAGE>
appropriate percentage of the taxable amount of the payment. Please call us at
1-800-722-2333 with any questions about the required withholding information.
For purposes of determining your withholding rate on annuity payments, you will
be treated as a married person with three exemptions. The rate of withholding
on all other payments made to you under your Contract, such as amounts you
receive upon withdrawals, will be 10%, unless otherwise specified by the Code.
Generally, there will be no withholding for taxes until you actually receive
payments under your Contract.
Distributions from a Contract under a Qualified Plan (not including an
individual retirement annuity subject to Code Section 408 or Code Section 408A)
to an employee, surviving spouse, or former spouse who is an alternate payee
under a qualified domestic relations order, in the form of a lump sum
settlement or periodic annuity payments for a fixed period of fewer than 10
years are subject to mandatory income tax withholding of 20% of the taxable
amount of the distribution, unless (1) the distributee directs the transfer of
such amounts in cash to another Qualified Plan or a Traditional IRA; or (2) the
payment is a minimum distribution required under the Code. The taxable amount
is the amount of the distribution less the amount allocable to after-tax
contributions. All other types of taxable distributions are subject to
withholding unless the distributee elects not to have withholding apply.
Certain states have indicated that pension and annuity withholding will apply
to payments made to residents. Generally, an election out of federal
withholding will also be considered an election out of state withholding.
Impact of Federal Income Taxes
In general, in the case of Non-Qualified Contracts if you expect to accumulate
your Contract Value over a relatively long period of time without making
significant withdrawals, there should be tax advantages, regardless of your tax
bracket, in purchasing such a Contract rather than, for example, a mutual fund
with a similar investment policy and approximately the same level of expected
investment results. This is because little or no income taxes are incurred by
you or by us while you are participating in the Subaccounts, and it is
generally advantageous to defer the payment of income taxes, so that the
investment return is compounded without any deduction for income taxes. The
advantage will be greater if you decide to liquidate your Contract Value in the
form of monthly annuity payments after your retirement, or if your tax rate is
lower at that time than during the period that you held the Contract, or both.
Taxes on Pacific Life
Although the Separate Account is registered as an investment company, it is not
a separate taxpayer for purposes of the Code. The earnings of the Separate
Account are taxed as part of our operations. No charge is made against the
Separate Account for our federal income taxes (excluding the charge for premium
taxes), but we will review, periodically, the question of charges to the
Separate Account or your Contract for such taxes. Such a charge may be made in
future years for any federal income taxes that would be attributable to the
Separate Account or to our operations with respect to your Contract, or
attributable, directly or indirectly, to Purchase Payments on your Contract.
Under current law, we may incur state and local taxes (in addition to premium
taxes) in several states. At present, these taxes are not significant and they
are not charged against the Contract or the Separate Account. If there is a
material change in applicable state or local tax laws, the imposition of any
such taxes upon us that are attributable to the Separate Account or to our
operations with respect to your Contract may result in a corresponding charge
against the Separate Account or your Contract.
ADDITIONAL INFORMATION
Voting Rights
We are the legal owner of the shares of the Portfolios held by the Subaccounts.
We may vote on any matter voted on at Fund shareholders' meetings. However, our
current interpretations of applicable law requires us to vote the number of
shares attributable to your Variable Account Value (your "voting interest") in
accordance with your directions.
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<PAGE>
We will pass proxy materials on to you so that you have an opportunity to give
us voting instructions for your voting interest. You may provide your
instructions by proxy or in person at the shareholders' meeting. If there are
shares of a Portfolio held by a Subaccount for which we do not receive timely
voting instructions, we will vote those shares in the same proportion as all
other shares of that Portfolio held by that Subaccount for which we have
received timely voting instructions. If we hold shares of a Portfolio in our
General Account, we will vote such shares in the same proportion as the total
votes cast for all of our separate accounts, including Separate Account A. We
will vote shares of any Portfolio held by our non-insurance affiliates in the
same proportion as the total votes for all separate accounts of ours and our
insurance affiliates.
We may elect, in the future, to vote shares of the Portfolios held in Separate
Account A in our own right if we are permitted to do so through a change in
applicable federal securities laws or regulations, or in their interpretation.
The number of Portfolio shares that form the basis for your voting interest is
determined as of the record date set by the Board of Trustees of the Fund. It
is equal to (a) your Contract Value allocated to the Subaccount corresponding
to that Portfolio, divided by (b) the net asset value per share of that
Portfolio. Fractional votes will be counted. We reserve the right, if required
or permitted by a change in federal regulations or their interpretation, to
amend how we calculate your voting interest.
After your Annuity Date, if you have selected a variable annuity, the voting
rights under your Contract will continue during the payout period of your
annuity, but the number of shares that form the basis for your voting interest,
as described above, will decrease throughout the payout period.
Changes to Your Contract
Contract Owner(s) and Contingent Owner
You may change your Non-Qualified Contract at any time prior to your Annuity
Date to name a different Contract Owner or to add a Joint Owner, or to add or
change a Contingent Owner; if yours is a Qualified Contract, you must be the
only Contract Owner, but you may still add or change a Contingent Owner. Your
Contract cannot name more than two Contract Owners (Joint Owners) and one
Contingent Owner at any time. Any newly-named Contract Owners, including Joint
and/or Contingent Owners, must be under the age of 81 at the time of change or
addition. Joint ownership is in the form of a joint tenancy. The Contract
Owner(s) may make all decisions regarding the Contract, including making
allocation decisions and exercising voting rights. Transactions under jointly
owned Contracts require authorization from both Contract Owners. Transfer of
Contract ownership may involve federal income tax consequences; you should
consult a qualified tax adviser before effecting such a transfer. A change to
joint Contract ownership is considered a transfer of ownership.
Annuitant and Contingent or Joint Annuitant
Your sole Annuitant cannot be changed, and Joint Annuitants cannot be added or
changed, once your Contract is issued. Certain changes may be permitted in
connection with Contingent Annuitants. See RETIREMENT BENEFITS AND OTHER
PAYOUTS--Selecting Your Annuitant. There may be limited exceptions for certain
Qualified Contracts.
Beneficiaries
Your Beneficiary is the person(s) who may receive death benefits under your
Contract or any remaining annuity payments after the Annuity Date if the
Annuitant dies. You may change or remove your Beneficiary or add Beneficiaries
at any time prior to the death of the Annuitant or Owner, as applicable. If you
have named your Beneficiary irrevocably, you will need to obtain that
Beneficiary's consent before making any changes. Qualified Contracts may have
additional restrictions on naming and changing Beneficiaries; for example, if
your Contract was issued in connection with a Qualified Plan subject to Title I
of ERISA, your spouse must either be your Beneficiary or consent to your naming
of a different Beneficiary. If you leave no surviving Beneficiary, your estate
will receive any death benefit proceeds under your Contract.
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<PAGE>
Changes to All Contracts
If, in the judgment of our management, continued investment by Separate Account
A in one or more of the Portfolios becomes unsuitable or unavailable, we may
seek to alter the Variable Investment Options available under the Contracts. We
do not expect that a Portfolio will become unsuitable, but unsuitability issues
could arise due to changes in investment policies, market conditions, or tax
laws, or due to marketing or other reasons.
Alterations of Variable Investment Options may take differing forms. We reserve
the right to substitute shares of any Portfolio that were already purchased
under any Contract (or shares that were to be purchased in the future under a
Contract) with shares of another Portfolio, shares of another investment
company or series of an investment company, or another investment vehicle. We
may also purchase, through a Subaccount, other securities for other series or
other classes of contracts, and may permit conversions or exchanges between
series or classes of contracts on the basis of Contract Owner requests.
Required approvals of the SEC and state insurance regulators will be obtained
before any such substitutions are effected, and you will be notified of any
planned substitution.
We may add new Subaccounts to Separate Account A, and any new Subaccounts may
invest in Portfolios or in other investment vehicles; availability of any new
Subaccounts to existing Contract Owners will be determined at our discretion.
We will notify you, and will comply with the filing or other procedures
established by applicable state insurance regulators, to the extent required by
applicable law. We also reserve the right, after receiving any required
regulatory approvals, to do any of the following:
. cease offering any Subaccount;
. add or change designated investment companies or their portfolios, or
other investment vehicles;
. add, delete or make substitutions for the securities and other assets that
are held or purchased by the Separate Account or any Variable Account;
. permit conversion or exchanges between portfolios and/or classes of
contracts on the basis of Owners' requests;
. add, remove or combine Variable Accounts;
. combine the assets of any Variable Account with any other of our separate
accounts or of any of our affiliates;
. register or deregister Separate Account A or any Variable Account under
the 1940 Act;
. operate any Variable Account as a managed investment company under the
1940 Act, or any other form permitted by law;
. run any Variable Account under the direction of a committee, board, or
other group;
. restrict or eliminate any voting rights of Owners with respect to any
Variable Account or other persons who have voting rights as to any
Variable Account;
. make any changes required by the 1940 Act or other federal securities
laws;
. make any changes necessary to maintain the status of the Contracts as
annuities under the Code;
. make other changes required under federal or state law relating to
annuities;
. suspend or discontinue sale of the Contracts; and
. comply with applicable law.
Inquiries and Submitting Forms and Requests
You may reach our service representatives at 1-800-722-2333 between the hours
of 6:00 a.m. and 5:00 p.m., Pacific time.
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Please send your forms and written requests or questions to:
Pacific Life Insurance Company
P.O. Box 7187
Pasadena, California 91109-7187
If you are submitting a purchase or other payment by mail, please send it,
along with your application if you are submitting one, to:
Pacific Life Insurance Company
P.O. Box 100060
Pasadena, California 91189-0060
If you are using an overnight delivery service to send payments, please send
them to:
Pacific Life Insurance Company
c/o FCNPC
1111 South Arroyo Parkway, First Floor
Pasadena, California 91105
The effective date of certain notices or of instructions is determined by the
date and time on which we "receive" the notice or instructions. We "receive"
this information only when it arrives, in proper form, at the correct mailing
address set out above. Please call us at 1-800-722-2333 if you have any
questions regarding which address you should use.
Purchase Payments after your initial Purchase Payment, loan requests, transfer
requests, loan repayments and withdrawal requests we receive before 4:00 p.m.
Eastern time will usually be effective on the same Business Day that we receive
them in "proper form," unless the transaction or event is scheduled to occur on
another day. Generally, whenever you submit any other form, notice or request,
your instructions will be effective on the next Business Day after we receive
them in "proper form" unless the transaction or event is scheduled to occur on
another day. "Proper form" means in a form satisfactory to us and may require,
among other things, a signature guarantee or other verification of
authenticity. We do not generally require a signature guarantee unless it
appears that your signature may have changed over time or the signature does
not appear to be yours; an executed application or confirmation of application,
as applicable, in proper form is not received by us; or, to protect you or us.
Requests regarding death benefits must be accompanied by both proof of death
and instructions regarding payment satisfactory to us. You should call your
registered representative or us if you have questions regarding the required
form of a request.
Telephone Transactions
After your "free look" period, you may make transfer requests by telephone if
you have authorized telephone requests (a "telephone authorization"). We cannot
guarantee that you will always be able to reach us to complete a telephone
transaction; for example, all telephone lines may be busy during certain
periods, such as periods of substantial market fluctuations or other drastic
economic or market change, or telephones may be out of service during severe
weather conditions or other emergencies. Under these circumstances, you should
submit your request in writing (or other form acceptable to us). Transaction
instructions we receive by telephone before 4:00 p.m. Eastern time on any
Business Day will usually be effective on that day, and we will send you
written confirmation of each telephone transfer.
We have established procedures reasonably designed to confirm that instructions
communicated by telephone are genuine. These procedures may require any person
requesting a telephone transaction to provide certain personal identification
upon our request. We may also record all or part of any telephone conversation
with respect to transaction instructions. We reserve the right to deny any
transaction request made by telephone. When you make a proper request for a
telephone authorization, you authorize us to accept and to act upon
instructions received by telephone with respect to your Contract, and you agree
that, as long as we comply with our procedures, neither we, any of our
affiliates, nor the Fund, or any of their directors, trustees, officers,
employees or agents will be liable for any loss, liability, cost or expense
(including attorneys' fees) in connection
39
<PAGE>
with requests that are effected in accordance with your telephone authorization
and that we believe to be genuine. This policy means that you will bear the
risk of loss arising out of your telephone transaction privileges. If a
Contract has Joint Owners, both Owners must sign the written request for a
telephone authorization, but each Owner individually may make transfer requests
by telephone.
Timing of Payments and Transactions
For withdrawals from the Variable Investment Options or for death benefit
payments attributable to your Variable Account Value, we will normally send the
proceeds within seven calendar days after your withdrawal request is effective
or after the Notice Date, as the case may be. Similarly, for transfers from the
Variable Investment Options, we will normally send the proceeds within seven
calendar days after your transfer (or exchange) request is effective. We will
normally effect periodic annuity payments on the day that corresponds to the
Annuity Date and will make payment on the following day. Payments or transfers
may be suspended for a longer period under certain extraordinary circumstances.
These include: a closing of the New York Stock Exchange other than on a regular
holiday or weekend; a trading restriction imposed by the SEC; or an emergency
declared by the SEC. For (i) withdrawals from the Fixed Option, (ii) death
benefit payments attributable to Fixed Option Value, or (iii) fixed periodic
annuity payments, payment of proceeds may be delayed for up to six months
(thirty days in West Virginia) after the request is effective. Similar delays
may apply to loans and transfers from the Fixed Option. See THE GENERAL ACCOUNT
for more details.
Confirmations, Statements and Other Reports to Contract Owners
Confirmations will be sent out for unscheduled Purchase Payments and transfers,
loans, loan repayments, unscheduled partial withdrawals, a full withdrawal, and
on payment of any death benefit proceeds. Each quarter prior to your Annuity
Date, we will send you a statement that provides certain information pertinent
to your Contract. These statements disclose Contract Value, Subaccount values,
values under each Fixed Option, fees and charges applied to your Contract
Value, transactions made and specific Contract data that apply to your
Contract. Confirmations of your transactions under the pre-authorized checking
plan, dollar cost averaging, earnings sweep, portfolio rebalancing, and pre-
authorized withdrawal options will appear on your quarterly account statements.
Your fourth-quarter statement will contain annual information about your
Contract Value and transactions. If you suspect an error on a confirmation or
quarterly statement, you must notify us in writing within 30 days from the date
of the first confirmation or statement on which the transaction you believe to
be erroneous appeared. When you write, tell us your name, contract number and a
description of the suspected error. You will also be sent an annual report for
the Separate Account and the Fund and a list of the securities held in each
Portfolio of the Fund, as required by the 1940 Act; or more frequently if
required by law.
Replacement of Life Insurance or Annuities
The term "replacement" has a special meaning in the life insurance industry and
is described more fully below. Before you make your purchase decision, Pacific
Life wants you to understand how a replacement may impact your existing plan of
insurance.
A policy "replacement" occurs when a new policy or contract is purchased and,
in connection with the sale, an existing policy or contract is surrendered,
lapsed, forfeited, assigned to the replacing insurer, otherwise terminated, or
used in a financed purchase. A "financed purchase" occurs when the purchase of
a new life insurance policy or annuity contract involves the use of funds
obtained from the values of an existing life insurance policy or annuity
contract through withdrawal, surrender or loan.
There are circumstances in which replacing your existing life insurance policy
or annuity contract can benefit you. As a general rule, however, replacement is
not in your best interest. Accordingly, you should make a careful comparison of
the costs and benefits of your existing policy or contract and the proposed
policy or contract to determine whether replacement is in your best interest.
Financial Statements
Audited financial statements of Separate Account A as of December 31, 1998 and
for the two years then ended are incorporated by reference in the SAI from the
Annual Report of Separate Account A dated as of
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<PAGE>
December 31, 1998. Pacific Life's audited consolidated financial statements as
of December 31, 1998 and 1997, and for the three years ended December 31, 1998,
are contained in the SAI.
Preparation for the Year 2000
Pacific Life long ago recognized the challenges associated with the Year 2000
date change. This change involves the ability of computer systems to properly
recognize the Year 2000. The inability to do so could result in major failures
or miscalculations. We began prior to 1995 to assess and plan for the potential
impact of the Year 2000. More recently, Pacific Life has been executing a
company-wide plan adopted during 1998 which called for correction or
replacement of remaining non-compliant systems by December 31, 1998.
We have successfully executed this project plan to date. Virtually all affected
systems were remediated and tested in time for use during 1998 year-end
processing cycles. Although it is not possible to certify that any system will
be completely free of Year 2000 problems, we have performed extensive testing
to identify and deal with such potential problems. Additionally, most of the
company's critical systems were subject to an independent third-party review
process which used sophisticated automated tools to identify Year 2000 related
bugs. The results have been very positive and we feel the company's internal
systems are positioned well for the date change in the century.
We plan to continue to test and re-test throughout 1999 and we will respond
promptly should any problems arise at any time thereafter.
We are continuing to work on contingency plans for critical business processes.
When appropriate, alternative methods and procedures are being developed to
work around unanticipated problems.
In addition to the above, we will continue to carefully evaluate responses from
vendors and significant business partners regarding the compliance of their
critical business processes and products. Although ultimately Pacific Life
cannot be responsible for the Year 2000 compliance efforts of these outside
entities, we will take appropriate steps wherever possible to develop
contingency plans to address vendors and partners deemed non-compliant.
Expenses to make our systems Year 2000 compliant are currently estimated to
range from $12 million to $15 million, which excludes the cost of our personnel
who support Year 2000 compliance efforts. We do not anticipate any other
material future costs associated with the Year 2000 compliance projects,
although there can be no assurance.
These Year 2000 related statements are designated as "Year 2000 Readiness
Disclosure" pursuant to the Year 2000 Information Readiness Disclosure Act,
enacted October 19, 1998.
THE GENERAL ACCOUNT
General Information
All amounts allocated to the Fixed Option become part of our General Account.
Subject to applicable law, we exercise sole discretion over the investment of
General Account assets, and bear the associated investment risk; you will not
share in the investment experience of General Account assets.
Because of exemptive and exclusionary provisions, interests in the General
Account under the Contract are not registered under the Securities Act of 1933,
as amended, and the General Account has not been registered as an investment
company under the 1940 Act. Any interest you have in the Fixed Option is not
subject to these Acts, and we have been advised that the SEC staff has not
reviewed disclosure in this Prospectus relating to the Fixed Option. This
disclosure may, however, be subject to certain provisions of federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
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Guarantee Terms
When you allocate any portion of your Purchase Payments or Contract Value to
the Fixed Option, we guarantee you an interest rate (a "Guaranteed Interest
Rate") for a specified period of time (a "Guarantee Term") of up to one year.
Guarantee terms will be offered at our discretion.
Guaranteed Interest Rates for the Fixed Option may be changed periodically for
new allocations; your allocation will receive the Guaranteed Interest Rate in
effect for the Fixed Option on the effective date of your allocation. All
Guaranteed Interest Rates will be expressed as annual effective rates; however,
interest will accrue daily. The Guaranteed Interest Rate on your Fixed Option
will remain in effect for the Guarantee Term and will never be less than an
annual rate of 3%.
Fixed Option
Each allocation (or rollover) you make to the Fixed Option receives a Guarantee
Term that begins on the day that allocation or rollover is effective and ends
at the end of that Contract Year or, if earlier, on your Annuity Date. At the
end of that Contract Year, we will roll over your Fixed Option Value on that
day into a new Guarantee Term of one year (or, if shorter, the time remaining
until your Annuity Date) at the then current Guaranteed Interest Rate, unless
you instruct us otherwise.
Example: Your Contract Anniversary is February 1. On February 1 of year 1,
you allocate $1,000 to the Fixed Option and receive a Guarantee Term of one
year and a Guaranteed Interest Rate of 5%. On August 1, you allocate another
$500 to the Fixed Option and receive a Guaranteed Interest Rate of 6%.
Through January 31, year 1, your first allocation of $1,000 earns 5%
interest and your second allocation of $500 earns 6% interest. On February
1, year 2, a new interest rate may go into effect for your entire Fixed
Option Value.
Withdrawals and Transfers
Prior to the Annuity Date, you may withdraw amounts from your Fixed Option or
transfer amounts from your Fixed Option to one or more of the other Investment
Options. If your Contract was delivered in a state that requires refund of
Purchase Payments under the Free Look Right, transfers may only be made after
your Free Look Transfer Date. In addition, no partial withdrawal or transfer
may be made from your Fixed Option within 30 days of the Contract Date. If your
withdrawal leaves you with a Net Contract Value of less than $1,000, we have
the right, at our option, to terminate your Contract and send you the
withdrawal proceeds.
Payments or transfers from the Fixed Option may be delayed, as described under
ADDITIONAL INFORMATION--Timing of Payments and Transactions; any amount delayed
will, as long as it is held under the Fixed Option, continue to earn interest
at the Guaranteed Interest Rate then in effect until that Guarantee Term has
ended, and the minimum guaranteed interest rate of 3% thereafter, unless state
law requires a greater rate be paid.
Fixed Option
After the first Contract Anniversary, you may make one transfer or partial
withdrawal from your Fixed Option during any Contract Year, except as provided
under the dollar cost averaging, earnings sweep and pre-authorized withdrawal
programs. You may make one transfer or one partial withdrawal within the 30
days after the end of each Contract Anniversary. Normally, you may transfer or
withdraw up to one-third (33 1/3%) of your Fixed Option Value in any given
Contract Year. However, in consecutive Contract Years you may transfer or
withdraw up to one-third (33 1/3%) of your Fixed Option Value in one year; you
may transfer or withdraw up to one-half (50%) of your remaining Fixed Option
Value in the next year; and you may transfer or withdraw up to the entire
amount (100%) of any remaining Fixed Option Value in the third year. In
addition, if, as a result of a partial withdrawal or transfer, the Fixed Option
Value is less than $500, we have the right, at our option, to transfer the
entire remaining amount to your other Investment Options on a proportionate
basis relative to your most recent allocation instructions.
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<TABLE>
<CAPTION>
TERMS USED IN THIS PROSPECTUS
<S> <C>
Some of the terms we've used in this Contract Owner, Owner, Policyholder, you,
Prospectus may be new to you. We've or your - Generally, a person who purchases
identified them in the Prospectus by a Contract and makes the Purchase Payments.
capitalizing the first letter of each A Contract Owner has all rights in the
word. You'll find an explanation of Contract, including the right to make
what they mean below. withdrawals, designate and change
beneficiaries, transfer amounts among
If you have any questions, please ask Investment Options, and designate an
your registered representative or call Annuity Option. If your Contract names
us at 1-800-722-2333. Joint Owners, both Joint Owners are Contract
Owners and share all such rights.
Account Value - The amount of your
Contract Value allocated to a specified Contract Value - As of the end of any
Variable Investment Option or the Fixed Business Day, the sum of your Variable
Option. Account Value, Fixed Option Value, and any
Loan Account Value. The Contract Value
Annuitant - A person on whose life includes any Credit Enhancements applied
annuity payments may be determined. An to your Contract.
Annuitant's life may also be used to
determine certain increases in death Contract Year - A year that starts on the
benefits, and to determine the Annuity Contract Date or on a Contract Anniversary.
Date. A Contract may name a single
("sole") Annuitant or two ("Joint") Credit Enhancement - An amount we add to
Annuitants, and may also name a your Contract Value at the time a Purchase
"Contingent" Annuitant. If you name Payment is applied and on the First Contract
Joint Annuitants or a Contingent Anniversary, if applicable. Each Credit
Annuitant, "the Annuitant" means the Enhancement will be counted as Earnings under
sole surviving Annuitant, unless otherwise your Contract.
stated.
Earnings - As of the end of any Business Day,
Annuity Date ("Annuity Start Date") - The your Earnings equal your Contract Value less
date specified in your Contract, or the your aggregate Purchase Payments, which are
date you later elect, if any, for the reduced by withdrawals of prior Purchase
start of annuity payments if the Annuitant Payments.
(or Joint Annuitants) is (or are) still
living and your Contract is in force; or Fixed Option - If you allocate all or part of
if earlier, the date that annuity payments your Purchase Payments or Contract Value to
actually begin. the Fixed Option, such amounts are held in
our General Account and receive the Guaranteed
Annuity Option - Any one of the income Interest Rates declared periodically, but not
options available for a series of payments less than an annual rate of 3%.
after your Annuity Date.
Fixed Option Value - The aggregate amount of
Beneficiary - A person who may have a right your Contract Value allocated to the Fixed
to receive the death benefit payable upon Option.
the death of the Annuitant or a Contract
Owner prior to the Annuity Date, or has a Fund - Pacific Select Fund.
right to receive remaining guaranteed
annuity payments, if any, if the Annuitant General Account - Our General Account consists
dies after the Annuity Date. of all of our assets other than those assets
allocated to Separate Account A or to any of
Business Day - Any day on which the value our other separate accounts.
of an amount invested in a Variable
Investment Option is required to be Guaranteed Interest Rate - The interest rate
determined, which currently includes each guaranteed at the time of allocation
day that the New York Stock Exchange is (or rollover) for the Guarantee Term on
open for trading and our Annuities amounts allocated to the Fixed Option. Each
administrative offices are open. The New Guaranteed Interest Rate is expressed as an
York Stock Exchange and our Annuities annual rate and interest is accrued daily.
administrative offices are closed on Each rate will not be less than an annual
weekends and on the following holidays: rate of 3%.
New Year's Day, Martin Luther King, Jr.
Day, President's Day, Good Friday, Guarantee Term - The period during which an
Memorial Day, July Fourth, Labor Day, amount you allocate to the Fixed Option earns
Thanksgiving Day and Christmas Day. In a Guaranteed Interest Rate. These terms are
this Prospectus, "day" or "date" means up to one-year for the Fixed Option.
Business Day unless otherwise specified.
If any transaction or event called for Investment Option - A Subaccount or the Fixed
under a Contract is scheduled to occur on Option offered under the Contract.
a day that is not a Business Day, such
transaction or event will be deemed to Joint Annuitant - If your Contract is a
occur on the next following Business Day Non-Qualified Contract, you may name two
unless otherwise specified. Special Annuitants, called "Joint Annuitants," in
circumstances such as leap years and months your application for your Contract. Special
with fewer than 31 days are discussed restrictions apply for Qualified Contracts.
in the SAI.
Loan Account - The Account in which the
Code - The Internal Revenue Code of 1986, amount equal to the principal amount of
as amended. a loan and any interest accrued is held to
secure any Contract Debt.
Contingent Annuitant - A person, named in
your Contract, who will become your sole Loan Account Value - The amount, including
surviving Annuitant if your existing sole any interest accrued, held in the
Annuitant (or both Joint Annuitants) should Loan Account to secure any Contract Debt.
die.
Net Contract Value - Your Contract Value less
Contingent Owner - A person, named in your Contract Debt.
Contract, who will succeed to the rights as
a Contract Owner of your Contract if all Non-Qualified Contract - A Contract other than
named Contract Owners die before your a Qualified Contract.
Annuity Date.
Policyholder - The Contract Owner.
Contract Anniversary - The same date, in
each subsequent year, as your Contract Portfolio - A separate portfolio of the Fund in
Date. which a Subaccount invests its assets.
Contract Date - The date we issue your
Contract. Contract Years, Contract
Semiannual Periods, Contract Quarters
and Contract Months are measured from
this date.
Contract Debt - As of the end of any
given Business Day, the principal amount
you have outstanding on any loan under
your Contract, plus any accrued and
unpaid interest. Loans are only available
on certain Qualified Contracts.
43
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TERMS USED IN THIS PROSPECTUS
<S> <C>
Primary Annuitant - The individual that is Subaccount Unit - Before your Annuity Date,
named in your Contract, the events in the each time you allocate an amount to a
life of whom are of primary importance in Subaccount, your Contract is credited with
affecting the timing or amount of the a number of Subaccount Units in that
payout under the Contract. Subaccount. These Units are used for
accounting purposes to measure your Account
Purchase Payment ("Premium Payment") - An Value in that Subaccount. The value of
amount paid to us by or on behalf of a Subaccount Units is expected to fluctuate
Contract Owner, as consideration for the daily, as described in the definition of
benefits provided under the Contract. Unit Value.
Qualified Contract - A Contract that Unit Value - The value of a Subaccount Unit
qualifies under the Code as an individual ("Subaccount Unit Value") or Subaccount
retirement annuity or account ("IRA"), or Annuity Unit ("Subaccount Annuity Unit
form thereof, or a Contract purchased by a Value"). Unit Value of any Subaccount is
Qualified Plan, qualifying for special tax subject to change on any Business Day in
treatment under the Code. much the same way that the value of a
mutual fund share changes each day. The
Qualified Plan - A retirement plan that fluctuations in value reflect the investment
receives favorable tax treatment under results, expenses of and charges against the
Section 401, 403, 408, 408A or 457 of the Portfolio in which the Subaccount invests
Code. its assets. Fluctuations also reflect
charges against the Separate Account.
SEC - Securities and Exchange Commission. Changes in Subaccount Annuity Unit Values
also reflect an additional factor that
Separate Account A (the "Separate Account") - adjusts Subaccount Annuity Unit Values to
A separate account of ours registered as a offset our Annuity Option Table's implicit
unit investment trust under the Investment assumption of an annual investment return
Company Act of 1940, as amended (the "1940 of 5%. The effect of this assumed investment
Act"). return is explained in detail in the SAI.
Unit Value of a Subaccount Unit or Subaccount
Subaccount - An investment division of the Annuity Unit on any Business Day is measured
Separate Account. Each Subaccount invests at or about 4:00 p.m., Eastern time, on that
its assets in shares of a corresponding Business Day.
Portfolio.
Variable Account Value - The aggregate amount
Subaccount Annuity Unit - Subaccount Annuity of your Contract Value allocated to all
Units (or "Annuity Units") are used to Subaccounts.
measure variation in variable annuity
payments. To the extent you elect to convert Variable Investment Option - A Subaccount
all or some of your Contract Value into (also called a Variable Account).
variable annuity payments, the amount of
each annuity payment (after the first
payment) will vary with the value and number
of Annuity Units in each Subaccount
attributed to any variable annuity payments.
At annuitization (after any applicable
premium taxes and/or other taxes are paid),
the amount annuitized to a variable annuity
determines the amount of your first variable
annuity payment and the number of Annuity
Units credited to your annuity in each
Subaccount. The value of Subaccount Annuity
Units, like the value of Subaccount Units,
is expected to fluctuate daily, as described
in the definition of Unit Value.
</TABLE>
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CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
PERFORMANCE................................................................ 1
Total Returns............................................................ 1
Yields................................................................... 2
Performance Comparisons and Benchmarks................................... 2
Separate Account Performance............................................. 3
DISTRIBUTION OF THE CONTRACTS.............................................. 7
Pacific Mutual Distributors, Inc......................................... 7
THE CONTRACTS AND THE SEPARATE ACCOUNT..................................... 8
Calculating Subaccount Unit Values....................................... 8
Variable Annuity Payment Amounts......................................... 8
Corresponding Dates...................................................... 10
Age and Sex of Annuitant................................................. 10
Systematic Transfer Programs............................................. 11
Pre-Authorized Withdrawals............................................... 13
Death Benefit............................................................ 13
Joint Annuitants on Qualified Contracts.................................. 13
1035 Exchanges........................................................... 14
Safekeeping of Assets.................................................... 14
FINANCIAL STATEMENTS....................................................... 14
</TABLE>
45
<PAGE>
APPENDIX A:
STATE LAW VARIATIONS
Right to Cancel ("Free Look")
Variations to the length of the Free Look period. In most states, the Free Look
period is a 10-day period beginning on the day you receive your Contract. If
your Contract was issued in one of the following states, the Free Look period
is as specified below:
Colorado (15 days)
Idaho (20 days)
North Dakota (20 days)
In addition, if you reside in California and are age 60 or older on your
Contract Date, the Free Look period is 30 days.
There may be extended Free Look periods in some states for replacement
business. Please consult with your registered representative if you have any
questions regarding your state's Free Look period.
States that require us to refund your Purchase Payments allocated to the
Variable Investment Options instead of your Variable Account Value. If your
Contract was issued in one of the following states and you exercise your Free
Look right and return your Contract to us within 10 days of your receipt of
your Contract (unless specified otherwise below), we will refund your Purchase
Payments under your Contract that we received:
Georgia Oklahoma
Idaho (20 days) South Carolina
Michigan Utah
Missouri Washington
Nebraska West Virginia
North Carolina
For Contracts delivered to residents of Oregon
As of the date of this Prospectus, the availability of the Stepped-Up Death
Benefit Rider ("SDBR") or Premier Death Benefit Rider ("PDBR") is subject to
approval of state insurance authorities. Ask your registered representative
about its current availability status at the time your application is
completed.
You may make additional Purchase Payments only during your first Contract Year.
For Contracts delivered to residents of Massachusetts:
You may not make additional Purchase Payments after your first Purchase
Payment.
For Contracts delivered to residents of Oregon:
You may make additional Purchase Payments only during your first Contract Year.
46
<PAGE>
- ------------------------------------------------------------------------[SYMBOL]
To receive a current copy of the Pacific Values SAI without charge, complete
the following and send it to:
Pacific Life Insurance Company
Variable Annuities
Post Office Box 7187
Pasadena, CA 91109-7187
Name _________________________
Address ______________________
City _________________________ State ____________________ Zip_________
PH02/53003.29
<PAGE>
<TABLE>
<CAPTION>
PACIFIC VALUE WHERE TO GO FOR MORE INFORMATION
<S> <C>
The Pacific Value variable annuity You'll find more information about the Pacific Value variable annuity contract
Contract is underwritten by Pacific Life and Separate Account A in the Statement of Additional Information (SAI) dated
Insurance Company, 700 Newport May 1, 1999.
Center Drive, P.O. Box 9000, Newport
Beach, California 92660. The SAI has been filed with the SEC and is considered to be part of this
Prospectus because it's incorporated by reference. You'll find the table of
If you have any questions about the contents for the SAI on page 45 of this Prospectus.
Contract, please ask your registered
representative or contact us. You can get a copy of the SAI at no charge by calling or writing to us, or by
contacting the SEC. The SEC may charge you a fee for this information.
--------------------------------------------------------------------------------
How to contact us Call or write to us at:
Pacific Life Insurance Company
Variable Annuities Department
P.O. Box 7187
Pasadena, California 91109-7187
1-800-722-2333
6 a.m. through 5 p.m. Pacific time
Send Purchase Payments, other payments and application forms:
By mail
Pacific Life Insurance Company
P.O. Box 100060
Pasadena, California 91189-0060
By overnight delivery service
Pacific Life Insurance Company
c/o FCNPC
1111 South Arroyo Parkway, Suite 150
Pasadena, California 91105
--------------------------------------------------------------------------------
How to contact the SEC Public Reference Section of the SEC
Washington, D.C. 20549-6009
1-800-SEC-0330
Internet: www.sec.gov
</TABLE>
<PAGE>
[LOGO OF PACIFIC VALUE]
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
PACIFIC VALUE
SEPARATE ACCOUNT A
----------------
Pacific Value (the "Contract") is a variable annuity contract underwritten by
Pacific Life Insurance Company ("Pacific Life").
This Statement of Additional Information is not a Prospectus and should be
read in conjunction with the Contract's Prospectus, dated May 1, 1999 which is
available without charge upon written or telephone request to Pacific Life.
Terms used in this Statement of Additional Information ("SAI") have the same
meanings as in the Prospectus, and some additional terms are defined
particularly for this SAI.
----------------
Pacific Life Insurance Company
Mailing Address: P.O. Box 7187
Pasadena, California 91109-7187
1-800-722-2333
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PERFORMANCE............................................................ 1
Total Returns........................................................ 1
Yields............................................................... 2
Performance Comparisons and Benchmarks............................... 2
Separate Account Performance......................................... 3
DISTRIBUTION OF THE CONTRACTS.......................................... 7
Pacific Mutual Distributors, Inc. ................................... 7
THE CONTRACTS AND THE SEPARATE ACCOUNT................................. 8
Calculating Subaccount Unit Values................................... 8
Variable Annuity Payment Amounts..................................... 8
Corresponding Dates.................................................. 10
Age and Sex of Annuitant............................................. 10
Systematic Transfer Programs......................................... 11
Pre-Authorized Withdrawals........................................... 13
Death Benefit........................................................ 13
Joint Annuitants on Qualified Contracts.............................. 13
1035 Exchanges....................................................... 14
Safekeeping of Assets................................................ 14
FINANCIAL STATEMENTS................................................... 14
</TABLE>
<PAGE>
PERFORMANCE
From time to time, our reports or other communications to current or
prospective Contract Owners or our advertising or other promotional material
may quote the performance (yield and total return) of a Subaccount. Quoted
results are based on past performance and reflect the performance of all
assets held in that Subaccount for the stated time period. Quoted results are
neither an estimate nor a guarantee of future investment performance, and do
not represent the actual experience of amounts invested by any particular
Contract Owner.
Total Returns
A Subaccount may advertise its "average annual total return" over various
periods of time. "Total return" represents the average percentage change in
value of an investment in the Subaccount from the beginning of a measuring
period to the end of that measuring period. "Annualized" total return assumes
that the total return achieved for the measuring period is achieved for each
such period for a full year. "Average annual" total return is computed in
accordance with a standard method prescribed by the SEC.
Average Annual Total Return
To calculate a Subaccount's average annual total return for a specific
measuring period, we first take a hypothetical $1,000 investment in that
Subaccount, at its then-applicable Subaccount Unit Value (the "initial
payment") and we compute the ending redeemable value of that initial payment
at the end of the measuring period based on the investment experience of that
Subaccount ("withdrawal value"). The redeemable value reflects the effect of
all recurring fees and charges applicable to a Contract Owner under the
Contract, including the Risk Charge, the Administrative Fee and the deduction
of the applicable withdrawal charge, but does not reflect any Credit
Enhancement, any charges for applicable premium taxes and/or other taxes, any
non-recurring fees or charges or any increase in the Risk Charge for an
optional Death Benefit Rider. The redeemable value is then divided by the
initial payment and this quotient is taken to the Nth root (N represents the
number of days in the measuring period), and 1 is subtracted from this result.
Average annual total return is expressed as a percentage.
T = [(ERV/P)(to the power of 365/N)] - 1
<TABLE>
<C> <C> <C> <S>
where T = average annual total return
ERV = ending redeemable value
P = hypothetical initial payment of $1,000
N = number of days
</TABLE>
Average annual total return figures will be given for recent one-, three-,
five- and ten-year periods (if applicable), and may be given for other periods
as well (such as from commencement of the Subaccount's operations, or on a
year-by-year basis).
When considering "average" total return figures for periods longer than one
year, it is important to note that the relevant Subaccount's annual total
return for any one year in the period might have been greater or less than the
average for the entire period.
Aggregate Total Return
A Subaccount may use "aggregate" total return figures along with its "average
annual" total return figures for various periods; these figures represent the
cumulative change in value of an investment in the Subaccount for a specific
period. Aggregate total returns may be shown by means of schedules, charts or
graphs and may indicate subtotals of the various components of total return.
The SEC has not prescribed standard formulas for calculating aggregate total
return.
Total returns may also be shown for the same periods that do not take into
account the withdrawal charge.
Non-Standardized Total Returns
We may also calculate non-standardized total returns which may or may not
reflect any Credit Enhancement and/or withdrawal charges, increases in Risk
Charges, charges for premium and/or other taxes, and any non-recurring fees or
charges.
Standardized return figures will always accompany any non-standardized returns
shown.
1
<PAGE>
Yields
Money Market Subaccount
The "yield" (also called "current yield") of the Money Market Subaccount is
computed in accordance with a standard method prescribed by the SEC. The net
change in the Subaccount's Unit Value during a seven-day period is divided by
the Unit Value at the beginning of the period to obtain a base rate of return.
The current yield is generated when the base rate is "annualized" by
multiplying it by the fraction 365/7; that is, the base rate of return is
assumed to be generated each week over a 365-day period and is shown as a
percentage of the investment. The "effective yield" of the Money Market
Subaccount is calculated similarly but, when annualized, the base rate of
return is assumed to be reinvested. The effective yield will be slightly
higher than the current yield because of the compounding effect of this
assumed reinvestment.
The formula for effective yield is: [(Base Period Return +1) (To the power of
365/7)] -1.
Realized capital gains or losses and unrealized appreciation or depreciation
of the assets of the underlying Money Market Portfolio are not included in the
yield calculation. Current yield and effective yield do not reflect any Credit
Enhancement, the deduction of charges for any applicable premium taxes and/or
other taxes, or any increase in the Risk Charge for an optional Death Benefit
Rider, but do reflect a deduction for the Risk Charge and the Administrative
Fee.
At December 31, 1998, the Money Market Subaccount's current yield was 3.41%
and the effective yield was 3.46%.
Other Subaccounts
"Yield" of the other Subaccounts is computed in accordance with a different
standard method prescribed by the SEC. The net investment income (investment
income less expenses) per Subaccount Unit earned during a specified one-month
or 30-day period is divided by the Subaccount Unit Value on the last day of
the specified period. This result is then annualized (that is, the yield is
assumed to be generated each month or each 30-day period for a year),
according to the following formula, which assumes semiannual compounding:
YIELD = 2[(a-b + 1)(To the power of 6) - 1]
---
cd
where: a = net investment income earned during the period by the Portfolio
attributable to the Subaccount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Subaccount Units outstanding during
the period that were entitled to receive dividends.
d = the Unit Value of the Subaccount Units on the last day of the
period.
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to the Subaccount, such as the Risk Charge and
Administrative Fee, but does not reflect any Credit Enhancement, any
withdrawal charge, any charge for applicable premium taxes and/or other taxes,
any increase in the Risk Charge for an optional Death Benefit Rider, or any
non-recurring fees or charges.
The Subaccounts' yields will vary from time to time depending upon market
conditions, the composition of each Portfolio and operating expenses of the
Fund allocated to each Portfolio. Consequently, any given performance
quotation should not be considered representative of the Subaccount's
performance in the future. Yield should also be considered relative to changes
in Subaccount Unit Values and to the relative risks associated with the
investment policies and objectives of the various Portfolios. In addition,
because performance will fluctuate, it may not provide a basis for comparing
the yield of a Subaccount with certain bank deposits or other investments that
pay a fixed yield or return for a stated period of time.
Performance Comparisons and Benchmarks
In advertisements and sales literature, we may compare the performance of some
or all of the Subaccounts to the performance of other variable annuity issuers
in general and to the performance of particular types of variable annuities
investing in mutual funds, or series of mutual funds, with investment
objectives similar to each of the
2
<PAGE>
Subaccounts. This performance may be presented as averages or rankings
compiled by Lipper Analytical Services, Inc. ("Lipper"), the Variable Annuity
Research and Data Service ("VARDS(R)") or Morningstar, Inc. ("Morningstar"),
which are independent services that monitor and rank the performance of
variable annuity issuers and mutual funds in each of the major categories of
investment objectives on an industry-wide basis. Lipper's rankings include
variable life issuers as well as variable annuity issuers. VARDS(R) rankings
compare only variable annuity issuers. The performance analyses prepared by
Lipper and VARDS(R) rank such issuers on the basis of total return, assuming
reinvestment of dividends and distributions, but do not take sales charges,
redemption fees or certain expense deductions at the separate account level
into consideration. In addition, VARDS(R) prepares risk adjusted rankings,
which consider the effects of market risk on total return performance. We may
also compare the performance of the Subaccounts with performance information
included in other publications and services that monitor the performance of
insurance company separate accounts or other investment vehicles. These other
services or publications may be general interest business publications such as
The Wall Street Journal, Barron's, Business Week, Forbes, Fortune, and Money.
In addition, our reports and communications to Contract Owners,
advertisements, or sales literature may compare a Subaccount's performance to
various benchmarks that measure the performance of a pertinent group of
securities widely regarded by investors as being representative of the
securities markets in general or as being representative of a particular type
of security. We may also compare the performance of the Subaccounts with that
of other appropriate indices of investment securities and averages for peer
universes of funds or data developed by us derived from such indices or
averages. Unmanaged indices generally assume the reinvestment of dividends or
interest but do not generally reflect deductions for investment management or
administrative costs and expenses.
Separate Account Performance
The Contract was not available prior to 1999. However, in order to help you
understand how investment performance can affect your Variable Account Value,
we are including performance information based on the historical performance
of the Subaccounts.
The following table presents the annualized total return for each Variable
Account for the period from each such Variable Account's commencement of
operations through December 31, 1998. The accumulated value (AV) reflects a
Credit Enhancement of 3% and the deductions for all contractual fees and
charges, but does not reflect the withdrawal charge, any nonrecurring fees and
charges, any increase in the Risk Charge for an optional Death Benefit Rider
or any charges for premium and/or other taxes. The withdrawal value (WV)
reflects the Credit Enhancement and the deductions for all contractual fees
and charges, but does not reflect any increase in the Risk Charge for an
optional Death Benefit Rider, any nonrecurring fees and charges, and any
charges for premium and/or other taxes).
3
<PAGE>
The results shown in this section are not an estimate or guarantee of future
investment performance.
Historical Separate Account Performance
Annualized Rates of Return for Periods Ended December 31, 1998**
All numbers are expressed as a percentage
<TABLE>
<CAPTION>
Since
1 Year Inception*
-------------- --------------
Variable Accounts AV WV AV WV
- ----------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Money Market 1/2/96*............................ 6.95 0.65 4.77 2.82
High Yield Bond 1/2/96*......................... 4.07 (2.23) 7.18 5.32
Managed Bond 1/2/96*............................ 10.92 4.62 7.31 5.45
Government Securities 1/2/96*................... 10.95 4.65 6.72 4.84
Aggressive Equity 4/17/96*...................... 15.00 8.70 9.15 7.12
Growth LT 1/2/96*............................... 60.77 54.47 26.92 25.60
Equity Income 1/2/96*........................... 26.13 19.83 23.11 21.70
Multi-Strategy 1/2/96*.......................... 20.03 13.73 16.05 14.46
Equity 1/2/96*.................................. 32.33 26.03 24.79 23.42
Bond and Income 1/2/96*......................... 10.68 4.38 7.53 5.68
Equity Index 1/2/96*............................ 30.47 24.17 27.01 25.69
International 1/2/96*........................... 7.25 0.95 11.04 9.31
Emerging Markets 4/17/96*....................... (25.68) (31.98) (13.15) (16.20)
</TABLE>
- --------
* Date Variable Account commenced operations.
** Effective June 1, 1997 Morgan Stanley Asset Management became the Portfolio
Manager of the International Portfolio. Effective May 1, 1998, Alliance
Capital Management L.P. became the Portfolio Manager of the Aggressive
Equity Portfolio and Goldman Sachs Asset Management became the Portfolio
Manager of the Equity and Bond and Income Portfolios; prior to May 1, 1998
some of the investment policies of the Aggressive Equity, Equity and Bond
and Income Portfolios and the investment objective of the Bond and Income
Portfolio differed.
Prior to January 1, 1999, the Large-Cap Value, the Mid-Cap Value, the Small-
Cap Index and the REIT Subaccounts and corresponding Portfolios had not yet
begun operations and there is no historical value available for these
Subaccounts and Portfolios.
In order to help you understand how investment performance can affect your
Variable Account Value, we are including performance information based on the
historical performance of the Portfolios.
The Separate Account commenced operations as of January 2, 1996. Therefore, no
historical performance data exists for the Subaccounts prior to that date. The
following table represents what the performance of the Subaccounts would have
been if the Subaccounts had been both in existence and invested in the
corresponding Portfolio since the date of the Portfolio's (or predecessor
series') inception or for the indicated time period. Nine of the Portfolios of
the Fund available under the Contract have been in operation since January 4,
1988 (January 30, 1991 in the case of the Equity Index Portfolio, January 4,
1994 in the case of the Growth LT Portfolio and April 1, 1996 in the case of
the Aggressive Equity Portfolio and Emerging Markets Portfolio). Historical
performance information for each of the Equity Portfolio and the Bond and
Income Portfolio is based in part on the performance of that Portfolio's
predecessor; each predecessor series was a series of Pacific Corinthian
Variable Fund and began its first full year of operations in 1984, the assets
of which were acquired by the Fund on December 31, 1994. Because the
Subaccounts had not commenced operations until January 2, 1996 or later, as
indicated in the chart above, and because the Contracts were not available
until 1999, these are not actual performance numbers for the Subaccounts or
for the Contract.
4
<PAGE>
These are hypothetical total return numbers based on accumulated value ("AV")
and withdrawal value ("WV") that represent the actual performance of the
Portfolios, adjusted to reflect a 3% Credit Enhancement and the deductions for
the fees and charges applicable to the Contract; the WV also includes
applicable withdrawal charges. Any charge for non-recurring fees and charges,
premium taxes and/or other taxes and an optional Death Benefit Rider are not
reflected in these data. The information presented also includes data
representing unmanaged market indices.
The results shown in this section are not an estimate or guarantee of future
investment performance.
Historical and Hypothetical Separate Account Performance
Annualized Rates of Return for Periods Ended December 31, 1998
All numbers are expressed as a percentage
<TABLE>
<CAPTION>
Since
1 year* 3 years* 5 years* 10 years* Inception*
-------------- ----------- ----------- ----------- --------------
Variable Accounts AV FWV AV FWV AV FWV AV FWV AV FWV
- ----------------- ------ ------ ----- ----- ----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market............ 6.95 0.65 4.78 2.83 4.14 3.37 4.14 4.14 4.17 4.17
High Yield Bond......... 4.07 (2.23) 7.22 5.36 7.43 6.74 9.30 9.30 9.07 9.07
Managed Bond............ 10.92 4.62 7.32 5.46 6.47 5.76 8.47 8.47 8.22 8.22
Government Securities... 10.95 4.65 6.73 4.86 5.92 5.19 7.88 7.88 7.64 7.64
Aggressive Equity....... 15.00 8.70 8.64 6.62
Growth LT............... 60.77 54.47 26.92 25.60 25.26 24.89
Equity Income........... 26.13 19.83 23.50 22.11 19.18 18.73 14.92 14.92 14.15 14.15
Multi-Strategy.......... 20.03 13.73 16.26 14.69 13.52 12.97 11.82 11.82 11.22 11.22
Equity.................. 32.33 26.03 24.86 23.50 17.88 17.41 15.73 15.73 14.59 14.59
Bond and Income......... 10.68 4.38 7.48 5.64 8.15 7.48 10.34 10.34 10.91 10.91
Equity Index............ 30.47 24.17 27.32 26.01 22.66 22.26 18.72 18.72
International........... 7.25 0.95 11.58 9.86 8.96 8.32 6.91 6.91 7.71 7.71
Emerging Markets........ (25.68) (31.98) (12.63) (15.62)
</TABLE>
<TABLE>
<CAPTION>
Major Indices 1 year 3 years 5 years 10 years
- ------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
CS First Boston High Yield Bond............... 0.58 8.39 8.16 10.74
Lehman Brothers Aggregate Bond................ 8.67 7.29 7.27 9.26
Lehman Brothers Government Bond............... 9.85 7.35 7.18 9.17
Lehman Brothers Government/Corporate Bond..... 9.47 7.33 7.30 9.34
Lehman Brothers Long-Term Government/Corporate
Bond......................................... 11.76 8.62 9.12 11.30
Morgan Stanley Capital International EAFE..... 20.33 9.31 9.50 5.86
Morgan Stanley Capital International Emerging
Markets Free................................. (25.34) (11.21) (9.27) 10.95
Russell 1000 Growth........................... 38.71 30.62 25.70 20.57
Russell 2000 Small-Stock...................... (2.55) 11.58 11.86 12.92
Russell 2500.................................. 0.38 14.11 14.13 14.61
Standard & Poor's 500 Composite Stock Price... 28.58 28.27 24.06 19.19
</TABLE>
- --------
* The performance of the Aggressive Equity, Equity Income, Multi-Strategy,
Equity, Bond and Income, and International Variable Accounts for a portion
of this period occurred at a time when other Portfolio Managers managed the
corresponding Portfolio in which each Variable Account invests. Effective
January 1, 1994, J. P. Morgan Investment Management Inc. became the
Portfolio Manager of the Equity Income and Multi-Strategy Portfolios; prior
to January 1, 1994, some of the investment policies of the Equity Income
Portfolio and the investment objective of the Multi-Strategy Portfolio
differed. Effective June 1, 1997 Morgan Stanley Asset Management became the
Portfolio Manager of the International Portfolio. Effective May 1, 1998,
Alliance Capital Management L.P. became the Portfolio Manager of the
Aggressive Equity Portfolio and Goldman Sachs Asset Management became the
Portfolio Manager of the Equity and Bond and Income Portfolios; prior to
May 1, 1998 some of the investment policies of the Aggressive Equity,
Equity and Bond and Income Portfolios and the investment objective of the
Bond and Income Portfolio differed. Performance of the Equity Portfolio and
the Bond and Income Portfolio is based in part on the performance of
predecessor portfolios of Pacific Corinthian Variable Fund, which began
their first full year of operations in 1984, the assets of which were
acquired by the Fund on December 31, 1994.
Tax Deferred Accumulation
In reports or other communications to you or in advertising or sales
materials, we may also describe the effects of tax-deferred compounding on the
Separate Account's investment returns or upon returns in general. These
effects may be illustrated in charts or graphs and may include comparisons at
various points in time of returns under the Contract or in general on a tax-
deferred basis with the returns on a taxable basis. Different tax rates may be
assumed.
5
<PAGE>
In general, individuals who own annuity contracts are not taxed on increases
in the value under the annuity contract until some form of distribution is
made from the contract. Thus, the annuity contract will benefit from tax
deferral during the accumulation period, which generally will have the effect
of permitting an investment in an annuity contract to grow more rapidly than a
comparable investment under which increases in value are taxed on a current
basis. The following chart illustrates this benefit by comparing accumulation
under a variable annuity contract with accumulations from an investment on
which gains are taxed on a current ordinary income basis. The chart shows
accumulations on a single Purchase Payment of $10,000, assuming hypothetical
annual returns of 0%, 4% and 8%, compounded annually, and a tax rate of 36%.
The values shown for the taxable investment do not include any deduction for
management fees or other expenses but assume that taxes are deducted annually
from investment returns. The values shown for the variable annuity do not
reflect the Credit Enhancement, the deduction of contractual expenses such as
the Risk Charge (equal to an annual rate of 1.25% of average daily account
value), the Administrative Fee (equal to an annual rate of 0.15% of average
daily account value), any increase in the Risk Charge for an optional Death
Benefit Rider (equal to a maximum annual rate of .35% of average daily account
value), any charge for premium taxes and/or other taxes, or the expenses of an
underlying investment vehicle, such as the Fund. The values shown also do not
reflect the withdrawal charge. Generally, the withdrawal charge is equal to 7%
of the amount withdrawn attributable to Purchase Payments that are less than 5
years old, 5% of the amount withdrawn attributable to Purchase Payments that
are five and six years old, and 4% of the amount withdrawn attributable to
Purchase Payments that are seven years old. The age of Purchase Payments is
considered 1 year old in the Contract Year we receive it and increases by one
year on each Contract Anniversary. There is no withdrawal charge on
withdrawals attributed to Purchase Payments at least 8 years old, or to the
extent that total withdrawals that are free of charge during the Contract Year
do not exceed 10% of your Purchase Payments that are less than 8 years old
plus 100% of all Purchase Payments that have an age of 8 years or more, or on
withdrawals of your Earnings. If these expenses and fees were taken into
account, they would reduce the investment return shown for both the taxable
investment and the hypothetical variable annuity contract. In addition, these
values assume that you do not surrender the Contract or make any withdrawals
until the end of the period shown. The chart assumes a full withdrawal, at the
end of the period shown, of all Contract Value and the payment of taxes at the
36% rate on the amount in excess of the Purchase Payment.
The rates of return illustrated are hypothetical and are not an estimate or
guarantee of performance. Actual tax rates may vary for different assets and
taxpayers from that illustrated and withdrawals by and distributions to
Contract Owners who have not reached age 59 1/2 may be subject to a tax
penalty of 10%.
6
<PAGE>
Power of Tax Deferral
$10,000 investment at annual rates of return of 0%, 4% and 8%, taxed @ 36%
[TAX DEFERRAL GRAPH APPEARS HERE]
Taxable Tax-Deferred
Investment Investment
---------- ------------
10 Years
0% $10,000.00 $10,000.00
4% $12,875.97 $13,073.56
8% $16,476.07 $17,417.12
20 Years
0% $10,000.00 $10,000.00
4% $16,579.07 $17,623.19
8% $27,146.07 $33,430.13
30 Years
0% $10,000.00 $10,000.00
4% $21,347.17 $24,357.74
8% $44,726.05 $68,001.00
DISTRIBUTION OF THE CONTRACTS
Pacific Mutual Distributors, Inc.
Pacific Mutual Distributors, Inc. ("PMD"), a subsidiary of ours, acts as the
principal underwriter ("distributor") of the Contracts and offers the Contracts
on a continuous basis. PMD is registered as a broker-dealer with the SEC and is
a member of the National Association of Securities Dealers ("NASD"). We pay PMD
for acting as principal underwriter under a Distribution Agreement. We and PMD
enter into selling agreements with broker-dealers whose registered
representatives are authorized by state insurance departments to sell the
Contracts. The aggregate amount of underwriting commissions paid to PMD for
1998 with regard to this Contract was $0 of which $0 was retained.
7
<PAGE>
THE CONTRACTS AND THE SEPARATE ACCOUNT
Calculating Subaccount Unit Values
The Unit Value of the Subaccount Units in each Variable Investment Option is
computed at or about 4:00 p.m. Eastern time on each Business Day. The initial
Unit Value of each Subaccount was $10 on the Business Day the Subaccount began
operations. At the end of each Business Day, the Unit Value for a Subaccount
is equal to:
Y x Z
where(Y)= the Unit Value for that Subaccount as of the end of the preceding
Business Day; and
(Z)= the Net Investment Factor for that Subaccount for the period (a
"valuation period") between that Business Day and the immediately
preceding Business Day.
The "Net Investment Factor" for a Subaccount for any valuation period is equal
to:
(A/B) - C
where(A)= the "per share value of the assets" of that Subaccount as of the end
of that valuation period, which is equal to: a+b+c
where(a)= the net asset value per share of the corresponding Portfolio shares
held by that Subaccount as of the end of that valuation period;
(b)= the per share amount of any dividend or capital gain distributions
made by the Fund for that Portfolio during that valuation period;
and
(c)= any per share charge (a negative number) or credit (a positive
number) for any income taxes and/or any other taxes or other
amounts set aside during that valuation period as a reserve for any
income and/or any other taxes which we determine to have resulted
from the operations of the Subaccount or Contract, and/or any taxes
attributable, directly or indirectly, to Purchase Payments;
(B)= the net asset value per share of the corresponding Portfolio shares
held by the Subaccount as of the end of the preceding valuation
period; and
(C)= a factor that assesses against the Subaccount net assets for each
calendar day in the valuation period the basic Risk Charge plus any
applicable increase in the Risk charge and the Administrative Fee
(see CHARGES, FEES AND DEDUCTIONS in the Prospectus).
Variable Annuity Payment Amounts
The following steps show how we determine the amount of each variable annuity
payment under your Contract.
First: Pay Applicable Premium Taxes
When you convert your Net Contract Value into annuity payments, you must pay
any applicable charge for premium taxes and/or other taxes on your Contract
Value (unless applicable law requires those taxes to be paid at a later time).
We assess this charge by reducing each Account Value proportionately, relative
to your Account Value in each Subaccount and in the Fixed Option, in an amount
equal to the aggregate amount of the charges. The remaining amount of your
available Net Contract Value may be used to provide variable annuity payments.
Alternatively, your remaining available Net Contract Value may be used to
provide fixed annuity payments, or it may be divided to provide both fixed and
variable annuity payments. You may also choose to withdraw some or all of your
remaining Net Contract Value, less any applicable withdrawal charge, and any
charges for premium taxes and/or other taxes without converting this amount
into annuity payments.
Second: The First Variable Payment
We begin by referring to your Contract's Option Table for your Annuity Option
(the "Annuity Option Table"). The Annuity Option Table allows us to calculate
the dollar amount of the first variable annuity payment under your Contract,
based on the amount applied toward the variable annuity. The number that the
Annuity Option
8
<PAGE>
Table yields will be based on the Annuitant's age (and, in certain cases, sex)
and assumes a 5% rate of return, as described in more detail below.
Example: Assume a man is 65 years of age at his Annuity Date and has
selected a lifetime annuity with monthly payments guaranteed for 10 years.
According to the Annuity Option Table, this man should receive an initial
monthly payment of $5.79 for every $1,000 of his Contract Value (reduced by
applicable charges) that he will be using to provide variable payments.
Therefore, if his Contract Value after deducting applicable fees and
charges is $100,000 on his Annuity Date and he applies this entire amount
toward his variable annuity, his first monthly payment will be $579.00.
You may choose any other Annuity Option Table that assumes a different rate of
return which we offer at the time your Annuity Option is effective.
Third: Subaccount Annuity Units
For each Subaccount, we use the amount of the first variable annuity payment
under your Contract attributable to each Subaccount to determine the number of
Subaccount Annuity Units that will form the basis of subsequent payment
amounts. First, we use the Annuity Option Table to determine the amount of
that first variable payment for each Subaccount. Then, for each Subaccount, we
divide that amount of the first variable annuity payment by the value of one
Subaccount Annuity Unit (the "Subaccount Annuity Unit Value") as of the end of
the Annuity Date to obtain the number of Subaccount Annuity Units for that
particular Subaccount. The number of Subaccount Annuity Units used to
calculate subsequent payments under your Contract will not change unless
exchanges of Annuity Units are made (or if the Joint and Survivor Annuity
Option is elected and the Primary Annuitant dies first), but the value of
those Annuity Units will change daily, as described below.
Fourth: The Subsequent Variable Payments
The amount of each subsequent variable annuity payment will be the sum of the
amounts payable based on each Subaccount. The amount payable based on each
Subaccount is equal to the number of Subaccount Annuity Units for that
Subaccount multiplied by their Subaccount Annuity Unit Value at the end of the
Business Day in each payment period you elected that corresponds to the
Annuity Date.
Each Subaccount's Subaccount Annuity Unit Value, like its Subaccount Unit
Value, changes each day to reflect the net investment results of the
underlying investment vehicle, as well as the assessment of the Risk Charge at
an annual rate of 1.25% and the Administrative Fee at an annual rate of 0.15%.
In addition, the calculation of Subaccount Annuity Unit Value incorporates an
additional factor; as discussed in more detail below, this additional factor
adjusts Subaccount Annuity Values to correct for the Option Table's implicit
assumed annual investment return on amounts applied but not yet used to
furnish annuity benefits. Any increase in your Risk Charge for an Optional
Death Benefit Rider is not charged on and after the Annuity Date.
Different Subaccounts may be selected for your Contract before and after your
Annuity Date, subject to any restrictions we may establish. Currently, you may
exchange Subaccount Annuity Units in any Subaccount for Subaccount Annuity
Units in any other Subaccount(s) up to four times in any twelve month period
after your Annuity Date. The number of Subaccount Annuity Units in any
Subaccount may change due to such exchanges. Exchanges following your Annuity
Date will be made by exchanging Subaccount Annuity Units of equivalent
aggregate value, based on their relative Subaccount Annuity Unit Values.
Understanding the "Assumed Investment Return" Factor
The Annuity Option Table incorporates a number of implicit assumptions in
determining the amount of your first variable annuity payment. As noted above,
the numbers in the Annuity Option Table reflect certain actuarial assumptions
based on the Annuitant's age, and, in some cases, the Annuitant's sex. In
addition, these numbers assume that the amount of your Contract Value that you
convert to a variable annuity will have a positive net investment return of 5%
(or such other rate of return you may elect) each year during the payout of
your annuity; thus 5% is referred to as an "assumed investment return."
9
<PAGE>
The Subaccount Annuity Unit Value for a Subaccount will increase only to the
extent that the investment performance of that Subaccount exceeds the Risk
Charge, the Administrative Fee, and the assumed investment return. The
Subaccount Annuity Unit Value for any Subaccount will generally be less than
the Subaccount Unit Value for that same Subaccount, and the difference will be
the amount of the assumed investment return factor.
Example: Assume the net investment performance of a Subaccount is at a rate
of 5.00% per year (after deduction of the 1.25% Risk Charge and the 0.15%
Administrative Fee). The Subaccount Unit Value for that Subaccount would
increase at a rate of 5.00% per year, but the Subaccount Annuity Unit Value
would not increase (or decrease) at all. The net investment factor for that
5% return [1.05] is then divided by the factor for the 5% assumed
investment return [1.05] and 1 is subtracted from the result to determine
the adjusted rate of change in Subaccount Annuity Unit Value:
1.05 = 1; 1 - 1 = 0; 0 x 100% = 0%.
----
1.05
If the net investment performance of a Subaccount's assets is at a rate less
than 5.00% per year, the Subaccount Annuity Unit Value will decrease, even if
the Subaccount Unit Value is increasing.
Example: Assume the net investment performance of a Subaccount is at a rate
of 2.60% per year (after deduction of the 1.25% Risk Charge and the 0.15%
Administrative Fee). The Subaccount Unit Value for that Subaccount would
increase at a rate of 2.60% per year, but the Subaccount Annuity Unit Value
would decrease at a rate of 2.29% per year. The net investment factor for
that 2.6% return [1.026] is then divided by the factor for the 5% assumed
investment return [1.05] and 1 is subtracted from the result to determine
the adjusted rate of change in Subaccount Annuity Unit Value:
1.026 = 0.9771; 0.9771 - 1 = - 0.0229; - 0.0229 x 100% = - 2.29%.
-----
1.05
The assumed investment return will always cause increases in Subaccount
Annuity Unit Values to be somewhat less than if the assumption had not been
made, will cause decreases in Subaccount Annuity Unit Values to be somewhat
greater than if the assumption had not been made, and will (as shown in the
example above) sometimes cause a decrease in Subaccount Annuity Unit Values to
take place when an increase would have occurred if the assumption had not been
made. If we had assumed a higher investment return in our Annuity Option
tables, it would produce annuities with larger first payments, but the
increases in subaccount annuity payments would be smaller and the decreases in
subsequent annuity payments would be greater; a lower assumed investment
return would produce annuities with smaller first payments, and the increases
in subsequent annuity payments would be greater and the decreases in
subsequent annuity payments would be smaller.
Corresponding Dates
If any transaction or event under your Contract is scheduled to occur on a
"corresponding date" that does not exist in a given calendar period, the
transaction or event will be deemed to occur on the following Business Day. In
addition, as stated in the Prospectus, any event scheduled to occur on a day
that is not a Business Day will occur on the next succeeding Business Day.
Example: If your Contract is issued on February 29 in year 1 (a leap year),
your Contract Anniversary in years 2, 3 and 4 will be on March 1.
Example: If your Annuity Date is July 31 and you select monthly annuity
payments, the payments received will be based on valuations made on July
31, August 31, October 1 (for September), October 31, December 1 (for
November), December 31, January 31, March 1 (for February), March 31, May 1
(for April), May 31 and July 1 (for June).
Age and Sex of Annuitant
As mentioned in the Prospectus, the Contracts generally provide for sex-
distinct annuity income factors in the case of life annuities. Statistically,
females tend to have longer life expectancies than males; consequently, if the
amount of annuity payments is based on life expectancy, they will ordinarily
be higher if an annuitant is male than if an annuitant is female. Certain
states' regulations prohibit sex-distinct annuity income factors, and
Contracts issued in those states will use unisex factors. In addition,
Contracts issued in connection with Qualified Plans are required to use unisex
factors.
10
<PAGE>
We may require proof of your Annuitant's age and sex before or after starting
annuity payments. If the age or sex (or both) of your Annuitant are
incorrectly stated in your Contract, we will correct the amount payable based
on your Annuitant's correct Age or sex, if applicable. If we make the
correction after annuity payments have started, and we have made overpayments,
we will deduct the amount of the overpayment, with interest at 3% a year, from
any payments due then or later; if we have made underpayments, we will add the
amount, with interest at 3% a year, of the underpayments to the next payment
we make after we receive proof of the correct Age and/or sex.
Systematic Transfer Programs
The Fixed Account is not available in connection with portfolio rebalancing.
If you are using the earnings sweep, you may also use portfolio rebalancing
only if you selected the Fixed Option as your sweep option. You may not use
dollar cost averaging and the earnings sweep at the same time.
Dollar Cost Averaging
When you request dollar cost averaging, you are authorizing us to make
periodic reallocations of your Contract Value without waiting for any further
instruction from you. You may request to begin or stop dollar cost averaging
at any time prior to your Annuity Date; the effective date of your request
will be the day we receive written notice from you in proper form. Your
request may specify the date on which you want your first transfer to be made.
If you do not specify a date for your first transfer, we will treat your
request as if you had specified the effective date of your request. Your first
transfer may not be made until 30 days after your Contract Date, and if you
specify an earlier date, your first transfer will be delayed until one
calendar month after the date you specify. If you request dollar cost
averaging on your application for your Contract and you fail to specify a date
for your first transfer, your first transfer will be made one period after
your Contract Date (that is, if you specify monthly transfers, the first
transfer will occur 30 days after your Contract Date; quarterly transfers, 90
days after your Contract Date; semiannual transfers, 180 days after your
Contract Date; and if you specify annual transfers, the first transfer will
occur on your Contract Anniversary). If you stop dollar cost averaging, you
must wait 30 days before you may begin this option again.
Your request to begin dollar cost averaging must specify the Investment Option
you wish to transfer money from (your "source account"). You may choose any
one Investment Option as your source account. The Account Value of your source
account must be at least $5,000 for you to begin dollar cost averaging.
Your request to begin dollar cost averaging must also specify the amount and
frequency of your transfers. You may choose monthly, quarterly, semiannual or
annual transfers. The amount of your transfers may be specified as a dollar
amount or a percentage of your source Account Value; however, each transfer
must be at least $250. Dollar cost averaging transfers are subject to the same
requirements and limitations as other transfers.
Finally, your request must specify the Fixed or Variable Investment Option(s)
you wish to transfer amounts to (your "target account(s)"). If you select more
than one target account, your dollar cost averaging request must specify how
transferred amounts should be allocated among the target accounts. Your source
account may not also be a target account.
Your dollar cost averaging transfers will continue until the earlier of (i)
your request to stop dollar cost averaging is effective, or (ii) your source
Account Value is zero, or (iii) your Annuity Date. If, as a result of a dollar
cost
11
<PAGE>
averaging transfer, your source Account Value falls below any minimum Account
Value we may establish, we have the right, at our option, to transfer that
remaining Account Value to your target account(s) on a proportionate basis
relative to your most recent allocation instructions. We may change, terminate
or suspend the dollar cost averaging option at any time.
Portfolio Rebalancing
Portfolio rebalancing allows you to maintain the percentage of your Contract
Value allocated to each Variable Investment Option at a pre-set level prior to
annuitization. For example, you could specify that 30% of your Contract Value
should be in the Equity Index Subaccount, 40% in the Managed Bond Subaccount,
and 30% in the Growth LT Subaccount. Over time, the variations in each
Subaccount's investment results will shift this balance of these Subaccount
Value allocations. If you elect the portfolio rebalancing feature, we will
automatically transfer your Subaccount Value back to the percentages you
specify.
You may choose to have rebalances made quarterly, semiannually or annually
until your Annuity Date; portfolio rebalancing is not available after you
annuitize.
Procedures for selecting portfolio rebalancing are generally the same as those
discussed in detail above for selecting dollar cost averaging: You may make
your request at any time prior to your Annuity Date and it will be effective
when we receive it in proper form. If you stop portfolio rebalancing, you must
wait 30 days to begin again. You may specify a date for your first rebalance,
or we will treat your request as if you selected the request's effective date.
If you specify a date fewer than 30 days after your Contract Date, your first
rebalance will be delayed one month, and if you request rebalancing on your
application but do not specify a date for the first rebalance, it will occur
one period after your Contract Date, as described above under Dollar Cost
Averaging. We may change, terminate or suspend the portfolio rebalancing
feature at any time.
Earnings Sweep
An earnings sweep automatically transfers the earnings attributable to a
specified Investment Option (the "sweep option") to one or more other
Investment Options (your "target option(s)"). If you elect to use the earnings
sweep, you may select either the Fixed Option or the Money Market Subaccount
as your sweep option. The Account Value of your sweep option will be required
to be at least $5,000 when you elect the earnings sweep. You may select one or
more Variable Investment Options (but not the Money Market Subaccount) as your
target option(s).
You may choose to have earnings sweeps occur monthly, quarterly, semiannually
or annually until you annuitize. At each earnings sweep, we will automatically
transfer your accumulated earnings attributable to your sweep option for the
previous period proportionately to your target option(s). That is, if you
select a monthly earnings sweep, we will transfer the sweep option earnings
from the preceding month; if you select a semiannual earnings sweep, we will
transfer the sweep option earnings accumulated over the preceding six months.
Earnings sweep transfers are subject to the same requirements and limitations
as other transfers.
To determine the earnings, we take the change in the sweep option's Account
Value during the sweep period, add any withdrawals or transfers out of the
sweep option Account that occurred during the sweep period, and subtract any
allocations, including Credit Enhancements, to the sweep option Account during
the sweep period. The result of this calculation represents the "total
earnings" for the sweep period.
If, during the sweep period, you withdraw or transfer amounts from the sweep
option Account, we assume that earnings are withdrawn or transferred before
any other Account Value. Therefore, your "total earnings" for the sweep period
will be reduced by any amounts withdrawn or transferred during the sweep
option period. The remaining earnings are eligible for the sweep transfer.
Procedures for selecting the earnings sweep are generally the same as those
discussed in detail above for selecting dollar cost averaging and portfolio
rebalancing: You may make your request at any time and it will be effective
when we receive it in a form satisfactory to us. If you stop the earnings
sweep, you must wait 30 days
12
<PAGE>
to begin again. You may specify a date for your first sweep, or we will treat
your request as if you selected the request's effective date. If you specify a
date fewer than 30 days after your Contract Date, your first earnings sweep
will be delayed one month, and if you request the earnings sweep on your
application but do not specify a date for the first sweep, it will occur one
period after your Contract Date, as described above under Dollar Cost
Averaging.
If, as a result of an earnings sweep transfer, your source Account Value falls
below $500, we have the right, at our option, to transfer that remaining
Account Value to your target account(s) on a proportionate basis relative to
your most recent allocation instructions. We may change, terminate or suspend
the earnings sweep option at any time.
Pre-Authorized Withdrawals
You may specify a dollar amount for your pre-authorized withdrawals, or you
may specify a percentage of your Contract Value or an Account Value. You may
direct us to make your pre-authorized withdrawals from one or more specific
Investment Options; if you do not give us these specific instructions, amounts
will be deducted proportionately from your Account Value in each Fixed or
Variable Investment Option.
Procedures for selecting pre-authorized withdrawals are generally the same as
those discussed in detail above for selecting dollar cost averaging, portfolio
rebalancing, and earnings sweeps: You may make your request at any time and it
will be effective when we receive it in proper form. If you stop the pre-
authorized withdrawals, you must wait 30 days to begin again. You may specify
a date for the first withdrawal, or we will treat your request as if you
selected the request's effective date. If you specify a date fewer than 30
days after your Contract Date, your first pre-authorized withdrawal will be
delayed one month, and if you request the pre-authorized withdrawals on your
application but do not specify a date for the first withdrawal, it will occur
one period after your Contract Date.
If your pre-authorized withdrawals cause your Account Value in any Investment
Option to fall below $500, we have the right, at our option, to transfer that
remaining Account Value to your other Investment Options on a proportionate
basis relative to your most recent allocation instructions. If your pre-
authorized withdrawals cause your Contract Value to fall below $1,000, we may,
at our option, terminate your Contract and send you the remaining withdrawal
proceeds.
Pre-authorized withdrawals are subject to the same withdrawal charges as are
other withdrawals, and each withdrawal is subject to any applicable charge for
premium taxes and/or other taxes, to federal income tax on its taxable
portion, and, if you have not reached age 59 1/2, a federal tax penalty of at
least 10%.
Death Benefit
Any death benefit payable will be calculated as of the date we receive proof
(in proper form) of the Annuitant's death (or, if applicable, the Contract
Owner's death) and instructions regarding payment; any claim of a death
benefit must be made in proper form. A recipient of death benefit proceeds may
elect to have this benefit paid in one lump sum, in periodic payments, in the
form of a lifetime annuity or in some combination of these. Annuity payments
will begin within 30 days once we receive all information necessary to process
the claim.
If your Contract names Joint or Contingent Annuitants, no death benefit
proceeds will be payable unless and until the last Annuitant dies prior to the
Annuity Date or a Contract Owner dies prior to the Annuity Date. If yours is a
Qualified Contract, your Contingent Annuitant or Contingent Owner must be your
spouse.
Joint Annuitants on Qualified Contracts
If your Contract was issued in connection with a Qualified Plan subject to
Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), and
you change your marital status after your Contract Date, you may be permitted
to add a Joint Annuitant on your Annuity Date and to change your Joint
Annuitant. Generally speaking, you may be permitted to add a new spouse as a
Joint Annuitant, and you may be permitted to remove a Joint Annuitant who is
no longer your spouse. You may call us for more information.
13
<PAGE>
1035 Exchanges
You may make your initial Purchase Payment through an exchange of an existing
annuity contract. To exchange, you must complete a 1035 Exchange form, which
is available by calling your representative, or by calling us at 1-800-722-
2333, and mail the form along with the annuity contract you are exchanging
(plus your completed application if you are making an initial Purchase
Payment) to us.
In general terms, Section 1035 of the Code provides that you recognize no gain
or loss when you exchange one annuity contract solely for another annuity
contract. However, transactions under Section 1035 may be subject to special
rules and may require special procedures and record-keeping, particularly if
the exchanged annuity contract was issued prior to August 14, 1982. You should
consult your tax adviser prior to effecting a 1035 Exchange.
Safekeeping of Assets
We are responsible for the safekeeping of the assets of the Separate Account.
These assets are held separate and apart from the assets of our General
Account and our other separate accounts.
FINANCIAL STATEMENTS
Audited financial statements of Separate Account A as of December 31, 1998 and
for the two years then ended are incorporated by reference in this SAI from
the Annual Report of the Separate Account dated as of December 31, 1998.
Pacific Life's audited consolidated financial statements as of December 31,
1998 and 1997 and for the three years ended December 31, 1998 are set forth
beginning on the next page. These financial statements should be considered
only as bearing on the ability of Pacific Life to meet its obligations under
the Contracts and not as bearing on the investment performance of the assets
held in the Separate Account.
The consolidated financial statements of Pacific Life as of December 31, 1998
and 1997 and for the three years ended December 31, 1998 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein.
The information in Separate Account A's Annual Report relates to variable
annuity contracts other than the Contract that we have issued and that are
funded by Separate Account A.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Pacific Life Insurance Company and Subsidiaries:
We have audited the accompanying consolidated statements of financial
condition of Pacific Life Insurance Company and Subsidiaries (the
"Company") as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pacific Life Insurance
Company and Subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 1999
15
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1998 1997
- ----------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $13,617.0 $13,938.5
Equity securities 547.5 346.4
Mortgage loans 2,788.7 1,922.1
Real estate 172.7 192.1
Policy loans 3,901.2 3,769.2
Short-term investments 99.9 83.8
Other investments 948.0 432.4
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS 22,075.0 20,684.5
Cash and cash equivalents 150.1 110.4
Deferred policy acquisition costs 889.7 716.9
Accrued investment income 252.3 255.4
Other assets 672.8 636.5
Separate account assets 15,844.0 11,605.1
- ------------------------------------------------------------------------------
TOTAL ASSETS $39,883.9 $34,008.8
==============================================================================
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life, annuity and other investment contract
deposits $17,973.0 $16,644.5
Future policy benefits 2,131.6 2,133.8
Short-term and long-term debt 445.1 253.6
Other liabilities 1,162.2 1,224.5
Separate account liabilities 15,844.0 11,605.1
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 37,555.9 31,861.5
- ------------------------------------------------------------------------------
Commitments and contingencies
Stockholder's Equity:
Common stock - $50 par value; 600,000 shares authorized,
issued and outstanding 30.0 30.0
Paid-in capital 126.2 120.1
Retained earnings 1,663.5 1,422.0
Accumulated other comprehensive income -
Unrealized gain on securities available for sale, net 508.3 575.2
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 2,328.0 2,147.3
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $39,883.9 $34,008.8
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
16
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Policy fees from universal life, annuity and other
investment contract deposits $ 525.3 $ 431.2 $ 348.6
Insurance premiums 514.7 504.3 465.4
Net investment income 1,293.8 1,225.3 1,087.3
Net realized capital gains 38.7 85.3 44.0
Commission revenue 220.1 146.6 79.6
Other income 216.6 181.7 123.1
- ------------------------------------------------------------------------------
TOTAL REVENUES 2,809.2 2,574.4 2,148.0
- ------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 880.8 797.8 665.0
Policy benefits paid or provided 719.5 675.7 652.9
Commission expenses 386.1 303.7 233.6
Operating expenses 467.8 507.7 316.2
- ------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,454.2 2,284.9 1,867.7
- ------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 355.0 289.5 280.3
Provision for income taxes 113.5 113.5 113.7
- ------------------------------------------------------------------------------
NET INCOME $ 241.5 $ 176.0 $ 166.6
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
17
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
- -------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1996 $1,151.4 $ 482.0 $1,633.4
Comprehensive income:
Net income 166.6 166.6
Change in unrealized gain on
securities available for sale,
net (102.8) (102.8)
--------
Total comprehensive income 63.8
- -------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1996 1,318.0 379.2 1,697.2
Comprehensive income:
Net income 176.0 176.0
Change in unrealized gain on
securities available for sale,
net 196.0 196.0
--------
Total comprehensive income 372.0
Issuance of partnership units by
affiliate $ 85.1 85.1
Initial member capitalization
of Pacific Mutual Holding Company (2.0) (2.0)
Issuance of common stock 0.6 $30.0 35.0 (65.0)
Dividend paid to parent (5.0) (5.0)
- -------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1997 0.6 30.0 120.1 1,422.0 575.2 2,147.3
Comprehensive income:
Net income 241.5 241.5
Change in unrealized gain on
securities available for sale,
net (66.9) (66.9)
--------
Total comprehensive income 174.6
Issuance of partnership units by
affiliate 6.1 6.1
- -------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1998 0.6 $30.0 $126.2 $1,663.5 $ 508.3 $2,328.0
===========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 241.5 $ 176.0 $ 166.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization on fixed maturities (39.4) (26.6) (45.2)
Depreciation and other amortization 26.0 38.3 43.8
Deferred income taxes (20.6) (14.4) (49.8)
Net realized capital gains (38.7) (85.3) (44.0)
Net change in deferred policy acquisition costs (172.8) (185.4) (140.4)
Interest credited to universal life, annuity
and other investment contract deposits 880.8 797.8 665.0
Change in accrued investment income 3.1 (52.9) (3.7)
Change in future policy benefits (2.2) (372.7) 62.3
Change in other assets and liabilities 99.4 577.4 158.1
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 977.1 852.2 812.7
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (4,302.3) (6,272.3) (4,525.0)
Sales 2,201.9 2,224.1 2,511.0
Maturities and repayments 2,196.1 2,394.6 1,184.7
Repayments of mortgage loans 334.9 179.3 220.4
Proceeds from sales of mortgage loans and real
estate 43.3 104.4 14.5
Purchases of mortgage loans and real estate (1,246.3) (643.7) (414.3)
Distributions from partnerships 119.5 91.6 78.8
Change in policy loans (132.0) (637.4) (338.5)
Change in short-term investments (16.1) (17.7) 37.2
Other investing activity, net (564.2) 43.5 (144.5)
- -------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,365.2) (2,533.6) (1,375.7)
- -------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
19
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1998 1997 1996
- ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,007.0 $ 4,373.6 $ 2,105.0
Withdrawals (3,770.7) (2,667.3) (1,756.6)
Net change in short-term debt 191.5 8.5 42.5
Repayment of long-term debt (25.0) (5.0)
Initial capitalization of Pacific Mutual
Holding Company (2.0)
Dividend paid to parent (5.0)
- ------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 427.8 1,682.8 385.9
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents 39.7 1.4 (177.1)
Cash and cash equivalents, beginning of year 110.4 109.0 286.1
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 150.1 $ 110.4 $ 109.0
==============================================================================
</TABLE>
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of an insurance block of business in 1997,
as discussed in Note 5, the following assets and liabilities were assumed:
<TABLE>
<S>
Cash <C>
Policy loans $1,215.9
Other assets 440.3
43.4
Total assets assumed --------
$1,699.6
Policyholder account values ========
Other liabilities $1,693.8
5.8
Total liabilities assumed --------
$1,699.6
========
===============================================================================
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion in 1997, as discussed in Note 1, $65 million of
retained earnings was allocated for the issuance of 600,000 shares of common
stock with a par value totaling $30 million and $35 million to paid-in
capital.
===============================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<S> <C> <C> <C>
Income taxes paid $127.9 $153.0 $189.6
Interest paid $ 24.0 $ 26.1 $ 27.3
===============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
CONVERSION TO MUTUAL HOLDING COMPANY STRUCTURE
Pursuant to consent received from the Insurance Department of the State of
California, Pacific Mutual Life Insurance Company ("Pacific Mutual")
implemented a plan of conversion to form a mutual holding company
structure (the "Conversion") on September 1, 1997. The Conversion created
Pacific LifeCorp, an intermediate stock holding company and Pacific Mutual
Holding Company ("PMHC"), a mutual holding company. Pacific Mutual was
converted to a stock life insurance company and renamed Pacific Life
Insurance Company ("Pacific Life"). Under their respective charters, PMHC
must always own at least 51% of the outstanding voting stock of Pacific
LifeCorp, and Pacific LifeCorp must always own 100% of the voting stock of
Pacific Life. Owners of Pacific Life's annuity contracts and life
insurance policies have certain membership interests in PMHC, consisting
principally of the right to vote on the election of the Board of Directors
of PMHC and on other matters, and certain rights upon liquidation or
dissolution of PMHC.
As a result of the Conversion, $65 million of retained earnings was
allocated for the issuance of 600,000 shares of common stock with a par
value totaling $30 million and $35 million to paid-in capital.
DESCRIPTION OF BUSINESS
Pacific Life was established in 1868 and is organized under the laws of
the State of California as a stock life insurance company. Pacific Life
conducts business in every state except New York.
Pacific Life and its subsidiaries and affiliates have primary business
operations which consist of life insurance, annuities, pension and
institutional products, group employee benefits, broker-dealer operations
and investment management and advisory services. Pacific Life's primary
business operations provide a broad range of life insurance, asset
accumulation and investment products for individuals and businesses and
offer a range of investment products to institutions and pension plans.
Additionally, through its major subsidiaries and affiliates, Pacific Life
provides a variety of group employee benefits, broker-dealer operations
and investment management and advisory services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Pacific Life
Insurance Company and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Life and its wholly-owned insurance
subsidiaries, PM Group Life Insurance Company ("PM Group") and World-Wide
Holdings Limited, and its wholly-owned noninsurance subsidiaries, Pacific
Asset Management LLC ("PAM"), Pacific Mutual Distributors, Inc. ("PMD"),
Pacific Mutual Realty Finance, Inc. and Pacific Mezzanine Associates,
L.L.C. (50% owned). All significant intercompany transactions and balances
have been eliminated. Pacific Life prepares its regulatory financial
statements based on accounting practices prescribed or permitted by the
Insurance Department of the State of California. These consolidated
financial statements differ from those followed in reports to regulatory
authorities (Note 2).
PAM was initially capitalized on December 31, 1997, when Pacific Life
completed a subsidiary restructuring in which all the assets and
liabilities of Pacific Financial Asset Management Corporation ("PFAMCo")
were contributed into this newly formed limited liability company. PFAMCo
was then merged into Pacific Life. On October 30, 1997, Pacific Corinthian
Life Insurance Company ("PCL"-Note 4), a wholly-owned insurance
subsidiary, was merged into Pacific Life, with Pacific Life as the
surviving entity.
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," and SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits."
21
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No. 130 established standards for the reporting and display of
comprehensive income and its components in financial statements (Note 11).
SFAS No. 131 established standards for the way information about operating
segments is reported in financial statements. It also established
standards for related disclosures about products and services, geographic
areas and major customers (Note 13). SFAS No. 132 standardized disclosure
requirements for employers' pensions and other retiree benefits (Note 14).
Adoption of these accounting standards did not have a significant impact
on the consolidated financial position or results of operations of the
Company.
On January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 provides guidance on when a liability should be
recognized for guaranty fund and other assessments and how to measure the
liability. Adoption of this accounting standard did not have a significant
impact on the consolidated financial position or results of operations of
the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. The Company currently plans to adopt
SFAS No. 133 on January 1, 2000. The impact on the consolidated financial
position or results of operations of the Company due to the adoption of
this statement has not yet been determined.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires that certain costs incurred in developing internal use computer
software be capitalized. The Company currently plans to adopt SOP 98-1 on
January 1, 1999. The adoption is not expected to have a significant impact
on the consolidated financial position or results of operations of the
Company.
INVESTMENTS
Available for sale fixed maturity and equity securities are reported at
estimated fair value, with unrealized gains and losses, net of deferred
income tax and adjustments related to deferred policy acquisition costs,
included as a separate component of equity on the accompanying
consolidated statements of financial condition. Trading securities, which
are included in short-term investments, are reported at estimated fair
value with unrealized gains and losses included in net realized capital
gains on the accompanying consolidated statements of operations.
For mortgage-backed securities included in fixed maturity securities, the
Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities.
When estimates of prepayments change, the effective yield is recalculated
to reflect actual payments to date and anticipated future payments. The
net investment in the securities is adjusted to the amount that would have
existed had the new effective yield been applied since the acquisition of
the securities. This adjustment is reflected in net investment income on
the accompanying consolidated statements of operations.
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in net realized capital
gains on the accompanying consolidated statements of operations.
Short-term investments are carried at estimated fair value and include all
trading securities.
Derivative financial instruments are carried at estimated fair value.
Unrealized gains and losses of derivatives used to hedge securities
classified as available for sale are reflected in a separate component of
equity on the accompanying consolidated statements of financial condition,
similar to the accounting of the underlying hedged assets. Realized gains
and losses on derivatives used for hedging are deferred and amortized over
the average life of the related hedged assets or insurance liabilities.
Unrealized gains and losses of other derivatives are included in net
realized capital gains on the accompanying consolidated statements of
operations.
Mortgage loans and policy loans are stated at unpaid principal balances.
22
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real estate is carried at depreciated cost, or for real estate acquired in
satisfaction of debt, estimated fair value less estimated selling costs at
the date of acquisition if lower than the related unpaid balance.
On November 15, 1994, certain of the Company's investment management and
advisory subsidiaries entered into an agreement and plan of consolidation
with Thomson Advisory Group L.P., a Delaware limited partnership with
publicly traded units, to merge into a newly capitalized partnership named
PIMCO Advisors L.P. ("PIMCO Advisors"). In December 1997, PIMCO Advisors
completed a transaction in which it acquired the assets of Oppenheimer
Capital, L.P., including its interest in Oppenheimer Capital, by issuing
approximately 33 million PIMCO Advisors General and Limited Partner units.
In connection with this transaction, the Company increased its investment
in PIMCO Advisors to reflect the excess of the Company's pro rata share of
PIMCO Advisors partners' capital subsequent to this transaction over the
carrying value of the Company's investment in PIMCO Advisors. The net
result of this transaction was to directly increase stockholder's equity
by $85.1 million. The Company's beneficial ownership in PIMCO Advisors was
approximately 42% prior to this transaction and 31% as of December 31,
1997. During 1998, the Company increased its investment in PIMCO Advisors
to reflect its pro rata share of the increase to PIMCO Advisors partners'
capital due to the issuance of additional partnership units. For the year
ended December 31, 1998, there was a direct increase to the Company's
stockholder's equity of $6.1 million. During 1998, the Company also
acquired the beneficial ownership of additional partnership units which
increased its ownership to 33% as of December 31, 1998. Deferred taxes
resulting from these transactions have been included in the accompanying
consolidated financial statements. The Company's investment in PIMCO
Advisors, which is included in other investments on the accompanying
consolidated statements of financial condition, is accounted for using the
equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid debt instruments with an
original maturity of three months or less.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business, principally commissions,
medical examinations, underwriting, policy issue and other expenses, all
of which vary with and are primarily related to the production of new
business, have been deferred. For universal life, annuity and other
investment contract products, such costs are generally amortized in
proportion to the present value of expected gross profits using the
assumed crediting rate. Adjustments are reflected in earnings or equity in
the period the Company experiences deviations in gross profit assumptions.
Adjustments directly affecting equity result from experience deviations
due to changes in unrealized gains and losses in investments classified as
available for sale. For life insurance products, such costs are being
amortized over the premium-paying period of the related policies in
proportion to premium revenues recognized, using assumptions consistent
with those used in computing policy reserves. For the years ended December
31, 1998, 1997 and 1996, net amortization of deferred policy acquisition
costs included in commission expenses amounted to $73.0 million,
$50.2 million and $42.6 million, respectively, and included in operating
expenses amounted to $33.5 million, $29.4 million and $27.4 million,
respectively, on the accompanying consolidated statements of operations.
PRESENT VALUE OF FUTURE PROFITS
In connection with the rehabilitation of First Capital Life Insurance
Company ("FCL"-Note 4), an asset was established which represented the
present value of estimated future profits of the acquired business. The
future profits were discounted to provide an appropriate rate of return
and were amortized over the rehabilitation plan period. Amortization for
the years ended December 31, 1997 and 1996 amounted to $16.1 million and
$24.2 million, respectively, and is included in commission expenses on the
accompanying consolidated statements of operations. During 1996, the
Company changed certain assumptions regarding the estimated life which
resulted in an increase in amortization in 1996 of approximately $17.0
million.
23
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Universal life, annuity and other investment contract deposits are valued
using the retrospective deposit method and consist principally of deposits
received plus interest credited less accumulated assessments. Interest
credited to these policies primarily ranged from 4.0% to 8.4% during 1998,
1997 and 1996.
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions ranged from 4.5% to 9.3% for 1998, 1997 and
1996. Mortality, morbidity and withdrawal assumptions are generally based
on the Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for participating business are provided for
in the liability for future policy benefits. Dividends to policyholders
are included in policy benefits paid or provided on the accompanying
consolidated statements of operations.
Dividends are accrued based on dividend formulas approved by the Board of
Directors and reviewed for reasonableness and equitable treatment of
policyholders by an independent consulting actuary. As of December 31,
1998 and 1997, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized
when incurred.
Generally, receipts for universal life, annuities and other investment
contracts are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Commission revenue from Pacific Life's broker-dealer subsidiaries is
generally recorded on the trade date.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 5 to 30 years.
Certain other assets are depreciated or amortized on the straight-line
method over periods ranging from 3 to 40 years. Depreciation of investment
real estate is included in net investment income on the accompanying
consolidated statements of operations. Depreciation and amortization of
other assets is included in operating expenses on the accompanying
consolidated statements of operations.
INCOME TAXES
Pacific Life is taxed as a life insurance company for income tax purposes
and is included in the consolidated income tax returns of PMHC. Prior to
1998, Pacific Life was subject to an equity tax calculated by a prescribed
formula that incorporated a differential earnings rate between stock and
mutual life insurance companies. In December 1998, the Internal Revenue
Service released Revenue Ruling 99-3 which exempts Pacific Life from this
tax for taxable years beginning in 1998. Deferred income taxes are
provided for timing differences in the recognition of revenues and
expenses for financial reporting and income tax purposes.
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in
accounts with individual investment objectives. The investment results of
separate account assets generally pass through to separate account
contract owners.
24
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 6 and
7 has been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented may not be indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies could have a significant
effect on the estimated fair value amounts.
BUSINESS RISKS
The Company operates in a business environment that is subject to various
risks and uncertainties. Such risks and uncertainties include, but are not
limited to, interest rate risk, credit risk, and legal and regulatory
changes.
Interest rate risk is the potential for interest rates to change, which
can cause fluctuations in the value of investments. To the extent that
fluctuations in interest rates cause the duration of assets and
liabilities to differ, the Company may have to sell assets prior to their
maturity and realize losses. The Company controls its exposure to this
risk by, among other things, asset/liability matching techniques which
attempt to match the duration of assets and liabilities and utilization of
derivative instruments. Additionally, the Company includes contractual
provisions limiting withdrawal rights for certain of its products. A
substantial portion of the Company's liabilities are not subject to
surrender or can be surrendered only after deduction of a surrender charge
or a market value adjustment.
Credit risk is the risk that issuers of investments owned by the Company
may default or that other parties may not be able to pay amounts due to
the Company. The Company manages its investments to limit credit risk by
diversifying its portfolio among various security types and industry
sectors. The credit risk of financial instruments is controlled through
credit approval procedures, limits and ongoing monitoring. Real estate and
mortgage loan investment risks are limited by diversification of
geographic location and property type. Management does not believe that
significant concentrations of credit risk exist.
The Company is also exposed to credit loss in the event of nonperformance
by the counterparties to interest rate swap contracts and other derivative
securities. The Company manages this risk through credit approvals and
limits on exposure to any specific counterparty. However, the Company does
not anticipate nonperformance by the counterparties.
The Company is subject to various state and Federal regulatory
authorities. The potential exists for changes in regulatory initiatives
that can result in additional, unanticipated expense to the Company.
Existing Federal laws and regulations affect the taxation of life
insurance or annuity products and insurance companies. There can be no
assurance as to what, if any, cases might be decided or future legislation
might be enacted, or if decided or enacted, whether such cases or
legislation would contain provisions with possible negative effects on the
Company's life insurance or annuity products.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
financial statement presentation.
25
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS
The following are reconciliations of statutory capital and surplus and
statutory net income for Pacific Life as calculated in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, to the amounts reported as stockholder's
equity and net income included on the accompanying consolidated financial
statements:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------
(In Millions)
<S> <C> <C>
Statutory capital and surplus $1,157.4 $ 944.8
Deferred policy acquisition costs 908.0 730.7
Unrealized gain on securities available for
sale, net 508.3 575.2
Deferred income tax 307.1 289.2
Asset valuation reserve 298.7 252.4
Non admitted assets 40.4 25.2
Subsidiary equity 26.5 60.4
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (654.4) (511.5)
Other (114.4) (69.5)
------------------
Stockholder's equity as reported herein $2,328.0 $2,147.3
==================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 187.6 $ 121.5 $113.1
Deferred policy acquisition costs 177.3 160.4 111.2
Interest maintenance reserve 24.1 7.6 3.8
Deferred income tax 17.9 41.2 70.9
Net realized gain (loss) on trading
securities 9.2 (5.8) (11.6)
Earnings of subsidiaries (32.8) (40.6) (33.0)
Insurance and annuity reserves (145.1) (107.0) (91.3)
Other 3.3 (1.3) 3.5
------------------------
Net income as reported herein $ 241.5 $ 176.0 $166.6
========================
</TABLE>
26
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (Continued)
RISK-BASED CAPITAL
Risk-based capital is a method developed by the National Association of
Insurance Commissioners ("NAIC") to measure the minimum amount of capital
appropriate for an insurance company to support its overall business
operations in consideration of its size and risk profile. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. The adequacy of a
company's actual capital is measured by comparing it to the risk-based
capital as determined by the formulas. Companies below minimum risk-based
capital requirements are classified within certain levels, each of which
requires specified corrective action. As of December 31, 1998 and 1997,
Pacific Life and PM Group exceeded the minimum risk-based capital
requirements.
CODIFICATION
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). The Codification, which is intended to
standardize regulatory accounting and reporting for the insurance
industry, is proposed to be effective January 1, 2001. However, statutory
accounting principles will continue to be established by individual state
laws and permitted practices and it is uncertain when, or if, the states
of California and Arizona will require adoption of Codification for the
preparation of statutory financial statements. The Company has not
finalized the quantification of the effects of Codification on its
statutory financial statements.
DIVIDEND RESTRICTIONS
Dividend payments by Pacific Life to its parent in any 12-month period
cannot exceed the greater of 10% of statutory capital and surplus as of
the preceding year-end or the statutory net gain from operations for the
previous calendar year, without prior approval from the Insurance
Department of the State of California. Based on this limitation and 1998
statutory results, Pacific Life could pay approximately $240.9 million in
dividends in 1999 without prior approval. No dividends were paid during
1998.
Extraordinary dividends to Pacific Life from PM Group are subject to
regulatory restrictions and approvals by the Insurance Department of the
State of Arizona, PM Group's state of domicile. The maximum amount of
ordinary dividends that can be paid by PM Group without restriction cannot
exceed the lesser of 10% of surplus as regards policyholders, or the
statutory net gain from operations. PM Group received approval to pay
dividends of $14 million and $25 million for the years ended December 31,
1997 and 1996 of which $8 million and $18 million, respectively, were
considered extraordinary. No dividends were paid during 1998.
PERMITTED PRACTICE
As discussed in Note 1, the Company beneficially owns approximately 33% of
the outstanding General and Limited Partner units in PIMCO Advisors L.P.
as of December 31, 1998. Net cash distributions received on these units
are recorded as income as permitted by the Insurance Department of the
State of California for statutory accounting purposes.
3. CLOSED BLOCK
In connection with the Conversion, an arrangement known as a closed block
(the "Closed Block"), was established, for dividend purposes only, for the
exclusive benefit of certain individual life insurance policies that had
an experience based dividend scale for 1997. The Closed Block was designed
to give reasonable assurance to holders of Closed Block policies that
policy dividends will not change solely as a result of the Conversion.
Assets of Pacific Life have been allocated to the Closed Block in an
amount that produces cash flows, which, together with anticipated
revenues, are expected to be sufficient to support the policies. Pacific
Life is not
27
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK (Continued)
required to support the payment of dividends on these policies from its
general funds. The Closed Block will continue in effect until either the
last policy is no longer in force, or the dissolution of the Closed Block.
Total assets of $311.6 million and $316.2 million and total liabilities of
$352.8 million and $356.0 million for the Closed Block are included in
other assets and other liabilities, respectively, on the accompanying
consolidated statements of financial condition as of December 31, 1998 and
1997, respectively. The contribution to income from the Closed Block of
$5.1 million and $5.7 million, consisting of net revenues and expenses
generated by the Closed Block, is included in other income on the
accompanying consolidated statements of operations for the years ended
December 31, 1998 and 1997, respectively.
4. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
On September 30, 1997, PCL completed the rehabilitation of FCL pursuant to
a five-year rehabilitation plan approved by the California Superior Court
and the Insurance Department of the State of California (the
"Rehabilitation Plan"). Under the terms of the Rehabilitation Plan, FCL's
insurance policies in force, primarily individual annuities and universal
life insurance, were restructured and assumed by PCL on December 31, 1992,
pursuant to an assumption reinsurance agreement and asset purchase
agreement. On October 30, 1997, PCL was merged into Pacific Life, with
Pacific Life as the surviving entity.
5. ACQUISITION OF INSURANCE BLOCKS OF BUSINESS
On June 1, 1997, Pacific Life acquired a block of corporate-owned life
insurance ("COLI") policies from Confederation Life Insurance Company
(U.S.) in Rehabilitation, which is currently under rehabilitation
("Confederation Life"), which consisted of approximately 38,000 policies
having a face amount of insurance of $8.6 billion and reserves of
approximately $1.7 billion. The assets received as part of this
acquisition amounted to approximately $1.2 billion in cash and
approximately $0.4 billion in policy loans. This block is primarily
non-leveraged COLI.
The remaining cost of acquiring this business, representing the amount
equal to the excess of the estimated fair value of the reserves assumed
over the estimated fair value of the assets acquired, amounted to $36.5
million and $43.4 million as of December 31, 1998 and 1997, respectively,
and is included in deferred policy acquisition costs on the accompanying
consolidated statements of financial condition. Amortization of this asset
for the years ended December 31, 1998 and 1997 was $7.7 million and $0.9
million, respectively, and is included in commission expenses on the
accompanying consolidated statements of operations.
In January 1999, Pacific Life signed a definitive agreement to acquire a
payout annuity block of business from Confederation Life. This block of
business consists of approximately 18,000, policies having reserves
amounting to approximately $2.0 billion. The transaction is subject to
various regulatory and Court approvals and is anticipated to close during
1999.
28
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities are shown below. The
estimated fair value of publicly traded securities is based on quoted
market prices. For securities not actively traded, estimated fair values
were provided by independent pricing services specializing in "matrix
pricing" and modeling techniques. The Company also estimates certain fair
values based on interest rates, credit quality and average maturity or
from securities with comparable trading characteristics.
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ----------------- Estimated
Cost Gains Losses Fair Value
--------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Securities Available for Sale:
-----------------------------
As of December 31, 1998:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 94.0 $ 24.9 $ 118.9
Obligations of states, political
subdivisions and foreign govern-
ments 726.0 118.0 $ 16.1 827.9
Corporate securities 7,766.0 438.0 122.4 8,081.6
Mortgage-backed and asset-backed
securities 4,391.7 139.6 52.9 4,478.4
Redeemable preferred stock 104.0 11.3 5.1 110.2
-------------------------------------
Total fixed maturity securities $13,081.7 $ 731.8 $ 196.5 $13,617.0
=====================================
Total equity securities $ 364.4 $ 202.6 $ 19.5 $ 547.5
=====================================
Securities Available for Sale:
-----------------------------
As of December 31, 1997:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 85.4 $ 17.5 $ 102.9
Obligations of states, political
subdivisions and foreign govern-
ments 730.2 89.4 $ 3.0 816.6
Corporate securities 7,658.6 594.3 72.7 8,180.2
Mortgage-backed and asset-backed
securities 4,597.2 147.1 15.5 4,728.8
Redeemable preferred stock 102.3 10.3 2.6 110.0
-------------------------------------
Total fixed maturity securities $13,173.7 $ 858.6 $ 93.8 $13,938.5
=====================================
Total equity securities $ 226.4 $ 122.5 $ 2.5 $ 346.4
=====================================
</TABLE>
29
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (Continued)
The amortized cost and estimated fair value of fixed maturity securities
as of December 31, 1998, by contractual repayment date of principal, are
shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------------------
(In Millions)
<S> <C> <C>
Securities Available for Sale:
-----------------------------
Due in one year or less $ 479.8 $ 482.6
Due after one year through five years 3,131.7 3,236.6
Due after five years through ten years 2,923.1 3,033.4
Due after ten years 2,155.4 2,386.0
-------------------
8,690.0 9,138.6
Mortgage-backed and asset-backed
securities 4,391.7 4,478.4
-------------------
Total $13,081.7 $13,617.0
===================
</TABLE>
Gross gains of $110.6 million, $69.1 million and $89.3 million and gross
losses of $35.9 million, $32.9 million and $29.9 million on securities
available for sale were realized during 1998, 1997 and 1996, respectively.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 915.9 $ 925.4 $ 820.7
Equity securities 17.5 12.8 17.8
Mortgage loans 174.6 129.5 109.4
Real estate 38.1 53.6 51.3
Policy loans 154.5 137.1 113.0
Other 100.2 75.5 82.6
--------------------------
Gross investment income 1,400.8 1,333.9 1,194.8
Investment expense 107.0 108.6 107.5
--------------------------
Net investment income $1,293.8 $1,225.3 $1,087.3
==========================
</TABLE>
30
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (Continued)
The change in gross unrealized gain on investments in available for sale
and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale securities:
Fixed maturity $(229.5) $223.5 $(168.6)
Equity 63.1 85.7 6.3
------------------------
Total $(166.4) $309.2 $(162.3)
========================
Trading securities:
Fixed maturity $ (2.5) $ (1.1) $ (0.5)
Equity 0.2
------------------------
Total $ (2.5) $ (1.1) $ (0.3)
========================
</TABLE>
As of December 31, 1998 and 1997, investments in fixed maturity securities
with a carrying value of $13.0 million and $14.4 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements.
No investment, aggregated by issuer, exceeded 10% of total stockholder's
equity as of December 31, 1998.
7. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities (Note 6) $14,164.5 $14,164.5 $14,284.9 $14,284.9
Mortgage loans 2,788.7 2,911.2 1,922.1 1,990.9
Policy loans 3,901.2 3,901.2 3,769.2 3,769.2
Cash and cash equivalents 150.1 150.1 110.4 110.4
Derivative financial
instruments:
Interest rate floors, caps,
options and swaptions 67.9 67.9 22.9 22.9
Interest rate swap contracts 0.5 0.5
Foreign currency derivatives 108.2 108.2 4.1 4.1
Liabilities:
Guaranteed interest contracts 5,665.3 5,751.0 3,982.0 4,035.7
Deposit liabilities 599.9 626.7 733.5 737.4
Annuity liabilities 1,448.0 1,430.1 1,883.5 1,872.6
Short-term debt 295.5 295.5 104.0 104.0
Surplus notes 149.6 176.0 149.6 164.7
Derivative financial
instruments:
Options written 1.6 1.6
Interest rate swap contracts 23.3 23.3
Asset swap contracts 3.6 3.6 12.6 12.6
Credit default and total
return swaps 9.1 9.1 4.0 4.0
</TABLE>
31
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used to estimate the fair value
of these financial instruments as of December 31, 1998 and 1997:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The carrying amounts of policy loans are a reasonable estimate of their
fair values.
CASH AND CASH EQUIVALENTS
The carrying amounts of these items are a reasonable estimate of their
fair values.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose value or cash flows are
"derived" from another source, such as an underlying security. They can
facilitate total return and, when used for hedging, they achieve the
lowest cost and most efficient execution of positions. Derivatives can
also be used to leverage by using very large notional amounts or by
creating formulas that multiply changes in the underlying security. The
Company's approach is to avoid highly leveraged or overly complex
investments. The Company utilizes certain derivative financial instruments
to diversify its business risk and to minimize its exposure to
fluctuations in market prices, interest rates or basis risk as well as for
facilitating total return. Risk is limited through modeling derivative
performance in product portfolios for hedging and setting loss limits in
total return portfolios.
Derivatives used by the Company involve elements of credit risk and market
risk in excess of amounts recognized in the accompanying consolidated
financial statements. The notional amounts of these instruments reflect
the extent of involvement in the various types of financial instruments.
The estimated fair values of these instruments are based on dealer
quotations or internal price estimates believed to be comparable to dealer
quotations. These amounts estimate what the Company would have to pay or
receive if the contracts were terminated at that time. The Company
determines, on an individual counterparty basis, the need for collateral
or other security to support financial instruments with off-balance sheet
counterparty risk.
32
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (Continued)
A reconciliation of the notional or contract amounts and discussion of the
various derivative instruments is as follows:
<TABLE>
<CAPTION>
Balance Terminations Balance
Beginning and End
of Year Acquisitions Maturities of Year
--------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1998:
-----------------
Interest rate floors, caps,
options and swaptions $2,730.0 $ 160.6 $ 237.6 $2,653.0
Interest rate swap
contracts 2,026.1 960.8 378.3 2,608.6
Asset swap contracts 67.4 30.3 34.5 63.2
Credit default and total
return swaps 288.5 771.5 410.4 649.6
Financial futures contracts 214.1 4,108.4 3,713.6 608.9
Foreign currency
derivatives 207.0 959.4 35.2 1,131.2
December 31, 1997:
-----------------
Interest rate floors, caps,
options and swaptions 4,538.2 1,644.2 3,452.4 2,730.0
Interest rate swap
contracts 988.3 1,356.0 318.2 2,026.1
Asset swap contracts 30.0 47.4 10.0 67.4
Credit default and total
return swaps 356.5 98.9 166.9 288.5
Financial futures contracts 609.2 3,930.6 4,325.7 214.1
Foreign currency
derivatives 41.4 217.0 51.4 207.0
</TABLE>
Interest Rate Floors, Caps, Options and Swaptions
-------------------------------------------------
The Company uses interest rate floors, caps, options and swaptions to
hedge against fluctuations in interest rates and to take positions in its
total return portfolios. Interest rate floor agreements entitle the
Company to receive the difference when the current rate of the underlying
index is below the strike rate. Interest rate cap agreements entitle the
Company to receive the difference when the current rate of the underlying
index is above the strike rate. Options purchased involve the right, but
not the obligation, to purchase the underlying securities at a specified
price during a given time period. Swaptions are options to enter into a
swap transaction at a specified price. The Company uses written covered
call options on a limited basis. Gains and losses on covered calls are
offset by gains and losses on the underlying position. Floors, caps and
options are reported as assets and options written are reported as
liabilities in the accompanying consolidated statements of financial
condition. Cash requirements for these instruments are generally limited
to the premium paid by the Company at acquisition. The purchase premium of
these instruments is amortized on a constant effective yield basis and
included as a component of net investment income in the accompanying
consolidated statements of operations over the term of the agreement.
Interest rate floors and caps, options and swaptions mature during the
years 1999 through 2017.
Interest Rate Swap Contracts
----------------------------
The Company uses interest rate swaps to manage interest rate risk and to
take positions in its total return portfolios. The interest rate swap
agreements generally involve the exchange of fixed and floating rate
interest payments or the exchange of floating to floating interest
payments tied to different indexes. Generally, no premium is paid to enter
into the contract and no principal payments are made by either party. The
amounts to be received or paid pursuant to these agreements are accrued
and recognized through an adjustment to net investment income in the
accompanying consolidated statements of operations over the life of the
agreements. The interest rate swap contracts mature during the years 1999
through 2021.
33
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (Continued)
Asset Swap Contracts
--------------------
The Company uses asset swap contracts to manage interest rate and equity
risk to better match portfolio duration to liabilities. Asset swap
contracts involve the exchange of upside equity potential for fixed income
streams. The amounts to be received or paid pursuant to these agreements
are accrued and recognized through an adjustment to net investment income
in the accompanying consolidated statements of operations over the life of
the agreements. The asset swap contracts mature during the years 2000
through 2005.
Credit Default and Total Return Swaps
-------------------------------------
The Company uses credit default and total return swaps to take advantage
of market opportunities. Credit default swaps involve the receipt of fixed
rate payments in exchange for assuming potential credit exposure of an
underlying security. Total return swaps involve the exchange of floating
rate payments for the total return performance of a specified index or
market. The amounts to be received or paid pursuant to these agreements
are accrued and recognized through an adjustment to net investment income
in the accompanying consolidated statements of operations over the life of
the agreements. Credit default and total return swaps mature during the
years 1999 through 2028.
Financial Futures Contracts
---------------------------
The Company uses exchange-traded financial futures contracts to hedge cash
flow timing differences between assets and liabilities and overall
portfolio duration. Assets and liabilities are rarely acquired or sold at
the same time, which creates a need to hedge their change in value during
the unmatched period. In addition, foreign currency futures may be used to
hedge foreign currency risk on non-U.S. dollar denominated securities.
Financial futures contracts obligate the holder to buy or sell the
underlying financial instrument at a specified future date for a set price
and may be settled in cash or by delivery of the financial instrument.
Price changes on futures are settled daily through the required margin
cash flows. The notional amounts of the contracts do not represent future
cash requirements, as the Company intends to close out open positions
prior to expiration.
Foreign Currency Derivatives
----------------------------
The Company enters into foreign exchange forward contracts and swaps to
hedge against fluctuations in foreign currency exposure. Foreign currency
derivatives involve the exchange of foreign currency denominated payments
for U.S. dollar denominated payments. Gains and losses on foreign exchange
forward contracts offset losses and gains, respectively, on the related
foreign currency denominated assets. The amounts to be received or paid
under the foreign currency swaps are accrued and recognized through an
adjustment to net investment income in the accompanying consolidated
statements of operations over the life of the agreements. Foreign currency
derivatives expire during the years 1999 through 2013.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair value of fixed maturity guaranteed interest contracts
is estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of deposit liabilities with
no defined maturities is the amount payable on demand.
ANNUITY LIABILITIES
The estimated fair value of annuity liabilities approximates carrying
value and primarily includes policyholder deposits and accumulated
credited interest.
34
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (Continued)
SHORT-TERM DEBT
The carrying amount of short-term debt is a reasonable estimate of its
fair value because the interest rates are variable and based on current
market values.
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Life has issued certain contracts to 401(k) plans totaling $1.6
billion as of December 31, 1998, pursuant to the terms of which the 401(k)
plan retains direct ownership and control of the assets related to these
contracts. Pacific Life agrees to provide benefit responsiveness in the
event that plan benefit requests exceed plan cash flows. In return for
this guarantee, Pacific Life receives a fee which varies by contract.
Pacific Life sets the investment guidelines to provide for appropriate
credit quality and cash flow matching.
8. UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
The detail of universal life, annuity and other investment contract
deposit liabilities is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------------
(In Millions)
<S> <C> <C>
Universal life $10,218.0 $10,012.0
Annuity 1,429.0 1,817.4
Other investment contract depos-
its 6,326.0 4,815.1
-------------------
$17,973.0 $16,644.5
===================
</TABLE>
The detail of universal life, annuity and other investment contract
deposits policy fees and interest credited net of reinsurance ceded is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees:
Universal life $439.9 $377.5 $318.4
Annuity 82.1 50.3 26.6
Other investment contract
deposits 3.3 3.4 3.6
------------------------
Total policy fees $525.3 $431.2 $348.6
========================
Interest credited:
Universal life $440.8 $368.2 $284.3
Annuity 79.8 116.8 138.7
Other investment contract
deposits 360.2 312.8 242.0
------------------------
Total interest credited $880.8 $797.8 $665.0
========================
</TABLE>
35
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHORT-TERM AND LONG-TERM DEBT
Pacific Life borrows for short-term needs by issuing commercial paper.
Principal of $234.9 million and interest payable of $0.6 million was
outstanding as of December 31, 1998, bearing an average interest rate of
5.22%, and was repaid in January 1999. There was no commercial paper debt
outstanding as of December 31, 1997. Pacific Life has a revolving credit
facility available of $350 million as of December 31, 1998 and 1997. There
was no debt outstanding under the revolving credit facility as of December
31, 1998 and 1997.
PAM had bank borrowings outstanding of $60 million and $104 million as of
December 31, 1998 and 1997, respectively. The interest rate averaged 5.8%,
5.8% and 5.6% for the years ended December 31, 1998, 1997 and 1996,
respectively. Outstanding debt is due and payable in 1999 and subject to
renewal. The borrowing limit for PAM as of December 31, 1998 and 1997 was
$200 million.
Pacific Life has $150 million of long-term debt which consists of surplus
notes outstanding at an interest rate of 7.9% maturing on December 30,
2023. Interest is payable semiannually on June 30 and December 30. The
surplus notes may not be redeemed at the option of Pacific Life or any
holder of the surplus notes. The surplus notes are unsecured and
subordinated to all present and future senior indebtedness and policy
claims of Pacific Life. Each payment of interest on and the payment of
principal of the surplus notes may be made only with the prior approval of
the Insurance Commissioner of the State of California. Interest expense
amounted to $11.8 million for each of the years ended December 31, 1998,
1997 and 1996 and is included in net investment income on the accompanying
consolidated statements of operations.
10. INCOME TAXES
The Company accounts for income taxes using the liability method. The
deferred tax consequences of changes in tax rates or laws must be computed
on the amounts of temporary differences and carryforwards existing at the
date a new tax law is enacted. Recording the effects of a change involves
adjusting deferred tax liabilities and assets with a corresponding charge
or credit recognized in the provision for income taxes. The objective is
to measure a deferred tax liability or asset using the enacted tax rates
and laws expected to apply to taxable income in the periods in which the
deferred tax liability or asset is expected to be settled or realized.
The provision for income taxes is as follows:
Years Ended December 31,
1998 1997 1996
---------------------------
(In Millions)
Current $134.1 $127.9 $163.5
Deferred (20.6) (14.4) (49.8)
---------------------------
$113.5 $113.5 $113.7
==========================
36
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
Years Ended December 31,
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
(In Millions)
Non deductible reserves $ 28.2 $(27.6) $ (6.4)
Duration hedging 20.8 (2.6) (14.9)
Partnership income 20.8
Deferred policy acquisition costs (12.6) (18.0) 2.1
Investment valuation (24.5) 3.9 (7.3)
Policyholder reserves (29.5) 20.1 (28.5)
Other (2.6) 9.8 5.2
---------------------------
Deferred taxes from operations 0.6 (14.4) (49.8)
Release of subsidiary deferred taxes (21.2)
---------------------------
Deferred tax provision $(20.6) $(14.4) $(49.8)
===========================
</TABLE>
The Company's acquisition of a controlling interest in a subsidiary
allowed such subsidiary to be included in PMHC's consolidated income tax
return. That inclusion resulted in the release of certain deferred taxes.
A reconciliation of the provision for income taxes based on the prevailing
corporate statutory tax rate to the provision reflected in the
consolidated financial statements is as follows:
<TABLE>
Years Ended December 31,
1998 1997 1996
-------------------------
<S> <C> <C> <C>
(In Millions)
Income taxes at the statutory rate $124.2 $101.3 $ 98.1
Equity tax (5.0) 5.0 16.3
Amortization of intangibles on equity
method investments 4.3 7.6 6.5
Non-taxable investment income (3.6) (2.6) (2.1)
Other (6.4) 2.2 (5.1)
-------------------------
Provision for income taxes $113.5 $113.5 $113.7
=========================
</TABLE>
37
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The net deferred tax liability is comprised of the following tax effected
temporary differences:
<TABLE>
December 31,
1998 1997
-----------------
(In Millions)
<S> <C> <C>
Policyholder reserves $ 254.3 $ 224.8
Investment valuation 44.7 20.2
Deferred compensation 33.7 25.9
Dividends 7.6 7.7
Non deductible reserves 5.9 34.1
Depreciation (2.4) (2.5)
Duration hedging (8.5) 12.3
Deferred policy acquisition costs (13.3) (25.9)
Partnership income (20.8)
Other (1.4) 3.8
-----------------
Deferred taxes from operations 299.8 300.4
Deferred taxes assumed in acquisition of subsidiary 4.8
Issuance of partnership units by affiliate (74.9) (47.9)
Unrealized gain on securities available for sale (272.3) (307.8)
-----------------
Net deferred tax liability $ (42.6) $ (55.3)
=================
</TABLE>
38
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMPREHENSIVE INCOME
The Company displays comprehensive income and its components in the
accompanying consolidated statements of stockholder's equity and the note
herein. The Company's only component of other comprehensive income,
unrealized gain (loss) on securities available for sale, is shown net of
reclassification adjustments, as defined by SFAS No. 130, and net of income
tax in the accompanying consolidated statements of stockholder's equity. The
disclosure of the gross components of other comprehensive income is as
follows:
<TABLE>
Years Ended December 31,
1998 1997 1996
-----------------------------
(In Millions)
<S> <C> <C> <C>
Calculation of Holding Gain (Loss):
-----------------------------------
Gross holding gain (loss) on securities
available for sale $(13.4) $ 338.2 $ (75.7)
Tax (expense) benefit 4.5 (117.1) 26.5
---------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (8.9) $ 221.1 $ (49.2)
===========================
Calculation of Reclassification Adjustment:
-------------------------------------------
Realized gain on sale of securities
available for sale $ 89.3 $ 38.9 $ 82.6
Tax expense (31.3) (13.8) (29.0)
---------------------------
Reclassification adjustment, net of tax $ 58.0 $ 25.1 $ 53.6
===========================
Amounts Reported in Other Comprehensive Income:
-----------------------------------------------
Holding gain (loss) on securities
available for sale, net of tax $ (8.9) $ 221.1 $ (49.2)
Less reclassification adjustment, net
of tax 58.0 25.1 53.6
---------------------------
Net unrealized gain (loss) recognized
in other comprehensive income $(66.9) $ 196.0 $(102.8)
===========================
</TABLE>
39
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. REINSURANCE
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger risks or,
in the case of a producer-owned reinsurance company, to diversify risk and
retain top producing agents. Amounts receivable from reinsurers for
reinsurance on future policy benefits, universal life deposits, and unpaid
losses is reported as an asset and included in other assets on the
accompanying consolidated statements of financial condition. All assets
associated with reinsured business remain with, and under the control of the
Company. Approximate amounts recoverable (payable) from (to) reinsurers
include the following amounts:
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(46.0) $(39.6)
Future policy benefits 108.9 92.2
Unpaid claims 12.5 14.0
Paid claims 24.3 10.2
</TABLE>
As of December 31, 1998, 79% of the reinsurance recoverables were from one
reinsurer, of which 100% is secured by payables to the reinsurer. To the
extent that the assuming companies become unable to meet their obligations
under these agreements, the Company remains contingently liable. The
Company does not anticipate nonperformance by the assuming companies.
Revenues and benefits are shown net of the following reinsurance
transactions:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance premiums $ 82.7 $ 70.7 $ 44.3
Assumed reinsurance included in insurance premiums 17.2 18.1 17.8
Ceded reinsurance netted against policy fees 65.0 77.5 71.0
Ceded reinsurance netted against net investment in-
come 203.3 204.9 192.5
Ceded reinsurance netted against interest credited 162.8 165.8 155.2
Ceded reinsurance netted against policy benefits 121.3 93.4 56.7
Assumed reinsurance included in policy benefits 17.7 12.7 9.9
</TABLE>
40
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION
The Company's six operating segments are Individual Insurance, Institutional
Products Group, Annuities, Group Employee Benefits, Broker-Dealers and
Investment Management. These segments have been identified based on
differences in products and services offered. All other activity is included
in Corporate and Other.
The Individual Insurance segment offers universal life, variable universal
life and other life insurance products to individuals, small businesses and
corporations through a network of distribution channels that include branch
offices, marketing organizations, national accounts and a national producer
group. The Institutional Products Group segment offers investment and
annuity products to pension fund sponsors and other institutional investors
primarily through its home office marketing team. The Annuities segment
offers variable and fixed annuities to individuals, small businesses and
qualified plans through financial institutions, National Association of
Securities Dealers ("NASD") firms, and regional and national wirehouses.
The Group Employee Benefits segment offers group life, health and dental
insurance, and stop loss insurance products to corporate, government and
labor-management-negotiated plans. The group life, health and dental
insurance is distributed through a network of sales offices and the stop
loss insurance is distributed through a network of third party
administrators. The Broker-Dealers segment includes five NASD registered
firms that provide securities and affiliated insurance brokerage services
and investment advisory services through more than 3,100 registered
representatives. The Investment Management segment is primarily comprised of
the Company's investment in PIMCO Advisors (Note 1). PIMCO Advisors offers a
diversified range of investment products through separately managed
accounts, and institutional, retail and offshore funds.
Corporate and Other primarily includes investment income, expenses and
assets not attributable to the major segments and the operations of the
Company's reinsurance subsidiary located in the United Kingdom. Corporate
and Other also includes the elimination of intersegment revenues, expenses
and assets.
The Company uses the same accounting policies and procedures to measure
segment income and assets as it uses to measure its consolidated net income
and assets. Net investment income and capital gains are allocated based on
invested assets purchased and held as is required for transacting the
business of that segment. Overhead expenses are allocated based on services
provided. Interest expense is allocated based on the short-term borrowing
needs of the segment and is included in net investment income. The income
tax provision is allocated based on each segment's actual tax liability.
Intersegment revenues include commissions paid by the Individual Insurance
segment and the Annuities segment for variable product sales to the Broker-
Dealers segment. Investment Management segment assets have been reduced by
an intersegment note payable of $110 million as of December 31, 1998. The
related intersegment note receivable is included in Corporate and Other
segment assets.
The Company generates substantially all of its revenues and income from
customers located in the United States. Additionally, substantially all of
the Company's assets are located in the United States.
Depreciation expense and capital expenditures are not material and have not
been reported herein. The Company's significant non cash item is interest
credited to universal life, annuity and other investment contract deposits
and is disclosed herein.
41
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION (Continued)
Financial information for each of the business segments is as follows:
<TABLE>
<CAPTION>
Institutional Group
Individual Products Employee Broker- Investment Corporate
Insurance Group Annuities Benefits Dealers Management and Other Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External customers and (In Millions)
other revenue
December 31, 1998 $ 414.6 $ 43.3 $ 124.0 $521.2 $236.1 $ 17.1 $ 17.4 $ 1,373.7
December 31, 1997 379.2 61.6 83.3 480.6 154.0 21.8 3.2 1,183.7
December 31, 1996 335.4 36.8 41.4 431.7 82.2 22.2 5.7 955.4
Intersegment revenues
December 31, 1998 185.3 (185.3) -
December 31, 1997 143.3 (143.3) -
December 31, 1996 98.0 (98.0) -
Net investment income
December 31, 1998 565.7 565.5 88.6 23.1 0.9 8.0 42.0 1,293.8
December 31, 1997 485.2 509.6 149.4 24.9 0.8 6.2 49.2 1,225.3
December 31, 1996 404.1 465.5 149.6 21.9 0.8 4.8 40.6 1,087.3
Net realized capital
gains (losses)
December 31, 1998 3.4 (13.6) 4.6 1.7 4.0 38.6 38.7
December 31, 1997 9.8 12.8 0.6 2.0 20.8 39.3 85.3
December 31, 1996 5.7 5.0 (4.5) 2.3 1.1 34.4 44.0
Net income of equity
method investees
December 31, 1998 103.0 103.0
December 31, 1997 80.1 80.1
December 31, 1996 61.3 61.3
Total revenues
December 31, 1998 983.7 595.2 217.2 546.0 422.3 132.1 (87.3) 2,809.2
December 31, 1997 874.2 584.0 233.3 507.5 298.1 128.9 (51.6) 2,574.4
December 31, 1996 745.2 507.3 186.5 455.9 181.0 89.4 (17.3) 2,148.0
Segment profit (loss)
before income tax
provision
December 31, 1998 151.1 74.6 34.1 10.3 9.9 60.1 14.9 355.0
December 31, 1997 132.4 98.3 23.5 28.8 6.4 24.6 (24.5) 289.5
December 31, 1996 109.3 80.7 (16.5) 26.3 4.3 34.1 42.1 280.3
Income tax provision
(benefit)
December 31, 1998 52.6 21.2 11.3 2.9 4.5 2.1 18.9 113.5
December 31, 1997 55.8 33.9 9.4 9.1 2.7 10.1 (7.5) 113.5
December 31, 1996 44.8 27.5 (0.4) 6.2 1.8 21.5 12.3 113.7
Segment net income
(loss)
December 31, 1998 98.5 53.4 22.8 7.4 5.4 58.0 (4.0) 241.5
December 31, 1997 76.6 64.4 14.1 19.7 3.7 14.5 (17.0) 176.0
December 31, 1996 64.5 53.2 (16.1) 20.1 2.5 12.6 29.8 166.6
Interest credited on
universal life, annuity
and other investment
contract deposits
December 31, 1998 449.6 354.1 71.0 6.1 880.8
December 31, 1997 378.8 299.8 106.2 13.0 797.8
December 31, 1996 290.3 232.9 132.8 9.0 665.0
Segment assets
As of December 31, 1998 14,578.2 15,221.0 8,384.2 361.1 55.8 267.3 1,016.3 39,883.9
As of December 31, 1997 13,426.7 12,241.7 6,310.8 368.6 52.4 305.4 1,303.2 34,008.8
</TABLE>
42
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLANS
Pacific Life has defined benefit pension plans which cover all eligible
employees who have one year of continuous employment and have attained age
21. The full-benefit vesting period for all participants is five years.
Benefits for employees are based on years of service and the highest five
consecutive years of compensation during the last ten years of employment.
Pacific Life's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as may be determined appropriate. Contributions are intended to
provide not only for benefits attributed to employment to date but also
for those expected to be earned in the future. All such contributions are
made to a tax-exempt trust. Plan assets consist primarily of group annuity
contracts issued by Pacific Life, as well as mutual funds managed by an
affiliate of Pacific Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned during
the year $ 4.0 $ 3.6 $ 3.7
Interest cost on projected benefit
obligation 10.9 10.4 9.8
Expected return on plan assets (15.0) (12.8) (11.2)
Amortization of net obligations and
prior service cost (1.4) (1.4) (1.4)
---------------------------
Net periodic pension cost (benefit) $ (1.5) $ (0.2) $ 0.9
===========================
</TABLE>
43
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
The following tables set forth the pension plans' reconciliation of
benefit obligation, plan assets and funded status for the years ended:
<TABLE>
December 31,
1998 1997
------------
<S> <C> <C>
(In Millions)
Change in Benefit Obligation:
-----------------------------
Benefit obligation, beginning of year $157.9 $140.9
Service cost 4.0 3.6
Interest cost 10.9 10.4
Plan expense (0.3) (0.2)
Actuarial loss 11.9 10.1
Benefits paid (6.6) (6.9)
--------------
Benefit obligation, end of year $177.8 $157.9
==============
Change in Plan Assets:
----------------------
Fair value of plan assets, beginning of year $180.3 $154.2
Actual return on plan assets 21.9 33.2
Plan expense (0.3) (0.2)
Benefits paid (6.6) (6.9)
--------------
Fair value of plan assets, end of year $195.3 $180.3
==============
Funded Status Reconciliation:
-----------------------------
Funded status $ 17.5 $ 22.4
Unrecognized transition asset (3.6) (4.8)
Unrecognized prior service cost (1.0) (1.2)
Unrecognized actuarial gain (9.7) (14.7)
--------------
Prepaid pension cost $ 3.2 $ 1.7
==============
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1998 and 1997, the weighted average discount
rate used was 6.5% and 7.0%, respectively, and the rate of increase in
future compensation levels was 5.0% and 5.5%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1998 and 1997.
In connection with the merger of PCL into Pacific Life as discussed in
Note 4, Pacific Life assumed sponsorship of PCL's defined benefit pension
plan. This pension plan provides for retirement income benefits at age 65
with reduced benefits for early retirement. Effective December 31, 1997,
PCL's defined benefit plan merged into Pacific Life's plan. All benefits
associated with PCL's plan remain unchanged subsequent to the merger.
POSTRETIREMENT BENEFITS
Pacific Life sponsors a defined benefit health care plan and a defined
benefit life insurance plan (the "Plans") that provide postretirement
benefits for all eligible retirees and their dependents. Generally,
qualified employees may become eligible for these benefits if they reach
normal retirement age, have been covered under Pacific Life's policy as an
active employee for a minimum continuous period prior to the date retired,
and have an employment date before January 1, 1990. The Plans contain
cost-sharing features such as deductibles and
44
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
coinsurance, and require retirees to make contributions which can be
adjusted annually. Pacific Life's commitment to qualified employees who
retire after April 1, 1994 is limited to specific dollar amounts. Pacific
Life reserves the right to modify or terminate the Plans at any time. As in
the past, the general policy is to fund these benefits on a pay-as-you-go
basis.
The net periodic postretirement benefit cost for the years ended December
31, 1998, 1997 and 1996 is $0.7 million, $0.8 million and $1.4 million,
respectively. As of December 31, 1998 and 1997, the accumulated benefit
obligation is $19.3 million and $20.0 million, respectively. The fair value
of the plan assets as of December 31, 1998 and 1997 is zero. The amount of
accrued benefit cost included in other liabilities on the accompanying
consolidated statements of financial condition is $25.3 million and $26.0
million as of December 31, 1998 and 1997, respectively.
The Plans include both indemnity and HMO coverage. The assumed health care
cost trend rate used in measuring the accumulated benefit obligation for
indemnity coverage was 8% and 9% for 1998 and 1997, respectively, and is
assumed to decrease gradually to 3.5% in 2003 and remain at that level
thereafter. The assumed health care cost trend rate used in measuring the
accumulated benefit obligation for HMO coverage was 7% and 8% for 1998 and
1997, respectively, and is assumed to decrease gradually to 3% in 2003 and
remain at that level thereafter.
The net periodic postretirement benefit cost for the years ended December
31, 1998, 1997 and 1996 is $0.7 million, $0.8 million and $1.4 million,
respectively. As of December 31, 1998 and 1997, the accumulated benefit
obligation is $19.3 million and $20.0 million, respectively. The fair
value of the plan assets as of December 31, 1998 and 1997 is zero. The
amount of accrued benefit cost included in other liabilities on the
accompanying consolidated statements of financial condition is $25.3
million and $26.0 million as of December 31, 1998 and 1997, respectively.
The Plans include both indemnity and HMO coverage. The assumed health care
cost trend rate used in measuring the accumulated benefit obligation for
indemnity coverage was 8% and 9% for 1998 and 1997, respectively, and is
assumed to decrease gradually to 3.5% in 2003 and remain at that level
thereafter. The assumed health care cost trend rate used in measuring the
accumulated benefit obligation for HMO coverage was 7% and 8% for 1998 and
1997, respectively, and is assumed to decrease gradually to 3% in 2003 and
remain at that level thereafter.
The amount reported is materially effected by the health care cost trend
rate assumptions. If the health care cost trend rate assumptions were
increased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1998 would be increased by 8.0%, and the aggregate of the
service and interest cost components of the net periodic benefit cost
would increase by 7.5%. If the health care cost trend rate assumptions
were decreased by 1%, the accumulated postretirement benefit obligation as
of December 31, 1998 would be decreased by 6.8%, and the aggregate of the
service and interest cost components of the net periodic benefit cost
would decrease by 6.5%.
The discount rate used in determining the accumulated postretirement
benefit obligation is 6.5% and 7.0% for 1998 and 1997, respectively.
OTHER PLANS
Pacific Life provides a voluntary Retirement Incentive Savings Plan
("RISP") pursuant to Section 401(k) of the Internal Revenue Code covering
all eligible employees of the Company. Effective October 1, 1997, Pacific
Life's RISP changed the matching percentage of each employee's
contributions from 50% to 75%, up to a maximum of 6% of eligible employee
compensation and restricted the matched investment to an Employee Stock
Ownership Plan ("ESOP") sponsored by Pacific LifeCorp. The ESOP was formed
at the time of the Conversion and is currently only available to the
participants of the RISP in the form of matching contributions.
Pacific Life also has a deferred compensation plan which permits certain
employees to defer portions of their compensation and earn a guaranteed
interest rate on the deferred amounts. The interest rate is determined
annually and is guaranteed for one year. The compensation which has been
deferred has been accrued and the primary expense, other than
compensation, related to this plan is interest on the deferred amounts.
The Company also has performance based incentive compensation plans for
its employees.
15. TRANSACTIONS WITH AFFILIATES
Pacific Life serves as the investment advisor for the Pacific Select Fund,
the investment vehicle provided to the Company's variable life and
variable annuity contractholders. Pacific Life charges fees based upon the
net asset value of the portfolios of the Pacific Select Fund, which
amounted to $42.1 million, $27.5 million and $14.3 million for the years
ended December 31, 1998, 1997 and 1996, respectively. In addition, Pacific
Life provides certain support services to the Pacific Select Fund for an
administration fee which is based on an
45
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. TRANSACTIONS WITH AFFILIATES (Continued)
allocation of actual costs. Such administration fees amounted to $232,000,
$165,000 and $108,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $16.9 million, $11.4 million and $6.2 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Included in
equity securities on the accompanying consolidated statements of financial
condition are investments in mutual funds and other investments managed by
PIMCO Advisors which amounted to $40.3 million and $46.5 million as of
December 31, 1998 and 1997, respectively.
Pacific Life provides certain support services to PIMCO Advisors. Charges
for these services are based on an allocation of actual costs and amounted
to $1.2 million, $1.2 million and $1.4 million for the years ended December
31, 1998, 1997 and 1996, respectively.
16. TERMINATION AND NON-COMPETITION AGREEMENTS
Effective November 15, 1994, in connection with the PIMCO Advisors
transaction (Note 1), termination and non-competition agreements were
entered into with certain former key employees of PAM's subsidiaries. These
agreements provide terms and conditions for the allocation of future
proceeds received from distributions and sales of certain PIMCO Advisors
units and other noncompete payments. When the amount of future obligations
to be made to a key employee is determinable, a liability for such amount is
established.
For the years ended December 31, 1998, 1997 and 1996, approximately $49.4
million, $85.8 million and $35.3 million, respectively, is included in
operating expenses on the accompanying consolidated statements of operations
related to the termination and non-competition agreements. This includes
payments of $43.1 million in 1997 to former key employees who elected to
sell to PAM's subsidiaries their rights to the future proceeds from the
PIMCO Advisors units.
17. COMMITMENTS
The Company has outstanding commitments to make investments primarily in
fixed maturities, mortgage loans, limited partnerships and other investments
as follows (In Millions):
Years Ending December 31:
-------------------------
1999 $172.7
2000-2003 202.1
2004 and thereafter 55.9
------
Total $430.7
======
The Company leases office facilities under various non-cancelable operating
leases. Aggregate minimum future commitments as of December 31, 1998 through
the term of the leases are approximately $37.5 million.
46
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. LITIGATION
The Company was named in civil litigation proceedings similar to other
litigation brought against many life insurers alleging misconduct in the
sale of products, sometimes referred to as market conduct litigation. The
class of plaintiffs included, with some exceptions, all persons who owned,
as of December 31, 1997 (or as of the date of policy termination, if
earlier), individual whole life, universal life or variable life insurance
policies sold by the Company on or after January 1, 1982. The Company has
settled this litigation pursuant to a finalsettlement agreement approved by
the Court in November 1998. The settlement agreement is currently being
implemented. The cost of the settlement has been included in the
accompanying consolidated statements of operations during the three years
ended December 31, 1998.
Further, the Company is a respondent in a number of other legal proceedings,
some of which involve allegations for extra-contractual damages. In the
opinion of management, the outcome of the foregoing proceedings is not
likely to have a material adverse effect on the consolidated financial
position or results of operations of the Company.
---------------------------------------------------------------------------
47
<PAGE>
Form No. 1418-9B
