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PACIFIC PORTFOLIOS PROSPECTUS MAY 1, 1999
Pacific Portfolios 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 of 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
describe the Contract or the Pacific Money Market Mid-Cap Value
Select Fund any differently than they High Yield Bond Equity
have been described in these Managed Bond Bond and Income
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 Equity Income International
not 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 OPTIONS
This Contract is not a deposit Fixed
or obligation of, or guaranteed Guaranteed Interest Options (GIOs) with 3-year, 6-year and 10-year terms
or endorsed by, any bank. It's not DCA Plus Fixed
federally insured by the Federal Not all of the Fixed Options are available in every state.
Deposit Insurance Corporation, the
Federal Reserve Board, or any You'll find more information about the Contract and Separate Account A in the
other government agency. Investment SAI dated May 1, 1999. The SAI has been filed with the SEC and is considered to
in a Contract involves risk, be part of this Prospectus because it's incorporated by reference. You'll find
including possible loss of a table of contents for the SAI on page 50 of this Prospectus. You can get a
principal. copy of the SAI without charge by calling or writing to Pacific Life. You can
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 Portfolios 3 Pacific Life and the Separate Account 29
- ------------------------------------------------------------- Pacific Life 29
Your Investment Options 10 Separate Account A 30
Your Variable Investment Options 10 Financial Highlights 31
Variable Investment Option Performance 11 --------------------------------------------------------------
Your Fixed Option, DCA Plus Fixed Option and GIOs 11 Federal Tax Status 32
- ------------------------------------------------------------- Taxes Payable by Contract Owners: General Rules 32
Purchasing Your Contract 12 Qualified Contracts 34
How to Apply for Your Contract 12 Loans 35
Purchasing the Enhanced Guaranteed Minimum Death Withholding 38
Benefit Rider (Optional) 12 Impact of Federal Income Taxes 38
Making Your Purchase Payments 13 Taxes on Pacific Life 38
- ------------------------------------------------------------- --------------------------------------------------------------
How Your Payments Are Allocated 13 Additional Information 39
Choosing Your Investment Options 13 Voting Rights 39
Investing in Variable Investment Options 13 Changes to Your Contract 39
When Your Investment is Effective 14 Changes to All Contracts 40
Transfers 14 Inquiries and Submitting Forms and Requests 41
- ------------------------------------------------------------- Telephone Transactions 41
Charges, Fees and Deductions 16 Timing of Payments and Transactions 42
Withdrawal Charge 16 Confirmations, Statements and Other Reports to
Premium Taxes 18 Contract Owners 42
Annual Fee 18 Replacement of Life Insurance or Annuities 42
Waivers and Reduced Charges 19 Financial Statements 43
Mortality and Expense Risk Charge 19 Preparation for the Year 2000 43
Administrative Fee 19 --------------------------------------------------------------
Annual Enhanced Guaranteed Minimum Death Benefit The General Account 44
Rider Charge (Optional Rider) 20 General Information 44
Expenses of the Fund 20 Guarantee Terms 44
- ------------------------------------------------------------- Withdrawals and Transfers 46
Retirement Benefits and Other Payouts 20 --------------------------------------------------------------
Selecting Your Annuitant 20 Terms Used in This Prospectus 48
Annuitization 20 --------------------------------------------------------------
Choosing Your Annuity Date ("Annuity Start Date") 20 Contents of the Statement of Additional Information 50
Default Annuity Date and Options 21 --------------------------------------------------------------
Choosing Your Annuity Option 22 Appendix A: State Law Variations 51
Your Annuity Payments 23 --------------------------------------------------------------
Death Benefits 23 Appendix B: Market Value Adjustment 52
- ------------------------------------------------------------- --------------------------------------------------------------
Withdrawals 27 Where to Go for More Information Back Cover
Optional Withdrawals 27
Tax Consequences of Withdrawals 29
Short-Term Cancellation Right ("Free Look") 29
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AN OVERVIEW OF PACIFIC PORTFOLIOS
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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 Portfolios variable annuity contract, unless we state
otherwise.
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Pacific Portfolios Basics Pacific Portfolios is an annuity contract between you and Pacific Life
Insurance Company.
An annuity contract may be appropriate
if you're looking for retirement income This Contract is designed for long-term financial planning. It allows you to
or you want to meet other long-term invest money on a tax-deferred basis for retirement or other goals, and to
financial objectives. receive income in a variety of ways, including a series of income payments for
life or for a specified period of years.
This Contract may not be the right one for
you, however, if you need to withdraw money Non-Qualified and Qualified Contracts are available. You buy a Non-Qualified
for short-term needs, because withdrawal Contract with "after-tax" dollars. You buy a Qualified Contract under a
charges and tax penalties for early withdrawal qualified retirement or pension plan, or an individual retirement annuity or
may apply. account (IRA), or form thereof.
You should consider the Contract's investment Pacific Portfolios is a variable annuity, which means that the value of your
and income benefits, as well as its costs. Contract fluctuates depending on the performance of the Investment Options you
choose. The Contract allows you to choose how often you make Purchase Payments
and how much you add each time. The Contract provides a death benefit if the
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 PORTFOLIOS
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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 and how also take money out of your Contract by making a withdrawal. The accumulation
they perform will affect the value phase begins on your Contract Date and continues until your Annuity Date.
of your Contract during the accumulation
phase, as well as the amount of your Purchase Payments
annuity payments during the income Your initial Purchase Payment must be at least $5,000 for a Non-Qualified
phase if you choose a variable Contract and at least $2,000 for a Qualified Contract. Additional Purchase
annuitization payout. Payments must be at least $250 for a Non-Qualified Contract and $50 for a
Qualified Contract.
Investment Options
You can ask your registered representative You can choose from 17 Variable Investment Options (also called Subaccounts),
to help you choose the right Investment each of which invests in a corresponding Portfolio of the Pacific Select Fund.
Options for your goals and risk tolerance. We're the investment adviser for the Pacific Select Fund. We oversee the
management of all the Fund's Portfolios and manage two of the Portfolios
You'll find more about the Investment Options directly. We've retained other managers to manage the other Portfolios. The
starting on page 10. value of each Portfolio will fluctuate with the value of the investments
it holds, and returns are not guaranteed.
You can also choose from three Fixed Options that earn a guaranteed rate of
interest of at least 3% annually: the Fixed Option, the DCA Plus Fixed Option when
you elect DCA Plus, and the Guaranteed Interest Option, which has Guaranteed Terms
of three, six or 10 years. Not all of the Fixed Options are available in every
state.
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.
We'll apply a Market Value Adjustment if Transferring among Investment Options
you make a transfer or withdrawal from a You can transfer among Investment Options any time until your Annuity Date
Guaranteed Interest Option before the end without paying any current income tax. You can also make automatic transfers by
of its term. See Appendix B for details enrolling in our dollar cost averaging, portfolio rebalancing or earnings sweep
about how we calculate the Market Value programs. Some restrictions apply to transfers to and from the Fixed Options.
Adjustment.
Withdrawals
You'll find more about transfers starting You can make full and partial withdrawals to supplement your income or for
on page 14. 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
You'll find more about withdrawals Payments that are less than seven years old. Some restrictions apply to making
starting on page 27. withdrawals from the Fixed Options.
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 20.
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 your 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 23. 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.
Enhanced Guaranteed Minimum Death Benefit Rider
This rider is not available in all states. This optional rider offers the potential for a larger death benefit. You can
buy the rider when you buy your Contract. You cannot buy the rider after you
buy your Contract.
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AN OVERVIEW OF PACIFIC PORTFOLIOS
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This section of the overview explains the fees and expenses associated with
your Pacific Portfolios Contract.
For information about how Separate Account A . Contract Expenses are expenses that we deduct from your Contract.
and Fund Expenses affect accumulation These expenses are fixed under the terms of your Contract. Premium
Units, see Financial Highlights on taxes or other taxes may also apply to your Contract. We generally
page 31. charge premium taxes when 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 $40.00/4/
Annual Enhanced Death Benefit Charge if you buy the
Enhanced Guaranteed Minimum Death Benefit Rider
(calculated as a percentage of the Contract Value)/5/
If the age of the youngest Annuitant on your Contract Date
is 65 or younger 0.10%
If the age of the youngest Annuitant on your Contract Date
is 66 to 75 0.30%
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Separate Account A Annual Expenses Mortality and Expense Risk Charge 1.25%/6/
(as a percentage of the average daily Administrative Fee 0.15%/6/
Account Value) ----
Total Separate Account A Annual Expenses 1.40%
----
/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/ We deduct the Annual Fee on each Contract Anniversary up to your Annuity
Date and when you make a full withdrawal if the Contract Value on these
days is less than $50,000 after deducting any outstanding loan and
interest (your Net Contract Value). See CHARGES, FEES AND DEDUCTIONS.
/5/ If you buy the Enhanced Guaranteed Minimum Death Benefit Rider
("EGMDBR"), which is subject to state availability, we deduct this
charge on each Contract Anniversary date that the rider is in effect
and when you make a full withdrawal. See CHARGES, FEES AND DEDUCTIONS.
/6/ This is an annual rate. The daily rate is calculated by dividing the
annual rate by 365.
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Fees and Expenses Paid by the The Pacific Select Fund pays advisory fees and other expenses. These are
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 Fund's indirectly because they reduce Portfolio returns.
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.
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AN OVERVIEW OF PACIFIC PORTFOLIOS
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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 the following:
. the Contract Value starts at $45,000
. the Investment Options have an annual return of 5%
. the Annual Fee is deducted even when the Contract Value goes over $50,000 and
a waiver would normally apply.
without rider reflects the expenses you would pay if you did not buy the
optional Enhanced Guaranteed Minimum Death Benefit Rider.
with rider reflects expenses you would pay if you bought the optional Enhanced
Guaranteed Minimum Death Benefit Rider. These expenses depend on the age of the
youngest Annuitant on the Contract Date.
These examples do not show past or future expenses. Your actual expenses in any
year may be more or less than those shown here.
--------------------------------------------------------------------------------
Expenses if you did
not annuitize or
Expenses if you Expenses if you surrender, but left
annuitized surrendered the money in your
your Contract ($) your Contract ($) Contract ($)
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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
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Money Market
without rider 82 60 103 222 82 114 130 222 19 60 103 222
with rider:
age 0-65 83 63 108 233 83 117 135 233 20 63 108 233
with rider:
age 66-75 86 69 119 254 86 123 146 254 23 69 119 254
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High Yield Bond
without rider 85 67 115 247 85 121 142 247 22 67 115 247
with rider:
age 0-65 86 70 120 257 86 124 147 257 23 70 120 257
with rider:
age 66-75 88 76 130 277 88 130 157 277 25 76 130 277
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Managed Bond
without rider 85 67 115 247 85 121 142 247 22 67 115 247
with rider:
age 0-65 86 70 120 257 86 124 147 257 23 70 120 257
with rider:
age 66-75 88 76 130 277 88 130 157 277 25 76 130 277
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Government
Securities
without rider 85 67 115 247 85 121 142 247 22 67 115 247
with rider:
age 0-65 86 70 120 257 86 124 147 257 23 70 120 257
with rider:
age 66-75 88 76 130 277 88 130 157 277 25 76 130 277
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Aggressive Equity
without rider 87 74 127 270 87 128 154 270 24 74 127 270
with rider:
age 0-65 88 77 132 280 88 131 159 280 25 77 132 280
with rider:
age 66-75 90 83 142 300 90 137 169 300 27 83 142 300
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Growth LT
without rider 86 71 122 261 86 125 149 261 23 71 122 261
with rider:
age 0-65 87 74 127 271 87 128 154 271 24 74 127 271
with rider:
age 66-75 89 80 137 291 89 134 164 291 26 80 137 291
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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 ($)
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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
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Equity Income
without rider 85 68 117 251 85 122 144 251 22 68 117 251
with rider: age 0-65 86 71 122 261 86 125 149 261 23 71 122 261
with rider: age 66-75 88 77 132 281 88 131 159 281 25 77 132 281
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Multi-Strategy
without rider 85 69 118 252 85 123 145 252 22 69 118 252
with rider: age 0-65 86 72 123 262 86 126 150 262 23 72 123 262
with rider: age 66-75 88 78 133 282 88 132 160 282 25 78 133 282
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Large-Cap Value
without rider 87 75 128 272 87 129 155 272 24 75 128 272
with rider: age 0-65 88 78 133 282 88 132 160 282 25 78 133 282
with rider: age 66-75 90 84 143 302 90 138 170 302 27 84 143 302
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Mid-Cap Value
without rider 87 75 128 272 87 129 155 272 24 75 128 272
with rider: age 0-65 88 78 133 282 88 132 160 282 25 78 133 282
with rider: age 66-75 90 84 143 302 90 138 170 302 27 84 143 302
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Equity
without rider 85 69 118 252 85 123 145 252 22 69 118 252
with rider: age 0-65 86 72 123 262 86 126 150 262 23 72 123 262
with rider: age 66-75 88 78 133 282 88 132 160 282 25 78 133 282
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Bond and Income
without rider 85 68 117 251 85 122 144 251 22 68 117 251
with rider: age 0-65 86 71 122 261 86 125 149 261 23 71 122 261
with rider: age 66-75 88 77 132 281 88 131 159 281 25 77 132 281
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Equity Index
without rider 80 53 92 199 80 107 119 199 17 53 92 199
with rider: age 0-65 81 56 97 210 81 110 124 210 18 56 97 210
with rider: age 66-75 83 63 107 231 83 117 134 231 20 63 107 231
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Small-Cap Index
without rider 84 64 110 236 84 118 137 236 21 64 110 236
with rider: age 0-65 85 67 115 247 85 121 142 247 22 67 115 247
with rider: age 66-75 87 73 125 267 87 127 152 267 24 73 125 267
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REIT
without rider 90 82 140 297 90 136 167 297 27 82 140 297
with rider: age 0-65 91 85 145 307 91 139 172 307 28 85 145 307
with rider: age 66-75 93 91 155 326 93 145 182 326 30 91 155 326
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International
without rider 88 77 132 281 88 131 159 281 25 77 132 281
with rider: age 0-65 89 80 137 291 89 134 164 291 26 80 137 291
with rider: age 66-75 91 86 147 311 91 140 174 311 28 86 147 311
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Emerging Markets
without rider 93 91 155 326 93 145 182 326 30 91 155 326
with rider: age 0-65 94 94 160 335 94 148 187 335 31 94 160 335
with rider: age 66-75 96 100 170 354 96 154 197 354 33 100 170 354
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YOUR INVESTMENT OPTIONS
You may choose among seventeen different Variable Investment Options, the Fixed
Option, the DCA Plus Fixed Option and among the three Guarantee Terms under the
Guaranteed Interest 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
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, DCA Plus Fixed Option and GIOs
The Fixed Option, the DCA Plus Fixed Option and the GIOs each offer you a
guaranteed minimum interest rate on the amounts you allocate to these Options.
Amounts you allocate to these Options, and your earnings credited are held in
our General Account. The GIOs are available in three-, six-, and ten-year
terms. If you annuitize, transfer or withdraw amounts allocated to a GIO before
its Guarantee Term has expired, these amounts are adjusted by the MVA. For more
detailed information about these Options, see THE GENERAL ACCOUNT section in
this Prospectus.
11
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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
and Contingent Owners, for which a Contract will be issued is 85. 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.
Purchasing the Enhanced Guaranteed Minimum Death Benefit Rider (Optional)
If you purchase the Enhanced Guaranteed Minimum Death Benefit Rider (the
"EGMDBR") (subject to state availability) at the time your application is
completed, we charge an annual Enhanced Death Benefit Charge on each Contract
Anniversary prior to the Annuity Date that the EGMDBR remains in effect. The
Charge will be equal to the pertinent percentage, as described below,
multiplied by the Contract Value on the day the charge is deducted. The Charge
percentage is equal to 0.10% if the youngest Annuitant's age is 65 or younger
on the Contract Date and 0.30% if the youngest Annuitant's age is 66 through 75
on the Contract Date. We deduct this Charge from your Contract Value allocated
to your Investment Options on a pro-rata basis. However, any portion of the
Charge we deduct from the Fixed Option, the DCA Plus Fixed Option, and the GIOs
will not be greater than the interest credited to each of these Options,
respectively, in excess of the annual rate of 3%. If you make a full withdrawal
of your Net Contract Value during a Contract Year, we will deduct the entire
Charge for that Contract Year from the final payment made to you.
The EGMDBR may only be purchased on the Contract Date and will remain in effect
until the earlier of (a) the full withdrawal of the amount available for
withdrawal under the Contract, (b) a death benefit becomes payable under the
Contract, (c) any termination of the Contract in accordance with the provisions
of the Contract, or (d) the Annuity Date. The EGMDBR may not otherwise be
cancelled. The EGMDBR may only be purchased if the age of each Annuitant is 75
or younger on the Contract Date.
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Making Your Purchase Payments
Making Your Initial Payment
Your initial Purchase Payment must be at least $5,000 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 $400 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 must be at least $250 for Non-Qualified Contracts
and $50 for Qualified Contracts.
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.
HOW YOUR PAYMENTS ARE ALLOCATED
Choosing Your Investment Options
You may allocate your Purchase Payments among the seventeen Subaccounts, the
GIOs, the Fixed Option and, if available in your state of issue, if you elect
DCA Plus, the DCA Plus 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--Short-Term
Cancellation Right ("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--Short-Term Cancellation Right ("Free Look")
section. We reserve the right, in the future, to require that your allocation
to any particular Investment Option meet a certain minimum amount. 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 issued. 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 you allocate your investment 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, 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.
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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 Purchase Payments 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 Risk Charge imposed on the Separate Account.
We calculate the value of all Subaccount Units at or about 4:00 p.m., Eastern
time 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. That Value 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.
Your initial Purchase Payment is ordinarily 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 Contract Value less Loan Account Value from any Investment
Option to any other Investment Option, except the DCA Plus Fixed Option.
Certain restrictions apply to the Fixed Option, the DCA Plus Fixed Option and
GIOs. See THE GENERAL ACCOUNT--Withdrawals and Transfers. Transfer requests are
normally effective on the Business Day we receive them in proper form. If your
Contract was issued in a state that requires refund of Purchase Payments under
your Free Look Right, transfers may only be made after your Free Look Transfer
Date. See WITHDRAWALS--Short-Term Cancellation Right ("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 those under the DCA Plus and the portfolio rebalancing
options 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.
We have the right, at our option (unless otherwise required by law), to require
certain minimums in the future in connection with transfers; these may include
a minimum transfer amount and a minimum Account Value, if any, for the
Investment Option from which the transfer is made or to which the transfer is
made. If your transfer request results in your having a remaining Account Value
in an Investment Option that is less than the minimum amount, we may transfer
that remaining amount to your other Investment Options in the proportions
specified in your current allocation instructions. Any such DCA Plus Fixed
Option balance or any amount that would otherwise be allocated to the DCA Plus
Fixed Option will be allocated to the Variable Investment Options according to
your most recent DCA Plus transfer instructions. We also reserve the right
(unless otherwise required by law) to limit the size of transfers, to limit the
number and frequency of transfers, to restrict transfers, and to suspend
transfers. We reserve the right to reject any transfer request.
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Exchanges of Annuity Units in any Subaccount(s) to any other Subaccount(s)
after annuitization 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 four automatic transfer options: DCA Plus, 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.
DCA Plus
DCA Plus provides a way for you to transfer amounts monthly from the DCA Plus
Fixed Option to one or more Variable Investment Option(s) over a period of up
to one year. This allows you to average the Unit Values of the Variable
Investment Option(s) over time, and may permit a "smoothing" of abrupt peaks
and drops in Unit Values.
Prior to the Annuity Date, you may allocate all or a portion of your Purchase
Payment(s) to the DCA Plus Fixed Option. The initial minimum amount that you
may allocate to the DCA Plus Fixed Option is $5,000. You may not transfer any
amounts to the DCA Plus Fixed Option from any other Investment Option. All
Purchase Payments allocated to the DCA Plus Fixed Option will earn interest at
the then current Guaranteed Interest Rate declared by us.
The day that the first Purchase Payment allocation is made to the DCA Plus
Fixed Option will begin a Guaranteed Term of 12 months and a period of 12
monthly transfers. On the same day of each month thereafter, we will transfer
to the Variable Investment Options you selected an amount equal to your DCA
Plus Fixed Option Value on that day divided by the remaining number of monthly
transfers in the Guaranteed Term.
Example: On May 1, you submit a $10,000 Purchase Payment entirely to the DCA
Plus Fixed Option at a then current Guaranteed Interest Rate of 5.00%. On
June 1, the value of the DCA Plus Fixed Option is $10,040.75. On June 1, a
transfer equal to $836.73 ($10,040.75/12) will be made according to your DCA
Plus transfer instructions. Your remaining DCA Plus Fixed Option Value after
the transfer is therefore $9,204.02.
On July 1, your DCA Plus Fixed Option Value has now increased to $9,241.52.
We will transfer $840.14 ($9,241.52/11) to the Variable Investment Options,
leaving a remaining value of $8,401.38 in the DCA Plus Fixed Option.
During the Guarantee Term, you may allocate all or a part of additional
Purchase Payments to the DCA Plus Fixed Option, provided such allocations are
at least $250. Each such allocation will be transferred to the Variable
Investment Options you selected over the remaining Guarantee Term. Transfers
will be made proportionately from the DCA Plus Fixed Option Value attributed to
each Purchase Payment allocation.
Example: (Using the previous example): On July 15, you allocate an
additional $5,000 to the DCA Plus Option at a Guaranteed Interest Rate of
4.00%. On August 1, your DCA Plus Fixed Option Value has increased to
$13,443.79. An amount equal to $1,344.38 ($13,443.79/10) is transferred from
the DCA Plus Fixed Option to the Variable Investment Options. The remaining
DCA Plus Fixed Option Value is $12,099.41.
The minimum amount for the DCA Plus monthly transfer is $250. If a monthly DCA
Plus transfer amount is less than $250, we may transfer your entire DCA Plus
Fixed Option Value to the Variable Investment Options according to your most
recent DCA Plus transfer instructions and automatically terminate your DCA
Plus. DCA Plus transfers must be made on a monthly basis to the Variable
Investment Options; you may not choose to transfer other than monthly nor may
you transfer to either the Fixed Option or any of the GIOs under DCA Plus.
Unless otherwise instructed, any additional Purchase Payment we receive during
a Guarantee Term will be allocated to the Investment Options, including the DCA
Plus Fixed Option if so indicated, according to your most recent Purchase
Payment allocation instructions. If we receive any additional Purchase Payments
after
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your DCA Plus ends and you have not changed your Purchase Payment allocation
instructions, the portion of additional Purchase Payments that you had
instructed us to allocate to the DCA Plus Fixed Option under DCA Plus will be
allocated to the Variable Investment Options in the same proportion you had
elected under DCA Plus.
When your DCA Plus program ends you may request, in a form satisfactory to us,
to establish a new DCA Plus program subject to our minimum allocation
requirements.
Your DCA Plus program automatically ends at the end of your DCA Plus Guarantee
Term. If we do not receive completed DCA Plus transfer instructions in proper
order by the time your first DCA Plus transfer is due, your DCA Plus will be
automatically terminated at the time and your DCA Plus Fixed Account Value will
be transferred to the Fixed Option at the Fixed Option's then current
Guaranteed Interest Rate, unless you provide us with other transfer
instructions. You may request, in a form satisfactory to us, termination of
your DCA Plus program at any time. Upon our receipt of such request, or when
death benefit proceeds become payable, any remaining balance in your DCA Plus
Fixed Option will be transferred to the Fixed Option at the Fixed Option's then
current Guaranteed Interest Rate, unless you instruct us to transfer such
amounts to other Investment Options. On your Annuity Date any net amount
converted to an annuity from your DCA Plus Fixed Option will be applied to a
fixed annuity and will be held in our General Account, unless you instruct us
otherwise.
You may have only one DCA Plus program in effect at any given time. DCA Plus
may not be used concurrently with our dollar cost averaging program. Further,
the DCA Plus Fixed Option is not available for use with any of our other
systematic transfer programs; i.e., dollar cost averaging, portfolio
rebalancing or earnings sweep.
We reserve the right to change the terms and conditions of DCA Plus, but not a
DCA Plus program you already have in effect.
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 Variable Investment Option
with an Account Value of at least $5,000 to one or more other Variable
Investment Options. Each transfer must be for at least $250. The Fixed Option,
DCA Plus Fixed Option and GIOs are not available for dollar cost averaging.
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, DCA Plus Fixed Option
and GIOs are 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.
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, 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) amounts annuitized after the first Contract Year, (ii)
payments of death benefits,
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(iii) withdrawals by Contract 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
We will not impose a withdrawal charge on withdrawals of your Earnings, or on
withdrawals of amounts held under your Contract for at least six Contract
Years. In addition, during each Contract Year we will not impose a withdrawal
charge on your withdrawal of up to 10% of your remaining Purchase Payments at
the beginning of the Contract Year that would otherwise be subject to the
withdrawal charge plus up to 10% of any additional Purchase Payments received
during the Contract Year. Our calculations of the withdrawal charge deduct this
"free 10%" from your "oldest" Purchase Payment that is still otherwise subject
to the charge.
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, your Contract Value in Contract Year 3 is $19,000. In
Contract Year 3, you may withdraw $3,700 free of the withdrawal charges
(your total Purchase Payments were $17,000, so 10% of that total equals
$1,700, plus you had $2,000 of Earnings). After this withdrawal, your
Contract Value is $15,300 (all attributable to Purchase Payments). In
Contract Year 4, your Contract Value falls to $12,500; you may withdraw
$1,530 (10% of $15,300) free of any withdrawal charges.
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 payment was
effective. A payment is "one year old" or has an "age of 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.
When you withdraw an amount subject to the withdrawal charge, the "age" of the
Purchase Payment you withdraw determines the level of withdrawal charge as
follows:
<TABLE>
<CAPTION>
"Age" of Payment Withdrawal
in Years Charge
---------------- ----------
<S> <C>
1............................................ 7%
2............................................ 7%
3............................................ 6%
4............................................ 5%
5............................................ 3%
6............................................ 1%
7 or more.................................... 0%
</TABLE>
We calculate your withdrawal charge by assuming that your Earnings are
withdrawn first, followed by amounts attributed to Purchase Payments with the
"oldest" Payment withdrawn first. The withdrawal charge will be deducted
proportionally among all Investment Options from which the withdrawal occurs.
Any applicable Annual Fee will be deducted after the withdrawal charge is
calculated. In addition, amounts you withdraw from your GIO(s) will be subject
to the MVA. See THE GENERAL ACCOUNT--Withdrawals and Transfers.
We pay sales commissions and other expenses associated with 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 6.75% 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
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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.
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. However, amounts transferred from a GIO before its
Guarantee Term has expired are subject to the MVA. See THE GENERAL ACCOUNT--
Withdrawals and Transfers and GIOs.
Premium Taxes
Depending on (among other factors) your state of residence, 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 annuitization 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. For these purposes, "premium taxes"
include any state or local premium 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 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.
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.
Annual Fee
We will charge you an Annual Fee of $40 on each Contract Anniversary prior to
the Annuity Date, and at the time you withdraw your entire Net Contract Value,
if your Net Contract Value is less than $50,000 on that date. The fee is not
imposed on amounts you annuitize or on payment of death benefit proceeds. The
fee reimburses certain of our costs in administering the Contracts and the
Separate Account; we do not intend to realize a profit from this fee or the
Administrative Fee. This fee is guaranteed not to increase for the life of your
Contract.
Your Annual Fee will be charged proportionately against your Investment
Options. Assessments against your Variable Investment Options are made by
debiting some of the Subaccount Units previously credited to your Contract;
that is, assessment of the Annual Fee does not change the Unit Value for those
Subaccounts.
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Waivers and Reduced Charges
We may agree to reduce or waive the withdrawal charge or the Annual Fee, 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 Contract Owner(s), sales of large
Contracts, sales of Contracts in connection with a group or sponsored
arrangement or mass transactions over multiple Contracts.
In addition, we may agree to reduce or waive some or all of such charges and/or
credit additional amounts under our Contracts, for those Contracts sold to
persons who meet criteria established by us, who may include current and
retired officers, directors and employees of us and our affiliates, trustees of
the Pacific Select Fund, registered representatives and employees of
broker/dealers with a current selling agreement with us and their affiliates,
employees of affiliated asset management firms and certain other service
providers, and immediate family members of such persons ("Eligible Persons").
We will credit additional amounts to Contracts owned by Eligible Persons if
such Contracts are purchased directly through Pacific Mutual Distributors, Inc.
Under such circumstances, Eligible Persons will not be afforded the benefit of
services of any other broker/dealer nor will commissions be payable to any
broker/dealer in connection with such purchases. Eligible Persons must contact
us directly with servicing questions, Contract changes and other matters
relating to their Contracts. The amount credited to Contracts owned by Eligible
Persons will equal the reduction in expenses we enjoy by not incurring
brokerage commissions in selling such Contracts, with the determination of the
expense reduction and of such crediting being made in accordance with our
administrative procedures. These credits will be added to an Eligible Person's
Contract when we apply the Purchase Payments. We may also agree to waive
minimum Purchase Payment requirements for Eligible Persons.
We will only reduce or waive withdrawal or other charges, reduce or waive
minimums, or credit additional amounts on any Contract where expenses
associated with the sale or distribution of the Contract and/or costs
associated with administering and maintaining the Contract are reduced. We
reserve the right to terminate waiver, reduced charge and crediting programs at
any time, including for issued Contracts.
If you are an Eligible Person, you will not keep any amounts credited if you
return your Contract during the Free Look Period as described under
WITHDRAWALS--Short-Term Cancellation Right ("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 of 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 annuitization if you select a fixed annuity; the
Risk Charge will continue after annuitization 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.
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.
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The Administrative Fee is assessed daily at an annual rate of 0.15% 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 annuitization if you choose any variable
annuity.
Annual Enhanced Guaranteed Minimum Death Benefit Rider Charge (Optional Rider)
If you purchase the Enhanced Guaranteed Minimum Death Benefit Rider, we charge
an annual Enhanced Death Benefit Charge which is described under PURCHASING
YOUR CONTRACT--Purchasing the Enhanced Guaranteed Minimum Death Benefit Rider
(Optional).
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 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 at the time of annuitization.
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 86th birthday. We reserve the right to require proof of age or
survival of the Annuitant(s).
Annuitization
You may choose both your Annuity Date (or "Annuity Start 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 MVAs, and 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,
any applicable withdrawal charge, any applicable MVA, any Annual Fee and any
Enhanced Death Benefit 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.
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You may change your Annuity Date by notifying us, in proper form, at least ten
Business Days prior to the earlier of your old Annuity Date or your new Annuity
Date.
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; if you have Joint
Annuitants and a Qualified Contract, your Annuity Date cannot be later than
your own 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.
For retirement plans that qualify under Section 401 or 408 of the Code, the
period elected for receipt of annuity payments under Annuity Options 1 and 4
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 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
Options 2 and 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 above 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 applicable MVA, and/or
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,
DCA Plus Fixed Option Value and GIO Value 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 ten year Period Certain. If you
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have a Qualified Contract and you are married, your default Annuity Option will
be Joint and Survivor Life with survivor payments of 50% and your spouse will
automatically be named your Joint Annuitant.
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 annuitization.
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, DCA Plus Fixed Option or GIOs).
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.
. Life Only. Periodic payments are made to the designated payee during the
lifetime of the Annuitant (even if the Owner dies). Payments stop when the
Annuitant dies.
. Life with Period Certain. Periodic payments are made to the designated
payee during the lifetime of the Annuitant (even if the Owner dies), with
payments guaranteed for a specified period. You may choose to have
payments guaranteed for anywhere from 5 through 30 years (in full years
only). If the designated payee dies before the guaranteed payments are
completed, the Beneficiary receives the remainder of the guaranteed
payments, if living; otherwise the Owner, if living; otherwise the Owner's
estate.
. Joint and Survivor Life. Periodic payments are made to the Primary
Annuitant during the lifetime of the Primary Annuitant. After the death of
the Primary Annuitant, periodic payments are made to 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 payments made during the
lifetime of the Primary Annuitant (you must make this election when you
choose your Annuity Option). Periodic payment amounts made during the life
of the Primary Annuitant depend upon the percentage election made with
respect to payments during the life of the secondary Annuitant. Payments
stop when both Annuitants have died.
. 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 5 through 30 years (in full years only). If the designated
payee dies before the guaranteed payments are completed, the Beneficiary
receives the remainder of the guaranteed payments, if living; otherwise
the Owner, if living; otherwise the Owner's estate.
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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.
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
table. 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
A death benefit 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 will be paid according to the Death Benefit Proceeds
section.
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
The proceeds of any death benefit payable 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 charge for premium taxes and/or other taxes and any Contract Debt. The
death benefit proceeds
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will be payable in a single sum, as an annuity, or in accordance with IRS
regulations (see Death of Owner Distribution Rules). Any such annuity 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 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 a Contract 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 Contract Owner to die.
If the Contract 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 Contract Owner was an Annuitant, the designated recipient is the
Beneficiary; if no Beneficiary is living, the designated recipient is the
Owner's estate. A sole designated recipient who is the Contract Owner's spouse
may elect to become the Contract Owner (and sole Annuitant if the deceased
Contract 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
Contract 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 Annual Fee, any Enhanced Death
Benefit Charge, and 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.
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, 408A, or 457 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 calendar year in which the fifth anniversary of the
Annuitant's death falls. In order to satisfy this requirement, the designated
recipient must receive a lump sum payment or elect to receive the Annuitant's
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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; however, if the designated
recipient is the surviving spouse 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
as the sole Annuitant and will not be entitled to death benefit proceeds as a
result of the death of the Annuitant; instead the Guaranteed Minimum Death
Benefit Amount (defined below) and payment of any death benefit proceeds will
be determined upon our receipt of proof of death and instructions regarding
payment of the surviving spouse as sole Annuitant. 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 any applicable charges, and/or MVAs and further
reduced by an amount for each withdrawal that is calculated by multiplying the
aggregate Purchase Payments received prior to each withdrawal by the ratio of
the amount of each withdrawal, including applicable withdrawal charges, to the
Contract Value immediately prior to each withdrawal. We calculate the Death
Benefit Amount as of the Notice 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 your sixth Contract
Anniversary and each Subsequent Contract Anniversary that occurs while the
Annuitant is living and before the Annuitant reaches his or her 76th birthday
(each of these Contract Anniversaries is a "Milestone Date"). Subject to
approval of insurance authorities in your state of issue, if your Contract is
issued before the Annuitant's 75th birthday, we will calculate what the Death
Benefit Amount would have been as of the Contract Anniversary immediately
following the Annuitant's 75th birthday while the Annuitant is living (also a
Milestone Date) even if such Milestone Date occurs before your sixth Contract
Anniversary. This added feature will benefit Contracts where the Annuitant is
from age 69 through 74 at the time the Contract is issued.
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 the
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
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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 for each Milestone Date, as
of the Notice Date, is your Guaranteed Minimum Death Benefit Amount.
Calculations of any Guaranteed Minimum Death Benefit are only made once death
benefit proceeds become payable under your Contract.
Optional Enhanced Guaranteed Minimum Death Benefit Rider
If at the time your application is completed, you purchase the Enhanced
Guaranteed Minimum Death Benefit Rider (the "EGMDBR") (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 and MVAs, increased
at an effective annual rate of 6% (and subject to a maximum of two times the
aggregate Purchase Payments less any withdrawals, including withdrawal charges
and MVAs). 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 1.000159654 to each day's balance. The 6% effective annual rate
of growth will stop accruing as of the earlier of: (i) the Contract Anniversary
following the date the Annuitant reaches his or her 80th 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 and MVA, 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 EGMDBR 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 (a) the Death Benefit Amount as of the Notice Date; or if applicable
(b) the "Guaranteed Minimum Death Benefit Amount" as of the Notice Date, if
greater.
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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 is not
yet payable. If there is no surviving Joint or Contingent Annuitant, the death
benefit is payable to your Beneficiary, if living. To avoid the possibility of
an adverse gift tax situation upon the death of a sole Annuitant with no living
Beneficiary, the death benefit will be paid to the Owner or 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.
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 above. 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 equal to the greater of (a) your Death
Benefit Amount as of the Notice Date, or (b) the "Guaranteed Minimum Death
Benefit Amount" as of the Notice Date, and will be paid in accordance with the
Death Benefit Proceeds section above. 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 annual fee, withdrawal fee, withdrawal charge, charge
for premium taxes and/or other taxes, and MVAs.
WITHDRAWALS
Optional Withdrawals
You may, on or prior to your Annuity Date, withdraw all or a portion of the
amount available under your Contract. 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 any minimum Account Value
we may require in the future, 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. Any such DCA Plus Fixed
Option balance or any amount that would otherwise be allocated to the DCA Plus
Fixed Option will be allocated to the Variable Investment Options according to
your most recent DCA Plus transfer 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. Partial
withdrawals from the Fixed Option in any Contract Year are subject to
restrictions. See GENERAL ACCOUNT--Withdrawals and Transfers.
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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 Annual Fee, any Enhanced Death Benefit Charge, any withdrawal
charge, any withdrawal transaction fee, and any charge for premium taxes and/or
other taxes, and after application of the MVA, if appropriate. 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.
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 10% penalty tax if you have not reached age 59 1/2. The GIOs are
not available for pre-authorized withdrawals. 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 10% penalty tax 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
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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.
Short-Term Cancellation Right ("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 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. Thus, an Owner who returns a Contract within the Free Look Period
bears only the investment risk on amounts attributable to Purchase Payments. If
you are an Eligible Person and we credit additional amounts to your Contract as
described in CHARGES, FEES, AND DEDUCTIONS--Waivers and Reduced Charges, if you
return your Contract during the Free Look Period you will not receive 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).
You will receive any Contract fees and charges that we deducted from the
credited amounts. 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.
Some states' laws require us to refund your Purchase Payments instead of your
Contract Value. If your Contract is issued 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 issue 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 investment 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
29
<PAGE>
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 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 Investment Company Act of
1940 (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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<PAGE>
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.
<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.
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<PAGE>
FEDERAL TAX STATUS
The following summary of federal income tax consequences is based on current
tax laws and regulations, which may be changed by legislative, judicial or
administrative action. The summary is general in nature, and 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, 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.
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<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 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).
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.
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<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:
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 us. Similar limitations and tax penalties
apply to tax sheltered annuities, government plans, 401(k) plans, and pension
and profit-sharing plans.
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<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. 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,
a new type of IRA which became available in 1998. Contributions to a Roth IRA
are not deductible, but withdrawals 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 "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 Qualified Contract Owners 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.
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<PAGE>
Interest paid on your loan under a 401 plan or 403(b) tax-sheltered annuity
will be considered "personal interest" under Section 163(h) of the Code, to the
extent the loan comes from 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, in accordance with the Loan
Agreement. Your GIO Value is not available to secure your loan.
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;
. 100% of your Contract Value excluding your GIO Value; or
. $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 determination (including loan amounts
permitted) or any interpretations with respect to your Qualification Plan.
You will be charged interest on your Contract Debt at an annual rate, set at
the time of the loan withdrawal, 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. Any
amounts that would otherwise be transferred to the DCA Plus Fixed Option will
be transferred to the Variable Investment Options according to your most recent
DCA Plus transfer instructions.
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<PAGE>
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.
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. Normally, 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.
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 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.
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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 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, 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 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.
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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.
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 86 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 a person(s) who may receive death benefits under your
Contract. You may change or remove your Beneficiary or add Beneficiaries at any
time prior to the death of the Annuitant or Owner, as
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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.
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 replace 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 as 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.
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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.
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 normally 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 normally be effective on that day, and we will send you
written confirmation of each telephone transfer.
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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 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 abnormal 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, DCA Plus Fixed
Option or GIOs, (ii) death benefit payments attributable to Fixed Option Value,
DCA Plus Fixed Option Value or GIO 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, the DCA Plus Fixed Option and the
GIOs. 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, GIO
renewals, 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, DCA Plus Fixed Option
or GIO, 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.
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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 Statement of
Additional Information from the Annual Report of Separate Account A 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 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.
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THE GENERAL ACCOUNT
General Information
All amounts allocated to the Fixed Option, DCA Plus Fixed Option and GIOs
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
and the General Account has not been registered as an investment company under
the 1940 Act. Any interest you have in the Fixed Option, DCA Plus Fixed Option
or GIOs 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 or GIOs. This disclosure may, however, be subject to certain provisions
of federal securities laws relating to the accuracy and completeness of
statements made in prospectuses.
You may choose among the following General Account options: the Fixed Option
and Guaranteed Interest Options with three available Guarantee Terms: three-
year, six-year and ten-year. Each is described below.
Guarantee Terms
When you allocate any portion of your Purchase Payments or Contract Value to
the Fixed Option, the DCA Plus Fixed Option or one or more GIOs in the General
Account, we guarantee you an interest rate (a "Guaranteed Interest Rate") for a
specified period of time (a "Guarantee Term") of up to ten years. The Fixed
Option, DCA Plus Fixed Option and each GIO offers a separate Guaranteed
Interest Rate and Guarantee Term. Guarantee Terms will be offered at our
discretion. Presently, we offer Guarantee Terms of up to one year for the Fixed
Option, one year for the DCA Plus Fixed Option and three-, six- and ten-years
for the GIOs. You should specify the Fixed Option, DCA Plus Fixed Option and/or
GIO(s) into which you want us to allocate your Purchase Payments or Contract
Value, if any. Each allocation to a GIO must be at least $500.
Guaranteed Interest Rates for each Fixed Option, DCA Plus Fixed Option and GIO
may be changed periodically for new allocations; your allocation will receive
the Guaranteed Interest Rate in effect for that Fixed Option, DCA Plus Fixed
Option or GIO 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, DCA Plus Fixed
Option and/or GIO will remain in effect for the Guarantee Term and will never
be less than an annual rate of 3%.
DCA Plus Fixed Option
Availability of the DCA Plus Fixed Option (and therefore also DCA Plus) is
subject to approval of state insurance authorities. Ask your registered
representative about its status in your state of issue.
When you establish a DCA Plus and you make your initial Purchase Payment
allocation to the DCA Plus Fixed Option, we establish a Guarantee Term that
ends one year from the day your allocation is effective. We credit each
allocation made to the DCA Plus Fixed Option during that Guarantee Term at the
Guaranteed Interest Rate in effect on the day each allocation is effective
through the earliest of:
(i) the end of the Guarantee Term;
(ii) the day on which the DCA Plus Fixed Option Value is zero;
(iii) the Annuity Date; or
(iv) the day on which death benefit proceeds become payable.
We stop crediting interest on any amount transferred or withdrawn from the DCA
Plus Fixed Option as of the day the transfer or withdrawal is effective.
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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.
Guaranteed Interest Options
Each allocation (or rollover) you make to a GIO receives a Guarantee Term that
begins on the day that allocation or rollover is effective and ends at the end
of the Guarantee Term. For each GIO, at the end of its Guarantee Term, we will
roll over that portion of your Account Value on that day into a new GIO with a
Guarantee Term of the same length and at the then current Guaranteed Interest
Rate corresponding to that Guarantee Term, unless, within thirty days after the
end of the Guarantee Term you instruct us otherwise (see End of GIO Guarantee
Term below). However, if the last day of this new Guarantee Term would occur
after the Annuity Date, we will roll over that portion of your Account Value
into the longest Guarantee Term, if any, that ends prior to the Annuity Date,
with the corresponding new Guaranteed Interest Rate then in effect. If there is
no Guarantee Term that ends before the Annuity Date, we will allocate that
portion of your Account Value to the Fixed Option at the corresponding
Guaranteed Interest Rate then in effect for new allocations.
Example: On January 1 of year 1, you allocate $1,000 to a GIO with a
Guarantee Term of three years and a Guaranteed Interest Rate of 7%. On
August 1, you allocate another $500 to another GIO with a Guarantee Term of
three years and a Guaranteed Interest Rate of 7.5%. On November 1, you
allocate $2,000 to a third GIO with a ten-year Guarantee Term at a
Guaranteed Interest Rate of 9%. Through December 31, year 3, your first
allocation of $1,000 earns 7% interest, and on January 1, year 4, a new
interest rate will go into effect for this portion of your GIO Value.
Through July 31, year 4, your second allocation of $500 earns 7.5% interest,
and on August 1, year 4, a new interest rate will go into effect for this
portion of your GIO Value. Finally, through October 31, year 11, your third
allocation of $2,000 earns 9% interest, and on November 1, year 11, a new
interest rate will go into effect on this portion of your GIO Value.
End of GIO Guarantee Term
You have thirty days after the last day of the Guarantee Term of a GIO to
inform us whether you want to (i) renew that particular Account Value in a
different Guarantee Term at its corresponding Guaranteed Interest Rate in
effect for new allocations, (ii) transfer all or part of that Account Value to
another Investment Option, and/or (iii) withdraw all or part of that Account
Value. Any subsequent change to such instructions will be subject to the
provisions of the CHARGES, FEES AND DEDUCTIONS section.
If you instruct us to allocate that portion of your Account Value that was
rolled over in the new GIO to a GIO with a different Guarantee Term, we will
consider that allocation to be made as of the end of the previous Guarantee
Term and will credit interest accordingly. If you instruct us to transfer to a
Variable Investment Option or the Fixed Option or to withdraw that portion of
your Account Value in the new GIO, we will effect such transfer or withdrawal
as of the day we receive your request; interest will be credited at the
Guaranteed Interest Rate for the time the Account Value was allocated to that
GIO. Any amounts that you transfer or withdraw before the last day of the
Guarantee Term or after this thirty-day period will be subject to the MVA, and
any transfer fee. All withdrawals made before, during or after this thirty-day
period will be subject to any applicable withdrawal charge, withdrawal fee and
any charges for premium taxes and/or other taxes.
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<PAGE>
Withdrawals and Transfers
Prior to the Annuity Date, you may withdraw amounts from your Fixed Option, DCA
Plus Fixed Option and/or one or more GIOs, or transfer amounts from your Fixed
Option, DCA Plus Fixed Option and/or GIOs to one or more of the other
Investment Options, except that you may not transfer amounts to the DCA Plus
Fixed Option. The withdrawal or transfer will access each GIO Term Value
proportionately (or you may specify a particular GIO Term Value). Amounts from
the oldest GIO within a GIO Term Value will be withdrawn or transferred first.
Transfer requests to a GIO will be applied as an allocation to a new GIO. If
your Contract was issued 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 (other than a
monthly transfer under DCA Plus) may be made from your Fixed Option, DCA Plus
Fixed Option or GIOs 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, DCA Plus Fixed Option or a GIO 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, DCA Plus Fixed Option or that GIO, 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. Any amount that
would otherwise be allocated to the DCA Plus Fixed Option will be allocated to
the Variable Investment Options according to your most recent DCA Plus transfer
instructions.
DCA Plus Fixed Option
No transfer to the DCA Plus Fixed Option may be made at any time.
GIOs
You may make unlimited transfers or withdrawals from your GIOs during any
Contract Year, however we reserve the right to impose a transaction fee of up
to $15 per transfer for transfers in excess of 15 in any Contract Year, as
described under HOW YOUR PAYMENTS ARE ALLOCATED--Transfers.
You may not request an allocation or transfer into or renewal of a GIO that has
a Guarantee Term that ends after the Annuity Date. If you do not specify a
particular GIO Term Value(s), the amount of any transfer or withdrawal will be
deducted proportionately from your GIO Term Values, beginning with the oldest
GIO within each GIO Term Value. In addition, if as the result of a partial
withdrawal or transfer, your Account Value in that GIO is less than $500, we
have the right, at our option, to transfer the remaining amount to your other
Investment Options on a proportionate basis relative to your most recent
allocation instructions. A GIO cannot participate in any systematic transfer
program. In addition, your GIO Value cannot be transferred to the Loan Account
to secure any loan made under the Contract.
46
<PAGE>
An MVA is applied to the Account Value of a GIO in order to determine the net
amount of the transfer or withdrawal prior to the deduction of any applicable
charges or fees. Unless you request a net amount, the amount actually
transferred or sent to you equals the amount requested, less any MVA, less any
applicable withdrawal charge (based upon the amount requested before the
application of the MVA), and less any charges for Annual Fees, transactions,
premium taxes and/or other taxes, including any taxes required for withholding.
The MVA is not applied to (i) amounts used to pay charges for the Annual Fee,
transfer fees, and/or premium taxes and/or other taxes, (ii) the amount of
death benefit proceeds, and (iii) subject to medical evidence satisfactory to
us, full or partial withdrawals, after the first Contract Anniversary if the
Annuitant has been diagnosed with a medically determinable condition that
results in a life expectancy of twelve (12) months or less.
The formula for calculating the MVA is set forth in Appendix B to this
Prospectus, which also contains illustrations of the application of the MVA.
47
<PAGE>
<TABLE>
<CAPTION>
TERMS USED IN THIS PROSPECTUS
<S> <C>
Some of the terms we've used in this Prospectus may be new Contract Debt - As of the end of any given Business Day,
to you. We've identified them in the Prospectus by the principal amount you have outstanding on any loan
capitalizing the first letter of each word. You'll find under your Contract, plus any accrued and unpaid interest.
an explanation of what they mean below. Loans are only available on certain Qualified Contracts.
If you have any questions, please ask your registered Contract Owner, Owner, Policyholder, you, or your -
representative or call us at 1-800-722-2333. Generally, a person who purchases a contract and makes
the Purchase Payments. A Contract Owner has all
Account Value - The amount of your Contract Value rights in the Contract, including the right to make
allocated to a specified Variable Investment Option, withdrawals, designate and change beneficiaries, transfer
the Fixed Option or to a GIO. amounts among Investment Options, and designate an
Annuity Option. If your Contract names Joint Owners, both
Annual Fee - A $40 fee charged each year on your Contract Joint Owners are Contract Owners and share such rights.
Anniversary and at the time of a full withdrawal, if your
Net Contract Value is less than $50,000 on that date. Contract Value - As of the end of any Business Day, the
sum of your Variable Account Value, Fixed Option Value,
Annuitant - A person on whose life annuity payments may DCA Plus Fixed Option Value, GIO Value and
be determined. An Annuitant's life may also be used to the Loan Account Value.
determine certain increases in death benefits, and to
determine the Annuity Date. A Contract may name a single Contract Year - A year that starts on the Contract
("sole") Annuitant or two ("Joint") Annuitants, and may also Date or on a Contract Anniversary.
name a "Contingent" Annuitant. If you name Joint Annuitants
or a Contingent Annuitant, "the Annuitant" means the sole DCA Plus Fixed Option - If you allocate all or part
surviving Annuitant, unless otherwise stated. of your Purchase Payments to the DCA Plus Fixed Option,
such amounts are held in our General Account and
Annuity Date ("Annuity Start Date") - The date specified receive interest at rates declared periodically
in your Contract, or the date you later elect, if any, for (the "Guaranteed Interest Rate"), but not less
the start of annuity payments if the Annuitant (or Joint than an annual rate of 3%.
Annuitants) is (or are) still living and your Contract is
in force; or if earlier, the date that annuity payments DCA Plus Fixed Option Value - The aggregate of your
actually begin. Contract Value allocated to the DCA Plus Fixed Option.
Annuity Option - Any one of the income options available Earnings - As of the end of any Business Day, your
for a series of payments after your Annuity Date. Earnings equal your Contract Value less your aggregate
Purchase Payments, which are reduced by withdrawals of
Beneficiary - A person who may have a right to receive prior Purchase Payments.
the death benefit payable upon the death of the Annuitant
or a Contract Owner prior to the Annuity Date, or has a Fixed Option - If you allocate all or part of your
right to receive remaining guaranteed annuity payments, Purchase Payments or Contract Value to the Fixed
if any, if the Annuitant dies after the Annuity Date. Option, such amounts are held in our General
Account and receive the Guaranteed Interest Rate declared
Business Day - Any day on which the value of an amount periodically, but not less than an annual rate of 3%.
invested in a Variable Investment Option is required to
be determined, which currently includes each day that the Fixed Option Value - The aggregate amount of your
New York Stock Exchange is open for trading and our Contract Value allocated to the Fixed Option.
Annuities administrative offices are open. The New York
Stock Exchange and our Annuities administrative offices Fund - Pacific Select Fund.
are closed on weekends and on the following holidays:
New Year's Day, Martin Luther King, Jr. Day, President's General Account - Our General Account consists of all
Day, Good Friday, Memorial Day, July Fourth, Labor Day, of our assets other than those assets allocated to
Thanksgiving Day and Christmas Day. In this Prospectus, Separate Account A or to any of our other separate
"day" or "date" means Business Day unless otherwise accounts.
specified. If any transaction or event called for under
a Contract is scheduled to occur on a day that is GIO Term Value - The aggregate amount under your
not a Business Day, such transaction or event will Contract allocated to all GIOs that have the same
be deemed to occur on the next following Business length Guarantee Term. The GIO Term Value is based
Day unless otherwise specified. Special circumstances on the original Guarantee Term, not the time remaining
such as leap years and months with fewer than 31 days in the Guarantee Term. The GIO Term Value is used in
are discussed in the SAI. determining which GIOs will be accessed when you make a
withdrawal or transfer.
Code - The Internal Revenue Code of 1986, as amended.
GIO Value - The aggregate amount of your Contract Value
Contingent Annuitant - A person, named in your Contract, allocated to all GIOs.
who will become your sole surviving Annuitant if your
existing sole Annuitant (or both Joint Annuitants) Guarantee Term - The period during which an amount you
should die. allocate to the Fixed Option or to a GIO earns a
Guaranteed Interest Rate. These terms are up to one-year
Contingent Owner - A person, named in your Contract, for the Fixed Option, one-year for the DCA Plus Fixed
who will succeed to the rights as a Contract Owner Option and three-, six- and ten-years for the GIOs.
of your Contract if all named Contract Owners die
before your Annuity Date. Guaranteed Interest Option ("GIO") - If you allocate
all or part of your Purchase Payments or Contract Value
Contract Anniversary - The same date, in each subsequent to one or more GIOs, such amounts are subject to a
year, as your Contract Date. particular Guaranteed Interest Rate for the Guarantee
Term selected. GIO amounts are held in our General
Contract Date - The date we issue your Contract. Account and are subject to a Market Value Adjustment
if annuitized, withdrawn or transferred prior to the
end of the Guarantee Term. Each new allocation will
receive the Guaranteed Interest Rate then applicable
to new allocations for the selected Guarantee Term.
</TABLE>
48
<PAGE>
<TABLE>
<S> <C>
Guaranteed Interest Rate - The interest rate guaranteed SEC - Securities and Exchange Commission.
at the time of allocation (or rollover) for the
Guarantee Term on amounts allocated to the Fixed Option, Separate Account A (the "Separate Account") - A separate
DCA Plus Fixed Option, or Guaranteed Interest Option. account of ours registered as a unit investment trust
All Guaranteed Interest Rates are expressed as annual under the Investment Company Act of 1940, as amended (the
rates and interest is accrued daily. The rate will not be "1940 Act").
less than an annual rate of 3%.
Subaccount - An investment division of the Separate
Investment Option - A Subaccount, the Fixed Option, the Account. Each Subaccount invests its assets in shares
DCA Plus Fixed Option or a GIO offered under the of a corresponding Portfolio.
Contract.
Subaccount Annuity Unit - Subaccount Annuity Units
Joint Annuitant - If your Contract is a Non-Qualified (or "Annuity Units") are used to measure variation
Contract, you may name two Annuitants, called "Joint in variable annuity payments. To the extent you elect
Annuitants," in your application for your Contract. to convert all or some of your Contract Value into
Special restrictions apply for Qualified Contracts. variable annuity payments, the amount of each annuity
payment (after the first payment) will vary with the
Loan Account - The account in which the amount equal to the value and number of Annuity Units in each Subaccount
principal amount of a loan and any interest accrued is attributed to any variable annuity payments. At
held to secure any Contract Debt. annuitization (after any applicable premium taxes
and/or other taxes are paid), the amount annuitized
Loan Account Value - The amount, including any interest to a variable annuity determines the amount of your
accrued, held in the Loan Account to secure Contract Debt. first variable annuity payment and the number of
Annuity Units credited to your annuity in each
Market Value Adjustment ("MVA") - The adjustment made Subaccount. The value of Subaccount Annuity Units,
to any amount annuitized, transferred or withdrawn from like the value of Subaccount Units, is expected
a GIO prior to the end of its Guarantee Term. This to fluctuate daily, as described in the definition
adjustment reflects the impact of changes in applicable of Unit Value.
interest rates between the time the Purchase Payment(s)
and/or Contract Value is allocated to a specific GIO Subaccount Unit - Before your Annuity Date, each
and the time of the annuitization, withdrawal or transfer. time you allocate an amount to a Subaccount, your
Contract is credited with a number of Subaccount
Net Contract Value - Your Contract Value less Units in that Subaccount. These Units are used
Contract Debt. for accounting purposes to measure your Account
Value in that Subaccount. The value of Subaccount
Non-Qualified Contract - A Contract other than a Units is expected to fluctuate daily, as described
Qualified Contract. in the definition of Unit Value.
Policyholder - The Contract Owner. Unit Value - The value of a Subaccount Unit
("Subaccount Unit Value") or Subaccount Annuity
Portfolio - A separate portfolio of the Fund in which a Unit ("Subaccount Annuity Unit Value"). Unit Value
Subaccount invests its assets. of any Subaccount is subject to change on any Business
Day in much the same way that the value of a mutual
Primary Annuitant - The individual that is named in fund share changes each day. The fluctuations in value
your Contract, the events in the life of whom are of reflect the investment results, expenses of and charges
primary importance in affecting the timing or amount against the Portfolio in which the Subaccount invests its
of the payout under the Contract. assets. Fluctuations also reflect charges against the
Separate Account. Changes in Subaccount Annuity Unit
Purchase Payment ("Premium Payment") - An amount paid to Values also reflect an additional factor that adjusts
us by or on behalf of a Contract Owner, as consideration Subaccount Annuity Unit Values to offset our Annuity
for the benefits provided under the Contract. Option Table's implicit assumption of an annual
investment return of 5%. The effect of this assumed
Qualified Contract - A Contract that qualifies under investment return is explained in detail in the SAI.
the Code as an individual retirement annuity or account Unit Value of a Subaccount Unit or Subaccount Annuity
("IRA"), or form thereof, or a Contract purchased by a Unit on any Business Day is measured at or about
Qualified Plan, qualifying for special tax treatment 4:00 p.m., Eastern time, on that Business Day.
under the Code.
Qualified Plan - A retirement plan that receives Variable Account Value - The aggregate amount of your
favorable tax treatment under Section 401, 403, 408, Contract Value allocated to all Subaccounts.
408A or 457 of the Code.
Variable Investment Option - A Subaccount (also called a
Variable Account).
49
</TABLE>
<PAGE>
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
PERFORMANCE................................................................ 1
Total Returns............................................................ 1
Yields................................................................... 2
Performance Comparisons and Benchmarks................................... 3
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................................................. 11
Systematic Transfer Programs............................................. 11
Pre-Authorized Withdrawals............................................... 13
Death Benefit............................................................ 13
Joint Annuitants on Qualified Contracts.................................. 14
1035 Exchanges........................................................... 14
Safekeeping of Assets.................................................... 14
Dividends................................................................ 14
FINANCIAL STATEMENTS....................................................... 14
</TABLE>
50
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APPENDIX A:
STATE LAW VARIATIONS
Short-Term Cancellation Right ("Free Look") ("Right to Cancel")
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 Massachusetts:
You may not make additional Purchase Payments after your first Purchase
Payment.
As of the date of this Prospectus, the Guaranteed Minimum Death Benefit
("GMDB") Endorsement and the Enhanced Guaranteed Minimum Death Benefit Rider
("EGMDBR") are not available. Availability of the GMDB or EGMDBR is subject to
approval of state insurance authorities. Ask your registered representative
about their current availability status at the time your application is
completed.
For Contracts delivered to residents of Oregon:
As of the date of this Prospectus, the Enhanced Guaranteed Minimum Death
Benefit Rider ("EGMDBR") is not available. Availability of the EGMDBR is
subject to approval of state insurance authorities. Ask your registered
representative about its current availability status at the time your
application is completed.
The Guaranteed Interest Options ("GIOs") are not available.
You may make additional Purchase Payments only during your first Contract Year.
For Contracts delivered to residents of Pennsylvania:
The Guaranteed Interest Options ("GIOs") are not available.
51
<PAGE>
APPENDIX B:
MARKET VALUE ADJUSTMENT
The MVA for amounts annuitized, transferred or withdrawn from a GIO prior to
the end of its Guarantee Term are based on the following formula:
MVA = W x [(J - I) x (N/12)] where:
(W) is the amount to be annuitized, withdrawn or transferred from the GIO.
(J) is the Guaranteed Interest Rate that would apply, as of the date of
transfer, annuitization or withdrawal, to a newly-issued GIO with a
Guarantee Term equal to the number of "years remaining" in the Guarantee
Term of the GIO from which the annuitization, withdrawal or transfer is
to be made, plus 0.25%. (For this purpose, the "years remaining" will be
rounded up to the next higher number of whole years. If a Guaranteed
Interest Rate is required for a Guarantee Term not currently offered, the
Guaranteed Interest Rate will be based on linear interpolation, between
the Guaranteed Interest Rates for currently offered Guarantee Terms, if
possible. Otherwise, we will determine a substitute Guaranteed Interest
Rate that will be no less favorable to you than the then most recent U.S.
Treasury Yield for a maturity closest to the "years remaining", plus
1.0%);
(I) is the Guaranteed Interest Rate applicable to the GIO; and
(N) is the number of complete months remaining in the Guarantee Term.
The MVA will never exceed, in the positive or negative direction, the excess
interest earned on the GIO from which the annuitization, withdrawal or transfer
is to be made. For this purpose, excess interest is defined as the dollar
amount of interest earned during the current Guarantee Term in excess of 3%,
per annum.
Generally, if the Guaranteed Interest Rate currently in effect for the
Guarantee Term (I) is lower than (J) as defined above, the MVA will result in a
lower amount payable to you. Similarly, if (I) is higher than (J), the MVA will
result in a higher amount payable to you. In no event will the MVA reduce
interest earned to less than 3% per annum.
MVA EXAMPLES
These assumptions are made in the following examples:
1. An allocation of $10,000 was made to a Guaranteed Interest Option (GIO)
with a 6-year Guarantee Term, and with a Guaranteed Interest Rate of
5.5%.
2. A full withdrawal is requested 2 1/2 years (30 months) from the
expiration of the Guarantee Term (i.e., N = 30).
3. The Account Value for the GIO at the time of the request is $12,061.01.
It is assumed that no Contract charges or fees have been applied to this
GIO.
4. If the GIO Account Value had been credited with 3% interest instead of
the 5.5%, the Account Value would have been $11,089.97. The excess
interest for this GIO is then $971.04, (i.e. $12,061.01- $11,089.97).
5. No transfers or withdrawals have been previously made from this GIO.
Examples of MVAs that Reduce the Withdrawal Amount:
Example A (MVA not limited to excess interest)
Assume that on the date of withdrawal the Guaranteed Interest Rate for a new
Guarantee Term of 3 years (2 1/2 years rounded up to the next higher whole
year) is 7.5%. "J" is then 7.75% (i.e. 7.50% + 0.25%). Then:
MVA = ($12,061.01) x [( 7.75% - 5.5%) x (30/12)]
= $678.43 (representing a positive amount to be subtracted from the GIO
Account Value)
52
<PAGE>
Since the amount of the MVA is less than the excess interest earned on the GIO,
the withdrawal amount will include the GIO Account Value less $678.43. That
amount, $11,382.58, would be further reduced by the withdrawal charge and any
other Contract charges or fees that apply. The withdrawal charge is calculated
based on the GIO Account Value before the MVA.
Example B (MVA is limited to excess interest)
This time, assume that on the date of withdrawal the Guaranteed Interest Rate
for a new Guarantee Term of 3 years (2 1/2 years rounded up to the next higher
whole year) is 9.0%. "J" is then 9.25% (i.e. 9.00% + 0.25%). Then:
MVA = ($12,061.01) x [(9.25% - 5.5%) x (30/12)]
= $1,130.72 (representing a positive amount to be subtracted from the GIO
Account Value)
Since the amount of the MVA exceeds the excess interest earned on the GIO, the
MVA must be reduced to equal the excess interest and the withdrawal amount will
include the GIO Account Value less $971.04. That amount, $11,089.97, would be
further reduced by the withdrawal charge and any other Contract charges or fees
that apply. The withdrawal charge is calculated based on the GIO Account Value
before the MVA.
Examples of MVAs that Increase the Withdrawal Amount:
Example C (MVA not limited to excess interest)
Assume that on the date of withdrawal the Guaranteed Interest Rate for a new
Guarantee Term of 3 years (2 1/2 years rounded up to the next higher whole
year) is 3.25%. "J" is then 3.50% (i.e. 3.25% + 0.25%). Then:
MVA = ($12,061.01) x [(3.50% - 5.5%) x (30/12)]
= - $603.05 (representing a negative amount to be subtracted from the GIO
Account Value)
Since the absolute amount of the MVA is less than the excess interest earned on
the GIO, the withdrawal amount will include the GIO Account Value plus $603.05.
That amount, $12,664.06, would then be reduced by the withdrawal charge and any
other Contract charges or fees that apply. The withdrawal charge is calculated
based on the GIO Account Value before the MVA.
Example D (MVA is limited to excess interest)
To more readily show this example, and to demonstrate a Guaranteed Interest
Rate ("J") based on interpolation, the assumptions for this example have been
modified and are as follows:
1. An allocation of $10,000 was made to a Guaranteed Interest Option (GIO)
with a 6-year Guarantee Term, and with a Guaranteed Interest Rate of
5.5%.
2. A full withdrawal is requested 3 1/2 years (42 months) from the
expiration of the Guarantee Term (i.e., N = 42).
3. The Account Value for the GIO at the time of the request is $11,432.24.
It is assumed that no Contract charges or fees have been applied to this
GIO.
4. If the GIO Account Value had been credited with 3% interest instead of
the 5.5%, the Account Value would have been $10,766.96. The excess
interest for this GIO is then $665.28.
5. No transfers or withdrawals have been previously made from this GIO.
This time, assume that on the date of withdrawal the Guaranteed Interest Rate
for a new Guarantee Term of 3 years is 3.25%, and also assume that the
Guaranteed Interest Rate for a new Guarantee Term of 6 years is 4.0%.
53
<PAGE>
Then the Guaranteed Interest Rate for a Guarantee Term of 4 years (3 1/2
rounded to the next higher whole year) is 3.5%. (That result is determined by
interpolation as follows: 3.25% plus (4.0% - 3.25%) x (4 years - 3 years)/(6
years - 3 years))
Then "J" is 3.75% (i.e. 3.50% + 0.25%), and:
MVA = ($11,432.24) x [(3.75% - 5.5%) x (42/12)]
= - $700.22 (representing a negative amount to be subtracted from the GIO
Account Value)
Since the absolute amount of the MVA exceeds the excess interest earned on the
GIO, the MVA must be reduced to equal the excess interest and the withdrawal
amount will include the GIO Account Value plus $665.28. That amount,
$12,097.52, would be reduced by the withdrawal charge and any other Contract
charges or fees that apply. The withdrawal charge is calculated based on the
GIO Account Value before the MVA.
54
<PAGE>
- ------------------------------------------------------------------------[SYMBOL]
To receive a current copy of the Pacific Portfolios SAI without charge, call
(800) 722-2333 or 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 PORTFOLIOS WHERE TO GO FOR MORE INFORMATION
<S> <C>
The Pacific Portfolios variable annuity You'll find more information about the Pacific Portfolios variable annuity
Contract is underwritten by Pacific Life contract and Separate Account A in the Statement of Additional Information
Insurance Company, 700 Newport Center (SAI) dated May 1, 1999.
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 50 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 PORTFOLIOS]
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
PACIFIC PORTFOLIOS
SEPARATE ACCOUNT A
----------------
Pacific Portfolios (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............................... 3
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............................................. 11
Systematic Transfer Programs......................................... 11
Pre-Authorized Withdrawals........................................... 13
Death Benefit........................................................ 13
Joint Annuitants on Qualified Contracts.............................. 14
1035 Exchanges....................................................... 14
Safekeeping of Assets................................................ 14
Dividends............................................................ 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 ("Cash Surrender Value")
of that initial payment at the end of the measuring period based on the
investment experience of that Subaccount ("withdrawal value"). The withdrawal
value reflects the effect of all recurring fees and charges applicable to a
Contract Owner under the Contract, including the Risk Charge, the asset-based
Administrative Fee and the deduction of the applicable withdrawal charge, but
does not reflect any charges for applicable premium taxes and/or other taxes,
or the Enhanced Guaranteed Minimum Death Benefit Charge for the optional
EGMDBR. The Annual Fee is also taken into account, assuming an average
Contract Value of $45,000. 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.
1
<PAGE>
Total returns may also be shown for the same periods that do not take into
account the withdrawal charge, the Annual Fee, or the Enhanced Guaranteed
Minimum Death Benefit Charge for the optional EGMDBR.
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 the
deduction of charges for any applicable premium taxes and/or other taxes or
any Enhanced Guaranteed Minimum Death Benefit Charge for the optional EGMDBR,
but do reflect a deduction for the Annual Fee, the Risk Charge and the asset-
based Administrative Fee and assume an average Contract Value of $45,000.
At December 31, 1998, the Money Market Subaccount's current yield was 3.32%
and the effective yield was 3.37%.
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
<TABLE>
<C> <C> <C> <S>
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.
</TABLE>
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to the Subaccount, such as the Risk Charge, the asset-based
Administrative Fee and the Annual Fee (assuming an average Contract Value of
$45,000), but does not reflect any withdrawal charge, any charge for
applicable premium taxes and/or other taxes, or any Enhanced Guaranteed
Minimum Death Benefit Charge for the optional EGMDBR.
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.
2
<PAGE>
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 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 1997. 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 table is based on a Contract for
which the average initial premium is approximately $45,000. The Accumulated
Value (AV) reflects the deductions for all contractual expenses except the
contingent deferred sales charge and the Enhanced Guaranteed Death Benefit
Charge for the optional EGMDBR. The Full Withdrawal Value (FWV) reflects the
deduction for all contractual expenses, except the Enhanced Death Benefit
Charge.
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 ending December 31, 1998**
All numbers are expressed as a percentage
<TABLE>
<CAPTION>
Since
1 Year Inception*
-------------- --------------
Variable Accounts AV FWV AV FWV
- ----------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Money Market 1/2/96*............................ 3.74 (2.56) 3.68 1.98
High Yield Bond 1/2/96*......................... 0.95 (5.35) 6.10 4.48
Managed Bond 1/2/96*............................ 7.60 1.30 6.22 4.60
Government Securities 1/2/96*................... 7.63 1.33 5.61 3.97
Aggressive Equity 4/17/96*...................... 11.65 5.35 7.93 6.15
Growth LT 1/2/96*............................... 56.09 49.79 25.67 24.52
Equity Income 1/2/96*........................... 22.46 16.16 21.90 20.67
Multi-Strategy 1/2/96*.......................... 16.53 10.23 14.88 13.49
Equity 1/2/96*.................................. 28.47 22.17 23.56 22.37
Bond and Income 1/2/96*......................... 7.37 1.07 6.44 4.83
Equity Index 1/2/96*............................ 26.67 20.37 25.76 24.61
International 1/2/96*........................... 4.04 (2.26) 9.95 8.44
Emerging Markets 4/17/96*....................... (27.93) (34.23) (14.15) (16.85)
</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 that 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 1997, these are not actual performance numbers for the Subaccounts or
for the Contract.
These are hypothetical total return numbers based on Account Value ("AV") and
Full Withdrawal Value ("FWV") that represent the actual performance of the
Portfolios, adjusted for the fees and charges applicable to the Contract; the
FWV also includes applicable withdrawal charges. Any charge for premium taxes
and/or other taxes and the Enhanced Guaranteed Death Benefit Charge for the
optional EGMDBR are not reflected in these data, and reflection of the Annual
Fee assumes an average Contract size of $45,000. The information presented
also includes data representing unmanaged market indices.
4
<PAGE>
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 ending December 31, 1998
All numbers are expressed as a percentage
<TABLE>
<CAPTION>
Since
1 Year* 3 Year* 5 Year* 10 Year* 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 ........... 3.74 (2.56) 3.69 1.99 3.48 3.00 3.83 3.83 3.88 3.88
High Yield Bond ........ 0.95 (5.35) 6.14 4.52 6.78 6.36 8.96 8.96 8.76 8.76
Managed Bond ........... 7.60 1.30 6.23 4.61 5.81 5.37 8.15 8.15 7.92 7.92
Government Securities .. 7.63 1.33 5.63 3.99 5.24 4.80 7.56 7.56 7.34 7.34
Aggressive Equity....... 11.65 5.35 7.44 5.68
Growth LT .............. 56.09 49.79 25.67 24.52 24.52 24.29
Equity Income .......... 22.46 16.16 22.29 21.07 18.46 18.18 14.58 14.58 13.84 13.84
Multi-Strategy ......... 16.53 10.23 15.09 13.71 12.83 12.50 11.49 11.49 10.92 10.92
Equity ................. 28.47 22.17 23.64 22.45 17.17 16.88 15.39 15.39 14.36 14.36
Bond and Income ........ 7.37 1.07 6.40 4.78 7.49 7.08 10.01 10.01 10.69 10.69
Equity Index ........... 26.67 20.37 26.07 24.93 21.92 21.67 18.28 18.28
International .......... 4.04 (2.26) 10.48 8.99 8.28 7.89 6.56 6.56 7.42 7.42
Emerging Markets ....... (27.93) (34.23) (13.62) (16.27)
</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 an initial 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 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) and the
Annual Fee (equal to $40 per year if your Net Contract Value is less than
$50,000), the Enhanced Death Benefit Charge, 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 one year old, 7% of the amount
withdrawn attributable to Purchase Payments that are two years old, 6% of the
amount withdrawn attributable to Purchase Payments that are three years old,
5% of the amount withdrawn attributable to Purchase Payments that are four
years old, 3% of the amount withdrawn attributable to Purchase Payments that
are five years old, and 1% of the amount withdrawn attributable to Purchase
Payments that are six 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 of your
Earnings, on amounts attributed to Purchase Payments at least 7 years old, or
to the extent that total withdrawals that are free of charge during the
Contract Year do not exceed 10% of the sum of your remaining Purchase Payments
at the beginning of the Contract Year that have been held under your Contract
for less than seven years plus additional Purchase Payments applied to your
Contract during that Contract Year. 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]
<TABLE>
<CAPTION>
Taxable Tax-Deferred
Investment Investment
---------- ------------
<S> <C> <C>
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
</TABLE>
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 and 1997, respectively, with regard to this Contract was $58,491,244 and
$7,949,241, 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 charge for mortality and
expense risks at a rate equal to 1.25% annually and the
Administrative Charge at a rate equal to 0.15% annually (see
CHARGES, FEES AND DEDUCTIONS in the Prospectus).
As explained in the Prospectus, the Annual Fee, if applicable, and any
Enhanced Death Benefit Charge are assessed against your Variable Account Value
through the automatic debit of Subaccount Units; the Annual Fee decreases the
number of Subaccount Units attributed to your Contract but does not alter the
Unit Value for any Subaccount.
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 your Contract Value, proportionately,
relative to your Account Value in each Subaccount, in the Fixed Option, the
DCA Plus Fixed Option and in each GIO in an amount equal to the aggregate
amount of the charges. The remaining amount of your available Contract Value
may be used to provide variable annuity payments. Alternatively, your
remaining available Contract Value may be used to provide fixed annuity
payments, or it may be divided to provide both fixed and variable annuity
payments. You
8
<PAGE>
may also choose to withdraw some or all of your remaining Net Contract Value,
less any applicable Annual Fees, Enhanced Death Benefit Charge, 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 Table yields will be based on the Annuitant's age (and, in
certain cases, sex) and assumes a 5% investment 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
assumption of a 5% annual investment return on amounts applied but not yet
used to furnish annuity benefits.
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.
9
<PAGE>
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%
each year during the payout of your annuity; thus 5% is referred to as an
"assumed investment return."
The Subaccount Annuity Unit Value for a Subaccount will increase only to the
extent that the investment performance of that Subaccount exceeds its 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% Mortality and Expense 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% Mortality and
Expense 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).
10
<PAGE>
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.
We may require proof of your Annuitant's age and sex before or after
commencing annuity payments. If the age or sex (or both) of your Annuitant are
incorrectly stated in your Contract, we will correct the amount payable to
equal the amount that the annuitized portion of the Contract Value under that
Contract would have purchased for your Annuitant's correct age and sex. If we
make the correction after annuity payments have started, and we have made
overpayments based on the incorrect information, 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 GIOs and the DCA Plus Fixed Option are not available for any systematic
transfer programs, except that if you elect DCA Plus, such transfers must be
made from the DCA Plus Fixed Option. For a description of DCA Plus, including
its limitations and restrictions, see HOW YOUR PAYMENTS ARE ALLOCATED--
Transfers in the Prospectus. The Fixed Account is not available in connection
with rebalancing and DCA Plus and may not be used as a source account for
dollar cost averaging programs newly established by you. You may not use
dollar cost averaging, DCA Plus and/or 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 Variable 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
11
<PAGE>
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) you annuitize. If, as a result of a dollar
cost 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 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
12
<PAGE>
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 proper form. If you stop the earnings sweep, you must
wait 30 days 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 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
the earnings sweep, DCA Plus and dollar cost averaging at the same time. If,
as a result of an earnings sweep 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 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
Fixed, DCA Plus Fixed or Variable Investment Options; if you do not give us
these specific directions, amounts will be deducted proportionately from your
Account Value in each Fixed, DCA Plus 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 any minimum Account Value we establish, 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. Any such DCA Plus Fixed Option balance or any amount
that would otherwise be allocated to the DCA Plus Fixed Option will be
allocated to the Variable Investment Options according to your most recent DCA
Plus transfer 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 10% tax penalty.
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
13
<PAGE>
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 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.
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.
Dividends
The current dividend scale is zero and we do not anticipate that dividends
will be paid. If any dividend is paid, you may elect to receive the dividend
in cash or to add the dividend to your Contract Value. If you make no
election, the dividend will be added to your Contract Value. We will allocate
any dividend to Contract Value in accordance with your most recent allocation
instructions, unless instructed otherwise. You should consult with your tax
adviser before making an election.
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.
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> <C>
Cash $1,215.9
Policy loans 440.3
Other assets 43.4
--------
Total assets assumed $1,699.6
========
Policyholder account values $1,693.8
Other liabilities 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 securi-
ties 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
------------------------
<S> <C> <C> <C>
(In Millions)
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 deposits
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:
<TABLE>
Years Ended December 31,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
Current $134.1 $127.9 $163.5
Deferred (20.6) (14.4) (49.8)
----------------------
$113.5 $113.5 $113.7
======================
</TABLE>
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>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------------------
(In Millions)
<S> <C> <C> <C>
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
---------------------------
(In Millions)
<S> <C> <C> <C>
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
----------------
<S> <C> <C>
(In Millions)
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>
<CAPTION>
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 income 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
--------------
(In Millions)
<S> <C> <C>
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 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):
<TABLE>
<S> <C>
Years Ending December 31:
-------------------------
1999 $172.7
2000-2003 202.1
2004 and thereafter 55.9
------
Total $430.7
======
</TABLE>
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.
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47
<PAGE>
Form No. 801-9A
