<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 2000 AS SUPPLEMENTED OCTOBER 2, 2000
PACIFIC INNOVATIONS
SEPARATE ACCOUNT A
-----------------
Pacific Innovations (the "Contract") is a variable annuity contract underwritten
by Pacific Life Insurance Company ("Pacific Life").
This Statement of Additional Information ("SAI") is not a Prospectus and should
be read in conjunction with the Contract's Prospectus, dated May 1, 2000 which
is available without charge upon written or telephone request to Pacific Life.
Terms used in this SAI have the same meanings as in the Prospectus, and some
additional terms are defined particularly for this SAI.
-------------------
Pacific Life Insurance Company
Annuities Division
Mailing Address: P.O. Box 7187
Pasadena, California 91109-7187
1-800-722-2333
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PERFORMANCE................................................. 1
Total Returns........................................... 1
Yields.................................................. 2
Performance Comparisons and Benchmarks.................. 2
Separate Account Performance............................ 3
DISTRIBUTION OF THE CONTRACTS............................... 7
Pacific Select Distributors, Inc........................ 7
THE CONTRACTS AND THE SEPARATE ACCOUNT...................... 8
Calculating Subaccount Unit Values...................... 8
Variable Annuity Payment Amounts........................ 8
Corresponding Dates..................................... 10
Age and Sex of Annuitant................................ 10
Systematic Transfer Programs............................ 11
Pre-Authorized Withdrawals.............................. 13
Death Benefit........................................... 13
Joint Annuitants on Qualified Contracts................. 13
1035 Exchanges.......................................... 14
Safekeeping of Assets................................... 14
FINANCIAL STATEMENTS........................................ 14
INDEPENDENT AUDITORS........................................ 14
</TABLE>
<PAGE>
PERFORMANCE
From time to time, our reports or other communications to current or prospective
Contract Owners or our advertising or other promotional material may quote the
performance (yield and total return) of a Subaccount. Quoted results are based
on past performance and reflect the performance of all assets held in that
Subaccount for the stated time period. QUOTED RESULTS ARE NEITHER AN ESTIMATE
NOR A GUARANTEE OF FUTURE INVESTMENT PERFORMANCE, AND DO NOT REPRESENT THE
ACTUAL EXPERIENCE OF AMOUNTS INVESTED BY ANY PARTICULAR CONTRACT OWNER.
TOTAL RETURNS
A Subaccount may advertise its "average annual total return" over various
periods of time. "Total return" represents the average percentage change in
value of an investment in the Subaccount from the beginning of a measuring
period to the end of that measuring period. "Annualized" total return assumes
that the total return achieved for the measuring period is achieved for each
such period for a full year. "Average annual" total return is computed in
accordance with a standard method prescribed by the SEC.
AVERAGE ANNUAL TOTAL RETURN
To calculate a Subaccount's average annual total return for a specific measuring
period, we first take a hypothetical $1,000 investment in that Subaccount, at
its then-applicable Subaccount Unit Value (the "initial payment") and we compute
the ending redeemable value of that initial payment at the end of the measuring
period based on the investment experience of that Subaccount ("full withdrawal
value"). The full withdrawal value reflects the effect of all recurring fees and
charges applicable to a Contract Owner under the Contract, including the Risk
Charge, the Administrative Fee and the deduction of the applicable withdrawal
charge, but does not reflect any charges for applicable premium taxes and/or
other taxes, any non-recurring fees or charges or any increase in the Risk
Charge for an optional Death Benefit Rider. The Annual Fee is also taken into
account, assuming an average Contract Value of $65,000. 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.
(365/N)
T = (ERV/P) - 1
where T = average annual total return
ERV = ending redeemable value
P = hypothetical initial payment of $1,000
N = number of days
Average annual total return figures will be given for recent one-, three-,
five-and ten-year periods (if applicable), and may be given for other periods as
well (such as from commencement of the Subaccount's operations, or on a
year-by-year basis).
When considering "average" total return figures for periods longer than one
year, it is important to note that the relevant Subaccount's annual total return
for any one year in the period might have been greater or less than the average
for the entire period.
AGGREGATE TOTAL RETURN
A Subaccount may use "aggregate" total return figures along with its "average
annual" total return figures for various periods; these figures represent the
cumulative change in value of an investment in the Subaccount for a specific
period. Aggregate total returns may be shown by means of schedules, charts or
graphs and may indicate subtotals of the various components of total return. The
SEC has not prescribed standard formulas for calculating aggregate total return.
Total returns may also be shown for the same periods that do not take into
account the withdrawal charge.
NON-STANDARDIZED TOTAL RETURNS
We may also calculate non-standardized total returns which may or may not
reflect any Annual Fee, withdrawal charges and/or increases in Risk Charges,
charges for premium and/or other taxes, and any non-recurring fees or charges.
Standardized return figures will always accompany any non-standardized returns
shown.
1
<PAGE>
YIELDS
MONEY MARKET SUBACCOUNT
The "yield" (also called "current yield") of the Money Market Subaccount is
computed in accordance with a standard method prescribed by the SEC. The net
change in the Subaccount's Unit Value during a seven-day period is divided by
the Unit Value at the beginning of the period to obtain a base rate of return.
The current yield is generated when the base rate is "annualized" by multiplying
it by the fraction 365/7; that is, the base rate of return is assumed to be
generated each week over a 365-day period and is shown as a percentage of the
investment. The "effective yield" of the Money Market Subaccount is calculated
similarly but, when annualized, the base rate of return is assumed to be
reinvested. The effective yield will be slightly higher than the current yield
because of the compounding effect of this assumed reinvestment.
The formula for effective yield is: [(Base Period Return +1) (To the power of
365/7)] -1.
Realized capital gains or losses and unrealized appreciation or depreciation of
the assets of the underlying Money Market Portfolio are not included in the
yield calculation. Current yield and effective yield do not reflect any
deduction of charges for any applicable premium taxes and/or other taxes, or any
increase in the Risk Charge for an optional Death Benefit Rider, but do reflect
a deduction for the Annual Fee, the Risk Charge and the Administrative Fee and
assumes an average Contract Value of $65,000.
At December 31, 1999, the Money Market Subaccount's current yield was 4.17% and
the effective yield was 4.26%.
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:
6
YIELD = 2[((a-b) + 1) - 1]
---
cd
where: a = net investment income earned during the period by the Portfolio
attributable to the Subaccount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Subaccount Units outstanding during the
period that were entitled to receive dividends.
d = the Unit Value of the Subaccount Units on the last day of the period.
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to the Subaccount, such as the Risk Charge, Administrative
Fee, the Annual Fee (assuming an average Contract Value of $65,000), but does
not reflect any withdrawal charge, any charge for applicable premium taxes
and/or other taxes, any increase in the Risk Charge for an optional Death
Benefit Rider, or any non-recurring fees or charges.
The Subaccounts' yields will vary from time to time depending upon market
conditions, the composition of each Portfolio and operating expenses of the Fund
allocated to each Portfolio. Consequently, any given performance quotation
should not be considered representative of the Subaccount's performance in the
future. Yield should also be considered relative to changes in Subaccount Unit
Values and to the relative risks associated with the investment policies and
objectives of the various Portfolios. In addition, because performance will
fluctuate, it may not provide a basis for comparing the yield of a Subaccount
with certain bank deposits or other investments that pay a fixed yield or return
for a stated period of time.
PERFORMANCE COMPARISONS AND BENCHMARKS
In advertisements and sales literature, we may compare the performance of some
or all of the Subaccounts to the performance of other variable annuity issuers
in general and to the performance of particular types of variable annuities
investing in mutual funds, or series of mutual funds, with investment objectives
similar to each of the
2
<PAGE>
Subaccounts. This performance may be presented as averages or rankings compiled
by Lipper Analytical Services, Inc. ("Lipper"), the Variable Annuity Research
and Data Service ("VARDS-Registered Trademark-") 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-Registered Trademark- rankings compare only variable annuity issuers. The
performance analyses prepared by Lipper and VARDS-Registered Trademark- 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-Registered Trademark- 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 2000. 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, 1999. The accumulated value ("AV") reflects the
deductions for all contractual fees and charges, but does not reflect the
withdrawal charge, any nonrecurring fees and charges, any increase in the Risk
Charge for an optional Death Benefit Rider or any charges for premium and/or
other taxes. The full withdrawal value ("FWV") reflects the deductions for all
contractual fees and charges, but does not reflect any increase in the Risk
Charge for an optional Death Benefit Rider, any nonrecurring fees and charges,
and any charges for premium and/or other taxes.
3
<PAGE>
THE RESULTS SHOWN IN THIS SECTION ARE NOT AN ESTIMATE OR GUARANTEE OF FUTURE
INVESTMENT PERFORMANCE.
HISTORICAL SEPARATE ACCOUNT PERFORMANCE
ANNUALIZED RATES OF RETURN FOR PERIODS ENDED DECEMBER 31, 1999**
ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
<TABLE>
<CAPTION>
SINCE
1 YEAR* 3 YEARS* INCEPTION*
-------------------- -------------------- --------------------
VARIABLE ACCOUNTS AV FWV AV FWV AV FWV
----------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Equity 4/17/96*............................... 25.58 17.48 12.79 10.87 12.03 12.03
Emerging Markets 4/17/96*................................ 51.43 43.33 1.92 (0.45) 0.36 0.36
Small-Cap Equity 10/1/99*................................ 27.98 19.88
Equity 1/2/96*........................................... 36.62 28.52 26.94 25.43 26.71 26.71
Multi-Strategy 1/2/96*................................... 5.56 (2.54) 13.21 11.31 12.49 12.49
Equity Income 1/2/96*.................................... 11.69 3.59 20.15 18.46 19.26 19.26
Growth LT 1/2/96*........................................ 95.33 87.23 49.42 48.34 40.33 40.33
Mid-Cap Value 1/4/99*.................................... 3.80 (4.39)
Equity Index 1/2/96*..................................... 18.92 10.82 25.46 23.92 24.01 24.01
Small-Cap Index 1/4/99*.................................. 17.92 9.72
REIT 1/4/99*............................................. (1.41) (9.59)
International Value 1/2/96*.............................. 21.11 13.01 10.77 8.77 12.64 12.64
Government Securities 1/2/96*............................ (3.31) (11.41) 3.99 1.72 3.35 3.35
Managed Bond 1/2/96*..................................... (3.28) (11.38) 4.13 1.87 3.78 3.78
Money Market 1/2/96*..................................... 3.48 (4.62) 3.71 1.43 3.67 3.67
High Yield Bond 1/2/96*.................................. 1.47 (6.63) 3.43 1.14 4.95 4.95
Large-Cap Value 1/4/99*.................................. 10.03 1.84
</TABLE>
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* Date Variable Account commenced operations.
** Effective June 1, 1997 Morgan Stanley Asset Management became the Portfolio
Manager of the International Value Portfolio. Effective May 1, 1998,
Alliance Capital Management L.P. ("Alliance Capital") became the Portfolio
Manager of the Aggressive Equity Portfolio and Goldman Sachs Asset
Management became the Portfolio Manager of the Equity Portfolio; prior to
May 1, 1998 some of the investment policies of the Aggressive Equity and
Equity Portfolios differed. Effective January 1, 2000, Alliance Capital
became the Portfolio Manager of the Emerging Markets Portfolio and Mercury
Asset Management US became the Portfolio Manager of the Equity Index and
Small-Cap Index Portfolios.
The Diversified Research, International Large-Cap, I-Net Toll Keeper, Strategic
Value and Focused 30 Subaccounts started operations after December 31, 1999 and
there is no historical value available for these Subaccounts.
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, April 1, 1996 in the case of the
Aggressive Equity and Emerging Markets Portfolios and January 4, 1999 in the
case of the Mid-Cap Value, Small-Cap Index, REIT and Large-Cap Value
Portfolios). Historical performance information for the Equity Portfolio is
based in part on the performance of that Portfolio's predecessor; the
predecessor series was a series of Pacific Corinthian Variable Fund and began
its first full year of operations in 1984, the assets of which were acquired by
the Fund on December 31, 1994. Because the Subaccounts had not commenced
operations until January 2, 1996 or later, as indicated in the chart above, and
because the Contracts were not available until 2000, these are not actual
performance numbers for the Subaccounts or for the Contract.
4
<PAGE>
THESE ARE HYPOTHETICAL TOTAL RETURN NUMBERS based on accumulated value ("AV")
and full withdrawal value ("FWV") that represent the actual performance of the
Portfolios, adjusted to reflect the deductions for the fees and charges
applicable to the Contract; the FWV also includes applicable withdrawal charges.
Any charge for non-recurring fees and charges, premium taxes and/or other taxes,
an optional Death Benefit Rider are not reflected in these data, and reflection
of the Annual Fee assumes an average Contract size of $65,000. The information
presented also includes data representing unmanaged market indices.
THE RESULTS SHOWN IN THIS SECTION ARE NOT AN ESTIMATE OR GUARANTEE OF FUTURE
INVESTMENT PERFORMANCE.
HISTORICAL AND HYPOTHETICAL SEPARATE ACCOUNT PERFORMANCE
ANNUALIZED RATES OF RETURN FOR PERIODS ENDED DECEMBER 31, 1999
ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
<TABLE>
<CAPTION>
1 YEAR* 3 YEARS* 5 YEARS*
-------------------- -------------------- --------------------
VARIABLE ACCOUNTS AV FWV AV FWV AV FWV
----------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Equity................... 25.58 17.48 12.79 10.87
Emerging Markets.................... 51.43 43.33 1.92 (0.45)
Small-Cap Equity.................... 45.47 37.37 23.69 22.10 23.43 23.43
Equity.............................. 36.62 28.52 26.94 25.43 25.81 25.81
Multi-Strategy...................... 5.56 (2.54) 13.21 11.31 14.74 14.74
Equity Income....................... 11.69 3.59 20.15 18.46 21.54 21.54
Growth LT........................... 95.33 87.23 49.42 48.34
Mid-Cap Value.......................
Equity Index........................ 18.92 10.82 25.46 23.92 26.33 26.33
Small-Cap Index.....................
REIT................................
International Value................. 21.11 13.01 10.77 8.77 12.23 12.23
Government Securities............... (3.31) (11.41) 3.99 1.72 5.98 5.98
Managed Bond........................ (3.28) (11.38) 4.13 1.87 6.38 6.38
Money Market........................ 3.48 (4.62) 3.71 1.43 3.76 3.76
High Yield Bond..................... 1.47 (6.63) 3.43 1.14 7.32 7.32
Large-Cap Value.....................
<CAPTION>
SINCE
10 YEARS* INCEPTION*
-------------------- --------------------
VARIABLE ACCOUNTS AV FWV AV FWV
----------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Aggressive Equity................... 12.03 12.03
Emerging Markets.................... 0.36 0.36
Small-Cap Equity.................... 15.10 15.10 16.41 16.41
Equity.............................. 16.11 16.11 15.65 15.65
Multi-Strategy...................... 9.92 9.92 10.47 10.47
Equity Income....................... 13.08 13.08 13.67 13.67
Growth LT........................... 34.23 34.23
Mid-Cap Value....................... 3.80 (4.39)
Equity Index........................ 18.35 18.35
Small-Cap Index..................... 17.92 9.72
REIT................................ (1.41) (9.59)
International Value................. 6.77 6.77 8.50 8.50
Government Securities............... 5.91 5.91 6.42 6.42
Managed Bond........................ 6.47 6.47 6.94 6.94
Money Market........................ 3.47 3.47 3.85 3.85
High Yield Bond..................... 8.85 8.85 8.15 8.15
Large-Cap Value.....................
</TABLE>
<TABLE>
<CAPTION>
MAJOR INDICES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
CS First Boston Global High Yield Bond...................... 3.28 5.37 9.07 11.06
Lehman Brothers Aggregate Bond.............................. (0.83) 5.73 7.73 7.69
Lehman Brothers Government Bond............................. (2.25) 5.57 7.43 7.48
Lehman Brothers Government/Corporate Bond................... (2.15) 5.54 7.60 7.66
Lehman Brothers Long-Term Government/Corporate Bond......... (7.64) 5.74 8.99 8.65
Morgan Stanley Capital International Europe, Australasia &
Far East.................................................. 27.30 16.06 13.15 7.33
Morgan Stanley Capital International Emerging Markets
Free...................................................... 63.70 0.91 (0.13) 8.58
NAREIT Equity............................................... (4.62) (1.82) 8.09 9.14
Russell Mid-Cap............................................. 18.23 18.86 21.86 15.92
Russell 1000 Growth......................................... 33.16 34.07 32.41 20.32
Russell 2000 Small-Stock.................................... 21.26 13.08 16.69 13.40
Russell 2500................................................ 24.15 15.72 19.43 15.05
Standard & Poor's 500 Composite Stock Price................. 21.04 27.56 28.55 18.20
</TABLE>
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* The performance of the Aggressive Equity, Equity Income, Multi-Strategy,
Equity, International Value, and Emerging Markets Variable Accounts for all
or 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 Value 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 Portfolio; prior to May 1, 1998 some of
the investment policies of the Aggressive Equity, and Equity Portfolios
differed. Performance of the Equity Portfolio is based in part on the
performance of the predecessor portfolio of Pacific Corinthian Variable
Fund, which began its first full year of operations in 1984, the assets of
which were acquired by the Fund on December 31, 1994. Effective January 1,
2000, Alliance Capital became the Portfolio Manager of the Emerging Markets
Portfolio and Mercury Asset Management US became the Portfolio Manager of
the Equity Index and Small-Cap Index Portfolios.
5
<PAGE>
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.
In general, individuals who own annuity contracts are not taxed on increases in
the value under the annuity contract until some form of distribution is made
from the contract. Thus, the annuity contract will benefit from tax deferral
during the accumulation period, which generally will have the effect of
permitting an investment in an annuity contract to grow more rapidly than a
comparable investment under which increases in value are taxed on a current
basis. The following chart illustrates this benefit by comparing accumulation
under a variable annuity contract with accumulations from an investment on which
gains are taxed on a current ordinary income basis. The chart shows
accumulations on a single Purchase Payment of $10,000, assuming hypothetical
annual returns of 0%, 4% and 8%, compounded annually, and a tax rate of 36%. The
values shown for the taxable investment do not include any deduction for
management fees or other expenses but assume that taxes are deducted annually
from investment returns. The values shown for the variable annuity do not
reflect the 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), the Annual
Fee (equal to $30 per year if your Net Contract Value is less than $50,000), any
increase in the Risk Charge for an optional Death Benefit Rider (equal to a
maximum annual rate of 0.35% of average daily account value), any charge for
premium taxes and/or other taxes, or the expenses of an underlying investment
vehicle, such as the Fund. The values shown also do not reflect the withdrawal
charge. Generally, the withdrawal charge is equal to 9% of the amount withdrawn
attributable to Purchase Payments that are less than one year old, 8% of the
amount withdrawn attributable to Purchase Payments that are less than two years
old, and 8% of the amount withdrawn attributable to Purchase Payments that are
three years old. The age of Purchase Payments is considered 1 year old in the
Contract Year we receive it and increases by one year beginning on the day
preceding each Contract Anniversary. During a Contract Year, you may withdraw
free of withdrawal charge amounts up to your "Eligible Purchase Payments".
Eligible Purchase Payments include 10% annually of total Purchase Payments that
have an "age" of less than four years, plus any remaining portion not withdrawn
from the previous Contract Year's Eligible Purchase Payments that are derived
from Purchase Payments which have an "age" of less than four years, plus 100% of
all Purchase Payments that have an "age" of four years or more. Once all
Purchase Payments have been deemed withdrawn, any withdrawal will be deemed a
withdrawal of your Earnings and will be free of the withdrawal charge. 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%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
0% GROWTH 4% GROWTH 8% GROWTH
TAXABLE TAX DEFERRED TAXABLE TAX DEFERRED TAXABLE TAX DEFERRED
INVESTMENT INVESTMENT INVESTMENT INVESTMENT INVESTMENT INVESTMENT
<S> <C> <C> <C> <C> <C> <C>
YEARS Before Tax Before Tax Before Tax Before Tax Before Tax Before Tax
10 $10,000.00 $10,000.00 $12,875.97 $13,073.56 $16,476.07 $17,417.12
20 $10,000.00 $10,000.00 $16,579.07 $17,623.19 $27,146.07 $33,430.13
30 $10,000.00 $10,000.00 $21,347.17 $24,357.74 $44,726.05 $68,001.00
</TABLE>
DISTRIBUTION OF THE CONTRACTS
PACIFIC SELECT DISTRIBUTORS, INC. (FORMERLY KNOWN AS PACIFIC MUTUAL
DISTRIBUTORS, INC.)
Pacific Select Distributors, Inc. ("PSD"), a subsidiary of ours, acts as the
principal underwriter ("distributor") of the Contracts and offers the Contracts
on a continuous basis. PSD is registered as a broker-dealer with the SEC and is
a member of the National Association of Securities Dealers ("NASD"). We pay PSD
for acting as principal underwriter under a Distribution Agreement. We and PSD
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 PSD for 1999
with regard to this Contract was $0 of which $0 was retained.
7
<PAGE>
THE CONTRACTS AND THE SEPARATE ACCOUNT
CALCULATING SUBACCOUNT UNIT VALUES
The Unit Value of the Subaccount Units in each Variable Investment Option is
computed at or about 4:00 p.m. Eastern time on each Business Day. The initial
Unit Value of each Subaccount was $10 on the Business Day the Subaccount began
operations. At the end of each Business Day, the Unit Value for a Subaccount is
equal to:
Y X Z
where (Y) = the Unit Value for that Subaccount as of the end of the preceding
Business Day; and
(Z) = the Net Investment Factor for that Subaccount for the period (a
"valuation period") between that Business Day and the immediately
preceding Business Day.
The "Net Investment Factor" for a Subaccount for any valuation period is equal
to:
(A DIVIDED BY B) - C
where (A) = the "per share value of the assets" of that Subaccount as of the end
of that valuation period, which is equal to: a+b+c
where (a) = the net asset value per share of the corresponding Portfolio
shares held by that Subaccount as of the end of that valuation
period;
(b) = the per share amount of any dividend or capital gain
distributions made by the Fund for that Portfolio during that
valuation period; and
(c) = any per share charge (a negative number) or credit (a positive
number) for any income taxes and/or any other taxes or other
amounts set aside during that valuation period as a reserve for
any income and/or any other taxes which we determine to have
resulted from the operations of the Subaccount or Contract,
and/or any taxes attributable, directly or indirectly, to
Purchase Payments;
(B) = the net asset value per share of the corresponding Portfolio shares
held by the Subaccount as of the end of the preceding valuation
period; and
(C) = a factor that assesses against the Subaccount net assets for each
calendar day in the valuation period the basic Risk Charge plus any
applicable increase in the Risk Charge and the Administrative Fee
(see CHARGES, FEES AND DEDUCTIONS in the Prospectus).
As explained in the Prospectus, the Annual Fee, if applicable, is 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 each Account Value proportionately, relative to
your Account Value in each Subaccount and in the Fixed Option, in an amount
equal to the aggregate amount of the charges. The remaining amount of your
available Net Contract Value may be used to provide variable annuity payments.
Alternatively, your remaining available Net Contract Value may be used to
provide fixed annuity payments, or it may be divided to provide both fixed and
variable annuity payments. You may also choose to withdraw some or all of your
remaining Net Contract Value, less any applicable Annual Fee, withdrawal charge,
and any charges for premium taxes and/or other taxes without converting this
amount into annuity payments.
SECOND: THE FIRST VARIABLE PAYMENT
We begin by referring to your Contract's Option Table for your Annuity Option
(the "Annuity Option Table"). The Annuity Option Table allows us to calculate
the dollar amount of the first variable annuity payment under your Contract,
based on the amount applied toward the variable annuity. The number that the
Annuity Option
8
<PAGE>
Table yields will be based on the Annuitant's age (and, in certain cases, sex)
and assumes a 5% rate of return, as described in more detail below.
EXAMPLE: Assume a man is 65 years of age at his Annuity Date and has
selected a lifetime annuity with monthly payments guaranteed for 10 years.
According to the Annuity Option Table, this man should receive an initial
monthly payment of $5.79 for every $1,000 of his Contract Value (reduced by
applicable charges) that he will be using to provide variable payments.
Therefore, if his Contract Value after deducting applicable fees and charges
is $100,000 on his Annuity Date and he applies this entire amount toward his
variable annuity, his first monthly payment will be $579.00.
You may choose any other Annuity Option Table that assumes a different rate of
return which we offer at the time your Annuity Option is effective.
THIRD: SUBACCOUNT ANNUITY UNITS
For each Subaccount, we use the amount of the first variable annuity payment
under your Contract attributable to each Subaccount to determine the number of
Subaccount Annuity Units that will form the basis of subsequent payment amounts.
First, we use the Annuity Option Table to determine the amount of that first
variable payment for each Subaccount. Then, for each Subaccount, we divide that
amount of the first variable annuity payment by the value of one Subaccount
Annuity Unit (the "Subaccount Annuity Unit Value") as of the end of the Annuity
Date to obtain the number of Subaccount Annuity Units for that particular
Subaccount. The number of Subaccount Annuity Units used to calculate subsequent
payments under your Contract will not change unless exchanges of Annuity Units
are made (or if the Joint and Survivor Annuity Option is elected and the Primary
Annuitant dies first), but the value of those Annuity Units will change daily,
as described below.
FOURTH: THE SUBSEQUENT VARIABLE PAYMENTS
The amount of each subsequent variable annuity payment will be the sum of the
amounts payable based on each Subaccount. The amount payable based on each
Subaccount is equal to the number of Subaccount Annuity Units for that
Subaccount multiplied by their Subaccount Annuity Unit Value at the end of the
Business Day in each payment period you elected that corresponds to the Annuity
Date.
Each Subaccount's Subaccount Annuity Unit Value, like its Subaccount Unit Value,
changes each day to reflect the net investment results of the underlying
investment vehicle, as well as the assessment of the Risk Charge at an annual
rate of 1.25% and the Administrative Fee at an annual rate of 0.15%. In
addition, the calculation of Subaccount Annuity Unit Value incorporates an
additional factor; as discussed in more detail below, this additional factor
adjusts Subaccount Annuity Values to correct for the Option Table's implicit
assumed annual investment return on amounts applied but not yet used to furnish
annuity benefits. Any increase in your Risk Charge for an Optional Death Benefit
Rider is not charged on and after the Annuity Date.
Different Subaccounts may be selected for your Contract before and after your
Annuity Date, subject to any restrictions we may establish. Currently, you may
exchange Subaccount Annuity Units in any Subaccount for Subaccount Annuity Units
in any other Subaccount(s) up to four times in any twelve month period after
your Annuity Date. The number of Subaccount Annuity Units in any Subaccount may
change due to such exchanges. Exchanges following your Annuity Date will be made
by exchanging Subaccount Annuity Units of equivalent aggregate value, based on
their relative Subaccount Annuity Unit Values.
UNDERSTANDING THE "ASSUMED INVESTMENT RETURN" FACTOR
The Annuity Option Table incorporates a number of implicit assumptions in
determining the amount of your first variable annuity payment. As noted above,
the numbers in the Annuity Option Table reflect certain actuarial assumptions
based on the Annuitant's age, and, in some cases, the Annuitant's sex. In
addition, these numbers assume that the amount of your Contract Value that you
convert to a variable annuity will have a positive net investment return of 5%
(or such other rate of return you may elect) each year during the payout of your
annuity; thus 5% is referred to as an "assumed investment return."
9
<PAGE>
The Subaccount Annuity Unit Value for a Subaccount will increase only to the
extent that the investment performance of that Subaccount exceeds the Risk
Charge, the Administrative Fee, and the assumed investment return. The
Subaccount Annuity Unit Value for any Subaccount will generally be less than the
Subaccount Unit Value for that same Subaccount, and the difference will be the
amount of the assumed investment return factor.
EXAMPLE: Assume the net investment performance of a Subaccount is at a rate
of 5.00% per year (after deduction of the 1.25% Risk Charge and the 0.15%
Administrative Fee). The Subaccount Unit Value for that Subaccount would
increase at a rate of 5.00% per year, BUT THE SUBACCOUNT ANNUITY UNIT VALUE
WOULD NOT INCREASE (OR DECREASE) AT ALL. The net investment factor for that
5% return [1.05] is then divided by the factor for the 5% assumed investment
return [1.05] and 1 is subtracted from the result to determine the adjusted
rate of change in Subaccount Annuity Unit Value:
1.05 = 1; 1 - 1 = 0; 0 X 100% = 0%.
----
1.05
If the net investment performance of a Subaccount's assets is at a rate less
than 5.00% per year, the Subaccount Annuity Unit Value will decrease, even if
the Subaccount Unit Value is increasing.
EXAMPLE: Assume the net investment performance of a Subaccount is at a rate
of 2.60% per year (after deduction of the 1.25% Risk Charge and the 0.15%
Administrative Fee). The Subaccount Unit Value for that Subaccount would
increase at a rate of 2.60% per year, BUT THE SUBACCOUNT ANNUITY UNIT VALUE
WOULD DECREASE AT A RATE OF 2.29% PER YEAR. The net investment factor for
that 2.6% return [1.026] is then divided by the factor for the 5% assumed
investment return [1.05] and 1 is subtracted from the result to determine
the adjusted rate of change in Subaccount Annuity Unit Value:
1.026 = 0.9771; 0.9771 - 1 = -0.0229; -0.0229 X 100% = -2.29%.
----
1.05
The assumed investment return will always cause increases in Subaccount Annuity
Unit Values to be somewhat less than if the assumption had not been made, will
cause decreases in Subaccount Annuity Unit Values to be somewhat greater than if
the assumption had not been made, and will (as shown in the example above)
sometimes cause a decrease in Subaccount Annuity Unit Values to take place when
an increase would have occurred if the assumption had not been made. If we had
assumed a higher investment return in our Annuity Option tables, it would
produce annuities with larger first payments, but the increases in subaccount
annuity payments would be smaller and the decreases in subsequent annuity
payments would be greater; a lower assumed investment return would produce
annuities with smaller first payments, and the increases in subsequent annuity
payments would be greater and the decreases in subsequent annuity payments would
be smaller.
CORRESPONDING DATES
If any transaction or event under your Contract is scheduled to occur on a
"corresponding date" that does not exist in a given calendar period, the
transaction or event will be deemed to occur on the following Business Day. In
addition, as stated in the Prospectus, any event scheduled to occur on a day
that is not a Business Day will occur on the next succeeding Business Day.
EXAMPLE: If your Contract is issued on February 29 in year 1 (a leap year),
your Contract Anniversary in years 2, 3 and 4 will be on March 1.
EXAMPLE: If your Annuity Date is July 31 and you select monthly annuity
payments, the payments received will be based on valuations made on
July 31, August 31, October 1 (for September), October 31, December 1 (for
November), December 31, January 31, March 1 (for February), March 31, May 1
(for April), May 31 and July 1 (for June).
AGE AND SEX OF ANNUITANT
As mentioned in the Prospectus, the Contracts generally provide for sex-distinct
annuity income factors in the case of life annuities. Statistically, females
tend to have longer life expectancies than males; consequently, if the amount of
annuity payments is based on life expectancy, they will ordinarily be higher if
an annuitant is male than if an annuitant is female. Certain states' regulations
prohibit sex-distinct annuity income factors, and Contracts issued in those
states will use unisex factors. In addition, Contracts issued in connection with
Qualified Plans are required to use unisex factors.
10
<PAGE>
We may require proof of your Annuitant's age and sex before or after starting
annuity payments. If the age or sex (or both) of your Annuitant are incorrectly
stated in your Contract, we will correct the amount payable based on your
Annuitant's correct Age or sex, if applicable. If we make the correction after
annuity payments have started, and we have made overpayments, we will deduct the
amount of the overpayment, with interest at 3% a year, from any payments due
then or later; if we have made underpayments, we will add the amount, with
interest at 3% a year, of the underpayments to the next payment we make after we
receive proof of the correct Age and/or sex.
SYSTEMATIC TRANSFER PROGRAMS
The Fixed Account is not available in connection with portfolio rebalancing. If
you are using the earnings sweep, you may also use portfolio rebalancing only if
you selected the Fixed Option as your sweep option. You may not use dollar cost
averaging and the earnings sweep at the same time.
DOLLAR COST AVERAGING
When you request dollar cost averaging, you are authorizing us to make periodic
reallocations of your Contract Value without waiting for any further instruction
from you. You may request to begin or stop dollar cost averaging at any time
prior to your Annuity Date; the effective date of your request will be the day
we receive written notice from you in proper form. Your request may specify the
date on which you want your first transfer to be made. If you do not specify a
date for your first transfer, we will treat your request as if you had specified
the effective date of your request. Your first transfer may not be made until 30
days after your Contract Date, and if you specify an earlier date, your first
transfer will be delayed until one calendar month after the date you specify. If
you request dollar cost averaging on your application for your Contract and you
fail to specify a date for your first transfer, your first transfer will be made
one period after your Contract Date (that is, if you specify monthly transfers,
the first transfer will occur 30 days after your Contract Date; quarterly
transfers, 90 days after your Contract Date; semiannual transfers, 180 days
after your Contract Date; and if you specify annual transfers, the first
transfer will occur on your Contract Anniversary). If you stop dollar cost
averaging, you must wait 30 days before you may begin this option again.
Your request to begin dollar cost averaging must specify the Investment Option
you wish to transfer money FROM (your "source account"). You may choose any one
Investment Option as your source account. The Account Value of your source
account must be at least $5,000 for you to begin dollar cost averaging.
Your request to begin dollar cost averaging must also specify the amount and
frequency of your transfers. You may choose monthly, quarterly, semiannual or
annual transfers. The amount of your transfers may be specified as a dollar
amount or a percentage of your source Account Value; however, each transfer must
be at least $250. Dollar cost averaging transfers are subject to the same
requirements and limitations as other transfers.
Finally, your request must specify the Variable Investment Option(s) you wish to
transfer amounts to (your "target account(s)"). If you select more than one
target account, your dollar cost averaging request must specify how transferred
amounts should be allocated among the target accounts. Your source account may
not also be a target account.
Your dollar cost averaging transfers will continue until the earlier of
(i) your request to stop dollar cost averaging is effective, or (ii) your source
Account Value is zero, or (iii) your Annuity Date. If, as a result of a dollar
cost
11
<PAGE>
averaging transfer, your source Account Value falls below any minimum Account
Value we may establish, we have the right, at our option, to transfer that
remaining Account Value to your target account(s) on a proportionate basis
relative to your most recent allocation instructions. We may change, terminate
or suspend the dollar cost averaging option at any time.
PORTFOLIO REBALANCING
Portfolio rebalancing allows you to maintain the percentage of your Contract
Value allocated to each Variable Investment Option at a pre-set level prior to
annuitization. For example, you could specify that 30% of your Contract Value
should be in the Equity Index Subaccount, 40% in the Managed Bond Subaccount,
and 30% in the Growth LT Subaccount. Over time, the variations in each
Subaccount's investment results will shift this balance of these Subaccount
Value allocations. If you elect the portfolio rebalancing feature, we will
automatically transfer your Subaccount Value back to the percentages you
specify.
You may choose to have rebalances made quarterly, semiannually or annually until
your Annuity Date; portfolio rebalancing is not available after you annuitize.
Procedures for selecting portfolio rebalancing are generally the same as those
discussed in detail above for selecting dollar cost averaging: You may make your
request at any time prior to your Annuity Date and it will be effective when we
receive it in proper form. If you stop portfolio rebalancing, you must wait 30
days to begin again. You may specify a date for your first rebalance, or we will
treat your request as if you selected the request's effective date. If you
specify a date fewer than 30 days after your Contract Date, your first rebalance
will be delayed one month, and if you request rebalancing on your application
but do not specify a date for the first rebalance, it will occur one period
after your Contract Date, as described above under Dollar Cost Averaging. We may
change, terminate or suspend the portfolio rebalancing feature at any time.
EARNINGS SWEEP
An earnings sweep automatically transfers the earnings attributable to a
specified Investment Option (the "sweep option") to one or more other Investment
Options (your "target option(s)"). If you elect to use the earnings sweep, you
may select either the Fixed Option or the Money Market Subaccount as your sweep
option. The Account Value of your sweep option will be required to be at least
$5,000 when you elect the earnings sweep. You may select one or more Variable
Investment Options (but not the Money Market Subaccount) as your target
option(s).
You may choose to have earnings sweeps occur monthly, quarterly, semiannually or
annually until you annuitize. At each earnings sweep, we will automatically
transfer your accumulated earnings attributable to your sweep option for the
previous period proportionately to your target option(s). That is, if you select
a monthly earnings sweep, we will transfer the sweep option earnings from the
preceding month; if you select a semiannual earnings sweep, we will transfer the
sweep option earnings accumulated over the preceding six months. Earnings sweep
transfers are subject to the same requirements and limitations as other
transfers.
To determine the earnings, we take the change in the sweep option's Account
Value during the sweep period, add any withdrawals or transfers out of the sweep
option Account that occurred during the sweep period, and subtract any
allocations to the sweep option Account during the sweep period. The result of
this calculation represents the "total earnings" for the sweep period.
If, during the sweep period, you withdraw or transfer amounts from the sweep
option Account, we assume that earnings are withdrawn or transferred before any
other Account Value. Therefore, your "total earnings" for the sweep period will
be reduced by any amounts withdrawn or transferred during the sweep option
period. The remaining earnings are eligible for the sweep transfer.
Procedures for selecting the earnings sweep are generally the same as those
discussed in detail above for selecting dollar cost averaging and portfolio
rebalancing: You may make your request at any time and it will be effective when
we receive it in a form satisfactory to us. If you stop the earnings sweep, you
must wait 30 days
12
<PAGE>
to begin again. You may specify a date for your first sweep, or we will treat
your request as if you selected the request's effective date. If you specify a
date fewer than 30 days after your Contract Date, your first earnings sweep will
be delayed one month, and if you request the earnings sweep on your application
but do not specify a date for the first sweep, it will occur one period after
your Contract Date, as described above under Dollar Cost Averaging.
If, as a result of an earnings sweep transfer, your source Account Value falls
below $500, we have the right, at our option, to transfer that remaining Account
Value to your target account(s) on a proportionate basis relative to your most
recent allocation instructions. We may change, terminate or suspend the earnings
sweep option at any time.
PRE-AUTHORIZED WITHDRAWALS
You may specify a dollar amount for your pre-authorized withdrawals, or you may
specify a percentage of your Contract Value or an Account Value. You may direct
us to make your pre-authorized withdrawals from one or more specific Investment
Options; if you do not give us these specific instructions, amounts will be
deducted proportionately from your Account Value in each Fixed or Variable
Investment Option.
Procedures for selecting pre-authorized withdrawals are generally the same as
those discussed in detail above for selecting dollar cost averaging, portfolio
rebalancing, and earnings sweeps: You may make your request at any time and it
will be effective when we receive it in proper form. If you stop the
pre-authorized withdrawals, you must wait 30 days to begin again. You may
specify a date for the first withdrawal, or we will treat your request as if you
selected the request's effective date. If you specify a date fewer than 30 days
after your Contract Date, your first pre-authorized withdrawal will be delayed
one month, and if you request the pre-authorized withdrawals on your application
but do not specify a date for the first withdrawal, it will occur one period
after your Contract Date.
If your pre-authorized withdrawals cause your Account Value in any Investment
Option to fall below $500, we have the right, at our option, to transfer that
remaining Account Value to your other Investment Options on a proportionate
basis relative to your most recent allocation instructions. If your
pre-authorized withdrawals cause your Contract Value to fall below $1,000, we
may, at our option, terminate your Contract and send you the remaining
withdrawal proceeds.
Pre-authorized withdrawals are subject to the same withdrawal charges as are
other withdrawals, and each withdrawal is subject to any applicable charge for
premium taxes and/or other taxes, to federal income tax on its taxable portion,
and, if you have not reached age 59 1/2, a federal tax penalty of at least 10%.
DEATH BENEFIT
Any death benefit payable will be calculated as of the date we receive proof (in
proper form) of the Annuitant's death (or, if applicable, the Contract Owner's
death) and instructions regarding payment; any claim of a death benefit must be
made in proper form. A recipient of death benefit proceeds may elect to have
this benefit paid in one lump sum, in periodic payments, in the form of a
lifetime annuity or in some combination of these. Annuity payments will begin
within 30 days once we receive all information necessary to process the claim.
If your Contract names Joint or Contingent Annuitants, no death benefit proceeds
will be payable unless and until the last Annuitant dies prior to the Annuity
Date or a Contract Owner dies prior to the Annuity Date. If yours is a Qualified
Contract, your Contingent Annuitant or Contingent Owner must be your spouse.
JOINT ANNUITANTS ON QUALIFIED CONTRACTS
If your Contract was issued in connection with a Qualified Plan subject to
Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), and
you change your marital status after your Contract Date, you may be permitted to
add a Joint Annuitant on your Annuity Date and to change your Joint Annuitant.
Generally speaking, you may be permitted to add a new spouse as a Joint
Annuitant, and you may be permitted to remove a Joint Annuitant who is no longer
your spouse. You may call us for more information.
13
<PAGE>
1035 EXCHANGES
You may make your initial Purchase Payment through an exchange of an existing
annuity contract. To exchange, you must complete a 1035 Exchange form, which is
available by calling your representative, or by calling us at 1-800-722-2333,
and mail the form along with the annuity contract you are exchanging (plus your
completed application if you are making an initial Purchase Payment) to us.
In general terms, Section 1035 of the Code provides that you recognize no gain
or loss when you exchange one annuity contract solely for another annuity
contract. However, transactions under Section 1035 may be subject to special
rules and may require special procedures and record-keeping, particularly if the
exchanged annuity contract was issued prior to August 14, 1982. You should
consult your tax adviser prior to effecting a 1035 Exchange.
SAFEKEEPING OF ASSETS
We are responsible for the safekeeping of the assets of the Separate Account.
These assets are held separate and apart from the assets of our General Account
and our other separate accounts.
FINANCIAL STATEMENTS
The statement of net assets of Separate Account A as of December 31, 1999 and
the related statement of operations for the year then ended and statements of
changes in net assets for each of the two years in the period then ended are
incorporated by reference in this Statement of Additional Information from the
Annual Report of Separate Account A dated December 31, 1999. Pacific Life's
consolidated financial statements as of December 31, 1999 and 1998 and for each
of the three years in the period ended December 31, 1999 are set forth beginning
on the next page. These financial statement 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 information in Separate Account A's Annual Report relates to variable
annuity contracts other than the Contract that we have issued and that are
funded by Separate Account A.
INDEPENDENT AUDITORS
The consolidated financial statements of Pacific Life as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
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, 1999 and 1998, 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, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 2000
15
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
--------------------------------------------------------------------------------------
(IN MILLIONS)
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $14,814.0 $13,804.7
Equity securities 295.2 547.5
Trading securities at estimated fair value 99.9 97.0
Mortgage loans 2,920.2 2,788.7
Real estate 236.0 172.7
Policy loans 4,258.5 4,003.2
Other investments 882.7 951.7
--------------------------------------------------------------------------------------
TOTAL INVESTMENTS 23,506.5 22,365.5
Cash and cash equivalents 439.4 154.1
Deferred policy acquisition costs 1,446.1 899.8
Accrued investment income 287.2 259.3
Other assets 830.7 361.2
Separate account assets 23,613.1 15,844.0
--------------------------------------------------------------------------------------
TOTAL ASSETS $50,123.0 $39,883.9
======================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life and investment-type products $19,045.5 $17,973.0
Future policy benefits 4,386.0 2,480.5
Short-term and long-term debt 224.4 445.1
Other liabilities 939.2 813.3
Separate account liabilities 23,613.1 15,844.0
--------------------------------------------------------------------------------------
TOTAL LIABILITIES 48,208.2 37,555.9
--------------------------------------------------------------------------------------
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 139.9 126.2
Unearned ESOP shares (11.6)
Retained earnings 2,034.5 1,663.5
Accumulated other comprehensive income (loss) -
Unrealized gain (loss) on securities available for
sale, net (278.0) 508.3
--------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 1,914.8 2,328.0
--------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $50,123.0 $39,883.9
======================================================================================
</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,
1999 1998 1997
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------
(IN MILLIONS)
REVENUES
Universal life and investment-type product policy fees $ 653.8 $ 525.3 $ 431.2
Insurance premiums 483.9 537.1 526.4
Net investment income 1,473.3 1,413.6 1,325.4
Net realized investment gains 101.5 39.4 85.4
Commission revenue 234.3 220.1 146.6
Other income 144.7 112.5 97.9
------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,091.5 2,848.0 2,612.9
------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life and investment-type
products 904.4 880.8 797.8
Policy benefits paid or provided 734.4 757.0 712.6
Commission expenses 484.6 387.2 305.1
Operating expenses 453.4 468.0 507.9
------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,576.8 2,493.0 2,323.4
------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 514.7 355.0 289.5
Provision for income taxes 143.7 113.5 113.5
------------------------------------------------------------------------------------------------
NET INCOME $ 371.0 $ 241.5 $ 176.0
================================================================================================
</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 Unearned Other
------------------- Paid-in ESOP Retained Comprehensive
Shares Amount Capital Shares Earnings Income (Loss) Total
<S> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
BALANCES,
JANUARY 1, 1997 $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 Pacific LifeCorp (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
Comprehensive loss:
Net income 371.0 371.0
Change in unrealized gain on
securities available for
sale, net (786.3) (786.3)
--------
Total comprehensive loss (415.3)
Issuance of partnership units by
affiliate 10.6 10.6
Capital contribution 3.1 3.1
Purchase of ESOP note $(13.1) (13.1)
Allocation of unearned ESOP shares 1.5 1.5
----------------------------------------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1999 0.6 $30.0 $139.9 $(11.6) $2,034.5 $(278.0) $1,914.8
======================================================================================================================
</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,
1999 1998 1997
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 371.0 $ 241.5 $ 176.0
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization on fixed maturity securities (77.8) (39.4) (26.6)
Depreciation and other amortization 20.5 26.0 38.3
Earnings of equity method investees (92.9) (99.0) (78.1)
Deferred income taxes (8.5) (20.6) (14.4)
Net realized investment gains (101.5) (39.4) (85.4)
Net change in deferred policy acquisition costs (546.3) (171.9) (196.4)
Interest credited to universal life and investment-type
products 904.4 880.8 797.8
Change in trading securities (2.9) (14.3) (18.3)
Change in accrued investment income (27.9) 3.1 (59.9)
Change in future policy benefits 58.1 (9.7) (16.3)
Change in other assets and liabilities 207.1 102.2 574.9
------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 703.3 859.3 1,091.6
------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (4,173.4) (4,330.5) (6,272.3)
Sales 2,333.8 2,209.3 2,224.1
Maturities and repayments 1,400.3 2,221.8 2,394.6
Repayments of mortgage loans 681.0 334.9 179.3
Proceeds from sales of mortgage loans and real estate 24.4 43.3 104.4
Purchases of mortgage loans and real estate (886.3) (1,246.3) (643.7)
Distributions from partnerships 138.2 119.5 91.6
Change in policy loans (255.3) (129.7) (301.4)
Cash received from acquisitions of insurance blocks of
business 164.9 1,215.9
Other investing activity, net 255.6 (466.6) (70.8)
------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (316.8) (1,244.3) (1,078.3)
------------------------------------------------------------------------------------------------
(CONTINUED)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
19
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(CONTINUED) 1999 1998 1997
<S> <C> <C> <C>
---------------------------------------------------------------------------------------------------
(IN MILLIONS)
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,453.4 $ 4,007.0 $ 2,679.8
Withdrawals (4,322.3) (3,770.7) (2,667.3)
Net change in short-term and long-term debt (220.7) 191.5 (16.5)
Purchase of ESOP note (13.1)
Allocation of unearned ESOP shares 1.5
Initial capitalization of Pacific Mutual Holding Company (2.0)
Dividend paid to Pacific LifeCorp (5.0)
---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (101.2) 427.8 (11.0)
---------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 285.3 42.8 2.3
Cash and cash equivalents, beginning of year 154.1 111.3 109.0
---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 439.4 $ 154.1 $ 111.3
===================================================================================================
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisitions of an annuity and an insurance block of business in 1999 and
1997, respectively, as discussed in Note 4, the following assets and liabilities were assumed:
Fixed maturity securities $ 1,592.7
Cash and cash equivalents 164.9 $ 1,215.9
Policy loans 440.3
Other assets 100.4 43.4
--------- ---------
Total assets assumed $ 1,858.0 $ 1,699.6
--------- ---------
Policyholder account values $ 1,693.8
Annuity reserves $ 1,847.4
Other liabilities 10.6 5.8
--------- ---------
Total liabilities assumed $ 1,858.0 $ 1,699.6
--------- ---------
===================================================================================================
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>
<TABLE>
<S> <C> <C> <C>
Income taxes paid $83.0 $127.9 $153.0
Interest paid $23.3 $ 24.0 $ 26.1
====================================================================================================
</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
DESCRIPTION OF BUSINESS
Pacific Life Insurance Company ("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 is an indirect subsidiary of Pacific Mutual
Holding Company ("PMHC"), a mutual holding company, and a wholly owned
subsidiary of Pacific LifeCorp, an intermediate stock holding company. PMHC
and Pacific LifeCorp were organized pursuant to consent received from the
Insurance Department of the State of California and the implementation of a
plan of conversion to form a mutual holding company structure in 1997 (the
"Conversion"). 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.
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.
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 majority owned and controlled
subsidiaries. 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 filed with regulatory authorities (Note 2).
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("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. Adoption of this accounting
standard did not have a material impact on the Company's consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 requires, among
other things, that all derivatives be recognized in the consolidated
statements of financial condition as either assets or liabilities and
measured at estimated fair value. The corresponding derivative gains and
losses should be reported based upon the hedge relationship, if such a
relationship exists. Changes in the estimated fair value of derivatives
that are not designated as hedges or that do not meet the hedge accounting
criteria in SFAS No. 133 are required to be reported in income. The Company
is required to adopt SFAS No. 133 as of January 1, 2001. The Company is in
the process of quantifying the impact of SFAS No. 133 on its consolidated
financial statements.
21
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk."
SOP 98-7 provides guidance on how to account for insurance and reinsurance
contracts that do not transfer insurance risk under a method referred to as
deposit accounting. SOP 98-7 is effective for fiscal years beginning after
June 15, 1999. The Company currently plans to adopt SOP 98-7 on January 1,
2000. Adoption of this accounting standard is not expected to have a
material impact on the Company's consolidated financial statements.
INVESTMENTS
Available for sale fixed maturity and equity securities are reported at
estimated fair value, with unrealized gains and losses, net of deferred
income taxes and adjustments related to deferred policy acquisition costs,
included as a separate component of equity on the accompanying consolidated
statements of financial condition. The cost of fixed maturity and equity
securities is adjusted for impairments in value deemed to be other than
temporary. Trading securities are reported at estimated fair value with
unrealized gains and losses included in net realized investment 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 investment
gains on the accompanying consolidated statements of operations.
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 liabilities. Unrealized
gains and losses of other derivatives are included in net realized
investment gains on the accompanying consolidated statements of operations.
Mortgage loans, net of valuation allowances, and policy loans are stated at
unpaid principal balances.
Real estate is carried at depreciated cost, net of writedowns, 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.
Partnership and joint venture interests in which the Company does not have
a controlling interest or a majority ownership are generally recorded using
the equity method of accounting and are included in other investments on
the accompanying consolidated statements of financial condition.
22
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company, through its wholly owned subsidiary Pacific Asset Management
LLC ("PAM"), has an approximate 33% beneficial ownership interest in PIMCO
Advisors L.P. ("PIMCO Advisors") as of December 31, 1999 and 1998. 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. During 1999 and 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 years ended December 31, 1999 and
1998, there was a direct increase to the Company's stockholder's equity of
$10.6 million and $6.1 million, respectively. During 1998, the Company also
acquired the beneficial ownership of additional partnership units. Deferred
taxes resulting from these transactions have been included in the
accompanying consolidated financial statements.
On October 31, 1999, PAM entered into an Implementation and Merger
Agreement with Allianz of America, Inc. ("Allianz") and a number of other
parties in which Allianz will purchase 70% of the outstanding partnership
units of PIMCO Advisors. PAM is exchanging its interest in PIMCO Advisors
for a beneficial economic interest in a new class of PIMCO Advisors
partnership units with a cash distribution comprised of a fixed and
variable return. This transaction is anticipated to close during the first
half of 2000, subject to certain closing conditions and approvals.
In connection with this transaction, PAM has entered into a Continuing
Investment Agreement with Allianz with respect to its investment in PIMCO
Advisors. The investment in PIMCO Advisors held by PAM will be subject to
put and call options held by PAM and Allianz, respectively. The put option
gives PAM the right to require Allianz, on the last business day of each
calendar quarter, to purchase all of the investment in PIMCO Advisors held
by PAM. The put option price would be the distributions per unit amount, as
defined in the Continuing Investment Agreement, for the most recently
completed four calendar quarters multiplied by a factor of 14.0. The call
option gives Allianz the right to require PAM, on any January 31, April 30,
July 31, or October 31, beginning on January 31, 2003, to sell its
investment in PIMCO Advisors to Allianz. The call option price would be the
distributions per unit, as defined in the Continuing Investment Agreement,
for the most recently completed four calendar quarters multiplied by a
factor of 14.0 if the call per unit value is at least $50.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid debt instruments with an
original maturity of three months or less.
23
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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-type products, such costs are generally amortized over the
expected life of the contract 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 traditional
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, 1999, 1998 and
1997, amortization of deferred policy acquisition costs included in
commission expenses amounted to $131.7 million, $73.0 million and
$50.2 million, respectively, and included in operating expenses amounted to
$55.4 million, $33.5 million and $29.4 million, respectively, on the
accompanying consolidated statements of operations.
UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS
Universal life and investment-type products, including guaranteed
investment contracts and funding agreements, 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% to 8.4% during 1999, 1998 and 1997.
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 1999, 1998 and 1997.
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, 1999
and 1998, 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-type
products 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
recorded on the trade date.
24
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
certain 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.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments, disclosed in Notes 5, 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.
RISKS AND UNCERTAINTIES
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include, but are not
limited to, interest rate risk, investment market 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.
25
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 which 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 1999
financial statement presentation.
26
<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,
1999 1998
<S> <C> <C>
----------------------
(IN MILLIONS)
Statutory capital and surplus $1,219.1 $1,157.4
Deferred policy acquisition costs 1,398.6 944.5
Deferred income taxes 304.5 307.1
Asset valuation reserve 232.1 298.7
Non admitted assets 83.3 40.4
Subsidiary equity 25.2 26.5
Surplus notes (149.6) (149.6)
Unrealized gain (loss) on securities available
for sale, net (278.0) 508.3
Insurance and annuity reserves (845.2) (654.4)
Other (75.2) (150.9)
----------------------
Stockholder's equity as reported herein $1,914.8 $2,328.0
======================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
--------------------------------------
(IN MILLIONS)
Statutory net income $ 168.4 $ 187.6 $ 121.5
Deferred policy acquisition costs 379.2 177.3 160.4
Deferred income taxes (2.7) 17.9 41.2
Earnings of subsidiaries (27.5) (32.8) (40.6)
Insurance and annuity reserves (184.3) (145.1) (107.0)
Other 37.9 36.6 0.5
--------------------------------------
Net income as reported herein $ 371.0 $ 241.5 $ 176.0
======================================
</TABLE>
27
<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 the risk-based capital results 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, 1999 and 1998, Pacific Life and
Pacific Life & Annuity Company, formerly PM Group Life Insurance Company, a
wholly owned Arizona domiciled life insurance subsidiary of Pacific Life,
exceeded the minimum risk-based capital requirements.
CODIFICATION
In 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 Pacific LifeCorp 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 1999
statutory results, Pacific Life could pay $174.0 million in dividends in
2000 without prior approval. No dividends were paid during 1999 and 1998.
The maximum amount of ordinary dividends that can be paid by PL&A without
restriction cannot exceed the lesser of 10% of statutory surplus as regards
to policyholders, or the statutory net gain from operations. No dividends
were paid during 1999 and 1998.
PERMITTED PRACTICE
Net cash distributions received on PAM's investment in PIMCO Advisors 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.
28
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK (CONTINUED)
Assets that support the Closed Block, which are primarily included in fixed
maturity securities, policy loans and accrued investment income, amounted
to $293.5 million and $311.6 million as of December 31, 1999 and 1998,
respectively. Liabilities allocated to the Closed Block, which are
primarily included in future policy benefits amounted to $341.8 million and
$352.8 million as of December 31, 1999 and 1998, respectively. The
contribution to income from the Closed Block amounted to $3.8 million, $5.1
million and $5.7 million and is primarily included in insurance premiums,
net investment income and policy benefits paid or provided for the years
ended December 31, 1999, 1998 and 1997, respectively.
4. ACQUISITIONS
Effective July 15, 1999, Pacific Life acquired a payout annuity block of
business from Confederation Life Insurance Company (U.S.) in
Rehabilitation, which is currently under rehabilitation ("Confederation
Life"). This block of business consists of approximately 16,000 annuitants
having reserves of $1.8 billion. The assets received as part of this
acquisition amounted to $1.6 billion in fixed maturity securities and
$0.2 billion in cash.
The remaining cost of acquiring this annuity 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
$74.5 million as of December 31, 1999, and is included in deferred policy
acquisition costs on the accompanying consolidated statement of financial
condition. Amortization of this asset for the year ended December 31, 1999
amounted to $0.4 million, and is included in commission expense on the
accompanying consolidated statement of operations.
On June 1, 1997, Pacific Life acquired a block of corporate-owned life
insurance ("COLI") policies from Confederation Life, which consisted of
approximately 38,000 policies having a face amount of insurance of
$8.6 billion and reserves of $1.7 billion. The assets received as part of
this acquisition amounted to $1.2 billion in cash and $0.4 billion in
policy loans. This block is primarily non leveraged COLI.
The remaining cost of acquiring this COLI 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
$27.9 million and $36.5 million as of December 31, 1999 and 1998,
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, 1999, 1998 and 1997 amounted
to $8.6 million, $7.7 million and $0.9 million, respectively, and is
included in commission expenses on the accompanying consolidated statements
of operations.
During 1999, Pacific Life acquired a 95% interest in Grayhawk Golf
Holdings, LLC, which owns 100% of a real estate investment property in
Arizona.
29
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. 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 available for sale 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
<S> <C> <C> <C> <C>
-----------------------------------------------------
(IN MILLIONS)
As of December 31, 1999:
--------------------------------------------------------
U.S. Treasury securities and obligations of
U.S. government authorities and agencies $ 107.7 $ 9.3 $ 1.0 $ 116.0
Obligations of states, political subdivisions 642.0 13.0 27.7 627.3
Foreign governments 285.0 10.5 6.7 288.8
Corporate securities 8,725.0 220.3 387.4 8,557.9
Mortgage-backed and asset-backed securities 5,323.8 33.7 251.1 5,106.4
Redeemable preferred stock 108.5 14.2 5.1 117.6
-----------------------------------------------------
Total fixed maturity securities $15,192.0 $301.0 $679.0 $14,814.0
=====================================================
Total equity securities $ 269.3 $ 57.0 $ 31.1 $ 295.2
=====================================================
As of December 31, 1998:
--------------------------------------------------------
U.S. Treasury securities and obligations of
U.S. government authorities and agencies $ 95.6 $ 25.1 $ 120.7
Obligations of states, political subdivisions 481.9 91.3 $ 11.8 561.4
Foreign governments 253.1 28.3 4.3 277.1
Corporate securities 7,888.7 446.3 124.5 8,210.5
Mortgage-backed and asset-backed securities 4,434.7 143.1 53.0 4,524.8
Redeemable preferred stock 104.0 11.3 5.1 110.2
-----------------------------------------------------
Total fixed maturity securities $13,258.0 $745.4 $198.7 $13,804.7
=====================================================
Total equity securities $ 364.4 $202.6 $ 19.5 $ 547.5
=====================================================
</TABLE>
30
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities
available for sale as of December 31, 1999, 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
<S> <C> <C>
-----------------------
(IN MILLIONS)
Due in one year or less $ 566.5 $ 572.6
Due after one year through five years 3,324.0 3,366.5
Due after five years through ten years 2,995.9 2,921.4
Due after ten years 2,981.8 2,847.1
-----------------------
9,868.2 9,707.6
Mortgage-backed and asset-backed securities 5,323.8 5,106.4
-----------------------
Total $15,192.0 $14,814.0
=======================
</TABLE>
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
--------------------------------
(IN MILLIONS)
Fixed maturity securities $1,030.3 $ 929.7 $ 940.2
Equity securities 14.6 13.5 10.2
Mortgage loans 205.6 174.6 129.5
Real estate 46.5 38.1 53.6
Policy loans 158.6 161.5 144.3
Other 131.7 203.2 156.2
--------------------------------
Gross investment income 1,587.3 1,520.6 1,434.0
Investment expense 114.0 107.0 108.6
--------------------------------
Net investment income $1,473.3 $1,413.6 $1,325.4
================================
</TABLE>
31
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
Net realized investment gain, including changes in valuation allowances,
are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
------------------------------------
(IN MILLIONS)
Fixed maturity securities available for sale:
Gross gain $ 89.3 $ 92.7 $ 56.3
Gross loss (72.9) (84.8) (31.1)
Equity securites available for sale:
Gross gain 109.0 40.9 36.1
Gross loss (52.0) (6.8) (6.2)
Mortgage loans on real estate 10.1 (10.7) (4.6)
Real estate 18.0 1.2 16.9
Other investments 6.9 18.0
------------------------------------
Total $101.5 $ 39.4 $ 85.4
====================================
</TABLE>
The change in gross unrealized gain on investments in available for sale
and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
<S> <C> <C> <C>
---------------------------------
(IN MILLIONS)
Available for sale securities:
Fixed maturity $ (924.7) $(229.5) $223.5
Equity (157.2) 63.1 85.7
---------------------------------
Total $(1,081.9) $(166.4) $309.2
=================================
Trading securities $ 0.4 $ (2.5) $ (1.1)
=================================
</TABLE>
As of December 31, 1999 and 1998, investments in fixed maturity securities
with a carrying value of $12.6 million and $13.0 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements. One diversified financial security, rated AA, exceeds 10% of
total stockholder's equity as of December 31, 1999.
32
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
--------------------------------------------------
(IN MILLIONS)
Assets:
Fixed maturity and equity securities (Note 5) $15,109.2 $15,109.2 $14,352.2 $14,352.2
Trading securities 99.9 99.9 97.0 97.0
Mortgage loans 2,920.2 2,983.8 2,788.7 2,911.2
Policy loans 4,258.5 4,258.5 4,003.2 4,003.2
Cash and cash equivalents 439.4 439.4 154.1 154.1
Derivative instruments 43.5 43.5 176.1 176.1
Liabilities:
Guaranteed interest contracts 6,365.0 6,296.3 5,665.3 5,751.0
Deposit liabilities 544.9 533.7 599.9 626.7
Annuity liabilities 1,323.3 1,304.8 1,448.0 1,430.1
Short-term debt 60.0 60.0 295.5 295.5
Long-term debt 164.4 164.3 149.6 176.0
Derivative instruments 229.5 229.5 36.0 36.0
</TABLE>
The following methods and assumptions were used to estimate the fair value
of these financial instruments as of December 31, 1999 and 1998:
TRADING SECURITIES
The estimated fair value of trading securities is based on quoted market
prices.
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 because interest rates are generally variable and based on
current market rates.
CASH AND CASH EQUIVALENTS
The carrying values approximate fair values due to the short-term
maturities of these instruments.
33
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (CONTINUED)
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.
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
rates.
LONG-TERM DEBT
The estimated fair value of surplus notes is based on market quotes. The
carrying amount of other long-term debt is a reasonable estimate of its
fair value because the interest on the debt is approximately the same as
current market rates.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Life has issued certain contracts to 401(k) plans totaling $1.7
billion as of December 31, 1999, 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.
34
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE 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 as 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 on 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.
Outstanding derivatives with off balance sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values
as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
------------------------------------------------
Notional or Carrying Estimated Carrying Estimated
Contract Amounts Value Fair Value Value Fair Value
1999 1998 1999 1999 1998 1998
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------
(IN MILLIONS)
Interest rate floors, caps, options
and swaptions $1,003.0 $2,653.0 $ 5.0 $ 5.0 $ 67.9 $ 67.9
Interest rate swap contracts 2,867.5 2,608.6 38.5 38.5 (23.3) (23.3)
Asset swap contracts 58.1 63.2 (3.6) (3.6) (3.6) (3.6)
Credit default and total return
swaps 2,061.9 649.6 (43.1) (43.1) (9.1) (9.1)
Financial futures contracts 676.8 608.9
Foreign currency derivatives 1,685.1 1,131.2 (182.8) (182.8) 108.2 108.2
------------------------------------------------------------------------
Total derivatives $8,352.4 $7,714.5 $(186.0) $(186.0) $140.1 $140.1
========================================================================
</TABLE>
35
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE INSTRUMENTS (CONTINUED)
A reconciliation of the notional or contract amounts and discussion of the
various derivative instruments are as follows:
<TABLE>
<CAPTION>
Balance Terminations
Beginning and Balance
of Year Acquisitions Maturities End
of Year
<S> <C> <C> <C> <C>
-----------------------------------------------------------
(IN MILLIONS)
December 31, 1999:
------------------------------------------------
Interest rate floors, caps, options and
swaptions $2,653.0 $ 670.9 $2,320.9 $1,003.0
Interest rate swap contracts 2,608.6 1,226.2 967.3 2,867.5
Asset swap contracts 63.2 7.8 12.9 58.1
Credit default and total return swaps 649.6 1,617.3 205.0 2,061.9
Financial futures contracts 608.9 5,586.8 5,518.9 676.8
Foreign currency derivatives 1,131.2 874.0 320.1 1,685.1
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
</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 on 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 on the accompanying consolidated
statements of operations over the term of the agreement. Interest rate
floors and caps, options and swaptions mature during the years 2000 through
2017.
36
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE INSTRUMENTS (CONTINUED)
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 on the accompanying
consolidated statements of operations over the life of the agreements. The
interest rate swap contracts mature during the years 2000 through 2021.
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
on 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 on
the accompanying consolidated statements of operations over the life of the
agreements. Credit default and total return swaps mature during the years
2000 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 on the accompanying consolidated
statements of operations over the life of the agreements. Foreign currency
derivatives expire during the years 2000 through 2013.
37
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS
The detail of universal life and investment-type product liabilities is as
follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
----------------------
(IN MILLIONS)
Universal life $10,807.7 $10,218.0
Investment-type products 8,237.8 7,755.0
----------------------
$19,045.5 $17,973.0
======================
</TABLE>
The detail of universal life and investment-type product policy fees and
interest credited net of reinsurance ceded is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
------------------------------------
(IN MILLIONS)
Policy fees:
Universal life $509.2 $439.9 $377.5
Investment-type products 144.6 85.4 53.7
------------------------------------
Total policy fees $653.8 $525.3 $431.2
====================================
Interest credited:
Universal life $443.9 $440.8 $368.2
Investment-type products 460.5 440.0 429.6
------------------------------------
Total interest credited $904.4 $880.8 $797.8
====================================
</TABLE>
38
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claim adjustment expenses,
which is included in future policy benefits on the accompanying
consolidated statements of financial condition, is summarized as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1999 1998
<S> <C> <C>
-------------------------
(IN MILLIONS)
Balance at January 1 $137.4 $140.5
Less reinsurance recoverables 0.1 0.7
-------------------------
Net balance at January 1 137.3 139.8
-------------------------
Incurred related to:
Current year 376.8 412.9
Prior years (33.8) (18.3)
-------------------------
Total incurred 343.0 394.6
-------------------------
Paid related to:
Current year 286.7 303.5
Prior years 77.1 93.6
-------------------------
Total paid 363.8 397.1
-------------------------
Net balance at December 31 116.5 137.3
Plus reinsurance recoverables 0.1 0.1
-------------------------
Balance at December 31 $116.6 $137.4
=========================
</TABLE>
As a result of payment of prior years' estimated claims, the provision for
claims and claim adjustment expenses decreased by $33.8 million and
$18.3 million for the years ended December 31, 1999 and 1998, respectively.
The reduction is primarily due to lower than anticipated settlement of
claims and reduced claim adjustment expenses.
10. SHORT-TERM AND LONG-TERM DEBT
Pacific Life borrows for short-term needs by issuing commercial paper.
There was no commercial paper debt outstanding as of December 31, 1999.
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
5.2%. As of December 31, 1999 and 1998, Pacific Life had a revolving credit
facility of $350 million. There was no debt outstanding under the revolving
credit facility as of December 31, 1999 and 1998.
PAM had bank borrowings outstanding of $60 million as of December 31, 1999
and 1998. The interest rate was 6.0%, 5.1% and 6.2% as of December 31,
1999, 1998 and 1997, respectively. Outstanding debt is due and payable in
2000 and subject to renewal. The borrowing limit for PAM as of
December 31, 1999 and 1998 was $100 million and $200 million, respectively.
In connection with Pacific Life's acquisition of Grayhawk Golf Holdings,
LLC in 1999, the Company assumed a note payable with a maturity date of
May 22, 2008. The note bears a fixed rate of interest of 7.6%. The
outstanding balance as of December 31, 1999 was $14.8 million.
39
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
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, 1999,
1998 and 1997 and is included in net investment income on the accompanying
consolidated statements of operations.
11. 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>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
------------------------------------
(IN MILLIONS)
Current $152.2 $134.1 $127.9
Deferred (8.5) (20.6) (14.4)
------------------------------------
$143.7 $113.5 $113.5
====================================
</TABLE>
40
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED)
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
--------------------------------------
(IN MILLIONS)
Policyholder reserves $ 50.9 $(29.5) $ 20.1
Deferred policy acquisition costs 20.0 (12.6) (18.0)
Non deductible reserves 4.0 28.2 (27.6)
Partnership income (25.6) 20.8
Investment valuation (28.0) (24.5) 3.9
Duration hedging (29.6) 20.8 (2.6)
Other (0.2) (2.6) 9.8
--------------------------------------
Deferred taxes from operations (8.5) 0.6 (14.4)
Release of subsidiary deferred taxes (21.2)
--------------------------------------
Deferred tax provision $ (8.5) $(20.6) $(14.4)
======================================
</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 in 1998.
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>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
--------------------------------------
(IN MILLIONS)
Provision for income taxes at the statutory rate $180.1 $124.2 $101.3
Amortization of intangibles on equity
method investments 2.0 4.3 7.6
Non taxable investment income (7.3) (3.6) (2.6)
Tax settlement (7.5)
Low income housing tax credits (19.2) (3.9)
Equity tax (5.0) 5.0
Other (4.4) (2.5) 2.2
--------------------------------------
Provision for income taxes $143.7 $113.5 $113.5
======================================
</TABLE>
41
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED)
The net deferred tax asset (liability), included in other assets on the
accompanying consolidated statements of financial condition, is comprised
of the following tax effected temporary differences:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
--------------------
(IN MILLIONS)
Deferred tax assets
Policyholder reserves $203.4 $ 254.3
Investment valuation 72.7 44.7
Deferred compensation 35.4 33.7
Duration hedging 21.1 (8.5)
Postretirement benefits 9.0 8.9
Dividends 8.4 7.6
Partnership income 4.8 (20.8)
Non deductible reserves 1.9 5.9
Other 3.1 5.2
--------------------
Total deferred tax assets 359.8 331.0
Deferred tax liabilities
Deferred policy acquisition costs 44.0 24.0
Depreciation 2.7 2.4
--------------------
Total deferred tax liabilities 46.7 26.4
--------------------
Net deferred tax asset from operations 313.1 304.6
Unrealized (gain) loss on securities 150.8 (272.3)
Issuance of partnership units by affiliate (81.1) (74.9)
--------------------
Net deferred tax asset (liability) $382.8 $ (42.6)
====================
</TABLE>
42
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMPREHENSIVE INCOME
The Company displays comprehensive income and its components on the
accompanying consolidated statements of stockholder's equity and the note
herein. Other comprehensive income is shown net of reclassification
adjustments 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,
1999 1998 1997
<S> <C> <C> <C>
---------------------------------------
(IN MILLIONS)
Calculation of Holding Gain (Loss):
-------------------------------------------------
Gross holding gain (loss) on securities
available for sale $(1,179.7) $(53.8) $359.8
Deferred policy acquisition costs 43.9 (6.9) (3.1)
Tax (expense) benefit 397.7 21.1 (125.1)
---------------------------------------
Holding gain (loss) on securities available
for sale, net of tax $ (738.1) $(39.6) $231.6
=======================================
Calculation of Reclassification Adjustment:
-------------------------------------------------
Realized gain on sale of securities
available for sale $ 73.4 $ 42.0 $ 55.1
Tax expense (25.2) (14.7) (19.5)
---------------------------------------
Reclassification adjustment, net of tax $ 48.2 $ 27.3 $ 35.6
=======================================
Amounts Reported in Other Comprehensive Income:
-------------------------------------------------
Holding gain (loss) on securities available
for sale, net of tax $ (738.1) $(39.6) $231.6
Less reclassification adjustment, net of tax 48.2 27.3 35.6
---------------------------------------
Net unrealized gain (loss) recognized in
other comprehensive income (loss) $ (786.3) $(66.9) $196.0
=======================================
</TABLE>
43
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. REINSURANCE
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger mortality
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 of 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 business reinsured on a yearly renewable term and modified
coinsurance basis remain with, and under the control of the Company.
Approximate amounts recoverable (payable) from (to) reinsurers include the
following amounts:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
--------------------
(IN MILLIONS)
Reinsured universal life deposits $(55.3) $(46.0)
Future policy benefits 141.8 108.9
Unpaid claims 8.5 12.5
Paid claims 6.4 24.3
</TABLE>
As of December 31, 1999, 74% 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,
1999 1998 1997
<S> <C> <C> <C>
--------------------------------------
(IN MILLIONS)
Ceded reinsurance netted against insurance premiums $ 92.8 $ 82.7 $ 70.7
Assumed reinsurance included in insurance premiums 13.9 17.2 18.1
Ceded reinsurance netted against policy fees 52.3 65.0 77.5
Ceded reinsurance netted against net investment income 211.9 203.3 204.9
Ceded reinsurance netted against interest credited 110.5 162.8 165.8
Ceded reinsurance netted against policy benefits 88.4 121.3 93.4
Assumed reinsurance included in policy benefits 8.3 17.7 12.7
</TABLE>
44
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION
The Company's six operating segments are Life Insurance, Institutional
Products, Annuities, Group Insurance, 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 Life 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 that has produced over 10% of the segment's in force business. The
Institutional Products 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 Insurance 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 insurance brokerage services and
investment advisory services through approximately 3,200 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 operating 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 investment 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 Life 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 $100.5 million and $110 million
as of December 31, 1999 and 1998, respectively. 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 disclosed
herein is interest credited to universal life and investment-type products.
45
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION (CONTINUED)
Financial information for each of the business segments is as follows:
<TABLE>
<CAPTION>
LIFE INSTITUTIONAL GROUP BROKER- INVESTMENT CORPORATE
INSURANCE PRODUCTS ANNUITIES INSURANCE DEALERS MANAGEMENT AND OTHER
<S> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------
(IN MILLIONS)
External customers and other
revenue
December 31, 1999 $ 502.0 $ 39.1 $ 205.0 $478.4 $253.2 $ 14.9 $ 24.1
December 31, 1998 431.9 43.2 124.0 521.2 236.1 17.0 21.6
December 31, 1997 395.6 61.4 83.3 480.6 154.0 21.2 6.0
Intersegment revenues
December 31, 1999 348.5 (348.5)
December 31, 1998 185.3 (185.3)
December 31, 1997 143.3 (143.3)
Net investment income
excluding earnings of
equity method investees
December 31, 1999 580.2 645.1 78.3 23.4 0.9 8.3 44.2
December 31, 1998 586.5 565.5 88.6 23.1 0.9 8.0 42.0
December 31, 1997 507.2 509.6 149.4 24.9 0.8 6.2 49.2
Earnings of equity method
investees
December 31, 1999 (0.7) (1.2) (0.1) 107.9 (13.0)
December 31, 1998 0.1 103.1 (4.2)
December 31, 1997 0.2 80.7 (2.8)
Net realized investment
gains (losses)
December 31, 1999 12.6 26.8 0.1 (0.6) 9.9 52.7
December 31, 1998 4.1 (13.6) 4.6 1.7 4.0 38.6
December 31, 1997 9.9 12.8 0.6 2.0 20.8 39.3
Total revenues
December 31, 1999 1,094.1 709.8 283.3 501.2 602.6 141.0 (240.5)
December 31, 1998 1,022.5 595.2 217.2 546.0 422.3 132.1 (87.3)
December 31, 1997 912.7 584.0 233.3 507.5 298.1 128.9 (51.6)
Income (loss) before provision
for income tax
December 31, 1999 178.4 111.9 73.2 30.4 11.9 62.6 46.3
December 31, 1998 151.1 74.6 34.1 10.3 9.9 60.1 14.9
December 31, 1997 132.4 98.3 23.5 28.8 6.4 24.6 (24.5)
Provision (benefit) for
income tax
December 31, 1999 54.4 30.7 24.0 10.1 5.2 11.3 8.0
December 31, 1998 52.6 21.2 11.3 2.9 4.5 2.1 18.9
December 31, 1997 55.8 33.9 9.4 9.1 2.7 10.1 (7.5)
Net income (loss)
December 31, 1999 124.0 81.2 49.2 20.3 6.7 51.3 38.3
December 31, 1998 98.5 53.4 22.8 7.4 5.4 58.0 (4.0)
December 31, 1997 76.6 64.4 14.1 19.7 3.7 14.5 (17.0)
Interest credited on universal
life and investment-type
products
December 31, 1999 451.4 383.8 65.1 4.1
December 31, 1998 449.6 354.1 71.0 6.1
December 31, 1997 378.8 299.8 106.2 13.0
Assets
As of December 31, 1999 16,276.1 17,649.4 14,565.2 341.5 60.9 264.5 965.4
As of December 31, 1998 14,578.2 15,221.0 8,384.2 361.1 55.8 267.3 1,016.3
<CAPTION>
TOTAL
<S> <C>
---------
(IN
MILLIONS)
External customers and other
revenue
December 31, 1999 $ 1,516.7
December 31, 1998 1,395.0
December 31, 1997 1,202.1
Intersegment revenues
December 31, 1999 -
December 31, 1998 -
December 31, 1997 -
Net investment income
excluding earnings of
equity method investees
December 31, 1999 1,380.4
December 31, 1998 1,314.6
December 31, 1997 1,247.3
Earnings of equity method
investees
December 31, 1999 92.9
December 31, 1998 99.0
December 31, 1997 78.1
Net realized investment
gains (losses)
December 31, 1999 101.5
December 31, 1998 39.4
December 31, 1997 85.4
Total revenues
December 31, 1999 3,091.5
December 31, 1998 2,848.0
December 31, 1997 2,612.9
Income (loss) before provision
for income tax
December 31, 1999 514.7
December 31, 1998 355.0
December 31, 1997 289.5
Provision (benefit) for
income tax
December 31, 1999 143.7
December 31, 1998 113.5
December 31, 1997 113.5
Net income (loss)
December 31, 1999 371.0
December 31, 1998 241.5
December 31, 1997 176.0
Interest credited on universal
life and investment-type
products
December 31, 1999 904.4
December 31, 1998 880.8
December 31, 1997 797.8
Assets
As of December 31, 1999 50,123.0
As of December 31, 1998 39,883.9
</TABLE>
46
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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 the net periodic pension benefit are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
------------------------------------
(IN MILLIONS)
Service cost - benefits earned during the year $ 4.6 $ 4.0 $ 3.6
Interest cost on projected benefit obligation 11.5 10.9 10.4
Expected return on plan assets (16.3) (15.0) (12.8)
Amortization of net obligations and prior
service cost (1.4) (1.4) (1.4)
------------------------------------
Net periodic pension benefit $ (1.6) $ (1.5) $ (0.2)
====================================
</TABLE>
47
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
--------------------
(IN MILLIONS)
Change in Benefit Obligation:
------------------------------------------------------------
Benefit obligation, beginning of year $177.8 $157.9
Service cost 4.6 4.0
Interest cost 11.5 10.9
Plan expense (0.3) (0.3)
Actuarial (gain) loss (30.7) 11.9
Benefits paid (7.0) (6.6)
--------------------
Benefit obligation, end of year $155.9 $177.8
====================
Change in Plan Assets:
------------------------------------------------------------
Fair value of plan assets, beginning of year $195.3 $180.3
Actual return on plan assets 23.6 21.9
Plan expense (0.3) (0.3)
Benefits paid (7.0) (6.6)
--------------------
Fair value of plan assets, end of year $211.6 $195.3
====================
Funded Status Reconciliation:
------------------------------------------------------------
Funded status $ 55.7 $ 17.5
Unrecognized transition asset (47.7) (3.6)
Unrecognized prior service cost (2.4) (1.0)
Unrecognized actuarial gain (0.8) (9.7)
--------------------
Prepaid pension cost $ 4.8 $ 3.2
====================
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1999 and 1998, the weighted average discount
rate used was 8.0% and 6.5%, respectively, and the rate of increase in
future compensation levels was 5.5% and 5.0%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1999 and 1998.
48
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
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 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, 1999, 1998 and 1997 is $0.5 million, $0.7 million and
$0.8 million, respectively. As of December 31, 1999 and 1998, the
accumulated benefit obligation is $19.7 million and $19.3 million,
respectively. The fair value of the plan assets as of December 31, 1999 and
1998 is zero. The amount of accrued benefit cost included in other
liabilities on the accompanying consolidated statements of financial
condition is $24.4 million and $25.3 million as of December 31, 1999 and
1998, 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 8.0% for 1999 and 1998 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 7.0% for 1999 and 1998 and is assumed to
decrease gradually to 3.0% 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, 1999 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 10.1%. If the health care cost trend rate assumptions were
decreased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1999 would be decreased by 7.0%, and the aggregate of the
service and interest cost components of the net periodic benefit cost would
decrease by 8.9%.
The discount rate used in determining the accumulated postretirement
benefit obligation is 8.0% and 6.5% for 1999 and 1998, 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 ("ESOP"). ESOP contributions made by the Company amounted to
$5.4 million, $5.2 million and $1.1 million for the years ended
December 31, 1999, 1998 and 1997, respectively, and are included in
operating expenses on the accompanying consolidated statements of
operations.
49
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
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 LifeCorp issued 1.7 million shares of common stock
at $12.50 per share to the ESOP ("ESOP Shares") on September 2, 1997, in
exchange for a promissory note in the amount of $21.2 million ("ESOP
Note"). Interest and principal payments made by the ESOP to Pacific
LifeCorp were funded by ESOP contributions from Pacific Life.
On July 27, 1999, Pacific Life loaned cash to the ESOP to pay off the ESOP
Note due Pacific LifeCorp. This loan is included in unearned ESOP shares on
the accompanying consolidated statement of stockholder's equity as of
December 31, 1999. The unearned ESOP shares account is reduced as ESOP
shares are released for allocation to participants through ESOP
contributions by Pacific Life. In addition, when the fair value of ESOP
shares being released for allocation to participants exceeds the original
issue price of those shares, paid in capital is increased by this
difference and reflected as a capital contribution on the accompanying
consolidated statement of stockholder's equity as of December 31, 1999.
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.
16. 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
$69.7 million, $42.1 million and $27.5 million for the years ended
December 31, 1999, 1998 and 1997, respectively. In addition, Pacific Life
provides certain support services to the Pacific Select Fund for an
administration fee which is based on an allocation of actual costs. Such
administration fees amounted to $265,000, $232,000 and $165,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $7.3 million, $16.9 million and $11.4 million
for the years ended December 31, 1999, 1998 and 1997, 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 $3.2 million and
$40.3 million as of December 31, 1999 and 1998, 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 $1.0 million, $1.2 million and $1.2 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
50
<PAGE>
PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. TERMINATION AND NON COMPETITION AGREEMENTS
The Company has termination and non competition agreements 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 non
compete 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, 1999, 1998 and 1997, approximately
$53.6 million, $49.4 million and $85.8 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.
In connection with the closing of the PIMCO Advisors transaction (Note 1),
the termination and non competition agreements with certain former key
employees of PAM's subsidiaries will be assumed by Allianz.
18. COMMITMENTS AND CONTINGENCIES
The Company has outstanding commitments to make investments primarily in
fixed maturity securities, mortgage loans, limited partnerships and other
investments as follows (IN MILLIONS):
<TABLE>
<S> <C>
Years Ending December 31:
------------------------------------------------------------
2000 $437.0
2001 through 2004 210.8
2005 and thereafter 144.3
------
Total $792.1
======
</TABLE>
The Company leases office facilities under various non cancelable operating
leases. Aggregate minimum future commitments as of December 31, 1999
through the term of the leases are approximately $43.3 million.
Pacific Life has a contingent liability of approximately $23 million
related to the posting of an appeal bond in conjunction with one of its
investments. An unrelated third party has agreed to reimburse Pacific Life
for 50% of any losses incurred under the bond. In addition, Pacific Life
has given a commitment for additional capital funding, as may be required,
to certain of its subsidiaries.
Pacific Life 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 Pacific Life on or after January 1, 1982. Pacific Life has
settled this litigation pursuant to a final settlement agreement approved
by the Court in November 1998. The settlement agreement was implemented
during 1999.
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.
---------------------------------------------------------------------------
51
<PAGE>
--------------------------------------------------------------------------------
<PAGE>
FORM NO. 1618-0B
