<PAGE>
Supplement Dated January 2, 2001 to Prospectus Dated May 1, 2000
for Pacific Value, a variable annuity contract
issued by Pacific Life Insurance Company
This supplement changes the Prospectus to reflect the
following, and restates information contained in a
supplement dated October 2, 2000:
---------------------------------------------------------
Eleven new Variable The following new Variable Investment Options are added
Investment Options to the list on page 1 of the Prospectus.
are available
.Blue Chip .Strategic Value
.Aggressive Growth .Focused 30
.Financial Services .Capital Opportunities
.Health Sciences .Mid-Cap Growth
.Technology .Global Growth
.Telecommunications
---------------------------------------------------------
The Bond and Income The Bond and Income Variable Account terminated on
Investment Option September 22, 2000.
is no longer
available All references to the Bond and Income Investment
Option, Portfolio, Subaccount or Variable Account in
the Prospectus are removed.
Unless you instruct us otherwise, to the extent any
outstanding instruction you have on file with us
designates the Bond and Income Subaccount, the
instruction will be deemed an instruction for the
Managed Bond Subaccount. Instructions include, but are
not limited to, instructions for Purchase Payment
allocations, any transfer or exchange instructions,
including instructions under the Portfolio Rebalancing,
Dollar Cost Averaging, and Sweep Programs, and Partial
Withdrawal instructions.
---------------------------------------------------------
The new eleven The new eleven Variable Accounts invest in their
Variable Accounts corresponding Portfolios of the Fund. References to the
are added as 22 Variable Investment Options throughout the
Variable Investment Prospectus are changed to refer to 31 Variable
Options Investment Options or Subaccounts.
---------------------------------------------------------
The International Effective January 1, 2001, Lazard Asset Management is
Value Portfolio has the portfolio manager of the International Value
a new portfolio Portfolio.
manager
---------------------------------------------------------
A portfolio manager Mercury Asset Management US has changed its name to
has changed its Mercury Advisors.
name
<PAGE>
---------------------------------------------------------
AN OVERVIEW OF The following replaces the Other Expenses section on
PACIFIC VALUE-Fees page 7 of the Prospectus:
and Expenses Paid
by the Pacific Other Expenses
Select Fund: Other
Expenses is The table below shows the advisory fee and Fund
replaced expenses as an annual percentage of each Portfolio's
average daily net assets for the year 2000. To help
limit Fund expenses, effective July 1, 2000 we
contractually agreed to waive all or part of our
investment advisory fees or otherwise reimburse each
Portfolio for operating expenses (including
organizational expenses, but not including advisory
fees, additional costs associated with foreign
investing and extraordinary expenses) that exceed an
annual rate of 0.10% of its average daily net assets.
Such waiver or reimbursement is subject to repayment to
us to the extent such expenses fall below the 0.10%
expense cap. For each Portfolio, our right to repayment
is limited to amounts waived and/or reimbursed that
exceed the new 0.10% expense cap and, except for
Portfolios that started on or after October 2, 2000,
that do not exceed the previously established 0.25%
expense cap. Any amounts repaid to us will have the
effect of increasing such expenses of the Portfolio,
but not above the 0.10% expense cap. There is no
guarantee that we will continue to cap expenses after
December 31, 2001. In 2000, Pacific Life reimbursed
approximately $14,627 to the I-Net Tollkeeper
Portfolio, $36,874 to the Strategic Value Portfolio,
$34,687 to the Focused 30 Portfolio and $28,882 to the
Small-Cap Index Portfolio.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Less
Advisory Other 12b-1 Total adviser's Total net
Portfolio fee expenses amounts+ expenses reimbursement expenses
----------------------------------------------------------------------------------------
As an annual % of average daily net assets
<S> <C> <C> <C> <C> <C> <C>
Blue Chip/1/ 0.95 0.06 -- 1.01 -- 1.01
Aggressive Growth/1/ 1.00 0.06 -- 1.06 -- 1.06
Aggressive Equity/2/ 0.80 0.04 0.02 0.86 -- 0.86
Emerging Markets/2/ 1.10 0.20 -- 1.30 -- 1.30
Diversified Research/2/ 0.90 0.08 0.01 0.99 -- 0.99
Small-Cap Equity/2/ 0.65 0.05 -- 0.70 -- 0.70
International Large-Cap/2/ 1.05 0.13 -- 1.18 -- 1.18
Equity 0.65 0.04 -- 0.69 -- 0.69
I-Net Tollkeeper/2/ 1.50 0.13 -- 1.63 (0.02) 1.61
Financial Services/1/ 1.10 0.15 -- 1.25 (0.05) 1.20
Health Sciences/1/ 1.10 0.11 -- 1.21 (0.01) 1.20
Technology/1/ 1.10 0.08 -- 1.18 -- 1.18
Telecommunications/1/ 1.10 0.08 -- 1.18 -- 1.18
Multi-Strategy 0.65 0.04 -- 0.69 -- 0.69
Equity Income/2/ 0.65 0.04 0.01 0.70 -- 0.70
Strategic Value 0.95 0.51 -- 1.46 (0.41) 1.05
Growth LT 0.75 0.04 -- 0.79 -- 0.79
Focused 30 0.95 0.43 -- 1.38 (0.33) 1.05
Mid-Cap Value/2/ 0.85 0.04 0.12 1.01 -- 1.01
International Value 0.85 0.11 -- 0.96 -- 0.96
Capital Opportunities/1/ 0.80 0.06 -- 0.86 -- 0.86
Mid-Cap Growth/1/ 0.90 0.06 -- 0.96 -- 0.96
Global Growth/1/ 1.10 0.19 -- 1.29 -- 1.29
Equity Index 0.25 0.04 -- 0.29 -- 0.29
Small-Cap Index/2/ 0.50 0.13 -- 0.63 (0.02) 0.61
REIT 1.10 0.05 -- 1.15 -- 1.15
Government Securities/2/ 0.60 0.05 -- 0.65 -- 0.65
Managed Bond/2/ 0.60 0.05 -- 0.65 -- 0.65
Money Market 0.34 0.04 -- 0.38 -- 0.38
High Yield Bond 0.60 0.04 -- 0.64 -- 0.64
Large-Cap Value/2/ 0.85 0.05 0.06 0.96 -- 0.96
----------------------------------------------------------------------------------------
</TABLE>
/1/ Expenses are estimated. There were no actual
advisory fees or expenses for these Portfolios in
2000 because the Portfolios started after December
31, 2000.
/2/ Total adjusted net expenses for these Portfolios,
after deduction of an offset for custodian credits
and the 12b-1 recapture were: 0.84% for Aggressive
Equity Portfolio, 1.29% for Emerging Markets
Portfolio, 0.98% for Diversified Research
Portfolio, 0.69% for Small-Cap Equity Portfolio,
1.17% for International Large-Cap Portfolio, 1.60%
for I-Net Tollkeeper Portfolio, 0.69% for Equity
Income Portfolio, 0.89% for Mid-Cap Value
Portfolio, 0.60% for Small-Cap Index Portfolio,
0.62% for Government Securities Portfolio, 0.64%
for Managed Bond Portfolio, and 0.90% for Large-Cap
Value Portfolio.
+ The Fund has a brokerage enhancement 12b-1 plan
under which brokerage transactions, subject to best
price and execution, may be placed with certain
broker-dealers in return for credits, cash or other
compensation ("recaptured commissions"). While a
Portfolio pays the cost of brokerage when it buys
or sells a Portfolio security, there are no fees or
charges to the Fund under the plan. Recaptured
commissions may be used to promote and market Fund
shares and the distributor may therefore defray
expenses for distribution that it might otherwise
incur. The SEC staff requires that the amount of
recaptured commissions be shown as an expense in
the chart above.
2
<PAGE>
---------------------------------------------------------
AN OVERVIEW OF The Examples on page 8 of the Prospectus is replaced
PACIFIC VALUE- with the following:
Examples is
replaced The following table shows the expenses you would pay on
each $1,000 you invested if, at the end of each period,
you: annuitized your Contract; surrendered your
Contract and withdrew the Contract Value, or did not
annuitize or surrender, but left the money in your
Contract.
These examples assume an annual return of 5%.
without any Rider reflects the expenses you would pay
if you did not buy the optional Stepped-Up Death
Benefit Rider (SDBR) or Premier Death Benefit Rider
(PDBR) and the Guaranteed Income Advantage Rider (GIA).
with SDBR reflects the expenses you would pay if you
bought the Stepped-Up Death Benefit Rider, but not the
GIA Rider or PDBR.
with PDBR reflects the expenses you would pay if you
bought the optional Premier Death Benefit Rider, but
not the GIA Rider or SDBR.
with GIA Rider reflects the expenses you would pay if
you bought the optional Guaranteed Income Advantage
Rider, but not the optional SDBR or PDBR.
with SDBR and GIA Rider reflects the expenses you would
pay if you bought the optional Stepped-Up Death Benefit
Rider and the Guaranteed Income Advantage Rider.
with PDBR and GIA Rider reflects the expenses you would
pay if you bought the Premier Death Benefit Rider and
the Guaranteed Income Advantage Rider.
These examples do not show past or future expenses.
Your actual expenses in any year may be more or less
than those shown here.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Expenses if you did
not annuitize or
Expenses if you Expenses if you surrender, but left
annuitized surrendered the money in your
your Contract ($) your Contract ($) Contract ($)
---------------------------------------------------------------------------------------
Variable Account 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Blue Chip
without any Rider 87 75 128 274 87 138 173 274 24 75 128 274
with SDBR 89 81 138 294 89 144 183 294 26 81 138 294
with PDBR 91 86 146 308 91 149 191 308 28 86 146 308
with GIA Rider 90 84 144 304 90 147 189 304 27 84 144 304
with SDBR and GIA Rider 92 90 153 323 92 153 198 323 29 90 153 323
with PDBR and GIA Rider 94 95 161 337 94 158 206 337 31 95 161 337
---------------------------------------------------------------------------------------
Aggressive Growth
without any Rider 88 77 131 279 88 140 176 279 25 77 131 279
with SDBR 90 83 141 299 90 146 186 299 27 83 141 299
with PDBR 91 87 148 313 91 150 193 313 28 87 148 313
with GIA Rider 91 86 146 309 91 149 191 309 28 86 146 309
with SDBR and GIA Rider 93 92 156 328 93 155 201 328 30 92 156 328
with PDBR and GIA Rider 94 96 163 342 94 159 208 342 31 96 163 342
---------------------------------------------------------------------------------------
Aggressive Equity
without any Rider 86 70 120 257 86 133 165 257 23 70 120 257
with SDBR 88 76 130 277 88 139 175 277 25 76 130 277
with PDBR 89 80 137 292 89 143 182 292 26 80 137 292
with GIA Rider 89 79 135 287 89 142 180 287 26 79 135 287
with SDBR and GIA Rider 91 85 145 307 91 148 190 307 28 85 145 307
with PDBR and GIA Rider 92 90 152 321 92 153 197 321 29 90 152 321
---------------------------------------------------------------------------------------
Emerging Markets
without any Rider 90 83 142 302 90 146 187 302 27 83 142 302
with SDBR 92 89 152 321 92 152 197 321 29 89 152 321
with PDBR 94 94 159 335 94 157 204 335 31 94 159 335
with GIA Rider 93 92 157 331 93 155 202 331 30 92 157 331
with SDBR and GIA Rider 95 98 167 349 95 161 212 349 32 98 167 349
with PDBR and GIA Rider 97 103 174 363 97 166 219 363 34 103 174 363
---------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Expenses if you did
not annuitize or
Expenses if you Expenses if you surrender, but left
annuitized surrendered the money in your
your Contract ($) your Contract ($) Contract ($)
---------------------------------------------------------------------------------------
Variable Account 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Research
without any Rider 87 74 127 271 87 137 172 271 24 74 127 271
with SDBR 89 80 137 291 89 143 182 291 26 80 137 291
with PDBR 91 85 144 305 91 148 189 305 28 85 144 305
with GIA Rider 90 83 142 301 90 146 187 301 27 83 142 301
with SDBR and GIA Rider 92 89 152 320 92 152 197 320 29 89 152 320
with PDBR and GIA Rider 94 94 159 334 94 157 204 334 31 94 159 334
---------------------------------------------------------------------------------------
Small-Cap Equity
without any Rider 84 65 112 242 84 128 157 242 21 65 112 242
with SDBR 86 71 122 262 86 134 167 262 23 71 122 262
with PDBR 88 76 130 277 88 139 175 277 25 76 130 277
with GIA Rider 87 75 128 272 87 138 173 272 24 75 128 272
with SDBR and GIA Rider 89 81 138 292 89 144 183 292 26 81 138 292
with PDBR and GIA Rider 91 85 145 307 91 148 190 307 28 85 145 307
---------------------------------------------------------------------------------------
International Large-Cap
without any Rider 89 80 136 290 89 143 181 290 26 80 136 290
with SDBR 91 86 146 309 91 149 191 309 28 86 146 309
with PDBR 92 90 154 324 92 153 199 324 29 90 154 324
with GIA Rider 92 89 151 319 92 152 196 319 29 89 151 319
with SDBR and GIA Rider 94 95 161 338 94 158 206 338 31 95 161 338
with PDBR and GIA Rider 96 99 168 352 96 162 213 352 33 99 168 352
---------------------------------------------------------------------------------------
Equity
without any Rider 84 65 112 242 84 128 157 242 21 65 112 242
with SDBR 86 71 122 262 86 134 167 262 23 71 122 262
with PDBR 88 76 130 277 88 139 175 277 25 76 130 277
with GIA Rider 87 75 128 272 87 138 173 272 24 75 128 272
with SDBR and GIA Rider 89 81 138 292 89 144 183 292 26 81 138 292
with PDBR and GIA Rider 91 85 145 307 91 148 190 307 28 85 145 307
---------------------------------------------------------------------------------------
I-Net Tollkeeper
without any Rider 93 93 157 331 93 156 202 331 30 93 157 331
with SDBR 95 99 167 350 95 162 212 350 32 99 167 350
with PDBR 97 103 174 363 97 166 219 363 34 103 174 363
with GIA Rider 96 102 172 359 96 165 217 359 33 102 172 359
with SDBR and GIA Rider 98 107 182 377 98 170 227 377 35 107 182 377
with PDBR and GIA Rider 100 112 189 390 100 175 234 390 37 112 189 390
---------------------------------------------------------------------------------------
Financial Services
without any Rider 89 81 138 293 89 144 183 293 26 81 138 293
with SDBR 91 87 148 312 91 150 193 312 28 87 148 312
with PDBR 93 91 155 326 93 154 200 326 30 91 155 326
with GIA Rider 92 90 153 322 92 153 198 322 29 90 153 322
with SDBR and GIA Rider 94 96 163 341 94 159 208 341 31 96 163 341
with PDBR and GIA Rider 96 100 170 355 96 163 215 355 33 100 170 355
---------------------------------------------------------------------------------------
Health Sciences
without any Rider 89 81 138 293 89 144 183 293 26 81 138 293
with SDBR 91 87 148 312 91 150 193 312 28 87 148 312
with PDBR 93 91 155 326 93 154 200 326 30 91 155 326
with GIA Rider 92 90 153 322 92 153 198 322 29 90 153 322
with SDBR and GIA Rider 94 96 163 341 94 159 208 341 31 96 163 341
with PDBR and GIA Rider 96 100 170 355 96 163 215 355 33 100 170 355
---------------------------------------------------------------------------------------
Technology
without any Rider 89 80 137 291 89 143 182 291 26 80 137 291
with SDBR 91 86 147 310 91 149 192 310 28 86 147 310
with PDBR 93 91 154 325 93 154 199 325 30 91 154 325
with GIA Rider 92 89 152 320 92 152 197 320 29 89 152 320
with SDBR and GIA Rider 94 95 162 339 94 158 207 339 31 95 162 339
with PDBR and GIA Rider 96 100 169 353 96 163 214 353 33 100 169 353
---------------------------------------------------------------------------------------
Telecommunications
without any Rider 89 80 137 291 89 143 182 291 26 80 137 291
with SDBR 91 86 147 310 91 149 192 310 28 86 147 310
with PDBR 93 91 154 325 93 154 199 325 30 91 154 325
with GIA Rider 92 89 152 320 92 152 197 320 29 89 152 320
with SDBR and GIA Rider 94 95 162 339 94 158 207 339 31 95 162 339
with PDBR and GIA Rider 96 100 169 353 96 163 214 353 33 100 169 353
---------------------------------------------------------------------------------------
Multi-Strategy
without any Rider 84 65 112 242 84 128 157 242 21 65 112 242
with SDBR 86 71 122 262 86 134 167 262 23 71 122 262
with PDBR 88 76 130 277 88 139 175 277 25 76 130 277
with GIA Rider 87 75 128 272 87 138 173 272 24 75 128 272
with SDBR and GIA Rider 89 81 138 292 89 144 183 292 26 81 138 292
with PDBR and GIA Rider 91 85 145 307 91 148 190 307 28 85 145 307
---------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Expenses if you did
not annuitize or
Expenses if you Expenses if you surrender, but left
annuitized surrendered the money in your
your Contract ($) your Contract ($) Contract ($)
---------------------------------------------------------------------------------------
Variable Account 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Income
without any Rider 84 65 112 242 84 128 157 242 21 65 112 242
with SDBR 86 71 122 262 86 134 167 262 23 71 122 262
with PDBR 88 76 130 277 88 139 175 277 25 76 130 277
with GIA Rider 87 75 128 272 87 138 173 272 24 75 128 272
with SDBR and GIA Rider 89 81 138 292 89 144 183 292 26 81 138 292
with PDBR and GIA Rider 91 85 145 307 91 148 190 307 28 85 145 307
---------------------------------------------------------------------------------------
Strategic Value
without any Rider 88 76 130 278 88 139 175 278 25 76 130 278
with SDBR 90 82 140 298 90 145 185 298 27 82 140 298
with PDBR 91 87 148 312 91 150 193 312 28 87 148 312
with GIA Rider 91 85 145 308 91 148 190 308 28 85 145 308
with SDBR and GIA Rider 93 91 155 327 93 154 200 327 30 91 155 327
with PDBR and GIA Rider 94 96 163 341 94 159 208 341 31 96 163 341
---------------------------------------------------------------------------------------
Growth LT
without any Rider 85 68 117 252 85 131 162 252 22 68 117 252
with SDBR 87 74 127 272 87 137 172 272 24 74 127 272
with PDBR 89 79 135 287 89 142 180 287 26 79 135 287
with GIA Rider 88 78 133 282 88 141 178 282 25 78 133 282
with SDBR and GIA Rider 90 84 143 302 90 147 188 302 27 84 143 302
with PDBR and GIA Rider 92 88 150 316 92 151 195 316 29 88 150 316
---------------------------------------------------------------------------------------
Focused 30
without any Rider 88 76 130 278 88 139 175 278 25 76 130 278
with SDBR 90 82 140 298 90 145 185 298 27 82 140 298
with PDBR 91 87 148 312 91 150 193 312 28 87 148 312
with GIA Rider 91 85 145 308 91 148 190 308 28 85 145 308
with SDBR and GIA Rider 93 91 155 327 93 154 200 327 30 91 155 327
with PDBR and GIA Rider 94 96 163 341 94 159 208 341 31 96 163 341
---------------------------------------------------------------------------------------
Mid-Cap Value
without any Rider 86 71 122 262 86 134 167 262 23 71 122 262
with SDBR 88 77 132 282 88 140 177 282 25 77 132 282
with PDBR 90 82 140 297 90 145 185 297 27 82 140 297
with GIA Rider 89 81 138 292 89 144 183 292 26 81 138 292
with SDBR and GIA Rider 91 87 147 312 91 150 192 312 28 87 147 312
with PDBR and GIA Rider 93 91 155 326 93 154 200 326 30 91 155 326
---------------------------------------------------------------------------------------
International Value
without any Rider 87 74 126 269 87 137 171 269 24 74 126 269
with SDBR 89 80 136 289 89 143 181 289 26 80 136 289
with PDBR 90 84 143 304 90 147 188 304 27 84 143 304
with GIA Rider 90 83 141 299 90 146 186 299 27 83 141 299
with SDBR and GIA Rider 92 89 151 318 92 152 196 318 29 89 151 318
with PDBR and GIA Rider 93 93 158 333 93 156 203 333 30 93 158 333
---------------------------------------------------------------------------------------
Capital Opportunities
without any Rider 86 71 121 259 86 134 166 259 23 71 121 259
with SDBR 88 77 131 279 88 140 176 279 25 77 131 279
with PDBR 89 81 138 294 89 144 183 294 26 81 138 294
with GIA Rider 89 80 136 289 89 143 181 289 26 80 136 289
with SDBR and GIA Rider 91 86 146 309 91 149 191 309 28 86 146 309
with PDBR and GIA Rider 92 90 153 323 92 153 198 323 29 90 153 323
---------------------------------------------------------------------------------------
Mid-Cap Growth
without any Rider 87 74 126 269 87 137 171 269 24 74 126 269
with SDBR 89 80 136 289 89 143 181 289 26 80 136 289
with PDBR 90 84 143 304 90 147 188 304 27 84 143 304
with GIA Rider 90 83 141 299 90 146 186 299 27 83 141 299
with SDBR and GIA Rider 92 89 151 318 92 152 196 318 29 89 151 318
with PDBR and GIA Rider 93 93 158 333 93 156 203 333 30 93 158 333
---------------------------------------------------------------------------------------
Global Growth
without any Rider 90 83 142 302 90 146 187 302 27 83 142 302
with SDBR 92 89 152 321 92 152 197 321 29 89 152 321
with PDBR 94 94 159 335 94 157 204 335 31 94 159 335
with GIA Rider 93 92 157 331 93 155 202 331 30 92 157 331
with SDBR and GIA Rider 95 98 167 349 95 161 212 349 32 98 167 349
with PDBR and GIA Rider 97 103 174 363 97 166 219 363 34 103 174 363
---------------------------------------------------------------------------------------
Equity Index
without any Rider 80 53 92 199 80 116 137 199 17 53 92 199
with SDBR 82 59 102 221 82 122 147 221 19 59 102 221
with PDBR 84 64 110 236 84 127 155 236 21 64 110 236
with GIA Rider 83 62 107 232 83 125 152 232 20 62 107 232
with SDBR and GIA Rider 85 69 117 252 85 132 162 252 22 69 117 252
with PDBR and GIA Rider 87 73 125 267 87 136 170 267 24 73 125 267
---------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Expenses if you did
not annuitize or
Expenses if you Expenses if you surrender, but left
annuitized surrendered the money in your
your Contract ($) your Contract ($) Contract ($)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Variable Account 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr
---------------------------------------------------------------------------------------
Small-Cap Index
without any Rider 83 63 108 232 83 126 153 232 20 63 108 232
with SDBR 85 69 118 253 85 132 163 253 22 69 118 253
with PDBR 87 73 125 268 87 136 170 268 24 73 125 268
with GIA Rider 86 72 123 263 86 135 168 263 23 72 123 263
with SDBR and GIA Rider 88 78 133 283 88 141 178 283 25 78 133 283
with PDBR and GIA Rider 90 82 141 298 90 145 186 298 27 82 141 298
---------------------------------------------------------------------------------------
REIT
without any Rider 89 79 135 288 89 142 180 288 26 79 135 288
with SDBR 91 85 145 307 91 148 190 307 28 85 145 307
with PDBR 92 90 153 322 92 153 198 322 29 90 153 322
with GIA Rider 92 88 150 317 92 151 195 317 29 88 150 317
with SDBR and GIA Rider 94 94 160 336 94 157 205 336 31 94 160 336
with PDBR and GIA Rider 95 99 167 350 95 162 212 350 32 99 167 350
---------------------------------------------------------------------------------------
Government Securities
without any Rider 83 63 109 234 83 126 154 234 20 63 109 234
with SDBR 85 69 119 255 85 132 164 255 22 69 119 255
with PDBR 87 74 126 270 87 137 171 270 24 74 126 270
with GIA Rider 87 72 124 265 87 135 169 265 24 72 124 265
with SDBR and GIA Rider 89 79 134 285 89 142 179 285 26 79 134 285
with PDBR and GIA Rider 90 83 142 300 90 146 187 300 27 83 142 300
---------------------------------------------------------------------------------------
Managed Bond
without any Rider 84 64 110 236 84 127 155 236 21 64 110 236
with SDBR 86 70 120 257 86 133 165 257 23 70 120 257
with PDBR 87 74 127 272 87 137 172 272 24 74 127 272
with GIA Rider 87 73 125 267 87 136 170 267 24 73 125 267
with SDBR and GIA Rider 89 79 135 287 89 142 180 287 26 79 135 287
with PDBR and GIA Rider 90 84 143 302 90 147 188 302 27 84 143 302
---------------------------------------------------------------------------------------
Money Market
without any Rider 81 56 96 209 81 119 141 209 18 56 96 209
with SDBR 83 62 107 230 83 125 152 230 20 62 107 230
with PDBR 85 67 114 246 85 130 159 246 22 67 114 246
with GIA Rider 84 65 112 241 84 128 157 241 21 65 112 241
with SDBR and GIA Rider 86 71 122 261 86 134 167 261 23 71 122 261
with PDBR and GIA Rider 88 76 130 276 88 139 175 276 25 76 130 276
---------------------------------------------------------------------------------------
High Yield Bond
without any Rider 84 64 109 235 84 127 154 235 21 64 109 235
with SDBR 86 70 119 256 86 133 164 256 23 70 119 256
with PDBR 87 74 127 271 87 137 172 271 24 74 127 271
with GIA Rider 87 73 125 266 87 136 170 266 24 73 125 266
with SDBR and GIA Rider 89 79 135 286 89 142 180 286 26 79 135 286
with PDBR and GIA Rider 90 83 142 301 90 146 187 301 27 83 142 301
---------------------------------------------------------------------------------------
Large-Cap Value
without any Rider 86 72 123 263 86 135 168 263 23 72 123 263
with SDBR 88 78 133 283 88 141 178 283 25 78 133 283
with PDBR 90 82 140 298 90 145 185 298 27 82 140 298
with GIA Rider 89 81 138 293 89 144 183 293 26 81 138 293
with SDBR and GIA Rider 91 87 148 313 91 150 193 313 28 87 148 313
with PDBR and GIA Rider 93 91 155 327 93 154 200 327 30 91 155 327
---------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
---------------------------------------------------------
YOUR INVESTMENT The chart on page 11 of the Prospectus YOUR INVESTMENT
OPTIONS: OPTIONS: Your Variable Investment Options is amended to
Your Variable add the following:
Investment Options
is amended
<TABLE>
<CAPTION>
Primary Investments Portfolio
Portfolio Objective (under normal circumstances) Manager
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Long-term growth of Equity securities of "blue chip" AIM
capital. Current companies--typically large companies
income is of that are well established in their
secondary importance. respective industries.
-------------------------------------------------------------------------------------------------
Aggressive Growth Long-term growth of Equity securities of small- and AIM
capital. medium-sized growth companies.
-------------------------------------------------------------------------------------------------
Financial Services Long-term growth of Equity securities in the financial INVESCO
capital. services sector. Such companies
include banks, insurance companies,
brokerage firms and other finance-
related firms.
-------------------------------------------------------------------------------------------------
Health Sciences Long-term growth of Equity securities in the health INVESCO
capital. sciences sector. Such companies
include medical equipment or
supplies, pharmaceuticals, health
care facilities and other health
sciences-related firms.
-------------------------------------------------------------------------------------------------
Technology Long-term growth of Equity securities in the technology INVESCO
capital. sector. Such companies include
biotechnology, communications,
computers, electronics, Internet
telecommunications, networking,
robotics, video and other
technology-related firms.
-------------------------------------------------------------------------------------------------
Telecommunications Long-term growth of Equity securities in the INVESCO
capital. Current telecommunications sector. Such as
income is of companies that offer telephone
secondary importance. service, wireless communications,
satellite communications, television
and movie programming, broadcasting
and Internet access.
-------------------------------------------------------------------------------------------------
Strategic Value Long-term growth of Equity securities with the potential Janus Capital
capital. for long-term growth of capital. Corporation
-------------------------------------------------------------------------------------------------
Focused 30 Long-term growth of Equity securities selected for their Janus Capital
capital. growth potential. Corporation
-------------------------------------------------------------------------------------------------
Capital Long-term growth of Equity securities with the potential MFS
Opportunities capital. for long-term growth of capital.
-------------------------------------------------------------------------------------------------
Mid-Cap Growth Long-term growth of Equity securities of medium-sized MFS
capital. companies believed to have above-
average growth potential.
-------------------------------------------------------------------------------------------------
Global Growth Capital appreciation. Equity securities of any size MFS
located within and outside of the
U.S.
-------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
---------------------------------------------------------
ADDITIONAL The following replaces Telephone Transactions on page
INFORMATION: 43 of the Prospectus:
Telephone
Transactions Telephone and Electronic Transactions
is changed to You are automatically entitled to make certain
Telephone and transactions by telephone or, to the extent available
Electronic in early 2001, electronically. You may also authorize
Transactions other people to make certain transaction requests by
telephone or to the extent available electronically by
so indicating on the application or by sending us
instructions in writing in a form acceptable to us. We
cannot guarantee that you or any other person you
authorize will always be able to reach us to complete a
telephone or electronic transaction; for example, all
telephone lines or our web-site may be busy during
certain periods, such as periods of substantial market
fluctuations or other drastic economic or market
change, or telephones or the internet may be out of
service during severe weather conditions or other
emergencies. Under these circumstances, you should
submit your request in writing (or other form
acceptable to us). Transaction instructions we receive
by telephone or electronically before 4:00 p.m. Eastern
time on any Business Day will usually be effective on
that day, and we will provide you confirmation of each
telephone or electronic transaction.
We have established procedures reasonably designed to
confirm that instructions communicated by telephone or
electronically are genuine. These procedures may
require any person requesting a telephone or electronic
transaction to provide certain personal identification
upon our request. We may also record all or part of any
telephone conversation with respect to transaction
instructions. We reserve the right to deny any
transaction request made by telephone or
electronically. You are authorizing us to accept and to
act upon instructions received by telephone or
electronically with respect to your Contract, and you
agree that, so long as we comply with our procedures,
neither we, any of our affiliates, nor the Fund, or any
of their directors, trustees, officers, employees or
agents will be liable for any loss, liability, cost or
expense (including attorneys' fees) in connection with
requests that we believe to be genuine. This policy
means that so long as we comply with our procedures,
you will bear the risk of loss arising out of the
telephone and electronic transaction privileges of your
Contract. If a Contract has Joint Owners, each Owner
We expect to make may individually make transaction requests by
the electronic telephone.
transaction and
delivery features Electronic Delivery Authorization
available in early Subject to availability, you may authorize us to
2001. Please ask provide prospectuses, statements and other information
your registered ("documents") electronically by so indicating on the
representative for application, or by sending us instructions in writing
more information. in a form acceptable to us to receive such documents
electronically. You must have Internet access to use
this service. While we impose no additional charge for
this service, there may be potential costs associated
with electronic delivery, such as on-line charges.
Documents will be available on our Internet Web site.
You may access and print all documents provided through
this service. As documents become available, we will
notify you of this by sending you an e-mail message
that will include instructions on how to retrieve the
document. If our e-mail notification is returned to us
as "undeliverable," we will contact you to obtain your
updated e-mail address. If we are unable to obtain a
valid e-mail address for you, we will send a paper copy
by regular U.S. mail to your address of record. You may
revoke your consent for electronic delivery at any time
and we will resume providing you with a paper copy of
all required documents; however, in order for us to be
properly notified, your revocation must be given to us
a reasonable time before electronic delivery has
commenced. We will provide you with paper copies at any
time upon request. Such request will not constitute
revocation of your consent to receive required
documents electronically.
8
<PAGE>
[LOGO OF PACIFIC VALUE]
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 2000 as restated and supplemented January 2, 2001
PACIFIC VALUE
SEPARATE ACCOUNT A
----------------
Pacific Value (the "Contract") is a variable annuity contract offered by
Pacific Life Insurance Company ("Pacific Life"). The Bond and Income Variable
Account terminated on September 22, 2000.
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, and any supplement thereto, 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....................................................... 13
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 Credit
Enhancement, any charges for applicable premium taxes and/or other taxes, any
non-recurring fees or charges, any increase in the Risk Charge for an optional
Death Benefit Rider, or any GIA Charge for the optional GIA Rider. The
redeemable value is then divided by the initial payment and this quotient is
taken to the Nth root (N represents the number of days in the measuring
period), and 1 is subtracted from this result. Average annual total return is
expressed as a percentage.
T = (ERV/P)(/365//N)-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 Credit Enhancement and/or withdrawal charges, increases in Risk
Charges, charges for premium and/or other taxes, and any non-recurring fees or
charges.
Standardized return figures will always accompany any non-standardized returns
shown.
1
<PAGE>
Yields
Money Market Subaccount
The "yield" (also called "current yield") of the Money Market Subaccount is
computed in accordance with a standard method prescribed by the SEC. The net
change in the Subaccount's Unit Value during a seven-day period is divided by
the Unit Value at the beginning of the period to obtain a base rate of return.
The current yield is generated when the base rate is "annualized" by
multiplying it by the fraction 365/7; that is, the base rate of return is
assumed to be generated each week over a 365-day period and is shown as a
percentage of the investment. The "effective yield" of the Money Market
Subaccount is calculated similarly but, when annualized, the base rate of
return is assumed to be reinvested. The effective yield will be slightly
higher than the current yield because of the compounding effect of this
assumed reinvestment.
The formula for effective yield is: [(Base Period Return +1) (To the power of
365/7)] -1.
Realized capital gains or losses and unrealized appreciation or depreciation
of the assets of the underlying Money Market Portfolio are not included in the
yield calculation. Current yield and effective yield do not reflect any Credit
Enhancement, the deduction of charges for any applicable premium taxes and/or
other taxes, any increase in the Risk Charge for an optional Death Benefit
Rider, or any GIA Charge for the optional GIA Rider, but do reflect a
deduction for the Risk Charge and the Administrative Fee.
At December 31, 1999, the Money Market Subaccount's current yield was 4.22%
and the effective yield was 4.30%.
Other Subaccounts
"Yield" of the other Subaccounts is computed in accordance with a different
standard method prescribed by the SEC. The net investment income (investment
income less expenses) per Subaccount Unit earned during a specified one-month
or 30-day period is divided by the Subaccount Unit Value on the last day of
the specified period. This result is then annualized (that is, the yield is
assumed to be generated each month or each 30-day period for a year),
according to the following formula, which assumes semiannual compounding:
YIELD = 2[(a-b + 1) (To the power of 6) - 1]
---
cd
where: a = net investment income earned during the period by the Portfolio
attributable to the Subaccount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Subaccount Units outstanding during
the period that were entitled to receive dividends.
d = the Unit Value of the Subaccount Units on the last day of the
period.
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to the Subaccount, such as the Risk Charge and
Administrative Fee, but does not reflect any Credit Enhancement, any
withdrawal charge, any charge for applicable premium taxes and/or other taxes,
any increase in the Risk Charge for an optional Death Benefit Rider, or any
GIA Charge for the optional GIA Rider.
The Subaccounts' yields will vary from time to time depending upon market
conditions, the composition of each Portfolio and operating expenses of the
Fund allocated to each Portfolio. Consequently, any given performance
quotation should not be considered representative of the Subaccount's
performance in the future. Yield should also be considered relative to changes
in Subaccount Unit Values and to the relative risks associated with the
investment policies and objectives of the various Portfolios. In addition,
because performance will fluctuate, it may not provide a basis for comparing
the yield of a Subaccount with certain bank deposits or other investments that
pay a fixed yield or return for a stated period of time.
Performance Comparisons and Benchmarks
In advertisements and sales literature, we may compare the performance of some
or all of the Subaccounts to the performance of other variable annuity issuers
in general and to the performance of particular types of variable annuities
investing in mutual funds, or series of mutual funds, with investment
objectives similar to each of the
2
<PAGE>
Subaccounts. This performance may be presented as averages or rankings
compiled by Lipper Analytical Services, Inc. ("Lipper"), the Variable Annuity
Research and Data Service ("VARDS(R)") or Morningstar, Inc. ("Morningstar"),
which are independent services that monitor and rank the performance of
variable annuity issuers and mutual funds in each of the major categories of
investment objectives on an industry-wide basis. Lipper's rankings include
variable life issuers as well as variable annuity issuers. VARDS(R) rankings
compare only variable annuity issuers. The performance analyses prepared by
Lipper and VARDS(R) rank such issuers on the basis of total return, assuming
reinvestment of dividends and distributions, but do not take sales charges,
redemption fees or certain expense deductions at the separate account level
into consideration. In addition, VARDS(R) prepares risk adjusted rankings,
which consider the effects of market risk on total return performance. We may
also compare the performance of the Subaccounts with performance information
included in other publications and services that monitor the performance of
insurance company separate accounts or other investment vehicles. These other
services or publications may be general interest business publications such as
The Wall Street Journal, Barron's, Business Week, Forbes, Fortune, and Money.
In addition, our reports and communications to Contract Owners,
advertisements, or sales literature may compare a Subaccount's performance to
various benchmarks that measure the performance of a pertinent group of
securities widely regarded by investors as being representative of the
securities markets in general or as being representative of a particular type
of security. We may also compare the performance of the Subaccounts with that
of other appropriate indices of investment securities and averages for peer
universes of funds or data developed by us derived from such indices or
averages. Unmanaged indices generally assume the reinvestment of dividends or
interest but do not generally reflect deductions for investment management or
administrative costs and expenses.
Separate Account Performance
The Contract was not available prior to 1999. However, in order to help you
understand how investment performance can affect your Variable Account Value,
we are including performance information based on the historical performance
of the Subaccounts.
The following table presents the annualized total return for each Variable
Account for the period from each such Variable Account's commencement of
operations through December 31, 1999. The accumulated value ("AV") reflects a
Credit Enhancement of 3% and the deductions for all contractual fees and
charges, but does not reflect the withdrawal charge, any nonrecurring fees and
charges, any increase in the Risk Charge for an optional Death Benefit Rider,
or any GIA Charge optional GIA Rider or any charges for premium and/or other
taxes. The full withdrawal value ("FWV") reflects the Credit Enhancement and
the deductions for all contractual fees and charges, but does not reflect any
increase in the Risk Charge for an optional Death Benefit Rider, optional GIA
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 Year Inception
------------ ----------- -----------
Variable Accounts AV FWV AV FWV AV FWV
----------------- ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Aggressive Equity 4/17/96*............... 30.61 24.31 14.27 12.64 13.21 12.00
Emerging Markets 4/17/96*................ 57.48 51.18 3.28 1.27 1.43 (0.22)
Small-Cap Equity 10/1/99*................ 33.10 26.80
Equity 1/2/96*........................... 42.08 35.78 28.61 27.33 27.96 27.20
Multi-Strategy 1/2/96*................... 9.78 3.48 14.70 13.08 13.60 12.51
Equity Income 1/2/96*.................... 16.16 9.86 21.73 20.30 20.44 19.52
Growth LT 1/2/96*........................ 103.15 96.85 51.39 50.47 41.71 41.16
Mid-Cap Value 1/4/99*.................... 8.00 1.63
Equity Index 1/2/96*..................... 23.68 17.38 27.11 25.80 25.24 24.42
Small-Cap Index 1/4/99*.................. 22.69 16.31
REIT 1/4/99*............................. 2.58 (3.79)
International Value 1/2/96*.............. 25.96 19.66 12.22 10.53 13.76 12.67
Government Securities 1/2/96*............ 0.55 (5.75) 5.35 3.43 4.37 2.95
Managed Bond 1/2/96*..................... 0.59 (5.71) 5.50 3.58 4.81 3.41
Money Market 1/2/96*..................... 7.62 1.32 5.07 3.14 4.70 3.30
High Yield Bond 1/2/96*.................. 5.53 (0.77) 4.79 2.84 5.98 4.63
Large-Cap Value 1/4/99*.................. 14.48 8.11
</TABLE>
--------
* 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
Advisors (formerly 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 Tollkeeper, Strategic
Value, and Focused 30 Subaccounts started operations after December 31, 1999
and there is no historical value available for the 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 Portfolio 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; each
predecessor series was a series of Pacific Corinthian Variable Fund and began
its first full year of operations in 1984, the assets of which were acquired
by the Fund on December 31, 1994. Because the Subaccounts had not commenced
operations until January 2, 1996 or later, as indicated in the chart above,
and because the Contracts were not available until 1999, these are not actual
performance numbers for the Subaccounts or for the Contract.
4
<PAGE>
These are hypothetical total return numbers based on accumulated value ("AV")
and full withdrawal value ("FWV") that represent the actual performance of the
Portfolios, adjusted to reflect a 3% Credit Enhancement and the deductions for
the fees and charges applicable to the Contract; the 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 and optional
GIA Rider are not reflected in these data. The information presented also
includes data representing unmanaged market indices.
The results shown in this section are not an estimate or guarantee of future
investment performance.
Historical and Hypothetical Separate Account Performance
Annualized Rates of Return for Periods Ended December 31, 1999
All numbers are expressed as a percentage
<TABLE>
<CAPTION>
Since
1 year* 3 years* 5 years* 10 years* Inception*
------------ ----------- ----------- ----------- -----------
Variable Accounts AV FWV AV FWV AV FWV AV FWV AV FWV
----------------- ------ ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Equity....... 30.61 24.31 14.27 12.64 13.21 12.00
Emerging Markets........ 57.48 51.18 3.28 1.27 1.43 (0.22)
Small-Cap Equity........ 51.29 44.99 25.32 23.97 24.40 24.02 15.55 15.55 16.79 16.79
Equity.................. 42.08 35.78 28.61 27.33 26.80 26.45 16.57 16.57 15.93 15.93
Multi-Strategy.......... 9.78 3.48 14.70 13.08 15.65 15.14 10.35 10.35 10.83 10.83
Equity Income........... 16.16 9.86 21.73 20.30 22.50 22.09 13.52 13.52 14.04 14.04
Growth LT............... 103.15 96.85 51.39 50.47 40.31 40.08 35.11 34.95
Mid-Cap Value........... 8.00 1.63
Equity Index............ 23.68 17.38 27.11 25.80 27.32 26.98 18.87 18.87
Small-Cap Index......... 22.69 16.31
REIT.................... 2.58 (3.79)
International Value..... 25.96 19.66 12.22 10.53 13.12 12.56 7.19 7.19 8.86 8.86
Government Securities... 0.55 (5.75) 5.35 3.43 6.82 6.12 6.33 6.33 6.76 6.76
Managed Bond............ 0.59 (5.71) 5.50 3.58 7.22 6.53 6.89 6.89 7.29 7.29
Money Market............ 7.62 1.32 5.07 3.14 4.58 3.82 3.87 3.87 4.19 4.19
High Yield Bond......... 5.53 (0.77) 4.79 2.84 8.16 7.50 9.28 9.28 8.51 8.51
Large-Cap Value......... 14.48 8.11
</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
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>
--------
* The performance of the Aggressive Equity, Equity Income, Multi-Strategy,
Equity, International Value and Emerging Markets Variable Accounts for a
portion of this period occurred at a time when other Portfolio Managers
managed the corresponding Portfolio in which each Variable Account invests.
Effective January 1, 1994, J. P. Morgan Investment Management Inc. became
the Portfolio Manager of the Equity Income and Multi-Strategy Portfolios;
prior to January 1, 1994, some of the investment policies of the Equity
Income Portfolio and the investment objective of the Multi-Strategy
Portfolio differed. Effective June 1, 1997 Morgan Stanley Asset Management
became the Portfolio Manager of the International 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 Advisors (formerly 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 Credit Enhancement, the deduction of contractual expenses such as
the Risk Charge (equal to an annual rate of 1.25% of average daily account
value), the Administrative Fee (equal to an annual rate of 0.15% of average
daily account value), any increase in the Risk Charge for an optional Death
Benefit Rider (equal to a maximum annual rate of .35% of average daily account
value), any GIA Charge for the optional GIA Rider (equal to an annual rate of
.30% of average daily account value), any charge for premium taxes and/or
other taxes, or the expenses of an underlying investment vehicle, such as the
Fund. The values shown also do not reflect the withdrawal charge. Generally,
the withdrawal charge is equal to 7% of the amount withdrawn attributable to
Purchase Payments that are less than 5 years old, 5% of the amount withdrawn
attributable to Purchase Payments that are five and six years old, and 4% of
the amount withdrawn attributable to Purchase Payments that are seven years
old. The age of Purchase Payments is considered 1 year old in the Contract
Year we receive it and increases by one year on the beginning of the day
preceding each Contract Anniversary. There is no withdrawal charge on
withdrawals attributed to Purchase Payments at least 8 years old, or to the
extent that total withdrawals that are free of charge during the Contract Year
do not exceed 10% of your Purchase Payments that are less than 8 years old
plus 100% of all Purchase Payments that have an age of 8 years or more, or on
withdrawals of your Earnings. If these expenses and fees were taken into
account, they would reduce the investment return shown for both the taxable
investment and the hypothetical variable annuity contract. In addition, these
values assume that you do not surrender the Contract or make any withdrawals
until the end of the period shown. The chart assumes a full withdrawal, at the
end of the period shown, of all Contract Value and the payment of taxes at the
36% rate on the amount in excess of the Purchase Payment.
The rates of return illustrated are hypothetical and are not an estimate or
guarantee of performance. Actual tax rates may vary for different assets and
taxpayers from that illustrated and withdrawals by and distributions to
Contract Owners who have not reached age 59 1/2 may be subject to a tax
penalty of 10%.
6
<PAGE>
Power of Tax Deferral
$10,000 investment at annual rates of return of 0%, 4% and 8%, taxed @ 36%
[GRAPH APPEARS HERE]
Taxable Tax-Deferred
Investment Investment
---------- ------------
10 Years
0% $10,000.00 $10,000.00
4% $12,875.97 $13,073.56
8% $16,476.07 $17,417.12
20 Years
0% $10,000.00 $10,000.00
4% $16,579.07 $17,623.19
8% $27,146.07 $33,430.13
30 Years
0% $10,000.00 $10,000.00
4% $21,347.17 $24,357.74
8% $44,726.05 $68,001.00
DISTRIBUTION OF THE CONTRACTS
Pacific 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 $92,499,492 of which $0 was retained.
7
<PAGE>
THE CONTRACTS AND THE SEPARATE ACCOUNT
Calculating Subaccount Unit Values
The Unit Value of the Subaccount Units in each Variable Investment Option is
computed at or about 4:00 p.m. Eastern time on each Business Day. The initial
Unit Value of each Subaccount was $10 on the Business Day the Subaccount began
operations. At the end of each Business Day, the Unit Value for a Subaccount
is equal to:
Y X Z
where (Y)= the Unit Value for that Subaccount as of the end of the preceding
Business Day; and
(Z)= the Net Investment Factor for that Subaccount for the period (a
"valuation period") between that Business Day and the immediately
preceding Business Day.
The "Net Investment Factor" for a Subaccount for any valuation period is equal
to:
(A/B) - C
where (A)= the "per share value of the assets" of that Subaccount as of the end
of that valuation period, which is equal to: a+b+c
where (a)= the net asset value per share of the corresponding Portfolio
shares held by that Subaccount as of the end of that valuation
period;
(b)= the per share amount of any dividend or capital gain distributions
made by the Fund for that Portfolio during that valuation period;
and
(c)= any per share charge (a negative number) or credit (a positive
number) for any income taxes and/or any other taxes or other
amounts set aside during that valuation period as a reserve for
any income and/or any other taxes which we determine to have
resulted from the operations of the Subaccount or Contract, and/or
any taxes attributable, directly or indirectly, to Purchase
Payments;
(B)= the net asset value per share of the corresponding Portfolio shares
held by the Subaccount as of the end of the preceding valuation
period; and
(C)= a factor that assesses against the Subaccount net assets for each
calendar day in the valuation period the basic Risk Charge plus any
applicable increase in the Risk charge and the Administrative Fee
(see CHARGES, FEES AND DEDUCTIONS in the Prospectus).
Variable Annuity Payment Amounts
The following steps show how we determine the amount of each variable annuity
payment under your Contract.
First: Pay Applicable Premium Taxes
When you convert your Net Contract Value into annuity payments, you must pay
any applicable charge for premium taxes and/or other taxes on your Contract
Value (unless applicable law requires those taxes to be paid at a later time).
We assess this charge by reducing each Account Value proportionately, relative
to your Account Value in each Subaccount and in the Fixed Option, in an amount
equal to the aggregate amount of the charges. The remaining amount of your
available Net Contract Value may be used to provide variable annuity payments.
Alternatively, your remaining available Net Contract Value may be used to
provide fixed annuity payments, or it may be divided to provide both fixed and
variable annuity payments. You may also choose to withdraw some or all of your
remaining Net Contract Value, less any applicable withdrawal charge, and any
charges for premium taxes and/or other taxes without converting this amount
into annuity payments.
Second: The First Variable Payment
We begin by referring to your Contract's Option Table for your Annuity Option
(the "Annuity Option Table"). The Annuity Option Table allows us to calculate
the dollar amount of the first variable annuity payment under your Contract,
based on the amount applied toward the variable annuity. The number that the
Annuity Option
8
<PAGE>
Table yields will be based on the Annuitant's age (and, in certain cases, sex)
and assumes a 5% rate of return, as described in more detail below.
Example: Assume a man is 65 years of age at his Annuity Date and has
selected a lifetime annuity with monthly payments guaranteed for 10 years.
According to the Annuity Option Table, this man should receive an initial
monthly payment of $5.79 for every $1,000 of his Contract Value (reduced by
applicable charges) that he will be using to provide variable payments.
Therefore, if his Contract Value after deducting applicable fees and
charges is $100,000 on his Annuity Date and he applies this entire amount
toward his variable annuity, his first monthly payment will be $579.00.
You may choose any other Annuity Option Table that assumes a different rate of
return which we offer at the time your Annuity Option is effective.
Third: Subaccount Annuity Units
For each Subaccount, we use the amount of the first variable annuity payment
under your Contract attributable to each Subaccount to determine the number of
Subaccount Annuity Units that will form the basis of subsequent payment
amounts. First, we use the Annuity Option Table to determine the amount of
that first variable payment for each Subaccount. Then, for each Subaccount, we
divide that amount of the first variable annuity payment by the value of one
Subaccount Annuity Unit (the "Subaccount Annuity Unit Value") as of the end of
the Annuity Date to obtain the number of Subaccount Annuity Units for that
particular Subaccount. The number of Subaccount Annuity Units used to
calculate subsequent payments under your Contract will not change unless
exchanges of Annuity Units are made (or if the Joint and Survivor Annuity
Option is elected and the Primary Annuitant dies first), but the value of
those Annuity Units will change daily, as described below.
Fourth: The Subsequent Variable Payments
The amount of each subsequent variable annuity payment will be the sum of the
amounts payable based on each Subaccount. The amount payable based on each
Subaccount is equal to the number of Subaccount Annuity Units for that
Subaccount multiplied by their Subaccount Annuity Unit Value at the end of the
Business Day in each payment period you elected that corresponds to the
Annuity Date.
Each Subaccount's Subaccount Annuity Unit Value, like its Subaccount Unit
Value, changes each day to reflect the net investment results of the
underlying investment vehicle, as well as the assessment of the Risk Charge at
an annual rate of 1.25% and the Administrative Fee at an annual rate of 0.15%.
In addition, the calculation of Subaccount Annuity Unit Value incorporates an
additional factor; as discussed in more detail below, this additional factor
adjusts Subaccount Annuity Values to correct for the Option Table's implicit
assumed annual investment return on amounts applied but not yet used to
furnish annuity benefits. Any increase in your Risk Charge for an Optional
Death Benefit Rider is not charged on and after the Annuity Date.
Different Subaccounts may be selected for your Contract before and after your
Annuity Date, subject to any restrictions we may establish. Currently, you may
exchange Subaccount Annuity Units in any Subaccount for Subaccount Annuity
Units in any other Subaccount(s) up to four times in any twelve month period
after your Annuity Date. The number of Subaccount Annuity Units in any
Subaccount may change due to such exchanges. Exchanges following your Annuity
Date will be made by exchanging Subaccount Annuity Units of equivalent
aggregate value, based on their relative Subaccount Annuity Unit Values.
Understanding the "Assumed Investment Return" Factor
The Annuity Option Table incorporates a number of implicit assumptions in
determining the amount of your first variable annuity payment. As noted above,
the numbers in the Annuity Option Table reflect certain actuarial assumptions
based on the Annuitant's age, and, in some cases, the Annuitant's sex. In
addition, these numbers assume that the amount of your Contract Value that you
convert to a variable annuity will have a positive net investment return of 5%
(or such other rate of return you may elect) each year during the payout of
your annuity; thus 5% is referred to as an "assumed investment return."
9
<PAGE>
The Subaccount Annuity Unit Value for a Subaccount will increase only to the
extent that the investment performance of that Subaccount exceeds the Risk
Charge, the Administrative Fee, and the assumed investment return. The
Subaccount Annuity Unit Value for any Subaccount will generally be less than
the Subaccount Unit Value for that same Subaccount, and the difference will be
the amount of the assumed investment return factor.
Example: Assume the net investment performance of a Subaccount is at a rate
of 5.00% per year (after deduction of the 1.25% Risk Charge and the 0.15%
Administrative Fee). The Subaccount Unit Value for that Subaccount would
increase at a rate of 5.00% per year, but the Subaccount Annuity Unit Value
would not increase (or decrease) at all. The net investment factor for that
5% return [1.05] is then divided by the factor for the 5% assumed
investment return [1.05] and 1 is subtracted from the result to determine
the adjusted rate of change in Subaccount Annuity Unit Value:
1.05 = 1; 1 - 1 = 0; 0 X 100% = 0%.
----
1.05
If the net investment performance of a Subaccount's assets is at a rate less
than 5.00% per year, the Subaccount Annuity Unit Value will decrease, even if
the Subaccount Unit Value is increasing.
Example: Assume the net investment performance of a Subaccount is at a rate
of 2.60% per year (after deduction of the 1.25% Risk Charge and the 0.15%
Administrative Fee). The Subaccount Unit Value for that Subaccount would
increase at a rate of 2.60% per year, but the Subaccount Annuity Unit Value
would decrease at a rate of 2.29% per year. The net investment factor for
that 2.6% return [1.026] is then divided by the factor for the 5% assumed
investment return [1.05] and 1 is subtracted from the result to determine
the adjusted rate of change in Subaccount Annuity Unit Value:
1.026 = 0.9771; 0.9771 - 1 = - 0.0229; - 0.0229 X 100% = - 2.29%.
-----
1.05
The assumed investment return will always cause increases in Subaccount
Annuity Unit Values to be somewhat less than if the assumption had not been
made, will cause decreases in Subaccount Annuity Unit Values to be somewhat
greater than if the assumption had not been made, and will (as shown in the
example above) sometimes cause a decrease in Subaccount Annuity Unit Values to
take place when an increase would have occurred if the assumption had not been
made. If we had assumed a higher investment return in our Annuity Option
tables, it would produce annuities with larger first payments, but the
increases in subaccount annuity payments would be smaller and the decreases in
subsequent annuity payments would be greater; a lower assumed investment
return would produce annuities with smaller first payments, and the increases
in subsequent annuity payments would be greater and the decreases in
subsequent annuity payments would be smaller.
Corresponding Dates
If any transaction or event under your Contract is scheduled to occur on a
"corresponding date" that does not exist in a given calendar period, the
transaction or event will be deemed to occur on the following Business Day. In
addition, as stated in the Prospectus, any event scheduled to occur on a day
that is not a Business Day will occur on the next succeeding Business Day.
Example: If your Contract is issued on February 29 in year 1 (a leap year),
your Contract Anniversary in years 2, 3 and 4 will be on March 1.
Example: If your Annuity Date is July 31 and you select monthly annuity
payments, the payments received will be based on valuations made on July
31, August 31, October 1 (for September), October 31, December 1 (for
November), December 31, January 31, March 1 (for February), March 31, May 1
(for April), May 31 and July 1 (for June).
Age and Sex of Annuitant
As mentioned in the Prospectus, the Contracts generally provide for sex-
distinct annuity income factors in the case of life annuities. Statistically,
females tend to have longer life expectancies than males; consequently, if the
amount of annuity payments is based on life expectancy, they will ordinarily
be higher if an annuitant is male than if an annuitant is female. Certain
states' regulations prohibit sex-distinct annuity income factors, and
Contracts issued in those states will use unisex factors. In addition,
Contracts issued in connection with Qualified Plans are required to use unisex
factors.
10
<PAGE>
We may require proof of your Annuitant's age and sex before or after starting
annuity payments. If the age or sex (or both) of your Annuitant are
incorrectly stated in your Contract, we will correct the amount payable based
on your Annuitant's correct Age or sex, if applicable. If we make the
correction after annuity payments have started, and we have made overpayments,
we will deduct the amount of the overpayment, with interest at 3% a year, from
any payments due then or later; if we have made underpayments, we will add the
amount, with interest at 3% a year, of the underpayments to the next payment
we make after we receive proof of the correct Age and/or sex.
Systematic Transfer Programs
The Fixed Account is not available in connection with portfolio rebalancing.
If you are using the earnings sweep, you may also use portfolio rebalancing
only if you selected the Fixed Option as your sweep option. You may not use
dollar cost averaging and the earnings sweep at the same time.
Dollar Cost Averaging
When you request dollar cost averaging, you are authorizing us to make
periodic reallocations of your Contract Value without waiting for any further
instruction from you. You may request to begin or stop dollar cost averaging
at any time prior to your Annuity Date; the effective date of your request
will be the day we receive written notice from you in proper form. Your
request may specify the date on which you want your first transfer to be made.
If you do not specify a date for your first transfer, we will treat your
request as if you had specified the effective date of your request. Your first
transfer may not be made until 30 days after your Contract Date, and if you
specify an earlier date, your first transfer will be delayed until one
calendar month after the date you specify. If you request dollar cost
averaging on your application for your Contract and you fail to specify a date
for your first transfer, your first transfer will be made one period after
your Contract Date (that is, if you specify monthly transfers, the first
transfer will occur 30 days after your Contract Date; quarterly transfers, 90
days after your Contract Date; semiannual transfers, 180 days after your
Contract Date; and if you specify annual transfers, the first transfer will
occur on your Contract Anniversary). If you stop dollar cost averaging, you
must wait 30 days before you may begin this option again.
Your request to begin dollar cost averaging must specify the Investment Option
you wish to transfer money from (your "source account"). You may choose any
one Investment Option as your source account. The Account Value of your source
account must be at least $5,000 for you to begin dollar cost averaging.
Your request to begin dollar cost averaging must also specify the amount and
frequency of your transfers. You may choose monthly, quarterly, semiannual or
annual transfers. The amount of your transfers may be specified as a dollar
amount or a percentage of your source Account Value; however, each transfer
must be at least $250. Dollar cost averaging transfers are subject to the same
requirements and limitations as other transfers.
Finally, your request must specify the Fixed or Variable Investment Option(s)
you wish to transfer amounts to (your "target account(s)"). If you select more
than one target account, your dollar cost averaging request must specify how
transferred amounts should be allocated among the target accounts. Your source
account may not also be a target account.
Your dollar cost averaging transfers will continue until the earlier of (i)
your request to stop dollar cost averaging is effective, or (ii) your source
Account Value is zero, or (iii) your Annuity Date. If, as a result of a dollar
cost 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
11
<PAGE>
Contract Value should be in the Equity Index Subaccount, 40% in the Managed
Bond Subaccount, and 30% in the Growth LT Subaccount. Over time, the
variations in each Subaccount's investment results will shift this balance of
these Subaccount Value allocations. If you elect the portfolio rebalancing
feature, we will automatically transfer your Subaccount Value back to the
percentages you specify.
You may choose to have rebalances made quarterly, semiannually or annually
until your Annuity Date; portfolio rebalancing is not available after you
annuitize.
Procedures for selecting portfolio rebalancing are generally the same as those
discussed in detail above for selecting dollar cost averaging: You may make
your request at any time prior to your Annuity Date and it will be effective
when we receive it in proper form. If you stop portfolio rebalancing, you must
wait 30 days to begin again. You may specify a date for your first rebalance,
or we will treat your request as if you selected the request's effective date.
If you specify a date fewer than 30 days after your Contract Date, your first
rebalance will be delayed one month, and if you request rebalancing on your
application but do not specify a date for the first rebalance, it will occur
one period after your Contract Date, as described above under Dollar Cost
Averaging. We may change, terminate or suspend the portfolio rebalancing
feature at any time.
Earnings Sweep
An earnings sweep automatically transfers the earnings attributable to a
specified Investment Option (the "sweep option") to one or more other
Investment Options (your "target option(s)"). If you elect to use the earnings
sweep, you may select either the Fixed Option or the Money Market Subaccount
as your sweep option. The Account Value of your sweep option will be required
to be at least $5,000 when you elect the earnings sweep. You may select one or
more Variable Investment Options (but not the Money Market Subaccount) as your
target option(s).
You may choose to have earnings sweeps occur monthly, quarterly, semiannually
or annually until you annuitize. At each earnings sweep, we will automatically
transfer your accumulated earnings attributable to your sweep option for the
previous period proportionately to your target option(s). That is, if you
select a monthly earnings sweep, we will transfer the sweep option earnings
from the preceding month; if you select a semiannual earnings sweep, we will
transfer the sweep option earnings accumulated over the preceding six months.
Earnings sweep transfers are subject to the same requirements and limitations
as other transfers.
To determine the earnings, we take the change in the sweep option's Account
Value during the sweep period, add any withdrawals or transfers out of the
sweep option Account that occurred during the sweep period, and subtract any
allocations, including Credit Enhancements, to the sweep option Account during
the sweep period. The result of this calculation represents the "total
earnings" for the sweep period.
If, during the sweep period, you withdraw or transfer amounts from the sweep
option Account, we assume that earnings are withdrawn or transferred before
any other Account Value. Therefore, your "total earnings" for the sweep period
will be reduced by any amounts withdrawn or transferred during the sweep
option period. The remaining earnings are eligible for the sweep transfer.
Procedures for selecting the earnings sweep are generally the same as those
discussed in detail above for selecting dollar cost averaging and portfolio
rebalancing: You may make your request at any time and it will be effective
when we receive it in a form satisfactory to us. If you stop the earnings
sweep, you must wait 30 days 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.
12
<PAGE>
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.
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
13
<PAGE>
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 statements should be considered
only as bearing on the ability of Pacific Life to meet its obligations under
the Contracts and not as bearing on the investment performance of the assets
held in the Separate Account.
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
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
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
-------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
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
-----------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
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
------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
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 in-
vestment-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)
------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
19
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1999 1998 1997
-----------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
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
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.
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
21
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
22
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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
23
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
24
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
25
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS
The following are reconciliations of statutory capital and surplus, and
statutory net income for Pacific Life, as calculated in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, to the amounts reported as stockholder's
equity and net income included on the accompanying consolidated financial
statements:
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------
(In Millions)
<S> <C> <C>
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
----------------------------
(In Millions)
<S> <C> <C> <C>
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>
26
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (Continued)
RISK-BASED CAPITAL
Risk-based capital is a method developed by the National Association of
Insurance Commissioners ("NAIC") to measure the minimum amount of capital
appropriate for an insurance company to support its overall business
operations in consideration of its size and risk profile. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. The adequacy of a
company's actual capital is measured by 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.
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
27
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK (Continued)
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.
28
<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
--------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
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>
29
<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
----------------------
(In Millions)
<S> <C> <C>
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
--------------------------
(In Millions)
<S> <C> <C> <C>
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>
30
<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
----------------------------
(In Millions)
<S> <C> <C> <C>
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
--------------------------
(In Millions)
<S> <C> <C> <C>
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.
31
<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
-----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
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>
32
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS (Continued)
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.
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.
33
<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
----------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
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>
34
<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 Balance
Beginning and End
of Year Acquisitions Maturities of Year
--------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
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.
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
35
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE INSTRUMENTS (Continued)
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.
36
<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
-------------------
(In Millions)
<S> <C> <C>
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
--------------------------
(In Millions)
<S> <C> <C> <C>
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>
37
<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
--------------
(In Millions)
<S> <C> <C>
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.
38
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
39
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
----------------------------
(In Millions)
<S> <C> <C> <C>
Current $152.2 $ 134.1 $ 127.9
Deferred (8.5) (20.6) (14.4)
----------------------------
$143.7 $ 113.5 $ 113.5
============================
The sources of the Company's provision for deferred taxes are as follows:
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------
(In Millions)
<S> <C> <C> <C>
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.
40
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (Continued)
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
----------------------------
(In Millions)
<S> <C> <C> <C>
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>
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
---------------
(In Millions)
<S> <C> <C>
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>
41
<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
--------------------------
(In Millions)
<S> <C> <C> <C>
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>
42
<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
--------------
(In Millions)
<S> <C> <C>
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
--------------------------
(In Millions)
<S> <C> <C> <C>
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 invest-
ment income 211.9 203.3 204.9
Ceded reinsurance netted against interest
credited 110.5 162.8 165.8
Ceded reinsurance netted against policy bene-
fits 88.4 121.3 93.4
Assumed reinsurance included in policy bene-
fits 8.3 17.7 12.7
</TABLE>
43
<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.
44
<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 Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External customers and (In Millions)
other revenue
December 31, 1999 $ 502.0 $ 39.1 $ 205.0 $478.4 $253.2 $ 14.9 $ 24.1 $ 1,516.7
December 31, 1998 431.9 43.2 124.0 521.2 236.1 17.0 21.6 1,395.0
December 31, 1997 395.6 61.4 83.3 480.6 154.0 21.2 6.0 1,202.1
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 1,380.4
December 31, 1998 586.5 565.5 88.6 23.1 0.9 8.0 42.0 1,314.6
December 31, 1997 507.2 509.6 149.4 24.9 0.8 6.2 49.2 1,247.3
Earnings of equity
method investees
December 31, 1999 (0.7) (1.2) (0.1) 107.9 (13.0) 92.9
December 31, 1998 0.1 103.1 (4.2) 99.0
December 31, 1997 0.2 80.7 (2.8) 78.1
Net realized investment
gains (losses)
December 31, 1999 12.6 26.8 0.1 (0.6) 9.9 52.7 101.5
December 31, 1998 4.1 (13.6) 4.6 1.7 4.0 38.6 39.4
December 31, 1997 9.9 12.8 0.6 2.0 20.8 39.3 85.4
Total revenues
December 31, 1999 1,094.1 709.8 283.3 501.2 602.6 141.0 (240.5) 3,091.5
December 31, 1998 1,022.5 595.2 217.2 546.0 422.3 132.1 (87.3) 2,848.0
December 31, 1997 912.7 584.0 233.3 507.5 298.1 128.9 (51.6) 2,612.9
Income (loss) before
provision for
income tax
December 31, 1999 178.4 111.9 73.2 30.4 11.9 62.6 46.3 514.7
December 31, 1998 151.1 74.6 34.1 10.3 9.9 60.1 14.9 355.0
December 31, 1997 132.4 98.3 23.5 28.8 6.4 24.6 (24.5) 289.5
Provision (benefit) for
income tax
December 31, 1999 54.4 30.7 24.0 10.1 5.2 11.3 8.0 143.7
December 31, 1998 52.6 21.2 11.3 2.9 4.5 2.1 18.9 113.5
December 31, 1997 55.8 33.9 9.4 9.1 2.7 10.1 (7.5) 113.5
Net income (loss)
December 31, 1999 124.0 81.2 49.2 20.3 6.7 51.3 38.3 371.0
December 31, 1998 98.5 53.4 22.8 7.4 5.4 58.0 (4.0) 241.5
December 31, 1997 76.6 64.4 14.1 19.7 3.7 14.5 (17.0) 176.0
Interest credited on
universal life and
investment-type
products
December 31, 1999 451.4 383.8 65.1 4.1 904.4
December 31, 1998 449.6 354.1 71.0 6.1 880.8
December 31, 1997 378.8 299.8 106.2 13.0 797.8
Assets
As of December 31, 1999 16,276.1 17,649.4 14,565.2 341.5 60.9 264.5 965.4 50,123.0
As of December 31, 1998 14,578.2 15,221.0 8,384.2 361.1 55.8 267.3 1,016.3 39,883.9
</TABLE>
45
<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
----------------------------
(In Millions)
<S> <C> <C> <C>
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>
46
<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
--------------
(In Millions)
<S> <C> <C>
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.
47
<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.
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
48
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
$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.
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
49
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. TERMINATION AND NON COMPETITION AGREEMENTS (Continued)
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>
<CAPTION>
Years Ending December 31:
-------------------------
<S> <C>
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.
---------------------------------------------------------------------------
50
