-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ESywY4HPJ6mnHc7mpJ89+gjWqGrCu6rVv8PwpdHN0Suh7x6Tn27X2y9m6B6Lfxmp tE73bhI/bolMbZSvuh15Hg== 0001104659-08-029534.txt : 20080502 0001104659-08-029534.hdr.sgml : 20080502 20080502170050 ACCESSION NUMBER: 0001104659-08-029534 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20080502 DATE AS OF CHANGE: 20080502 EFFECTIVENESS DATE: 20080502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENN MUTUAL VARIABLE ANNUITY ACCOUNT III CENTRAL INDEX KEY: 0000702184 IRS NUMBER: 230952300 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-77283 FILM NUMBER: 08799813 BUSINESS ADDRESS: STREET 1: PENN MUTUALS INDEPENDENCE PL C30 STREET 2: 600 DRESHER RD CITY: HORSHAM STATE: PA ZIP: 19044 BUSINESS PHONE: 2159568104 MAIL ADDRESS: STREET 1: INDEPENDENCE PLACE C30 STREET 2: 600 DRESHER ROAD CITY: HORSHAM STATE: PA ZIP: 19044 0000702184 S000010942 PENN MUTUAL VARIABLE ANNUITY ACCOUNT III C000030293 Diversifier II C000030297 Retirement Planner Variable Annuity 497 1 a08-10365_15497.htm 497

 

PROSPECTUS — MAY 1, 2008

Individual Annuity Contracts With Variable Benefit Provisions — Flexible Purchase Payments

 

DIVERSIFIER II

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III

THE PENN MUTUAL LIFE INSURANCE COMPANY

Philadelphia, Pennsylvania 19172 · Telephone (800) 523-0650

 

This prospectus describes two annuity contracts (“Contracts”) offered by the Penn Mutual Life Insurance Company (“Penn Mutual” or the “Company”) and contains information that you should know before purchasing a Contract.  Please read it carefully and save it for future reference.

 

Each Contract is an agreement between you and Penn Mutual.  One Contract is an individual fixed and variable annuity contract.  The other is a variable annuity contract that is available only if you own a companion fixed annuity contract issued by us.

 

Under either Contract, you agree to make one or more payments to us and we agree to pay annuity and other benefits at a future date.  The Contract

 

·                                          has a variable component, which means that your Variable Account Value and any variable payout will be based upon investment experience (see investment options on next page),

 

·                                          is tax-deferred, which means that you will not pay taxes until we begin to make annuity payments to you or you take money out, and

 

·                                          allows you to choose to receive your annuity payments over different periods of time, including your lifetime.

 

The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this prospectus is truthful or complete.  It is a crime for anyone to tell you otherwise.

 

The Contracts are not suitable for short-term investment.  You may pay a deferred sales charge on early withdrawals.  If you withdraw money before age 59 1/2, you may pay a 10% additional income tax.  Your Contract is not a bank deposit and is not federally insured.

 

You may return your Contract within ten days of receipt for a full refund of the Contract Value (or purchase payments, if required by law).  Longer free look periods apply in some states.  To return your Contract, simply deliver or mail it to our office or to our representative who delivered the Contract to you.  The date of the cancellation will be the date we receive your Contract.  Your purchase payment will be allocated to the Subaccounts you have selected on the date we issue your Contract.

 

You may obtain a Statement of Additional Information, dated May 1, 2008, from us free of charge by writing to The Penn Mutual Life Insurance Company, Attn: SAI Request, Philadelphia, PA 19172 or by visiting our web site at www.pennmutual.com. Or you can call us 800-523-0650.  The Statement of Additional Information contains more information about the Contract.  It is filed with the Securities and Exchange Commission (the “Commission’) and we incorporate it by reference into this prospectus.  The table of contents of the Statement of Additional Information is at the end of this prospectus.

 

The Commission maintains a web site (http://www.sec.gov) that contains this prospectus, the Statement of Additional Information, material incorporated by reference, and other information regarding registrants that file electronically with the Commission.

 



 

Under either Contract, you may direct us to invest your payments in one or more of the following underlying funds (the “Funds”) through Penn Mutual Variable Annuity Account III (the “Separate Account”).

 

Penn Series Funds, Inc.

 

Manager

Money Market Fund

 

Independence Capital Management, Inc.

Limited Maturity Bond Fund

 

Independence Capital Management, Inc.

Quality Bond Fund

 

Independence Capital Management, Inc.

High Yield Bond Fund

 

T. Rowe Price Associates, Inc.

Flexibly Managed Fund

 

T. Rowe Price Associates, Inc.

Growth Stock Fund

 

T. Rowe Price Associates, Inc.

Large Cap Value Fund

 

Lord, Abbett & Co. LLC

Large Cap Growth Fund

 

ABN AMRO Asset Management, Inc.

Index 500 Fund

 

Wells Capital Management Incorporated

Mid Cap Growth Fund

 

Turner Investment Partners, Inc.

Mid Cap Value Fund

 

Neuberger Berman Management Inc.

Strategic Value Fund

 

Lord, Abbett & Co. LLC

Small Cap Growth Fund

 

Bjurman, Barry & Associates

Small Cap Value Fund

 

Goldman Sachs Asset Management, L.P.

International Equity Fund

 

Vontobel Asset Management, Inc.

REIT Fund

 

Heitman Real Estate Securities LLC

Large Core Growth Fund

 

Wells Capital Management Incorporated

Large Core Value Fund

 

Eaton Vance Management

SMID Cap Growth Fund

 

Wells Capital Management Incorporated

SMID Cap Value Fund

 

AllianceBernstein L.P.

Emerging Markets Equity Fund

 

Van Kampen Asset Management

Small Cap Index Fund

 

SSgA Funds Management, Inc.

Developed International Index Fund

 

SSgA Funds Management, Inc.

Balanced Fund

 

Independence Capital Management, Inc.

Aggressive Allocation Fund

 

Independence Capital Management, Inc.

Moderately Aggressive Allocation Fund

 

Independence Capital Management, Inc.

Moderate Allocation Fund

 

Independence Capital Management, Inc.

Moderately Conservative Allocation Fund

 

Independence Capital Management, Inc.

Conservative Allocation Fund

 

Independence Capital Management, Inc.

 

2



 

PROSPECTUS CONTENTS

 

 

Glossary

4

 

 

EXPENSES

5

 

 

EXAMPLES OF FEES AND EXPENSES

8

 

 

CONDENSED FINANCIAL INFORMATION

9

 

 

FINANCIAL STATEMENTS

10

 

 

THE PENN MUTUAL LIFE INSURANCE COMPANY

10

 

 

THE SEPARATE ACCOUNT

10

Investment Options in the Separate Account

10

Penn Series Funds, Inc.

10

Voting Instructions

14

Accumulation Units - Valuation

14

 

 

THE FIXED INTEREST ACCOUNT

14

 

 

THE CONTRACTS

14

How Do I Purchase a Contract?

15

What Types of Annuity Payments May I Choose?

16

Variable Annuity Payments

16

Fixed Annuity Payments Under a Variable/Fixed Contract

16

Other Information

16

What Are the Death Benefits Under My Contract?

17

May I Transfer Money Among Investment Options?

18

Variable/Fixed Contracts

18

Variable Contract

18

General Rules

18

Frequent Trading Risks

18

Frequent Trading Policies

19

Dollar Cost Averaging

19

Automatic Rebalancing

19

Additional Information

19

May I Withdraw Any of My Money?

20

Systematic Withdrawals.

20

403(b) Withdrawals.

20

Deferment of Payments and Transfers

20

What Charges Do I Pay?

21

Administration Charges

21

Mortality and Expense Risk Charge

21

Contingent Deferred Sales Charge

21

Variable/Fixed Contract

21

Variable Contract

22

Other Information

22

Underlying Fund Charges

22

Premium Taxes

23

 

 

MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNT

23

General Information

23

Loans Under Section 403(b) Contracts

24

 

 

Federal Income Tax Considerations

24

Withdrawals and Death Benefits

24

Annuity Payments

24

Early Withdrawals.

25

Transfers.

25

Separate Account Diversification.

25

Qualified Plans.

25

Distribution Arrangements.

26

 

 

STATEMENT OF ADDITIONAL INFORMATION CONTENTS

28

 

 

APPENDIX A

A-1

 

3



 

GLOSSARY

 

Accumulation Period: A period that begins with your first purchase payment and ends on the Annuity Date.

 

Accumulation Unit:  If you own a Variable/Fixed Contract, this is a unit of measure used to compute the Variable Account Value under the Contract prior to the Annuity Date.  If you own a Variable Contract, this is a unit of measure used to compute Contract Value prior to the Annuity Date.

 

Administrative Office:  A reference to our administrative office means The Penn Mutual Life Insurance Company, Administrative Office, 600 Dresher Road, Horsham, Pennsylvania 19044.

 

Annuitant:  The person during whose life annuity payments are made.

 

Annuity Date:  The date on which annuity payments start.

 

Annuity Payout Period:  The period of time, starting on the Annuity Date, during which we make annuity payments.

 

Annuity Unit:  A unit of measure used to calculate the amount of each variable annuity payment.

 

Beneficiary:  The person(s) named by the Contract Owner to receive the death benefit payable upon the death of the Contract Owner or Annuitant.

 

Contract:  The combination variable and fixed annuity contract or the variable annuity contract described in this prospectus.

 

Contract Owner:  The person named in the Contract as the Contract Owner.

 

Contract Value:  If you own a Variable/Fixed Contract, this is the sum of the Variable Account Value and the Fixed Interest Account Value.  If you own a Variable Contract, this is the Variable Account Value.

 

Contract Year:  Each twelve-month period following the contract date.

 

Dollar Cost Averaging Accounts: The two fixed account options available under the Contract that are used in conjunction with our dollar cost averaging program.  We offer a Six Month Dollar Cost Averaging Account and a Twelve Month Dollar Cost Averaging Account.

 

Fixed Interest Account Value:  The value of amounts held under the Variable/Fixed Contract in the fixed interest account.

 

Fund:  An open-end management investment company registered with the Securities and Exchange Commission (commonly known as a “mutual fund”) in which a Subaccount of a Separate Account invests all of its assets.

 

Separate Account:  Penn Mutual Variable Annuity Account III, a separate account of The Penn Mutual Life Insurance Company that is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940, as amended.

 

Subaccount: A division of the Separate Account which holds shares of the Funds.

 

Variable Account Value:  The value of amounts held under the Contract in all Subaccounts of the Separate Account.

 

Valuation Period:  The period from one valuation of Separate Account assets to the next. Valuation is performed on each day the New York Stock Exchange is open for trading.

 

Variable Contract:  The variable annuity contract described in this prospectus.

 

Variable/Fixed Contract:  The combination variable and fixed annuity contract described in this prospectus.

 

4



 

We or Us:  “We” or “us” means The Penn Mutual Life Insurance Company, also referred to in this prospectus as Penn Mutual or the Company.

 

You:  “You” means the Contract Owner or prospective Contract Owner.

 

EXPENSES

 

The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the Contract.  The first table describes the fees and expenses that you will pay at the time you buy the Contract, surrender the Contract, or transfer cash value between investment options.  State premium taxes may also be deducted.

 

Contract Owner Transaction Expenses

 

 

 

Sales Load Imposed on Purchase Payments

 

None

 

Maximum Contingent Deferred Sales Charge

 

 

 

Variable/Fixed Contract

 

7

%(a)

Variable Contract

 

5

%(b)

Transfer Fee

 

None

 

 

The next table describes the fees and expenses that you will pay periodically during the time that you own the Contract, not including Fund fees and expenses.

 

Maximum Annual Contract Administration Charge

 

$

30

 

Separate Account Annual Expenses (as a percentage of Variable Account Value)

 

 

 

Mortality and Expense Risk Charge

 

1.25

%

Account Fees and Expenses

 

None

 

Total Separate Account Annual Expenses

 

1.25

%

 

The next item shows the minimum and maximum total operating expenses charged by the Funds that you may pay periodically during the time that you own the Contract.  More detail concerning each Fund’s fees and expenses is contained in the prospectus for each Fund.

 

 

 

Minimum

 

Maximum

 

Total Annual Fund Operating Expenses

 

 

 

 

 

(expenses that are deducted from Fund assets, including management fees and other expenses)

 

0.35

%

1.60

%

 


(a)                                 You pay this charge as a percentage of the amount that you withdraw.  This charge will never be more than 8½% of purchase payments that you allocate to the Separate Account.  After your first Contract Year, you will not pay this charge on your first withdrawal in a Contract Year unless it exceeds 10% of your Contract Value.  See What Charges Do I Pay? in this prospectus.

(b)                                You pay this charge as a percentage of the amount that you withdraw, or as a percentage of the total purchase payments that you made within seven years of the withdrawal, whichever is less.  You will not pay this charge on that portion of the first withdrawal that you make in a Contract Year that does not exceed 10% of the purchase payments that you made one year or more prior to the withdrawal.  See What Charges Do I Pay?  in this prospectus.

 

5



 

Penn Series Funds, Inc.

Underlying Fund Annual Expenses (as a % of portfolio average net assets)

 

 

 

Management
Fees

 

Other
Expenses

 

Acquired
Fund Fees
and
Expenses

 

Total
Fund
Expenses

 

Fee
Waivers

 

Net
Fund
Expenses

 

Money Market(1)

 

0.20

0.30

%

0.00

0.50

%

0.00

%

0.50

%

Limited Maturity Bond(1)

 

0.30

0.30

%

0.01

%(3)

0.61

%

0.00

%

0.61

%

Quality Bond(1)

 

0.33

0.27

%

0.00

0.60

%

0.00

%

0.60

%

High Yield Bond(1)

 

0.50

0.34

%

0.00

0.84

%

0.00

%

0.84

%

Flexibly Managed(1)

 

0.60

0.23

%

0.00

0.83

%

0.00

%

0.83

%

Growth Stock(1)

 

0.63

0.31

%

0.00

0.94

%

0.00

%

0.94

%

Large Cap Value(1)

 

0.60

0.28

%

0.00

0.88

%

0.00

%

0.88

%(6)

Large Cap Growth(1)

 

0.55

0.32

%

0.00

0.87

%

0.00

%

0.87

%(6)

Index 500(1)

 

0.07

0.28

%

0.00

0.35

%

0.00

%

0.35

%

Mid Cap Growth(1)

 

0.70

0.31

%

0.00

1.01

%

0.00

%

1.01

%(6)

Mid Cap Value(1)

 

0.55

0.28

%

0.00

0.83

%

0.00

%

0.83

%(6)

Strategic Value(1)

 

0.72

0.34

%

0.00

1.06

%

0.00

%

1.06

%(6)

Small Cap Growth(1)

 

0.74

0.28

%

0.00

1.02

%

0.00

%

1.02

%

Small Cap Value(1)

 

0.85

0.30

%

0.00

1.15

%

0.00

%

1.15

%

International Equity(1)

 

0.85

0.33

%

0.00

1.18

%

0.00

%

1.18

%(6)

REIT(1)

 

0.70

0.29

%

0.00

0.99

%

0.00

%

0.99

%

Large Core Growth

 

0.56

0.27

%(2)

0.00

%

0.83

%

0.19

%(5)

0.64

%

Large Core Value

 

0.46

0.27

%(2)

0.00

%

0.73

%

0.19

%(5)

0.54

%

SMID Cap Growth

 

0.75

0.30

%(2)

0.00

%

1.05

%

0.00

%

1.05

 %

SMID Cap Value

 

0.95

0.30

%(2)

0.00

%

1.25

%

0.11

%(5)

1.14

%

Emerging Markets Equity

 

1.25

0.40

%(2)

0.02

%

1.67

%

0.07

%(5)

1.60

%

Small Cap Index

 

0.30

0.35

%(2)

0.00

%

0.65

%

0.10

%(5)

0.55

%

Developed International Index

 

0.30

0.37

%(2)

0.00

%

0.67

%

0.08

%(5)

0.59

%

Balanced

 

0.00

0.22

%(2)

0.45

%(4)

0.67

%

0.05

%(5)

0.62

%

Aggressive Allocation

 

0.10

0.23

%(2)

0.97

%(4)

1.30

%

0.00

%(5)

1.30

%

Moderately Aggressive Allocation

 

0.10

0.23

%(2)

0.88

%(4)

1.21

%

0.00

%(5)

1.21

%

Moderate Allocation

 

0.10

0.23

%(2)

0.84

%(4)

1.17

%

0.00

%(5)

1.17

%

Moderately Conservative Allocation

 

0.10

0.23

%(2)

0.78

%(4)

1.11

%

0.00

%(5)

1.11

%

Conservative Allocation

 

0.10

0.23

%(2)

0.69

%(4)

1.02

%

0.00

%(5)

1.02

%

 


(1)                                 These expenses are for the fiscal year ended December 31, 2007.

(2)                                 These expenses are based on estimated amounts for the current fiscal year.

(3)                                 Acquired Fund Fees and Expenses reflect the fees and expenses that were incurred indirectly by the Fund through its investments in other investment companies in the prior fiscal year.

(4)                                 Acquired Fund Fees and Expenses reflect the estimated amount of the fees and expenses that will be incurred indirectly by the Fund through its investments in the underlying funds during the current fiscal year.

(5)                                 The Administrative and Corporate Services Agent has contractually agreed under the administrative and corporate services agreement to waive a portion of its fees and/or reimburse expenses to the extent necessary to keep total operating expenses of certain funds from exceeding the amounts shown below.  This agreement is limited to a Fund’s direct operating expenses and, therefore, does not apply to acquired fund fees and expenses (excluding the Balanced Fund), which are indirect expenses incurred by each Fund through its investments in the underlying funds.  Further, this  

 

6



 

agreement continues indefinitely so long as the Board of Directors, including a majority of the Directors who are not “interested persons” of the Company, approves it at least annually.

 

Large Core Growth

 

0.64

%

Large Core Value

 

0.54

%

SMID Cap Value

 

1.14

%

Emerging Markets Equity

 

1.58

%

Small Cap Index

 

0.55

%

Developed International Index

 

0.59

%

Balanced

 

0.62

%

Aggressive Allocation

 

0.33

%

Moderately Aggressive Allocation

 

0.33

%

Moderate Allocation

 

0.33

%

Moderately Conservative Allocation

 

0.33

%

Conservative Allocation

 

0.33

%

 

(6)                                 Certain sub-advisers have directed certain portfolio trades to a broker.  A portion of the commissions paid to that broker has been recaptured by the Funds.  The total expenses for the Funds after the recapture (not including each Fund’s acquired fund fees and expenses) were:

 

Large Cap Value

 

0.86

%

Large Cap Growth

 

0.83

%

Mid Cap Growth

 

0.97

%

Mid Cap Value

 

0.79

%

Strategic Value

 

1.04

%

International Equity

 

1.16

%

 

7



 

Please review these tables carefully.  They show the expenses that you pay directly and indirectly when you purchase a Contract.  Your expenses include Contract expenses and the expenses of the Funds that you select.  See the prospectus of Penn Series Funds, Inc., for additional information on Fund expenses.

 

You also may pay premium taxes.  These tables and the examples that follow do not show the effect of premium taxes.  See What Charges Do I Pay? in this prospectus.

 

EXAMPLES OF FEES AND EXPENSES

 

This Example is intended to help you compare the cost of investing in the Contract with the cost of investing in other variable annuity contracts.  These costs include Contract Owner transaction expenses, Contract fees, Separate Account annual expenses, and Fund fees and expenses, net of contractual waivers, if any.

 

The Example assumes that you invest $10,000 in the Contract for the time periods indicated and that your investment has a 5% return each year.  Although your actual costs may be higher or lower, based on these assumptions, your costs would be:

 

(1)                                 If you surrender your Variable Contract at the end of the applicable time period:

 

 

 

One

 

Three

 

Five

 

Ten

 

 

 

Year

 

Years

 

Years

 

Years

 

Assuming Maximum Total Annual Fund Expenses

 

$

788

 

$

1,360

 

$

1,807

 

$

3,174

 

Assuming Minimum Total Annual Fund Expenses

 

$

663

 

$

1,005

 

$

1,195

 

$

1,899

 

 

8



 

(2)                                 If you do not surrender your Contract or if you annuitize at the end of the applicable time period:

 

 

 

One

 

Three

 

Five

 

Ten

 

 

 

Year

 

Years

 

Years

 

Years

 

Assuming Maximum Total Annual Fund Expenses

 

$

288

 

$

883

 

$

1,503

 

$

3,174

 

Assuming Minimum Total Annual Fund Expenses

 

$

163

 

$

505

 

$

871

 

$

1,899

 

 

(3)                                 If you surrender your Variable/Fixed Contract at the end of the applicable time period and made purchase payments only during the first Contract Year:

 

 

 

One

 

Three

 

Five

 

Ten

 

 

 

Year

 

Years

 

Years

 

Years

 

Assuming Maximum Total Annual Fund Expenses

 

$

933

 

$

1,366

 

$

1,807

 

$

3,174

 

Assuming Minimum Total Annual Fund Expenses

 

$

816

 

$

1,007

 

$

1,195

 

$

1,899

 

 

(4)                                 If you surrender your Variable/Fixed Contract at the end of the applicable time period and made purchase payments after the first Contract Year:

 

 

 

One

 

Three

 

Five

 

Ten

 

 

 

Year

 

Years

 

Years

 

Years

 

Assuming Maximum Total Annual Fund Expenses

 

$

933

 

$

1,366

 

$

1,857

 

$

3,288

 

Assuming Minimum Total Annual Fund Expenses

 

$

816

 

$

1,007

 

$

1,249

 

$

2,029

 

 

CONDENSED FINANCIAL INFORMATION

 

Appendix A to this prospectus contains tables that show Accumulation Unit values and the number of Accumulation Units outstanding for each of the Subaccounts of the Separate Account.  The financial data included in the tables should be read in conjunction with the financial statements and the related notes that are included in the Statement of Additional Information.

 

9



 

FINANCIAL STATEMENTS

 

The financial statements of the Separate Account and the consolidated financial statements of the Company appear in the Statement of Additional Information.  The consolidated financial statements of the Company should be considered only as bearing upon the Company’s ability to meet its obligations under the Contracts.

 

THE PENN  MUTUAL LIFE INSURANCE COMPANY

 

Penn Mutual is a Pennsylvania mutual life insurance company chartered in 1847.  We are located at 600 Dresher Road, Horsham, PA 19044.  Our mailing address is The Penn Mutual Life Insurance Company Attn: Customer Service Group, Philadelphia, PA 19172.  We issue and are liable for all benefits and payments under the Contracts.

 

THE SEPARATE ACCOUNT

 

Penn Mutual established Penn Mutual Variable Annuity Account III (the “Separate Account”) on April 13, 1982.  The Separate Account is registered with the Securities and Exchange Commission as a unit investment trust and is a “separate account” within the meaning of the federal securities laws.  The Separate Account is divided into Subaccounts that invest in shares of different mutual funds.

 

·                                         The income, gains and losses, whether or not realized, of Penn Mutual do not have any effect on the income, gains or losses of the Separate Account or any Subaccount.

 

·                                         The Separate Account and its Subaccounts are not responsible for the liabilities of any other business of Penn Mutual.

 

The financial statements of the Subaccounts of the Separate Account for the year ended December 31, 2007 are included in the Statement of Additional Information referred to on the cover page of this prospectus.

 

Investment Options in the Separate Account

 

The Separate Account currently has Subaccounts that invest in the following Funds:

 

Penn Series Funds, Inc.

 

Money Market Fund — seeks to preserve capital, maintain liquidity and achieve the highest possible level of current income consistent with these objectives, by investing in high quality money market instruments; an investment in the Fund is neither insured nor guaranteed by the U.S. Government and there can be no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share.

 

Limited Maturity Bond Fund seeks highest available current income consistent with liquidity and low risk to principal through investment primarily in marketable investment grade debt securities; total return is secondary.

 

Quality Bond Fund — seeks the highest income over the long term consistent with the preservation of principal through investment primarily in marketable investment grade debt securities.

 

High Yield Bond Fund — seeks high current income by investing primarily in a diversified portfolio of long term high-yield/high-risk fixed income securities in the medium to lower quality ranges; capital appreciation is a secondary objective; high-yield/high-risk fixed income securities, which are commonly referred to as “junk” bonds, generally involve greater risks of loss of income and principal than higher rated securities.

 

10



 

Flexibly Managed Fund — seeks to maximize total return (capital appreciation and income) by investing in common stocks, other equity securities, corporate debt securities, and/or short term reserves, in proportions considered appropriate in light of the availability of attractively valued individual securities and current and expected economic and market conditions.

 

Growth Stock Fund — seeks long term growth of capital and increase of future income by investing primarily in common stocks of well established growth companies.

 

Large Cap Value Fund — seeks to maximize total return (capital appreciation and income) primarily by investing in equity securities of companies believed to be undervalued.

 

Large Cap Growth Fund — seeks to achieve long-term growth of capital (capital appreciation) by investing in equity securities of large capitalization growth companies with above-average growth potential.

 

Index 500 Fund — seeks to match the total return of the S&P 500 while keeping expenses low.  The S&P 500 is an index of 500 common stocks, most of which trade on the New York Stock Exchange; “S&P 500 Index” and “500” are trademarks of the McGraw-Hill Companies, Inc. and have been licensed for use by Penn Series Funds, Inc.; the Fund is not sponsored, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of investing in the Fund.

 

Mid Cap Growth Fund — seeks to maximize capital appreciation by investing primarily in common stocks of mid-cap U.S. companies with market capitalizations in the range of those companies included in the Russell Mid Cap Index that have strong earnings growth potential.

 

Mid Cap Value Fund — seeks to achieve growth of capital by investing primarily in mid-cap U.S. companies with market capitalizations in the range of those companies included in the Russell Mid Cap Index that are undervalued.

 

Strategic Value Fund — seeks to achieve growth of capital by investing in equity securities of mid-cap companies with market capitalizations in the range of those companies included in the Russell Mid Cap Index; the Fund seeks to invest in well-managed companies whose stock prices are undervalued.

 

Small Cap Growth Fund — seeks capital appreciation by investing primarily in common stocks of emerging growth companies with above-average growth prospects.

 

Small Cap Value Fund — seeks capital appreciation through investment in a diversified portfolio of securities consisting primarily of equity securities of companies with market capitalizations in the range of those companies included in the Russell 2000 Value Index.

 

International Equity Fund — seeks to maximize capital appreciation by investing in a carefully selected diversified portfolio consisting primarily of equity securities; the investments will consist principally of equity securities of European and Pacific Basin countries.

 

REIT Fund — seeks to achieve a high total return consistent with reasonable investment risks by investing in equity securities of real estate investment trusts.

 

Large Core Growth Fund—  seeks to achieve long-term growth of capital (capital appreciation) by investing primarily in common and preferred stocks of large capitalization U.S. companies.

 

Large Core Value Fund—  seeks to achieve total return by investing primarily in value stocks of large capitalization companies and dividend-paying stocks.

 

11



 

SMID Cap Growth Fund—  seeks to achieve long term returns by investing primarily in common stocks of small and medium capitalization U.S. companies.

 

SMID Cap Value Fund—  seeks to achieve long-term growth of capital by investing primarily in a diversified portfolio of equity securities of small and medium capitalization U.S. companies, generally representing 60 to 125 companies.

 

Emerging Markets Equity Fund—  seeks to achieve capital appreciation by investing in equity securities located in emerging market countries.

 

Small Cap Index Fund—  seeks to replicate the returns and characteristics of a small cap index by investing at least 80% of its net assets in securities listed in the Russell 2000® Index.

 

Developed International Index Fund—  seeks to replicate the returns and characteristics of an international index composed of securities from developed countries by investing at least 80% of its net assets in securities listed in the Morgan Stanley Capital International® Europe, Australasia, Far East (MSCI EAFE) Index.

 

Balanced Fund—  seeks to achieve long-term growth and current income by using a “fund-of-funds” strategy.

 

Aggressive Allocation Fund—  seeks to achieve long-term capital growth by using a “fund-of-funds” strategy.

 

Moderately Aggressive Allocation Fund—  seeks to achieve long-term capital growth and current income by using a “fund-of-funds” strategy.

 

Moderate Allocation Fund—  seeks to achieve long-term capital growth and current income by using a “fund-of-funds” strategy.

 

Moderately Conservative Allocation Fund—  seeks to achieve long-term capital growth and current income by using a “fund-of-funds” strategy.

 

Conservative Allocation Fund—  seeks to achieve long-term capital growth and current income by using a “fund-of-funds” strategy.

 

Independence Capital Management, Inc., Horsham, Pennsylvania is investment adviser to each of the Funds and a wholly owned subsidiary of Penn Mutual. ABN AMRO Asset Management, Inc., Chicago, Illinois, is investment sub-adviser to the Large Cap Growth Fund.  T. Rowe Price Associates, Baltimore, Maryland, is investment sub-adviser to the Flexibly Managed, Growth Stock and High Yield Bond Funds.  Wells Capital Management Incorporated, San Francisco, California, is investment sub-adviser to the Index 500, Large Core Growth and SMID Cap Growth Funds.  Turner Investment Partners, Inc., Berwyn, Pennsylvania is sub-adviser to the Mid Cap Growth Fund.  Neuberger Berman Management Inc., New York, New York, is investment sub-adviser to the Mid Cap Value Fund.  Lord, Abbett & Co., Jersey City, New Jersey, is investment sub-adviser to the Strategic Value and Large Cap Value Funds.  Goldman Sachs Asset Management, L.P., New York, New York, is investment sub-adviser to the Small Cap Value Fund.  Vontobel Asset Management, Inc., New York, New York, is investment sub-adviser to the International Equity Fund.  Heitman Real Estate Securities LLC, Chicago, Illinois, is investment sub-adviser to the REIT Fund.  Bjurman, Barry & Associates, Los Angeles, California, is investment sub-adviser to the Small Cap Growth Fund. Eaton Vance Management, Boston, Massachusetts, is investment sub-adviser to the Large Core Value Fund. AllianceBernstein L.P., New York, New York, is investment sub-adviser to the SMID Cap Value Fund.  Van Kampen Asset Managemen, New York, New York, is investment sub-adviser to the Emerging Markets Equity Fund. SSgA Funds Management, Inc., Boston, Massachusetts, is investment sub-adviser to the Small Cap Index and Developed International Index Funds.

 

12



 

Shares of Penn Series are sold  to other variable life and variable annuity separate accounts of Penn Mutual and its subsidiary, The Penn Insurance and Annuity Company.  For more information on the possible conflicts involved when the Separate Account invests in Funds offered to other separate accounts, see the Fund prospectuses and statements of additional informaiton.

 

Read the prospectuses of these Funds carefully before investing.  You may obtain copies of the prospectuses which contain additional information about the Funds including their investment objectives and policies and

 

13



 

expenses, without charge, by writing to The Penn Mutual Life Insurance Company, Customer Service Group — H3F, Philadelphia, PA 19172.  Or, you may call, toll free, 800-548-1119.

 

Voting Instructions

 

You have the right to tell us how to vote proxies for the Fund shares in which your purchase payments are invested.  If the law changes and permits us to vote the Fund shares, we may do so.

 

If you are a Contract Owner, we determine the number of Fund shares that you may vote by dividing your interest in a Subaccount by the net asset value per share of the Fund.  If you are receiving annuity payments, we determine the number of Fund shares that you may vote by dividing the reserve allocated to the Subaccount by the net asset value per share of the Fund.  We change these procedures whenever we are required to do so by law.

 

Accumulation Units - Valuation

 

Your allocations and transfers to the Separate Account are held as Accumulation Units of the Subaccounts that you select.  We value Accumulation Units as of the close of regular trading on the New York Stock Exchange (NYSE) (generally, 4:00 p.m. ET).  When you invest in, withdraw from or transfer money to a Subaccount, you receive the Accumulation Unit price next computed after we receive and accept your purchase payment or your withdrawal or transfer request at our Administrative Office.  Allocation, withdrawal and transfer instructions received from you or the agent of record (pursuant to your instruction) at our Administrative Office after the close of regular trading on the NYSE will be valued based on the Accumulation Unit price computed as of the close of regular trading on the next NYSE business day.  In the case of your first purchase payment, you receive the price next computed after we accept your application to purchase a Contract.

 

The value of an Accumulation Unit is $10 when a Subaccount begins operation. The value of an Accumulation Unit may vary, and is determined by multiplying its last computed value by the net investment factor for the Subaccount for the current Valuation Period.  The net investment factor measures (1) investment performance of Fund shares held in the Subaccount, (2) any taxes on income or gains from investments held in the Subaccount, and (3) the mortality and expense risk charge at an annual rate of 1.25%.

 

THE FIXED INTEREST ACCOUNT

 

The fixed interest account is part of the Company’s general investment account.  Interests in the fixed interest account are not registered under the Securities Act of 1933 and the general account is not registered as an investment company under the Investment Company Act of 1940.  This prospectus generally discusses only the variable portion of the Contract. The staff of the Commission has not reviewed the disclosure in this prospectus relating to the fixed interest account.  Disclosure regarding the fixed interest account, however, may be subject to generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in this prospectus.  See MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNT.

 

THE CONTRACTS

 

An individual variable and fixed annuity contract may be an attractive long-term investment vehicle for many people. Our contract allows you to invest in the Separate Account, through which you may invest in one or more of the available Funds of Penn Series Funds, Inc. See THE SEPARATE ACCOUNT in this prospectus.

 

In addition, the Variable/Fixed Contract allows you to allocate your purchase payment(s) and transfer amounts to a fixed interest account.  The Variable Contract allows you to transfer amounts from your Contract to a fixed interest account in a separate fixed annuity contract issued by Penn Mutual.  The fixed interest account is

 

14



 

funded and guaranteed by Penn Mutual through its general account. See THE FIXED  INTEREST ACCOUNT and MORE  INFORMATION ABOUT THE FIXED INTEREST ACCOUNT  in this prospectus.

 

You decide, within Contract limits,

 

·                                          how often you make a purchase payment and how much you invest;

 

·                                          the Funds and/or fixed interest account in which your purchase payments are invested;

 

·                                          whether or not to transfer money among the available Funds and fixed interest account;

 

·                                          the type of annuity that we pay and who receives it;

 

·                                          the Beneficiary or Beneficiaries to whom we pay death benefits; and

 

·                                          the amount and frequency of withdrawals from the Contract Value.

 

Your Contract has

 

·                                          an Accumulation Period, during which you make one or more purchase payments and we invest your payments as you tell us; and

 

·                                          an Annuity Payout Period, during which we make annuity payments to you.  Your Annuity Payout Period begins on your Annuity Date.

 

We may amend your Contract at any time to comply with legal requirements.  State law may require us to obtain your approval for any Contract amendment.  We may, with any necessary approval of the Commission and the governing state insurance department, substitute another mutual fund for any of the Funds currently available.  We will notify you of any material contract amendment and mutual fund substitutions.

 

You may contact us by writing The Penn Mutual Life Insurance Company, Customer Service Group, Philadelphia, PA 19172; or you may call (800) 523-0650.

 

How Do I Purchase a Contract?

 

Our representative will assist you in completing an application and sending it, together with a check for your first purchase payment, to our Administrative Office.  All subsequent purchase payments should be sent as follows: 1) checks sent by mail: The Penn Mutual Life Insurance Company, Payment Processing Center, P.O. Box 9773, Providence, RI 02940-9773, and 2) checks sent by overnight delivery: The Penn Mutual Life Insurance Company, Payment Processing Center, 101 Sabin Street, Pawtucket, RI 02860.  We usually accept an application to purchase a Contract within two business days after we receive it at our Administrative Office.  If you send us an incomplete application, we will return your purchase payment to you within five business days unless you ask us to keep it while you complete the application.

 

For Variable/Fixed Contracts issued in connection with qualified retirement plans, the minimum first purchase payment is $250 and the minimum for each subsequent purchase payment is $50.  The minimum first purchase payment for Variable/Fixed Contracts which are not issued in connection with qualified retirement plans is $2,500 and the minimum for each subsequent purchase payment is $300.  The total purchase payments that you make on a Variable/Fixed Contract may not exceed $1,000,000 in any calendar year without our consent.

 

For Variable Contracts issued in connection with retirement plans qualifying for special tax treatment under the Internal Revenue Code of 1986, as amended, (the “Code”), the minimum first purchase payment is $250 and the minimum for each subsequent purchase payment is $40.  The minimum first purchase payment for Variable Contracts that are not issued in connection with qualified retirement plans is $1,500 and the minimum for each subsequent purchase payment is $300.

 

15



 

We may, at our discretion, reduce the minimum requirements for initial and subsequent purchase payments.

 

What Types of Annuity Payments May I Choose?

 

You may choose from the following options:

 

·                                          An annuity for a set number of years (5 to 25 years for a Variable/Fixed Contract; 5 to 30 years for a Variable Contract);

 

·                                          A life annuity;

 

·                                          A life annuity with payments guaranteed for 10 or 20 years;

 

·                                          A joint and survivor life annuity; or

 

·                                          Any other form of annuity that we may agree upon.

 

You may choose a person other than yourself to be the Annuitant.  Your annuity payments will not start until you choose an annuity option.  The shorter the expected length of the Annuity Payout Period, the larger each payment will be.

 

You will pay a mortality and expense risk charge during both the Accumulation Period and the Annuity Payout Period under your Contract.  We charge this fee while you receive a variable annuity even though we may no longer bear a mortality risk.

 

Variable Annuity Payments. The size of your variable annuity payments will vary depending upon the  performance of the investment options that you choose for the Annuity Payout Period.  Your payments also will depend on factors such as the size of your investment, the type of annuity you choose, the expected length of the annuity period, frequency with which you receive payments, and the annuity purchase rates and charges in your Contract.

 

The variable annuity purchase rate assumes an annual net investment return of 4%.  If the annual net investment return during the Annuity Payout Period is greater than 4%, the amount of your payments will increase.  If the annual net investment return is less, the amount of your payments will  decrease.

 

Fixed Annuity Payments Under a Variable/Fixed Contract.  The size of your fixed annuity payments will not change.  The size of these payments is determined by a number of factors, including the size of your investment, the form of annuity chosen, and the expected length of the annuity period.

 

Other Information.  If your Contract is not issued under a qualified retirement plan, annuity payments must commence not later than the first day of the next month after the Annuitant’s 85th birthday.   If your Contract is issued under a qualified retirement plan, you must begin to take minimum distributions not later than the first day of April following the year in which the Annuitant turns 70 1/2.

 

You or your surviving Beneficiary may change the Annuity Date or your annuity option by giving us written notice at our Administrative Office at least 30 days prior to the current Annuity Date.   The Annuity Date under a Variable/Fixed Contract may not be earlier than the first contract anniversary.

 

If the Contract Value of a Variable/Fixed Contract is less than $5,000, or if the Contract Value of a Variable Contract is less than $2,000, we may pay you in a lump sum.  We usually make annuity payments on the first day of each month, starting with the Annuity Date, but we will pay you quarterly, semiannually or annually, if you prefer.  If necessary, we will adjust the frequency of your payments so that payments are at least $50 each. For information on the tax treatment of annuity payments, see FEDERAL INCOME TAX CONSIDERATIONS in this prospectus.

 

16



 

What Are the Death Benefits Under My Contract?

 

You may designate a Beneficiary in your application.  If you fail to designate a Beneficiary, your Beneficiary will be your estate.  You may change your Beneficiary at any time before the death of the Annuitant.

 

Variable/Fixed Contracts sold in most states provide that if the Annuitant dies (or in some cases, you die and you are not the Annuitant) prior to the Annuity Date, we will pay your Beneficiary the greatest of

 

·                                          the sum of all purchase payments, adjusted for withdrawals and contract transfers,

 

·                                          the Contract Value for the Valuation Period in which proof of death, i.e., a death certificate or other official document establishing death, and any other required information needed to make payment is received in our Administrative Office, or

 

·                                          the Variable Account Value, as of the contract date or, if later, as of the end of the most recent seven-year contract period occurring prior to the Contract Owner’s 81st birthday, adjusted for subsequent purchase payments and adjusted for withdrawals and contract transfers, plus the value the Fixed Interest Account under your Contract.

 

Similarly, Variable Contracts sold in most states provide that if the Annuitant dies (or, in some cases, if you die) prior to the Annuity Date, we will pay your Beneficiary the greatest of

 

·                                          the sum of all purchase payments, adjusted for withdrawals and contract transfers,

 

·                                          the Contract Value for the Valuation Period in which proof of death and any other required information needed to make payment is received in our Administrative Office, or

 

·                                          the Contract Value, as of the contract date or, if later, as of the end of the most recent seven-year contract period occurring prior to the Contract Owner’s 81st birthday, adjusted for subsequent purchase payments and adjusted for withdrawals and contract transfers.

 

With respect to Contracts sold in Texas, if the Annuitant dies (or, in some cases, if you die) prior to the Annuity Date, we will pay the greater of

 

·                                          the sum of all purchase payments, adjusted for withdrawals and contract transfers, or

 

·                                          the Contract Value for the Valuation Period in which proof of death and any other required information needed to make payment is received at Penn Mutual’s service office.

 

The death benefit may be paid in a lump sum or in the form of annuity payments.  We normally will pay the death benefit in a lump sum within seven days after we receive proof of the date of death and all required information.  We will delay payment of the lump sum upon request, but not for longer than five years.

 

If the Beneficiary is not the spouse of the decedent, he or she may choose an annuity option rather than a lump sum payment.  If he or she selects an annuity option, payments must begin within one year of the decedent’s death.  Payments may not be made over a period longer than the Beneficiary’s life or life expectancy (whichever is longer).

 

If the Beneficiary is the spouse of the decedent, he or she may select any annuity option that was available to the decedent or apply to become the Contract Owner.

 

If the Annuitant dies on or after the Annuity Date and the annuity is for a specified number of years or for life with payments guaranteed for 10 or 20 years, the Beneficiary may elect to have the payments continue for the specified or guaranteed period or to receive in a lump sum the present value of the remaining payments.

 

17



 

For information on the tax treatment of death benefits, see FEDERAL INCOME TAX CONSIDERATIONS in this prospectus.

 

May I Transfer Money Among Investment Options?

 

Variable/Fixed Contracts.  You may transfer amounts from one Subaccount of the Separate Account to another Subaccount of the Separate Account.  Within Contract limits, you also may transfer from the Subaccounts of the Separate Account to the fixed interest account.  You may transfer from the fixed interest account to Subaccounts of the Separate Account.  You may make no more than two transfers per calendar month and no more than twelve per calendar year.  The minimum amount that you may transfer is $250 or the total amount held in the investment account, if less.

 

If you own a Variable/Fixed Contract as trustee under a qualified retirement plan, you may transfer all or part of the Contract Value to another annuity contract issued by us that you own under the same plan.

 

Variable Contract.  You may transfer amounts from one Subaccount of the Separate Account to another, up to six times in a calendar year.  The minimum transfer for a Contract issued under a tax-qualified retirement plan is $250.  The minimum for all other Contracts is $1,000.  If a partial transfer is made to another Contract, the remaining Contract Value must be $250.

 

You may transfer all or part of your Contract Value to another contract issued by us containing a reciprocal transfer provision, subject to the following conditions.  The Contract Owner, Annuitant and Beneficiary must be the same under both contracts.  No more than six such transfers may be made in a calendar year and no transfer may be made after the thirtieth day before the Annuity Date.

 

General Rules.  Transfers will be based on values at the end of the Valuation Period in which the transfer request is received at our Administrative Office.  A transfer request must be received at our Administrative Office from you or the agent of record (pursuant to your instruction), and all other administrative requirements must be met to make the transfer.  We will not be liable for following instructions, including instructions from the agent of record, communicated by telephone that we reasonably believe to be genuine.  We require certain personal identifying information to process a request for transfer made over the telephone.  For transfers other than dollar cost averaging and automatic rebalancing, we reserve the right to charge a fee, although we have no present intention of doing so.  The Contract is not designed for individuals and professional market timing organizations that use programmed and frequent transfers among investment options.  We therefore reserve the right to change our telephone transaction policies and procedures at any time to restrict the use of telephone transfers for market timing and to otherwise restrict market timing, up to and including rejecting transactions we reasonably believe are market timing transactions, when we believe it is in the interest of all of our Contract Owners to do so.   However, we may not be able to detect all market timing and may not be able to prevent frequent transfers, and any possible harm caused, by those we do detect.

 

Frequent Trading Risks.  We did not design this variable annuity and the available Subaccounts to accommodate market timing or frequent transfers between the Subaccounts.  Frequent exchanges among Subaccounts and market timing by Contract Owners can reduce the long–term returns of the underlying mutual funds.  The reduced returns could adversely affect the Contract Owners, Annuitants, insureds or Beneficiaries of any variable annuity or variable life insurance contract issued by any insurance company with respect to values allocated to the underlying fund.  Frequent exchanges may reduce the mutual fund’s performance by increasing costs paid by the fund (such as brokerage commissions); they can disrupt portfolio management strategies; and they can have the effect of diluting the value of the shares of long term shareholders in cases in which fluctuations in markets are not fully priced into the fund’s net asset value.

 

The insurance–dedicated mutual funds available through the Subaccounts generally cannot detect individual contract owner exchange activity because they are owned primarily by insurance company separate accounts that aggregate exchange orders from owners of individual contracts.  Accordingly, the funds are dependent in large part on the rights, ability and willingness of the participating insurance companies to detect and deter short-term trading by contract owners.

 

18



 

As outlined below, we have adopted policies regarding frequent trading, but there is the risk that these policies and procedures concerning frequent trading will prove ineffective in whole or in part in detecting or preventing frequent trading.  As a result of these limitations, some Contract Owners may be able to engage in frequent trading, while other Contract Owners will bear the affects of such frequent trading.  Please review the mutual funds’ prospectuses for specific information about the funds’ short—term trading policies and risks.

 

Frequent Trading Policies.  We have adopted policies and procedures designed to discourage frequent trading as described below.  We intend to monitor on an ongoing basis the operation of these policies and procedures and may, at any time without notice to Contract Owners, revise them in any manner not inconsistent with the terms of the Contract.  If requested by the investment adviser and/or sub-adviser of a Fund, we will consider additional steps to discourage frequent trading.  In addition, we reserve the right to reject any purchase payment or exchange request at any time for any reason.

 

We have adopted certain procedures to detect frequent trading.  If it appears that market timing activity is occurring or the transfer frequency would be expected to have a detrimental impact on the affected Funds, the following steps will be taken on a uniform basis:

 

(1)                                 A letter is sent to the Contract Owner and to the registered representative/insurance agent associated with the Contract reiterating the policy with respect to frequent transfers and urging a cessation of any market timing or frequent transfer activity.

 

(2)                                 If market timing or frequent transfer activity continues after the initial letter, a second letter is sent requiring that all subsequent transfer requests be submitted in writing containing the Contract Owner’s original signature.  Thereafter, any attempt to make a transfer request electronically, telephonically or by facsimile will be rejected.

 

(3)                                 Any Contracts which have been the subject of a letter referred to in paragraph 1 or 2 will be subject to special monitoring to determine whether the potentially detrimental frequent trading has ceased.

 

Dollar Cost Averaging. Dollar cost averaging is a way to invest in which securities are purchased at regular intervals in fixed dollar amounts so that the cost of the securities gets averaged over time and possibly over market cycles.  If your Contract Value is at least $10,000, you can have a fixed percentage of your purchase payments transferred monthly from one account to other accounts to achieve dollar cost averaging ($50 minimum per account).  These transfers may be made only from one of the following accounts: Money Market Subaccount, Limited Maturity Bond Subaccount, Quality Bond Subaccount, or the Fixed Holding Account.  You may do this for 12 to 60 months, or until you change your allocations or tell us to stop dollar cost averaging.

 

Automatic Rebalancing. Automatic rebalancing is a way to maintain your desired asset allocation percentages.  Because the value of your Subaccounts will fluctuate in response to investment performance, your asset allocation percentages may become out of balance over time.  If you elect automatic rebalancing, we will transfer funds under your Contract on a quarterly (calendar) basis among the Subaccounts to maintain a specified percentage allocation among your selected variable investment options.

 

Dollar cost averaging and automatic rebalancing may not be in effect at the same time and are not available after annuitization.  There is no charge for either of these programs.

 

Additional Information.  Transfers will be based on values at the end of the Valuation Period in which the transfer request is received at our Administrative Office.  You may transfer amounts to a Contract from another contract issued by us to the extent permitted by the other contract.  If you make a withdrawal from a Contract that relates to money transferred from another contract with a front-end sales load, we will not charge you a deferred sales charge on the withdrawal.

 

A transfer request must be received at our Administrative Office from you or the agent of record (pursuant to your instructions) and all other administrative requirements for transfer must be met to make the transfer.  We reserve the right to lower the minimum transfer amount.  Neither we nor the Separate Account will be liable for following instructions communicated by telephone that we reasonably believe to be genuine.  We require certain personal identifying information to process a request for transfer made over the telephone.

 

19



 

May I Withdraw Any of My Money?

 

Prior to the earlier of the Annuity Date or the death of the Contract Owner or Annuitant, you may withdraw all or part of your Contract Value.  We base your withdrawal request on your Contract Value next determined after we receive a proper written request for withdrawal (and the Contract, in case of a full withdrawal) at our Administrative Office.  We normally will pay you within seven days.  You may pay a contingent deferred sales charge when you withdraw Contract Value.  See WHAT CHARGES DO I PAY – Contingent Deferred Sales Charge.  You may pay tax when you make a withdrawal, including an additional 10% tax under certain circumstances.  See FEDERAL INCOME TAX CONSIDERATIONS in this prospectus.

 

·                                          A partial withdrawal must be at least $250 and the remaining Contract Value must be at least $250.

 

·                                          After the Annuity Date, you may choose an annuity for a set number of years, or you may withdraw the present value of your annuity.

 

·                                          If you do not tell us otherwise, the withdrawal will be taken pro rata from the Subaccounts if you own a Variable Contract.  If you own a Variable/Fixed Contract, and you do not tell us otherwise, the withdrawal will be taken first from the Fixed Holding Account.  If the withdrawal exhausts your Fixed Holding Account value, any remaining withdrawal will be taken pro rata from the Subaccounts.  If the withdrawal exhausts your Variable Account Value, then any remaining withdrawal will be taken from a fixed interest account beginning with the fixed interest account with the shortest interest period.

 

Systematic Withdrawals.  If your Contract Value is at least $25,000 and you have not taken a lump sum free withdrawal in the current contract year, you can make systematic withdrawals.  These are regular payments that we make to you on a monthly, quarterly, semiannual or annual basis.  It is a convenient way for you to withdraw a limited percentage of purchase payments without incurring a contingent deferred sales charge.  The total amount that you withdraw in a contract year cannot exceed your free withdrawal amount, and the minimum monthly amount of each withdrawal payment is $100.  Your payments will begin on the next withdrawal date after we receive your request.  See Free Withdrawals below.  For information on the tax treatment of withdrawals, see FEDERAL INCOME TAX CONSIDERATIONS in this prospectus.  

 

403(b) Withdrawals. There are restrictions on withdrawals from Contracts qualifying under Section 403(b) of the Code.  Generally, withdrawals attributable to purchase payments made after December 31, 1988, pursuant to a salary reduction plan may be made only if the Contract Owner is over the age of 59 1/2, leaves the employment of the employer, dies, or becomes disabled as defined in the Code. Withdrawals (other than withdrawals attributable to income earned on purchase payments) may also be possible in the case of hardship as defined in the Code.  The restrictions do not apply to transfers among Subaccounts and may also not apply to transfers to other investments qualifying under Section 403(b).  For information on the tax treatment of withdrawals under Section 403(b) Contracts, see FEDERAL INCOME TAX CONSIDERATIONS in this prospectus.

 

Deferment of Payments and Transfers

 

We reserve the right to defer a withdrawal, a transfer of Contract Value, or annuity payments funded by the Separate Account if (a) the NYSE is closed (other than customary weekend and holiday closings); (b) trading on the NYSE is restricted; (c) an emergency exists that makes it impractical for us to dispose of securities held in the Separate Account or to determine the value of its assets; or (d) the Commission by order so permits for the protection of investors.  Conditions described in (b) and (c) will be decided by, or in accordance with rules of, the Commission.

 

20



 

What Charges Do I Pay?

 

The following discussion explains the Contract charges that you pay.  You also indirectly pay expenses of the Funds that you select as investment options in the Separate Account.  See the prospectuses of the Funds for information on Fund expenses.

 

Administration Charges   These charges reimburse us for administering the Contracts and the Separate Account.

 

·                                          We deduct from your Variable Account Value an annual contract administration charge that is the lesser of $30 or 2% of your Variable Account Value.  We deduct this charge each year on the date specified in the Contract (and on the date the Variable Account Value or Contract Value is withdrawn in full if other than the date specified).  To pay this charge, we cancel Accumulation Units credited to your Contract, pro rata among the Subaccounts in which you invest.

 

Mortality and Expense Risk Charge

 

·                                          We deduct from the net asset value of the Separate Account a daily expense risk charge equal to an annual rate of 0.50% of the daily net asset value of the Separate Account. You pay this charge to compensate us for the risk of guaranteeing not to increase the annual contract administration charge to more than $30 regardless of actual administrative costs.

 

·                                          We deduct a daily mortality risk charge equal to an annual rate of 0.75% of the daily net asset value of the Separate Account (prior to September 1, 1990 the charge was 0.80%). This charge is to compensate us for the mortality-related guarantees (e.g. guarantees that the annuity factors will never be decreased even if mortality experience is substantially different than originally assumed) we make under your Contract.

 

You pay the mortality and expense risk charges during both the accumulation and variable annuity payout phases of your Contract.

 

Contingent Deferred Sales Charge  This charge pays for our sales expenses.  Sales expenses that are not covered by the deferred sales charge are paid from our surplus, which may include proceeds from the expense and mortality risk charges.  You may pay this charge if you make a full or partial withdrawal of the Contract Value or if you withdraw the present value of your annuity payments.  Purchase payments will be treated as withdrawn on a first-in, first-out basis.

 

Variable/Fixed Contract     The following tables show the schedule of the contingent deferred sales charge that will apply to the withdrawal of a purchase payment, after allowing for the free withdrawals described below.

 

First, if no purchase payments have been made after the first Contract Year, the deferred sales charge will equal:

 

Withdrawal During
Contract Year

 

Deferred Sales Charge as a
Percentage of Amount Withdrawn

 

1

 

7.0%

 

2

 

6.0%

 

3

 

5.0%

 

4

 

4.0%

 

5

 

3.0%

 

6

 

2.0%

 

7

 

1.0%

 

8 and later

 

No Charge

 

 

Second, if purchase payments have been made in any Contract Year after the first, the deferred sales charge will equal:

 

21



 

Withdrawal During
Contract Year

 

Deferred Sales Charge as a
Percentage of Amount Withdrawn

 

1

 

7.0%

 

2

 

6.0%

 

3

 

5.0%

 

4

 

4.0%

 

5

 

3.5%

 

6

 

3.0%

 

7

 

2.5%

 

8

 

2.0%

 

9

 

1.5%

 

10

 

1.0%

 

11 and later

 

No Charge

 

 

Once in each Contract Year on or after the last day of the first Contract Year, you may withdraw 10% of the Contract Value (determined as of the date of withdrawal) free of the contingent deferred sales charge.  The 10% free withdrawal may be taken either in one sum or, subject to meeting certain minimum amounts, in a series of scheduled amounts during the Contract Year.  The total sum of the contingent deferred sales charges deducted from amounts withdrawn from the Separate Account will never exceed 8 1/2% of the total of all purchase payments credited to the Separate Account.

 

Variable Contract  If the contingent deferred sales charge applies, it will equal the lesser of (a) 5% of the sum of purchase payments made within seven years prior to the date of withdrawal, or (b) 5% of the amount withdrawn. Under no circumstances will the cumulative charges ever exceed 5% of total purchase payments.

 

You will not pay a charge on that portion of the first withdrawal in a Contract Year that does not exceed 10% of total purchase payments made one year or more prior to the withdrawal.  This 10% free withdrawal may be taken either in one sum or, subject to certain minimum amounts, in a series of scheduled amounts during the Contract Year.  Further, no charge will be made under the Variable Contract on that portion of the first withdrawal in the eighth, ninth and tenth Contract Years that does not exceed the following percentages of the Contract Value:

 

Contract Year

 

Percentage

 

Eighth

 

25%

 

Ninth

 

50%

 

Tenth

 

75%

 

 

No charge will be made on any withdrawal in any Contract Year after the tenth Contract Year.

 

Other Information  You may at any time withdraw all or any part of the Contract Value free from the contingent deferred sales charge if (i) you (or the Annuitant under a qualified retirement plan) are disabled as defined in Section 72 (m) (7) of the Code and as applied under the Social Security Act, (ii) the disability began after the Contract Date, and (iii) the disability has continued without interruption for four months.

 

The contingent deferred sales charge may be reduced on Contracts sold to a trustee, employer or similar party pursuant to a retirement plan or to a group of individuals, if such sales are expected to involve reduced sales expenses.  The amount of reduction will depend upon such factors as the size of the group, any prior or existing relationship with the purchaser or group, the total amount of purchase payments and other relevant factors that might tend to reduce expenses incurred in connection with such sales.  The reduction will not be unfairly discriminatory to any Contract Owners.

 

Underlying Fund Charges.  The Funds assess fees and charges that you pay indirectly through your investment subaccount.  For more information about these fees see EXPENSES in this prospectus and the fee table in a Fund’s prospectus.

 

22



 

Premium Taxes  Some states and municipalities impose premium taxes on purchase payments received by insurance companies.  Generally, any premium taxes payable will be deducted upon annuitization, although we reserve the right to deduct such taxes when due in jurisdictions that impose such taxes on purchase payments.  Currently, state premium taxes on purchase payments range from 0% to 3.5%.

 

The Company or an affiliate may receive asset-based compensation from the Funds’ advisors or their affiliates for, among other things, customer service and recordkeeping services with respect to those assets. These payments are not charges under your Contract and do not increase the Underlying Fund or Contract charges described in this section or in the fee table.

 

MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNT

 

General Information

 

If you own a Variable/Fixed Contract you may allocate or transfer all or part of the amount credited to your Contract to one or more of the following fixed interest options in the Fixed Interest Account: (1) the Fixed Holding Account; (2) the One Year Guaranteed Account; (3) the Three Year Guaranteed Account; (4) the Five Year Guaranteed Account; and (5) the Seven Year Guaranteed Account.  The minimum amount for an allocation to the Fixed Holding Account is $50; the minimum amount for an allocation to the One Year Guaranteed Account or the Three Year Guaranteed Account is $250; and the minimum amount for an allocation to the Five Year Guaranteed Account or the Seven Year Guaranteed Account is $5,000.  We periodically declare an effective annual interest rate applicable to allocations to the various fixed interest options.  For each amount allocated to the Fixed Holding Account, interest will be credited at an effective annual interest rate declared by us on the first day of each calendar year. The declared rate of interest will apply through the end of the calendar year in which an allocation is made to the Fixed Holding Account, at which time a new rate will be declared by Penn Mutual.  For each amount allocated to the One Year Guaranteed Account, the Three Year Guaranteed Account, the Five Year Guaranteed Account or the Seven Year Guaranteed Account, interest will be credited at an annual effective interest rate declared by us each month.  The declared rate of interest will apply through the end of the twelve month, thirty-six month, sixty month or eighty-four month period, as applicable, which begins on the first day of the calendar month in which the allocation is made.  We guarantee an effective annual rate of interest on allocations to all fixed interest options of not less than 4%.  In addition, the Contract provides that the rates declared during the first seven Contract Years for the One Year Guaranteed Account will not be less than an average of the 3 month and 2 Year U.S. Treasury Bill discount rate from the most recent regularly scheduled auction held before the beginning of the calendar month.  If the auction program is discontinued, Penn Mutual will substitute an index which in its opinion is comparable and which is approved by state insurance regulatory authorities.  We reserve the right to reduce our guaranteed minimum interest rate if permitted by your state.  If required by law, we will notify you in advance of any such change.

 

If you own a Variable/Fixed Contract you may transfer Fixed Account funds to Subaccounts or to another fixed interest option within the Fixed Account, subject to the conditions and limitations in the fixed account provisions of the Contract.  A premature withdrawal charge may be deducted from the interest earned on any amount that is withdrawn from the Three Year Guaranteed Account, the Five Year Guaranteed Account or the Seven Year Guaranteed Account during the period for which an interest rate is guaranteed.  The premature withdrawal charge will be determined by multiplying the premature withdrawal rate by the premature withdrawal amount.  The premature withdrawal rate for the Three Year Guaranteed Account and the Five and Seven Year Guaranteed Accounts equals one quarter and one-half, respectively, of the most recent effective annual interest rate then applicable to the fixed interest account from which the withdrawal is being made (i.e., 3 months’ interest and 6 months’ interest, respectively).  The premature withdrawal amount equals (a) minus the greater of (b) or (c) where: (a) is the total amount withdrawn from the fixed interest account, excluding the One Year Fixed Guaranteed; (b) is the amount for which the declared effective annual interest rate has expired in the immediately preceding 25 days (which reflects that you may make withdrawals up to 25 days after the maturity of a fixed interest account without application of the premature withdrawal charge); and (c) is 10% of purchase payments.  In no event will the premature withdrawal charge exceed 10% of the amount withdrawn.  In accordance with state law, we may defer a withdrawal or transfer from the Fixed Account for up to six months if we reasonably determine that investment conditions are such that an orderly sale of assets in our general account is not feasible.  The One Year Fixed Interest Account is not available to Contracts issued on or after August 11, 2003.

 

23



 

Loans Under Section 403(b) Contracts

 

If your Contract qualifies under Section 403(b) of the Code, and if state law permits, you may be able to borrow against money that you have invested in a Fixed Interest Account.  Review your Contract loan endorsement or consult our representative for a complete description of the terms of the loan privilege, including minimum and maximum loan amounts, repayment terms, and restrictions on prepayments.

 

When you borrow, an amount equal to your loan will be transferred as collateral from your Subaccounts to an account in our general account called the “Restricted Account.”  Amounts transferred to the Restricted Account currently earn interest at a rate of 2 1/2 percentage points less than the rate of interest that we charge you on the loan.  On your contract anniversary, the accrued interest in the Restricted Account will be transferred to your Subaccounts in accordance with your current payment allocation instructions.

 

Loan repayments are due quarterly.  When you repay part of your loan, we transfer an amount equal to the principal portion of the repayment from the Restricted Account to the Fixed Holding Account subaccount. You may then transfer amounts from the Fixed Holding Account subaccount to the other investment options offered under the Contract.

 

If you are in default, we must report the default to the Internal Revenue Service as a taxable distribution and, if you are then under age 59 1/2, as a premature distribution that may be subject to a 10% penalty.  We will repay the loan by withdrawing the amount in default, plus interest and any applicable contingent deferred sales charge, from your Subaccounts in accordance with your loan request and agreement.  If Section 403(b) prevents us from doing this, your outstanding loan balance will continue to accrue interest and the amount due will be withdrawn when a withdrawal becomes permissible.  While a loan balance is outstanding, any withdrawal or death benefit proceeds must first be used to pay the loan.

 

Loans are subject to the terms of your Contract, your Section 403(b) plan and the Code, and, in the case of plans subject to the Employee Retirement Income Security Act of 1974 (“ERISA”), the ERISA regulations on plan loans, all of which may impose restrictions.  We reserve the right to suspend, modify or terminate the availability of loans.  Where there is a plan fiduciary, it is the responsibility of the fiduciary to ensure that any Contract loans comply with plan qualification requirements, including ERISA.

 

FEDERAL INCOME TAX CONSIDERATIONS

 

The following is a general summary of some federal income tax considerations.  It is based on the law in effect on the date of this prospectus, which may change, and does not address state or local tax laws.  For further information, you should consult qualified tax counsel.

 

You pay no federal income tax on increases in the value of your Contract until money is distributed to you or your Beneficiary as a withdrawal, death benefit or an annuity payment.

 

Withdrawals and Death Benefits. You may pay tax on a withdrawal, and your Beneficiary may pay tax on a death benefit.  The taxable portion of these payments generally will be the amount by which the payment exceeds your cost.  Thus, you or your Beneficiary generally will have taxable income to the extent that your Contract Value exceeds your purchase payments.  Ordinary income tax rates apply.  If you designate a Beneficiary who is either more than 37½ years younger than you or your grandchild, you may be subject to the Generation Skipping Transfer Tax treatment under Section 2601 of the Code.

 

Annuity Payments. The taxable portion of an annuity payment generally is determined by a formula that establishes the ratio of the cost basis of the Contract (as adjusted for any refund feature) to the expected return under the Contract.  The taxable portion, which is the amount of the annuity payment in excess of the cost basis, is taxed at ordinary income tax rates.

 

Subject to certain exceptions, a Contract must be held by or on behalf of a natural person in order to be treated as an annuity Contract under federal income tax law and to be accorded the tax treatment described in the

 

24



 

preceding paragraphs.  If a Contract is not treated as an annuity contract for federal income tax purposes, the income on the Contract is treated as ordinary income received or accrued by the Contract Owner during the taxable year.

 

Early Withdrawals. An additional income tax of 10% (or 25% under certain circumstances) may be imposed on the taxable portion of an early withdrawal or distribution unless one of several exceptions apply.  Generally, there will be no additional income tax on

 

·                                          early withdrawals that are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of the taxpayer and a Beneficiary;

 

·                                          withdrawals made on or after age 59½;

 

·                                          distributions made after death; and

 

·                                          withdrawals attributable to total and permanent disability.

 

Transfers. You may pay tax if you transfer your Contract to someone else.  If the transfer is for less than adequate consideration special rules apply. These rules do not apply to transfers between spouses or to transfers incident to a divorce.

 

Separate Account Diversification.  Section 817(h) of the Code provides that the investments of a separate account (or the investments of a mutual fund, the shares of which are owned by the variable annuity separate account) underlying a variable annuity contract which is not purchased under a qualified retirement plan or certain other types of plans must be “adequately diversified” in order for the Contract to be treated as an annuity contract for tax purposes.  The Treasury Department has issued regulations prescribing such diversification requirements.  The Separate Account, through each of the available funds of the Penn Series Funds, Inc., intends to comply with those requirements.  The requirements are briefly discussed in the accompanying prospectuses for the underlying funds.

 

The Treasury Department has stated in published rulings that a variable contract owner will be considered the owner of separate account assets if the contract owner possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets.  If a variable contract owner is treated as owner of separate account assets, income and gain from the assets would be includable in the variable contract owner’s gross income.  The Treasury Department indicated in 1986 that, in regulations or revenue rulings under Section 817(d) (relating to the definition of a variable contract), it would provide guidance on the extent to which contract owners may direct their investments to particular Subaccounts without being treated as owners of the underlying shares.  No such regulations have been issued to date.  The Internal Revenue Service has issued Revenue Ruling 2003-91 in which it ruled that the ability to choose among 20 subaccounts and make not more than one transfer per month without charge did not result in the owner of a contract  being treated as the owner of the assets in the subaccount under the investment control doctrine.

 

The ownership rights under your Contact are similar to, but different in certain respects from, those described by the IRS in Revenue Ruling 2003-91 and other rulings in which it was determined that contract owners were not owners of the subaccount assets.  Although we do not believe this to be the case, these differences could result in Contact owners being treated as the owners of the assets of the Subaccounts under the Contract.  We, therefore, reserve the right to modify the Contact as necessary to attempt to prevent the owners of the Contact from being considered the owners of a pro rata share of the assets of the Subaccounts under the Contact.   It is possible that when regulations or additional rulings are issued, the Contracts may need to be modified to comply with them.

 

Qualified Plans. The Contracts may be used in connection with certain retirement plans that qualify for special tax treatment under the Code.  The plans include individual retirement annuities qualified under Section 408(b) of the Code (referred to as IRAs), simplified employee pension plans qualified under Section 408(k) of the

 

25



 

Code,  tax-deferred annuities qualified under Section 403(b) of the Code, state and local government deferred compensation plans qualified under Section 457 of the Code, pension or profit sharing plans for self-employed individuals qualified under Section 401 of the Code (referred to as H.R. 10 or Keogh plans) and corporate pension or profit sharing plans qualified under Section 401 of the Code or annuity plans qualified under Section 403(a) of the Code. Special provisions are required in some Contracts for qualification under the Code.

 

For some types of qualified retirement plans, there may be no cost basis in the Contract.  In this case, the total payments received may be taxable.  Before purchasing a Contract under a qualified retirement plan, the tax law provisions applicable to the particular plan should be considered.

 

Distribution must generally commence from individual retirement annuities and from contracts qualified under Section 403(b) no later than the April 1 following the calendar year in which the Contract Owner attains age 70½.  Failure to make such required minimum distributions may result in a 50% tax on the amount of the required distribution.

 

Generally, under a nonqualified annuity or rollover individual retirement annuity qualified under Section 408(b), unless the Contract Owner elects to the contrary, any amounts that are received under the Contract that the Company believes are includable in gross income for tax purposes will be subject to mandatory withholding to meet federal income tax obligations.  The same treatment will apply to distributions from a Section 403(b) annuity that are payable as an annuity for the life or life expectancy of one or more individuals, or for a period of at least 10 years, or are required minimum distributions.  Other distributions from a qualified plan or a Section 403(b) annuity are subject to mandatory withholding, unless an election is made to receive the distribution as a direct rollover to another eligible retirement plan.  Distributions from a Section 457 eligible deferred compensation plan are wages subject to general income tax withholding requirements.

 

This general summary of federal income tax considerations does not address every issue that may affect you. You should consult qualified tax counsel.

 

Distribution Arrangements

 

Penn Mutual has a distribution agreement with Hornor, Townsend & Kent, Inc. (“HTK”) to act as principal underwriter for the distribution and sale of the Contracts.  HTK is a wholly owned subsidiary of Penn Mutual and is located at 600 Dresher Road, Suite C1C, in Horsham, Pennsylvania, 19044.  HTK sells the Contracts through its sales representatives.  HTK has also entered into selling agreements with other broker-dealers who in turn sell the Contracts through their sales representatives.  HTK is registered as a broker-dealer with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as well as with the securities commissions in the states in which it operates, and is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”).

 

Penn Mutual enters into selling agreements with HTK and other broker-dealers whose registered representatives are authorized by state insurance and securities departments to solicit applications for the Contracts.  Sales and renewal compensation are paid to these broker-dealers for soliciting applications as premium-based commission, asset-based commission (sometimes referred to as “trails” or “residuals”), or a combination of the two. Premium-based commissions on purchase payments made under the Contract will not exceed 6.7% and trailer commissions based on a percentage of Contract Value, other allowances and overrides may be paid.

 

In addition to or partially in lieu of commission, Penn Mutual may also make override payments and pay expense allowances and reimbursements, bonuses, wholesaler fees, and training and marketing allowances.  Such payments may offset broker-dealer expenses in connection with activities they are required to perform, such as educating personnel and maintaining records.  Registered representatives may also receive non-cash compensation such as expense-paid educational or training seminars involving travel within and outside the U.S. or promotional merchandise.

 

Such additional compensation may give Penn Mutual greater access to registered representatives of the broker-dealers that receive such compensation.  While this greater access provides the opportunity for training and other educational programs so that your registered representative may serve you better, this additional compensation also may afford Penn Mutual a “preferred’’ status at the recipient broker-dealer (along with other product vendors

 

26



 

that provide similar support) and offer some other marketing benefit such as web site placement, access to registered representative lists, extra marketing assistance, or other heightened visibility and access to the broker-dealer’s sales force that otherwise influences the way that the broker-dealer and the registered representative market the contracts.

 

Finally, within certain limits imposed by FINRA, registered representatives who are associated with HTK, as a Penn Mutual broker-dealer affiliate, may qualify for sales incentive programs and other benefits sponsored by Penn Mutual.  These HTK registered representatives are also agents of Penn Mutual and upon achievement of specified annual sales goals may be eligible for compensation in addition to the amounts stated above, including bonuses, fringe benefits, financing arrangements, conferences, trips, prizes and awards.

 

All of the compensation described in this section, and other compensation or benefits provided by Penn Mutual or its affiliates, may be more or less than the overall compensation on similar or other products and may influence your registered representative or broker-dealer to present this Contract rather than other investment options.

 

Individual registered representatives typically receive a portion of the compensation that is paid to the broker-dealer in connection with the Contract, depending on the agreement between the registered representative and their broker-dealer firm.  Penn Mutual is not involved in determining that compensation arrangement, which may present its own incentives or conflicts.  You may ask your registered representative how he/she will be compensated for the transaction.

 

27



 

STATEMENT OF ADDITIONAL INFORMATION CONTENTS

 

VARIABLE ANNUITY PAYMENTS

 

B-2

First Variable Annuity Payments

 

B-2

Subsequent Variable Annuity Payments

 

B-2

Annuity Units

 

B-2

Value of Annuity Units

 

B-2

Net Investment Factor

 

B-2

Assumed Interest Rate

 

B-3

Valuation Period

 

B-3

 

 

 

ADMINISTRATIVE AND RECORDKEEPING SERVICES

 

B-3

 

 

 

DISTRIBUTION OF CONTRACTS

 

B-4

 

 

 

CUSTODIAN

 

B-4

 

 

 

INDEPENDENT AUDITORS

 

B-4

 

 

 

LEGAL MATTERS

 

B-4

 

 

 

FINANCIAL STATEMENTS

 

B-4

 

28



 

APPENDIX A

 

This Appendix contains tables that show Accumulation Unit values and the number of Accumulation Units outstanding for each of the Subaccounts of the Separate Account.  The financial data included in the tables should be read in conjunction with the financial statements and the related notes of the Separate Account that are included in the Statement of Additional Information.

 

PENN SERIES MONEY MARKET FUND SUBACCOUNT

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

23.572

 

$

22.809

 

$

22.462

 

$

22.258

 

$

22.616

 

Accumulation Unit Value, end of period

 

$

24.435

 

$

23.572

 

$

22.809

 

$

22.462

 

$

22.528

 

Number of Accumulation Units outstanding, end of period

 

468,495

 

323,605

 

337,233

 

440,650

 

575,314

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of period

 

$

22.529

 

$

21.937

 

$

20.953

 

$

20.268

 

$

19.541

 

Accumulation Unit Value, end of period

 

$

22.616

 

$

22.529

 

$

21.937

 

$

20.953

 

$

20.268

 

Number of Accumulation Units outstanding, end of period

 

1,001,710

 

1,263,582

 

1,066,633

 

1,669,670

 

1,449,199

 

 

PENN SERIES LIMITED MATURITY BOND FUND SUBACCOUNT (a)

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

15.502

 

$

15.021

 

$

14.891

 

$

14.736

 

$

14.501

 

Accumulation Unit Value, end of period

 

$

16.108

 

$

15.502

 

$

15.021

 

$

14.891

 

$

14.736

 

Number of Accumulation Units outstanding, end of period

 

326,313

 

346,764

 

311,508

 

377,834

 

501,159

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of period

 

$

13.819

 

$

13.122

 

$

12.339

 

$

12.313

 

$

11.943

 

Accumulation Unit Value, end of period

 

$

14.501

 

$

13.819

 

$

13.122

 

$

12.339

 

$

12.313

 

Number of Accumulation Units outstanding, end of period

 

683,529

 

419,087

 

369,397

 

473,183

 

509,381

 

 


(a)               Neuberger Berman AMT Limited Maturity Bond Fund Subaccount prior to May 1, 2000.

 

A-1



 

PENN SERIES QUALITY BOND FUND SUBACCOUNT

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

30.690

 

$

29.524

 

$

29.165

 

$

28.234

 

$

26.926

 

Accumulation Unit Value, end of period

 

$

32.227

 

$

30.690

 

$

29.524

 

$

29.165

 

$

28.234

 

Number of Accumulation Units outstanding, end of period

 

691,442

 

736,923

 

818,298

 

961,735

 

1,065,243

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of period

 

$

25.898

 

$

24.078

 

$

21.769

 

$

22.043

 

$

20.260

 

Accumulation Unit Value, end of period

 

$

26.926

 

$

25.898

 

$

24.078

 

$

21.769

 

$

22.043

 

Number of Accumulation Units outstanding, end of period

 

1,206,212

 

1,341,947

 

1,254,944

 

1,612,651

 

1,665,664

 

 

PENN SERIES HIGH YIELD BOND FUND SUBACCOUNT

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

53.785

 

$

49.524

 

$

48.635

 

$

44.482

 

$

36.581

 

Accumulation Unit Value, end of period

 

$

55.009

 

$

53.785

 

$

49.524

 

$

48.635

 

$

44.482

 

Number of Accumulation Units outstanding, end of period

 

340,084

 

425,216

 

514,250

 

583,958

 

729,334

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of period

 

$

35.822

 

$

33.923

 

$

35.666

 

$

34.645

 

$

33.476

 

Accumulation Unit Value, end of period

 

$

36.581

 

$

35.822

 

$

33.923

 

$

35.666

 

$

34.645

 

Number of Accumulation Units outstanding, end of period

 

774,481

 

877,109

 

961,997

 

1,176,269

 

1,308,094

 

 

A-2



 

PENN SERIES FLEXIBLY MANAGED FUND SUBACCOUNT

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

149.071

 

$

130.835

 

$

122.841

 

$

104.894

 

$

81.754

 

Accumulation Unit Value, end of period

 

$

153.793

 

$

149.071

 

$

130.835

 

$

122.841

 

$

104.894

 

Number of Accumulation Units outstanding, end of period

 

1,952,018

 

2,278,653

 

2,514,472

 

2,650,018

 

2,719,530

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of period

 

$

82.027

 

$

75.311

 

$

62.396

 

$

58.951

 

$

56.265

 

Accumulation Unit Value, end of period

 

$

81.754

 

$

82.027

 

$

75.311

 

$

62.396

 

$

58.951

 

Number of Accumulation Units outstanding, end of period

 

2,294,054

 

3,305,527

 

3,500,263

 

4,634,490

 

5,766,014

 

 

PENN SERIES GROWTH STOCK FUND SUBACCOUNT (a)

Values of an Accumulation Unit Outstanding Throughout Each Period for Qualified and Nonqualified Retirement Plans

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

 

 

Qual

 

Non-
Qual

 

Qual

 

Non-
Qual

 

Qual

 

Non-
Qual

 

Qual

 

Non-
Qual

 

Accumulation Unit Value, beginning of period

 

$

44.375

 

$

44.010

 

$

39.760

 

$

39.433

 

$

37.930

 

$

37.617

 

$

34.322

 

$

34.039

 

Accumulation Unit Value, end of period

 

$

47.833

 

$

47.439

 

$

44.375

 

$

44.010

 

$

39.760

 

$

39.433

 

$

37.930

 

$

37.617

 

Number of Accumulation Units outstanding, end of period

 

549,132

 

159,850

 

632,535

 

192,085

 

704,398

 

216,176

 

774,981

 

234,602

 

 

A-3



 

PENN SERIES GROWTH STOCK FUND SUBACCOUNT (a) (continued)

Values of an Accumulation Unit Outstanding Throughout Each Period for Qualified and Nonqualified Retirement Plans

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

Qual

 

Non-
Qual

 

Qual

 

Non-
Qual

 

Qual

 

Non-
Qual

 

Accumulation Unit Value, beginning of period

 

$

30.930

 

$

30.675

 

$

48.112

 

$

47.716

 

$

65.253

 

$

64.715

 

Accumulation Unit Value, end of period

 

$

34.322

 

$

34.039

 

$

30.930

 

$

30.675

 

$

48.112

 

$

47.716

 

Number of Accumulation Units outstanding, end of period

 

954,642

 

282,510

 

1,251,261

 

334,151

 

1,366,134

 

438,677

  

 

 

 

Year Ended December 31,

 

 

 

2000

 

1999

 

1998

 

 

 

Qual

 

Non-
Qual

 

Qual

 

Non-
Qual

 

Qual

 

Non-
Qual

 

Accumulation Unit Value, beginning of period

 

$89.413

 

$88.677

 

$67.515

 

$

66.959

 

$48.256

 

$47.859

 

Accumulation Unit Value, end of period

 

$65.253

 

$64.715

 

$89.413

 

$88.677

 

$67.515

 

$66.959

 

Number of Accumulation Units outstanding, end of period

 

1,638,918

 

632,835

 

1,772,202

 

665,530

 

1,752,036

 

626,895

 

 


(a)               Penn Series Growth Equity Fund Subaccount prior to August 1, 2004.

 

PENN SERIES LARGE CAP VALUE FUND SUBACCOUNT (a)

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

60.678

 

$

51.949

 

$

51.068

 

$

45.821

 

$

36.316

 

Accumulation Unit Value, end of period

 

$

62.157

 

$

60.678

 

$

51.949

 

$

51.068

 

$

45.821

 

Number of Accumulation Units outstanding, end of period

 

1,106,434

 

1,345,261

 

1,539,420

 

1,792,241

 

2,084,422

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of period

 

$

43.241

 

$

44.862

 

$

40.329

 

$

41.167

 

$

38.038

 

Accumulation Unit Value, end of period

 

$

36.316

 

$

43.241

 

$

44.862

 

$

40.329

 

$

41.167

 

Number of Accumulation Units outstanding, end of period

 

2,399,446

 

2,846,994

 

3,228,429

 

4,407,110

 

5,273,048

 

 


(a)               Penn Series Value Equity Fund Subaccount prior to May 1, 2000.

 

A-4



 

PENN SERIES LARGE CAP GROWTH FUND SUBACCOUNT

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

11.404

 

$

11.136

 

$

11.142

 

$

10.383

 

$

8.370

 

Accumulation Unit Value, end of period

 

$

11.792

 

$

11.404

 

$

11.136

 

$

11.142

 

$

10.383

 

Number of Accumulation Units outstanding, end of period

 

217,052

 

328,102

 

354,234

 

378,789

 

259,358

 

 

 

 

Year Ended December 31,

 

 

 

2002(a)

 

 

 

 

 

 

 

 

 

Accumulation Unit Value, beginning of period

 

$

10.000

 

 

 

 

 

 

 

 

 

Accumulation Unit Value, end of period

 

$

8.370

 

 

 

 

 

 

 

 

 

Number of Accumulation Units outstanding, end of period

 

59,181

 

 

 

 

 

 

 

 

 

 


(a)               For the period May 1, 2002 (date Subaccount was established) through December 31, 2002.

 

PENN SERIES INDEX 500 FUND SUBACCOUNT (a)

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

17.844

 

$

15.661

 

$

15.177

 

$

13.911

 

$

10.970

 

Accumulation Unit Value, end of period

 

$

18.518

 

$

17.844

 

$

15.661

 

$

15.177

 

$

13.911

 

Number of Accumulation Units outstanding, end of period

 

1,730,697

 

2,030,923

 

2,373,565

 

2,823,090

 

3,169,175

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of period

 

$

14.292

 

$

16.443

 

$

18.344

 

$

15.414

 

$

12.162

 

Accumulation Unit Value, end of period

 

$

10.970

 

$

14.292

 

$

16.443

 

$

18.344

 

$

15.414

 

Number of Accumulation Units outstanding, end of period

 

3,405,972

 

4,065,632

 

4,646,239

 

4,389,976

 

2,350,293

 

 


(a)               Fidelity Investments’ VIP Index 500 Fund Subaccount prior to May 1, 2000.

 

A-5



 

PENN SERIES MID CAP GROWTH FUND SUBACCOUNT (a)

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

16.687

 

$

15.820

 

$

14.240

 

$

12.947

 

$

8.781

 

Accumulation Unit Value, end of period

 

$

20.623

 

$

16.687

 

$

15.820

 

$

14.240

 

$

12.947

 

Number of Accumulation Units outstanding, end of period

 

804,086

 

873,396

 

969,393

 

1,073,658

 

1,274,276

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of period

 

$

13.191

 

$

18.581

 

$

19.924

 

$

12.262

 

$

12.690

 

Accumulation Unit Value, end of period

 

$

8.781

 

$

13.191

 

$

18.581

 

$

19.924

 

$

12.262

 

Number of Accumulation Units outstanding, end of period

 

1,087,651

 

1,201,212

 

1,310,821

 

916,231

 

1,153,673

 

 


(a)               American Century V.I. Capital Appreciation Portfolio Subaccount prior to May 1, 2000.

 

PENN SERIES MID CAP VALUE FUND SUBACCOUNT (a)

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of Period

 

$

27.924

 

$

25.379

 

$

22.876

 

$

18.805

 

$

13.915

 

Accumulation Unit Value, end of period

 

$

28.613

 

$

27.924

 

$

25.379

 

$

22.876

 

$

18.805

 

Number of Accumulation Units outstanding, end of period

 

838,484

 

1,010,390

 

1,132,860

 

1,174,771

 

1,351,693

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of Period

 

$

15.555

 

$

16.266

 

$

13.544

 

$

12.773

 

$

12.411

 

Accumulation Unit Value, end of period

 

$

13.915

 

$

15.555

 

$

16.266

 

$

13.544

 

$

12.773

 

Number of Accumulation Units outstanding, end of period

 

1,466,935

 

1,630,710

 

1,636,891

 

1,787,163

 

1,716,964

 

 


(a)               Neuberger Berman AMT Partners Portfolio Subaccount prior to May 1, 2000.

 

A-6



 

PENN SERIES STRATEGIC VALUE FUND SUBACCOUNT

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

15.272

 

$

13.779

 

$

12.894

 

$

10.508

 

$

8.503

 

Accumulation Unit Value, end of period

 

$

15.210

 

$

15.272

 

$

13.779

 

$

12.894

 

$

10.508

 

Number of Accumulation Units outstanding, end of period

 

288,929

 

312,906

 

366,455

 

308,103

 

173,321

 

 

 

 

Year Ended December 31,

 

 

 

2002(a)

 

 

 

 

 

 

 

 

 

Accumulation Unit Value, beginning of period

 

$

10.000

 

 

 

 

 

 

 

 

 

Accumulation Unit Value, end of period

 

$

8.503

 

 

 

 

 

 

 

 

 

Number of Accumulation Units outstanding, end of period

 

69,035

 

 

 

 

 

 

 

 

 

 


(a)         For the period May 1, 2002 (date Subaccount was established) through December 31, 2002.

 

PENN SERIES SMALL CAP GROWTH FUND SUBACCOUNT (a)

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

28.182

 

$

28.891

 

$

27.527

 

$

25.456

 

$

17.474

 

Accumulation Unit Value, end of period

 

$

29.978

 

$

28.182

 

$

28.891

 

$

27.527

 

$

25.456

 

Number of Accumulation Units outstanding, end of period

 

624,495

 

817,610

 

967,455

 

1,171,164

 

1,368,904

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of period

 

$

30.550

 

$

36.756

 

$

52.084

 

$

18.503

 

$

13.806

 

Accumulation Unit Value, end of period

 

$

17.474

 

$

30.550

 

$

36.756

 

$

52.084

 

$

18.503

 

Number of Accumulation Units outstanding, end of period

 

1,470,450

 

1,722,296

 

1,977,899

 

1,645,175

 

781,196

 

 


(a)               Penn Series Emerging Growth Fund Subaccount prior to August 1, 2004.

 

A-7



 

PENN SERIES SMALL CAP VALUE FUND SUBACCOUNT (a)

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

34.747

 

$

29.960

 

$

29.261

 

$

25.791

 

$

14.936

 

Accumulation Unit Value, end of period

 

$

32.494

 

$

34.747

 

$

29.960

 

$

29.261

 

$

25.791

 

Number of Accumulation Units outstanding, end of period

 

855,666

 

1,070,370

 

1,188,984

 

1,374,755

 

1,542,137

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of period

 

$

18.170

 

$

15.760

 

$

14.032

 

$

14.400

 

$

16.051

 

Accumulation Unit Value, end of period

 

$

14.936

 

$

18.170

 

$

15.760

 

$

14.032

 

$

14.400

 

Number of Accumulation Units outstanding, end of period

 

1,543,061

 

1,784,282

 

1,511,552

 

1,249,298

 

1,306,650

 

 


(a)         Penn Series Small Capitalization Fund Subaccount prior to May 1, 2000.

 

PENN SERIES INTERNATIONAL EQUITY FUND SUBACCOUNT

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

38.902

 

$

30.220

 

$

26.205

 

$

20.410

 

$

15.556

 

Accumulation Unit Value, end of period

 

$

46.120

 

$

38.902

 

$

30.220

 

$

26.205

 

$

20.410

 

Number of Accumulation Units outstanding, end of period

 

1,519,330

 

1,697,957

 

1,773,262

 

1,934,076

 

2,184,851

  

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

Accumulation Unit Value, beginning of period

 

$

17.491

 

$

24.641

 

$

30.678

 

$

21.320

 

$

18.164

 

Accumulation Unit Value, end of period

 

$

15.556

 

$

17.491

 

$

24.641

 

$

30.678

 

$

21.320

 

Number of Accumulation Units outstanding, end of period

 

2,481,498

 

3,049,380

 

3,568,406

 

3,579,323

 

3,822,847

 

 

A-8



 

PENN SERIES REIT FUND SUBACCOUNT

Values of an Accumulation Unit Outstanding Throughout Each Period

 

 

 

Year Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Accumulation Unit Value, beginning of period

 

$

23.952

 

$

18.317

 

$

16.418

 

$

12.266

 

$

9.167

 

Accumulation Unit Value, end of period

 

$

19.426

 

$

23.952

 

$

18.317

 

$

16.418

 

$

12.266

 

Number of Accumulation Units outstanding, end of period

 

266,298

 

422,525

 

371,627

 

361,613

 

241,611

 

 

 

 

Year Ended December 31,

 

 

 

2002 (a)

 

 

 

 

 

 

 

 

 

Accumulation Unit Value, beginning of period

 

$

10.000

 

 

 

 

 

 

 

 

 

Accumulation Unit Value, end of period

 

$

9.167

 

 

 

 

 

 

 

 

 

Number of Accumulation Units outstanding, end of period

 

74,393

 

 

 

 

 

 

 

 

 

 


(a)         For the period May 1, 2002 (date Subaccount was established) through December 31, 2002.

 

NEUBERGER BERMAN AMT BALANCED PORTFOLIO SUBACCOUNT

Values of an Accumulation Unit Outstanding Throughout Each Period