497 1 a08-10365_16497.htm 497

 

PROSPECTUS – MAY 1, 2008

Individual Variable and Fixed Annuity Contract – Flexible Purchase Payments

 

ENHANCED CREDIT VARIABLE ANNUITY

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III

THE PENN MUTUAL LIFE INSURANCE COMPANY

Philadelphia, Pennsylvania 19172 Telephone (800) 523-0650

 

This prospectus describes an individual variable and fixed annuity contract (“Contract”) 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.

 

The Contract is an agreement between you and Penn Mutual.  You agree to make one or more payments to us and we agree to make annuity and other payments to you 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),

·                  has a fixed component, which means that your Fixed Account Value and any fixed payout will be based on purchase payments accumulated with interest at a rate of not less than 3%,

·                  has a purchase payment enhancement feature, which means that each time you make a purchase payment, Penn Mutual will add an additional credit to your Contract Value,

·                  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,

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

·                  offers an optional guaranteed minimum accumulation benefit rider,

·                  offers an optional guaranteed minimum accumulation benefit and guaranteed minimum withdrawal benefit rider, and

·                  offers a guaranteed lifetime withdrawal benefit rider with an adjustment for changes in the inflation rate.

 

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 Contract is not suitable for short-term investment.  You may pay a deferred sales charge of up to 8% on early withdrawals.  If you withdraw money before age 59 1/2, you may pay a 10% additional income tax. The Contract is not a bank deposit and is not federally insured.

 

Contract expenses are higher than other annuity contracts offered by Penn Mutual without a purchase payment enhancement feature.  The benefit of the purchase payment enhancement may be more than offset by the higher expenses, relative to other annuity contracts we offer, if withdrawals are made in the early years of the Contract.

 

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.  Your purchase payments and purchase payment enhancement will be allocated to the Subaccounts you have selected on the date we issued your Contract.  The refund will not include the portion of the Contract Value which is attributable to the purchase payment enhancement.  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.

 

You may obtain a Statement of Additional Information, dated May 1, 2008, from us free of charge by writing The Penn Mutual Life Insurance Company, Attn: SAI Request, Philadelphia, PA 19172 or visit our web site at www.pennmutual.com.  Or, you can call us at (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 the variable component of the Contract, you may direct us to invest your payments in one or more of the following 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.

 

A prospectus for each of these Funds accompanies this prospectus.

 

2


 

PROSPECTUS CONTENTS

 

 

 

 

 

GLOSSARY

 

5

 

 

 

EXPENSES

 

7

 

 

 

EXAMPLES OF FEES AND EXPENSES

 

10

 

 

 

CONDENSED FINANCIAL INFORMATION

 

11

 

 

 

FINANCIAL STATEMENTS

 

11

 

 

 

THE PENN MUTUAL LIFE INSURANCE COMPANY

 

11

THE SEPARATE ACCOUNT

 

11

Investment Options in the Separate Account

 

12

Penn Series Funds, Inc.

 

12

Voting Instructions

 

15

Accumulation Units - Valuation

 

15

 

 

 

THE FIXED INTEREST ACCOUNT

 

15

 

 

 

THE CONTRACT

 

15

How Do I Purchase a Contract?

 

16

What Are Purchase Payment Enhancements?

 

17

Do I Always Get to Keep My Purchase Payment Enhancements?

 

18

Do Purchase Payment Enhancements Benefit All People?

 

18

What Types of Annuity Payments May I Choose?

 

19

Variable Annuity Payments

 

19

Fixed Annuity Payments

 

19

Other Information

 

19

What Are the Death Benefits Under My Contract?

 

20

Optional Step-Up Plus Death Benefit Enhancement Rider

 

20

Optional Estate Enhancement Death Benefit Rider

 

21

Choosing a Lump Sum or Annuity

 

22

May I Transfer Money Among Subaccounts and the Dollar Cost Averaging Accounts?

 

23

Before the Annuity Date

 

23

After the Annuity Date

 

23

General Rules

 

23

Frequent Trading Risks

 

23

Frequent Trading Policies

 

24

Dollar Cost Averaging

 

24

Automatic Rebalancing

 

24

May I Withdraw Any of My Money?

 

24

Systematic Withdrawals

 

25

403(b) Withdrawals

 

25

 

3


 

Optional Guaranteed Minimum Accumulation Benefit Rider

 

25

Optional Guaranteed Minimum Accumulation Benefit and Guaranteed Minimum Withdrawal

 

 

Benefit Rider.

 

26

Guaranteed Lifetime Withdrawal Benefit Rider.

 

32

Deferment of Payments and Transfers

 

37

What Charges Do I Pay?

 

37

Administration Charges

 

37

Mortality and Expense Risk Charge

 

38

Contingent Deferred Sales Charge

 

38

Free Withdrawals

 

38

Contract Rider Charges

 

39

Underlying Fund Charges

 

40

Premium Taxes

 

40

 

 

 

MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNT

 

41

General Information

 

41

 

 

 

FEDERAL INCOME TAX CONSIDERATIONS

 

41

Withdrawals and Death Benefits

 

41

Annuity Payments

 

41

Early Withdrawals

 

42

Transfers

 

42

Separate Account Diversification

 

42

Qualified Plans

 

43

Distribution Arrangements

 

43

 

 

 

STATEMENT OF ADDITIONAL INFORMATION CONTENTS

 

45

 

 

 

APPENDIX A

 

A-1

 

 

4


 

GLOSSARY

 

We have included in this section additional explanation of certain words or terms used in this prospectus.  These words or terms are capitalized throughout this prospectus.

 

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

 

Accumulation Unit:  A unit of measure used to compute the Variable Account Value under the Contract 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.

 

Code:  The Internal Revenue Code of 1986, as amended.

 

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

 

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

 

Contract Value:  The sum of the Variable Account Value and the Fixed Account Value.

 

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

 

Dollar Cost Averaging Accounts:  The two fixed accounts 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 Account Value:  The value of amounts held under the Contract in the Dollar Cost Averaging Accounts.

 

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.

 

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

 

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

 

5


 

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

 

You:  A reference to “you” denotes the Contract Owner or prospective Contract Owner.

 

6


 

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 Subaccounts.  State premium taxes may also be deducted.

 

Contract Owner Transaction Expenses

 

 

Sales Load Imposed on Purchase Payments

 

None

Maximum Contingent Deferred Sales Charge

 

8% of purchase payments withdrawn(a)

Transfer Fee

 

None(b)

 

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

 

$

40

(c)

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

 

 

 

Mortality and Expense Risk Charge

 

1.25

%

Contract Administration Charge

 

0.15

%

Total Separate Account Annual Expenses (without riders)

 

1.40

%

Contract Rider Charges (Optional)

 

 

 

Estate Enhancement Death Benefit Rider (for Annuitants Age 60 and Under)

 

0.20

%(d)

Estate Enhancement Death Benefit Rider (for Annuitants Age 61 to 70)

 

0.30

%(e)

Estate Enhancement Death Benefit Rider (for Annuitants Age 71 to 80)

 

0.60

%(f)

Guaranteed Minimum Accumulation Benefit Rider (for Annuitants to Age 80)

 

1.00

%(g)

Guaranteed Minimum Accumulation Benefit and Guaranteed Minimum Withdrawal Benefit Rider (for Annuitants Ages 35 to 80)1.00%(h)

 

 

 

Guaranteed Lifetime Withdrawal Benefit Rider

 

1.25

%(i)

 

 

 

 

Total Separate Account Annual Expenses, Including Maximum Charges for Contract Riders (as a percentage of Variable Account Value)

 

3.00

%(j)

 

Optional Step-Up Plus Death Benefit Enhancement Rider(k)

 

Monthly Charge per $1,000 of Benefit

 

 

 

Minimum

 

Maximum

 

 

 

$

0.208

 

$

17.292

 

 

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)                                  The charge decreases to zero after the ninth year.  (See What Charges Do I Pay? in this prospectus.)

(b)                                 Although we have no present intention of charging a transfer fee, we reserve the right to do so in the future.

(c)                                  You pay $40 or 2% of the Variable Account Value, whichever is less.  You do not pay this charge if your Variable Account Value is more than $100,000.

(d)                                 The current annual charge for this rider is 0.15% and may not be increased beyond the maximum of 0.20%.

(e)                                  The current annual charge for this rider is 0.25% and may not be increased beyond the maximum of 0.30%.

(f)                                    The current annual charge for this rider is 0.55% and may not be increased beyond the maximum of 0.60%.

(g)                 The current annual charge for this rider is 0.50% and may not be increased beyond the maximum of 1.00%.

(h)                                 The current annual charge for this rider is 0.65% for a single life guarantee and 0.85% for a joint life guarantee and neither may be increased beyond the maximum of 1.00%.

(i)                                     The current annual charge for this rider is 0.65% for a single life guarantee and 0.85% for a joint life guarantee and neither may be increased beyond the maximum of 1.25%.

(j)                                     This is the total of the maximum total Separate Account Annual Expenses that may be charged with all available riders attached.  Your total current charges will be between 1.40% and 3.00%, depending on whether you choose optional riders and which rider(s) you choose to purchase.

(k)                                  A Contract Owner may elect the Optional Step-Up Plus Death Benefit Enhancement Rider. The charge for the rider  

 

7


 

depends on the attained age of the Annuitant and on the amount of the Death Benefit Enhancement. It will be assessed on a pro rata basis among the Subaccounts of the Separate Account.  See What Charges Do I Pay? in this prospectus.

 

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

%

0.0

%(5)

1.30

%

Moderately Aggressive Allocation

 

0.10

%

0.23

%(2)

0.88

%(4)

1.21

%

0.0

%(5)

1.21

%

Moderate Allocation

 

0.10

%

0.23

%(2)

0.84

%(4)

1.17

%

0.0

%(5)

1.17

%

Moderately Conservative Allocation

 

0.10

%

0.23

%(2)

0.78

%(4)

1.11

%

0.0

%(5)

1.11

%

Conservative Allocation

 

0.10

%

0.23

%(2)

0.69

%(4)

1.02

%

0.0

%(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,   

 

8


 

this 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%

 

9


 

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.  The prospectus of Penn Series Funds, Inc. accompanies this prospectus.  These prospectuses contain additional information regarding these Funds’ expenses.

 

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 examples do not reflect the deduction of state premium taxes.

 

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 Contract at the end of the applicable time period and have purchased riders with maximum charges*:

 

 

 

One

 

Three

 

Five

 

Ten

 

 

 

Year

 

Years

 

Years

 

Years

 

Assuming Maximum Total Annual Fund Expenses

 

$

1,178

 

$

2,140

 

$

2,929

 

$

4,831

 

Assuming Minimum Total Annual Fund Expenses

 

$

1,062

 

$

1,802

 

$

1,375

 

$

3,747

 

 

(2)                                  If you do not surrender your Contract or if you annuitize at the end of the applicable time period and have purchased riders with maximum charges*:

 

 

 

One

 

Three

 

Five

 

Ten

 

 

 

Year

 

Years

 

Years

 

Years

 

Assuming Maximum Total Annual Fund Expenses

 

$

475

 

$

1,430

 

$

2,392

 

$

4,831

 

Assuming Minimum Total Annual Fund Expenses

 

$

348

 

$

1,061

 

$

1,797

 

$

3,747

 

 

10


 

(3)                                  If you surrender your Contract at the end of the applicable time period and have not purchased any riders:

 

 

 

One

 

Three

 

Five

 

Ten

 

 

 

Year

 

Years

 

Years

 

Years

 

Assuming Maximum Total Annual Fund Expenses

 

$

1,029

 

$

1,705

 

$

2,213

 

$

3,415

 

Assuming Minimum Total Annual Fund Expenses

 

$

910

 

$

1,351

 

$

1,609

 

$

2,123

 

 

(4)                                  If you do not surrender your Contract or if you annuitize at the end of the applicable time period and have not purchased any riders:

 

 

 

One

 

Three

 

Five

 

Ten

 

 

 

Year

 

Years

 

Years

 

Years

 

Assuming Maximum Total Annual Fund Expenses

 

$

312

 

$

955

 

$

1,624

 

$

3,415

 

Assuming Minimum Total Annual Fund Expenses

 

$

183

 

$

567

 

$

977

 

$

2,123

 

 

*                                         The examples do not reflect charges for the Optional Step-Up Plus Death Benefit Enhancement Rider because the examples assume a 5% rate of return.  There is no charge for the Optional Step-Up Plus Death Benefit Enhancement Rider for any month if cumulative prior performance has been positive and there is no Death Benefit Enhancement payable.

 

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.

 

FINANCIAL STATEMENTS

 

The financial statements of the Separate Account and the consolidated financial statements appear in the Statement of Additional Information.  The consolidated financial statements 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 Contract.

 

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.

 

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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.

 

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, endorsed, 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.

 

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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 risk 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 value stocks of large capitalization companies and dividend-paying stocks.

 

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

 

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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.

 

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 information.

 

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 expenses, without charge, by writing to The Penn Mutual Life Insurance Company, Customer Service Group –

 

14


 

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 full and fractional 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 full and fractional 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 may change these procedures whenever we are required or permitted 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 value of an Accumulation Unit 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.  Any purchase payment enhancements credited to the Contract are allocated to the Subaccount and Dollar Cost Averaging Accounts in the same proportions as purchase payments are allocated.

 

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% and contract administration charge at an annual rate of 0.15% assessed against the Subaccount.

 

THE FIXED INTEREST ACCOUNT

 

Interests in the fixed interest account, which is part of Penn Mutual’s general account, is 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.  The fixed interest account may not be available in all states. See MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNT.

 

THE CONTRACT

 

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.  See THE SEPARATE ACCOUNT in this prospectus.

 

You may also allocate purchase payments to our Dollar Cost Averaging Accounts if you participate in our dollar cost averaging program.  The Dollar Cost Averaging Accounts are guaranteed and funded by Penn Mutual through its general account.  See THE FIXED  INTEREST ACCOUNT and MORE  INFORMATION ABOUT THE FIXED INTEREST ACCOUNT  in this prospectus.

 

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You decide, within Contract limits,

 

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

 

·                                          the Funds and/or Dollar Cost Averaging Accounts in which your purchase payments and purchase payment enhancements are invested;

 

·                                          whether or not to transfer money among the available Funds and Dollar Cost Averaging Accounts;

 

·                                          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 purchase payments and any purchase payment enhancement 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 required approval of the Securities and Exchange 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.

 

The Contract is available to individuals and institutions.  The Contract also may be issued as individual retirement annuities under Section 408(b) of the Internal Revenue Code (the “Code”) in connection with IRA rollovers and as tax-deferred annuities under Section 403(b) of the Code (often referred to as qualified contracts).

 

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.   We hold your initial purchase payment in a non-interest bearing account until it is applied to your Contract or returned to you.

 

The minimum initial purchase payment that we will accept is $25,000 with subsequent purchase payments of $5,000 ($1,000 subsequent purchase payments for qualified contracts), although we may decide to accept lower amounts.  The Contract form describes a total purchase payment maximum of $2 million.  Currently, we will accept total purchase payments under your Contract of up to $5 million.  You must obtain our prior approval to make total purchase payments in excess of $5 million.

 

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What Are Purchase Payment Enhancements?

 

We will credit purchase payment enhancements to your Contract based upon the amounts of your purchase payments and withdrawals (if any).

 

When you make a purchase payment, we will determine your purchase payment enhancement by multiplying the amount of the purchase payment by the applicable purchase payment enhancement percentage set forth in the tables below.  The purchase payment enhancement percentage is based on cumulative total of purchase payments received (including the purchase payment being processed) less withdrawals.  We will credit the purchase payment enhancement to your Contract and allocate the enhancement amount to the Subaccounts of the Separate Account and/or the Dollar Cost Averaging Accounts, along with your purchase payments, in accordance with your direction.

 

If you make more than one purchase payment during the first Contract Year, we will determine if any additional purchase payment enhancements will be credited for the prior purchase payments you have made by taking the difference between (1) the cumulative prior purchase payments paid during the Contract Year less any withdrawals multiplied by the purchase payment enhancement percentage applied to the current purchase payment, and (2) the prior cumulative purchase payment enhancements credited to the Contract during that Contract Year.  If the result exceeds zero, the excess will be credited to the Contract as a purchase payment enhancement at the same time as the purchase payment is credited.

 

First Contract Year

 

During the first Contract Year, the calculation of premium bonuses will be as follows:

 

·                  The initial purchase payment will receive the rate applicable as set forth in the first year bonus rate table below and payment amount.

 

·                  If a purchase payment is received within the first policy year and does not cause the updated cumulative net payments to cross a bonus tier threshold, then the premium bonus to be applied with that current purchase payment will be the product of the payment amount and the applicable bonus rate for the appropriate tier set forth in the first year rate table below.

 

·                  Premium bonuses are not included in the determination of total net purchase payments.

 

We reserve the right to discontinue crediting purchase payment enhancements under this Contract in the future, provided we give you advance written notice:

 

First Policy Year Bonus Rate Table

 

Cumulative Total of Purchase Payments
Less Withdrawals

 

1st Year Premium Bonus percentage

 

Up to $49,999.99

 

3

%

$ 50,000 to $149,999.99

 

4

%

$ 150,000 to $1,999,999

 

5

%

$ 2,000,000 and above

 

6

%*

 

* If the purchase payment on the initial application is equal to $2,000,000 or more, a 6% purchase payment enhancement will be applied to the initial purchase payment only.  A 5% purchase payment enhancement will be applied to subsequent payments in the first Contract year.

 

Second and Subsequent Contract Years

 

·                  When a purchase payment is allocated to a Contract in the second and subsequent Contract Years, it will receive the premium bonus percentage rate applicable as set forth in the Renewal Bonus Rate Table below and the cumulative total of net purchase payments now received.

 

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·        When the new cumulative total of net purchase payments moves the contract into a new tier, there is to be no look back/adjustment of premium bonuses previously allocated.

 

Renewal Bonus Rate Table

 

Cumulative Total of Purchase Payments 
Less Withdrawals

 

Renewal Years Premium Bonus
 percentage

 

Up to $49,999.99

 

3

%

$50,000 to $149,999.99

 

4

%

$150,000 & above

 

5

%

 

The Contract provides no specific charge for providing the purchase payment enhancement.  Penn Mutual pays the purchase payment enhancement from its surplus which reflects revenues from multiple sources, including the administrative, mortality and expense risk, and deferred sales charges made under the Contract.  The charges are expected to produce a profit or return to Penn Mutual’s surplus, in addition to covering the cost of issuing and administering the Contract.

 

For purposes of calculating any death benefit available under the Contract or through a rider, any purchase payment enhancements are included.

 

Do I Always Get To Keep My Purchase Payment Enhancements?

 

You won’t always get to keep the purchase payment enhancements credited to your Contract.  We will take back or “recapture” some or all of the purchase payment enhancements under certain circumstances:

 

·                                          If you cancel your Contract during the “Right to Review” period described in your Contract, we will recapture the entire portion of the Contract Value which is attributable to the purchase payment enhancement.  Thus, in the event of cancellation, you bear no investment risk with respect to the purchase payment enhancement.

 

·                                          If you make a withdrawal from your Contract where a contingent deferred sales charge is applied or surrender your Contract, we will recapture any purchase payment enhancement credited to your Contract within 12 months of the withdrawal or surrender.  We will not recapture the purchase payment enhancement when there is a free withdrawal.  See Free Withdrawals in this prospectus.

 

Do Purchase Payment Enhancements Benefit All People?

 

No.  Penn Mutual issues a variety of individual variable and fixed annuity contracts designed to meet different retirement planning goals.  We issue contracts with no purchase payment enhancement, lower mortality and expense risk charges, lower contingent deferred sales charges and/or shorter contingent deferred sales charge periods.  You should consider the following factors when determining which annuity contract is appropriate for you:

 

·              The length of time that you plan to continue to own your Contract.

 

·              The frequency, amount and timing of withdrawals you plan to make.

 

·              The amount of purchase payments you plan to make.

 

·              Whether you might experience an event that results in the loss of some or all of the purchase payment enhancements.

 

The purchase payment enhancement feature would be disadvantageous to a purchaser who makes a withdrawal, subject to a contingent deferred sales charge, within 12 months of the crediting of a purchase enhancement.  With respect to a withdrawal during the first Contract Year, the contingent deferred sales charge would be higher than in other contracts we offer.  Also, in a declining market, the purchaser would bear the loss on the credit enhancement.

 

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What Types of Annuity Payments May I Choose?

 

After the first Contract anniversary date, you may choose:

 

·      an annuity for a set number of years;

 

·      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 variable annuity (except for a set number of years), a fixed annuity, or a combination of both.  You may choose a person other than yourself to be the Annuitant.  The shorter the expected length of the Annuity Payout Period, the larger each payment will be.  Currently, during the Annuity Payout Period, your variable annuity may not be allocated to more than four Subaccounts.

 

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 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.

 

When you purchase a variable annuity, you will pick an assumed interest rate of 3% or 5%.  If the annual net investment return during the Annuity Payout Period is greater than the rate chosen, your annuity payments will increase.  If the annual net investment return is less, your payments will decrease.  Choosing a higher assumed interest rate would mean a higher first annuity payment but more slowly rising or more rapidly falling subsequent payments.  Choosing a lower assumed interest rate would have the opposite effect.

 

During the Variable Annuity Payout Period, you (or your Beneficiary in the event of death) may transfer your Annuity Unit values among four Subaccounts of the Separate Account that you choose on the Annuity Date.  You may not select other Subaccounts after the Annuity Date.

 

Fixed Annuity Payments.   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, the expected length of the annuity period, and a guaranteed 3% rate of return.

 

Other Information.  Unless you tell us otherwise:

 

·              you will receive a life annuity with payments guaranteed for 10 years (except if your Contract is issued under Section 403(b) of the Code you will receive a joint and survivor annuity).

 

·              the annuity will be split between fixed and variable accounts in the same proportions as your Contract Value on the Annuity Date.  If your Contract Value is allocated to more than four Subaccounts, the variable portion will be allocated to the Money Market Subaccount until you give us instructions to allocate it to not more than four Subaccounts.

 

·              your annuity payments will begin on the later of (1) the first day of the next month after the Annuitant’s 95th birthday, or (2) 10 years after the contract date, unless state law requires an earlier Annuity Date. The Annuity Date under the Contract must be on the first day of a month.

 

You 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.  If your Contract Value is less than $5,000 ($2,000 for Contracts sold in New York), we may pay you in a lump sum.  We usually make annuity payments monthly, starting with the Annuity Date, but we will pay you quarterly, semiannually or annually, if

 

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you prefer.  The less frequently we make payments, the larger each payment will be.  If necessary, we will adjust the frequency of your payments so that payments are at least $50 each ($20 for Contracts sold in New York). For information on the treatment of annuity payments, see FEDERAL INCOME TAX CONSIDERATIONS in this prospectus.

 

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 the Beneficiary at any time before your death or the death of the Annuitant, whichever occurs first.

 

If you die before the Annuity Date and you are not the Annuitant, we will pay your Beneficiary the Contract Value as of the date our Administrative Office receives proof of death, i.e., a death certificate or other official document establishing death, and other information required to process the payment.  If you are the Annuitant, we will pay your Beneficiary the death benefit described in the next paragraph.

 

For Contracts issued on or after August 11, 2003, if the Annuitant dies before the Annuity Date, we will pay a death benefit equal to the sum of the Separate Account death benefit and the Fixed Interest Account death benefit as of the date we receive proof of death and other information required to process the payment. The Fixed Account death benefit is the Fixed Account Value.  The Separate Account death benefit is the greater of: (1) the Variable Account Value; or (2) all purchase payments allocated and transfers made to the Separate Account, less adjusted partial withdrawals and transfers. “Adjusted partial withdrawals and transfers” means the amount of each partial withdrawal from or transfer out of the Separate Account, multiplied by the amount of the Separate Account death benefit just before the partial withdrawal or transfer, divided by your Variable Account Value just before the partial withdrawal or transfer.  If you make a partial withdrawal or transfer at a time when the amount of your Separate Account death benefit is greater than your Variable Account Value, then your Separate Account death benefit amount will be reduced by an amount greater than the amount withdrawn or transferred.  The Fixed Interest Account benefit is the Fixed Account Value.

 

We generally pay the death benefit within seven days after we receive proof of death and all required information.

 

Optional Step-Up Plus Death Benefit Enhancement Rider.  If the Annuitant is age 75 or less, you may purchase this death benefit enhancement rider as part of your Contract at the time we issue the Contract.  If you purchase this death benefit enhancement rider, we will pay your Beneficiary(ies), upon the Annuitant’s death, a Death Benefit Enhancement, as described below, in addition to any other death benefit payment under the Contract.  This Optional Step-Up Plus death benefit enhancement rider provides a benefit when (1) cumulative prior performance has been negative such that the Minimum Death Benefit Amount (defined below) exceeds the Variable Account Value, as determined on the first day of a calendar month, and (2) the Annuitant dies during that month.

 

You may purchase this rider only at the time you purchase your Contract.  This rider may only be purchased in combination with the optional estate enhancement death benefit rider described below and may not be purchased with any other rider described in this prospectus, except for Contract Owners who purchased the rider prior to May 1, 2007, who may purchase the Optional Guaranteed Minimum Accumulation Benefit Rider described below.  The Death Benefit Enhancement from this rider is limited to $1 million.

 

If you purchase this rider, the Death Benefit Enhancement is determined on the first day of the calendar month following each contract anniversary until the Annuitant reaches age 80 and adjusted on the first day of each calendar month following any purchase payment or withdrawal.  The Death Benefit Enhancement is the Minimum Death Benefit Amount as of the first day of that month minus the greater of (a) the Variable Account Value as of the first day of that month, or (b) the sum of the purchase payments paid into the Separate Account less any withdrawals from the Separate Account.

 

On the first day of the calendar month following the first contract anniversary, the Minimum Death

 

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Benefit Amount is equal to the Variable Account Value on the first contract anniversary.

 

On the first day of the calendar month following the second and subsequent contract anniversaries, the Minimum Death Benefit Amount is equal to the greater of:

 

 (1)          The Minimum Death Benefit Amount as of the first day of the prior calendar month following any purchase payments, (and any purchase payment enhancements) to or withdrawals from the Separate Account in the prior calendar month; or

 

(2)           the Variable Account Value on the current contract anniversary.

 

We make adjustments to the Minimum Death Benefit Amount on the first day of a calendar month following any purchase payment to or withdrawal from the Separate Account.  We increase the Minimum Death Benefit Amount by the amount of purchase payments made to the Separate Account in the prior calendar month.  We reduce the Minimum Death Benefit Amount for withdrawals taken from the Separate Account in the prior calendar month.  The reduction is the greater of (1) the amount of the withdrawal, or (2) the Minimum Death Benefit Amount immediately prior to the withdrawal divided by the Variable Account Value as of the date of the withdrawal multiplied by the amount of the withdrawal.

 

Treatment of Transfers.  Transfers into the Separate Account from a Dollar Cost Averaging Account will be treated as purchase payments allocated to the Separate Account.  This Optional Step-Up Plus death benefit enhancement rider will terminate if you withdraw or transfer the full Variable Account Value from your Contract.

 

Charge.  We will calculate and accrue a charge for your rider on the first day of each calendar month but only if the Death Benefit Enhancement is greater than zero on that day.  The charge will be based on the attained age of the Annuitant as of the prior Contract Anniversary and the amount of the Death Benefit Enhancement.  Accrued charges will be deducted on the Contract Anniversary or, if sooner, on the date we pay the death benefit, you begin taking annuity payments or you surrender the Contract.  There is no charge for any month if cumulative prior performance has been positive and there is no Death Benefit Enhancement payable.

 

For information on the cost of this death benefit enhancement rider, see What Charges Do I Pay? in this prospectus.

 

Optional Estate Enhancement Death Benefit Rider.  You may purchase an estate enhancement death benefit rider with your Contract at the time the Contract is issued.  If you purchase the rider and the Annuitant dies before the Annuity Date, we will pay the estate enhancement death benefit to the Beneficiary as of the date we receive due proof of death and other information required to process the payment.  The estate enhancement death benefit is in addition to the death benefit described in the preceding section and may not be purchased in combination with any other rider described in this prospectus, except for Contract Owners who purchased the rider prior to May 1, 2007, who may purchase the Optional Guaranteed Minimum Accumulation Benefit Rider described below.

 

The amount of the estate enhancement death benefit will be a percentage of the sum of the Fixed Account Value, the Variable Account Value and all withdrawals from the Contract, less all purchase payments, and any purchase payment enhancements, subject to a limit as specified in the Contract.

 

The Estate Enhancement Benefit Percentage and Benefit Cap vary based on the issue age of the Annuitant as shown below:

 

Issue Age Range

 

Estate Enhancement Benefit%

 

Estate Enhancement Benefit 
Cap % (applied to total purchase
 payments and any purchase
 payment enhancements net of
 withdrawals)

 

1 - 60

 

40

%

100

%

61- 70

 

35

%

60

%

71- 80

 

30

%

40

%

81 and above

 

0

%

0

%

 

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If the purchase payments, and any purchase payment enhancements exceed the sum of Fixed Account Value, the Variable Account Value and all withdrawals from the Contract, no estate enhancement death benefit will be paid.

 

Example 1.  Assume an individual purchases the Contract with Annuitant age 65 and with the estate enhancement death benefit attached.  Assume further that $100,000 of purchase payments and $20,000 of withdrawals have been made, and that when the Annuitant dies the Variable Account Value is $90,000 and the Fixed Account Value is $30,000.  The benefit amount would be $14,000, which is 35% of $40,000 (the sum of the Variable Account Value ($90,000), the Fixed Account Value ($30,000) and withdrawals ($20,000) less purchase payments ($100,000)).  The benefit cap would be $48,000 ($600 for each $1,000 of the total $100,000 purchase payments that were made less the $20,000 of withdrawals).  In this example, the estate enhancement death benefit would be $14,000.

 

Example 2.  Assume an individual purchases the Contract with Annuitant age 65 and with the estate enhancement death benefit attached.  Assume further that $100,000 of purchase payments and $20,000 of withdrawals have been made, and that when the Annuitant dies the Variable Account Value is $190,000 and the Fixed Account Value is $130,000.  The benefit amount would be $84,000, which is 35% of $240,000 (the sum of the Variable Account Value ($190,000), the Fixed Account Value ($130,000) and withdrawals ($20,000) less purchase payments ($100,000)).  The benefit cap would be $48,000 ($600 for every $1,000 of the total $100,000 purchase payments that were made less the $20,000 of withdrawals).  In this example, the estate enhancement death benefit would be capped at $48,000.

 

The estate enhancement death benefit will terminate if you withdraw or transfer the full Variable Account Value from your Contract.  For information on the cost of the estate enhancement death benefit, see What Charges Do I Pay? in this prospectus.

 

Choosing a Lump Sum or Annuity.   Your Beneficiary has one year from your death to choose to receive the death benefit in a lump sum or as an annuity.  Your Beneficiary has only 60 days to make this election if the death benefit is paid upon death of an Annuitant other than you.

 

·            If the Beneficiary chooses a lump sum, he or she may ask us to postpone payment of the lump sum for up to five years (until paid out, the death benefit will be allocated to Subaccounts of the Separate Account and/or fixed interest account as directed by the Beneficiary).

 

·            If the Beneficiary chooses an annuity, we will begin annuity payments no later than one year from the date of death.  Payments will be made over the Beneficiary’s life or over a period not longer than the Beneficiary’s life expectancy.

 

·            If an election is not made within one year of the date of death of the Contract Owner or within 60 days of the death of an Annuitant other than you, the death benefit will be paid to the Beneficiary in a lump sum.

 

If your Beneficiary is your surviving spouse, he or she may become the Contract Owner rather than receive the death benefit.

 

If there is more than one surviving Beneficiary, they must choose their portion of the death benefit in accordance with the above options.

 

If the Annuitant dies on or after the Annuity Date, the death benefit payable, if any, will be paid in accordance with your choice of annuity.

 

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

 

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May I Transfer Money Among Subaccounts and the Dollar Cost Averaging Accounts?

 

Before the Annuity Date.   You may transfer your Contract Value among Subaccounts of the Separate Account.

 

·              The minimum amount that may be transferred is $250 or, if less, the amount held in the Subaccount.  In the case of partial transfers, the amount remaining in the Subaccount must be at least $250.

 

·              You may transfer from the Six Month Dollar Cost Averaging Account or the Twelve Month Dollar Cost Averaging Account to a Subaccount of the Separate Account as described under Dollar Cost Averaging below.

 

·              You may not transfer from a Subaccount of the Separate Account to the Six Month Dollar Cost Averaging Account or the Twelve Month Dollar Cost Averaging Account.

 

After the Annuity Date.   You or the Beneficiary (upon your death or the death of the Annuitant) may transfer amounts among Subaccounts of the Separate Account.

 

·              The minimum amount that may be transferred is $250 or, if less, the amount held in the Subaccount.  In the case of partial transfers, the amount remaining in the Subaccount must be at least $250.

 

·              Transfers are currently limited to a total of three Subaccounts and one fixed interest account selected at the time of annuitization.

 

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 to engage in market timing.  We therefore reserve the right not to accept programmed or frequent requests used for market timing, 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 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.  We will notify you in writing in a timely manner of any actions we take to restrict your ability to make transfers.

 

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.

 

As outlined below, we have adopted policies regarding frequent trading, but there is the risk that these

 

23


 

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 you have Contract Value of at least $10,000, you may allocate or transfer money to the Six Month Dollar Cost Averaging Account or the Twelve Month Dollar Cost Averaging Account, and have a fixed percentage transferred monthly from the account to variable Subaccounts to achieve dollar cost averaging.  The minimum transfer to each Subaccount must be at least $50.  Dollar cost averaging may also be done from one of the following accounts: Money Market Subaccount, Limited Maturity Bond Subaccount and Quality Bond Subaccount.  You may dollar cost average from these variable Subaccounts for up to 60 months, from the Six Month Dollar Cost Averaging Account for up to 6 months and from the Twelve Month Dollar Cost Averaging Account for up to twelve months. Only new purchase payments may be allocated to these Dollar Cost Averaging accounts.  If you stop the program while in the Six or Twelve Month Dollar Cost Averaging Accounts, any money left in the account will be transferred into the Money Market Subaccount.

 

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 assets allocation percentages may become out of balance over time.  If you have a Contract Value of at least $10,000 you may 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.  You may elect to participate in the program when you apply for your Policy or, after you have owned your Policy, by completing an election form or by calling our office at 800-523-0650.  You may discontinue the program at any time.

 

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 dollar cost averaging or automatic rebalancing.

 

May I Withdraw Any of My Money?

 

Before the Annuity Date and the death of the Contract Owner or Annuitant, you may withdraw all or part of your Contract Value.  We base your withdrawal on your Contract Value next determined after we receive a proper written request (and the Contract, in case of a full withdrawal) at our Administrative Office.  We normally will pay

 

24


 

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.

 

·              The minimum withdrawal is $500.  However, if it is your first withdrawal in a Contract Year, the minimum withdrawal is the Free Withdrawal Amount (as defined below) if that amount is less than $500. See Free Withdrawals below.

 

·              You may make a partial withdrawal only if the amount remaining in the Contract is at least $5,000 and the balance remaining in each Subaccount is at least $250.

 

·              If you do not tell us otherwise, the withdrawal will be taken pro rata from the variable Subaccounts; if the partial withdrawal exhausts your Variable Account Value, then any remaining withdrawal will be taken from Dollar Cost Averaging Accounts beginning with the one having the shortest interest period.

 

Systematic Withdrawals.  If your Contract Value is at least $25,000 and you have not made a 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.  Please note that no confirmations will be sent on systematic withdrawals.  They will, however be reflected on statements.  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 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.

 

Optional Guaranteed Minimum Accumulation Benefit Rider.  You may purchase a guaranteed minimum accumulation benefit rider as part of your Contract at the time the Contract is issued or on any contract anniversary after your Contract is issued as long as we receive written notice of your intention to do so.  This rider may not be purchased in combination with any other rider described in this prospectus, except that this rider is available to Contract Owners who purchased the Optional Step-Up Plus Death Benefit Enhancement Rider or the Optional Estate Enhancement Death Benefit Rider prior to May 1, 2007.  The date of such purchase, however, must be at least ten years prior to the Annuity Date specified in the contract.  Written notice must be received by The Penn Mutual Life Insurance Company, Customer Service Group, Philadelphia, PA 19172, at least 30 calendar days prior to your contract anniversary date.

 

A guaranteed minimum accumulation benefit ensures the availability of a minimum Contract Value at the end of the benefit period, which is defined below, see Guaranteed Minimum Accumulation Benefit.  It may provide protection in the event of lower Contract Values that may result from the investment performance of the Contract.  The Company also reserves the right to make the availability of the guaranteed minimum accumulation benefit contingent upon the investment of the entire Contract Value, according to an asset allocation program established by the Company for the full benefit period.  At the present time, no asset allocation program is required for this rider.  If the Company requires an asset allocation program in the future, the asset allocation program will only apply to new purchasers of this benefit.

 

The guaranteed minimum accumulation benefit will be equal to the Contract Value at the start of the benefit period, plus the amount of any subsequent purchase payments (and any purchase payment enhancements)

 

25


 

received during the first Contract Year of the benefit period, reduced by a proportional amount for any partial withdrawals of the Contract Value during the benefit period.  The reductions in the guaranteed minimum accumulation benefit will occur as of the date of each applicable partial withdrawal.  If the guaranteed minimum accumulation benefit exceeds the Contract Value at the end of the benefit period, the Company will increase the Contract Value so that it equals the guaranteed minimum accumulation benefit.  At the end of the benefit period, the Contract Owner can elect to renew the guaranteed minimum accumulation benefit for a new benefit period.

 

The Contract Owner may elect to increase the guaranteed minimum accumulation benefit through the use of the Step-Up Benefit as of the Step-Up Benefit Date.  The Step-Up Benefit Date is any contract anniversary starting with the 5th anniversary of the effective date of the rider.  The Step-Up Benefit is the increase of the guaranteed minimum accumulation benefit to an amount equal to 100% of the Contract Value as of the Step-Up Benefit Date.  Written notice must be received by The Penn Mutual Life Insurance Company, Customer Service Group, Philadelphia, PA 19172, 30 days prior to the contract anniversary.   An additional Step-Up Benefit cannot be elected until after the 5th anniversary of the most recent Step-Up Benefit Date.

 

The guaranteed minimum accumulation benefit will terminate under the following conditions:

 

(a)           at the end of the benefit period if the guaranteed minimum accumulation benefit is not renewed;

 

(b)           on the contract anniversary immediately following receipt by the Company of a written request by the Contract Owner to discontinue the agreement;

 

(c)           full surrender of the Contract;

 

(d)           date of the first death of a Contract Owner or the date of death of the last surviving Annuitant; or

 

(e)           annuitization.

 

Optional Guaranteed Minimum Accumulation Benefit and Guaranteed Minimum Withdrawal Benefit Rider.  At the time you purchase your Contract, as an alternative, you have the option to purchase the Growth and Income Protector package which includes the following enhancements to your Contract:

 

(1)           Guaranteed Minimum Accumulation Benefit;

 

(2)           Guaranteed Minimum Withdrawal Benefit; and

 

(3)           Death Benefit Enhancement.

 

This package of enhancements is available for Annuitants ages 35 to 80 and may not be added after you purchase your Contract.  This package of enhancements may not be purchased in combination with any other riders described in this prospectus.  Certain capitalized terms used to describe this package of enhancements are defined in this section or in the rider itself.  The Company also reserves the right to make the availability of these enhancements contingent upon the investment of the entire Contract Value, according to an asset allocation program established by the Company for the full benefit period.  At the present time, no asset allocation program is required for this rider.  If the Company requires an asset allocation program in the future, the asset allocation program will only apply to new purchasers of this benefit.  The Death Benefit Enhancement available as part of the package differs from the death benefit riders described above, see WHAT ARE THE DEATH BENEFITS UNDER MY CONTRACT.

 

This package of benefits can be purchased on a single or a joint life basis.  A Joint Life Guarantee is issued when a Joint Annuitant is specified in the Contract Specifications.  The Joint Annuitant must be the spouse of the Annuitant on the rider effective date.  If the Contract Owner is a natural person, the Contract Owner must also be the Annuitant and the spouse must be the Joint Annuitant and Successor Owner.

 

A Single Life Guarantee is issued when a Joint Annuitant is not specified in the Contract Specifications.  The Withdrawal Amount is guaranteed over the lifetime of the Annuitant.  If the Contract Owner is a natural

 

26


 

person, the Contract Owner must also be the Annuitant.

 

A Single Life Guarantee cannot be converted to a Joint Life Guarantee.  If no withdrawals have been taken, a Joint Life Guarantee can be changed to a Single Life Guarantee.  The Joint Annuitant can also be changed to the Annuitant’s current spouse if no withdrawals have been taken.  If a withdrawal has been taken, the Joint Annuitant cannot be changed.  The Joint Annuitant can be dropped from the Contract, but the charge for the Rider would remain at the Joint Life Guarantee charge, and the Withdrawal Percentage would not change.

 

Note that the Joint Guarantee Life Guarantee option acts like a second to die policy.  Therefore, the contract with the Joint Life Guarantee option is set up with one owner and two annuitants.  Upon the death of the first annuitant, the second annuitant becomes the successor owner.  The contract then stays in force and the living benefit features continue until the death of the second annuitant.  Also note that the successor owner has no contractual rights while the owner is alive, and steps into ownership upon the death of the owner.  In addition, it is important to name someone other than one of the two spouses as beneficiary.

 

Guaranteed Minimum Accumulation Benefit - The Guaranteed Minimum Accumulation Benefit will be equal to the Contract Value at the start of the benefit period, plus a percentage (set forth in the table below), of any subsequent purchase payments (and any purchase payment enhancements) received during the benefit period, reduced by a proportional amount for any partial withdrawals of the Contract Value during the benefit period.  The reductions in the Guaranteed Minimum Accumulation Benefit will occur as of the date of each applicable partial withdrawal.  If the Guaranteed Minimum Accumulation Benefit exceeds the Contract Value at the end of the benefit period, the Company will increase the Contract Value so that it equals the Guaranteed Minimum Accumulation Benefit.  At the end of the benefit period, the Guaranteed Minimum Accumulation Benefit will be automatically renewed for a new benefit period.

 

The benefit period for this benefit is ten years after the latest of:

 

(a)           the rider effective date;

 

(b)           a step-up benefit date (see below); or

 

(c)           the renewal date.

 

Step-Up Benefit and Step-Up Benefit Date – The Step-Up Benefit for the Guaranteed Minimum Accumulation Benefit is the increase in the Guaranteed Minimum Accumulation Benefit to an amount equal to 100% of the Contract Value as of the Step-Up Benefit Date.

 

The Contract Owner may elect to increase both the Guaranteed Minimum Accumulation Benefit and the Guaranteed Minimum Withdrawal Benefit (see below) through the use of the step-up benefit as of the Step-Up Benefit Date.  The Step-Up Benefit Date is any contract anniversary starting with the 5th anniversary of the effective date of the rider.  Written notice must be received by The Penn Mutual Life Insurance Company, Customer Service Group, Philadelphia, PA 19172, 30 days prior to the contract anniversary.  An additional step-up benefit cannot be elected until after the 5th anniversary of the most recent Step-Up Benefit Date.

 

Once a step-up has been elected and is effective, a new Guaranteed Minimum Accumulation Benefit Base and a new Guaranteed Minimum Accumulation Benefit Period will commence as of the most recent step-up date and the previously effective step-up benefit will terminate.

 

For all benefit periods described above, subsequent purchase payments made to the Contract will increase the Guaranteed Minimum Accumulation Benefit Base as follows:

 

·      100% of premiums made in years one through two

 

·      90% of premiums made in years three through four

 

27


 

·      80% of premiums made in years five through six

 

·      70% of premiums made in years seven through eight

 

·      60% of premiums made in years nine through ten

 

Adjustments for Withdrawals - The Guaranteed Minimum Accumulation Benefit will be reduced by a proportional amount of any partial withdrawals of Contract Value.  The reductions in the Guaranteed Minimum Accumulation Benefit occur as of the date of each applicable partial withdrawal.

 

The amount of the reduction in relation to the amount of partial withdrawals is calculated as follows:

 

The Guaranteed Minimum Accumulation Benefit after the withdrawal equals the Guaranteed Minimum Accumulation Benefit immediately before the withdrawal less the multiplication of (i) and (ii), where:

 

(i)            is the Guaranteed Minimum Accumulation Benefit immediately before the withdrawal, and

 

(ii)           is a ratio of (A) over (B) where:

 

(A)          is the current withdrawal amount; and

 

(B)           is the Contract Value immediately before the withdrawal.

 

Guaranteed Minimum Withdrawal Benefit - The Guaranteed Minimum Withdrawal Benefit allows you to receive withdrawals in guaranteed minimum amounts via the Return of Benefit Base Withdrawal Option or the Lifetime Withdrawal Option.  These options are defined below and operate concurrently until one or both terminate.

 

The Benefit Base is the starting point for determining the amounts you receive under these minimum withdrawal options.  The Benefit Base is the greatest of (a), (b), (c) or (d), where:

 

(a)           is the Contract Value on the date of the first withdrawal, just before the first withdrawal;

 

(b)           is the sum of (1) plus (2), where;

 

(1) is the Contract Value on the rider effective date accumulated on a daily basis at a rate of 5% (3% for Contracts issued in Washington) until the earlier of 10 years from the contract issue date and the date of the first withdrawal; and

 

(2) is each purchase payment received after the rider effective date but prior to the first withdrawal, accumulated on a daily basis at a rate of 5% (3% for Contracts issued in Washington) until the earlier of 10 years from the contract issue date and the date of the first withdrawal; and

 

(c)           is the highest Contract Value as of a contract anniversary date until the earlier of the 10 years from the contract issue date and the date of the first withdrawal; and

 

(d)           is the Contract Value on the last Step-Up Date.

 

Purchase payments made after the date of the first withdrawal will increase the Guaranteed Minimum Withdrawal Benefit base on a dollar-for-dollar basis.

 

The Return of Benefit Base Withdrawal Option guarantees that each Contract Year you can take withdrawals up to the Guaranteed Annual Withdrawal Amount which is initially equal to the Guaranteed Annual Withdrawal Percentage multiplied by the initial Benefit Base.  The current Guaranteed Annual Withdrawal Percentage is 7%.

 

The Lifetime Withdrawal Option guarantees that each Contract Year you can take withdrawals up to the Guaranteed Annual Lifetime Withdrawal Amount which is initially equal to the Guaranteed Annual Lifetime

 

28


 

Withdrawal Percentage multiplied by the initial Benefit Base.  The current Guaranteed Annual Lifetime Withdrawal Percentage is 5%.

 

For both options:

 

(1)                                  withdrawals in a Contract Year that do not exceed the guaranteed amount do not affect the guaranteed amount for that option for subsequent years;

 

(2)                                  withdrawals in a Contract Year that exceed the guaranteed amount for that option reduce the guaranteed amount in subsequent years by multiplying the previous guaranteed amount by the amount of the  excess withdrawals and dividing  by the Contract Value immediately prior to the excess withdrawal.

 

For example, if the guaranteed annual amount is $1,000, there is a $1,100 withdrawal during a Contract Year and the Contract Value prior to the $1,100 withdrawal is $10,000, then the guaranteed annual withdrawal amount for subsequent years would be reduced by $10 to $990, calculated as follows:

 

$1,000 x $100  = $10

 

$10,000

 

 

(3)                                  withdrawals in a Contract Year that are less than the guaranteed amount for that option do not increase the permitted withdrawal in subsequent Contract Years;

 

(4)                                  as long as the Contract Value is positive, an additional purchase payment will increase the Benefit Base by the amount of the purchase payment.  The annual payment under both options will be increased by the amount of the additional purchase payment multiplied by the applicable Withdrawal Percentage.

 

Effect of Withdrawals on Benefit Base – The Guaranteed Withdrawal Benefit Base and the Death Benefit Enhancement Benefit Base are reduced, on a dollar-for-dollar basis, by the amount of withdrawals in a Contract Year that do not exceed the Guaranteed Annual Withdrawal Amount, until the Benefit Base is reduced to zero.  Once the Guaranteed Annual Withdrawal Amount has been withdrawn in a Contract Year, any Extra Return of Benefit Base Withdrawals (the full amount or a portion of a withdrawal that exceeds the remaining Guaranteed Annual Withdrawal Amount within a Contract Year) reduce the Benefit Base in a proportional manner until it is reduced to zero.  The proportional reduction is subtracted from the Benefit Base and is determined by multiplying (1) and (2) where:

 

(1)           is the Benefit Base; and

 

(2)           is the ratio of the Extra Return of Benefit Base Withdrawal to the Contract Value immediately prior to the Extra Return of Benefit Base Withdrawal.

 

Extra Return of Benefit Base Withdrawal is the full amount or a portion of a withdrawal that exceeds the remaining Guaranteed Annual Withdrawal Amount within a Contract Year.

 

Step-Up Benefit and Step-Up Benefit Date - The Step-Up Benefit for the Guaranteed Minimum Withdrawal Benefit is an increase in the Benefit Base to an amount equal to 100% of the Contract Value as of the Step-Up Benefit Date.  As a result of the election of this Step-Up Benefit, the Guaranteed Annual Withdrawal Amount steps up to an amount equal to the Contract Value as of the Guaranteed Minimum Withdrawal Benefit Step-Up Date multiplied by the Guaranteed Annual Withdrawal Percentage.  In addition, as a result of the election of this Step-Up Benefit, the Guaranteed Annual Lifetime Withdrawal Amount steps up to an amount equal to the Contract Value as of the Step-Up Date multiplied by the Guaranteed Annual Lifetime Withdrawal Percentage.

 

The Contract Owner may elect to increase both the Guaranteed Minimum Accumulation Benefit and the Guaranteed Minimum Withdrawal Benefit through the use of the step-up benefit as of the Step-Up Benefit Date.  The Step-Up Benefit Date is any contract anniversary starting with the 5th anniversary of the effective date of the rider.  Written notice must be received by The Penn Mutual Life Insurance Company, Customer Service Group, Philadelphia, PA 19172, 30 days prior to the contract anniversary.   An additional step-up benefit cannot be elected until after the 5th anniversary of the most recent Step-Up Benefit Date.

 

29


 

Once a Step-Up Benefit has been elected and is effective a new Guaranteed Minimum Accumulation Benefit Base, a new Guaranteed Minimum Accumulation Benefit Period, a new Guaranteed Withdrawal Benefit Base, a new Guaranteed Annual Withdrawal Amount, and a new Guaranteed Annual Lifetime Withdrawal Amount will commence as of the most recent Step-Up Date and the previously effective Step-Up Benefit will terminate.

 

Remaining Guaranteed Minimum Withdrawal Benefit Payments When Contract Value is Reduced to Zero – If the Contract Value is reduced to zero and benefits are due under either withdrawal option, no additional purchase payments will be accepted and the remaining minimum withdrawals will be made as follows:

 

If there is any Guaranteed Annual Lifetime Withdrawal Amount due or any remaining Benefit Base, the Contract Owner has the option to receive the remaining minimum withdrawals under either option.

 

If the Return of Benefit Base Withdrawal Option is elected, the remaining guaranteed minimum withdrawal made in the Contract Year in which the Contract Value is reduced to zero is equal to the remaining Guaranteed Annual Withdrawal Amount not yet withdrawn in that year.  In subsequent Contract Years, the remaining minimum withdrawal equals the Guaranteed Annual Withdrawal Amount in effect as of the date that the Contract Value is reduced to zero.

 

If the Lifetime Withdrawal Option is elected, the remaining minimum withdrawal made in the Contract Year in which the Contract Value is reduced to zero is equal to the remaining Guaranteed Annual Lifetime Withdrawal Amount not yet withdrawn in that year.  In subsequent Contract Years, the remaining minimum withdrawal equals the Guaranteed Annual Lifetime Withdrawal Amount in effect as of the date that the Contract Value is reduced to zero.  If no election is made, the default option is the Lifetime Withdrawal Option.

 

If the Contract Value is reduced to zero in a Contract Year where the Guaranteed Annual Lifetime Withdrawal Amount is reduced to zero by the impact of withdrawals in excess of the Guaranteed Annual Lifetime Withdrawal Amount and the Benefit Base is positive, remaining minimum withdrawals will be made under the Return of Benefit Base Withdrawal Option only.  In the Contract Year in which the Contract Value is reduced to zero, the remaining minimum withdrawal made in that year is equal to the Guaranteed Annual Withdrawal Amount not yet withdrawn.  In subsequent Contract Years, the remaining minimum withdrawal is the Guaranteed Annual Withdrawal Amount, in effect as of the date that the Contract Value is reduced to zero, or any remaining Benefit Base, if less.

 

Remaining minimum withdrawals are made once each Contract Year.

 

If the total remaining minimum withdrawals due each Contract Year are less than $100, the remaining payments will be commuted and a lump sum will be paid.  If the remaining minimum withdrawals are based on the Guaranteed Annual Lifetime Withdrawal Amount, such payments will be commuted using the greater of the then currently available annuity factors or the then currently available annuity factors for a single life annuity under the Contract.   If the remaining minimum withdrawals are based on the Guaranteed Annual Withdrawal Amount, the remaining Benefit Base will be paid.

 

Effect of Required Minimum Distributions on Guaranteed Minimum Withdrawal Benefit – Either or both of the Guaranteed Annual Withdrawal Amount and the Guaranteed Annual Lifetime Withdrawal Amount will be increased on a dollar-for-dollar basis in any Contract Year in order to meet that Contract Year’s required minimum distribution requirement according to the Code, and the regulations promulgated thereunder.  This increase applies only in relation to the required minimum distribution based on the value of the Contract.

 

Death Benefit Enhancement - Prior to the Annuity Date and upon receipt of due proof of the Annuitant’s death for Single Life Guarantees, or the death of the survivor of the Annuitant and Joint Annuitant for Joint Life Guarantees, and the necessary forms to make payment to a Beneficiary, the Company will pay to the Beneficiary a Death Benefit Enhancement in addition to the death benefit provided in your Contract.  The Death Benefit Enhancement is equal to the remaining Death Benefit Enhancement Benefit Base, for purposes of determining the Death Benefit Enhancement, minus the sum of the Fixed Account death benefit and the Variable Account death benefit payable under the Contract.  The Death Benefit Enhancement cannot be less than zero. The maximum Death Benefit Enhancement is equal to $1 million.

 

30


 

For purposes of calculating the Death Benefit Enhancement as described below, the Death Benefit Enhancement Benefit Base is the greatest of (a), (b), (c) or (d), where:

 

(a)                                  is the Contract Value on the date of the first withdrawal, just before the first withdrawal;

 

(b)                                 is the sum of (1) plus (2), where:

 

(1) is the Contract Value on the rider effective date accumulated on a daily basis at a rate of 5% (3% for Contracts issued in Washington) until the earliest of (i) 10 years from the Contract issue date; (ii) the Annuitant’s attainment of age 80 for Single Life Guarantees or age 80 of the younger of the Annuitant and the Joint Annuitant for Joint Life Guarantees; and (iii) the date of the first withdrawal; and

 

(2) is each purchase payment received after the rider effective date but prior to the first withdrawal, accumulated on a daily basis at a rate of 5% (3% for Contracts issued in Washington) until the earliest of (i) 10 years from the Contract issue date; (ii) the Annuitant’s attainment of age 80 for Single Life Guarantees or age 80 of the younger of the Annuitant and the Joint Annuitant for Joint Life Guarantees; and (iii) the date of the first withdrawal; and

 

(c)                                  is the highest Contract Value as of a contract anniversary date until the earlier of the 10 years from the Contract issue date and the date of the first withdrawal; and

 

(d)                                 is the Contract Value on the last Step-Up Date before the Annuitant’s attainment of age     80 for Single Life Guarantees or age 80 of the younger of the Annuitant and the Joint Annuitant for Joint Life Guarantees.

 

Purchase payments made after the date of the first withdrawal will increase the Death Benefit Enhancement Benefit Base on a dollar-for-dollar basis as of the Step-Up Benefit Date.

 

Step-Up Benefit and Step-Up Date – Any increase in the Guaranteed Withdrawal Benefit Base as a result of a Step-Up Benefit will increase the Death Benefit Enhancement Base as of the Step-Up Benefit Date until age 80.

 

If the Beneficiary is the surviving spouse of the deceased Annuitant, the spouse may elect to become the Contract Owner and upon such election, the Contract Value, if lower than the remaining Guaranteed Minimum Withdrawal Benefit Base, shall be adjusted to equal the remaining Guaranteed Minimum Withdrawal Benefit Base.

 

Impact of Annuitant’s Death for Joint Life Guarantees – If the Joint Annuitant is still alive after the Annuitant’s death, the Joint Annuitant can surrender the contract and receive a Death Benefit equal to the value of the contract.  If no withdrawals have been taken, the guarantee converts to a Single Life Guarantee based on the Joint Annuitant’s lifetime.  If withdrawals have been taken, the guarantee does not change.

 

If the Joint Annuitant is not alive on the date of death of the Annuitant, the Death Benefit is payable to a Beneficiary and the rider is terminated.

 

Impact of Joint Annuitant’s Death for Joint Life Guarantees – If the Annuitant is still alive after the Joint Annuitant’s death, no death benefit is paid. If no withdrawals have been taken, the Contract Owner has the option to convert the guarantee to a Single Life Guarantee based on the Annuitant’s lifetime.  The Company must receive this request in writing from the Contract Owner.  If the Contract Owner does not convert the guarantee to a Single Life Guarantee, the Annuitant may name a new spouse as the Joint Annuitant before withdrawals are taken.  If withdrawals have been taken, the guarantee does not change.

 

31


 

If the Annuitant is not alive on the date of death of the Joint Annuitant, the Death Benefit is payable to a Beneficiary and the rider is terminated.

 

Annuity Payments – If annuity payments are to commence under the conditions specified in the Contract, the Contract Owner can elect one of the following options:

 

(a)                                  apply the Contract Value to any of the annuity options available in the Annuity Options section of the Contract;

 

(b)                                 request that as of the annuity payment commencement date, annuity payments are made each year equal to the Guaranteed Annual Lifetime Withdrawal Amount until the death of the Annuitant for Single Life Guarantees, or the death of the survivor of the Annuitant and Joint Annuitant for Joint Life Guarantees; or

 

(c)                                  request that as of the annuity payment commencement date, the remaining Benefit Base is paid out in the form of annuity payments.  Each year these annuity payments will equal the lesser of the Guaranteed Annual Withdrawal Amount or the remaining Benefit Base.  These annuity payments will be made until the earlier of the Annuitant’s death for Single Life Guarantees, or the death of the survivor of the Annuitant and Joint Annuitant for Joint Life Guarantees or the date that the Benefit Base is reduced to zero.

 

If annuity payments are to commence under the conditions specified in the Contract and none of the above elections have been made, then the default annuity option in your Contract will apply.

 

For information on the cost of this package of enhancements, see “What Changes Do I Pay?” in this prospectus.

 

These enhancements will terminate under the following conditions:

 

a)                                      at any time after the 5th contract anniversary, following receipt by the Company of a written request by the Contract Owner to discontinue the package of enhancements;

 

b)                                     if the Contract Value equals zero and there is no Guaranteed Annual Withdrawal Amount due in future years, no Guaranteed Annual Lifetime Withdrawal Amount due in future years, and no remaining Benefit Base;

 

c)                                      upon full surrender of the Contract;

 

d)                                     on the date of the death of the Annuitant for Single Life Guarantees, or the date of the death of the survivor of the Annuitant or Joint Annuitant for Joint Life Guarantees; or

 

e)                                      upon annuitization.

 

Guaranteed Lifetime Withdrawal Benefit Rider.   At the time you purchase your Contract, you may purchase The Purchasing Power Protector, a package which includes the following enhancements to your Contract:

 

1)                                      Guaranteed Lifetime Withdrawal Benefit; and

 

2)                                      Death Benefit Enhancement.

 

This package of enhancements is available for Annuitants ages 35 to 80 and may not be added after you purchase your Contract and may not be selected if you intend to purchase any other package of enhancements or riders described in this prospectus.  Certain capitalized terms used to describe this package of enhancements are defined in this section or in the rider itself.

 

32


 

The Company reserves the right to make the availability of this rider contingent upon the investment of the entire Contract Value according to an asset allocation program established by the Company for the full benefit period.  At the present time, no asset allocation program is required for this rider.  If the Company requires an asset allocation program in the future, the asset allocation program will only apply to new purchasers of this rider.  The Death Benefit Enhancement available as part of the package differs from the death benefit riders described above, see WHAT ARE THE DEATH BENEFITS UNDER MY CONTRACT.

 

If this rider is purchased, the Company guarantees that the Annuitant or Joint Annuitants, if selected, can withdraw an amount annually as long as the Annuitant or either of the Joint Annuitants is alive.  The amount which can be withdrawn is called the Guaranteed Annual Lifetime Withdrawal Amount (“Withdrawal Amount”) and equals the Lifetime Withdrawal Base (“Withdrawal Base”) multiplied by the Guaranteed Annual Lifetime Withdrawal Percentage (“Withdrawal Percentage”).

 

Withdrawal Base.  The Withdrawal Base is the greater of (a) or (b) where:

 

(a)          is the Contract Value on the date of the first withdrawal, prior to the first withdrawal; and

 

(b)         is the sum of (1) plus (2), where;

 

(1) is the Contract Value on the rider effective date; and

 

(2) is each purchase payment received after the rider effective date.

 

Withdrawal Percentage.  For a Single Life Guarantee, the Withdrawal Percentage is based on the age of the Annuitant at the time of the first withdrawal.  For a Joint Life Guarantee, the Withdrawal Percentage is based on the age of the younger of the Annuitant or Joint Annuitant at the time of the first withdrawal.  Set forth below are examples of the Withdrawal Percentages for your Contract.

 

Single or Joint Life Guarantee

 

Age of Annuitant (at time of first
withdrawal)

 

Withdrawal Percentage

 

Under 55

 

2.5

%

55-59

 

3.0

%

60-64

 

3.5

%

65-69

 

4.0

%

70-74

 

4.5

%

75 and older

 

5.0

%

 

The Withdrawal Base is subject to certain adjustments while the rider is in effect.  The Withdrawal Base will automatically be increased by an inflation adjustment on each contract anniversary after the first withdrawal from the Contract and will be increased if the Contract Owner purchases a step-up benefit.  The Withdrawal Base will be reduced if cumulative withdrawals in a Contract Year exceed the Withdrawal Amount.

 

Inflation Adjustment.  The inflation adjustment is credited to the Withdrawal Base following the first withdrawal.  The inflation adjustment is made on each contract anniversary and equals (a) multiplied by (b), where:

 

(a)           is the current CPI Factor; and

 

(b)           is the average monthly value of the Withdrawal Base throughout the Contract Year.

 

CPI Factor.  The CPI Factor equals the ratio of (a) to (b), where:

 

(a)           is the greater of 0 and the difference between (1) and (2), where:

 

(1)                                  is the Consumer Price Index for All Urban Consumers (“CPI-U”) released in the

 

33


 

previous month; and

 

(2)                                  is the CPI-U released twelve months prior to the most recent release; and

 

(b)           is the CPI-U released twelve months prior to the most recent release.

 

The CPI-U is published monthly by the United States Department of Labor.  If this index is discontinued or a new Index series is established on a different basis, the Company may establish a new basis for determining the CPI Factor.  The Contract Owner will be given at least 90 days notice prior to any such change.

 

The CPI Factor will be updated on the first day of the month of each contract anniversary.  On the first contract anniversary following the first withdrawal, the CPI Factor will be prorated for the partial year between the date of the first withdrawal and the contract anniversary.

 

Step-Up Benefit and Step-Up Benefit Date.  The Step-Up Benefit allows the Contract Owner to increase the Withdrawal Base to an amount equal to 100% of the Contract Value as of the Step-Up Benefit Date.  This would increase the Withdrawal Amount which would then equal the increased Contract Value multiplied by the Withdrawal Percentage.

 

The first Step-Up Benefit Date a Contract Owner can elect is the third contract anniversary starting with the rider’s effective date.   Subsequent Step-Up Benefit Dates can be no earlier than the third anniversary of the previous Step-Up Benefit Date.

 

Election of a Step-Up Benefit must be made in writing by the Contract Owner and received by the Company, in good order, at least thirty days prior to the contract anniversary on which the Step-Up Benefit is effective.

 

Excess Withdrawal Reduction.  If your cumulative withdrawals in a Contract Year exceed the Withdrawal Amount, the Withdrawal Base will be reduced.  The Excess Withdrawal is the amount by which the cumulative withdrawals exceed the Withdrawal Amount.  The reduction is determined by multiplying the Excess Withdrawal by the ratio of (a) to (b) where:

 

(a)           is the Withdrawal Base; and

 

(b)           is the Contract Value immediately prior to the withdrawal of the Excess Withdrawal.

 

Waiting Bonus.  In addition to the adjustments to the Withdrawal Base described above, the Withdrawal Percentage can be increased by an amount (the “Waiting Bonus”) which is added to the Withdrawal Percentage if the first withdrawal is taken after a specified contract anniversary.  The Waiting Bonus percentages are as follows:

 

Contract Year at First Withdrawal

 

Waiting Bonus

 

0 - 5

 

0

%

6 -10

 

0.5

%

11 and later

 

1.0

%

 

The Waiting Bonus will only be applied to purchase payments made prior to the first contract anniversary.  Purchase payments made after the first contract anniversary will become part of the Withdrawal Base but will not receive the Waiting Bonus.

 

Effect of Withdrawals Less Than the Withdrawal Amount.  If total withdrawals in a Contract Year are less than the Withdrawal Amount, the Withdrawal Amount is not increased in subsequent Contract Years.

 

Effect of Required Minimum Distributions on Withdrawal Amount.  The Withdrawal Amount will be increased in any Contract Year in order to meet that Contract Year’s required minimum distribution requirement according to the Code.  This increase will not be treated as an Excess Withdrawal and applies only in relation to the required minimum distribution based on the value of the Contract.

 

34


 

Annuity Payments.  The Contract Owner can elect to receive annuity payments under one of the following options:

 

(a)                                  apply the Contract Value to any of the annuity options available in the Annuity Options section of the Contract;

 

(b)                                 request that as of the annuity payment commencement date, annuity payments are made each year equal to the Withdrawal Amount until the death of the Annuitant for Single Life Guarantees, or the death of the Annuitant and Joint Annuitant for Joint Life Guarantees;

 

If annuity payments are to commence and none of the above elections have been made, then the default annuity option in your Contract will apply.

 

Remaining Payments When Contract Value is Reduced to Zero.  If the Contract Value is reduced to zero and the Withdrawal Base is still positive, such Remaining Payments will be made once each Contract Year.  In this situation, no additional purchase payments will be accepted.  The only provisions of the Contract that remain in effect are those that are associated with Remaining Guaranteed Lifetime Withdrawal Benefit Payments.

 

If the Contract Value is reduced to zero in a Contract Year and there is any Withdrawal Amount due for that year, the Contract Owner will receive any Remaining Payment, as of the date the Contract Value is reduced to zero.

 

Joint and Single Life Guarantees.  The Guaranteed Lifetime Withdrawal Benefit can be purchased on a single or a joint life basis.  A Joint Life Guarantee is issued when a Joint Annuitant is specified in the Contract Specifications.  The Withdrawal Amount is guaranteed over the lifetime of the Annuitant and Joint Annuitant.  The Joint Annuitant must be the spouse of the Annuitant on the rider effective date.  If the Contract Owner is a natural person, the Contract Owner must also be the Annuitant and the spouse must be the Joint Annuitant and Successor Owner.

 

A Single Life Guarantee is issued when a Joint Annuitant is not specified in the Contract Specifications.  The Withdrawal Amount is guaranteed over the lifetime of the Annuitant.  If the Contract Owner is a natural person, the Contract Owner must also be the Annuitant.

 

A Single Life Guarantee cannot be converted to a Joint Life Guarantee.  If no withdrawals have been taken, a Joint Life Guarantee can be changed to a Single Life Guarantee.  The Joint Annuitant can also be changed to the Annuitant’s current spouse if no withdrawals have been taken.  If a withdrawal has been taken, the Joint Annuitant cannot be changed.  The Joint Annuitant can be dropped from the Contract, but the charge for the Rider would remain at the Joint Life Guarantee charge, and the Withdrawal Percentage would not change.

 

Note that the Joint Guarantee Life Guarantee option acts like a second to die policy.  Therefore, the contract with the Joint Life Guarantee option is set up with one owner and two annuitants.  Upon the death of the first annuitant, the second annuitant becomes the successor owner.  The contract then stays in force and the living benefit features continue until the death of the second annuitant.  Also note that the successor owner has no contractual rights while the owner is alive, and steps into ownership upon the death of the owner.  In addition, it is important to name someone other than one of the two spouses as beneficiary.

 

Death Benefit Enhancement.  Prior to the Annuity Date and upon receipt of due proof of the Annuitant’s death for Single Life Guarantees, or the last death of the Annuitant and Joint Annuitant for Joint Life Guarantees, and the necessary forms to make payment to a Beneficiary, the Company will pay a Death Benefit Enhancement in addition to the death benefit provided in your Contract.  The Death Benefit Enhancement is equal to the remaining Death Benefit Enhancement Benefit Base (the “Benefit Base”), minus the sum of the Fixed Account death benefit and the Variable Account death benefit payable under the Contract.  The Death Benefit Enhancement cannot be less than zero. The maximum Death Benefit Enhancement is $1 million.

 

Benefit Base.  For purposes of calculating the Death Benefit Enhancement, the Benefit Base is the greatest of (a), (b) or (c) below, where:

 

35


 

(a)                                  is the Contract Value on the date of the first withdrawal, just before the first withdrawal; and

 

(b)                                 is the sum of (1) plus (2), where:

 

(1)                                  is the Contract Value on the rider effective date accumulated on a daily basis at an annual rate of 5% (3% for Contracts issued in Washington) until the earliest of:

 

(i)                                     10 years from the Contract issue date;

 

(ii)                                  attainment of age 80 of the Annuitant, or age 80 of the younger of the Annuitant or the Joint Annuitant;

 

(iii)                               the date of the first withdrawal; and

 

(2)                                  is each purchase payment received after the rider effective date but prior to the first withdrawal accumulated on a daily basis at an annual rate of 5% (3% for Contracts issued in Washington) until the earliest of:

 

(i)                                     10 years from the Contract issue date,

 

(ii)                                  attainment of age 80 of the Annuitant, or age 80 of the younger of the Annuitant or the Joint  Annuitant,

 

(iii)                               the date of the first withdrawal; and

 

(c)           the highest Contract Value as of a contract anniversary date until the earliest of:

 

(i)                                     10 years from the Contract issue date;

 

(ii)                                  attainment of age 80 of the Annuitant for Single Life Guarantees, or age 80 of the younger of the Annuitant or the Joint Annuitant for Joint Life Guarantees;

 

(iii)                               the date of the first withdrawal.

 

Purchase payments made after the date of the first withdrawal will increase the Benefit Base on a dollar-for-dollar basis.

 

Any increase in the Guaranteed Withdrawal Benefit Base as a result of a Step-Up Benefit will increase the Death Benefit Enhancement Benefit Base as of the Step-Up Benefit Date.

 

Effect of Withdrawals on the Benefit Base.  If total withdrawals in a Contract Year are less than the Withdrawal Amount, the Benefit Base is reduced for the withdrawals on a dollar-for-dollar basis.  If the total withdrawals in a Contract Year exceed the Withdrawal Amount, the Benefit Base is reduced for the amount of the Excess Withdrawals by multiplying the Excess Withdrawal by the ratio of (a) to (b) where

 

(a)           is the Benefit Base immediately prior to the Excess Withdrawal; and

 

(b)           is the Contract Value immediately prior to the withdrawal of the Excess Withdrawal.

 

Impact of Annuitant’s Death for Joint Life Guarantees.  If the Annuitant dies and the Joint Annuitant is still alive, the Joint Annuitant can surrender the Contract and receive a Death Benefit equal to the Contract Value.  If no withdrawals have been taken, the guarantee converts to a Single Life Guarantee based on the Joint Annuitant’s lifetime.  If withdrawals have been taken, the guarantee does not change and the Withdrawal Amount applies to the Joint Annuitant’s lifetime.

 

If the Joint Annuitant is not alive on the date of death of the Annuitant, the Death Benefit is payable to a Beneficiary and the rider is terminated.

 

36


 

Impact of Joint Annuitant’s Death for Joint Life Guarantees.  If the Joint Annuitant dies and the Annuitant is still alive, no Death Benefit is paid.  If no withdrawals have been taken, the Contract Owner has the option, upon written request to the Company to convert the guarantee to a Single Life Guarantee based on the Annuitant’s lifetime.  If the Annuitant does not convert the guarantee to a Single Life Guarantee, the Annuitant may name a new spouse as the Joint Annuitant before withdrawals are taken.  If withdrawals have been taken, the guarantee does not change and the Withdrawal Amount applies to the Annuitant’s lifetime.

 

If the Annuitant is not alive on the date of death of the Joint Annuitant, the Death Benefit is payable to a Beneficiary and the rider is terminated.

 

Transfer Limits.  Notwithstanding any other provision of this Contract, no more than two transfers may be made in a calendar month and no more than 12 such transfers can be made in a calendar year.

 

For information on the cost of this package of enhancements, see “What Charges Do I Pay?” in this prospectus.

 

Termination of Rider.   This Rider will terminate:

 

(a)                                  on any contract anniversary, after the third contract anniversary immediately following receipt by the Company of a written request by the Contract Owner to discontinue the Rider;

 

(b)                                 if the Contract Value equals zero and there is no Withdrawal Amount due in future years;

 

(c)                                  upon full surrender of the Contract;

 

(d)                                 on the date of the death of the Annuitant for Single Life Guarantees, or the date of the last death of the Annuitant or Joint Annuitant for Joint Life Guarantees; or

 

(e)                                  upon annuitization.

 

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.

 

What Charges Do I Pay?

 

The following discussion explains the Contract charges that you pay.  You also 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 Contract and the Separate Account.

 

·                                          We deduct from your Variable Account Value an annual contract administration charge that is the lesser of $40 or 2% of your Variable Account Value on the deduction date, the last day of your contract year.  This charge will also be deducted if the Variable Account Value is withdrawn or transferred in full on a date other than the deduction date.  You will not pay this charge if your Variable Account Value is more than $100,000 on the deduction date.  To pay this charge, we cancel Accumulation Units credited to your Contract, pro rata among the Subaccounts in which you invest.

 

37


 

·                                          We deduct from the net asset value of the Separate Account a daily administration charge that currently is, and will not exceed an effective annual rate of 0.15%.

 

For transfers among investment options other than dollar cost averaging and automatic rebalancing, we reserve the right to charge for making the transfer, although we have no present intention of doing so.

 

Mortality and Expense Risk Charge.   We deduct from the net asset value of the Separate Account a daily mortality and expense risk charge that currently is, and will not exceed, an effective annual rate of 1.25%.   This charge compensates us for the mortality-related guarantees we make under the Contract (e.g., the death benefit and the guarantee that the annuity factors will never be decreased even if mortality experience is substantially different than originally assumed), and for the risk that our administration charges will be insufficient to cover administration expenses over the life of the Contracts.  The mortality and expense risk charge is paid during both the accumulation and variable annuity payout phases of the 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 the surplus of Penn Mutual, which may include proceeds from the mortality and expense risk charge.

 

You pay this charge only if you withdraw a purchase payment within nine years of the effective date of payment.  This charge does not apply to earnings or purchase payment enhancements.  We will apply the following schedule of contingent deferred sales charges to all withdrawals of purchase payments (including withdrawals of amounts attributable to the Guaranteed Minimum Withdrawal Benefit and Guaranteed Lifetime Withdrawal Benefit), which are not free withdrawals as described in the next subsection.

 

Year After Purchase Payment
In Which Withdrawal Is Made

 

Applicable Charge

 

First

 

8

%

Second

 

8

%

Third

 

8

%

Fourth

 

8

%

Fifth

 

7

%

Sixth

 

6

%

Seventh

 

5

%

Eighth

 

3

%

Ninth

 

3

%

Tenth and thereafter

 

0

%

 

Purchase payments will be treated as withdrawn on a first-in, first-out basis.  However, for Contracts sold to certain charitable remainder trusts, any gains will be treated as withdrawn first before the withdrawal of purchase payments.

 

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 or other 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 unfairly discriminate against any Contract Owner.

 

Free Withdrawals.  The following withdrawals may be made free of the contingent deferred sales charge.

 

Nine Year-Old Purchase Payments.  You may withdraw any purchase payment that was made more than nine years before the withdrawal without incurring a contingent deferred sales charge.

 

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Annual Withdrawals of 15% of Purchase Payments.  On the last day of the first Contract Year and once each Contract Year thereafter, you may withdraw an amount (the “Free Withdrawal Amount”), without incurring a contingent deferred sales charge, up to 15% of total purchase payments as of the date of the request.  You may take a free withdrawal on a single sum basis or systematically, but not both.  The Free Withdrawal Amount will be applied to purchase payments on a first-in, first-out basis.  With respect to any withdrawal in excess of the free withdrawal limit in a Contract Year, the contingent deferred sales charge schedule set forth above will apply to the remainder of the purchase payments so withdrawn on a first-in, first-out basis.  This free withdrawal applies only to the first withdrawal request made in a Contract Year and the amount is not cumulative from year to year.

 

Medically Related Withdrawal.  Subject to state law, after the first Contract Year and before the Annuity Date, you may withdraw, without incurring a contingent deferred sales charge, all or part of your Contract Value (up to a maximum of $500,000) if certain medically related contingencies occur.  This free withdrawal is available if you are (1) first confined in a nursing home or hospital while this Contract is in force and remain confined for at least 90 days in a row, or (2) first diagnosed as having a fatal illness (an illness expected to result in death within 2 years for 80% of diagnosed cases) while this Contract is in force.  The precise terms and conditions of this benefit are set forth in the Contract.  It is not available if your age at issue is greater than 75.  The medically related contingencies that must be met for free withdrawal vary in some states.

 

Disability Related Withdrawal.  You may withdraw, without incurring a contingent deferred sales charge, part or all of your Contract Value if you (you or the Annuitant for qualified contracts) become totally disabled as defined in the Contract.

 

Other Withdrawals.  There is no contingent deferred sales charge imposed upon minimum distributions under qualified contracts which are required by the Code.

 

Contract Rider Charges.   You may elect to purchase optional contract riders to increase the benefits paid under your Contract.  If you purchase any optional contract riders, the charges for which are deducted annually, and make a full surrender of your Contract before the costs for these optional contract riders have been deducted, your Contract Value will be reduced by the accrued costs of the optional contract riders, plus any applicable surrender charge.

 

Optional Step-Up Plus Death Benefit Enhancement Rider.  We will calculate a charge on the first day of each calendar month but only if the Death Benefit Enhancement is greater than zero on that day.  The monthly charges will be accumulated during a Contract Year and deducted on the contract anniversary.  In addition, we will deduct any uncollected rider charges on the date we pay the death benefit under your Contract, the date you elect to begin taking annuity payments or the date you surrender your Contract.

 

The charge for any month will be the rate from the tables shown below based on the attained age of the Annuitant as of the prior contract anniversary multiplied by the Death Benefit Enhancement.  There is no charge for any month if cumulative prior performance has been positive and there is no Death Benefit Enhancement payable.

 

We will deduct the charge by canceling Accumulation Units credited to your Contract, with the charge allocated pro rata among the Subaccounts comprising the Variable Account Value.

 

39


 

 

 

Monthly Charge per $ 1,000 of

 

Attained Age

 

Benefit

 

Less than 40

 

$

0. 208

 

40-44

 

0.208

 

45-49

 

0.333

 

50-54

 

0.458

 

55-59

 

0.708

 

60-64

 

1.083

 

65-69

 

1.667

 

70-74

 

2.708

 

75-79

 

4.250

 

80-84

 

7.083

 

85-89

 

11.000

 

90-94

 

17.292

 

 

Estate Enhancement Death Benefit Rider.  For Annuitants who are 60 years of age or less at date of issue, the current charge for the rider is 0.15% of the average Variable Account Value and Fixed Account Value.  For Annuitants between the age of 61 and 70, the current charge is 0.25% and for Annuitants between the age of 71 and 80, the current charge is 0.55%.  The guaranteed maximum charge that we may make for this rider for issue ages of 60 years or less, issues ages between 61 and 70, and issue ages between 71 and 80 are 0.20%, 0.30% and 0.60%, respectively.

 

The charge will be made on each contract anniversary and at any time the Variable Account Value is withdrawn or transferred in full.  The charge will be deducted by canceling Accumulation Units credited to your Contract, with the charge allocated pro rata among the Subaccounts comprising the Variable Account Value.

 

Guaranteed Minimum Accumulation Benefit Rider.  The rider charge for this benefit, to be assessed annually, will be a percentage of the monthly Contract Value that is allocated to the variable sub-accounts.  The current effective annual charge for this agreement is 0.50% and may not be increased beyond the maximum of 1.00%.  If a Step-Up Benefit is elected, the monthly charge may be increased, but not above the then current charge applicable to the class of Contract Owners then electing such benefit.  We will deduct any accrued, but uncollected rider charges on the date you surrender your Contract or upon your death as of the date of surrender or death.  No rider charge will be imposed upon annuitization.

 

Combined Minimum Accumulation Benefit and Guaranteed Minimum Withdrawal Benefit Rider.  The rider charge for this package of enhancements, to be assessed annually, will be a percentage of the monthly Contract Value that is allocated to the variable sub-accounts.  The current effective annual charge for this agreement is 0.65% for a Single Life Guarantee and 0.85% for a Joint Life Guarantee and may not be increased beyond the maximum of 1.00%.  If a Step-Up Benefit is elected, the monthly charge may be increased, but not above the then current charge applicable to the class of Contract Owners then electing such benefit.  We will deduct any accrued, but uncollected rider charges on the date you surrender your Contract or upon your death as of the date of surrender or death.  No rider charge will be imposed upon annuitization.

 

Guaranteed Lifetime Withdrawal Benefit Rider.  On an annual basis the rider charge for this benefit will be a percentage of the monthly average of the withdrawal base and will be deducted from the contract value.  The current effective annual charge for the Rider is 0.65% for a Single Life Guarantee and 0.85% for a Joint Life Guarantee and neither may be increased beyond a maximum of 1.25%.  If the step-up benefit is elected, the rider charge may be increased, but not above the then current charge applicable to the class of Contact Owners then electing this benefit.  We will deduct any accrued, but uncollected rider charges on the date you surrender your Contract or upon your death as of the date of surrender or death.  No rider charge will be imposed upon annuitization.

 

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.

 

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

 

40


 

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 3½%.

 

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 participate in our dollar cost averaging program, you may allocate money to either our Six Month Dollar Cost Averaging Account or our Twelve Month Dollar Cost Averaging Account.  Amounts may be only allocated to one of the dollar cost averaging accounts.  The interest rate that you earn is set at the time that you invest and will not vary during the period you selected.  The rate will never be less than 3%, unless applicable law permits a reduction.  If you stop dollar cost averaging before your money has been in either account for the full six month or twelve month term, your money will be transferred to the Money Market Subaccount unless you specify a different investment option.   The One Year Fixed Interest Account is not available to Contracts issued on or after August 11, 2003.

 

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 your grandchild or more than 37 1/2 years younger than you, you may be subject to the Generation Skipping Transfer Tax under Section 2601 of the Code.

 

In the case of a nonqualified Contract and death of an Annuitant who was not the Contract Owner, an election to receive the death benefit in the form of annuity payment must be made within 60 days.  If such election is not made, the gain from the Contract will generally be taxed as a lump sum payment, as described in the preceding paragraph.

 

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 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.

 

If your nonqualified Contract contains a Guaranteed Minimum Withdrawal Benefit Rider, certain rules may apply.  It is not clear whether guaranteed minimum withdrawal benefit payments made during the settlement or income (payout) phase may be taxed as either withdrawals or annuities.  In view of this uncertainty, we intend to adopt a conservative approach and treat guaranteed minimum withdrawal payments during the settlement phase

 

41


 

under nonqualified Contracts as withdrawals.  Consult a tax advisor before purchasing a Guaranteed Minimum Withdrawal Benefit Rider or option.

 

Early Withdrawals.  An additional income tax of 10% 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 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 59 1/2;

 

·                                          on distributions made after death; or

 

·                                          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 underlying a variable annuity contract which is not purchased under a qualified retirement plan or certain other types of plans (or the investments of a mutual fund, the shares of which are owned by the variable annuity separate account) 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.

 

42


 

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 rollover individual retirement annuities qualified under Section 408(b) of the Code (referred to as IRAs) and certain tax deferred annuities qualified under Section 403(b) of the Code.  Qualified Contracts have special provisions in order to be treated as qualified 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.

 

If your qualified Contract contains a Guaranteed Minimum Withdrawal Benefit Rider, certain rules may apply.  If you elect a guaranteed minimum withdrawal benefit and your minimum required distribution amount exceeds your guaranteed withdrawal amount, you will have to withdraw more than the guaranteed withdrawal amount to avoid imposition of a 50% excise tax.  It is not clear whether guaranteed minimum withdrawal benefit payments made during the settlement phase will be taxed as withdrawals or as annuity payments.  In view of this uncertainty, we will apply the non-annuity rules for determining minimum required distributions, meaning that a percentage of the value of all benefits under the Contract will need to be withdrawn each year.  The value may have to include the value of enhanced death benefits and other optional contract provisions such as the Guaranteed Minimum Withdrawal Benefit Rider itself.

 

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 Penn Mutual 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.

 

This general summary of federal income tax 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 5 1/2% and trailer commissions based on a percentage of Contract Value, other allowance and overrides may be paid.

 

In addition to or partially in lieu of commission, Penn Mutual may also make override payments and pay

 

43


 

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 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.

 

44


 

STATEMENT OF ADDITIONAL INFORMATION CONTENTS

 

VARIABLE ANNUITY PAYMENTS

B-2

First Variable Annuity Payment

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-3

 

 

CUSTODIAN

B-4

 

 

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

B-4

 

 

LEGAL MATTERS

B-4

 

 

FINANCIAL STATEMENTS

B-4

 

45


 

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 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

 

$

11.590

 

$

11.232

 

$

11.078

 

$

11.127

 

$

11.187

 

Accumulation Unit Value, end of period

 

$

11.997

 

$

11.590

 

$

11.232

 

$

11.078

 

$

11.127

 

Number of Accumulation Units outstanding, end of period

 

1,557,882

 

950,715

 

773,686

 

630,218

 

766,994

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(a)

 

Accumulation Unit Value, beginning of period

 

$

11.161

 

$

10.884

 

$

10.393

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

11.187

 

$

11.161

 

$

10.884

 

$

10.393

 

Number of Accumulation Units outstanding, end of period

 

1,262,109

 

648,187

 

172,667

 

15,304

 

 

(a)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

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

 

$

12.451

 

$

12.083

 

$

11.996

 

$

11.889

 

$

11.717

 

Accumulation Unit Value, end of period

 

$

12.918

 

$

12.451

 

$

12.083

 

$

11.996

 

$

11.889

 

Number of Accumulation Units outstanding, end of period

 

1,652,199

 

1,031,421

 

798,623

 

699,129

 

743,438

  

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(b)

 

Accumulation Unit Value, beginning of period

 

$

11.183

 

$

10.635

 

$

10.015

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

11.717

 

$

11.183

 

$

10.635

 

$

10.015

 

Number of Accumulation Units outstanding, end of period

 

565,396

 

89,072

 

13,396

 

4,391

 

 

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

(b)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

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

 

$

13.772

 

$

13.269

 

$

13.127

 

$

12.727

 

$

12.156

 

Accumulation Unit Value, end of period

 

$

14.440

 

$

13.772

 

$

13.269

 

$

13.127

 

$

12.727

 

Number of Accumulation Units outstanding, end of period

 

4,297,158

 

3,448,814

 

2,782,715

 

2,101,791

 

1,970,936

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(a)

 

Accumulation Unit Value, beginning of period

 

$

11.709

 

$

10.903

 

$

9.872

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

12.156

 

$

11.709

 

$

10.903

 

$

9.872

 

Number of Accumulation Units outstanding, end of period

 

1,536,051

 

892,054

 

63,890

 

28,113

 

 

(a)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

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

 

$

15.309

 

$

14.117

 

$

13.884

 

$

12.718

 

$

10.475

 

Accumulation Unit Value, end of period

 

$

15.634

 

$

15.309

 

$

14.117

 

$

13.884

 

$

12.718

 

Number of Accumulation Units outstanding, end of period

 

1,355,341

 

1,230,953

 

1,141,521

 

907,419

 

629,753

  

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(a)

 

Accumulation Unit Value, beginning of period

 

$

10.273

 

$

9.743

 

$

10.259

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

10.475

 

$

10.273

 

$

9.743

 

$

10.259

 

Number of Accumulation Units outstanding, end of period

 

406,091

 

234,808

 

36,361

 

21,145

 

 

(a)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

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

 

$

24.935

 

$

21.918

 

$

20.609

 

$

17.625

 

$

13.757

 

Accumulation Unit Value, end of period

 

$

25.686

 

$

24.935

 

$

21.918

 

$

20.609

 

$

17.625

 

Number of Accumulation Units outstanding, end of period

 

16,574,261

 

13,263,296

 

9,952,827

 

6,791,978

 

3,946,928

  

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(a)

 

Accumulation Unit Value, beginning of period

 

$

13.824

 

$

12.711

 

$

10.547

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

13.757

 

$

13.824

 

$

12.711

 

$

10.547

 

Number of Accumulation Units outstanding, end of period

 

2,309,692

 

772,946

 

62,964

 

39,752

 

 

(a)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

PENN SERIES GROWTH STOCK 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

 

$

6.512

 

$

5.844

 

$

5.583

 

$

5.059

 

$

4.566

 

Accumulation Unit Value, end of period

 

$

7.009

 

$

6.512

 

$

5.844

 

$

5.583

 

$

5.059

 

Number of Accumulation Units outstanding, end of period

 

3,708,087

 

2,406,386

 

1,238,834

 

806,444

 

664,296

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(b)

 

Accumulation Unit Value, beginning of period

 

$

7.114

 

$

9.662

 

$

13.260

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

4.566

 

$

7.114

 

$

9.662

 

$

13.260

 

Number of Accumulation Units outstanding, end of period

 

690,910

 

682,221

 

122,879

 

25,504

 

 

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

(b)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

A-3


 

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

 

$

14.618

 

$

12.534

 

$

12.340

 

$

11.089

 

$

8.801

 

Accumulation Unit Value, end of period

 

$

14.952

 

$

14.618

 

$

12.534

 

$

12.340

 

$

11.089

 

Number of Accumulation Units outstanding, end of period

 

1,977,571

 

1,690,649

 

1,591,641

 

1,334,366

 

946,582

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(b)

 

Accumulation Unit Value, beginning of period

 

$

10.496

 

$

10.905

 

$

9.818

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

8.801

 

$

10.496

 

$

10.905

 

$

9.818

 

Number of Accumulation Units outstanding, end of period

 

638,638

 

348,986

 

37,505

 

22,230

 

 

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

(b)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

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

 

$

11.325

 

$

11.074

 

$

11.097

 

$

10.357

 

$

8.361

 

Accumulation Unit Value, end of period

 

$

11.692

 

$

11.325

 

$

11.074

 

$

11.097

 

$

10.357

 

Number of Accumulation Units outstanding, end of period

 

688,019

 

668,223

 

628,957

 

521,962

 

231,952

 

 

 

 

Year Ended December 31,

 

 

 

2002(a)

 

Accumulation Unit Value, beginning of period

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

8.361

 

Number of Accumulation Units outstanding, end of period

 

46,278

 

 

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

 

A-4


 

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

 

$

11.462

 

$

10.074

 

$

9.778

 

$

8.976

 

$

7.088

 

Accumulation Unit Value, end of period

 

$

11.877

 

$

11.462

 

$

10.074

 

$

9.778

 

$

8.976

 

Number of Accumulation Units outstanding, end of period

 

3,446,619

 

2,635,109

 

2,021,754

 

1,767,288

 

1,336,429

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(b)

 

Accumulation Unit Value, beginning of period

 

$

9.249

 

$

10.657

 

$

11.907

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

7.088

 

$

9.249

 

$

10.657

 

$

11.907

 

Number of Accumulation Units outstanding, end of period

 

964,164

 

769,958

 

136,019

 

72,842

 

 

(a)  Fidelity Investments Variable Insurance Products Index 500 Portfolio Subaccount prior to May 1, 2000.

(b)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

PENN SERIES MID 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

 

$

7.715

 

$

7.325

 

$

6.604

 

$

6.013

 

$

4.084

 

Accumulation Unit Value, end of period

 

$

9.521

 

$

7.715

 

$

7.325

 

$

6.604

 

$

6.013

 

Number of Accumulation Units outstanding, end of period

 

2,503,459

 

1,785,774

 

1,471,470

 

1,306,081

 

1,012,920

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000(a)

 

Accumulation Unit Value, beginning of period

 

$

6.145

 

$

8.668

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

4.084

 

$

6.145

 

$

8.668

 

Number of Accumulation Units outstanding, end of period

 

685,869

 

456,042

 

81,282

 

 

(a)  For the period October 23, 2000 (date Subaccount was established) through December 31, 2000.

 

A-5


 

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

 

$

21.627

 

$

19.686

 

$

17.771

 

$

14.631

 

$

10.842

 

Accumulation Unit Value, end of period

 

$

22.128

 

$

21.627

 

$

19.686

 

$

17.771

 

$

14.631

 

Number of Accumulation Units outstanding, end of period

 

1,246,530

 

999,073

 

812,565

 

673,607

 

462,080

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(b)

 

Accumulation Unit Value, beginning of period

 

$

12.138

 

$

12.712

 

$

10.601

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

10.842

 

$

12.138

 

$

12.712

 

$

10.601

 

Number of Accumulation Units outstanding, end of period

 

388,902

 

359,610

 

19,960

 

25,519

 

 

(a)  Neuberger Berman Advisors Management Trust Partners Portfolio prior to May 1, 2000.

(b)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

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

 

$

15.165

 

$

13.703

 

$

12.843

 

$

10.482

 

$

8.495

 

Accumulation Unit Value, end of period

 

$

15.081

 

$

15.165

 

$

13.703

 

$

12.843

 

$

10.482

 

Number of Accumulation Units outstanding, end of period

 

867,198

 

694,871

 

617.147

 

445,327

 

212,118

 

 

 

 

Year Ended December 31,

 

 

 

2002(a)

 

Accumulation Unit Value, beginning of period

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

8.495

 

Number of Accumulation Units outstanding, end of period

 

56,754

 

 

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

 

A-6


 

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

 

$

15.183

 

$

15.588

 

$

14.874

 

$

13.776

 

$

9.470

 

Accumulation Unit Value, end of period

 

$

16.126

 

$

15.183

 

$

15.588

 

$

14.874

 

$

13.776

 

Number of Accumulation Units outstanding, end of period

 

904,286

 

892,272

 

649,989

 

551,681

 

411,806

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(b)

 

Accumulation Unit Value, beginning of period

 

$

16.582

 

$

19.981

 

$

28.356

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

9.470

 

$

16.582

 

$

19.981

 

$

28.356

 

Number of Accumulation Units outstanding, end of period

 

274,259

 

213,125

 

72,912

 

26,453

 

 

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

(b)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

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

 

$

23.884

 

$

20.624

 

$

20.173

 

$

17.808

 

$

10.328

 

Accumulation Unit Value, end of period

 

$

22.301

 

$

23.884

 

$

20.624

 

$

20.173

 

$

17.808

 

Number of Accumulation Units outstanding, end of period

 

1,716,779

 

1,355,380

 

1,052,118

 

941,695

 

712,591

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(b)

 

Accumulation Unit Value, beginning of period

 

$

12.584

 

$

10.930

 

$

9.747

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

10.328

 

$

12.584

 

$

10.930

 

$

9.747

 

Number of Accumulation Units outstanding, end of period

 

483,927

 

258,125

 

28,569

 

1,759

 

 

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

(b)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

A-7


 

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

 

$

17.667

 

$

13.745

 

$

11.936

 

$

9.311

 

$

7.107

 

Accumulation Unit Value, end of period

 

$

20,913

 

$

17.667

 

$

13.745

 

$

11.936

 

$

9.311

 

Number of Accumulation Units outstanding, end of period

 

3,974,214

 

2,598,426

 

1,416,458

 

865,403

 

457,134

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(a)

 

Accumulation Unit Value, beginning of period

 

$

8.003

 

$

11.291

 

$

14.079

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

7.107

 

$

8.003

 

$

11.291

 

$

14.079

 

Number of Accumulation Units outstanding, end of period

 

280,777

 

191,787

 

77,062

 

45,321

 

 

(a)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

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

 

$

23.785

 

$

18.216

 

$

16.352

 

$

12.236

 

$

9.158

 

Accumulation Unit Value, end of period

 

$

19.262

 

$

23.785

 

$

18.216

 

$

16.352

 

$

12.236

 

Number of Accumulation Units outstanding, end of period

 

942,534

 

895,884

 

649,288

 

430,815

 

214,634

 

 

 

 

Year Ended December 31,

 

 

 

2002(a)

 

Accumulation Unit Value, beginning of period

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

9.158

 

Number of Accumulation Units outstanding, end of period

 

64,005

 

 

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

 

A-8


 

NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST BALANCED PORTFOLIO 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

 

$

12.668

 

$

11.608

 

$

10.781

 

$

10.002

 

$

8.723

 

Accumulation Unit Value, end of period

 

$

14.440

 

$

12.668

 

$

11.608

 

$

10.781

 

$

10.002

 

Number of Accumulation Units outstanding, end of period

 

667,905

 

546,186

 

431,088

 

431,093

 

412,630

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(a)

 

Accumulation Unit Value, beginning of period

 

$

10.678

 

$

12.498

 

$

13.279

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

8.723

 

$

10.678

 

$

12.498

 

$

13.279

 

Number of Accumulation Units outstanding, end of period

 

392,053

 

299,267

 

60,723

 

1,560

 

 

(a)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

FIDELITY INVESTMENTS’ VARIABLE INSURANCE PRODUCTS EQUITY-INCOME PORTFOLIO 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

 

$

15.110

 

$

12.748

 

$

12.211

 

$

11.103

 

$

8.639

 

Accumulation Unit Value, end of period

 

$

15.127

 

$

15.110

 

$

12.748

 

$

12.211

 

$

11.103

 

Number of Accumulation Units outstanding, end of period

 

2,262,697

 

1,721,366

 

1,387,624

 

1,040,561

 

829,163

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(a)

 

Accumulation Unit Value, beginning of period

 

$

10.549

 

$

11.255

 

$

10.528

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

8.639

 

$

10.549

 

$

11.255

 

$

10.528

 

Number of Accumulation Units outstanding, end of period

 

634,787

 

382,311

 

61,224

 

88,377

 

 

(a)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

A-9


 

FIDELITY INVESTMENTS’ VARIABLE INSURANCE PRODUCTS GROWTH PORTFOLIO 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

 

$

9.776

 

$

9.278

 

$

8.893

 

$

8.724

 

$

6.659

 

Accumulation Unit Value, end of period

 

$

12.239

 

$

9.776

 

$

9.278

 

$

8.893

 

$

8.724

 

Number of Accumulation Units outstanding, end of period

 

1,591,349

 

1,407,496

 

1,280,219

 

1,343,862

 

1,165,541

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(a)

 

Accumulation Unit Value, beginning of period

 

$

9.662

 

$

11.898

 

$

13.555

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

6.659

 

$

9.662

 

$

11.898

 

$

13.555

 

Number of Accumulation Units outstanding, end of period

 

914,951

 

574,206

 

138,303

 

60,951

 

 

(a)          For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

FIDELITY INVESTMENTS’ VARIABLE INSURANCE PRODUCTS II ASSET MANAGER PORTFOLIO 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

 

$

11.626

 

$

10.986

 

$

10.707

 

$

10.295

 

$

8.850

 

Accumulation Unit Value, end of period

 

$

13.241

 

$

11.626

 

$

10.986

 

$

10.707

 

$

10.295

 

Number of Accumulation Units outstanding, end of period

 

328,514

 

284,171

 

300,907

 

311,429

 

220,990

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(a)

 

Accumulation Unit Value, beginning of period

 

$

9.883

 

$

10.396

 

$

10.975

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

8.850

 

$

9.833

 

$

10.396

 

$

10.975

 

Number of Accumulation Units outstanding, end of period

 

117,897

 

78,299

 

24,490

 

14,010

 

 

(a)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

A-10


 

VAN KAMPEN’S UNIVERSAL INSTITUTIONAL FUNDS EMERGING MARKETS EQUITY (INTERNATIONAL) PORTFOLIO 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

 

$

30.038

 

$

22.211

 

$

16.826

 

$

13.860

 

$

9.391

 

Accumulation Unit Value, end of period

 

$

41.599

 

$

30.038

 

$

22.211

 

$

16.826

 

$

13.860

 

Number of Accumulation Units outstanding, end of period

 

914,928

 

586,923

 

300,355

 

152,177

 

112,025

 

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999(a)

 

Accumulation Unit Value, beginning of period

 

$

10.453

 

$

11.336

 

$

18.913

 

$

10.000

 

Accumulation Unit Value, end of period

 

$

9.391

 

$

10.453

 

$

11.336

 

$

18.913

 

Number of Accumulation Units outstanding, end of period

 

65,917

 

67,195

 

14,415

 

572

 

 

(a)  For the period January 16, 1999 (date Subaccount was established) through December 31, 1999.

 

A-11


SUPPLEMENT DATED MAY 1, 2008 TO
PROSPECTUSES DATED MAY 1, 2008

FOR

DIVERSIFIER II, RETIREMENT PLANNER VA,
ENHANCED CREDIT VARIABLE ANNUITY,
PENNANT SELECT AND PENN FREEDOM

CORNERSTONE VUL II, CORNERSTONE VUL III,
CORNERSTONE VUL IV, ESTATE MAX II AND ESTATE MAX III

ISSUED BY

THE PENN MUTUAL LIFE INSURANCE COMPANY

AND FUNDED THROUGH

PENN MUTUAL VARIABLE LIFE ACCOUNT I

AND

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III

THE PENN MUTUAL LIFE INSURANCE COMPANY

PHILADELPHIA, PA 19172

800-523-0650

THIS SUPPLEMENT PROVIDES NEW AND ADDITIONAL INFORMATION BEYOND THAT CONTAINED IN
THE PROSPECTUSES AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUSES.

IMPORTANT NOTICE

The Penn Mutual Life Insurance Company will be making some enhancements to the investment options within their variable products. These enhancements are part of an ongoing effort to deliver a diversified mix of investment options that have been carefully selected to meet the needs of effective asset allocation.

The following series of Penn Series Funds, which are part of the overall enhancements, will not be available for allocation of premium payments or Contract/Policy value until the currently anticipated date of July 28, 2008:

Large Core Growth Fund

Large Core Value Fund

SMID Cap Growth Fund

SMID Cap Value Fund

Emerging Markets Equity Fund

Small Cap Index Fund

Developed International Index Fund

Balanced Fund

Aggressive Allocation Fund

Moderately Aggressive Allocation Fund

Moderate Allocation Fund

Moderately Conservative Allocation Fund

Conservative Allocation Fund


1


In addition, the following Funds will no longer be available under your Contracts and Policies after the currently anticipated date of July 25, 2008:

Neuberger Berman Advisers Management Trust   Manager  
Balanced Portfolio   Neuberger Berman Management Inc.  
Fidelity Investments' Variable Insurance
Products Fund		   Manager  
Equity-Income Portfolio   Fidelity Management & Research Company  
Growth Portfolio   Fidelity Management & Research Company  
Fidelity Investments' Variable Insurance Products
Fund II		   Manager  
Asset Manager Portfolio   Fidelity Management & Research Company  
Van Kampen's The Universal Institutional Funds, Inc.   Manager  
Emerging Markets Equity (International) Portfolio   Van Kampen  

 

The following is relevant information concerning these Funds and should be read in conjunction with the remainder of your prospectus dated May 1, 2008.

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

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

Neuberger Berman Advisers Management Trust (a)

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

    Management
Fee *		   Other
Expenses		   Total Fund
Expenses		  
Balanced     0.85 %     0.32 %     1.17 %  

 

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

  *  Management fees include investment management and administration fees.

Fidelity Investments' Variable Insurance Products Fund (a)

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

    Management
Fee		   Other
Expenses		   Total Fund
Expenses		  
Equity-Income     0.46 %     0.09 %     0.55 %  
Growth     0.56 %     0.09 %     0.65 %  

 

  (a)  These expenses are for the fiscal year ended December 31, 2007. Some of the brokerage commissions paid by the funds reduced the expenses shown in this table. With these reductions, net total expenses were 0.54% for the Equity-Income Portfolio and 0.64% for the Growth Portfolio.

Fidelity Investments' Variable Insurance Products Fund II (a)

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

    Management
Fee		   Other
Expenses		   Total Fund
Expenses		  
Asset Manager     0.51 %     0.12 %     0.63 %  

 

  (a)  These expenses are for the fiscal year ended December 31, 2007. Some of the brokerage commissions paid by the fund reduced the expenses shown in this table. With these reductions, net total expenses were 0.62%.


2


Van Kampen's The Universal Institutional Funds, Inc. (a)

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

    Management
Fee		   Other
Expenses		   Acquired Fund
Fees and
Expenses		   Total Fund
Expenses		  
Emerging Markets Equity (International)     1.21 %     0.37 %     0.02 %     1.60 %  

 

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

Investment Objectives and Investment Advisers

Neuberger Berman Advisers Management Trust:

Balanced Portfolio — seeks long-term capital growth and reasonable current income without undue risk to principal through investment of a portion of its assets in common stock and a portion in debt securities.

Neuberger Berman Management Inc., New York, New York, is investment adviser to the Balanced Portfolio.

Fidelity Investments' Variable Insurance Products Fund:

Equity-Income Portfolio — seeks reasonable income by investing primarily in income-producing equity securities; in choosing these securities, the Fund will also consider the potential for capital appreciation; the Fund's goal is to achieve a yield which exceeds the composite yield on the securities comprising the Standard & Poor's 500 Composite Stock Price Index.

Growth Portfolio — seeks to achieve capital appreciation; the Fund normally purchases common stocks, although its investments are not restricted to any one type of security; capital appreciation may also be found in other types of securities, including bonds and preferred stocks.

Fidelity Management & Research Company, Boston, Massachusetts, is investment adviser to the Equity-Income Portfolio and the Growth Portfolio.

Fidelity Investments' Variable Insurance Products Fund II:

Asset Manager Portfolio — seeks high total return with reduced risk over the long-term by allocating its assets among domestic and foreign stocks, bonds and short-term fixed income investments.

Fidelity Management & Research Company, Boston, Massachusetts, is investment adviser to the Asset Manager Portfolio.

Van Kampen's The Universal Institutional Funds, Inc.:

Emerging Markets Equity (International) Portfolio — seeks long term capital appreciation by investing primarily in equity securities of emerging market country issuers; the Fund will focus on economies that are developing strongly and in which the markets are becoming more sophisticated.

Morgan Stanley Investment Management Inc., New York, New York, doing business as Van Kampen, is investment adviser to the Emerging Markets Equity (International) Portfolio.

Shares of Neuberger Berman Advisers Management Trust, Fidelity Investments' Variable Insurance Products Fund and Variable Insurance Products Fund II and Van Kampen's The Universal Institutional Funds, Inc. are offered not only to variable annuity and variable life separate accounts of Penn Mutual, but also to such accounts of other insurance companies unaffiliated with Penn Mutual and, in the case of Neuberger Berman Advisers Management Trust and Van Kampen's The Universal Institutional Funds, Inc., directly to qualified pension and retirement plans. 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 information.


3


INFORMATION REGARDING THE FUND SUBSTITUTION

On June 29, 2007, The Penn Mutual Life Insurance Company filed an exemptive application with the Securities and Exchange Commission ("SEC"). This exemptive application requested the approval of the SEC to substitute, as described in the chart below, the Replacement Funds for the Replaced Funds, which are currently available investment options under your Contracts and Policies.

Replaced Fund   Replacement Fund  
1. Fidelity Investments' Variable Insurance Products Fund
Equity-Income Portfolio		   Penn Series Large Core Value
Fund		  
2. Fidelity Investments' Variable Insurance Products Fund
Growth Portfolio		   Penn Series Large Core Growth
Fund		  
3. Fidelity Investments' Variable Insurance Products Fund II
Asset Manager Portfolio		   Penn Series Balanced Fund
 		 
4. Neuberger Berman Advisers Management Trust
Balanced Portfolio		   Penn Series Balanced Fund
 		 
5. Van Kampen's The Universal Institutional Funds, Inc.
Emerging Markets Equity (International) Portfolio		   Penn Series Emerging Markets
Equity Fund		  

 

Assuming the requested approval is granted, Penn Mutual will automatically move all assets in the Replaced Funds to the corresponding Replacement Fund, as shown above, on the substitution date. The currently anticipated date is end of business on July 25, 2008. If your Contract/Policy value is transferred to a Replacement Fund, you will have thirty (30) days after the transfer occurred to allocate your money to any fund you choose and it will not count as one of your allowed transfers in a 12 month period.

Information concerning the Replacement Funds is provided in the Penn Series Funds prospectus which you are receiving with this document.


4



 

STATEMENT OF ADDITIONAL INFORMATION - MAY 1, 2008

 

ENHANCED CREDIT VARIABLE ANNUITY

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III

THE PENN MUTUAL LIFE INSURANCE COMPANY

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

 

INDIVIDUAL VARIABLE AND FIXED ANNUITY CONTRACT

 

This statement of additional information is not a prospectus.  It should be read in conjunction with the current Prospectus dated May 1, 2008 for the individual variable and fixed annuity contract (the “Contract”).  The Contract is funded through Penn Mutual Variable Annuity Account III (referred to as the “Separate Account” in the Prospectus and this Statement of Additional Information).  To obtain the Prospectus you may write to The Penn Mutual Life Insurance Company (“Penn Mutual” or the “Company”), Attn: SAI Request, Philadelphia, PA 19172 or visit our web site at www.pennmutual.com or you may call (800) 523-0650.  Terms used in this Statement of Additional Information have the same meaning as in the Prospectus.

 

Table of Contents

 

VARIABLE ANNUITY PAYMENTS

 

B-2

First Variable Annuity Payment

 

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-3

 

 

 

CUSTODIAN

 

B-4

 

 

 

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

B-4

 

 

 

LEGAL MATTERS

 

B-4

 

 

 

FINANCIAL STATEMENTS

 

B-4

 


 

VARIABLE ANNUITY PAYMENTS

 

First Variable Annuity Payment

 

When a variable annuity is effected, we will first deduct applicable premium taxes, if any, from the Contract Value.  The dollar amount of the first monthly annuity payment will be determined by applying the net Contract Value to the annuity table set forth in the contract for the annuity option chosen.  The annuity tables show the amount of the first monthly income payment under each annuity option for each $1,000 of value applied, based on the Annuitant’s age at the Annuity Date.  The annuity tables are based on the Annuity 2000 Basic Table with interest rates at 3% or 5%.

 

Subsequent Variable Annuity Payments

 

The dollar amount of subsequent variable annuity payments will vary in accordance with the investment experience of the Subaccount(s) of the Separate Account applicable to the annuity.  Each subsequent variable annuity payment will equal the number of annuity units credited, multiplied by the value of the annuity unit for the Valuation Period.  Penn Mutual guarantees that the amount of each subsequent annuity payment will not be affected by variations in expense or mortality experience.

 

Annuity Units

 

For each Subaccount selected, the number of annuity units is the amount of the first annuity payment allocated to the Subaccount divided by the value of an annuity unit for the Subaccount on the Annuity Date.  The number of your annuity units will not change as a result of investment experience.

 

Value of Annuity Units

 

The value of an annuity unit for each Subaccount was arbitrarily set at $10 when the Subaccount was established.  The value may increase or decrease from one Valuation Period to the next.  For a Valuation Period, the value of an annuity unit for a Subaccount is the value of an annuity unit for the Subaccount for the last prior Valuation Period multiplied by the net investment factor for the Subaccount for the Valuation Period.  The result is then multiplied by a factor to neutralize an assumed interest rate of 3% or 5%, as applicable, built into the annuity tables.

 

Net Investment Factor

 

For any Subaccount, the net investment factor for a Valuation Period is determined by dividing (a) by (b) and subtracting (c):

 

Where (a) is:

 

The net asset value per share of the mutual fund held in the Subaccount, as of the end of the Valuation Period.

 

plus

 

The per share amount of any dividend or capital gain distributions by the mutual fund if the “ex-dividend” date occurs in the Valuation Period.

 

plus or minus

 

A per share charge or credit, as we may determine as of the end of the Valuation Period, for provision for taxes (if applicable).

 

B-2


 

Where (b) is:

 

The net asset value per share of the mutual fund held in the Subaccount as of the end of the last prior Valuation Period.

 

plus or minus

 

The per share charge or credit for provision for taxes as of the end of the last prior Valuation Period (if applicable).

 

Where (c) is:

 

The sum of the mortality and expense risk charge and the daily administration charge.  On an annual basis, the sum of such charges equals 1.40% of the daily net asset value of the Subaccount.

 

Assumed Interest Rate

 

Assumed interest rates of 3% or 5% are included in the annuity tables in the contracts.  A higher assumption would mean a higher first annuity payment but more slowly rising or more rapidly falling subsequent payments.  A lower assumption would have the opposite effect.  If the actual net investment rate on an annual basis is equal to the assumed interest rate you have selected, annuity payments will be level.

 

Valuation Period

 

Valuation Period is the period from one valuation of underlying fund assets to the next.  Valuation is performed each day the New York Stock Exchange is open for trading.

 

Transaction 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 at our Administrative Office after the close of regular trading on the NYSE will be valued based on the value of an Accumulation Unit computed as of the close of regular trading on the next NYSE business day. In order to receive a day’s closing price, instructions sent by facsimile transmission must be received by our fax server prior to the close of regular trading on that day. Telephone instructions must be received in full, containing all required information and confirmed back to the caller prior to the close of regular trading in order to receive that day’s closing price.

 

ADMINISTRATIVE AND RECORDKEEPING SERVICES

 

Penn Mutual performs all data processing, recordkeeping and other related services with respect to the Contracts and the Separate Accounts.

 

DISTRIBUTION OF CONTRACTS

 

Hornor, Townsend & Kent, Inc. (“HTK”), a wholly owned subsidiary of Penn Mutual, serves as principal underwriter of all annuity contracts funded through the Separate Account, including the Contract.  The address of HTK is 600 Dresher Road, Horsham, PA 19044.  For 2007, 2006 and 2005 Penn Mutual paid commissions of approximately $519,830, $348,362 and $211,486, to HTK, respectively.

 

The Contracts will be distributed by HTK through broker-dealers.  Total commissions on purchase payments made under the Contract will not exceed 5 1/2% and trailer commissions based on a percentage of Contract Value, other allowance and overrides may be paid. The offering of the Contract is continuous, and Penn

 

B-3


 

Mutual does not anticipate discontinuing the offering of the Contract, although we reserve the right to do so.

 

CUSTODIAN

 

Penn Mutual is custodian of the assets held in the Separate Account.

 

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

PricewaterhouseCoopers LLP serves as independent registered public accounting firm of the Company and the Separate Account.  Their offices are located at 2001 Market Street, Suite 1700, Philadelphia, PA 19103.

 

LEGAL MATTERS

 

Morgan, Lewis & Bockius LLP has provided advice on certain matters relating to the federal securities laws and the offering of the Contract.  Their offices are located at 1701 Market Street, Philadelphia, PA.

 

FINANCIAL STATEMENTS

 

The financial statements of the Separate Account and the consolidated financial statements of the Company appear on the following pages.  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.

 

B-4


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF NET ASSETS - DECEMBER 31, 2007 

 

 

 

 

 

 

 

Limited

 

 

 

 

 

 

 

Money

 

Maturity Bond

 

Quality

 

 

 

Total

 

Market Fund†

 

Fund†

 

Bond Fund†

 

Investment in Fund Shares

 

 

 

 

 

 

 

 

 

Number of Shares

 

 

 

51,354,071

 

4,341,420

 

12,608,169

 

Cost

 

$

2,563,596,531

 

$

51,354,071

 

$

45,659,680

 

$

132,400,336

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Investments at market value

 

$

2,596,672,806

 

$

50,942,253

 

$

45,011,807

 

$

131,417,109

 

Dividends receivable

 

193,114

 

193,114

 

—

 

—

 

Receivable for securities sold

 

5,434,987

 

218,704

 

182,370

 

968,663

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Payable for securities purchased

 

6,031,224

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

2,596,269,683

 

$

51,354,071

 

$

45,194,177

 

$

132,385,772

 

 

 

 

 

 

 

 

 

 

 

Units Oustanding

 

 

 

3,901,826

 

3,508,136

 

8,590,864

 

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2007 

 

 

 

 

 

 

 

Limited

 

 

 

 

 

 

 

Money

 

Maturity Bond

 

Quality

 

 

 

Total

 

Market Fund†

 

Fund†

 

Bond Fund†

 

Net Investment Income (Loss):

 

 

 

 

 

 

 

 

 

Dividends

 

$

49,970,584

 

$

2,127,907

 

$

1,696,995

 

$

5,643,789

 

Expense:

 

 

 

 

 

 

 

 

 

Mortality and expense risk and administration charges

 

31,139,439

 

544,168

 

478,551

 

1,512,107

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

18,831,145

 

1,583,739

 

1,218,444

 

4,131,682

 

 

 

 

 

 

 

 

 

 

 

Net Realized and Unrealized Gains (Losses) on Investments:

 

 

 

 

 

 

 

 

 

Realized gain (loss) from redemption of fund shares

 

76,445,548

 

—

 

(22,819

)

27,834

 

Realized gains distributions

 

177,097,606

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) from investment transactions

 

253,543,154

 

—

 

(22,819

)

27,834

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) of investments

 

(145,267,319

)

—

 

304,001

 

1,968,973

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gain (loss) on investments

 

108,275,835

 

—

 

281,182

 

1,996,807

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

127,106,980

 

$

1,583,739

 

$

1,499,626

 

$

6,128,489

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF NET ASSETS - DECEMBER 31, 2007 

 

 

 

 

 

Flexibly

 

 

 

Large Cap

 

 

 

High Yield

 

Managed

 

Growth Stock

 

Value

 

 

 

Bond Fund†

 

Fund†

 

Fund†

 

Fund†

 

Investment in Fund Shares

 

 

 

 

 

 

 

 

 

Number of Shares

 

7,574,134

 

44,917,016

 

5,219,412

 

7,273,112

 

Cost

 

$

60,490,711

 

$

1,078,808,947

 

$

85,545,596

 

$

119,757,124

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Investments at market value

 

$

57,374,300

 

$

1,065,736,497

 

$

83,400,755

 

$

128,647,530

 

Dividends receivable

 

—

 

—

 

—

 

—

 

Receivable for securities sold

 

37,637

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Payable for securities purchased

 

—

 

304,880

 

98,940

 

277,108

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

57,411,937

 

$

1,065,431,617

 

$

83,301,815

 

$

128,370,422

 

 

 

 

 

 

 

 

 

 

 

Units Oustanding

 

2,831,170

 

34,300,679

 

7,312,861

 

5,112,126

 

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2007 

 

 

 

 

 

Flexibly

 

 

 

Large Cap

 

 

 

High Yield

 

Managed

 

Growth Stock

 

Value

 

 

 

Bond Fund†

 

Fund†

 

Fund†

 

Fund†

 

Net Investment Income (Loss):

 

 

 

 

 

 

 

 

 

Dividends

 

$

4,175,254

 

$

23,801,244

 

$

327,585

 

$

1,875,618

 

Expense:

 

 

 

 

 

 

 

 

 

Mortality and expense risk and administration charges

 

743,826

 

13,064,734

 

969,267

 

1,682,330

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

3,431,428

 

10,736,510

 

(641,682

)

193,288

 

 

 

 

 

 

 

 

 

 

 

Net Realized and Unrealized Gains (Losses) on Investments:

 

 

 

 

 

 

 

 

 

Realized gain (loss) from redemption of fund shares

 

(944,681

)

36,764,213

 

(3,083,187

)

7,980,376

 

Realized gains distributions

 

—

 

79,751,173

 

—

 

15,197,825

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) from investment transactions

 

(944,681

)

116,515,386

 

(3,083,187

)

23,178,201

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) of investments

 

(1,200,659

)

(97,519,301

)

9,268,458

 

(20,029,585

)

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gain (loss) on investments

 

(2,145,340

)

18,996,085

 

6,185,271

 

3,148,616

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

1,286,088

 

$

29,732,595

 

$

5,543,589

 

$

3,341,904

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF NET ASSETS - DECEMBER 31, 2007 

 

 

 

Large Cap

 

 

 

Mid Cap

 

Mid Cap

 

 

 

Growth

 

Index 500

 

Growth

 

Value

 

 

 

Fund†

 

Fund†

 

Fund†

 

Fund†

 

Investment in Fund Shares

 

 

 

 

 

 

 

 

 

Number of Shares

 

1,779,751

 

10,792,253

 

5,819,666

 

5,697,990

 

Cost

 

$

19,350,536

 

$

99,938,523

 

$

49,369,154

 

$

76,233,697

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Investments at market value

 

$

19,629,462

 

$

109,669,619

 

$

61,415,842

 

$

74,582,634

 

Dividends receivable

 

—

 

—

 

—

 

—

 

Receivable for securities sold

 

—

 

—

 

272,617

 

175,000

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Payable for securities purchased

 

87,796

 

559,937

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

19,541,666

 

$

109,109,682

 

$

61,688,459

 

$

74,757,634

 

 

 

 

 

 

 

 

 

 

 

Units Oustanding

 

1,669,063

 

8,111,633

 

5,183,228

 

3,184,444

 

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2007 

 

 

 

Large Cap

 

 

 

Mid Cap

 

Mid Cap

 

 

 

Growth

 

Index 500

 

Growth

 

Value

 

 

 

Fund†

 

Fund†

 

Fund†

 

Fund†

 

Net Investment Income (Loss):

 

 

 

 

 

 

 

 

 

Dividends

 

$

108,876

 

$

1,767,211

 

$

—

 

$

888,694

 

Expense:

 

 

 

 

 

 

 

 

 

Mortality and expense risk and administration charges

 

251,849

 

1,329,570

 

630,833

 

964,308

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

(142,973

)

437,641

 

(630,833

)

(75,614

)

 

 

 

 

 

 

 

 

 

 

Net Realized and Unrealized Gains (Losses) on
Investments:

 

 

 

 

 

 

 

 

 

Realized gain (loss) from redemption of fund shares

 

562,541

 

1,428,701

 

2,061,246

 

2,850,117

 

Realized gains distributions

 

886,281

 

—

 

—

 

4,395,563

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) from investment transactions

 

1,448,822

 

1,428,701

 

2,061,246

 

7,245,680

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) of investments

 

(622,856

)

1,892,316

 

8,970,443

 

(5,593,238

)

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gain (loss) on investments

 

825,966

 

3,321,017

 

11,031,689

 

1,652,442

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

682,993

 

$

3,758,658

 

$

10,400,856

 

$

1,576,828

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF NET ASSETS - DECEMBER 31, 2007 

 

 

 

Strategic

 

Small Cap

 

Small Cap

 

 

 

 

 

Value

 

Growth

 

Value

 

International

 

 

 

Fund†

 

Fund†

 

Fund†

 

Equity Fund†

 

Investment in Fund Shares

 

 

 

 

 

 

 

 

 

Number of Shares

 

2,711,882

 

2,243,134

 

7,060,816

 

8,974,242

 

Cost

 

$

35,911,614

 

$

51,783,420

 

$

117,003,232

 

$

193,136,468

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Investments at market value

 

$

32,291,342

 

$

49,057,994

 

$

100,748,498

 

$

213,644,218

 

Dividends receivable

 

—

 

—

 

—

 

—

 

Receivable for securities sold

 

—

 

—

 

—

 

2,545,265

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Payable for securities purchased

 

345,376

 

516,576

 

1,402,810

 

—

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

31,945,966

 

$

48,541,418

 

$

99,345,688

 

$

216,189,483

 

 

 

 

 

 

 

 

 

 

 

Units Oustanding

 

2,115,433

 

2,626,239

 

4,214,748

 

8,181,917

 

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2007 

 

 

 

Strategic

 

Small Cap

 

Small Cap

 

 

 

 

 

Value

 

Growth

 

Value

 

International

 

 

 

Fund†

 

Fund†

 

Fund†

 

Equity Fund†

 

Net Investment Income (Loss):

 

 

 

 

 

 

 

 

 

Dividends

 

$

170,070

 

$

—

 

$

747,729

 

$

1,053,504

 

Expense:

 

 

 

 

 

 

 

 

 

Mortality and expense risk and administration charges

 

370,684

 

629,145

 

1,338,809

 

2,274,498

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

(200,614

)

(629,145

)

(591,080

)

(1,220,994

)

 

 

 

 

 

 

 

 

 

 

Net Realized and Unrealized Gains (Losses) on Investments:

 

 

 

 

 

 

 

 

 

Realized gain (loss) from redemption of fund shares

 

1,258,504

 

(2,499,848

)

3,811,387

 

10,469,744

 

Realized gains distributions

 

3,514,111

 

—

 

15,755,608

 

35,464,350

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) from investment transactions

 

4,772,615

 

(2,499,848

)

19,566,995

 

45,934,094

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) of investments

 

(5,018,900

)

6,350,714

 

(26,114,040

)

(13,660,479

)

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gain (loss) on investments

 

(246,285

)

3,850,866

 

(6,547,045

)

32,273,615

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

(446,899

)

$

3,221,721

 

$

(7,138,125

)

$

31,052,621

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF NET ASSETS - DECEMBER 31, 2007 

 

 

 

REIT

 

Balanced

 

Equity Income

 

Growth

 

 

 

Fund†

 

Portfolio††

 

Portfolio†††

 

Portfolio†††

 

Investment in Fund Shares

 

 

 

 

 

 

 

 

 

Number of Shares

 

3,017,404

 

2,360,769

 

4,516,205

 

2,066,511

 

Cost

 

$

48,117,948

 

$

31,659,885

 

$

108,817,574

 

$

75,472,371

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Investments at market value

 

$

37,643,425

 

$

30,934,342

 

$

108,863,641

 

$

92,998,935

 

Dividends receivable

 

—

 

—

 

—

 

—

 

Receivable for securities sold

 

—

 

—

 

—

 

242,057

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Payable for securities purchased

 

1,434,574

 

55,485

 

881,167

 

—

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

36,208,851

 

$

30,878,857

 

$

107,982,474

 

$

93,240,992

 

 

 

 

 

 

 

 

 

 

 

Units Oustanding

 

1,877,416

 

1,782,930

 

5,969,691

 

5,148,583

 

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2007 

 

 

 

REIT

 

Balanced

 

Equity Income

 

Growth

 

 

 

Fund†

 

Portfolio††

 

Portfolio†††

 

Portfolio†††

 

Net Investment Income (Loss):

 

 

 

 

 

 

 

 

 

Dividends

 

$

1,181,655

 

$

337,427

 

$

2,028,924

 

$

720,409

 

Expense:

 

 

 

 

 

 

 

 

 

Mortality and expense risk and administration charges

 

569,674

 

355,916

 

1,354,406

 

1,056,258

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

611,981

 

(18,489

)

674,518

 

(335,849

)

 

 

 

 

 

 

 

 

 

 

Net Realized and Unrealized Gains (Losses) on Investments:

 

 

 

 

 

 

 

 

 

Realized gain (loss) from redemption of fund shares

 

3,030,109

 

(926,637

)

4,019,419

 

2,137,256

 

Realized gains distributions

 

5,893,392

 

—

 

8,949,499

 

77,359

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) from investment transactions

 

8,923,501

 

(926,637

)

12,968,918

 

2,214,615

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) of investments

 

(18,866,841

)

4,633,459

 

(13,698,353

)

16,829,116

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gain (loss) on investments

 

(9,943,340

)

3,706,822

 

(729,435

)

19,043,731

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

(9,331,359

)

$

3,688,333

 

$

(54,917

)

$

18,707,882

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF NET ASSETS - DECEMBER 31, 2007 

 

 

 

 

 

Emerging

 

V.I. Capital

 

 

 

 

 

Asset Manager

 

Markets Equity

 

Appreciation

 

High Income Bond

 

 

 

Portfolio†††

 

(Int’l) Portfolio††††

 

Fund ‡

 

Fund II ‡‡

 

Investment in Fund Shares

 

 

 

 

 

 

 

 

 

Number of Shares

 

1,001,789

 

3,465,130

 

4,332

 

55,911

 

Cost

 

$

15,428,626

 

$

64,611,561

 

$

121,396

 

$

418,141

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Investments at market value

 

$

16,659,855

 

$

83,312,764

 

$

127,203

 

$

418,917

 

Dividends receivable

 

—

 

—

 

—

 

—

 

Receivable for securities sold

 

—

 

785,940

 

16

 

—

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Payable for securities purchased

 

60,209

 

—

 

—

 

147

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

16,599,646

 

$

84,098,704

 

$

127,219

 

$

418,770

 

 

 

 

 

 

 

 

 

 

 

Units Oustanding

 

1,037,627

 

2,267,310

 

9,588

 

29,509

 

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2007 

 

 

 

 

 

Emerging

 

V.I. Capital

 

 

 

 

 

Asset Manager

 

Markets Equity

 

Appreciation

 

High Income Bond

 

 

 

Portfolio†††

 

(Int’l Portfolio††††

 

Fund ‡

 

Fund II ‡‡

 

Net Investment Income (Loss):

 

 

 

 

 

 

 

 

 

Dividends

 

$

961,765

 

$

262,935

 

$

—

 

$

39,587

 

Expense:

 

 

 

 

 

 

 

 

 

Mortality and expense risk and administration charges

 

192,686

 

783,362

 

2,113

 

7,607

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

769,079

 

(520,427

)

(2,113

)

31,980

 

 

 

 

 

 

 

 

 

 

 

Net Realized and Unrealized Gains (Losses) on Investments:

 

 

 

 

 

 

 

 

 

Realized gain (loss) from redemption of fund shares

 

56,522

 

7,239,394

 

20,591

 

32,733

 

Realized gains distributions

 

430,463

 

6,708,034

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) from investment transactions

 

486,985

 

13,947,428

 

20,591

 

32,733

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) of investments

 

786,649

 

6,314,691

 

(730

)

(44,118)

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gain (loss) on investments

 

1,273,634

 

20,262,119

 

19,861

 

(11,385)

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

2,042,713

 

$

19,741,692

 

$

17,748

 

$

20,595

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF NET ASSETS - DECEMBER 31, 2007 

 

 

 

 

 

 

 

Russell 2000

 

 

 

 

 

Financial Services

 

Health Care

 

Advantage

 

Nova

 

 

 

Fund‡‡‡

 

Fund‡‡‡

 

Fund‡‡‡*

 

Fund‡‡‡

 

Investment in Fund Shares

 

 

 

 

 

 

 

 

 

Number of Shares

 

1,546

 

1,044

 

4,743

 

19,530

 

Cost

 

$

46,695

 

$

31,515

 

$

176,562

 

$

205,638

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Investments at market value

 

$

33,944

 

$

30,903

 

$

162,160

 

$

189,843

 

Dividends receivable

 

—

 

—

 

—

 

—

 

Receivable for securities sold

 

4

 

4

 

40

 

6,626

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Payable for securities purchased

 

—

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

33,948

 

$

30,907

 

$

162,200

 

$

196,469

 

 

 

 

 

 

 

 

 

 

 

Units Oustanding

 

3,092

 

2,304

 

11,739

 

15,123

 

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2007 

 

 

 

Financial Services

 

Health Care

 

Advantage

 

Nova

 

 

 

Fund‡‡‡

 

Fund‡‡‡

 

Fund‡‡‡*

 

Fund‡‡‡

 

Net Investment Income (Loss):

 

 

 

 

 

 

 

 

 

Dividends

 

$

857

 

$

—

 

$

2,422

 

$

1,973

 

Expense:

 

 

 

 

 

 

 

 

 

Mortality and expense risk and administration charges

 

620

 

283

 

2,145

 

4,451

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

237

 

(283

)

277

 

(2,478

)

 

 

 

 

 

 

 

 

 

 

Net Realized and Unrealized Gains (Losses) on Investments:

 

 

 

 

 

 

 

 

 

Realized gain (loss) from redemption of fund shares

 

(443

)

49

 

12,359

 

81,270

 

Realized gains distributions

 

4,720

 

418

 

8,128

 

—

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) from investment transactions

 

4,277

 

467

 

20,487

 

81,270

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) of investments

 

(15,032

)

(75

)

(34,058

)

(89,612

)

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gain (loss) on investments

 

(10,755

)

392

 

(13,571

)

(8,342

)

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

(10,518

)

$

109

 

$

(13,294

)

$

(10,820

)

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF NET ASSETS - DECEMBER 31, 2007 

 

 

 

 

 

 

 

Inverse S&P

 

Government Long

 

 

 

OTC

 

Technology

 

500 Index

 

Bond Advantage

 

 

 

Fund‡‡‡

 

Fund‡‡‡

 

Fund‡‡‡**

 

Fund‡‡‡***

 

Investment in Fund Shares

 

 

 

 

 

 

 

 

 

Number of Shares

 

15,251

 

526

 

 

 

13,130

 

Cost

 

$

265,894

 

$

8,733

 

$

—

 

$

152,864

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Investments at market value

 

$

276,322

 

$

8,556

 

$

—

 

$

163,103

 

Dividends receivable

 

—

 

—

 

—

 

—

 

Receivable for securities sold

 

32

 

1

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Payable for securities purchased

 

—

 

—

 

—

 

2,389

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

276,354

 

$

8,557

 

$

—

 

$

160,714

 

 

 

 

 

 

 

 

 

 

 

Units Oustanding

 

19,242

 

628

 

—

 

11,715

 

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2007 

 

 

 

 

 

 

 

Inverse S&P

 

Government Long

 

 

 

OTC

 

Technology

 

500 Index

 

Bond Advantage

 

 

 

Fund‡‡‡

 

Fund‡‡‡

 

Fund‡‡‡**

 

Fund‡‡‡***

 

Net Investment Income (Loss):

 

 

 

 

 

 

 

 

 

Dividends

 

$

229

 

$

—

 

$

—

 

$

8,086

 

Expense:

 

 

 

 

 

 

 

 

 

Mortality and expense risk and administration charges

 

2,609

 

295

 

272

 

3,065

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

(2,380

)

(295

)

(272

)

5,021

 

 

 

 

 

 

 

 

 

 

 

Net Realized and Unrealized Gains (Losses) on Investments:

 

 

 

 

 

 

 

 

 

Realized gain (loss) from redemption of fund shares

 

15,759

 

1,340

 

7,818

 

(1,559

)

Realized gains distributions

 

—

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) from investment transactions

 

15,759

 

1,340

 

7,818

 

(1,559

)

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) of investments

 

2,549

 

(1,024

)

—

 

7,176

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gain (loss) on investments

 

18,308

 

316

 

7,818

 

5,617

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

15,928

 

$

21

 

$

7,546

 

$

10,638

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF NET ASSETS - DECEMBER 31, 2007 

 

 

 

U.S. Government

 

 

 

 

 

International

 

 

 

Money Market

 

Utilites

 

Equity Income

 

Stock

 

 

 

Fund‡‡‡

 

Fund‡‡‡

 

Portfolio II ‡‡‡‡

 

Portfolio ‡‡‡‡‡

 

Investment in Fund Shares

 

 

 

 

 

 

 

 

 

Number of Shares

 

593,318

 

4,163

 

14,639

 

13,715

 

Cost

 

$

593,318

 

$

99,529

 

$

368,863

 

$

256,309

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Investments at market value

 

$

596,645

 

$

92,783

 

$

346,640

 

$

242,965

 

Dividends receivable

 

—

 

—

 

—

 

—

 

Receivable for securities sold

 

—

 

11

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Payable for securities purchased

 

3,327

 

—

 

423

 

80

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

593,318

 

$

92,794

 

$

346,217

 

$

242,885

 

 

 

 

 

 

 

 

 

 

 

Units Oustanding

 

58,420

 

6,352

 

25,020

 

14,050

 

 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2007 

 

 

 

U.S. Government

 

 

 

 

 

International

 

 

 

Money Market

 

Utilites

 

Equity Income

 

Stock

 

 

 

Fund‡‡‡

 

Fund‡‡‡

 

Portfolio II ‡‡‡‡

 

Portfolio ‡‡‡‡‡

 

Net Investment Income (Loss):

 

 

 

 

 

 

 

 

 

Dividends

 

$

28,817

 

$

1,332

 

$

5,957

 

$

3,733

 

Expense:

 

 

 

 

 

 

 

 

 

Mortality and expense risk and administration charges

 

10,152

 

941

 

5,089

 

2,816

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

18,665

 

391

 

868

 

917

 

 

 

 

 

 

 

 

 

 

 

Net Realized and Unrealized Gains (Losses) on Investments:

 

 

 

 

 

 

 

 

 

Realized gain (loss) from redemption of fund shares

 

—

 

8,032

 

32,718

 

14,690

 

Realized gains distributions

 

—

 

8,983

 

21,704

 

29,995

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) from investment transactions

 

—

 

17,015

 

54,422

 

44,685

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) of investments

 

—

 

(10,365

)

(49,850

)

(26,748

)

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized gain (loss) on investments

 

—

 

6,650

 

4,572

 

17,937

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

18,665

 

$

7,041

 

$

5,440

 

$

18,854

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMEBER 31, 2007 AND 2006 

 

 

 

 

 

 

 

 

 

 

 

Limited Maturity

 

 

 

Total

 

Money Market Fund†

 

Bond Fund†

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

18,831,145

 

$

9,761,091

 

$

1,583,739

 

$

910,072

 

$

1,218,444

 

$

912,476

 

Net realized gains (losses) from investment transactions

 

253,543,154

 

215,261,263

 

—

 

—

 

(22,819

)

(105,973

)

Net change in unrealized appreciation (depreciation) of investments

 

(145,267,319

)

34,469,683

 

—

 

—

 

304,001

 

11,750

 

Net increase (decrease) in net assets resulting from operations

 

127,106,980

 

259,492,037

 

1,583,739

 

910,072

 

1,499,626

 

818,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Annuity Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase payments

 

380,052,861

 

290,259,536

 

11,712,755

 

6,408,408

 

10,412,178

 

5,373,490

 

Surrender benefits

 

(242,837,521

)

(159,338,956

)

(14,400,079

)

(3,033,864

)

(2,953,849

)

(1,493,957

)

Net transfers

 

108,578,187

 

88,757,992

 

24,571,964

 

2,347,565

 

6,226,663

 

3,447,076

 

Considerations for supplementary contracts with life contingency

 

—

 

64,733

 

—

 

—

 

—

 

—

 

Payments for supplementary contracts with life contingency.

 

(159,722

)

(149,912

)

(1,673

)

(1,664

)

—

 

—

 

Contract administration charges

 

(5,279,686

)

(3,122,177

)

(116,730

)

(52,315

)

(96,654

)

(44,683

)

Annuity benefits

 

(51,263,759

)

(39,506,533

)

(2,129,707

)

(1,051,378

)

(1,094,679

)

(915,533

)

Net increase (decrease) in net assets resulting from variable annuity activities

 

189,090,360

 

176,964,683

 

19,636,530

 

4,616,752

 

12,493,659

 

6,366,393

 

Total increase (decrease) in net assets

 

316,197,340

 

436,456,720

 

21,220,269

 

5,526,824

 

13,993,285

 

7,184,646

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

2,280,072,343

 

1,843,615,623

 

30,133,802

 

24,606,978

 

31,200,892

 

24,016,246

 

End of year

 

$

2,596,269,683

 

$

2,280,072,343

 

$

51,354,071

 

$

30,133,802

 

$

45,194,177

 

$

31,200,892

 

 

 

 

Quality Bond Fund†

 

High Yield Bond Fund†

 

Flexibly Managed Fund†

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

4,131,682

 

$

2,874,170

 

$

3,431,428

 

$

2,547,164

 

$

10,736,510

 

$

4,420,672

 

Net realized gains (losses) from investment transactions

 

27,834

 

(182,098

)

(944,681

)

(1,162,133

)

116,515,386

 

152,336,317

 

Net change in unrealized appreciation (depreciation) of investments

 

1,968,973

 

1,362,935

 

(1,200,659

)

3,269,843

 

(97,519,301

)

(44,388,503

)

Net increase (decrease) in net assets resulting from operations

 

6,128,489

 

4,055,007

 

1,286,088

 

4,654,874

 

29,732,595

 

112,368,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Annuity Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase payments

 

19,170,852

 

17,920,350

 

5,312,157

 

5,334,183

 

160,510,781

 

127,822,587

 

Surrender benefits

 

(8,497,287

)

(6,137,660

)

(5,626,181

)

(3,605,485

)

(95,904,523

)

(77,198,797

)

Net transfers

 

8,808,359

 

4,038,690

 

(247,504

)

(1,782,862

)

40,006,870

 

70,258,660

 

Considerations for supplementary contracts with life contingency

 

—

 

—

 

—

 

7,533

 

—

 

8,695

 

Payments for supplementary contracts with life contingency.

 

(1,426

)

(1,431

)

—

 

—

 

(75,355

)

(70,658

)

Contract administration charges

 

(304,856

)

(172,110

)

(115,147

)

(84,064

)

(2,207,004

)

(1,255,604

)

Annuity benefits

 

(2,798,440

)

(2,649,509

)

(1,433,998

)

(1,956,870

)

(25,693,617

)

(18,169,468

)

Net increase (decrease) in net assets resulting from variable annuity activities

 

16,377,202

 

12,998,330

 

(2,110,673

)

(2,087,565

)

76,637,152

 

101,395,415

 

Total increase (decrease) in net assets

 

22,505,691

 

17,053,337

 

(824,585

)

2,567,309

 

106,369,747

 

213,763,901

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

109,880,081

 

92,826,744

 

58,236,522

 

55,669,213

 

959,061,870

 

745,297,969

 

End of year

 

$

132,385,772

 

$

109,880,081

 

$

57,411,937

 

$

58,236,522

 

$

1,065,431,617

 

$

959,061,870

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMEBER 31, 2007 AND 2006 

 

 

 

 

 

 

 

 

 

 

 

Large Cap Growth

 

 

 

Growth Stock Fund†

 

Large Cap Value Fund†

 

Fund†

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

(641,682

)

$

(579,986

)

$

193,288

 

$

(231,706

)

$

(142,973

)

$

(191,553

)

Net realized gains (losses) from investment transactions

 

(3,083,187

)

(3,875,627

)

23,178,201

 

11,749,821

 

1,448,822

 

515,641

 

Net change in unrealized appreciation (depreciation) of investments

 

9,268,458

 

11,220,797

 

(20,029,585

)

8,682,864

 

(622,856

)

102,350

 

Net increase (decrease) in net assets resulting from operations

 

5,543,589

 

6,765,184

 

3,341,904

 

20,200,979

 

682,993

 

426,438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Annuity Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase payments

 

15,079,101

 

10,719,140

 

9,546,164

 

6,070,796

 

2,000,397

 

2,813,820

 

Surrender benefits

 

(8,019,799

)

(4,815,126

)

(14,041,726

)

(10,062,989

)

(1,887,355

)

(820,246

)

Net transfers

 

4,576,943

 

2,585,379

 

(3,668,040

)

(3,447,410

)

(973,685

)

(330,587

)

Considerations for supplementary contracts with life contingency

 

—

 

—

 

—

 

—

 

—

 

—

 

Payments for supplementary contracts with life contingency.

 

—

 

—

 

(22,270

)

(20,975

)

—

 

—

 

Contract administration charges

 

(174,752

)

(87,741

)

(195,912

)

(166,524

)

(49,342

)

(33,300

)

Annuity benefits

 

(1,071,589

)

(763,900

)

(1,982,561

)

(1,838,806

)

(208,060

)

(297,422

)

Net increase (decrease) in net assets resulting from variable annuity activities

 

10,389,904

 

7,637,752

 

(10,364,345

)

(9,465,908

)

(1,118,045

)

1,332,265

 

Total increase (decrease) in net assets

 

15,933,493

 

14,402,936

 

(7,022,441

)

10,735,071

 

(435,052

)

1,758,703

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

67,368,322

 

52,965,386

 

135,392,863

 

124,657,792

 

19,976,718

 

18,218,015

 

End of year

 

$

83,301,815

 

$

67,368,322

 

$

128,370,422

 

$

135,392,863

 

$

19,541,666

 

$

19,976,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Index 500

 

Mid Cap

 

Mid Cap

 

 

 

Fund†

 

Growth Fund†

 

Value Fund†

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

437,641

 

$

86,080

 

$

(630,833

)

$

(518,161

)

$

(75,614

)

$

(407,862

)

Net realized gains (losses) from investment transactions

 

1,428,701

 

(613,684

)

2,061,246

 

657,345

 

7,245,680

 

5,951,410

 

Net change in unrealized appreciation (depreciation) of investments

 

1,892,316

 

12,373,169

 

8,970,443

 

1,817,879

 

(5,593,238

)

906,126

 

Net increase (decrease) in net assets resulting from operations

 

3,758,658

 

11,845,565

 

10,400,856

 

1,957,063

 

1,576,828

 

6,449,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Annuity Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase payments

 

16,800,266

 

13,819,811

 

10,253,660

 

5,588,163

 

10,249,648

 

9,626,001

 

Surrender benefits

 

(11,204,341

)

(7,198,772

)

(4,829,147

)

(2,854,633

)

(6,633,356

)

(3,776,467

)

Net transfers

 

2,809,119

 

(953,171

)

3,883,400

 

499,813

 

(1,060,280

)

(2,514,594

)

Considerations for supplementary contracts with life contingency

 

—

 

7,894

 

—

 

9,120

 

—

 

—

 

Payments for supplementary contracts with life contingency.

 

(3,320

)

(3,107

)

—

 

—

 

—

 

—

 

Contract administration charges

 

(253,801

)

(152,234

)

(109,566

)

(67,954

)

(147,189

)

(100,412

)

Annuity benefits

 

(1,622,471

)

(1,563,211

)

(698,748

)

(506,453

)

(1,099,059

)

(807,370

)

Net increase (decrease) in net assets resulting from variable annuity activities

 

6,525,452

 

3,957,210

 

8,499,599

 

2,668,056

 

1,309,764

 

2,427,158

 

Total increase (decrease) in net assets

 

10,284,110

 

15,802,775

 

18,900,455

 

4,625,119

 

2,886,592

 

8,876,832

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

98,825,572

 

83,022,797

 

42,788,004

 

38,162,885

 

71,871,042

 

62,994,210

 

End of year

 

$

109,109,682

 

$

98,825,572

 

$

61,688,459

 

$

42,788,004

 

$

74,757,634

 

$

71,871,042

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMEBER 31, 2007 AND 2006 

 

 

 

Strategic Value

 

 

 

 

 

Small Cap

 

 

 

Fund†

 

Small Cap Growth Fund†

 

Value Fund†

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

(200,614

)

$

(191,879

)

$

(629,145

)

$

(690,266

)

$

(591,080

)

$

(865,151

)

Net realized gains (losses) from investment transactions

 

4,772,615

 

4,114,721

 

(2,499,848

)

(2,243,749

)

19,566,995

 

10,126,750

 

Net change in unrealized appreciation (depreciation) of investments

 

(5,018,900

)

(1,396,096

)

6,350,714

 

1,408,351

 

(26,114,040

)

4,517,890

 

Net increase (decrease) in net assets resulting from operations

 

(446,899

)

2,526,746

 

3,221,721

 

(1,525,664

)

(7,138,125

)

13,779,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Annuity Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase payments

 

7,621,784

 

2,644,005

 

3,800,614

 

7,270,009

 

14,635,899

 

13,019,387

 

Surrender benefits

 

(2,047,888

)

(904,433

)

(6,356,389

)

(4,010,500

)

(9,927,878

)

(5,070,744

)

Net transfers

 

807,895

 

(736,280

)

(4,631,055

)

(1,279,308

)

423,071

 

(781,250

)

Considerations for supplementary contracts with life contingency

 

—

 

—

 

—

 

—

 

—

 

8,201

 

Payments for supplementary contracts with life contingency.

 

—

 

—

 

—

 

—

 

(24,158

)

(23,311

)

Contract administration charges

 

(64,762

)

(43,926

)

(109,126

)

(90,194

)

(234,888

)

(149,197

)

Annuity benefits

 

(338,029

)

(380,430

)

(588,366

)

(619,170

)

(1,816,199

)

(1,074,592

)

Net increase (decrease) in net assets resulting from variable annuity activities

 

5,979,000

 

578,936

 

(7,884,322

)

1,270,837

 

3,055,847

 

5,928,494

 

Total increase (decrease) in net assets

 

5,532,101

 

3,105,682

 

(4,662,601

)

(254,827

)

(4,082,278

)

19,707,983

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

26,413,865

 

23,308,183

 

53,204,019

 

53,458,846

 

103,427,966

 

83,719,983

 

End of year

 

$

31,945,966

 

$

26,413,865

 

$

48,541,418

 

$

53,204,019

 

$

99,345,688

 

$

103,427,966

 

 

 

 

 

 

 

 

REIT

 

Balanced

 

 

 

International Equity Fund†

 

Fund†

 

Portfolio††

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

(1,220,994

)

$

496,285

 

$

611,981

 

$

(703

)

$

(18,489

)

$

(114,050

)

Net realized gains (losses) from investment transactions

 

45,934,094

 

18,942,694

 

8,923,501

 

4,678,311

 

(926,637

)

(1,733,372

)

Net change in unrealized appreciation (depreciation) of investments

 

(13,660,479

)

10,909,689

 

(18,866,841

)

4,750,564

 

4,633,459

 

4,175,728

 

Net increase (decrease) in net assets resulting from operations

 

31,052,621

 

30,348,668

 

(9,331,359

)

9,428,172

 

3,688,333

 

2,328,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Annuity Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase payments

 

37,766,077

 

23,771,875

 

9,634,341

 

8,134,668

 

1,945,044

 

1,673,386

 

Surrender benefits

 

(14,592,294

)

(6,946,781

)

(2,631,034

)

(939,838

)

(2,859,097

)

(1,920,758

)

Net transfers

 

14,118,320

 

13,854,529

 

(6,235,735

)

3,150,621

 

2,140,396

 

(270,952

)

Considerations for supplementary contracts with life contingency

 

—

 

11,301

 

—

 

4,601

 

—

 

—

 

Payments for supplementary contracts with life contingency.

 

—

 

—

 

(3,873

)

(3,628

)

—

 

—

 

Contract administration charges

 

(413,012

)

(171,042

)

(112,433

)

(61,115

)

(51,003

)

(41,545

)

Annuity benefits

 

(2,777,651

)

(1,818,502

)

(804,999

)

(706,018

)

(595,525

)

(481,140

)

Net increase (decrease) in net assets resulting from variable annuity activities

 

34,101,440

 

28,701,380

 

(153,733

)

9,579,291

 

579,815

 

(1,041,009

)

Total increase (decrease) in net assets

 

65,154,061

 

59,050,048

 

(9,485,092

)

19,007,463

 

4,268,148

 

1,287,297

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

151,035,422

 

91,985,374

 

45,693,943

 

26,686,480

 

26,610,709

 

25,323,412

 

End of year

 

$

216,189,483

 

$

151,035,422

 

$

36,208,851

 

$

45,693,943

 

$

30,878,857

 

$

26,610,709

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMEBER 31, 2007 AND 2006 

 

 

 

Equity Income

 

Growth

 

Asset Manager

 

 

 

Portfolio†††

 

Portfolio†††

 

Portfolio†††

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

674,518

 

$

1,872,278

 

$

(335,849

)

$

(713,847

)

$

769,079

 

$

257,787

 

Net realized gains (losses) from investment transactions

 

12,968,918

 

13,278,803

 

2,214,615

 

(784,250

)

486,985

 

(189,913

)

Net change in unrealized appreciation (depreciation) of investments

 

(13,698,353

)

211,699

 

16,829,116

 

5,942,540

 

786,649

 

850,956

 

Net increase (decrease) in net assets resulting from operations

 

(54,917

)

15,362,780

 

18,707,882

 

4,444,443

 

2,042,713

 

918,830

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Annuity Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase payments

 

16,380,953

 

8,996,882

 

4,335,469

 

3,759,720

 

1,472,947

 

554,138

 

Surrender benefits

 

(9,985,672

)

(6,378,690

)

(11,904,564

)

(7,213,412

)

(2,008,936

)

(1,594,864

)

Net transfers

 

4,470,560

 

1,546,898

 

962,684

 

(4,549,251

)

502,738

 

(1,528,830

)

Considerations for supplementary contracts with life contingency

 

—

 

—

 

—

 

—

 

—

 

7,388

 

Payments for supplementary contracts with life contingency.

 

(27,647

)

(25,138

)

—

 

—

 

—

 

—

 

Contract administration charges

 

(200,982

)

(128,961

)

(134,709

)

(128,697

)

(25,973

)

(24,568

)

Annuity benefits

 

(1,963,241

)

(1,800,270

)

(1,058,788

)

(1,084,747

)

(520,956

)

(358,356

)

Net increase (decrease) in net assets resulting from variable annuity activities

 

8,673,971

 

2,210,721

 

(7,799,908

)

(9,216,387

)

(580,180

)

(2,945,092

)

Total increase (decrease) in net assets

 

8,619,054

 

17,573,501

 

10,907,974

 

(4,771,944

)

1,462,533

 

(2,026,262

)

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

99,363,420

 

81,789,919

 

82,333,018

 

87,104,962

 

15,137,113

 

17,163,375

 

End of year

 

$

107,982,474

 

$

99,363,420

 

$

93,240,992

 

$

82,333,018

 

$

16,599,646

 

$

15,137,113

 

 

 

 

Emerging Markets

 

V.I. Capital Appreciation

 

High Income Bond

 

 

 

(Int’l) Portfolio††††

 

Fund ‡

 

Fund II ‡‡

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

(520,427

)

$

(176,490

)

$

(2,113

)

$

(1,322

)

$

31,980

 

$

33,645

 

Net realized gains (losses) from investment transactions

 

13,947,428

 

3,647,131

 

20,591

 

4,956

 

32,733

 

(11,980

)

Net change in unrealized appreciation (depreciation) of investments

 

6,314,691

 

7,551,954

 

(730

)

(158

)

(44,118

)

35,739

 

Net increase (decrease) in net assets resulting from operations

 

19,741,692

 

11,022,595

 

17,748

 

3,476

 

20,595

 

57,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Annuity Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase payments

 

11,411,774

 

8,893,045

 

—

 

—

 

—

 

—

 

Surrender benefits

 

(5,870,631

)

(1,724,122

)

(6,933

)

(382

)

(87,805

)

(193,973

)

Net transfers

 

11,495,435

 

5,242,650

 

12,059

 

34,271

 

(485,349

)

629,573

 

Considerations for supplementary contracts with life contingency

 

—

 

—

 

—

 

—

 

—

 

—

 

Payments for supplementary contracts with life contingency.

 

—

 

—

 

—

 

—

 

—

 

—

 

Contract administration charges

 

(155,049

)

(56,551

)

(304

)

(223

)

(1,172

)

(1,339

)

Annuity benefits

 

(882,681

)

(412,215

)

(5,814

)

(5,015

)

(17,798

)

(18,512

)

Net increase (decrease) in net assets resulting from variable annuity activities

 

15,998,848

 

11,942,807

 

(992

)

28,651

 

(592,124

)

415,749

 

Total increase (decrease) in net assets

 

35,740,540

 

22,965,402

 

16,756

 

32,127

 

(571,529

)

473,153

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

48,358,164

 

25,392,762

 

110,463

 

78,336

 

990,299

 

517,146

 

End of year

 

$

84,098,704

 

$

48,358,164

 

$

127,219

 

$

110,463

 

$

418,770

 

$

990,299

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMEBER 31, 2007 AND 2006 

 

 

 

Financial Services

 

Health Care

 

Russell 2000 Advantage

 

 

 

 

 

 

 

Fund ‡‡‡

 

Fund ‡‡‡

 

Fund ‡‡‡*

 

Nova Fund ‡‡‡

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

237

 

$

(571

)

$

(283

)

$

(396

)

$

277

 

$

(6,115

)

$

(2,478

)

$

1,836

 

Net realized gains (losses) from investment transactions

 

4,277

 

3,828

 

467

 

5,065

 

20,487

 

99,918

 

81,270

 

7,841

 

Net change in unrealized appreciation (depreciation) of investments

 

(15,032

)

2,564

 

(75

)

(1,778

)

(34,058

)

30,354

 

(89,612

)

80,250

 

Net increase (decrease) in net assets resulting from operations

 

(10,518

)

5,821

 

109

 

2,891

 

(13,294

)

124,157

 

(10,820

)

89,927

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Annuity Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase payments

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Surrender benefits

 

(2,010

)

(16,535

)

(1,687

)

(3,950

)

(1,942

)

(187,893

)

(64,868

)

(123,255

)

Net transfers

 

(7,991

)

(1,196

)

14,967

 

(14,283

)

(65,654

)

(704,401

)

(396,850

)

549,121

 

Considerations for supplementary contracts with life contingency

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Payments for supplementary contracts with life contingency.

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Contract administration charges

 

(98

)

(200

)

(40

)

(75

)

(339

)

(957

)

(655

)

(894

)

Annuity benefits

 

(2,562

)

(4,385

)

(221

)

(408

)

(4,104

)

(9,320

)

(7,513

)

(7,226

)

Net increase (decrease) in net assets resulting from variable annuity activities

 

(12,661

)

(22,316

)

13,019

 

(18,716

)

(72,039

)

(902,571

)

(469,886

)

417,746

 

Total increase (decrease) in net assets

 

(23,179

)

(16,495

)

13,128

 

(15,825

)

(85,333

)

(778,414

)

(480,706

)

507,673

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

57,127

 

73,622

 

17,779

 

33,604

 

247,533

 

1,025,947

 

677,175

 

169,502

 

End of year

 

$

33,948

 

$

57,127

 

$

30,907

 

$

17,779

 

$

162,200

 

$

247,533

 

$

196,469

 

$

677,175

 

 

 

 

OTC

 

Technology

 

Inverse S&P 500 Index

 

Government Long Bond

 

 

 

Fund ‡‡‡

 

Fund ‡‡‡

 

Fund ‡‡‡**

 

Advantage Fund ‡‡‡***

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

(2,380

)

$

(1,983

)

$

(295

)

$

(512

)

$

(272

)

$

(194

)

$

5,021

 

$

6,677

 

Net realized gains (losses) from investment transactions

 

15,759

 

26,852

 

1,340

 

(894

)

7,818

 

15,159

 

(1,559

)

(41,089

)

Net change in unrealized appreciation (depreciation) of investments

 

2,549

 

4,967

 

(1,024

)

547

 

—

 

—

 

7,176

 

(14,645

)

Net increase (decrease) in net assets resulting from operations

 

15,928

 

29,836

 

21

 

(859

)

7,546

 

14,965

 

10,638

 

(49,057

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Annuity Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase payments

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Surrender benefits

 

(61,148

)

(29,649

)

(3,876

)

(7,344

)

(165

)

(9,612

)

(20,708

)

(171,648

)

Net transfers

 

231,018

 

11,635

 

(1,838

)

(3,756

)

(6,473

)

(4,893

)

51,547

 

(685,942

)

Considerations for supplementary contracts with life contingency

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Payments for supplementary contracts with life contingency.

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Contract administration charges

 

(398

)

(297

)

(46

)

(102

)

(69

)

(32

)

(544

)

(840

)

Annuity benefits

 

(5,612

)

(3,089

)

(191

)

(777

)

(839

)

(428

)

(7,667

)

(14,493

)

Net increase (decrease) in net assets resulting from variable annuity activities

 

163,860

 

(21,400

)

(5,951

)

(11,979

)

(7,546

)

(14,965

)

22,628

 

(872,923

)

Total increase (decrease) in net assets

 

179,788

 

8,436

 

(5,930

)

(12,838

)

—

 

—

 

33,266

 

(921,980

)

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

96,566

 

88,130

 

14,487

 

27,325

 

—

 

—

 

127,448

 

1,049,428

 

End of year

 

$

276,354

 

$

96,566

 

$

8,557

 

$

14,487

 

$

—

 

$

—

 

$

160,714

 

$

127,448

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE YEARS ENDED DECEMEBER 31, 2007 AND 2006 

 

 

 

U.S. Government Money

 

Utilities

 

Equity Income

 

International Stock

 

 

 

Market Fund ‡‡‡

 

Fund ‡‡‡

 

Portfolio II ‡‡‡‡

 

Portfolio ‡‡‡‡‡

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (loss)

 

$

18,665

 

$

34,594

 

$

391

 

$

524

 

$

868

 

$

(538

)

$

917

 

$

116

 

Net realized gains (losses) from investment transactions

 

—

 

—

 

17,015

 

8,771

 

54,422

 

24,130

 

44,685

 

10,561

 

Net change in unrealized appreciation (depreciation) of investments

 

—

 

—

 

(10,365

)

4,486

 

(49,850

)

37,967

 

(26,748

)

6,905

 

Net increase (decrease) in net assets resulting from operations

 

18,665

 

34,594

 

7,041

 

13,781

 

5,440

 

61,559

 

18,854

 

17,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Annuity Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase payments

 

—

 

45,672

 

—

 

—

 

—

 

—

 

—

 

—

 

Surrender benefits

 

(312,832

)

(728,262

)

(5,175

)

(6,454

)

(21,979

)

(100,422

)

(64,367

)

(57,439

)

Net transfers

 

(21,702

)

311,934

 

12,029

 

16,784

 

57,236

 

(228,071

)

197,070

 

49,830

 

Considerations for supplementary contracts with life contingency

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Payments for supplementary contracts with life contingency.

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Contract administration charges

 

(1,866

)

(3,190

)

(145

)

(168

)

(718

)

(976

)

(402

)

(147

)

Annuity benefits

 

(12,624

)

(167,891

)

(2,988

)

(3,618

)

(8,430

)

(12,156

)

(8,032

)

(3,855

)

Net increase (decrease) in net assets resulting from variable annuity activities

 

(349,024

)

(541,737

)

3,721

 

6,544

 

26,109

 

(341,625

)

124,269

 

(11,611

)

Total increase (decrease) in net assets

 

(330,359

)

(507,143

)

10,762

 

20,325

 

31,549

 

(280,066

)

143,123

 

5,971

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

923,677

 

1,430,820

 

82,032

 

61,707

 

314,668

 

594,734

 

99,762

 

93,791

 

End of year

 

$

593,318

 

$

923,677

 

$

92,794

 

$

82,032

 

$

346,217

 

$

314,668

 

$

242,885

 

$

99,762

 

 

†

 

Investment in Penn Series Funds, Inc., an affiliate of Separate Account

††

 

Investment in Neuberger Berman Advisers Management Trust

†††

 

Investment in Fidelity Investments’ Variable Insurance Products Funds I and II

††††

 

Investment in Van Kampen’s The Universal Institutional Funds, Inc.

‡

 

Investment in AIM Variable Insurance Funds

‡‡

 

Investment in Federated Insurance Series

‡‡‡

 

Investment in Rydex Variable Trust

‡‡‡‡

 

Investment in T. Rowe Price Equity Series, Inc.

‡‡‡‡‡

 

Investment in T. Rowe Price International Series, Inc.

*

 

Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund

**

 

Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund

***

 

Prior to May 1, 2006 Government Long Bond Advantage Fund was named U.S. Government Bond Fund 

 

The accompanying notes are an integral part of these financial statements. 

 


 

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III 

 

Notes to Financial Statements - December 31, 2007 

 

Note 1. Organization 

 

Penn Mutual Variable Annuity Account III (“Account III”) was established by The Penn Mutual Life Insurance Company (“Penn Mutual”) under the provisions of the Pennsylvania Insurance Law. Account III is registered under the Investment Company Act of 1940, as amended, as a unit investment trust. Account III offers units to variable annuity contract owners to provide for the accumulation of value and for the payment of annuities. Account III contains contracts of the Diversifier II, Optimizer, Commander, Penn Freedom, Enhanced Credit Variable Annuity, Pennant Select, Olympia XT Advisor, Penn Freedom Advisor, and Retirement Planner VA variable annuity products. Under applicable insurance law, the assets and liabilities of Account III are clearly identified and distinguished from Penn Mutual’s other assets and liabilities. The portion of Account III’s assets applicable to the variable annuity contracts is not chargeable with liabilities arising out of any other business Penn Mutual may conduct. 

 

Note 2. Significant Accounting Policies 

 

The preparation of the accompanying financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported values of assets and liabilities as of December 31, 2007 and the reported amounts from operations and contract transactions during 2007 and 2006. Actual results could differ with those estimates. The significant accounting policies of Account III are as follows: 

 

Investments - Assets of Account III are invested into subaccounts which are invested in shares of Penn Series Funds, Inc. (“Penn Series”), an affiliated entity of Penn Mutual: Money Market, Limited Maturity Bond, Quality Bond, High Yield Bond, Flexibly Managed, Growth Stock, Large Cap Value, Large Cap Growth, Index 500, Mid Cap Growth, Mid Cap Value, Strategic Value, Small Cap Growth, Small Cap Value, International Equity and REIT Funds; Neuberger Berman Advisers Management Trust (“AMT”): Balanced Portfolio; Fidelity Investments’ Variable Insurance Products Funds I and II (“Fidelity”): Equity Income, Growth, and Asset Manager Portfolios; The Universal Institutional Funds, Inc. (“Van Kampen”): Emerging Markets Equity (Int’l) Portfolio; AIM Variable Insurance Funds (“AIM”): V.I. Capital Appreciation Fund; Federated Insurance Series (“Federated”): High Income Bond Fund II; Rydex Variable Trust (“Rydex”): Financial Services, Health Care, Russell 2000 Advantage , Nova, OTC, Technology, Inverse S&P 500 Index, Government Long Bond Advantage, U.S. Government Money Market, and Utilities Funds;  T. Rowe Price Equity Series, Inc. (“T. Rowe”): Equity Income Portfolio II, and T. Rowe Price International Series, Inc. (“T. Rowe”): International Stock Portfolio. Penn Series, AMT, Fidelity, Van Kampen, AIM, Federated, Rydex, and T. Rowe are open-end diversified management investment companies. The investment in shares of these funds or portfolios is carried at fair market value as determined by the underlying net asset value of the respective funds or portfolios. Dividend income and realized gain distributions are recorded on the ex-dividend date. Investment transactions are accounted for on a trade date basis. 

 

Federal Income Taxes – The operations of Account III are included in the federal income tax return of Penn Mutual, which is taxed as a life insurance company under the provisions of the Internal Revenue Code (“IRC”). Under the current provisions of the IRC, Penn Mutual does not expect to incur federal income taxes on the earnings of Account III to the extent the earnings are credited under the contracts. Based on this, no charge is being made currently to Account III for federal income taxes. Penn Mutual will review periodically the status of this policy in the event of changes in the tax law. A charge may be made in future years for any federal income taxes that would be attributable to the contracts. 

 


 

Diversification Requirements - Under the provisions of Section 817(h) of the IRC, a variable annuity contract other than a contract issued in connection with certain types of employee benefit plans will not be treated as an annuity contract for federal tax purposes for any period for which the investments of the segregated asset account on which the contract is based fail to meet applicable diversification requirements. The IRC provides that the “adequately diversified” requirement may be met if the underlying investments satisfy either a statutory safe harbor test or diversification requirements set forth in regulations issued by the Secretary of Treasury. The Internal Revenue Service has issued regulations under section 817(h) of IRC. Penn Mutual believes that Account III satisfies the current requirements of the regulations, and it intends that Account III will continue to meet such requirements. 

 

Accounting Pronouncements – Effective July 1, 2007, Account III adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, a clarification of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 establishes financial accounting and disclosure requirements for recognition and measurement of tax positions taken or expected to be taken on an income tax return. The adoption of FIN 48 had no impact on the fund’s net assets or results of operations. 

 

In September 2006, the FASB released the Statement of Financial Accounting Standard No. 157 (FAS 157), Fair Value Measurements. FAS 157 clarifies the definition of fair value and establishes the framework for measuring fair value, as well as proper disclosure of this methodology in the financial statements. It will be effective for Account III’s fiscal year ended December 31, 2008. Management is evaluating the effects of FAS 157; however, it is not expected to have a material impact on Account III’s net assets or results of operations. 

 

Note 3. Purchases and Sales of Investments 

 

The following table shows aggregate cost of shares purchased and proceeds of shares redeemed of each fund or portfolio for the period ended December 31, 2007: 

 

 

 

Purchases

 

Sales

 

Money Market Fund

 

$

91,757,133

 

$

70,539,179

 

Limited Maturity Bond Fund

 

20,463,246

 

6,776,302

 

Quality Bond Fund

 

35,297,320

 

14,768,821

 

High Yield Bond Fund.

 

20,715,912

 

20,344,102

 

Flexibly Managed Fund

 

297,008,661

 

93,190,307

 

Growth Stock Fund

 

21,649,786

 

14,989,607

 

Large Cap Value Fund.

 

29,477,089

 

16,479,625

 

Large Cap Growth Fund

 

5,589,575

 

5,403,269

 

Index 500 Fund

 

21,975,346

 

13,590,803

 

Mid Cap Growth Fund

 

18,134,108

 

8,207,245

 

Mid Cap Value Fund

 

20,857,636

 

12,383,058

 

Strategic Value Fund

 

16,732,123

 

6,183,097

 

Small Cap Growth Fund

 

5,710,185

 

16,727,367

 

Small Cap Value Fund

 

37,919,317

 

15,895,151

 

International Equity Fund

 

92,014,301

 

13,210,784

 

REIT Fund

 

22,254,875

 

12,876,542

 

Balanced Portfolio

 

5,692,579

 

6,059,818

 

Equity Income Portfolio

 

35,828,879

 

13,518,696

 

Growth Portfolio

 

16,078,704

 

22,005,724

 

Asset Manager Portfolio

 

4,267,391

 

3,592,603

 

 


 

 

 

Purchases

 

Sales

 

Emerging Markets Equity (Int’l) Portfolio

 

$

40,332,512

 

$

10,910,220

 

V.I. Capital Appreciation Fund

 

$

269,033

 

$

251,557

 

High Income Bond Fund II

 

948,162

 

1,475,655

 

Financial Services Fund

 

76,575

 

84,728

 

Health Care Fund

 

87,825

 

74,624

 

Russell 2000 Advantage Fund

 

210,911

 

262,208

 

Nova Fund

 

332,158

 

723,306

 

OTC Fund

 

4,828,755

 

4,651,525

 

Technology Fund

 

122,843

 

127,751

 

Inverse S&P 500 Index Fund

 

2,730,452

 

2,730,452

 

Government Long Bond Advantage Fund

 

1,588,429

 

1,562,350

 

U.S. Government Money Market Fund

 

7,556,101

 

7,886,708

 

Utilities Fund

 

159,741

 

138,621

 

Equity Income Portfolio II

 

483,394

 

402,021

 

International Stock Portfolio

 

390,315

 

220,453

 

 

Note 4. Related Party Transactions and Contract Charges 

 

Penn Mutual received $36,419,125 and $28,573,355 from Account III for the years ended December 31, 2007 and 2006. These charges include those assessed through a reduction in unit values as well as those assessed through the redemption of units. 

 

Certain charges of the products are reflected as a reduction in the value of the units held by the policyholder. These are as follows: 

 

Products 

 

Mortality &
Risk Expense

 

Contract
Administration

 

Maximum Supplemental Rider
Charge

 

Diversifier II/Optimizer

 

1.25

%

None

 

N/A

 

Commander

 

1.25

%

0.15

%

0.95

%

Penn Freedom

 

1.30

%

0.15

%

0.95

%

Enhanced Credit Variable Annuity

 

1.25

%

0.15

%

0.60

%

Pennant Select

 

1.20

%

0.15

%

0.95

%

Olympia XT Advisor

 

1.25

%

0.15

%

0.60

%

Penn Freedom Advisor

 

1.45

%

0.15

%

0.60

%

Retirement Planner VA

 

1.25

%

None

 

0.60

%

 

Certain charges of the products are reflected as a redemption of units held by the policyholder. These are as follows: 

 

Products 

 

Annual
Contract
Charge

 

Diversifier II/Optimizer

 

$30 maximum

 

Commander

 

If Account Value is < $100,000, the lesser of $40 or 2% of the Account Value

 

Penn Freedom

 

If Account Value is < $100,000, the lesser of $40 or 2% of the Account Value

 

Enhanced Credit Variable Annuity

 

If Account Value is < $100,000, the lesser of $40 or 2% of the Account Value

 

Pennant Select

 

If Account Value is < $100,000, the lesser of $40 or 2% of the Account Value

 

Olympia XT Advisor

 

If Account Value is < $100,000, the lesser of $40 or 2% of the Account Value

 

Penn Freedom Advisor

 

If Account Value is < $100,000, the lesser of $40 or 2% of the Account Value

 

Retirement Planner VA

 

$30 maximum

 

 


 

Products 

 

Surrender
Charges

 

Diversifier II/Optimizer

 

Maximum charge of 7% of purchase payments received. Charges do not apply after 10 years.

 

Commander

 

Maximum charge of 1% of purchase payments received. Charges do not apply after 1 year.

 

Penn Freedom

 

Maximum charge of 8% of purchase payments received. Charges do not apply after 4 years.

 

Enhanced Credit Variable Annuity

 


Maximum charge of 8% of purchase payments received. Charges do not apply after 9 years.

 

Pennant Select

 

Maximum charge of 7% of purchase payments received. Charges do not apply after 7 years.

 

Olympia XT Advisor

 

Maximum charge of 8% of purchase payments received. Charges do not apply after 9 years.

 

Penn Freedom Advisor

 

Maximum charge of 8% of purchase payments received. Charges do not apply after 4 years.

 

Retirement Planner VA

 

Maximum charge of 7% of purchase payments received. Charges do not apply after 10 years.

 

 

Premium taxes on purchase payments are withdrawn from payments prior to the purchase of units. Currently, state premium taxes on purchase payments range from 0.00% to 3.50%. 

 

Note 5. Accumulation Units 

 

The accumulation units are as follows: 

 

 

 

January 1,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

December 31, 2006

 

December 31, 2007

 

 

 

 

 

 

 

 

 

Ending

 

 

 

 

 

Ending

 

 

 

Unit

 

Units

 

Units

 

Unit

 

Units

 

Units

 

Unit

 

Subaccount

 

Balance

 

Purchased

 

Redeemed

 

Balance

 

Purchased

 

Redeemed

 

Balance

 

Money Market Fund

 

1,861,213

 

1,747,719

 

(1,293,380

)

2,315,552

 

6,741,763

 

(5,155,490

)

3,901,826

 

Limited Maturity Bond Fund

 

1,939,898

 

810,077

 

(281,709

)

2,468,266

 

1,369,653

 

(329,782

)

3,508,136

 

Quality Bond Fund

 

6,125,094

 

1,573,862

 

(428,815

)

7,270,141

 

1,804,057

 

(483,335

)

8,590,864

 

High Yield Bond Fund

 

2,662,065

 

634,247

 

(549,626

)

2,746,686

 

820,903

 

(736,419

)

2,831,170

 

Flexibly Managed Fund

 

22,744,508

 

6,738,403

 

(445,929

)

29,036,982

 

7,493,511

 

(2,229,813

)

34,300,679

 

Growth Stock Fund

 

3,658,181

 

1,835,898

 

(167,898

)

5,326,181

 

2,297,525

 

(310,846

)

7,312,861

 

Large Cap Value Fund

 

5,118,168

 

371,993

 

(449,207

)

5,040,954

 

606,302

 

(535,130

)

5,112,126

 

Large Cap Growth Fund

 

1,642,898

 

439,061

 

(320,499

)

1,761,460

 

304,825

 

(397,221

)

1,669,063

 

Index 500 Fund

 

6,877,142

 

1,029,723

 

(493,650

)

7,413,215

 

1,226,488

 

(528,071

)

8,111,633

 

Mid Cap Growth

 

3,917,660

 

958,995

 

(580,084

)

4,296,571

 

1,387,920

 

(501,263

)

5,183,228

 

Mid Cap Value Fund

 

2,909,100

 

471,170

 

(306,230

)

3,074,040

 

514,715

 

(404,311

)

3,184,444

 

Strategic Value Fund

 

1,698,434

 

368,288

 

(327,769

)

1,738,953

 

698,895

 

(322,415

)

2,115,433

 

Small Cap Growth Fund

 

2,689,797

 

624,299

 

(361,335

)

2,952,761

 

238,927

 

(565,449

)

2,626,239

 

Small Cap Value Fund

 

3,601,431

 

561,847

 

(199,888

)

3,963,390

 

713,322

 

(461,964

)

4,214,748

 

International Equity Fund

 

4,481,484

 

2,035,277

 

(202,775

)

6,313,986

 

2,294,469

 

(426,539

)

8,181,917

 

REIT Fund

 

1,462,734

 

549,811

 

(94,550

)

1,917,995

 

533,358

 

(573,937

)

1,877,416

 

Balanced Portfolio

 

1,703,787

 

206,217

 

(216,401

)

1,693,603

 

278,187

 

(188,860

)

1,782,930

 

Equity Income Portfolio

 

4,864,020

 

685,162

 

(341,119

)

5,208,063

 

1,290,822

 

(529,194

)

5,969,691

 

Growth Portfolio

 

5,952,287

 

365,126

 

(825,142

)

5,492,271

 

857,727

 

(1,201,415

)

5,148,583

 

Asset Manager Portfolio

 

1,217,502

 

50,635

 

(230,636

)

1,037,501

 

169,976

 

(169,850

)

1,037,627

 

Emerging Markets Equity (Int’l)Portfolio

 

1,381,594

 

754,808

 

(263,236

)

1,873,166

 

814,282

 

(420,137

)

2,267,310

 

 


 

 

 

January 1,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

 

December 31, 2006

 

December 31, 2007

 

 

 

 

 

 

 

 

 

Ending

 

 

 

 

 

Ending

 

 

 

Unit

 

Units

 

Units

 

Unit

 

Units

 

Units

 

Unit

 

Subaccount

 

Balance

 

Purchased

 

Redeemed

 

Balance

 

Purchased

 

Redeemed

 

Balance

 

V.I. Capital Appreciation Fund

 

6,805

 

12,105

 

(9,730

)

9,180

 

21,264

 

(20,857

)

9,588

 

High Income Bond Fund II

 

40,607

 

86,579

 

(56,090

)

71,096

 

64,100

 

(105,687

)

29,509

 

Financial Services Fund

 

6,175

 

32,734

 

(34,739

)

4,170

 

4,816

 

(5,894

)

3,092

 

Health Care Fund

 

2,710

 

21,987

 

(23,310

)

1,387

 

6,381

 

(5,464

)

2,304

 

Russell 2000 Advantage Fund(a)

 

81,278

 

61,124

 

(125,880

)

16,522

 

12,858

 

(17,640

)

11,739

 

Nova Fund

 

15,297

 

92,203

 

(55,502

)

51,998

 

24,121

 

(60,996

)

15,123

 

OTC Fund

 

7,441

 

966,404

 

(966,035

)

7,810

 

364,267

 

(352,835

)

19,242

 

Technology Fund

 

2,263

 

24,915

 

(26,028

)

1,150

 

9,140

 

(9,662

)

628

 

Inverse S&P 500 Index Fund(b)

 

—

 

308,633

 

(308,633

)

—

 

413,992

 

(413,992

)

—

 

Government Long Bond Advantage Fund(c)

 

79,258

 

231,173

 

(300,358

)

10,073

 

109,243

 

(107,601

)

11,715

 

U.S. Government Money Market Fund

 

147,435

 

1,638,449

 

(1,692,767

)

93,117

 

734,313

 

(769,011

)

58,420

 

Utilities Fund

 

5,598

 

10,899

 

(10,246

)

6,251

 

10,768

 

(10,666

)

6,352

 

Equity Income Portfolio II

 

50,863

 

19,026

 

(46,813

)

23,076

 

32,866

 

(30,922

)

25,020

 

International Stock Portfolio

 

7,093

 

4,737

 

(5,384

)

6,446

 

22,125

 

(14,521

)

14,050

 

 

Note 6. Financial Highlights 

 

Account III is a funding vehicle for a number of variable annuity products, which have unique combinations of features and fees that are charged against the contract owner’s account balance. Differences in the fee structures result in a variety of unit values, expense ratios and total returns. 

 

The following table was developed by determining which products offered within Account III have the lowest and highest total return. Only product designs within each subaccount that has units outstanding during the respective periods were considered when determining the lowest and highest total return. The summary may not reflect the minimum and maximum contract charges offered within Account III as contract owners may not have selected all available and applicable contract options. 

 

 

 

January 1, 2007

 

December 31, 2007

 

For the Year ended December 31, 2007

 

Subaccount

 

Unit Fair Value

 

Units

 

Unit Fair Value

 

Net Assets

 

Investment
Income
Ratio*(%)

 

Expense
Ratio**(%)

 

Total
Return***(%)

 

Money Market Fund

 

$10.36 to $23.57

 

3,901,826

 

$10.72 to $24.43

 

$

51,354,071

 

4.86

 

1.25 to 1.60

 

3.45 to 3.66

 

Limited Maturity Fund

 

11.02 to 15.50

 

3,508,136

 

11.42 to 16.11

 

45,194,177

 

4.42

 

1.25 to 1.60

 

3.70 to 3.91

 

Quality Bond Fund

 

11.59 to 30.69

 

8,590,864

 

12.15 to 32.23

 

132,385,772

 

4.65

 

1.25 to 1.60

 

4.79 to 5.01

 

High Yield Bond Fund

 

14.69 to 53.79

 

2,831,170

 

15.00 to 55.01

 

57,411,937

 

6.99

 

1.25 to 1.60

 

2.07 to 2.28

 

Flexibly Managed Fund

 

18.05 to 149.07

 

34,300,679

 

18.58 to 153.79

 

1,065,431,617

 

2.28

 

1.25 to 1.60

 

2.96 to 3.17

 

Growth Stock Fund

 

6.51 to 44.38

 

7,312,861

 

7.01 to 47.83

 

83,301,815

 

0.42

 

1.25 to 1.60

 

7.58 to 7.79

 

 


 

 

 

January 1, 2007

 

December 31, 2007

 

For the Year ended December 31, 2007

 

Subaccount 

 

Unit Fair Value

 

Units

 

Unit Fair Value

 

Net Assets

 

Investment
Income
Ratio*(%)

 

Expense
Ratio**(%)

 

Total
Return***(%)

 

Large Cap Value Fund

 

$14.00 to $60.68

 

5,112,126

 

$14.31 to $62.16

 

$128,370,422

 

1.39

 

1.25 to 1.60

 

2.23 to 2.44

 

Large Cap Growth Fund

 

11.30 to 11.40

 

1,669,063

 

11.66 to 11.79

 

19,541,666

 

0.54

 

1.25 to 1.60

 

3.20 to 3.41

 

Mid Cap Growth Fund

 

7.72 to 16.69

 

5,183,228

 

9.52 to 20.62

 

61,688,459

 

—

 

1.25 to 1.60

 

23.34 to 23.59

 

Mid Cap Value Fund

 

18.17 to 27.92

 

3,184,444

 

18.58 to 28.61

 

74,757,634

 

1.14

 

1.25 to 1.60

 

2.26 to 2.47

 

Strategic Value Fund

 

15.13 to 15.27

 

2,115,433

 

15.04 to 15.21

 

31,945,966

 

0.57

 

1.25 to 1.60

 

(0.61 to (0.41)

 

Small Cap Growth Fund

 

9.32 to 28.18

 

2,626,239

 

9.89 to 29.98

 

48,541,418

 

—

 

1.25 to 1.60

 

6.16 to 6.37

 

Small Cap Value Fund

 

18.66 to 34.75

 

4,214,748

 

17.41 to 32.49

 

99,345,688

 

0.70

 

1.25 to 1.60

 

(6.67 to (6.48)

 

International Equity Fund

 

17.67 to 38.90

 

8,181,917

 

20.91 to 46.12

 

216,189,483

 

0.58

 

1.25 to 1.60

 

18.32 to 18.55

 

REIT Fund

 

23.73 to 23.95

 

1,877,416

 

19.21 to 19.43

 

36,208,851

 

2.59

 

1.25 to 1.60

 

(19.06 to (18.90)

 

Balanced Portfolio

 

12.12 to 21.91

 

1,782,930

 

13.81 to 25.01

 

30,878,857

 

1.18

 

1.25 to 1.60

 

13.93 to 14.16

 

Equity Income Portfolio

 

14.53 to 28.58

 

5,969,691

 

14.54 to 28.65

 

107,982,474

 

1.86

 

1.25 to 1.60

 

0.06 to 0.26

 

Growth Portfolio

 

9.78 to 23.27

 

5,148,583

 

12.24 to 29.17

 

93,240,992

 

0.85

 

1.25 to 1.60

 

25.13 to 25.38

 

Asset Manager Portfolio

 

11.63 to 20.07

 

1,037,627

 

13.24 to 22.89

 

16,599,646

 

6.20

 

1.25 to 1.60

 

13.83 to 14.06

 

Emerging Markets Equity (Int’l)

 

20.86 to 30.16

 

2,267,310

 

28.93 to 41.79

 

84,098,704

 

0.42

 

1.25 to 1.60

 

38.42 to 38.70

 

Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

V.I. Capital Appreciation Fund

 

11.98 to 12.09

 

9,588

 

13.20 to 13.35

 

127,219

 

—

 

1.25 to 1.60

 

10.23 to 10.45

 

High Income Bond Fund II

 

13.87 to 14.00

 

29,509

 

14.12 to 14.28

 

418,770

 

7.15

 

1.25 to 1.60

 

1.78 to 1.98

 

Financial Services Fund

 

13.62 to 13.75

 

3,092

 

10.88 to 11.01

 

33,948

 

1.79

 

1.25 to 1.60

 

(20.10 to (19.94)

 

Health Care Fund

 

12.77 to 12.89

 

2,304

 

13.32 to 13.47

 

30,907

 

—

 

1.25 to 1.60

 

4.33 to 4.54

 

Russell 2000 Advantage Fund(a)

 

14.93 to 15.07

 

11,739

 

13.70 to 13.86

 

162,200

 

1.50

 

1.25 to 1.60

 

(8.23 to (8.04)

 

Nova Fund

 

12.93 to 13.05

 

15,123

 

12.87 to 13.01

 

196,469

 

0.58

 

1.25 to 1.60

 

(0.49 to (0.29)

 

OTC Fund

 

12.25 to 12.37

 

19,242

 

14.21 to 14.37

 

276,354

 

0.11

 

1.25 to 1.60

 

15.94 to 16.18

 

Technology Fund

 

12.55 to 12.66

 

628

 

13.63 to 13.78

 

8,557

 

—

 

1.25 to 1.60

 

8.62 to 8.84

 

Inverse S&P 500 Index Fund(b)

 

6.87 to 6.87

 

—

 

6.75 to 6.83

 

—

 

—

 

1.25 to 1.60

 

(0.78 to (0.58)

 

Government Long Bond Advantage Fund(c)

 

12.60 to 12.72

 

11,715

 

13.61 to 13.77

 

160,714

 

3.61

 

1.25 to 1.60

 

8.03 to 8.25

 

U.S. Government Money Market

 

9.89 to 9.98

 

58,420

 

10.11 to 10.23

 

593,318

 

3.85

 

1.25 to 1.60

 

2.23 to 2.44

 

Fund

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities Fund

 

13.05 to 13.17

 

6,352

 

14.50 to 14.66

 

92,794

 

1.86

 

1.25 to 1.60

 

11.06 to 11.29

 

Equity Income Portfolio II

 

13.61 to 13.67

 

25,020

 

13.83 to 13.86

 

346,217

 

1.53

 

1.25 to 1.60

 

1.39 to 1.59

 

International Stock Portfolio

 

15.40 to 15.55

 

14,050

 

17.13 to 17.33

 

242,885

 

1.74

 

1.25 to 1.60

 

11.23 to 11.45

 

 


 

 

 

January 1, 2006

 

December 31, 2006

 

For the Year ended December 31, 2006

 

Subaccount

 

Unit Fair Value

 

Units

 

Unit Fair Value

 

Net Assets

 

Investment
Income
Ratio*(%)

 

Expense
Ratio**(%)

 

Total
Return***(%)

 

Money Market Fund

 

$10.04 to $22.81

 

2,315,552

 

$10.36 to $23.57

 

$

30,133,802

 

4.60

 

1.25 to 1.60

 

3.14 to 3.34

 

Limited Maturity Fund

 

10.70 to 15.02

 

2,468,266

 

11.02 to 15.50

 

31,200,892

 

4.81

 

1.25 to 1.60

 

2.99 to 3.20

 

Quality Bond Fund

 

11.18 to 29.52

 

7,270,141

 

11.59 to 30.69

 

109,880,081

 

4.12

 

1.25 to 1.60

 

3.74 to 3.95

 

High Yield Bond Fund

 

13.55 to 49.52

 

2,746,686

 

14.69 to 53.79

 

58,236,522

 

5.82

 

1.25 to 1.60

 

8.39 to 8.60

 

Flexibly Managed Fund

 

15.87 to 130.83

 

29,036,982

 

18.05 to 149.07

 

959,061,870

 

1.77

 

1.25 to 1.60

 

13.71 to 13.94

 

Growth Stock Fund

 

5.84 to 39.76

 

5,326,181

 

6.51 to 44.38

 

67,368,322

 

0.26

 

1.25 to 1.60

 

11.38 to 11.61

 

Large Cap Value Fund

 

12.01 to 51.95

 

5,040,954

 

14.00 to 60.68

 

135,392,863

 

1.07

 

1.25 to 1.60

 

16.57 to 16.80

 

Large Cap Growth Fund

 

11.05 to 11.14

 

1,761,460

 

11.30 to 11.40

 

19,976,718

 

0.24

 

1.25 to 1.60

 

2.21 to 2.41

 

Index 500 Fund

 

10.07 to 15.66

 

7,413,215

 

11.46 to 17.84

 

98,825,572

 

1.34

 

1.25 to 1.60

 

13.72 to 13.94

 

Mid Cap Growth Fund

 

7.33 to 15.82

 

4,296,571

 

7.72 to 16.69

 

42,788,004

 

—

 

1.25 to 1.60

 

5.28 to 5.49

 

Mid Cap Value Fund

 

16.55 to 25.38

 

3,074,040

 

18.17 to 27.92

 

71,871,042

 

0.64

 

1.25 to 1.60

 

9.81 to 10.03

 

Strategic Value Fund

 

13.68 to 13.78

 

1,738,953

 

15.13 to 15.27

 

26,413,865

 

0.47

 

1.25 to 1.60

 

10.62 to 10.84

 

Small Cap Growth Fund

 

9.57 to 28.89

 

2,952,761

 

9.32 to 28.18

 

53,204,019

 

—

 

1.25 to 1.60

 

(2.65 to (2.45)

 

Small Cap Value Fund

 

16.12 to 29.96

 

3,963,390

 

18.66 to 34.75

 

103,427,966

 

0.31

 

1.25 to 1.60

 

15.75 to 15.98

 

International Equity Fund

 

13.74 to 30.22

 

6,313,986

 

17.67 to 38.90

 

151,035,422

 

1.66

 

1.25 to 1.60

 

28.47 to 28.73

 

REIT Fund

 

18.18 to 18.32

 

1917,995

 

23.73 to 23.95

 

45,693,943

 

1.24

 

1.25 to 1.60

 

30.51 to 30.77

 

Balanced Portfolio

 

11.11 to 20.05

 

1,693,603

 

12.12 to 21.91

 

26,610,709

 

0.81

 

1.25 to 1.60

 

9.08 to 9.30

 

Equity Income Portfolio

 

12.27 to 24.07

 

5,208,063

 

14.53 to 28.58

 

99,363,420

 

3.36

 

1.25 to 1.60

 

18.47 to 18.70

 

Growth Portfolio

 

9.28 to 22.05

 

5,492,271

 

9.78 to 23.27

 

82,333,018

 

0.40

 

1.25 to 1.60

 

5.32 to 5.53

 

Asset Manager Portfolio

 

10.99 to 18.94

 

1,037,501

 

11.63 to 20.07

 

15,137,113

 

2.83

 

1.25 to 1.60

 

5.78 to 5.99

 

Emerging Markets Equity (Int’l)

 

15.40 to 22.29

 

1,873,166

 

20.86 to 30.16

 

48,358,164

 

0.76

 

1.25 to 1.60

 

35.17 to 35.44

 

Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

V.I. Capital Appreciation Fund

 

11.45 to 11.53

 

9,180

 

11.98 to 12.09

 

110,463

 

0.06

 

1.25 to 1.60

 

4.62 to 4.83

 

High Income Bond Fund II

 

12.72 to 12.82

 

71,096

 

13.87 to 14.00

 

990,299

 

6.64

 

1.25 to 1.60

 

9.05 to 9.27

 

Financial Services Fund

 

11.86 to 11.94

 

4,170

 

13.62 to 13.75

 

57,127

 

0.64

 

1.25 to 1.60

 

14.88 to 15.11

 

Health Care Fund

 

12.35 to 12.43

 

1,387

 

12.77 to 12.89

 

17,779

 

—

 

1.25 to 1.60

 

3.45 to 3.65

 

Mekros Fund(a)

 

12.55 to 12.64

 

16,522

 

14.93 to 15.07

 

247,533

 

0.14

 

1.25 to 1.60

 

18.94 to 19.17

 

Nova Fund

 

11.02 to 11.10

 

51,998

 

12.93 to 13.05

 

677,175

 

1.69

 

1.25 to 1.60

 

17.39 to 17.62

 

OTC Fund

 

11.77 to 11.85

 

7,810

 

12.25 to 12.37

 

96,566

 

—

 

1.25 to 1.60

 

4.10 to 4.31

 

Technology Fund

 

12.04 to 12.13

 

1,150

 

12.55 to 12.66

 

14,487

 

—

 

1.25 to 1.60

 

4.21 to 4.42

 

Ursa Fund(b)

 

7.48 to 7.53

 

—

 

6.87 to 6.87

 

—

 

—

 

1.25 to 1.60

 

(8.97 to (8.79)

 

U.S. Government Bond Fund(c)

 

13.22 to 13.31

 

10,073

 

12.60 to 12.72

 

127,448

 

3.50

 

1.25 to 1.60

 

(4.67 to (4.48)

 

U.S. Government Money Market

 

9.68 to 9.75

 

93,117

 

9.89 to 9.98

 

923,677

 

3.71

 

1.25 to 1.60

 

2.18 to 2.39

 

Fund

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities Fund

 

10.96 to 11.04

 

6,251

 

13.05 to 13.17

 

82,032

 

2.00

 

1.25 to 1.60

 

19.05 to 19.29

 

Equity Income Portfolio II

 

11.63 to 11.71

 

23,076

 

13.61 to 13.67

 

314,668

 

1.22

 

1.25 to 1.60

 

16.77 to 17.00

 

International Stock Portfolio

 

13.14 to 13.24

 

6,446

 

15.40 to 15.55

 

99,762

 

1.49

 

1.25 to 1.60

 

17.21 to 17.44

 

 


 

 

 

January 1, 2005

 

December 31, 2005

 

For the Year ended December 31, 2005

 

Subaccount

 

Unit Fair Value

 

Units

 

Unit Fair Value

 

Net Assets

 

Investment
Income
Ratio*(%)

 

Expense
Ratio**(%)

 

Total
Return***(%)

 

Money Market Fund

 

$9.91 to $22.46

 

1,861,213

 

$10.04 to $22.81

 

$

24,607,883

 

2.78

 

1.25 to 1.60

 

1.35 to 1.55

 

Limited Maturity Fund

 

10.62 to 14.89

 

1,939,898

 

10.70 to 15.02

 

24,017,142

 

4.06

 

1.25 to 1.60

 

0.68 to 0.88

 

Quality Bond Fund

 

11.06 to 29.16

 

6,125,094

 

11.18 to 29.52

 

92,830,190

 

4.44

 

1.25 to 1.60

 

1.03 to 1.23

 

High Yield Bond Fund

 

13.34 to 48.63

 

2,662,065

 

13.55 to 49.52

 

55,671,235

 

7.21

 

1.25 to 1.60

 

1.63 to 1.83

 

Flexibly Managed Fund

 

14.93 to 122.84

 

22,744,508

 

15.87 to 130.83

 

91,988,671

 

1.61

 

1.25 to 1.60

 

6.30 to 6.51

 

Growth Stock Fund

 

5.58 to 37.93

 

3,658,181

 

5.84 to 39.76

 

52,967,259

 

0.11

 

1.25 to 1.60

 

4.62 to 4.83

 

Large Cap Value Fund

 

11.83 to 51.07

 

5,118,168

 

12.01 to 51.95

 

124,662,226

 

1.14

 

1.25 to 1.60

 

1.52 to 1.73

 

Large Cap Growth Fund

 

11.08 to 11.14

 

1,642,898

 

11.05 to 11.14

 

18,218,696

 

0.17

 

1.25 to 1.60

 

(0.26 to (0.06)

 

Index 500 Fund

 

9.78 to 15.18

 

6,877,142

 

10.07 to 15.66

 

83,025,808

 

1.57

 

1.25 to 1.60

 

2.98 to 3.19

 

Mid Cap Growth Fund

 

6.60 to 14.24

 

3,917,660

 

7.33 to 15.82

 

38,164,279

 

—

 

1.25 to 1.60

 

10.87 to 11.09

 

Mid Cap Value Fund

 

14.94 to 22.88

 

2,909,100

 

16.55 to 25.38

 

62,996,495

 

0.67

 

1.25 to 1.60

 

10.72 to 10.94

 

Strategic Value Fund

 

12.83 to 12.89

 

1,698,434

 

13.68 to 13.78

 

23,309,051

 

0.52

 

1.25 to 1.60

 

6.65 to 6.86

 

Small Cap Growth Fund

 

9.14 to 27.53

 

2,689,797

 

9.57 to 28.89

 

53,460,767

 

—

 

1.25 to 1.60

 

4.75 to 4.95

 

Small Cap Value Fund

 

15.77 to 29.26

 

3,601,431

 

16.12 to 29.96

 

83,723,028

 

0.40

 

1.25 to 1.60

 

2.18 to 2.39

 

International Equity Fund

 

11.94 to 26.21

 

4,481,484

 

13.74 to 30.22

 

91,988,671

 

0.42

 

1.25 to 1.60

 

15.09 to 15.32

 

REIT Fund

 

16.33 to 16.42

 

1,462,734

 

18.18 to 18.32

 

26,687,472

 

2.29

 

1.25 to 1.60

 

11.34 to 11.57

 

Balanced Portfolio

 

10.32 to 18.59

 

1,703,787

 

11.11 to 20.05

 

25,324,321

 

0.96

 

1.25 to 1.60

 

7.61 to 7.83

 

Equity Income Portfolio

 

11.76 to 23.03

 

4,864,020

 

12.27 to 24.07

 

81,792,866

 

1.58

 

1.25 to 1.60

 

4.35 to 4.55

 

Growth Portfolio

 

8.89 to 21.10

 

5,952,287

 

9.28 to 22.05

 

87,108,057

 

0.52

 

1.25 to 1.60

 

4.28 to 4.49

 

Asset Manager Portfolio

 

10.71 to 18.43

 

744,668

 

10.99 to 18.94

 

17,163,991

 

2.74

 

1.25 to 1.60

 

2.55 to 2.76

 

Emerging Markets Equity (Int’l)

 

11.65 to 16.88

 

1,381,594

 

15.40 to 22.29

 

25,393,683

 

0.38

 

1.25 to 1.60

 

31.93 to 32.20

 

Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

V.I. Capital Appreciation Fund

 

10.69 to 10.75

 

6,805

 

11.45 to 11.53

 

78,339

 

0.05

 

1.25 to 1.60

 

7.11 to 7.33

 

High Income Bond Fund II

 

12.59 to 12.66

 

40,607

 

12.72 to 12.82

 

517,168

 

10.24

 

1.25 to 1.60

 

1.03 to 1.23

 

Financial Services Fund

 

11.65 to 11.71

 

6,175

 

11.86 to 11.94

 

73,625

 

0.78

 

1.25 to 1.60

 

1.74 to 1.95

 

Health Care Fund

 

11.34 to 11.40

 

2,710

 

12.35 to 12.43

 

33,605

 

—

 

1.25 to 1.60

 

8.89 to 9.11

 

Mekros Fund(a)

 

12.27 to 12.34

 

81,278

 

12.55 to 12.64

 

1,025,988

 

0.76

 

1.25 to 1.60

 

2.27 to 2.48

 

Nova Fund

 

10.77 to 10.82

 

15,297

 

11.02 to 11.10

 

169,509

 

0.39

 

1.25 to 1.60

 

2.32 to 2.52

 

OTC Fund

 

11.83 to 11.89

 

7,441

 

11.77 to 11.85

 

88,133

 

—

 

1.25 to 1.60

 

(0.49 to (0.29)

 

Technology Fund

 

11.86 to 11.93

 

2,263

 

12.04 to 12.13

 

27,326

 

—

 

1.25 to 1.60

 

1.48 to 1.68

 

Ursa Fund(b)

 

7.66 to 7.70

 

—

 

7.48 to 7.53

 

—

 

—

 

1.25 to 1.60

 

(2.34 to (2.15)

 

U.S. Government Bond Fund(c)

 

12.47 to 12.53

 

79,258

 

13.22 to 13.31

 

1,049,473

 

3.34

 

1.25 to 1.60

 

6.01 to 6.22

 

U.S. Government Money Market

 

9.64 to 9.69

 

1,581,196

 

9.68 to 9.75

 

1,430,882

 

1.93

 

1.25 to 1.60

 

0.40 to 0.60

 

Fund

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities Fund

 

10.08 to 10.13

 

62,880

 

10.96 to 11.04

 

61,709

 

0.59

 

1.25 to 1.60

 

8.81 to 9.03

 

Equity Income Portfolio

 

11.38 to 11.47

 

47,215

 

11.63 to 11.71

 

594,757

 

1.25

 

1.25 to 1.60

 

2.05 to 2.26

 

International Stock Portfolio

 

11.51 to 11.57

 

6,772

 

13.14 to 13.24

 

93,795

 

4.17

 

1.25 to 1.60

 

14.20 to 14.43

 

 


 

 

 

January 1, 2004

 

December 31, 2004

 

For the Year ended December 31, 2004

 

Subaccount

 

Unit Fair Value

 

Units

 

Unit Fair Value

 

Net Assets

 

Investment
Income
Ratio*(%)

 

Expense
Ratio**(%)

 

Total
Return***(%)

 

Money Market Fund

 

$9.96 to $22.53

 

1,842,289

 

$9.91 to $22.46

 

$

25,259,288

 

0.92

 

1.25 to 1.60

 

(0.49 to (0.30)

 

Limited Maturity Fund

 

10.54 to 14.74

 

1,893,330

 

10.62 to 14.89

 

23,515,056

 

3.39

 

1.25 to 1.60

 

.85 to 1.05

 

Quality Bond Fund

 

10.73 to 28.23

 

5,308,321

 

11.06 to 29.16

 

83,861,067

 

4.20

 

1.25 to 1.60

 

3.09 to 3.29

 

High Yield Bond Fund

 

12.22 to 44.48

 

2,400,182

 

13.34 to 48.63

 

53,530,372

 

7.37

 

1.25 to 1.60

 

9.12 to 9.34

 

Flexibly Managed Fund

 

12.78 to 104.89

 

16,828,951

 

14.93 to 122.84

 

603,145,736

 

2.06

 

1.25 to 1.60

 

16.88 to 17.11

 

Growth Stock Fund

 

5.06 to 34.32

 

3,183,875

 

5.58 to 37.93

 

50,595,473

 

0.43

 

1.25 to 1.60

 

10.29 to 10.51

 

Large Cap Value Fund

 

10.64 to 45.82

 

4,924,604

 

11.83 to 51.07

 

130,069,852

 

1.41

 

1.25 to 1.60

 

11.23 to 11.45

 

Large Cap Growth Fund

 

10.35 to 10.38

 

1,489,064

 

11.08 to 11.14

 

16,543,958

 

0.61

 

1.25 to 1.60

 

7.10 to 7.31

 

Index 500 Fund

 

8.98 to 13.91

 

7,296,541

 

9.78 to 15.18

 

87,000,138

 

1.67

 

1.25 to 1.60

 

8.88 to 9.10

 

Mid Cap Growth Fund

 

6.01 to 12.95

 

3,901,641

 

6.60 to 14.24

 

34,930,568

 

—

 

1.25 to 1.60

 

9.77 to 9.99

 

Mid Cap Value Fund

 

12.31 to 18.81

 

2,577,894

 

14.94 to 22.88

 

51,433,208

 

0.40

 

1.25 to 1.60

 

21.40 to 21.65

 

Strategic Value Fund

 

10.47 to 10.51

 

1,284,004

 

12.83 to 12.89

 

16,508,987

 

0.52

 

1.25 to 1.60

 

22.46 to 22.71

 

Small Cap Growth Fund

 

8.47 to 25.46

 

2,779,089

 

9.14 to 27.53

 

55,169,724

 

—

 

1.25 to 1.60

 

7.92 to 8.14

 

Small Cap Value Fund

 

13.93 to 25.79

 

3,588,341

 

15.77 to 29.26

 

83,681,235

 

0.03

 

1.25 to 1.60

 

13.23 to 13.45

 

International Equity Fund

 

9.31 to 20.41

 

3,829,204

 

11.94 to 26.21

 

73,895,865

 

0.64

 

1.25 to 1.60

 

28.14 to 28.40

 

REIT Fund

 

12.23 to 12.27

 

1,111,732

 

16.33 to 16.42

 

18,205,011

 

3.79

 

1.25 to 1.60

 

33.58 to 33.84

 

Balanced Portfolio

 

9.58 to 17.22

 

1,909,414

 

10.32 to 18.59

 

26,703,581

 

1.21

 

1.25 to 1.60

 

7.74 to 7.95

 

Equity Income Portfolio

 

10.69 to 20.91

 

4,634,977

 

11.76 to 23.03

 

77,817,156

 

1.52

 

1.25 to 1.60

 

9.92 to 10.14

 

Growth Portfolio

 

8.72 to 20.67

 

6,921,706

 

8.89 to 21.10

 

99,015,538

 

0.27

 

1.25 to 1.60

 

1.89 to 2.09

 

Asset Manager Portfolio

 

10.30 to 17.69

 

1,324,744

 

10.71 to 18.43

 

18,485,779

 

2.67

 

1.25 to 1.60

 

3.95 to 4.16

 

Emerging Markets Equity (Int’l) Portfolio

 

9.58 to 13.89

 

1,128,099

 

11.65 to 16.88

 

15,231,832

 

0.66

 

1.25 to 1.60

 

21.34 to 21.59

 

V.I. Capital Appreciation Fund

 

10.19 to 10.22

 

12,294

 

10.69 to 10.75

 

131,963

 

—

 

1.25 to 1.60

 

4.93 to 5.14

 

High Income Bond Fund II

 

11.58 to 11.62

 

187,933

 

12.59 to 12.66

 

2,370,366

 

6.43

 

1.25 to 1.60

 

8.71 to 8.93

 

Financial Services Fund

 

10.11 to 10.14

 

6,142

 

11.65 to 11.71

 

71866

 

0.41

 

1.25 to 1.60

 

15.26 to 15.49

 

Health Care Fund

 

10.85 to 10.88

 

5,534

 

11.34 to 11.40

 

62,990

 

—

 

1.25 to 1.60

 

4.54 to 4.75

 

Mekros Fund(a)

 

9.96 to 9.99

 

56,193

 

12.27 to 12.34

 

692,769

 

—

 

1.25 to 1.60

 

23.21 to 23.46

 

Nova Fund

 

9.55 to 9.58

 

29,414

 

10.77 to 10.82

 

317,979

 

—

 

1.25 to 1.60

 

12.80 to 13.03

 

OTC Fund

 

10.99 to 11.03

 

39,693

 

11.83 to 11.89

 

471,573

 

—

 

1.25 to 1.60

 

7.61 to 7.83

 

Technology Fund

 

11.92 to 11.96

 

14,246

 

11.86 to 11.93

 

169,823

 

—

 

1.25 to 1.60

 

(0.46 to (0.26)

 

Ursa Fund(b)

 

8.67 to 8.69

 

—

 

7.66 to 7.70

 

—

 

—

 

1.25 to 1.60

 

(11.63 to (11.46)

 

U.S. Government Bond Fund(c)

 

11.69 to 11.73

 

33,817

 

12.47 to 12.53

 

422,597

 

3.06

 

1.25 to 1.60

 

6.68 to 6.90

 

U.S. Government Money Market Fund

 

9.77 to 9.81

 

206,521

 

9.64 to 9.69

 

1,992,298

 

0.14

 

1.25 to 1.60

 

(1.35 to (1.15)

 

Utilities Fund

 

8.73 to 8.75

 

6,027

 

10.08 to 10.13

 

60,973

 

3.23

 

1.25 to 1.60

 

15.45 to 15.68

 

Equity Income Portfolio

 

10.07 to 10.17

 

82,922

 

11.38 to 11.47

 

946,739

 

3.54

 

1.25 to 1.60

 

12.80 to 13.02

 

International Stock Portfolio

 

10.28 to 10.31

 

1,709

 

11.51 to 11.57

 

19,736

 

0.24

 

1.25 to 1.60

 

11.97 to 12.19

 

 


 

 

 

January 1, 2003

 

December 31, 2003

 

For the Year ended December 31, 2003

 

Subaccount

 

Unit Fair Value

 

Units

 

Unit Fair Value

 

Net Assets

 

Investment
Income
Ratio*(%)

 

Expense
Ratio**(%)

 

Total
Return***(%)

 

Money Market Fund

 

$10.02 to $22.62

 

2,209,800

 

$9.96 to $22.53

 

$

31,014,882

 

0.90

 

1.25 to 1.60

 

(0.59 to (0.39)

 

Limited Maturity Bond Fund

 

10.39 to 14.50

 

1,975,056

 

10.54 to 14.74

 

24,763,137

 

3.71

 

1.25 to 1.60

 

1.42 to 1.62

 

Quality Bond Fund

 

10.25 to 26.93

 

5,164,695

 

10.73 to 28.23

 

81,481,029

 

4.47

 

1.25 to 1.60

 

4.65 to 4.86

 

High Yield Bond Fund

 

10.07 to 36.58

 

2,185,320

 

12.22 to 44.48

 

50,912,737

 

8.76

 

1.25 to 1.60

 

21.35 to 21.60

 

Flexibly Managed Fund

 

9.98 to 81.75

 

11,550,403

 

12.78 to 104.89

 

435,827,384

 

2.17

 

1.25 to 1.60

 

28.05 to 28.30

 

Growth Stock Fund

 

4.57 to 61.60

 

3,344,230

 

5.06 to 34.32

 

53,191,881

 

0.03

 

1.25 to 1.60

 

(44.29 to 10.86)

 

Large Cap Value Fund

 

8.45 to 36.32

 

4,736,097

 

10.64 to 45.82

 

124,852,324

 

1.61

 

1.25 to 1.60

 

25.92 to 26.17

 

Large Cap Growth Fund

 

8.36 to 8.37

 

863,343

 

10.35 to 10.38

 

8,949,195

 

0.46

 

1.25 to 1.60

 

23.80 to 24.05

 

Index 500 Fund

 

7.09 to 10.97

 

7,119,751

 

8.98 to 13.91

 

79,787,359

 

1.47

 

1.25 to 1.60

 

26.56 to 26.81

 

Mid Cap Growth Fund

 

4.08 to 8.78

 

3,800,719

 

6.01 to 12.95

 

32,287,718

 

—

 

1.25 to 1.60

 

47.15 to 47.44

 

Mid Cap Value Fund

 

9.13 to 13.91

 

2,455,518

 

12.31 to 18.81

 

41,381,342

 

0.39

 

1.25 to 1.60

 

34.88 to 35.15

 

Strategic Value Fund

 

8.49 to 8.50

 

687,299

 

10.47 to 10.51

 

7,209,721

 

0.53

 

1.25 to 1.60

 

23.33 to 23.58

 

Small Cap Growth Fund

 

5.83 to 17.47

 

2,802,966

 

8.47 to 25.46

 

54,098,865

 

—

 

1.25 to 1.60

 

45.39 to 45.68

 

Small Cap Value Fund

 

8.08 to 14.94

 

3,397,254

 

13.93 to 25.79

 

72,130,927

 

—

 

1.25 to 1.60

 

72.33 to 72.68

 

International Equity Fund

 

7.11 to 15.56

 

3,537,633

 

9.31 to 20.41

 

57,419,609

 

0.66

 

1.25 to 1.60

 

30.94 to 31.20

 

REIT Fund

 

9.15 to 9.17

 

691,940

 

12.23 to 12.27

 

8,474,702

 

4.32

 

1.25 to 1.60

 

33.54 to 33.80

 

Balanced Portfolio

 

8.36 to 15.00

 

2,129,172

 

9.58 to 17.22

 

28,515,617

 

1.74

 

1.25 to 1.60

 

9.62 to 19.93

 

Equity Income Portfolio

 

8.33 to 16.24

 

4,621,038

 

10.69 to 20.91

 

73,309,592

 

1.80

 

1.25 to 1.60

 

28.45 to 28.71

 

Growth Portfolio

 

6.66 to 15.75

 

7,331,178

 

8.72 to 20.67

 

107,262,818

 

0.27

 

1.25 to 1.60

 

26.01 to 36.19

 

Asset Manager Portfolio

 

8.85 to 15.19

 

1,305,076

 

10.30 to 17.69

 

18,334,086

 

3.55

 

1.25 to 1.60

 

14.59 to 18.11

 

Emerging Markets Equity (Int’l) Portfolio

 

6.48 to 9.41

 

1,153,874

 

9.58 to 13.89

 

12,587,574

 

—

 

1.25 to 1.60

 

37.12 to 58.86

 

V.I. Capital Appreciation Fund

 

7.99 to 8.00

 

26,917

 

10.19 to 10.22

 

274,790

 

—

 

1.25 to 1.60

 

27.46 to 27.72

 

High Income Bond Fund II

 

9.63 to 9.64

 

134,415

 

11.58 to 11.62

 

1,561,502

 

3.35

 

1.25 to 1.60

 

20.28 to 20.52

 

Financial Services Fund

 

7.97 to 7.98

 

—

 

10.11 to 10.14

 

—

 

—

 

1.25 to 1.60

 

26.88 to 27.13

 

Health Care Fund

 

8.49 to 8.50

 

657

 

10.85 to 10.88

 

7,120

 

—

 

1.25 to 1.60

 

27.71 to 27.97

 

Mekros Fund(a)

 

6.16 to 6.17

 

18,953

 

9.96 to 9.99

 

213,611

 

42.93

 

1.25 to 1.60

 

61.67 to 62.00

 

Nova Fund

 

6.97 to 6.98

 

349,021

 

9.55 to 9.58

 

3,332,453

 

—

 

1.25 to 1.60

 

36.98 to 37.26

 

OTC Fund

 

7.68 to 7.69

 

11,116

 

10.99 to 11.03

 

122,567

 

—

 

1.25 to 1.60

 

43.11 to 43.39

 

Technology Fund

 

7.51 to 7.52

 

10,053

 

11.92 to 11.96

 

120,114

 

—

 

1.25 to 1.60

 

58.77 to 59.08

 

Ursa Fund(b)

 

11.53 to 11.55

 

863

 

8.67 to 8.69

 

7,478

 

—

 

1.25 to 1.60

 

(24.86 to (24.71)

 

U.S. Government Bond Fund(c)

 

11.90 to 11.92

 

74,950

 

11.69 to 11.73

 

864,216

 

3.46

 

1.25 to 1.60

 

(1.80 to (1.60)

 

U.S. Government Money Market Fund

 

9.93 to 9.94

 

613,906

 

9.77 to 9.81

 

6,001,539

 

—

 

1.25 to 1.60

 

(1.58 to (1.38)

 

Utilities Fund

 

7.07 to 7.08

 

869

 

8.73 to 8.75

 

11,531

 

0.17

 

1.25 to 1.60

 

23.41 to 23.66

 

Equity Income Portfolio II

 

8.24 to 8.26

 

28,216

 

10.07 to 10.17

 

288,829

 

2.18

 

1.25 to 1.60

 

22.16 to 23.16

 

International Stock Portfolio

 

8.00 to 8.01

 

13,147

 

10.28 to 10.31

 

135,440

 

1.41

 

1.25 to 1.60

 

30.01 to 30.27

 

 

(a) Prior to May 1, 2006, Russell 2000 Advantage Fund was named Mekros Fund. 

(b) Prior to May 1, 2006, Inverse S&P 500 Index Fund was named Ursa Fund. 

(c) Prior to May 1, 2006, Government Long Bond Advantage was named U.S. Government Bond Fund. 

 


 

*

These ratios represent the dividends, excluding distributions of capital gains, received by the subaccounts within Account III from the underlying mutual fund, net of management fees and expenses assessed by the fund manager, divided by the average net assets of the respective subaccounts. These ratios exclude those expenses, such as mortality and expense charges, that result in direct reduction in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying funds in which the subaccounts invest.

 

 

**

These ratios represent the annualized contract expenses of the subaccount, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying subaccount are excluded.

 

 

***

These ratios represent the total return for the periods indicated, including changes in the value of the underlying subaccount, and reflect deductions for all items included in the expense ratio. The total return does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. Investment options with a date notation indicate the effective date of that investment option in the variable account. The total return is calculated for the period indicated or from the effective date through the end of the reporting period. 

 


 

 

PricewaterhouseCoopers LLP
Two Commerce Square, Suite 1700
2001 Market Street
Philadelphia PA 19103-7042
Telephone (267) 330 3000
Facsimile (267) 330 3300
www.pwc.com 

 

Report of the Independent Accounting Firm 

 

To the Board of Trustees of The Penn Mutual Life Insurance Company and contract owners of Penn Mutual Variable Annuity Account III 

 

In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of each of the sub accounts disclosed in Note 1 which comprise the Penn Mutual Variable Annuity Account III (the “Variable Account”) at December 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the four years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.  These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Variable Account’s management; our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit, which included confirmation of securities at December 31, 2007 by correspondence with the transfer agent, provides a reasonable basis for our opinion.  The financial highlights included in Note 5 of the Variable Account for the year ended December 31, 2003 were audited by other auditors whose report dated March 19, 2004 expressed an unqualified opinion on those financial highlights. 

 

 

PricewaterhouseCoopers LLP
Philadelphia, PA
April 17, 2008 

 


 

The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Balance Sheets

 

As of December 31,

 

2007

 

2006

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Debt securities, at fair value

 

$

5,886,524

 

$

5,690,980

 

Equity securities, at fair value

 

8,582

 

8,980

 

Real estate, net of accumulated depreciation

 

16,311

 

16,896

 

Policy loans

 

669,338

 

633,403

 

Short-term investments

 

38,060

 

191,347

 

Other invested assets, at fair value

 

363,706

 

245,156

 

Total investments

 

6,982,521

 

6,786,762

 

 

 

 

 

 

 

Cash and cash equivalents

 

23,806

 

54,600

 

Investment income due and accrued

 

81,381

 

73,528

 

Deferred acquisition costs

 

806,718

 

753,703

 

Amounts recoverable from reinsurers

 

355,112

 

352,920

 

Broker/dealer receivables

 

1,708,810

 

1,922,896

 

Goodwill

 

50,026

 

50,026

 

Other assets

 

334,785

 

296,565

 

Separate account assets

 

4,137,215

 

3,791,429

 

 

 

 

 

 

 

Total Assets

 

$

14,480,374

 

$

14,082,429

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Reserves for future policy benefits

 

$

2,608,995

 

$

2,615,706

 

Other policyholder funds

 

3,357,686

 

3,278,736

 

Policyholders’ dividends payable

 

16,596

 

18,554

 

Broker/dealer payables

 

1,435,009

 

1,678,262

 

Accrued income taxes

 

195,135

 

152,966

 

Debt

 

299,992

 

298,185

 

Other liabilities

 

390,852

 

353,254

 

Separate account liabilities

 

4,137,215

 

3,791,429

 

 

 

 

 

 

 

Total Liabilities

 

12,441,480

 

12,187,092

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

1,977,554

 

1,835,306

 

Accumulated other comprehensive income:

 

 

 

 

 

Unrealized appreciation of securities, net

 

63,205

 

61,805

 

Minimum pension liability

 

—

 

(1,774

)

Pension liability after adoption of FAS 158

 

(1,865

)

—

 

Total accumulated other comprehensive income

 

61,340

 

60,031

 

Total Equity

 

2,038,894

 

1,895,337

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

14,480,374

 

$

14,082,429

 

 

The accompanying notes are an integral part of these financial statements.

 

1


 

The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Income

 

For the Years Ended December 31,

 

2007

 

2006

 

2005

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premium and annuity considerations

 

$

130,323

 

$

139,298

 

$

123,909

 

Policy fee income

 

314,450

 

249,635

 

222,188

 

Net investment income

 

425,251

 

410,491

 

385,285

 

Net realized capital losses

 

(10,894

)

(9,667

)

(2,949

)

Broker/dealer fees and commissions

 

552,132

 

536,732

 

467,947

 

Other income

 

36,296

 

32,377

 

29,591

 

 

 

 

 

 

 

 

 

Total Revenues

 

1,447,558

 

1,358,866

 

1,225,971

 

 

 

 

 

 

 

 

 

BENEFITS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefits paid to policyholders and beneficiaries

 

419,109

 

403,781

 

399,437

 

Policyholder dividends

 

34,496

 

37,122

 

36,247

 

Decrease in reserves for future policy benefits

 

(25,857

)

(11,187

)

(31,233

)

General expenses

 

369,657

 

350,385

 

313,988

 

Broker/dealer sales expense

 

314,060

 

301,959

 

264,719

 

Amortization of deferred acquisition costs

 

133,406

 

86,974

 

74,898

 

 

 

 

 

 

 

 

 

Total Benefits and Expenses

 

1,244,871

 

1,169,034

 

1,058,056

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

202,687

 

189,832

 

167,915

 

 

 

 

 

 

 

 

 

Income taxes:

 

 

 

 

 

 

 

Current

 

33,652

 

(2,716

)

22,699

 

Deferred

 

31,977

 

47,134

 

32,788

 

 

 

 

 

 

 

 

 

Income Tax Expense

 

65,629

 

44,418

 

55,487

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

137,058

 

$

145,414

 

$

112,428

 

 

The accompanying notes are an integral part of these financial statements.

 

2


 

The Penn Mutual Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Equity

 

(In thousands)

 

Accumulated
Other
Comprehensive
Income/(Loss)

 

Retained
Earnings

 

Total Equity

 

 

 

 

 

 

 

 

 

Balance at January 1, 2005

 

$

188,366

 

$

1,577,464

 

$

1,765,830

 

 

 

 

 

 

 

 

 

Net income for 2005

 

—

 

112,428

 

112,428

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

Unrealized depreciation of securities,

 

—

 

—

 

—

 

net of reclassification adjustments

 

(85,992

)

—

 

(85,992

)

Minimum pension liability

 

(131

)

—

 

(131

)

Comprehensive income

 

 

 

 

 

26,305

 

Balance at December 31, 2005

 

$

102,243

 

$

1,689,892

 

$

1,792,135

 

 

 

 

 

 

 

 

 

Net income for 2006

 

—

 

145,414

 

145,414

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

Unrealized depreciation of securities,

 

—

 

—

 

—

 

net of reclassification adjustments

 

(43,269

)

—

 

(43,269

)

Minimum pension liability

 

1,057

 

—

 

1,057

 

Comprehensive Income

 

 

 

 

 

103,202

 

Balance at December 31, 2006

 

$

60,031

 

$

1,835,306

 

$

1,895,337

 

 

 

 

 

 

 

 

 

Net income for 2007

 

—

 

137,058

 

137,058

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

Unrealized appreciation of securities,

 

 

 

 

 

 

 

net of reclassification adjustments

 

1,400

 

—

 

1,400

 

Minimum pension liability

 

237

 

—

 

237

 

Comprehensive income

 

 

 

 

 

138,695

 

Impact of adoption of Statement of Financial Accouting Standards (SFAS) No. 158, net of tax

 

(328

)

—

 

(328

)

Impact of adoption of FASB Interpretation (FIN)No. 48, net of tax

 

—

 

5,190

 

5,190

 

Balance at December 31, 2007

 

$

61,340

 

$

1,977,554

 

$

2,038,894

 

 

The accompanying notes are an integral part of these financial statements.

 

3


 

The Penn Mutual Life Insurance Company and Subsidiaries

 

Consolidated Statements of Cash Flows

 

For the Years Ended December 31,

 

2007

 

2006

 

2005

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

137,058

 

$

145,414

 

$

112,428

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Capitalization of acquisition costs

 

(186,381

)

(135,526

)

(128,349

)

Amortization of deferred acquisition costs

 

133,406

 

86,974

 

74,898

 

Policy fees on universal life and investment contracts

 

(190,460

)

(137,060

)

(124,112

)

Interest credited on universal life and investment contracts

 

146,862

 

136,499

 

127,058

 

Depreciation and amortization

 

(10,335

)

(8,483

)

1,870

 

Net realized capital losses

 

10,894

 

9,667

 

2,949

 

Net investment income on alternative assets and derivatives

 

(16,662

)

(7,986

)

4,011

 

(Increase)/decrease in investment income due and accrued

 

(7,853

)

(6,305

)

5,691

 

Increase in amounts recoverable from reinsurers

 

(2,192

)

(18,097

)

(9,289

)

Decrease in reserves for future policy benefits

 

(6,711

)

(7,687

)

(33,062

)

Increase in accrued income taxes

 

42,234

 

33,354

 

19,391

 

Increase/(decrease) in net broker/dealer receivables

 

(29,167

)

34,669

 

11,552

 

Increase in broker loans and advances

 

(12,943

)

1,881

 

(9,421

)

Increase in sales inducements

 

(9,879

)

(8,278

)

(4,611

)

Other, net

 

(3,375

)

(3,330

)

28,878

 

 

 

 

 

 

 

 

 

Net cash (used) provided by operating activities

 

(5,504

)

115,706

 

79,882

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of investments:

 

 

 

 

 

 

 

Debt securities

 

1,046,967

 

2,877,545

 

1,128,999

 

Equity securities

 

200

 

1,373

 

4,386

 

Other

 

—

 

(166

)

(36

)

 

 

 

 

 

 

 

 

Maturity and other principal repayments:

 

 

 

 

 

 

 

Debt securities

 

518,835

 

544,353

 

640,578

 

Other

 

21,806

 

26,866

 

13,673

 

 

 

 

 

 

 

 

 

Cost of investments acquired:

 

 

 

 

 

 

 

Debt securities

 

(1,763,617

)

(3,657,500

)

(2,188,988

)

Acquisition, net of cash acquired

 

—

 

—

 

(60,045

)

Equity securities

 

—

 

(1,380

)

(4,576

)

Alternative assets

 

(57,883

)

(50,318

)

(28,431

)

Derivatives

 

(32,797

)

(12,422

)

(8,660

)

Other

 

(34

)

(2,161

)

(2,085

)

 

 

 

 

 

 

 

 

Change in policy loans, net

 

(35,935

)

(7,971

)

(3,468

)

Cost of short-term investments sold, net

 

153,287

 

29,436

 

187,460

 

Purchases of furniture and equipment, net

 

4,603

 

(3,453

)

(2,655

)

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

$

(144,568

)

$

(255,798

)

$

(323,848

)

 

4


 

For the Years Ended December 31,

 

2007

 

2006

 

2005

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits for universal life and investment contracts

 

$

1,139,291

 

$

974,050

 

$

922,974

 

Withdrawals from universal life and investment contracts

 

(835,543

)

(704,739

)

(669,576

)

Transfers to separate accounts

 

(186,235

)

(127,116

)

(62,534

)

Issuance/(extinguishment) of debt

 

1,765

 

(31,487

)

58,322

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

119,278

 

110,708

 

249,186

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

(30,794

)

(29,394

)

5,220

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

Beginning of the year

 

54,600

 

83,994

 

78,774

 

End of the year

 

$

23,806

 

$

54,600

 

$

83,994

 

 

The accompanying notes are an integral part of these financial statements.

 

5


 

THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands)

 

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization and Basis of Presentation

The Penn Mutual Life Insurance Company (“PML”) was founded and commenced business in 1847 as a mutual life insurance company.  PML concentrates primarily on the sale of individual life insurance and annuity products.  The primary products that PML currently markets are traditional whole life, term life, universal life, variable universal life, immediate annuities and deferred annuities, both fixed and variable.  PML markets its products through a network of career agents, independent agents, and independent marketing organizations.  PML is also involved in the broker/dealer business, which offers a variety of investment products and services and is conducted through PML’s non-insurance subsidiaries.  PML sells its products in all fifty states and the District of Columbia.

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of The Penn Mutual Life Insurance Company, its wholly owned life insurance subsidiary, The Penn Insurance and Annuity Company (“PIA”), and non-insurance subsidiaries (principally broker/dealer and investment advisory subsidiaries) (collectively the “Company”).  All significant intercompany accounts and transactions have been eliminated in consolidation.  The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes.  Such estimates and assumptions could change in the future, as more information becomes known which could impact the amounts reported and disclosed therein.

 

Investments

The Company classifies its debt securities (bonds, preferred stocks and mortgage and asset-backed securities) as available-for-sale.  These securities are carried at fair value, with the change in unrealized gains and losses reported in other comprehensive income, net of tax.  Income on debt securities is recognized using the effective yield method. For mortgage and asset-backed securities (“structured securities”), changes in expected cash flows are recognized using the retrospective method, except for changes in expected cash flows for structured securities where the possibility of credit loss is other than remote.  In these cases, income is recognized on the prospective method over the remaining life of the securities. Cash flow assumptions for structured securities are obtained from broker dealer survey values or internal estimates consistent with the current interest rate and economic environments.  These assumptions represent the Company’s best estimate of the amount and timing of estimated principal and interest cash flows based on current information and events that a market participant would use in determining the current fair value of the security.  Interest on debt securities is recorded as income when earned.

 

Equity securities are classified as available-for-sale and carried at fair value.  Dividends on equity securities are credited to income on their ex-dividend dates.

 

The Company regularly evaluates the carrying value of debt and equity securities and adjusts their recorded value for impairment considered other than temporary.  Factors considered in determining whether a decline in fair value is other than temporary include the significance of the decline, the length of time a security’s fair value is below its amortized cost, current economic conditions, past credit loss experience, estimated future cash flows, and other circumstances of the investee, and the Company’s ability and intent to hold the investment for a sufficient period of time to allow for anticipated recovery.  A decline in a security’s fair value that is deemed to be other than temporary is reported in income as a realized capital loss and an appropriate reduction in the cost basis of the security is recognized.  The discount created by the impairment loss is amortized into investment income over the remaining term of the security based on expected future cash flows.

 

6


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

Realized gains and losses are determined by specific identification and are included in income on the trade date, net of amortization of deferred acquisition costs.  Unrealized gains and losses, net of applicable taxes and amortization of deferred acquisition costs, are accounted for as a separate component of other comprehensive income.

 

Policy loans are carried at the aggregate of unpaid principal balances with interest.

 

Short-term investments include securities purchased with an original maturity date of less than one year.  Short-term investments are valued at cost, which approximates fair value.

 

Other invested assets primarily include limited partnerships and derivatives.  Investments in limited partnerships are accounted for using the equity method.  Income from these partnerships is classified as investment income.

 

Derivatives

The Company utilizes various derivatives, including interest rate swaps, financial futures, interest rate caps, and put options in conjunction with its management of assets and liabilities and interest rate risk.  All derivatives are recognized at fair value and reported in other invested assets.  The accounting treatment for specific derivatives depends on whether management elects to follow hedge accounting, subject to the criteria for demonstrating hedge effectiveness specified in Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

 

Interest rate swaps are used to manage risk from interest rate fluctuations.  Credit default swaps protect the Company from a decline in credit quality of a specified security.  These derivative transactions have been designated to qualify as fair value or cash flow hedges of fixed income securities in the investment portfolio.

 

For a fair value hedge, the gain or loss on the hedging instrument is recognized in current earnings.  The carrying value of the hedged items is adjusted by the change in fair value and is recognized in current earnings.  The Company recognized realized capital gains/(losses) of $(8,745), $392, and $(11,040) in 2007, 2006 and 2005, respectively, related to the ineffectiveness of its swap hedges.

 

For a cash flow hedge, the effective portion flows through other comprehensive income and the ineffective portion is recognized in current earnings.  The effective portion of the cash flow hedge recorded in other comprehensive income was $15,046 at December 31, 2007.

 

In 2007 and 2006, the Company entered into interest rate swaps, financial futures and put options to hedge risks associated with the offering of equity market based guarantees in the Company’s annuity product portfolio. These derivatives do not qualify for hedge accounting.  The change in fair value of these derivatives is recognized as a realized gain/(loss) of $20,436 and $(6,429) during 2007 and 2006, respectively.  The gain/(loss) on settlement of these derivative transactions was $92 and $2,174 during 2007 and 2006, respectively.

 

Interest rate caps are carried at fair value and are classified as other invested assets in the consolidated balance sheet.  The Company’s use of interest rate caps is designed to manage risk associated with rising interest rates, but is not a hedge of specific assets or liabilities.  Therefore, these transactions do not qualify for hedge accounting treatment.  As a result, the change in the fair value of the derivatives is recognized currently in realized capital gains or losses in the period of change.  The Company recognized realized capital losses of $35, $1,697 and $4,666 in 2007, 2006 and 2005, respectively, related to the change in fair value of interest rate caps.

 

7


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, money market instruments and other debt securities purchased with an original  maturity date of 90 days or less.

 

Other Assets

Property and equipment, leasehold improvements, computer equipment,  and packaged software  are stated at cost, less accumulated depreciation and amortization.  Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the related assets.  Amortization of leasehold improvements is calculated using the straight-line method over the lesser of the term of the leases or the estimated useful life of the improvements.  Depreciation of computer equipment is calculated using the straight-line method over the lesser of its useful life or three years. Packaged software is depreciated using the straight-line method over the lesser of its useful life or three years.  At December 31, 2007 and 2006, these assets had a gross carrying amount of $98,804 and $96,085, respectively and accumulated depreciation and amortization was $77,061 and $71,871 at December 31, 2007 and 2006, respectively.  Related depreciation and amortization expense was $5,190, $7,341, and $13,072 for the years ended December 31, 2007, 2006 and 2005, respectively.

 

Intangibles assets, which are related to purchased customer lists, are amortized over its useful life, unless the asset is determined to have an indefinite useful life.  Those intangible assets had a gross carrying amount of $10,707 and $10,707 and accumulated amortization of $5,928 and $4,411 as of December 31, 2007 and 2006, respectively.  The aggregate amortization expense related to these intangible assets was $1,517, $1,768 and $1,432 in 2007, 2006 and 2005, respectively.  Estimated annual amortization expense is:

 

Years ending
December 31,

 

Amortization
Expense

 

2008

 

$

1,316

 

2009

 

912

 

2010

 

668

 

2011

 

479

 

2012

 

374

 

 

The Company had goodwill of $50,026 and $50,026 as of December 31, 2007 and 2006, respectively.   Goodwill is reviewed annually for impairment pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets.”  No impairment of goodwill was recognized during 2007, 2006 or 2005.

 

Deferred Acquisition Costs

Costs of acquiring new insurance and investment type contracts, which vary with and are primarily related to the production of new business, are deferred to the extent that such costs are deemed recoverable from future gross profits.  Such costs include commissions, certain costs of policy issuance and underwriting, and certain variable agency expenses.

 

Deferred acquisition costs (“DAC”) related to participating traditional and universal life insurance policies and investment type products without mortality risk that include significant surrender charges fall under SFAS No. 120, “Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts” and SFAS No. 97. “Accounting by Insurance Cos. for Certain Long-Duration Contracts & Realized Gains & Losses on Investment Sales” and are being amortized over the lesser of the estimated or actual contract life. Amortization expense is recognized in proportion to estimated gross profits arising principally from interest, mortality margins, expense margins and surrender charges.  The effects of revisions to estimated gross profits are reflected as adjustments to DAC in the period such estimated gross profits are revised.  Deferred acquisition costs related to certain term business fall under SFAS No. 60. “Accounting and Reporting by Insurance Enterprises “ and are amortized in proportion to premium revenue.

 

8


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

During 2007, the Company completed an annual review of the assumptions underlying the amortization for DAC. As a result of the comprehensive review, we recorded negative net prospective unlocking of approximately $12 million pre-tax ($8 million after-tax) for 2007.

 

DAC is reviewed annually to determine whether the unamortized portion of such costs is recoverable from future estimated gross profits.  The Company has evaluated all unamortized DAC and concluded these amounts are recoverable at December 31, 2007 and 2006, respectively.  Certain costs and expenses reported in the consolidated income statements are net of amounts deferred.

 

Separate Accounts

Separate Account assets and liabilities represent segregated funds administered and invested by the Company primarily for the benefit of variable life insurance policyholders and annuity and pension contractholders, including the Company’s benefit plans.  The value of the assets in the Separate Accounts reflects the actual investment performance of the respective accounts and is not guaranteed by the Company.  The carrying value for Separate Account assets and liabilities approximates the fair value of the underlying assets, which are primarily common stocks.

 

The Company issues traditional variable annuity contracts in the separate accounts in which the Company provides various forms of guarantees to benefit the related contract holders called Guaranteed Minimum Death Benefits (“GMDB”), Guaranteed Minimum Accumulated Benefits (“GMAB”) and GMAB/Guaranteed Minimum Withdrawal Benefits (“GMWB”).  See Note 10 for a discussion of the Company’s obligation regarding these product features.

 

Sales Inducements

Certain sales inducements are capitalized and then amortized into income in the future.  PML has deferred annuity policies in force that contain sales inducements, which are deferred if they meet the requirements.

 

Capitalized sales inducements are amortized using the same methodology and assumptions used to amortize DAC.  The following table summarizes the changes to the sales inducements asset as of December 31:

 

 

 

2007

 

2006

 

Beginning balance

 

$

27,707

 

$

19,430

 

Additional amounts deferred

 

12,951

 

9,764

 

Amortization

 

3,072

 

1,487

 

Ending balance

 

$

37,586

 

$

27,707

 

 

Reserves for Future Policy Benefits

Future policy benefits include reserves for participating traditional life insurance and life contingent annuity products and are established in amounts adequate to meet the estimated future obligations of the policies in force.

 

Liabilities for participating traditional life products are computed using the net level premium method, using assumptions for investment yields, mortality and morbidity, which are consistent with the dividend fund interest rate and mortality rates used in calculating cash surrender values.  Interest rate assumptions used in the calculation of the liabilities for participating traditional life products ranged from 2.5% to 8.5%.  Reserves for substandard policies are computed using multiples of the respective underlying mortality tables.

 

Liabilities for life contingent annuity products are computed by estimating future benefits and expenses.  Assumptions are based on the Company’s actual experience projected at the time of policy issue with provision for adverse deviations.  Interest rate assumptions range from 2.25% to 13.25%.

 

9


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

Other Policyholder Funds

Other policyholder funds represent liabilities for universal life and investment-type annuity products.  The liabilities for these products are based on the contract account value, which consists of deposits received from customers and investment earnings on the account value, less administrative and expense charges.  The liability for universal life products is also reduced by mortality charges.

 

Liabilities for the non-life contingent annuity products are computed by estimating future benefits and expenses.  Assumptions are based on Company experience projected at the time of policy issue.  Interest rate assumptions range from 2.0% to 10.5%.

 

Contract charges assessed against account values for universal life and investment-type annuities are reflected as policy fee income in revenue.  Interest credited to account values and universal life benefit claims in excess of fund values are reflected as benefit expense.

 

Policyholders’ Dividends Payable

As of December 31, 2007, participating insurance expressed as a percentage of insurance in force is 96%, and as a percentage of premium income is 67%.  The Board of Trustees approves the amount of Policyholders’ dividends to be paid annually.  The aggregate amount of policyholders’ dividends is calculated based on actual interest, mortality, morbidity and expense experience for the year and on management’s judgment as to the appropriate level of equity to be retained by the Company.  The carrying value of this liability approximates the earned amount and fair value at December 31, 2007.

 

Broker/Dealer Receivables and Payables

Broker/dealer transactions in securities and listed options, including related commission revenue and expense, are recorded on a trade-date basis.

 

At December 31, 2007, the customer margin securities of $482,243 and stock borrowings of $1,216,318 were available to the Company to utilize as collateral on various borrowings and other purposes.  The Company utilized $17,858 of these securities as collateral for bank loans and $1,275,754 in stock loan agreements.

 

Federal Income Taxes

The Company files a consolidated federal income tax return with its life and non-life insurance subsidiaries.  Federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year.  Deferred income tax assets and liabilities are established to reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes.  These deferred tax assets or liabilities are measured by using the enacted tax rates expected to apply to taxable income in the period in which the deferred tax liabilities or assets are expected to be settled or realized.  The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes on January 1, 2007.

 

Reinsurance

In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts.  The Company has set its retention limit for acceptance of risk on life insurance policies at various levels up to $5 million.

 

Insurance liabilities are reported before the effects of reinsurance.  Reinsurance receivables (including amounts related to insurance liabilities) are reported as assets, Amounts recoverable from reinsurers.  Estimated reinsurance receivables are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts.

 

10


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

Benefit Plans

The Company accounts for defined benefits in accordance with the requirements of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”  On December 31, 2007, the Company adopted this statement, which requires an employer on a prospective basis to recognize the funded status of its defined benefit pension and post retirement plans as an asset or liability in its statement of financial position and to recognize changes in that funded status through comprehensive income in the year in which the changes occur.

 

Reclassification

Certain 2006 and 2005 amounts have been reclassified to conform with 2007 presentation.

 

New Accounting Pronouncements

 

SOP 05-1

Effective January 1, 2007, the Company adopted the American Institute of Certified Public Accountants Statement of Position 05-1 (“SOP 05-1”), “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts”.   SOP 05-1 provides the criteria for defining an internal replacement as well as classifying whether it is due to an integrated feature or a non-integrated feature.  The SOP also provides guidance on establishing DAC on internal replacements.  The company’s implementation of the standard did not have a material effect on its consolidated results from operations or financial position.

 

FIN 48

Effective January 1, 2007, the company adopted FASB interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes.  FIN 48 provides guidance for recognizing and measuring uncertain tax positions. The guidance clarifies that the amount of tax benefit recognized should be measured using management’s best estimate based on the most favorable expected benefit that is more likely than not (i.e. has a greater than 50% likelihood) to be realized.  Under the guidance for implementing FIN 48 the required cumulative effect adjustment is recorded to retained earnings as of January 1, 2007.  The company’s implementation of the standard increased equity by $5,190.

 

SFAS 158

Effective December 31, 2007, the Company adopted Financial Accounting Standards Board’s Statement of Accounting Standards No. 158 (“SFAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”.  This statement requires an employer on a prospective basis to recognize the funded status of its defined benefit pension and postretirement plans, defined as the difference between the fair value of plan assets and the benefit obligations, as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  In addition, the measurement date of the funded status of the plan is the Balance Sheet date.  The company’s implementation of the standard decreased equity by $328.

 

11


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

SFAS 155

Effective January 1, 2007, the Company adopted FAS No. 155, Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No.  133 and 140  (“FAS 155”). FAS 155 permits fair value re-measurement of an entire hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain embedded derivatives requiring bifurcation; narrows the scope exemption applicable to interest-only strips and principal-only strips from FAS 133 and clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. In December 2006, the FASB issued implementation guidance, Statement 133 Implementation Issue B40 Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets , which creates a scope exception with respect to accounting for prepayment risk within certain securitized financial assets as an embedded derivative. The Company’s implementation of FAS 155 did not have a material impact on the Company’s financial condition or results of operations

 

SFAS 157

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”).  This statement creates a common definition of fair value to be used throughout generally accepted accounting principles.  SFAS 157 will apply whenever another standard requires or permits assets or liabilities to be measured at fair value, with certain exceptions.  The standard establishes a hierarchy for determining fair value which emphasizes the use of observable market data whenever available and focuses on the price that would be received when selling an asset or paid when transferring a liability (i.e., the exit price).  The statement also requires expanded disclosures which include the extent to which assets and liabilities are measured at fair value, the methods and assumptions used to measure fair value and the effect of fair value measures on earnings.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  The company does not expect implementation of the standard will have a material effect on its consolidated results from operation or financial position.

 

SFAS 159

In February 2007, the FASB issues Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”).  This statement provides companies with an option to report selected financial assets and liabilities at fair value.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  The company does not expect implementation of the standard will have a material effect on its consolidated results from operation or financial position.

 

12


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

2.  INVESTMENTS:

 

Debt Securities

The following tables summarize the Company’s investments in debt securities. All debt securities are classified as available-for-sale and are carried at fair value.  Amortized cost is net of cumulative writedowns determined by management to be other than temporary declines in value of $22,783 and $20,617 as of December 31, 2007 and 2006, respectively.

 

 

 

December 31, 2007

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

U.S. Treasury, government and agency securities

 

$

180,859

 

$

5,697

 

$

296

 

$

186,260

 

States and political subdivisions

 

7,314

 

731

 

—

 

8,045

 

Corporate securities

 

2,511,577

 

103,835

 

33,386

 

2,582,026

 

Residential mortgage backed securities

 

1,219,015

 

10,731

 

3,654

 

1,226,092

 

Commercial mortgage backed securities

 

1,284,568

 

21,799

 

7,393

 

1,298,974

 

Asset-backed securities

 

544,354

 

4,772

 

10,250

 

538,876

 

Redeemable preferred stocks

 

43,694

 

5,387

 

2,830

 

46,251

 

Total debt securities

 

$

5,791,381

 

$

152,952

 

$

57,809

 

$

5,886,524

 

 

 

 

December 31, 2006

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

U.S. Treasury, government agency securities

 

$

196,348

 

$

1,999

 

$

2,617

 

$

195,730

 

States and political subdivisions

 

7,299

 

630

 

—

 

7,929

 

Corporate securities

 

2,288,357

 

111,016

 

27,772

 

2,371,601

 

Residential mortgage backed securities

 

1,235,784

 

9,751

 

3,885

 

1,241,650

 

Commercial mortgage backed securities

 

1,273,375

 

12,097

 

8,492

 

1,276,980

 

Asset-backed securities

 

546,938

 

8,851

 

503

 

555,286

 

Redeemable preferred stocks

 

37,474

 

4,809

 

479

 

41,804

 

Total debt securities

 

$

5,585,575

 

$

149,153

 

$

43,748

 

$

5,690,980

 

 

Corporate securities include $50,000 in notes initially yielding 1.6% with imbedded floors inversely tied to LIBOR.  As of December 31, 2007 and 2006, the notes had a fair value of $51,334 and $48,575, respectively.

 

13


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

The following table summarizes the amortized cost and fair value of debt securities as of December 31, 2007 by contractual maturity.

 

Years to maturity:

 

Amortized
Cost

 

Fair Value

 

 

 

 

 

 

 

One or less

 

$

137,371

 

$

138,305

 

After one through five

 

454,833

 

479,594

 

After five through ten

 

866,024

 

881,084

 

After ten

 

1,241,522

 

1,277,348

 

Residential mortgage backed securities

 

1,219,015

 

1,226,092

 

Commercial mortgage backed securities

 

1,284,568

 

1,298,974

 

Asset-backed securities

 

544,354

 

538,876

 

Redeemable preferred stocks

 

43,694

 

46,251

 

Total debt securities

 

$

5,791,381

 

$

5,886,524

 

 

Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Mortgage and other asset-backed securities are presented separately in the maturity schedule due to the potential for prepayment.  The weighted average life of these securities is estimated at 4.4 years.

 

Residential mortgage backed securities (MBS), Commercial MBS and Asset-backed securities follow a structured principal repayment schedule and 98% are of high credit quality. Securities totaling $2,967,190 are rated AAA and include $5,398 of interest-only tranches.

 

The U.S. residential mortgage market is experiencing a decline due to credit quality deterioration in a significant portion of loans originated, primarily to sub-prime borrowers. The slowing U.S. residential mortgage market has caused many sub-prime borrowers to be unable to refinance their mortgage loans, particularly those customers who had adjustable rate mortgages that reset at a higher rate than the rate at the origination of their mortgage. As a result, there has been a significant increase in delinquency and foreclosure rates within the United States. The Company does not engage in sub-prime residential mortgage lending, which is the origination of residential mortgage loans to customers with weak credit profiles including the use of relaxed mortgage underwriting standards to provide affordable mortgage products. Our exposure to sub-prime residential mortgage lending is through investments within our fixed income investment portfolio that contain securities collateralized by mortgages that have characteristics of sub-prime lending. These investments are in the form of asset-backed securities supported by sub-prime mortgage loans. The collective carrying value of these investments is approximately $80 million, representing less that 2 percent of our total fixed income investments, and 82 percent of these securities had a Standard & Poor’s credit rating of “AAA”. None of our sub-prime investments were other than temporarily impaired as of December 31, 2007.  The Company manages its sub-prime risk exposure by maintaining high credit quality investments, limiting our holdings in these types of instruments and by utilizing expert investment advisors who perform ongoing analysis of cash flows, prepayment speeds, default rates and other stress variables. While the Company’s exposure to sub-prime investments is not significant to our total investment portfolio, if the residential market continues to decline and/or expands beyond the U.S. sub-prime residential mortgage market, such events could ultimately have an impact on the Company’s fixed income portfolio and may have an adverse effect on the Company’s financial condition, results of operations and cash flows.

 

14


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

At December 31, 2007, the largest industry concentration of the Company’s portfolio was investments in the electric industry of $387,327 representing 6.58% of the total debt portfolio.

 

Proceeds during 2007, 2006 and 2005 from sales of available-for-sale debt securities were $1,046,967, $2,877,545, and $1,128,999, respectively.  Gross gains (losses) realized on those sales were $9,551 and $(8,950), respectively, during 2007, $48,401 and $(48,820), respectively, during 2006, and $25,496 and $(9,301), respectively, during 2005.  During 2007, 2006, and 2005, the Company realized losses of $7,998, $9,207, and $1,537, respectively, related to impairment of debt securities.

 

The Company’s investment portfolio of debt securities is predominantly comprised of investment grade securities.  At December 31, 2007 and 2006, debt securities with fair value totaling $249,852 and $270,701, respectively, were less than investment grade.  At December 31, 2007 and 2006, there were no securities to be restructured pursuant to commenced negotiations.

 

Equity Securities

During 2007, 2006 and 2005, the proceeds from sales of equity securities amounted to $200, $1,373, and $4,386, respectively.  The gross gains (losses) realized on those sales were $200 and $0, $18 and $(25), and $20 and $(210), for 2007, 2006 and 2005, respectively.

 

The cost basis of equity securities, excluding affiliates, was $6,186 and $6,186 as of December 31, 2007 and 2006, respectively. The equity securities had gross unrealized gains of $2,396 and $2,794 as of December 31, 2007 and 2006, respectively.

 

Other Invested Assets

As of December 31, 2007 and 2006, other invested assets included $226,375 and $178,745 of partnership investments.  The Company recognized realized losses of $2,803 and $4,993 on these investments in 2007 and 2006, respectively, which were classified as investment income.

 

Unrealized Losses on Investments

Management has determined that the unrealized losses on the Company’s investments in equity and fixed maturity securities at December 31, 2007 are temporary in nature.  The Company regularly evaluates the carrying value of debt and equity securities and adjusts their recorded value for impairment considered other than temporary.  Factors considered in determining whether a decline in fair value is other than temporary include the significance of the decline, the length of time a security’s fair value is below its amortized cost, current economic conditions, past credit loss experience, estimated future cash flows, and other circumstances of the investee, and the Company’s ability and intent to hold the investment for a sufficient period of time to allow for anticipated recovery.  A decline in a security’s fair value that is deemed to be other than temporary is reported in income as a realized capital loss and an appropriate reduction in the cost basis of the security is recognized.  The discount created by the impairment loss is amortized into investment income over the remaining term of the security based on expected future cash flows.

 

The tables below show the fair value of investments in debt securities in an unrealized loss position at December 31, 2007 and 2006, respectively.

 

15


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

 

 

December 31, 2007

 

 

 

Less than 12 months

 

12 Months or longer

 

Total

 

 

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

U.S Treasury, government and agency securities

 

$

18,306

 

$

296

 

$

—

 

$

—

 

$

18,306

 

$

296

 

Corporate securities

 

513,139

 

15,858

 

290,110

 

17,528

 

803,249

 

33,386

 

Residential MBS

 

377,139

 

2,785

 

94,622

 

869

 

471,761

 

3,654

 

Commercial MBS

 

113,209

 

405

 

288,457

 

6,988

 

401,666

 

7,393

 

Asset-backed securities

 

428,329

 

9,726

 

36,533

 

524

 

464,862

 

10,250

 

Redeemable preferred stocks

 

12,366

 

1,662

 

3,142

 

1,168

 

15,508

 

2,830

 

Total debt securities

 

$

1,462,488

 

$

30,732

 

$

712,864

 

$

27,077

 

$

2,175,352

 

$

57,809

 

 

 

 

December 31, 2006

 

 

 

Less than 12 months

 

12 Months or longer

 

Total

 

 

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

U.S Treasury, government and agency securities

 

$

91,191

 

$

2,615

 

$

1,010

 

$

2

 

$

92,201

 

$

2,617

 

Corporate securities

 

372,468

 

22,072

 

421,603

 

5,701

 

794,071

 

27,773

 

Residential MBS

 

171,472

 

3,635

 

248,386

 

250

 

419,858

 

3,885

 

Commercial MBS

 

229,980

 

6,975

 

304,979

 

1,516

 

534,959

 

8,491

 

Asset-backed securities

 

57,367

 

428

 

47,099

 

75

 

104,466

 

503

 

Redeemable preferred stocks

 

—

 

—

 

7,521

 

479

 

7,521

 

479

 

Total debt securities

 

$

922,478

 

$

35,725

 

$

1,030,598

 

$

8,023

 

$

1,953,076

 

$

43,748

 

 

Other

Investments on deposit with regulatory authorities as required by law were $7,709 and $7,714 at December 31, 2007 and 2006, respectively.

 

3.  INVESTMENT  INCOME AND CAPITAL GAINS:

The following table summarizes the sources of investment income for the years ended December 31:

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Debt securities

 

$

352,692

 

$

341,647

 

$

328,587

 

Equity securities

 

2

 

—

 

—

 

Real estate

 

—

 

2,209

 

2,209

 

Policy loans

 

36,070

 

35,213

 

37,358

 

Short-term investments

 

4,094

 

9,508

 

10,135

 

Other invested assets

 

42,041

 

31,149

 

16,120

 

Gross investment income

 

434,899

 

419,726

 

394,409

 

Less: Investment expense

 

9,648

 

9,235

 

9,124

 

Net investment income

 

$

425,251

 

$

410,491

 

$

385,285

 

 

16


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

The following table summarizes net realized capital gains/(losses) on investments for the years ended December 31:

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Debt securities

 

$

(6,784

)

$

(9,626

)

$

14,658

 

Equity securities, mortgage loans and real estate

 

200

 

(13

)

(243

)

Other invested assets

 

(5,368

)

(1,206

)

(15,931

)

Amortization of deferred acquisition costs

 

1,058

 

1,178

 

(1,433

)

Net realized losses

 

$

(10,894

)

$

(9,667

)

$

(2,949

)

 

The following table sets forth the reclassification adjustment required to avoid double-counting in comprehensive income items that are included as part of net income for a period that also had been part of other comprehensive income in earlier periods:

 

 

 

2007

 

2006

 

2005

 

Reclassification Adjustments

 

 

 

 

 

 

 

Unrealized holding (losses) arising during period, net of taxes

 

$

(391

)

$

(52,696

)

$

(79,123

)

Reclassification adjustment for losses/(gains) included in
net income

 

1,791

 

9,427

 

(6,869

)

Unrealized gains/(losses) on investments, net of reclassification adjustment

 

$

1,400

 

$

(43,269

)

$

(85,992

)

 

Reclassification adjustments reported in the above table for the years ended December 31, 2007, 2006 and 2005 are net of income tax expense/(benefits) of $(964), $(5,076) and $3,697, respectively, and $(429), $(1,584), and $(1,538), respectively, relating to the effects of such amounts on deferred acquisition benefits.

 

4.  DERIVATIVES:

The Company utilizes derivatives to achieve its risk management goals.  Exposure to risk is monitored and analyzed as part of the Company’s asset/liability management process, which focuses on risks that impact liquidity, capital, and income.  The Company may enter into derivative transactions to hedge exposure to interest rate, credit, liability, currency, and cash flow risks.  The Company may use forward contracts, swaps, futures, options, swaptions, caps, floors, collars and options on futures to hedge these risks.

 

When entering into a derivative transaction, there are several risks, including but not limited to basis risk, credit risk, and market risk.  Basis risk is the exposure to loss from imperfectly matched positions, and is monitored and minimized by modifying or terminating the transaction.  Credit risk is the exposure to loss as a result of default or a decline in credit rating of a counterparty.  Credit risk is addressed by establishing and monitoring guidelines on the amount of exposure to any particular counterparty.  Also, the Company requires that an International Swaps and Derivatives Association Master agreement govern all OTC derivative contracts.  Market risk is the adverse effect that a change in interest rates, currency rates, implied volatility rates, or a change in certain equity indexes or instruments has on the value of a financial instrument.  The Company manages the market risk by establishing and monitoring limits as to the types and degree of risk that may be undertaken.

 

17


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

The fair value of derivatives contracts are based on dealers’ quotes and represent the estimated amount the Company would receive to terminate the contracts taking into account current interest rates and the credit worthiness of the counterparties, where appropriate.  The Company had open futures with a fair value of $(780) and $(184) as of December 31, 2007 and 2006, respectively.  The Company had open put options with a fair value of $69,128 and $15,727 as of December 31, 2007 and 2006, respectively.  The Company had open interest rate and credit default swaps with a notional amount of $660,000 and $35,000 and a fair value of $17,885 and $(126) as of December 31, 2007 and 2006, respectively.  The Company had open interest rate cap positions with a notional amount of $875,000 and $1,250,000 and a fair value of $1,758 and $1,724 as of December 31, 2007 and 2006, respectively.

 

5.  FAIR VALUE INFORMATION:

The following table summarizes the carrying value and fair value of the Company’s financial instruments as of December 31, 2007 and 2006.

 

 

 

2007

 

2006

 

 

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

Fair Value

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Debt securities, available for sale

 

$

5,886,524

 

$

5,886,524

 

$

5,690,980

 

$

5,690,980

 

Equity securities

 

8,582

 

8,582

 

8,980

 

8,980

 

Policy loans

 

669,338

 

670,713

 

633,403

 

640,240

 

Short-term investments

 

38,060

 

38,060

 

191,347

 

191,347

 

Other invested assets

 

363,706

 

363,704

 

245,156

 

245,151

 

Cash and cash equivalents

 

23,806

 

23,806

 

55,288

 

55,288

 

Separate account assets

 

4,137,215

 

4,137,215

 

3,791,429

 

3,791,429

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

Investment-type contracts

 

 

 

 

 

 

 

 

 

Individual annuities

 

$

1,231,688

 

$

1,236,629

 

$

1,266,887

 

$

1,263,130

 

Group annuities

 

15,628

 

15,730

 

16,639

 

16,532

 

Other policyholder funds

 

236,270

 

236,270

 

240,496

 

240,496

 

Total policyholder funds

 

1,483,586

 

1,488,629

 

1,524,022

 

1,520,158

 

Policyholder’s dividends payable

 

16,596

 

16,596

 

18,554

 

18,554

 

Separate account liabilities

 

4,137,215

 

4,137,215

 

3,791,429

 

3,791,429

 

 

The fair values for the Company’s investments in debt and equity securities are based on quoted market prices, where available.  In situations where market prices are not readily available, primarily private placements, fair values are estimated using a pricing method based on fair values of securities with similar characteristics.  The fair value of currently performing mortgage loans is estimated by discounting the cash flows associated with the investment, using an interest rate currently offered for similar loans to borrowers with similar credit ratings.   The fair value of policy loans is calculated by discounting estimated future cash flows using interest rates currently being offered for similar loans.  Loans with similar characteristics are aggregated for purposes of the calculations.  The estimated fair values for limited partnerships, included in other invested assets, are based on values determined by the partnerships’ managing general partners.  The carrying values of cash, cash equivalents, short-term investments and separate account assets approximate their fair values.  The resulting fair values may not be indicative of the value that could be negotiated in an orderly transaction between market participants.

 

18


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

The fair values of the Company’s liabilities for individual annuities and certain group annuities are estimated by discounting the cash flows associated with the contracts, using an interest rate currently offered for similar contracts with maturities similar to those remaining for the contracts being valued.  The statement values of other policyholder funds, policyholders’ dividends payable, debt and separate account liabilities approximate their fair values.

 

The fair values of liabilities under all of the Company’s contracts are considered in the overall management of interest rate risk.  The Company is exposed to interest rate risk on its interest-sensitive products.  The Company’s investment strategy is designed to minimize interest risk by managing the durations and anticipated cash flows of the Company’s assets and liabilities.

 

6.  BENEFIT PLANS:

The Company maintains both funded and unfunded non-contributory defined benefit pension plans covering all eligible employees.  The Company also has other postretirement benefit plans (health care plans) covering eligible existing retirees and limited other eligible employees.  The Company uses a measurement date of December 31 for all plans.

 

The Company approved the freezing of benefits under its qualified and TEFRA pension plans effective December 31, 2005.  The qualified and TEFRA pension plans’ obligation and assets were remeasured, with obligations using a 5.75% discount rate.  During 2005, the pension plan was amended to increase the pension policy benefit, to freeze the benefit service credit that applied toward the payment period, and to allow future service to count toward vesting.  Therefore, effective January 1, 2006, there will be no further benefits accrued for participants.

 
Benefit Obligations

The following table sets forth the plans’ change in benefit obligation as of December 31, 2007 and 2006:

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Benefit obligation at beginning of year

 

$

132,144

 

$

135,187

 

$

35,324

 

$

37,390

 

Service cost

 

—

 

134

 

627

 

551

 

Interest cost

 

7,679

 

7,402

 

1,896

 

1,919

 

Plan amendment

 

—

 

—

 

—

 

—

 

Actuarial (gain) loss

 

(4,940

)

(5,439

)

564

 

(2,176

)

Benefits paid

 

(6,130

)

(5,140

)

(2,194

)

(2,360

)

Benefit obligation at end of year

 

$

128,753

 

$

132,144

 

$

36,217

 

$

35,324

 

 

The accumulated benefit obligation for all defined benefit plans as of December 31, 2007 and 2006 was $127,864 and $130,760, respectively.

 

The weighted-average assumptions used to measure the actuarial present value of the projected benefit obligation at December 31 were:

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2007

 

2006

 

2007

 

2006

 

Discount rate

 

6.25

%

5.90

%

6.20

%

5.75

%

Rate of compensation increase

 

4.25

%

4.25

%

4.00

%

4.00

%

 

19


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

The discount rate is determined at the annual measurement date of the plans and is therefore subject to change each year.  The rate reflects prevailing market rates for high quality fixed-income debt instruments with maturities corresponding to expected duration of the benefit obligations on the measurement date.  The rate is used to discount the future cashflows of benefits obligations back to the measurement date.

 

Plan Assets

The following table sets forth the plan assets as of December 31:

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2007

 

2006

 

2007

 

2006

 

Change in plan assets:

 

 

 

 

 

 

 

 

 

Fair value of plans assets at beginning of year

 

$

121,435

 

$

108,935

 

$

—

 

$

—

 

Actual return on plan assets

 

11,408

 

15,719

 

 

 

—

 

Employer contribution

 

2,644

 

1,921

 

2,194

 

2,360

 

Benefits paid

 

(6,130

)

(5,140

)

(2,194

)

(2,360

)

Fair value of plan assets at end of year

 

$

129,357

 

$

121,435

 

$

—

 

$

—

 

 

The Company’s investment objectives with respect to pension assets are growth, preservation of principal, preservation of purchasing power and partial immunization through asset/liability matching while maintaining return objective over the long term.  To achieve these objectives, the Company has established a strategic asset allocation policy.  Plan assets are diversified both by asset class and within each asset class in order to provide reasonable assurance that no single security or class of security will have a disproportionate impact on the plan.  Fixed income assets are to be managed on a buy-and-hold basis to achieve durations consistent with the liability matching strategy yet allow for appropriate liquidity for benefit payments.  The plan is rebalanced annually back to the current 50/50 target allocation between equity securities and fixed income/cash.  Performance of investment managers, liability measurement and investment objectives are reviewed on a regular basis.  The Company’s pension plan asset allocation at December 31, 2007 and 2006, and the current target allocations are as follows:

 

 

 

2008 Target

 

Percentage of Plan Assets
As of December 31,

 

Asset Category

 

Allocation

 

2007

 

2006

 

Equity securities

 

50

%

51

%

51

%

Fixed income & cash

 

50

%

49

%

49

%

Total

 

 

 

100

%

100

%

 

The expected long-term rate of return on plan assets was 7.0% in both 2007 and 2006.  The expected rate of return on plan assets was estimated utilizing a variety of factors including the historical investment returns achieved over a long-term period, the targeted allocation of plan assets and expectations concerning future returns in the marketplace for both equity and debt securities.  Lower returns on plan assets result in higher pension expense.

 

At December 31, 2007, the fair value of the investment in fixed income securities and group annuity contracts was $63,322 and $66,035, respectively.  At December 31, 2006, the fair value of the investment in fixed income securities and group annuity contracts was $58,578 and $62,857, respectively.  The investments in group annuity contracts are invested in various investment options of related funds.

 

20


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

Funded Status

The funded status of the plans, reconciled to the amount reported on the statement of financial position is as follows:

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2007

 

2006

 

2007

 

2006

 

Benefit Obligation

 

$

(128,753

)

$

(132,144

)

$

(36,217

)

$

(35,323

)

Fair value of plan assets

 

129,357

 

121,435

 

—

 

—

 

Funded Status

 

$

604

 

$

(10,709

)

$

(36,217

)

$

(35,323

)

 

 

 

 

 

 

 

 

 

 

Funded status

 

$

604

 

$

(10,709

)

$

(36,217

)

$

(35,323

)

Unrecognized net actuarial loss

 

—

 

5,099

 

—

 

4,258

 

Unrecognized prior service cost (benefit)

 

—

 

—

 

—

 

(1,353

)

Net amount recognized

 

$

604

 

$

(5,610

)

$

(36,217

)

$

(32,418

)

 

 

 

 

 

 

 

 

 

 

Amount recognized in balance sheet:

 

 

 

 

 

 

 

 

 

Prepaid pension asset

 

$

27,482

 

$

18,802

 

$

—

 

$

—

 

Accrued benefit liability

 

(26,878

)

(27,143

)

(36,217

)

(32,418

)

Minimum pension liability

 

—

 

2,731

 

—

 

—

 

Net amount recognized

 

$

604

 

$

(5,610

)

$

(36,217

)

$

(32,418

)

 

The incremental adjustment related to the implementation of FAS 158 is as follows:

 

 

 

December 31,

2007 Prior to
AML and
FAS 158
Adjustments

 

2007 AML
Adjustment
per FAS 87

 

Adjustment
to initially
apply FAS
158

 

December 31,
2007 Post
AML and FAS
158
Adjustments

 

Other assets

 

$

328,115

 

$

—

 

$

6,670

 

$

334,785

 

Other liabilities

 

384,043

 

(365

)

7,174

 

390,852

 

Accrued income taxes

 

194,831

 

128

 

176

 

195,135

 

Accumulated other comprehensive income, net of tax

 

61,431

 

237

 

(328

)

61,340

 

 

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $26,878, $25,890 and $0, respectively as of December 31, 2007.  The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $28,527, $27,143 and $0, respectively as of December 31, 2006.

 

As of December 31, 2007, the projected benefit obligation for all pension benefit plans exceeds the fair value of plan assets and the accumulated postretirement benefit obligation exceeds plan assets for all of the Company’s other postretirement benefit plans.

 

Prior to adoption of SFAS 158, a minimum pension liability adjustment was required when the actuarial present value of accumulated benefits exceeds plan assets.  In 2007 and 2006, the change in the minimum pension liability, net of the change in the related intangible asset of  $365 and $(1,628) respectively, was reported in equity.

 

21


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

Actual Contributions and Benefits

The contributions made and the benefits paid from the plans were:

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2007

 

2006

 

2007

 

2006

 

Employer Contributions

 

$

2,644

 

$

1,921

 

$

2,194

 

$

2,360

 

Benefits Paid

 

(6,130

)

(5,140

)

(2,194

)

(2,360

)

 

Expected Employer Contributions

The Company’s funding policy is to contribute an amount at least equal to the minimum required contribution under ERISA.  The Company may increase its contribution above the minimum based upon an evaluation of the Company’s tax and cash positions and the plan’s funded status.

 

In 2008, the Company expects to make the minimum required contribution to the unfunded pension and postretirement plans in an amount equal to benefit costs of approximately $2,108 and $2,813, respectively.  The Company does not expect to make a contribution to the funded pension plan.

 

Estimated Future Benefit Payments:

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

 

 

 

Pension
Benefits

 

Other
Benefits

 

2008

 

$

5,993

 

$

2,813

 

2009

 

6,482

 

2,933

 

2010

 

7,009

 

3,081

 

2011

 

7,355

 

3,252

 

2012

 

7,787

 

3,347

 

Years 2013-2017

 

45,980

 

16,894

 

 

22


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

Net Periodic Cost

The following are the components of the net periodic benefit costs (excluding the minimum pension liability adjustment) for the years ending December 31, 2007 and 2006:

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2007

 

2006

 

2007

 

2006

 

Service cost

 

$

—

 

$

134

 

$

627

 

$

551

 

Interest cost

 

7,679

 

7,402

 

1,897

 

1,919

 

Expected return on plan assets

 

(8,376

)

(7,513

)

—

 

—

 

Amortization of prior service cost

 

—

 

—

 

(451

)

(451

)

Amount of recognized gains and loss

 

543

 

496

 

—

 

171

 

Total net periodic benefit cost

 

$

(154

)

$

519

 

$

2,073

 

$

2,190

 

 

The weighted-average assumptions used to determine net cost were:

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2007

 

2006

 

2007

 

2006

 

Discount rate

 

5.90

%

5.65

%

5.75

%

5.50

%

Expected return on plan assets

 

7.00

%

7.00

%

—

 

—

 

Rate of compensation increase

 

4.25

%

4.25

%

4.00

%

4.00

%

 

The assumed health care cost trend rate used in determining net periodic costs for 2007 was 9.5%,  grading to 5.0% for 2010.

 

The assumed health care cost trend rate used in determining net periodic costs for 2006 was 11.0%, grading to 5.0% for 2010.

 

Assumed health care trend rates have a significant effect on the amounts reported for the health care plans.  A one-percentage point change in assumed health care cost trend rates would have the following effects:

 

 

 

One-Percentage Point

 

 

 

Increase

 

Decrease

 

Service and interest cost components

 

$

203

 

$

(177

)

Postretirement benefit obligation

 

2,767

 

(2,434

)

 

Defined Contribution Plans

The Company maintains four defined contribution pension plans for substantially all of its employees and full-time agents.  For two plans, designated contributions of up to 6% or 8% of annual compensation are eligible to be matched by the Company.  Contributions for the third plan are based on tiered earnings of full-time agents.  The last plan, which covers employees of a subsidiary, is determined on a discretionary basis by the Board of Directors of that subsidiary.  For the years ended December 31, 2007, 2006 and 2005, the expense recognized for these plans was $4,552, $4,729 and $4,665, respectively.  The estimated fair value of the defined contribution plans’ assets at December 31, 2007 and 2006 was $411,233 and $371,483, respectively.

 

At December 31, 2007 and 2006, $133,169 and $118,469, respectively, of the defined contribution plans’ assets were invested in the Company’s group annuity contracts.

 

23


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

7.  INCOME TAXES:

 

The Company follows the asset and liability method of accounting for income taxes whereby current and deferred tax assets and liabilities are recognized utilizing currently enacted tax laws and rates.  Deferred taxes are adjusted to reflect tax rates at which future tax liabilities or assets are expected to be settled or realized.

 

Deferred income taxes reflect the impact for financial statement reporting purposes of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities.  The significant temporary differences that give rise to the deferred tax assets and liabilities at December 31 relate to the following:

 

 

 

2007

 

2006

 

Deferred tax assets:

 

 

 

 

 

Future policy benefits

 

$

50,124

 

$

56,083

 

Policyholders’ dividends payable

 

5,740

 

6,433

 

Investment losses

 

28,783

 

22,050

 

Employee benefit liabilities

 

35,747

 

33,570

 

Other

 

3,641

 

10,209

 

Total deferred tax asset

 

124,035

 

128,345

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

DAC

 

222,132

 

207,470

 

Unrealized investment gains

 

33,123

 

31,860

 

Deferred investment income

 

46,171

 

37,831

 

Other

 

4,231

 

5,682

 

Total deferred tax liability

 

305,657

 

282,843

 

Net deferred tax liability

 

181,622

 

154,498

 

Uncertain tax position

 

4,537

 

9,781

 

Tax currently (receivable)/payable

 

8,976

 

(11,313

)

Accrued income taxes

 

$

195,135

 

$

152,966

 

 

The change in net deferred income taxe expense to net deferred income tax liability is comprised of the following::

 

 

 

2007

 

2006

 

Change

 

 

 

 

 

 

 

 

 

Total deferred tax assets

 

$

124,035

 

$

128,345

 

$

(4,310

)

Total deferred tax liabilities

 

305,657

 

282,843

 

22,814

 

Net deferred tax asset (liability)

 

$

(181,622

)

$

(154,498

)

(27,124

)

Tax effect of unrealized gains/(losses)

 

 

 

 

 

1,263

 

Deferred tax asset reclass

 

 

 

 

 

(5,958

)

Change in net income tax

 

 

 

 

 

(31,819

)

Items reflected directly through equity/other

 

 

 

 

 

(158

)

Deferred income tax expense

 

 

 

 

 

$

(31,977

)

 

24


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

The income taxes attributable to consolidated net income are different from the amounts determined by multiplying consolidated net income before income taxes by the expected federal income tax rate.  The difference between the amount of tax at the U.S. federal income tax rate of 35% and the consolidated tax provision is summarized as follows:

 

 

 

2007

 

2006

 

2005

 

Tax expense at 35%

 

$

70,941

 

$

66,441

 

$

58,770

 

(Decrease)/increase in income taxes resulting from:

 

 

 

 

 

 

 

Tax release

 

—

 

(10,683

)

—

 

Prior period adjustment

 

496

 

(1,233

)

(1,456

)

Dividends received deduction

 

(5,334

)

(5,756

)

(4,991

)

Tax reserve

 

309

 

(3,561

)

3,382

 

Other

 

(783

)

(790

)

(218

)

Income tax expense

 

$

65,629

 

$

44,418

 

$

55,487

 

 

The Pension Funding Equity Act of 2004 repealed Internal Revenue Code Section 809, relating to the DEA for taxable years beginning after December 31, 2004.  There was no income impact from the DEA in 2004.  The DEA recalculation for 2004 did not result in an income adjustment for 2005.

 

Cash paid for federal income taxes in 2007, 2006, and 2005 was $13,635,  $19,910, and $37,250, respectively.

 

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007.  As a result of the implementation of Interpretation 48, the Company recognized approximately a $5,190 decrease in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of retained earnings.  Included in the amount is approximately $1,300 of tax positions that would not effect the annual effective tax rate.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

Unrecognized Tax Benefits:

 

 

 

FAS 5 Balance at December 31, 2006

 

$

9,621

 

Impact of FIN48 adoption

 

(5,190

)

Balance at January 1, 2007

 

4,431

 

Additions based on tax positions related to the current year

 

672

 

Additions for tax positions in prior years

 

—

 

Reductions for tax positions in prior years

 

(728

)

Settlements/Statute expiration

 

(143

)

Balance at December 31, 2007

 

$

4,232

 

 

Included in the balance at December 31, 2007, is $803 of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.  Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductible period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

 

The Company recognizes penalties and/or interest as a component of tax expense.  During the years ended December 31, 2007, 2006 and 2005, the Company recognized approximately $145, $(459), and $629 in interest.  The Company had approximately $305 and $160 for the payment of interest accrued at December 31, 2007 and 2006.  No penalties were recognized or accrued.  Therefore, the total unrecognized tax positions reserve as of December 31, 2007 is $4,537 and $9,781 as of December 31, 2006.

 

25


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

The Internal Revenue Service (“IRS”) has completed their examination of the Company’s income tax returns through the year 2001.  The IRS is currently examining income tax returns for the tax years 2002 through 2004.  Management believes that an adequate provision has been made for potential adjustments.

 

The Company does not anticipate that total unrecognized tax benefits will significantly change in the next 12 months due to settlement of audits or statute expirations.

 

8.  REINSURANCE:

 

The Company has assumed and ceded reinsurance on certain life and annuity contracts under various agreements.  Reinsurance permits recovery of a portion of losses from reinsurers, although the Company remains primarily liable as the direct insurer on all risks reinsured.  The Company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of present reinsurers to ensure that amounts due from reinsurers are collectible.  The table below highlights the amounts shown in the accompanying financial statements.

 

 

 

Gross Amount

 

Assumed
From Other
Companies

 

Ceded to
Other
Companies

 

Net Amount

 

December 31, 2007:

 

 

 

 

 

 

 

 

 

Life Insurance in-Force

 

$

61,175,170

 

$

1,607,008

 

$

24,275,380

 

$

38,506,798

 

Premiums

 

163,368

 

1,954

 

35,000

 

130,322

 

Benefits

 

496,640

 

—

 

77,530

 

419,110

 

Reserves

 

5,963,874

 

2,807

 

322,508

 

5,644,173

 

 

 

 

 

 

 

 

 

 

 

December 31, 2006:

 

 

 

 

 

 

 

 

 

Life Insurance in-Force

 

$

57,285,924

 

$

1,695,211

 

$

24,089,218

 

$

34,891,917

 

Premiums

 

174,088

 

2,105

 

36,895

 

139,298

 

Benefits

 

473,447

 

—

 

69,666

 

403,781

 

Reserves

 

5,891,784

 

2,658

 

317,736

 

5,576,706

 

 

The December 31, 2007 reserves ceded to other company is net of an allowance for reinsurance recoverables of $2,166.

 

During 2005, the Company had gross premiums of $155,737, assumed premiums of $2,518, ceded premiums of $34,346, gross benefits of $453,995, assumed benefits of $0, and ceded benefits of $54,558.

 

Reinsurance recoverables with a carrying value of $176,408 and $187,192 were associated with a single reinsurer at December 31, 2007 and 2006, respectively.  This recoverable is secured by investment grade securities with a market value of $225,310 and $220,859, respectively held in trust.

 

9.  DEBT:

 

On June 23, 2004, the Company issued a Surplus Note (“Notes”) with a principal balance of $200,000, at a discount of $3,260.  The Notes bears interest at 6.65%, and have a maturity date of June 15, 2034.  The Notes were issued pursuant to Rule 144A under the Securities Act of 1933, as amended and are administered by a U.S. bank as registrar/paying agent.  Interest on the 6.65% Notes is scheduled to be paid semiannually on

 

26


 

April 1 and October 1 of each year.  At December 31, 2007 and 2006, the amortized cost basis of the Notes was $196,885 and $196,843, respectively.

 

27


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

The Company’s broker/dealer affiliate borrows from banks in connection with the securities settlement process and to finance margin loans made to customers.  The Company is required to collateralize amounts borrowed in excess of certain limits.  At December 31, 2007, the Company had debt of $57,300, which was collateralized by customer-owned securities valued at approximately $17,858 and remaining bank loans, including bank overdrafts of $45,807, which were not collateralized.

 

At December 31, 2006, the Company had debt of $55,400, which was collateralized by customer-owned securities valued at approximately $27,690 and remaining bank loans, including bank overdrafts of $45,942, which were not collateralized.  The bank loans are demand obligations and generally require interest based on the Federal Funds rate.  At December 31, 2007 and 2006, the weighted average interest rates on these borrowings were 4.45% and 5.56% respectively.

 

10.  Guaranteed Minimum Death Benefits and Living Benefits:

 

The Company has variable annuity contracts containing GMDB provisions that provide a specified minimum benefit payable upon death as follows:

 

·                  Return of premium – provides the greater of the account value or total deposits made to the contract less any partial withdrawals and assessments, which is referred to as “net purchase Payments”.  This guarantee is a standard death benefit on all individual variable annuity products.

 

·                  Step-up – provides a variable death benefit equal to the greater of the account value and the highest variable account value adjusted for withdrawals and transfers from any prior contract anniversary date.

 

·                  Rising Floor – provides a variable death benefit equal to the greater of the current account value and the variable purchase payments accumulated at a set rate and adjusted for withdrawals and transfers.

 

The following table summarizes the account values and net amount at risk, net of reinsurance, and reserves for variable annuity contracts with guarantees invested in the separate account as of December 31:

 

 

 

2007

 

2006

 

Account value

 

$

2,754,864

 

$

2,466,556

 

Net amount at risk

 

25,278

 

34,748

 

GAAP Reserves

 

3,406

 

2,613

 

 

Stochastic modeling was used to determine the liability.  The stochastic model involves 200 scenarios.  Stochastic modeling generates a projection of excess benefits.  A ratio of the present value of these excess benefits to the present value of excess revenues is calculated and applied to the excess revenues in that period to determine the new liability accrual.  This accrual is rolled forward with interest and amortized as excess payments are made.

 

The Company regularly evaluates the estimates used to model the GMDB reserve and adjusts the additional liability balance as appropriate, with a related charge or credit to other benefits and claims in the period of evaluation if actual experience or other evidence suggests that earlier assumptions should be revised.

 

28


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

The Company has variable annuity contracts that have GMAB (Guaranteed Minimum Accumulation Benefit), GPPP (Guaranteed Purchasing Power Protection) and GMAB/GMWB (Guaranteed Minimum Accumulation Benefit/Guaranteed Minimum Withdrawal Benefit) Rider options.  The GMAB provides for a return of principal at the end of a ten-year period.  The GPPP adjusts the withdrawal amounts for the cost of living increases due to inflation.  The GMAB/GMWB combination rider allows for guaranteed withdrawals from a benefit base after a selected waiting period.  The benefit base is calculated as the maximum of principal times a roll up rate less any partial withdrawals during the accumulation phase, the current account value, and the highest anniversary value over the first ten years.  The withdrawal amount is stated as a percentage of the benefit base and varies based on whether the annuitant selects lifetime withdrawals or a specified period.  The following table summarizes the account values and reserves for the different benefit types as of December 31, 2007:

 

Rider Type

 

Contracts

 

Fixed
Account
Value

 

Variable
Account Value

 

Total Fund
Account
Value

 

Reserves

 

GMAB

 

342

 

$

2,232

 

$

33,698

 

$

35,931

 

$

561

 

GPPP

 

463

 

5,447

 

54,711

 

60,157

 

1,377

 

GMAB/GMWB

 

3,764

 

17,262

 

495,436

 

512,698

 

15,962

 

Total

 

4,569

 

$

24,941

 

$

583,845

 

$

608,786

 

$

17,900

 

 

The guaranteed living benefits are considered to be derivatives under FASB No. 133, Accounting for Derivative Instruments and Hedging Activities.  Changes in these values are recorded in realized capital gains/losses.

 

11. COMMITMENTS AND CONTINGENCIES:

 

The Company and its subsidiaries are involved in various pending or threatened legal and/or regulatory proceedings arising from the normal conduct of its business.  Most of these proceedings are routine in the ordinary course of business, although some involve extra-contractual damages in addition to other damages.  In addition, the regulators within the insurance and brokerage industries continue to focus on market conduct and compliance issues.  The Company monitors sales materials and compliance procedures and makes extensive efforts to minimize any potential liabilities in this area.

 

In the opinion of management, after consultation with legal counsel and a review of available facts, the outcome of the proceedings and assessments are not likely to have a material adverse effect on the financial position of the Company.  Insurance companies are also subject to assessments, up to statutory limits, by state guaranty funds for losses of policyholders of insolvent insurance companies.  The liability for estimated guaranty fund assessments, net of applicable premium tax credits, as of December 31, 2007 and 2006 was $500 and $500, respectively.

 

The Company, in the ordinary course of business, extends commitments relating to its investment activities.  As of December 31, 2007, the Company had outstanding commitments totaling $140,118, which approximates fair value, relating to these investment activities.

 

29


 

Notes to Consolidated Financial Statements, continued
(In thousands)

 

The Company has entered into various leases, primarily for field and sales offices.  As of December 31, 2007, future minimum payments under noncancellable leases are as follows:

 

Year ending
December 31,

 

Operating
Leases

 

2008

 

$

22,220

 

2009

 

20,328

 

2010

 

17,465

 

2011

 

14,691

 

2012

 

10,121

 

Thereafter

 

13,124

 

 

12. STATUTORY INFORMATION:

 

State insurance regulatory authorities prescribe or permit statutory accounting practices for calculating net income and capital and surplus, which differs in certain respects from with GAAP.  The significant differences relate to deferred acquisition costs, which are charged to expenses as incurred; federal income taxes, which reflect amounts that are currently taxable; and benefit reserves, which are determined using prescribed mortality, morbidity and interest assumptions, and which, when considered in light of the assets supporting these reserves, adequately provide for obligations under policies and contracts.

 

Investments in bonds and preferred stocks are generally carried at amortized cost or market value. An Asset Valuation Reserve (AVR) is established as a liability to offset potential investment losses and an Interest Maintenance Reserve (IMR) is established as a liability to capture capital gains and losses on the sale of fixed income investments, resulting from changes in the general level of interest rates.

 

The combined insurance companies’ statutory capital and surplus at December 31, 2007 and 2006 was $1,302,211 and $1,295,642, respectively.  The combined insurance companies’ net income, determined in accordance with statutory accounting practices, for the years ended December 31, 2007, 2006, and 2005, was ($5,962),  $56,694, and $184,590, respectively.

 

Life insurance companies are subject to certain risk-based capital (RBC) requirements as specified by the NAIC.  Under those requirements, minimum amounts of statutory surplus are required to be maintained based on various risk factors related to it.  At December 31, 2007, the Company’s surplus exceeds these minimum levels.

 

30


 

 

 

 

 

 

PricewaterhouseCoopers LLP

 

Two Commerce Square, Suite 1700

 

2001 Market Street

 

Philadelphia PA 19103-7042

 

Telephone (267) 330 3000

 

Facsimile (267) 330 3300

 

www.pwc.com

 

Report of Independent Auditors

 

To the Board of Trustees

The Penn Mutual Life Insurance Company:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in equity, and cash flows present fairly, in all material respects, the financial position of The Penn Mutual Life Insurance Company and its subsidiaries (the “Company”) at December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

February 7, 2008