-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C9IxDQEgSRoBla/Py+YW5CXLJwMFs7BVmOjP7bBFQ/E+U2XfnvmrMUpwbUOpj8rx I519HQmCdjZ9YWUPsqAxUA== 0000912057-01-000123.txt : 20010122 0000912057-01-000123.hdr.sgml : 20010122 ACCESSION NUMBER: 0000912057-01-000123 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20010103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEPARATE ACCOUNT A OF PACIFIC LIFE INSURANCE CO CENTRAL INDEX KEY: 0000935823 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 333-93059 FILM NUMBER: 1501125 BUSINESS ADDRESS: STREET 1: P O BOX 7500 CITY: NEWPORT BEACH STATE: CA ZIP: 92658-7500 BUSINESS PHONE: 7146403743 MAIL ADDRESS: STREET 1: P O BOX 7500 CITY: NEWPORT BEACH STATE: CA ZIP: 92658-7500 FORMER COMPANY: FORMER CONFORMED NAME: SEPARATE ACCOUNT A OF PACIFIC MUTUAL LIFE INS CO DATE OF NAME CHANGE: 19950119 497 1 a2034345z497.txt 497 SUPPLEMENT DATED JANUARY 2, 2001 TO PROSPECTUS DATED MAY 1, 2000 FOR PACIFIC INNOVATIONS, A VARIABLE ANNUITY CONTRACT ISSUED BY PACIFIC LIFE INSURANCE COMPANY This supplement changes the Prospectus to reflect the following, and restates information contained in a supplement dated October 2, 2000: ELEVEN NEW VARIABLE INVESTMENT OPTIONS ARE AVAILABLE - -------------------------------------------------------------------------------- The following new Variable Investment Options are added to the list on page 1 of the Prospectus. - - Blue Chip - Strategic Value - - Aggressive Growth - Focused 30 - - Financial Services - Capital Opportunities - - Health Sciences - Mid-Cap Growth - - Technology - Global Growth - - Telecommunications THE NEW ELEVEN VARIABLE ACCOUNTS ARE ADDED AS VARIABLE INVESTMENT OPTIONS - -------------------------------------------------------------------------------- The new eleven Variable Accounts invest in their corresponding Portfolios of the Fund. References to the 22 Variable Investment Options throughout the Prospectus are changed to refer to 31 Variable Investment Options or Subaccounts. THE INTERNATIONAL VALUE PORTFOLIO HAS A NEW PORTFOLIO MANAGER - -------------------------------------------------------------------------------- Effective January 1, 2001, Lazard Asset Management is the portfolio manager of the International Value Portfolio. A PORTFOLIO MANAGER HAS CHANGED ITS NAME - -------------------------------------------------------------------------------- Mercury Asset Management US has changed its name to Mercury Advisors. 1 AN OVERVIEW OF PACIFIC INNOVATIONS-FEES AND EXPENSES PAID BY THE PACIFIC SELECT FUND: OTHER EXPENSES IS REPLACED - -------------------------------------------------------------------------------- The following replaces the OTHER EXPENSES section on page 7 of the Prospectus: OTHER EXPENSES The table also shows the advisory fee and Fund expenses as an annual percentage of each Portfolio's average daily net assets for the year 2000. To help limit Fund expenses, effective July 1, 2000 we contractually agreed to waive all or part of our investment advisory fees or otherwise reimburse each Portfolio for operating expenses (including organizational expenses, but not including advisory fees, additional costs associated with foreign investing and extraordinary expenses) that exceed an annual rate of 0.10% of its average daily net assets. Such waiver or reimbursement is subject to repayment to us to the extent such expenses fall below the 0.10% expense cap. For each Portfolio, our right to repayment is limited to amounts waived and/or reimbursed that exceed the new 0.10% expense cap and, except for Portfolios that started on or after October 2, 2000, that do not exceed the previously established 0.25% expense cap. Any amounts repaid to us will have the effect of increasing such expenses of the Portfolio, but not above the 0.10% expense cap. There is no guarantee that we will continue to cap expenses after December 31, 2001. In 2000, Pacific Life reimbursed approximately $14,627 to the I-Net Tollkeeper Portfolio, $36,874 to the Strategic Value Portfolio, $34,687 to the Focused 30 Portfolio and $28,882 to the Small-Cap Index Portfolio.
- -------------------------------------------------------------------------------------------------------------- ADVISORY OTHER 12b-1 TOTAL LESS ADVISER'S TOTAL NET PORTFOLIO FEE EXPENSES AMOUNTS+ EXPENSES REIMBURSEMENT EXPENSES - -------------------------------------------------------------------------------------------------------------- AS AN ANNUAL % OF AVERAGE DAILY NET ASSETS Blue Chip(1) 0.95 0.06 -- 1.01 -- 1.01 Aggressive Growth(1) 1.00 0.06 -- 1.06 -- 1.06 Aggressive Equity(2) 0.80 0.04 0.02 0.86 -- 0.86 Emerging Markets(2) 1.10 0.20 -- 1.30 -- 1.30 Diversified Research(2) 0.90 0.08 0.01 0.99 -- 0.99 Small-Cap Equity(2) 0.65 0.05 -- 0.70 -- 0.70 International Large-Cap(2) 1.05 0.13 -- 1.18 -- 1.18 Equity 0.65 0.04 -- 0.69 -- 0.69 I-Net Tollkeeper(2) 1.50 0.13 -- 1.63 (0.02) 1.61 Financial Services(1) 1.10 0.15 -- 1.25 (0.05) 1.20 Health Sciences(1) 1.10 0.11 -- 1.21 (0.01) 1.20 Technology(1) 1.10 0.08 -- 1.18 -- 1.18 Telecommunications(1) 1.10 0.08 -- 1.18 -- 1.18 Multi-Strategy 0.65 0.04 -- 0.69 -- 0.69 Equity Income(2) 0.65 0.04 0.01 0.70 -- 0.70 Strategic Value 0.95 0.51 -- 1.46 (0.41) 1.05 Growth LT 0.75 0.04 -- 0.79 -- 0.79 Focused 30 0.95 0.43 -- 1.38 (0.33) 1.05 Mid-Cap Value(2) 0.85 0.04 0.12 1.01 -- 1.01 International Value 0.85 0.11 -- 0.96 -- 0.96 Capital Opportunities(1) 0.80 0.06 -- 0.86 -- 0.86 Mid-Cap Growth(1) 0.90 0.06 -- 0.96 -- 0.96 Global Growth(1) 1.10 0.19 -- 1.29 -- 1.29 Equity Index 0.25 0.04 -- 0.29 -- 0.29 Small-Cap Index(2) 0.50 0.13 -- 0.63 (0.02) 0.61 REIT 1.10 0.05 -- 1.15 -- 1.15 Government Securities(2) 0.60 0.05 -- 0.65 -- 0.65 Managed Bond(2) 0.60 0.05 -- 0.65 -- 0.65 Money Market 0.34 0.04 -- 0.38 -- 0.38 High Yield Bond 0.60 0.04 -- 0.64 -- 0.64 Large-Cap Value(2) 0.85 0.05 0.06 0.96 -- 0.96 - --------------------------------------------------------------------------------------------------------------
(1) Expenses are estimated. There were no actual advisory fees or expenses for these Portfolios in 2000 because the Portfolios started after December 31, 2000. (2) Total adjusted net expenses for these Portfolios, after deduction of an offset for custodian credits and the 12b-1 recapture were: 0.84% for Aggressive Equity Portfolio, 1.29% for Emerging Markets Portfolio, 0.98% for Diversified Research Portfolio, 0.69% for the Small-Cap Equity Portfolio, 1.17% for International Large-Cap Portfolio, 1.60% for I-Net Tollkeeper Portfolio, 0.69% for Equity Income Portfolio, 0.89% for Mid-Cap Value Portfolio, 0.60% for Small-Cap Index Portfolio, 0.62% for Government Securities Portfolio, 0.64% for Managed Bond Portfolio, and 0.90% for Large-Cap Value Portfolio. + The Fund has a brokerage enhancement 12b-1 plan under which brokerage transactions, subject to best price and execution, may be placed with certain broker-dealers in return for credits, cash, or other compensation ("recaptured commissions"). While a Portfolio pays the cost of brokerage when it buys or sells a Portfolio security, there are no fees or charges to the Fund under the plan. Recaptured commissions may be used to promote and market Fund shares and the distributor may therefore defray expenses for distribution that it might otherwise incur. The SEC staff requires that the amount of recaptured commissions be shown as an expense in the chart above. 2 AN OVERVIEW OF PACIFIC INNOVATIONS-EXAMPLES IS REPLACED - -------------------------------------------------------------------------------- The EXAMPLES on page 8 of the Prospectus is replaced with the following: The following table shows the expenses you would pay on each $1,000 you invested if, at the end of each period, you: annuitized your Contract; surrendered your Contract and withdrew the Contract Value, or did not annuitize or surrender, but left the money in your Contract. These examples assume the following: - - the Contract Value starts at $65,000 - - the Investment Options have an annual return of 5% - - the Annual Fee is deducted even when the Contract Value goes over $50,000 and a waiver would normally apply. WITHOUT RIDER reflects the expenses you would pay if you did not buy the optional Stepped-Up Death Benefit Rider (SDBR) or Premier Death Benefit Rider (PDBR). WITH SDBR reflects the expenses you would pay if you bought the optional Stepped-Up Death Benefit Rider. WITH PDBR reflects expenses you would pay if you bought the optional Premier Death Benefit Rider. THESE EXAMPLES DO NOT SHOW PAST OR FUTURE EXPENSES. YOUR ACTUAL EXPENSES IN ANY YEAR MAY BE MORE OR LESS THAN THOSE SHOWN HERE.
- ----------------------------------------------------------------------------------------------- EXPENSES IF YOU DID NOT ANNUITIZE OR EXPENSES IF YOU EXPENSES IF YOU SURRENDER, BUT LEFT ANNUITIZED SURRENDERED THE MONEY IN YOUR YOUR CONTRACT ($) YOUR CONTRACT ($) CONTRACT ($) - ----------------------------------------------------------------------------------------------- VARIABLE ACCOUNT 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr - ----------------------------------------------------------------------------------------------- BLUE CHIP without Rider 106 76 131 278 106 148 131 278 25 76 131 278 with SDBR 108 82 141 298 108 154 141 298 27 82 141 298 with PDBR 109 87 148 312 109 159 148 312 28 87 148 312 - ----------------------------------------------------------------------------------------------- AGGRESSIVE GROWTH without Rider 106 78 133 283 106 150 133 283 25 78 133 283 with SDBR 108 84 143 303 108 156 143 303 27 84 143 303 with PDBR 110 88 150 317 110 160 150 317 29 88 150 317 - ----------------------------------------------------------------------------------------------- AGGRESSIVE EQUITY without Rider 104 71 122 261 104 143 122 261 23 71 122 261 with SDBR 106 77 132 281 106 149 132 281 25 77 132 281 with PDBR 108 82 140 296 108 154 140 296 27 82 140 296 - ----------------------------------------------------------------------------------------------- EMERGING MARKETS without Rider 109 85 144 306 109 157 144 306 28 85 144 306 with SDBR 111 91 154 325 111 163 154 325 30 91 154 325 with PDBR 112 95 162 339 112 167 162 339 31 95 162 339 - ----------------------------------------------------------------------------------------------- DIVERSIFIED RESEARCH without Rider 106 76 129 275 106 148 129 275 25 76 129 275 with SDBR 108 82 139 295 108 154 139 295 27 82 139 295 with PDBR 109 86 146 310 109 158 146 310 28 86 146 310 - ----------------------------------------------------------------------------------------------- SMALL-CAP EQUITY without Rider 103 67 114 246 103 139 114 246 22 67 114 246 with SDBR 105 73 125 266 105 145 125 266 24 73 125 266 with PDBR 106 77 132 281 106 149 132 281 25 77 132 281 - ----------------------------------------------------------------------------------------------- INTERNATIONAL LARGE-CAP without Rider 107 81 139 294 107 153 139 294 26 81 139 294 with SDBR 109 87 148 313 109 159 148 313 28 87 148 313 with PDBR 111 92 156 328 111 164 156 328 30 92 156 328
3
- ---------------------------------------------------------------------------------------------- EXPENSES IF YOU DID NOT ANNUITIZE OR EXPENSES IF YOU EXPENSES IF YOU SURRENDER, BUT LEFT ANNUITIZED SURRENDERED THE MONEY IN YOUR YOUR CONTRACT ($) YOUR CONTRACT ($) CONTRACT ($) - ---------------------------------------------------------------------------------------------- VARIABLE ACCOUNT 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr - ---------------------------------------------------------------------------------------------- EQUITY without Rider 103 67 114 246 103 139 114 246 22 67 114 246 with SDBR 105 73 125 266 105 145 125 266 24 73 125 266 with PDBR 106 77 132 281 106 149 132 281 25 77 132 281 - ---------------------------------------------------------------------------------------------- I-NET TOLLKEEPER without Rider 112 94 160 335 112 166 160 335 31 94 160 335 with SDBR 114 100 169 354 114 172 169 354 33 100 169 354 with PDBR 115 104 176 367 115 176 176 367 34 104 176 367 - ---------------------------------------------------------------------------------------------- FINANCIAL SERVICES without Rider 108 82 140 297 108 154 140 297 27 82 140 297 with SDBR 110 88 150 316 110 160 150 316 29 88 150 316 with PDBR 111 93 157 330 111 165 157 330 30 93 157 330 - ---------------------------------------------------------------------------------------------- HEALTH SCIENCES without Rider 108 82 140 297 108 154 140 297 27 82 140 297 with SDBR 110 88 150 316 110 160 150 316 29 88 150 316 with PDBR 111 93 157 330 111 165 157 330 30 93 157 330 - ---------------------------------------------------------------------------------------------- TECHNOLOGY without Rider 108 82 139 295 108 154 139 295 27 82 139 295 with SDBR 110 87 149 314 110 159 149 314 29 87 149 314 with PDBR 111 92 156 329 111 164 156 329 30 92 156 329 - ---------------------------------------------------------------------------------------------- TELECOMMUNICATIONS without Rider 108 82 139 295 108 154 139 295 27 82 139 295 with SDBR 110 87 149 314 110 159 149 314 29 87 149 314 with PDBR 111 92 156 329 111 164 156 329 30 92 156 329 - ---------------------------------------------------------------------------------------------- MULTI-STRATEGY without Rider 103 67 114 246 103 139 114 246 22 67 114 246 with SDBR 105 73 125 266 105 145 125 266 24 73 125 266 with PDBR 106 77 132 281 106 149 132 281 25 77 132 281 - ---------------------------------------------------------------------------------------------- EQUITY INCOME without Rider 103 67 114 246 103 139 114 246 22 67 114 246 with SDBR 105 73 125 266 105 145 125 266 24 73 125 266 with PDBR 106 77 132 281 106 149 132 281 25 77 132 281 - ---------------------------------------------------------------------------------------------- STRATEGIC VALUE without Rider 106 78 133 282 106 150 133 282 25 78 133 282 with SDBR 108 84 143 302 108 156 143 302 27 84 143 302 with PDBR 110 88 150 316 110 160 150 316 29 88 150 316 - ---------------------------------------------------------------------------------------------- GROWTH LT without Rider 104 70 120 256 104 142 120 256 23 70 120 256 with SDBR 106 76 130 276 106 148 130 276 25 76 130 276 with PDBR 107 80 137 291 107 152 137 291 26 80 137 291 - ---------------------------------------------------------------------------------------------- FOCUSED 30 without Rider 106 78 133 282 106 150 133 282 25 78 133 282 with SDBR 108 84 143 302 108 156 143 302 27 84 143 302 with PDBR 110 88 150 316 110 160 150 316 29 88 150 316 - ---------------------------------------------------------------------------------------------- MID-CAP VALUE without Rider 105 73 125 266 105 145 125 266 24 73 125 266 with SDBR 107 79 135 286 107 151 135 286 26 79 135 286 with PDBR 108 83 142 301 108 155 142 301 27 83 142 301 - ---------------------------------------------------------------------------------------------- INTERNATIONAL VALUE without Rider 105 75 128 273 105 147 128 273 24 75 128 273 with SDBR 107 81 138 293 107 153 138 293 26 81 138 293 with PDBR 109 85 145 308 109 157 145 308 28 85 145 308
4
- ------------------------------------------------------------------------------------------------- EXPENSES IF YOU DID NOT ANNUITIZE OR EXPENSES IF YOU EXPENSES IF YOU SURRENDER, BUT LEFT ANNUITIZED SURRENDERED THE MONEY IN YOUR YOUR CONTRACT ($) YOUR CONTRACT ($) CONTRACT ($) - ------------------------------------------------------------------------------------------------- VARIABLE ACCOUNT 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr 1 yr 3 yr 5 yr 10 yr - ------------------------------------------------------------------------------------------------- CAPITAL OPPORTUNITIES without Rider 104 72 123 263 104 144 123 263 23 72 123 263 with SDBR 106 78 133 283 106 150 133 283 25 78 133 283 with PDBR 108 82 141 298 108 154 141 298 27 82 141 298 - ------------------------------------------------------------------------------------------------- MID-CAP GROWTH without Rider 105 75 128 273 105 147 128 273 24 75 128 273 with SDBR 107 81 138 293 107 153 138 293 26 81 138 293 with PDBR 109 85 145 308 109 157 145 308 28 85 145 308 - ------------------------------------------------------------------------------------------------- GLOBAL GROWTH without Rider 109 85 144 306 109 157 144 306 28 85 144 306 with SDBR 111 91 154 325 111 163 154 325 30 91 154 325 with PDBR 112 95 162 339 112 167 162 339 31 95 162 339 - ------------------------------------------------------------------------------------------------- EQUITY INDEX without Rider 99 55 94 204 99 127 94 204 18 55 94 204 with SDBR 101 61 104 225 101 133 104 225 20 61 104 225 with PDBR 102 65 112 241 102 137 112 241 21 65 112 241 - ------------------------------------------------------------------------------------------------- SMALL-CAP INDEX without Rider 102 64 110 236 102 136 110 236 21 64 110 236 with SDBR 104 70 120 257 104 142 120 257 23 70 120 257 with PDBR 105 75 128 272 105 147 128 272 24 75 128 272 - ------------------------------------------------------------------------------------------------- REIT without Rider 107 81 138 292 107 153 138 292 26 81 138 292 with SDBR 109 87 147 311 109 159 147 311 28 87 147 311 with PDBR 111 91 155 326 111 163 155 326 30 91 155 326 - ------------------------------------------------------------------------------------------------- GOVERNMENT SECURITIES without Rider 102 65 111 239 102 137 111 239 21 65 111 239 with SDBR 104 71 121 259 104 143 121 259 23 71 121 259 with PDBR 105 75 129 274 105 147 129 274 24 75 129 274 - ------------------------------------------------------------------------------------------------- MANAGED BOND without Rider 102 65 112 241 102 137 112 241 21 65 112 241 with SDBR 104 71 122 261 104 143 122 261 23 71 122 261 with PDBR 106 76 130 276 106 148 130 276 25 76 130 276 - ------------------------------------------------------------------------------------------------- MONEY MARKET without Rider 100 57 99 213 100 129 99 213 19 57 99 213 with SDBR 102 63 109 234 102 135 109 234 21 63 109 234 with PDBR 103 68 116 250 103 140 116 250 22 68 116 250 - ------------------------------------------------------------------------------------------------- HIGH YIELD BOND without Rider 102 65 111 240 102 137 111 240 21 65 111 240 with SDBR 104 71 122 260 104 143 122 260 23 71 122 260 with PDBR 106 76 129 275 106 148 129 275 25 76 129 275 - ------------------------------------------------------------------------------------------------- LARGE-CAP VALUE without Rider 105 73 125 267 105 145 125 267 24 73 125 267 with SDBR 107 79 135 287 107 151 135 287 26 79 135 287 with PDBR 108 84 143 302 108 156 143 302 27 84 143 302 - -------------------------------------------------------------------------------------------------
5 YOUR INVESTMENT OPTIONS: YOUR VARIABLE INVESTMENT OPTIONS IS AMENDED - -------------------------------------------------------------------------------- The chart on page 10 of the Prospectus YOUR INVESTMENT OPTIONS: YOUR VARIABLE INVESTMENT OPTIONS is amended to add the following:
PRIMARY INVESTMENTS PORTFOLIO PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) MANAGER - ------------------------------------------------------------------------------------------------------------------------------- Blue Chip Long-term growth of capital. Equity securities of "blue chip" companies--typically AIM Current income is of secondary large companies that are well established in their importance. respective industries. - ------------------------------------------------------------------------------------------------------------------------------- Aggressive Growth Long-term growth of capital. Equity securities of small- and medium-sized growth AIM companies. - ------------------------------------------------------------------------------------------------------------------------------- Financial Services Long-term growth of capital. Equity securities in the financial services sector. INVESCO Such companies include banks, insurance companies, brokerage firms and other finance-related firms. - ------------------------------------------------------------------------------------------------------------------------------- Health Sciences Long-term growth of capital. Equity securities in the health sciences INVESCO sector. Such companies include medical equipment or supplies, pharmaceuticals, health care facilities and other health sciences-related firms. - ------------------------------------------------------------------------------------------------------------------------------- Technology Long-term growth of capital. Equity securities in the technology sector. INVESCO Such companies include biotechnology, communications, computers, electronics, Internet telecommunications, networking, robotics,video, and other technology- related firms. - ------------------------------------------------------------------------------------------------------------------------------- Telecommunications Long-term growth of capital. Equity securities in the telecommunications INVESCO Current income is of secondary sector. Such as companies that offer importance. telephone service, wireless communications, satellite communications, television and movie programming, broadcasting and Internet access. - ------------------------------------------------------------------------------------------------------------------------------- Strategic Value Long-term growth of capital. Equity securities with potential for long- Janus Capital term growth of capital. Corporation - ------------------------------------------------------------------------------------------------------------------------------- Focused 30 Long-term growth of capital. Equity securities selected for their Janus Capital growth potential. Corporation - ------------------------------------------------------------------------------------------------------------------------------- Capital Opportunities Long-term growth of capital. Equity securities with the potential for long-term MFS growth of capital. - ------------------------------------------------------------------------------------------------------------------------------- Mid-Cap Growth Long-term growth of capital. Equity securities of medium-sized companies believed MFS to have above-average growth potential. - ------------------------------------------------------------------------------------------------------------------------------- Global Growth Capital appreciation. Equity securities of any size located within and MFS outside of the U.S. - -------------------------------------------------------------------------------------------------------------------------------
6 ADDITIONAL INFORMATION: ELECTRONIC DELIVERY AUTHORIZATION IS AMENDED - ------------------------------------------------------------------------------- The following amends ELECTRONIC DELIVERY AUTHORIZATION on page 42 of the Prospectus: ELECTRONIC DELIVERY AUTHORIZATION You may authorize us to provide prospectuses, statements and other information ("documents") electronically by so indicating on the application, or by sending us instructions in writing in a form acceptable to us to receive such documents electronically. You must have internet access to use this service. While we impose no additional charge for this service, there may be potential costs associated with electronic delivery, such as on-line charges. Documents will be available on our Internet Web site. You may access and print all documents provided through this service. As documents become available, we will notify you of this by sending you an e-mail message that will include instructions on how to retrieve the document. If our e-mail notification is returned to us as "undeliverable," we will contact you to obtain your updated e-mail address. If we are unable to obtain a valid e-mail address for you, we will send a paper copy by regular U.S. mail to your address of record. You may revoke your consent for electronic delivery at any time and we will resume providing you with a paper copy of all required documents; however, in order for us to be properly notified, your revocation must be given to us a reasonable time before electronic delivery has commenced. We will provide you with paper copies at any time upon request. Such request will not constitute revocation of your consent to receive required documents electronically. 7 PISUP-101 STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 2000 AS RESTATED AND SUPPLEMENTED JANUARY 2, 2001 PACIFIC INNOVATIONS SEPARATE ACCOUNT A ----------------- Pacific Innovations (the "Contract") is a variable annuity contract underwritten by Pacific Life Insurance Company ("Pacific Life"). This Statement of Additional Information ("SAI") is not a Prospectus and should be read in conjunction with the Contract's Prospectus, dated May 1, 2000 and any supplement thereto, which is available without charge upon written or telephone request to Pacific Life. Terms used in this SAI have the same meanings as in the Prospectus, and some additional terms are defined particularly for this SAI. ------------------- Pacific Life Insurance Company Annuities Division Mailing Address: P.O. Box 7187 Pasadena, California 91109-7187 1-800-722-2333 TABLE OF CONTENTS
PAGE NO. -------- PERFORMANCE................................................. 1 Total Returns........................................... 1 Yields.................................................. 2 Performance Comparisons and Benchmarks.................. 2 Separate Account Performance............................ 3 DISTRIBUTION OF THE CONTRACTS............................... 7 Pacific Select Distributors, Inc........................ 7 THE CONTRACTS AND THE SEPARATE ACCOUNT...................... 8 Calculating Subaccount Unit Values...................... 8 Variable Annuity Payment Amounts........................ 8 Corresponding Dates..................................... 10 Age and Sex of Annuitant................................ 10 Systematic Transfer Programs............................ 11 Pre-Authorized Withdrawals.............................. 13 Death Benefit........................................... 13 Joint Annuitants on Qualified Contracts................. 13 1035 Exchanges.......................................... 14 Safekeeping of Assets................................... 14 FINANCIAL STATEMENTS........................................ 14 INDEPENDENT AUDITORS........................................ 14
PERFORMANCE From time to time, our reports or other communications to current or prospective Contract Owners or our advertising or other promotional material may quote the performance (yield and total return) of a Subaccount. Quoted results are based on past performance and reflect the performance of all assets held in that Subaccount for the stated time period. QUOTED RESULTS ARE NEITHER AN ESTIMATE NOR A GUARANTEE OF FUTURE INVESTMENT PERFORMANCE, AND DO NOT REPRESENT THE ACTUAL EXPERIENCE OF AMOUNTS INVESTED BY ANY PARTICULAR CONTRACT OWNER. TOTAL RETURNS A Subaccount may advertise its "average annual total return" over various periods of time. "Total return" represents the average percentage change in value of an investment in the Subaccount from the beginning of a measuring period to the end of that measuring period. "Annualized" total return assumes that the total return achieved for the measuring period is achieved for each such period for a full year. "Average annual" total return is computed in accordance with a standard method prescribed by the SEC. AVERAGE ANNUAL TOTAL RETURN To calculate a Subaccount's average annual total return for a specific measuring period, we first take a hypothetical $1,000 investment in that Subaccount, at its then-applicable Subaccount Unit Value (the "initial payment") and we compute the ending redeemable value of that initial payment at the end of the measuring period based on the investment experience of that Subaccount ("full withdrawal value"). The full withdrawal value reflects the effect of all recurring fees and charges applicable to a Contract Owner under the Contract, including the Risk Charge, the Administrative Fee and the deduction of the applicable withdrawal charge, but does not reflect any charges for applicable premium taxes and/or other taxes, any non-recurring fees or charges or any increase in the Risk Charge for an optional Death Benefit Rider. The Annual Fee is also taken into account, assuming an average Contract Value of $65,000. The redeemable value is then divided by the initial payment and this quotient is raised to the 365/N power (N represents the number of days in the measuring period), and 1 is subtracted from this result. Average annual total return is expressed as a percentage. (365/N) T = (ERV/P) - 1 where T = average annual total return ERV = ending redeemable value P = hypothetical initial payment of $1,000 N = number of days Average annual total return figures will be given for recent one-, three-, five-and ten-year periods (if applicable), and may be given for other periods as well (such as from commencement of the Subaccount's operations, or on a year-by-year basis). When considering "average" total return figures for periods longer than one year, it is important to note that the relevant Subaccount's annual total return for any one year in the period might have been greater or less than the average for the entire period. AGGREGATE TOTAL RETURN A Subaccount may use "aggregate" total return figures along with its "average annual" total return figures for various periods; these figures represent the cumulative change in value of an investment in the Subaccount for a specific period. Aggregate total returns may be shown by means of schedules, charts or graphs and may indicate subtotals of the various components of total return. The SEC has not prescribed standard formulas for calculating aggregate total return. Total returns may also be shown for the same periods that do not take into account the withdrawal charge. NON-STANDARDIZED TOTAL RETURNS We may also calculate non-standardized total returns which may or may not reflect any Annual Fee, withdrawal charges and/or increases in Risk Charges, charges for premium and/or other taxes, and any non-recurring fees or charges. Standardized return figures will always accompany any non-standardized returns shown. 1 YIELDS MONEY MARKET SUBACCOUNT The "yield" (also called "current yield") of the Money Market Subaccount is computed in accordance with a standard method prescribed by the SEC. The net change in the Subaccount's Unit Value during a seven-day period is divided by the Unit Value at the beginning of the period to obtain a base rate of return. The current yield is generated when the base rate is "annualized" by multiplying it by the fraction 365/7; that is, the base rate of return is assumed to be generated each week over a 365-day period and is shown as a percentage of the investment. The "effective yield" of the Money Market Subaccount is calculated similarly but, when annualized, the base rate of return is assumed to be reinvested. The effective yield will be slightly higher than the current yield because of the compounding effect of this assumed reinvestment. The formula for effective yield is: [(Base Period Return +1) (To the power of 365/7)] -1. Realized capital gains or losses and unrealized appreciation or depreciation of the assets of the underlying Money Market Portfolio are not included in the yield calculation. Current yield and effective yield do not reflect any deduction of charges for any applicable premium taxes and/or other taxes, or any increase in the Risk Charge for an optional Death Benefit Rider, but do reflect a deduction for the Annual Fee, the Risk Charge and the Administrative Fee and assumes an average Contract Value of $65,000. At December 31, 1999, the Money Market Subaccount's current yield was 4.17% and the effective yield was 4.26%. OTHER SUBACCOUNTS "Yield" of the other Subaccounts is computed in accordance with a different standard method prescribed by the SEC. The net investment income (investment income less expenses) per Subaccount Unit earned during a specified one-month or 30-day period is divided by the Subaccount Unit Value on the last day of the specified period. This result is then annualized (that is, the yield is assumed to be generated each month or each 30-day period for a year), according to the following formula, which assumes semiannual compounding: 6 YIELD = 2[((a-b) + 1) - 1] --- cd where: a = net investment income earned during the period by the Portfolio attributable to the Subaccount. b = expenses accrued for the period (net of reimbursements). c = the average daily number of Subaccount Units outstanding during the period that were entitled to receive dividends. d = the Unit Value of the Subaccount Units on the last day of the period. The yield of each Subaccount reflects the deduction of all recurring fees and charges applicable to the Subaccount, such as the Risk Charge, Administrative Fee, the Annual Fee (assuming an average Contract Value of $65,000), but does not reflect any withdrawal charge, any charge for applicable premium taxes and/or other taxes, any increase in the Risk Charge for an optional Death Benefit Rider, or any non-recurring fees or charges. The Subaccounts' yields will vary from time to time depending upon market conditions, the composition of each Portfolio and operating expenses of the Fund allocated to each Portfolio. Consequently, any given performance quotation should not be considered representative of the Subaccount's performance in the future. Yield should also be considered relative to changes in Subaccount Unit Values and to the relative risks associated with the investment policies and objectives of the various Portfolios. In addition, because performance will fluctuate, it may not provide a basis for comparing the yield of a Subaccount with certain bank deposits or other investments that pay a fixed yield or return for a stated period of time. PERFORMANCE COMPARISONS AND BENCHMARKS In advertisements and sales literature, we may compare the performance of some or all of the Subaccounts to the performance of other variable annuity issuers in general and to the performance of particular types of variable annuities investing in mutual funds, or series of mutual funds, with investment objectives similar to each of the 2 Subaccounts. This performance may be presented as averages or rankings compiled by Lipper Analytical Services, Inc. ("Lipper"), the Variable Annuity Research and Data Service ("VARDS-Registered Trademark-") or Morningstar, Inc. ("Morningstar"), which are independent services that monitor and rank the performance of variable annuity issuers and mutual funds in each of the major categories of investment objectives on an industry-wide basis. Lipper's rankings include variable life issuers as well as variable annuity issuers. VARDS-Registered Trademark- rankings compare only variable annuity issuers. The performance analyses prepared by Lipper and VARDS-Registered Trademark- rank such issuers on the basis of total return, assuming reinvestment of dividends and distributions, but do not take sales charges, redemption fees or certain expense deductions at the separate account level into consideration. In addition, VARDS-Registered Trademark- prepares risk adjusted rankings, which consider the effects of market risk on total return performance. We may also compare the performance of the Subaccounts with performance information included in other publications and services that monitor the performance of insurance company separate accounts or other investment vehicles. These other services or publications may be general interest business publications such as THE WALL STREET JOURNAL, BARRON'S, BUSINESS WEEK, FORBES, FORTUNE, and MONEY. In addition, our reports and communications to Contract Owners, advertisements, or sales literature may compare a Subaccount's performance to various benchmarks that measure the performance of a pertinent group of securities widely regarded by investors as being representative of the securities markets in general or as being representative of a particular type of security. We may also compare the performance of the Subaccounts with that of other appropriate indices of investment securities and averages for peer universes of funds or data developed by us derived from such indices or averages. Unmanaged indices generally assume the reinvestment of dividends or interest but do not generally reflect deductions for investment management or administrative costs and expenses. SEPARATE ACCOUNT PERFORMANCE The Contract was not available prior to 2000. However, in order to help you understand how investment performance can affect your Variable Account Value, we are including performance information based on the historical performance of the Subaccounts. The following table presents the annualized total return for each Variable Account for the period from each such Variable Account's commencement of operations through December 31, 1999. The accumulated value ("AV") reflects the deductions for all contractual fees and charges, but does not reflect the withdrawal charge, any nonrecurring fees and charges, any increase in the Risk Charge for an optional Death Benefit Rider or any charges for premium and/or other taxes. The full withdrawal value ("FWV") reflects the deductions for all contractual fees and charges, but does not reflect any increase in the Risk Charge for an optional Death Benefit Rider, any nonrecurring fees and charges, and any charges for premium and/or other taxes. 3 THE RESULTS SHOWN IN THIS SECTION ARE NOT AN ESTIMATE OR GUARANTEE OF FUTURE INVESTMENT PERFORMANCE. HISTORICAL SEPARATE ACCOUNT PERFORMANCE ANNUALIZED RATES OF RETURN FOR PERIODS ENDED DECEMBER 31, 1999** ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
SINCE 1 YEAR* 3 YEARS* INCEPTION* -------------------- -------------------- -------------------- VARIABLE ACCOUNTS AV FWV AV FWV AV FWV - ----------------- -------- -------- -------- -------- -------- -------- Aggressive Equity 4/17/96*............................... 25.58 17.48 12.79 10.87 12.03 12.03 Emerging Markets 4/17/96*................................ 51.43 43.33 1.92 (0.45) 0.36 0.36 Small-Cap Equity 10/1/99*................................ 27.98 19.88 Equity 1/2/96*........................................... 36.62 28.52 26.94 25.43 26.71 26.71 Multi-Strategy 1/2/96*................................... 5.56 (2.54) 13.21 11.31 12.49 12.49 Equity Income 1/2/96*.................................... 11.69 3.59 20.15 18.46 19.26 19.26 Growth LT 1/2/96*........................................ 95.33 87.23 49.42 48.34 40.33 40.33 Mid-Cap Value 1/4/99*.................................... 3.80 (4.39) Equity Index 1/2/96*..................................... 18.92 10.82 25.46 23.92 24.01 24.01 Small-Cap Index 1/4/99*.................................. 17.92 9.72 REIT 1/4/99*............................................. (1.41) (9.59) International Value 1/2/96*.............................. 21.11 13.01 10.77 8.77 12.64 12.64 Government Securities 1/2/96*............................ (3.31) (11.41) 3.99 1.72 3.35 3.35 Managed Bond 1/2/96*..................................... (3.28) (11.38) 4.13 1.87 3.78 3.78 Money Market 1/2/96*..................................... 3.48 (4.62) 3.71 1.43 3.67 3.67 High Yield Bond 1/2/96*.................................. 1.47 (6.63) 3.43 1.14 4.95 4.95 Large-Cap Value 1/4/99*.................................. 10.03 1.84
- ------------ * Date Variable Account commenced operations. ** Effective June 1, 1997 Morgan Stanley Asset Management became the Portfolio Manager of the International Value Portfolio. Effective May 1, 1998, Alliance Capital Management L.P. ("Alliance Capital") became the Portfolio Manager of the Aggressive Equity Portfolio and Goldman Sachs Asset Management became the Portfolio Manager of the Equity Portfolio; prior to May 1, 1998 some of the investment policies of the Aggressive Equity and Equity Portfolios differed. Effective January 1, 2000, Alliance Capital became the Portfolio Manager of the Emerging Markets Portfolio and Mercury Advisors (formerly Mercury Asset Management US) became the Portfolio Manager of the Equity Index and Small-Cap Index Portfolios. The Diversified Research, International Large-Cap, I-Net Toll Keeper, Strategic Value and Focused 30 Subaccounts started operations after December 31, 1999 and there is no historical value available for these Subaccounts. In order to help you understand how investment performance can affect your Variable Account Value, we are including performance information based on the historical performance of the Portfolios. The Separate Account commenced operations as of January 2, 1996. Therefore, no historical performance data exists for the Subaccounts prior to that date. The following table represents what the performance of the Subaccounts would have been if the Subaccounts had been both in existence and invested in the corresponding Portfolio since the date of the Portfolio's (or predecessor series') inception or for the indicated time period. Nine of the Portfolios of the Fund available under the Contract have been in operation since January 4, 1988 (January 30, 1991 in the case of the Equity Index Portfolio, January 4, 1994 in the case of the Growth LT Portfolio, April 1, 1996 in the case of the Aggressive Equity and Emerging Markets Portfolios and January 4, 1999 in the case of the Mid-Cap Value, Small-Cap Index, REIT and Large-Cap Value Portfolios). Historical performance information for the Equity Portfolio is based in part on the performance of that Portfolio's predecessor; the predecessor series was a series of Pacific Corinthian Variable Fund and began its first full year of operations in 1984, the assets of which were acquired by the Fund on December 31, 1994. Because the Subaccounts had not commenced operations until January 2, 1996 or later, as indicated in the chart above, and because the Contracts were not available until 2000, these are not actual performance numbers for the Subaccounts or for the Contract. 4 THESE ARE HYPOTHETICAL TOTAL RETURN NUMBERS based on accumulated value ("AV") and full withdrawal value ("FWV") that represent the actual performance of the Portfolios, adjusted to reflect the deductions for the fees and charges applicable to the Contract; the FWV also includes applicable withdrawal charges. Any charge for non-recurring fees and charges, premium taxes and/or other taxes, an optional Death Benefit Rider are not reflected in these data, and reflection of the Annual Fee assumes an average Contract size of $65,000. The information presented also includes data representing unmanaged market indices. THE RESULTS SHOWN IN THIS SECTION ARE NOT AN ESTIMATE OR GUARANTEE OF FUTURE INVESTMENT PERFORMANCE. HISTORICAL AND HYPOTHETICAL SEPARATE ACCOUNT PERFORMANCE ANNUALIZED RATES OF RETURN FOR PERIODS ENDED DECEMBER 31, 1999 ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
1 YEAR* 3 YEARS* 5 YEARS* -------------------- -------------------- -------------------- VARIABLE ACCOUNTS AV FWV AV FWV AV FWV - ----------------- -------- -------- -------- -------- -------- -------- Aggressive Equity................... 25.58 17.48 12.79 10.87 Emerging Markets.................... 51.43 43.33 1.92 (0.45) Small-Cap Equity.................... 45.47 37.37 23.69 22.10 23.43 23.43 Equity.............................. 36.62 28.52 26.94 25.43 25.81 25.81 Multi-Strategy...................... 5.56 (2.54) 13.21 11.31 14.74 14.74 Equity Income....................... 11.69 3.59 20.15 18.46 21.54 21.54 Growth LT........................... 95.33 87.23 49.42 48.34 Mid-Cap Value....................... Equity Index........................ 18.92 10.82 25.46 23.92 26.33 26.33 Small-Cap Index..................... REIT................................ International Value................. 21.11 13.01 10.77 8.77 12.23 12.23 Government Securities............... (3.31) (11.41) 3.99 1.72 5.98 5.98 Managed Bond........................ (3.28) (11.38) 4.13 1.87 6.38 6.38 Money Market........................ 3.48 (4.62) 3.71 1.43 3.76 3.76 High Yield Bond..................... 1.47 (6.63) 3.43 1.14 7.32 7.32 Large-Cap Value..................... SINCE 10 YEARS* INCEPTION* -------------------- -------------------- VARIABLE ACCOUNTS AV FWV AV FWV - ----------------- -------- -------- -------- -------- Aggressive Equity................... 12.03 12.03 Emerging Markets.................... 0.36 0.36 Small-Cap Equity.................... 15.10 15.10 16.41 16.41 Equity.............................. 16.11 16.11 15.65 15.65 Multi-Strategy...................... 9.92 9.92 10.47 10.47 Equity Income....................... 13.08 13.08 13.67 13.67 Growth LT........................... 34.23 34.23 Mid-Cap Value....................... 3.80 (4.39) Equity Index........................ 18.35 18.35 Small-Cap Index..................... 17.92 9.72 REIT................................ (1.41) (9.59) International Value................. 6.77 6.77 8.50 8.50 Government Securities............... 5.91 5.91 6.42 6.42 Managed Bond........................ 6.47 6.47 6.94 6.94 Money Market........................ 3.47 3.47 3.85 3.85 High Yield Bond..................... 8.85 8.85 8.15 8.15 Large-Cap Value.....................
MAJOR INDICES 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------- -------- -------- -------- -------- CS First Boston Global High Yield Bond...................... 3.28 5.37 9.07 11.06 Lehman Brothers Aggregate Bond.............................. (0.83) 5.73 7.73 7.69 Lehman Brothers Government Bond............................. (2.25) 5.57 7.43 7.48 Lehman Brothers Government/Corporate Bond................... (2.15) 5.54 7.60 7.66 Morgan Stanley Capital International Europe, Australasia & Far East.................................................. 27.30 16.06 13.15 7.33 Morgan Stanley Capital International Emerging Markets Free...................................................... 63.70 0.91 (0.13) 8.58 NAREIT Equity............................................... (4.62) (1.82) 8.09 9.14 Russell Mid-Cap............................................. 18.23 18.86 21.86 15.92 Russell 1000 Growth......................................... 33.16 34.07 32.41 20.32 Russell 2000 Small-Stock.................................... 21.26 13.08 16.69 13.40 Russell 2500................................................ 24.15 15.72 19.43 15.05 Standard & Poor's 500 Composite Stock Price................. 21.04 27.56 28.55 18.20
- ------------ * The performance of the Aggressive Equity, Equity Income, Multi-Strategy, Equity, International Value, and Emerging Markets Variable Accounts for all or a portion of this period occurred at a time when other Portfolio Managers managed the corresponding Portfolio in which each Variable Account invests. Effective January 1, 1994, J. P. Morgan Investment Management Inc. became the Portfolio Manager of the Equity Income and Multi-Strategy Portfolios; prior to January 1, 1994, some of the investment policies of the Equity Income Portfolio and the investment objective of the Multi-Strategy Portfolio differed. Effective June 1, 1997 Morgan Stanley Asset Management became the Portfolio Manager of the International Value Portfolio. Effective May 1, 1998, Alliance Capital Management L.P. became the Portfolio Manager of the Aggressive Equity Portfolio and Goldman Sachs Asset Management became the Portfolio Manager of the Equity Portfolio; prior to May 1, 1998 some of the investment policies of the Aggressive Equity, and Equity Portfolios differed. Performance of the Equity Portfolio is based in part on the performance of the predecessor portfolio of Pacific Corinthian Variable Fund, which began its first full year of operations in 1984, the assets of which were acquired by the Fund on December 31, 1994. Effective January 1, 2000, Alliance Capital became the Portfolio Manager of the Emerging Markets Portfolio and Mercury Advisors (formerly Mercury Asset Management US) became the Portfolio Manager of the Equity Index and Small-Cap Index Portfolios. 5 TAX DEFERRED ACCUMULATION In reports or other communications to you or in advertising or sales materials, we may also describe the effects of tax-deferred compounding on the Separate Account's investment returns or upon returns in general. These effects may be illustrated in charts or graphs and may include comparisons at various points in time of returns under the Contract or in general on a tax-deferred basis with the returns on a taxable basis. Different tax rates may be assumed. In general, individuals who own annuity contracts are not taxed on increases in the value under the annuity contract until some form of distribution is made from the contract. Thus, the annuity contract will benefit from tax deferral during the accumulation period, which generally will have the effect of permitting an investment in an annuity contract to grow more rapidly than a comparable investment under which increases in value are taxed on a current basis. The following chart illustrates this benefit by comparing accumulation under a variable annuity contract with accumulations from an investment on which gains are taxed on a current ordinary income basis. The chart shows accumulations on a single Purchase Payment of $10,000, assuming hypothetical annual returns of 0%, 4% and 8%, compounded annually, and a tax rate of 36%. The values shown for the taxable investment do not include any deduction for management fees or other expenses but assume that taxes are deducted annually from investment returns. The values shown for the variable annuity do not reflect the deduction of contractual expenses such as the Risk Charge (equal to an annual rate of 1.25% of average daily account value), the Administrative Fee (equal to an annual rate of 0.15% of average daily account value), the Annual Fee (equal to $30 per year if your Net Contract Value is less than $50,000), any increase in the Risk Charge for an optional Death Benefit Rider (equal to a maximum annual rate of 0.35% of average daily account value), any charge for premium taxes and/or other taxes, or the expenses of an underlying investment vehicle, such as the Fund. The values shown also do not reflect the withdrawal charge. Generally, the withdrawal charge is equal to 9% of the amount withdrawn attributable to Purchase Payments that are less than one year old, 8% of the amount withdrawn attributable to Purchase Payments that are less than two years old, and 8% of the amount withdrawn attributable to Purchase Payments that are three years old. The age of Purchase Payments is considered 1 year old in the Contract Year we receive it and increases by one year beginning on the day preceding each Contract Anniversary. During a Contract Year, you may withdraw free of withdrawal charge amounts up to your "Eligible Purchase Payments". Eligible Purchase Payments include 10% annually of total Purchase Payments that have an "age" of less than four years, plus any remaining portion not withdrawn from the previous Contract Year's Eligible Purchase Payments that are derived from Purchase Payments which have an "age" of less than four years, plus 100% of all Purchase Payments that have an "age" of four years or more. Once all Purchase Payments have been deemed withdrawn, any withdrawal will be deemed a withdrawal of your Earnings and will be free of the withdrawal charge. If these expenses and fees were taken into account, they would reduce the investment return shown for both the taxable investment and the hypothetical variable annuity contract. In addition, these values assume that you do not surrender the Contract or make any withdrawals until the end of the period shown. The chart assumes a full withdrawal, at the end of the period shown, of all Contract Value and the payment of taxes at the 36% rate on the amount in excess of the Purchase Payment. The rates of return illustrated are hypothetical and are not an estimate or guarantee of performance. Actual tax rates may vary for different assets and taxpayers from that illustrated and withdrawals by and distributions to Contract Owners who have not reached age 59 1/2 may be subject to a tax penalty of 10%. 6 POWER OF TAX DEFERRAL $10,000 investment at annual rates of return of 0%, 4% and 8%, taxed @ 36% EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
0% GROWTH 4% GROWTH 8% GROWTH TAXABLE TAX DEFERRED TAXABLE TAX DEFERRED TAXABLE TAX DEFERRED INVESTMENT INVESTMENT INVESTMENT INVESTMENT INVESTMENT INVESTMENT YEARS Before Tax Before Tax Before Tax Before Tax Before Tax Before Tax 10 $10,000.00 $10,000.00 $12,875.97 $13,073.56 $16,476.07 $17,417.12 20 $10,000.00 $10,000.00 $16,579.07 $17,623.19 $27,146.07 $33,430.13 30 $10,000.00 $10,000.00 $21,347.17 $24,357.74 $44,726.05 $68,001.00
DISTRIBUTION OF THE CONTRACTS PACIFIC SELECT DISTRIBUTORS, INC. (FORMERLY KNOWN AS PACIFIC MUTUAL DISTRIBUTORS, INC.) Pacific Select Distributors, Inc. ("PSD"), a subsidiary of ours, acts as the principal underwriter ("distributor") of the Contracts and offers the Contracts on a continuous basis. PSD is registered as a broker-dealer with the SEC and is a member of the National Association of Securities Dealers ("NASD"). We pay PSD for acting as principal underwriter under a Distribution Agreement. We and PSD enter into selling agreements with broker-dealers whose registered representatives are authorized by state insurance departments to sell the Contracts. The aggregate amount of underwriting commissions paid to PSD for 1999 with regard to this Contract was $0 of which $0 was retained. 7 THE CONTRACTS AND THE SEPARATE ACCOUNT CALCULATING SUBACCOUNT UNIT VALUES The Unit Value of the Subaccount Units in each Variable Investment Option is computed at or about 4:00 p.m. Eastern time on each Business Day. The initial Unit Value of each Subaccount was $10 on the Business Day the Subaccount began operations. At the end of each Business Day, the Unit Value for a Subaccount is equal to: Y X Z where (Y) = the Unit Value for that Subaccount as of the end of the preceding Business Day; and (Z) = the Net Investment Factor for that Subaccount for the period (a "valuation period") between that Business Day and the immediately preceding Business Day. The "Net Investment Factor" for a Subaccount for any valuation period is equal to: (A DIVIDED BY B) - C where (A) = the "per share value of the assets" of that Subaccount as of the end of that valuation period, which is equal to: a+b+c where (a) = the net asset value per share of the corresponding Portfolio shares held by that Subaccount as of the end of that valuation period; (b) = the per share amount of any dividend or capital gain distributions made by the Fund for that Portfolio during that valuation period; and (c) = any per share charge (a negative number) or credit (a positive number) for any income taxes and/or any other taxes or other amounts set aside during that valuation period as a reserve for any income and/or any other taxes which we determine to have resulted from the operations of the Subaccount or Contract, and/or any taxes attributable, directly or indirectly, to Purchase Payments; (B) = the net asset value per share of the corresponding Portfolio shares held by the Subaccount as of the end of the preceding valuation period; and (C) = a factor that assesses against the Subaccount net assets for each calendar day in the valuation period the basic Risk Charge plus any applicable increase in the Risk Charge and the Administrative Fee (see CHARGES, FEES AND DEDUCTIONS in the Prospectus). As explained in the Prospectus, the Annual Fee, if applicable, is assessed against your Variable Account Value through the automatic debit of Subaccount Units; the Annual Fee decreases the number of Subaccount Units attributed to your Contract but does not alter the Unit Value for any Subaccount. VARIABLE ANNUITY PAYMENT AMOUNTS The following steps show how we determine the amount of each variable annuity payment under your Contract. FIRST: PAY APPLICABLE PREMIUM TAXES When you convert your Net Contract Value into annuity payments, you must pay any applicable charge for premium taxes and/or other taxes on your Contract Value (unless applicable law requires those taxes to be paid at a later time). We assess this charge by reducing each Account Value proportionately, relative to your Account Value in each Subaccount and in the Fixed Option, in an amount equal to the aggregate amount of the charges. The remaining amount of your available Net Contract Value may be used to provide variable annuity payments. Alternatively, your remaining available Net Contract Value may be used to provide fixed annuity payments, or it may be divided to provide both fixed and variable annuity payments. You may also choose to withdraw some or all of your remaining Net Contract Value, less any applicable Annual Fee, withdrawal charge, and any charges for premium taxes and/or other taxes without converting this amount into annuity payments. SECOND: THE FIRST VARIABLE PAYMENT We begin by referring to your Contract's Option Table for your Annuity Option (the "Annuity Option Table"). The Annuity Option Table allows us to calculate the dollar amount of the first variable annuity payment under your Contract, based on the amount applied toward the variable annuity. The number that the Annuity Option 8 Table yields will be based on the Annuitant's age (and, in certain cases, sex) and assumes a 5% rate of return, as described in more detail below. EXAMPLE: Assume a man is 65 years of age at his Annuity Date and has selected a lifetime annuity with monthly payments guaranteed for 10 years. According to the Annuity Option Table, this man should receive an initial monthly payment of $5.79 for every $1,000 of his Contract Value (reduced by applicable charges) that he will be using to provide variable payments. Therefore, if his Contract Value after deducting applicable fees and charges is $100,000 on his Annuity Date and he applies this entire amount toward his variable annuity, his first monthly payment will be $579.00. You may choose any other Annuity Option Table that assumes a different rate of return which we offer at the time your Annuity Option is effective. THIRD: SUBACCOUNT ANNUITY UNITS For each Subaccount, we use the amount of the first variable annuity payment under your Contract attributable to each Subaccount to determine the number of Subaccount Annuity Units that will form the basis of subsequent payment amounts. First, we use the Annuity Option Table to determine the amount of that first variable payment for each Subaccount. Then, for each Subaccount, we divide that amount of the first variable annuity payment by the value of one Subaccount Annuity Unit (the "Subaccount Annuity Unit Value") as of the end of the Annuity Date to obtain the number of Subaccount Annuity Units for that particular Subaccount. The number of Subaccount Annuity Units used to calculate subsequent payments under your Contract will not change unless exchanges of Annuity Units are made (or if the Joint and Survivor Annuity Option is elected and the Primary Annuitant dies first), but the value of those Annuity Units will change daily, as described below. FOURTH: THE SUBSEQUENT VARIABLE PAYMENTS The amount of each subsequent variable annuity payment will be the sum of the amounts payable based on each Subaccount. The amount payable based on each Subaccount is equal to the number of Subaccount Annuity Units for that Subaccount multiplied by their Subaccount Annuity Unit Value at the end of the Business Day in each payment period you elected that corresponds to the Annuity Date. Each Subaccount's Subaccount Annuity Unit Value, like its Subaccount Unit Value, changes each day to reflect the net investment results of the underlying investment vehicle, as well as the assessment of the Risk Charge at an annual rate of 1.25% and the Administrative Fee at an annual rate of 0.15%. In addition, the calculation of Subaccount Annuity Unit Value incorporates an additional factor; as discussed in more detail below, this additional factor adjusts Subaccount Annuity Values to correct for the Option Table's implicit assumed annual investment return on amounts applied but not yet used to furnish annuity benefits. Any increase in your Risk Charge for an Optional Death Benefit Rider is not charged on and after the Annuity Date. Different Subaccounts may be selected for your Contract before and after your Annuity Date, subject to any restrictions we may establish. Currently, you may exchange Subaccount Annuity Units in any Subaccount for Subaccount Annuity Units in any other Subaccount(s) up to four times in any twelve month period after your Annuity Date. The number of Subaccount Annuity Units in any Subaccount may change due to such exchanges. Exchanges following your Annuity Date will be made by exchanging Subaccount Annuity Units of equivalent aggregate value, based on their relative Subaccount Annuity Unit Values. UNDERSTANDING THE "ASSUMED INVESTMENT RETURN" FACTOR The Annuity Option Table incorporates a number of implicit assumptions in determining the amount of your first variable annuity payment. As noted above, the numbers in the Annuity Option Table reflect certain actuarial assumptions based on the Annuitant's age, and, in some cases, the Annuitant's sex. In addition, these numbers assume that the amount of your Contract Value that you convert to a variable annuity will have a positive net investment return of 5% (or such other rate of return you may elect) each year during the payout of your annuity; thus 5% is referred to as an "assumed investment return." 9 The Subaccount Annuity Unit Value for a Subaccount will increase only to the extent that the investment performance of that Subaccount exceeds the Risk Charge, the Administrative Fee, and the assumed investment return. The Subaccount Annuity Unit Value for any Subaccount will generally be less than the Subaccount Unit Value for that same Subaccount, and the difference will be the amount of the assumed investment return factor. EXAMPLE: Assume the net investment performance of a Subaccount is at a rate of 5.00% per year (after deduction of the 1.25% Risk Charge and the 0.15% Administrative Fee). The Subaccount Unit Value for that Subaccount would increase at a rate of 5.00% per year, BUT THE SUBACCOUNT ANNUITY UNIT VALUE WOULD NOT INCREASE (OR DECREASE) AT ALL. The net investment factor for that 5% return [1.05] is then divided by the factor for the 5% assumed investment return [1.05] and 1 is subtracted from the result to determine the adjusted rate of change in Subaccount Annuity Unit Value: 1.05 = 1; 1 - 1 = 0; 0 X 100% = 0%. ---- 1.05 If the net investment performance of a Subaccount's assets is at a rate less than 5.00% per year, the Subaccount Annuity Unit Value will decrease, even if the Subaccount Unit Value is increasing. EXAMPLE: Assume the net investment performance of a Subaccount is at a rate of 2.60% per year (after deduction of the 1.25% Risk Charge and the 0.15% Administrative Fee). The Subaccount Unit Value for that Subaccount would increase at a rate of 2.60% per year, BUT THE SUBACCOUNT ANNUITY UNIT VALUE WOULD DECREASE AT A RATE OF 2.29% PER YEAR. The net investment factor for that 2.6% return [1.026] is then divided by the factor for the 5% assumed investment return [1.05] and 1 is subtracted from the result to determine the adjusted rate of change in Subaccount Annuity Unit Value: 1.026 = 0.9771; 0.9771 - 1 = -0.0229; -0.0229 X 100% = -2.29%. ---- 1.05 The assumed investment return will always cause increases in Subaccount Annuity Unit Values to be somewhat less than if the assumption had not been made, will cause decreases in Subaccount Annuity Unit Values to be somewhat greater than if the assumption had not been made, and will (as shown in the example above) sometimes cause a decrease in Subaccount Annuity Unit Values to take place when an increase would have occurred if the assumption had not been made. If we had assumed a higher investment return in our Annuity Option tables, it would produce annuities with larger first payments, but the increases in subaccount annuity payments would be smaller and the decreases in subsequent annuity payments would be greater; a lower assumed investment return would produce annuities with smaller first payments, and the increases in subsequent annuity payments would be greater and the decreases in subsequent annuity payments would be smaller. CORRESPONDING DATES If any transaction or event under your Contract is scheduled to occur on a "corresponding date" that does not exist in a given calendar period, the transaction or event will be deemed to occur on the following Business Day. In addition, as stated in the Prospectus, any event scheduled to occur on a day that is not a Business Day will occur on the next succeeding Business Day. EXAMPLE: If your Contract is issued on February 29 in year 1 (a leap year), your Contract Anniversary in years 2, 3 and 4 will be on March 1. EXAMPLE: If your Annuity Date is July 31 and you select monthly annuity payments, the payments received will be based on valuations made on July 31, August 31, October 1 (for September), October 31, December 1 (for November), December 31, January 31, March 1 (for February), March 31, May 1 (for April), May 31 and July 1 (for June). AGE AND SEX OF ANNUITANT As mentioned in the Prospectus, the Contracts generally provide for sex-distinct annuity income factors in the case of life annuities. Statistically, females tend to have longer life expectancies than males; consequently, if the amount of annuity payments is based on life expectancy, they will ordinarily be higher if an annuitant is male than if an annuitant is female. Certain states' regulations prohibit sex-distinct annuity income factors, and Contracts issued in those states will use unisex factors. In addition, Contracts issued in connection with Qualified Plans are required to use unisex factors. 10 We may require proof of your Annuitant's age and sex before or after starting annuity payments. If the age or sex (or both) of your Annuitant are incorrectly stated in your Contract, we will correct the amount payable based on your Annuitant's correct Age or sex, if applicable. If we make the correction after annuity payments have started, and we have made overpayments, we will deduct the amount of the overpayment, with interest at 3% a year, from any payments due then or later; if we have made underpayments, we will add the amount, with interest at 3% a year, of the underpayments to the next payment we make after we receive proof of the correct Age and/or sex. SYSTEMATIC TRANSFER PROGRAMS The Fixed Account is not available in connection with portfolio rebalancing. If you are using the earnings sweep, you may also use portfolio rebalancing only if you selected the Fixed Option as your sweep option. You may not use dollar cost averaging and the earnings sweep at the same time. DOLLAR COST AVERAGING When you request dollar cost averaging, you are authorizing us to make periodic reallocations of your Contract Value without waiting for any further instruction from you. You may request to begin or stop dollar cost averaging at any time prior to your Annuity Date; the effective date of your request will be the day we receive written notice from you in proper form. Your request may specify the date on which you want your first transfer to be made. If you do not specify a date for your first transfer, we will treat your request as if you had specified the effective date of your request. Your first transfer may not be made until 30 days after your Contract Date, and if you specify an earlier date, your first transfer will be delayed until one calendar month after the date you specify. If you request dollar cost averaging on your application for your Contract and you fail to specify a date for your first transfer, your first transfer will be made one period after your Contract Date (that is, if you specify monthly transfers, the first transfer will occur 30 days after your Contract Date; quarterly transfers, 90 days after your Contract Date; semiannual transfers, 180 days after your Contract Date; and if you specify annual transfers, the first transfer will occur on your Contract Anniversary). If you stop dollar cost averaging, you must wait 30 days before you may begin this option again. Your request to begin dollar cost averaging must specify the Investment Option you wish to transfer money FROM (your "source account"). You may choose any one Investment Option as your source account. The Account Value of your source account must be at least $5,000 for you to begin dollar cost averaging. Your request to begin dollar cost averaging must also specify the amount and frequency of your transfers. You may choose monthly, quarterly, semiannual or annual transfers. The amount of your transfers may be specified as a dollar amount or a percentage of your source Account Value; however, each transfer must be at least $250. Dollar cost averaging transfers are subject to the same requirements and limitations as other transfers. Finally, your request must specify the Variable Investment Option(s) you wish to transfer amounts to (your "target account(s)"). If you select more than one target account, your dollar cost averaging request must specify how transferred amounts should be allocated among the target accounts. Your source account may not also be a target account. Your dollar cost averaging transfers will continue until the earlier of (i) your request to stop dollar cost averaging is effective, or (ii) your source Account Value is zero, or (iii) your Annuity Date. If, as a result of a dollar cost 11 averaging transfer, your source Account Value falls below any minimum Account Value we may establish, we have the right, at our option, to transfer that remaining Account Value to your target account(s) on a proportionate basis relative to your most recent allocation instructions. We may change, terminate or suspend the dollar cost averaging option at any time. PORTFOLIO REBALANCING Portfolio rebalancing allows you to maintain the percentage of your Contract Value allocated to each Variable Investment Option at a pre-set level prior to annuitization. For example, you could specify that 30% of your Contract Value should be in the Equity Index Subaccount, 40% in the Managed Bond Subaccount, and 30% in the Growth LT Subaccount. Over time, the variations in each Subaccount's investment results will shift this balance of these Subaccount Value allocations. If you elect the portfolio rebalancing feature, we will automatically transfer your Subaccount Value back to the percentages you specify. You may choose to have rebalances made quarterly, semiannually or annually until your Annuity Date; portfolio rebalancing is not available after you annuitize. Procedures for selecting portfolio rebalancing are generally the same as those discussed in detail above for selecting dollar cost averaging: You may make your request at any time prior to your Annuity Date and it will be effective when we receive it in proper form. If you stop portfolio rebalancing, you must wait 30 days to begin again. You may specify a date for your first rebalance, or we will treat your request as if you selected the request's effective date. If you specify a date fewer than 30 days after your Contract Date, your first rebalance will be delayed one month, and if you request rebalancing on your application but do not specify a date for the first rebalance, it will occur one period after your Contract Date, as described above under Dollar Cost Averaging. We may change, terminate or suspend the portfolio rebalancing feature at any time. EARNINGS SWEEP An earnings sweep automatically transfers the earnings attributable to a specified Investment Option (the "sweep option") to one or more other Investment Options (your "target option(s)"). If you elect to use the earnings sweep, you may select either the Fixed Option or the Money Market Subaccount as your sweep option. The Account Value of your sweep option will be required to be at least $5,000 when you elect the earnings sweep. You may select one or more Variable Investment Options (but not the Money Market Subaccount) as your target option(s). You may choose to have earnings sweeps occur monthly, quarterly, semiannually or annually until you annuitize. At each earnings sweep, we will automatically transfer your accumulated earnings attributable to your sweep option for the previous period proportionately to your target option(s). That is, if you select a monthly earnings sweep, we will transfer the sweep option earnings from the preceding month; if you select a semiannual earnings sweep, we will transfer the sweep option earnings accumulated over the preceding six months. Earnings sweep transfers are subject to the same requirements and limitations as other transfers. To determine the earnings, we take the change in the sweep option's Account Value during the sweep period, add any withdrawals or transfers out of the sweep option Account that occurred during the sweep period, and subtract any allocations to the sweep option Account during the sweep period. The result of this calculation represents the "total earnings" for the sweep period. If, during the sweep period, you withdraw or transfer amounts from the sweep option Account, we assume that earnings are withdrawn or transferred before any other Account Value. Therefore, your "total earnings" for the sweep period will be reduced by any amounts withdrawn or transferred during the sweep option period. The remaining earnings are eligible for the sweep transfer. Procedures for selecting the earnings sweep are generally the same as those discussed in detail above for selecting dollar cost averaging and portfolio rebalancing: You may make your request at any time and it will be effective when we receive it in a form satisfactory to us. If you stop the earnings sweep, you must wait 30 days 12 to begin again. You may specify a date for your first sweep, or we will treat your request as if you selected the request's effective date. If you specify a date fewer than 30 days after your Contract Date, your first earnings sweep will be delayed one month, and if you request the earnings sweep on your application but do not specify a date for the first sweep, it will occur one period after your Contract Date, as described above under Dollar Cost Averaging. If, as a result of an earnings sweep transfer, your source Account Value falls below $500, we have the right, at our option, to transfer that remaining Account Value to your target account(s) on a proportionate basis relative to your most recent allocation instructions. We may change, terminate or suspend the earnings sweep option at any time. PRE-AUTHORIZED WITHDRAWALS You may specify a dollar amount for your pre-authorized withdrawals, or you may specify a percentage of your Contract Value or an Account Value. You may direct us to make your pre-authorized withdrawals from one or more specific Investment Options; if you do not give us these specific instructions, amounts will be deducted proportionately from your Account Value in each Fixed or Variable Investment Option. Procedures for selecting pre-authorized withdrawals are generally the same as those discussed in detail above for selecting dollar cost averaging, portfolio rebalancing, and earnings sweeps: You may make your request at any time and it will be effective when we receive it in proper form. If you stop the pre-authorized withdrawals, you must wait 30 days to begin again. You may specify a date for the first withdrawal, or we will treat your request as if you selected the request's effective date. If you specify a date fewer than 30 days after your Contract Date, your first pre-authorized withdrawal will be delayed one month, and if you request the pre-authorized withdrawals on your application but do not specify a date for the first withdrawal, it will occur one period after your Contract Date. If your pre-authorized withdrawals cause your Account Value in any Investment Option to fall below $500, we have the right, at our option, to transfer that remaining Account Value to your other Investment Options on a proportionate basis relative to your most recent allocation instructions. If your pre-authorized withdrawals cause your Contract Value to fall below $1,000, we may, at our option, terminate your Contract and send you the remaining withdrawal proceeds. Pre-authorized withdrawals are subject to the same withdrawal charges as are other withdrawals, and each withdrawal is subject to any applicable charge for premium taxes and/or other taxes, to federal income tax on its taxable portion, and, if you have not reached age 59 1/2, a federal tax penalty of at least 10%. DEATH BENEFIT Any death benefit payable will be calculated as of the date we receive proof (in proper form) of the Annuitant's death (or, if applicable, the Contract Owner's death) and instructions regarding payment; any claim of a death benefit must be made in proper form. A recipient of death benefit proceeds may elect to have this benefit paid in one lump sum, in periodic payments, in the form of a lifetime annuity or in some combination of these. Annuity payments will begin within 30 days once we receive all information necessary to process the claim. If your Contract names Joint or Contingent Annuitants, no death benefit proceeds will be payable unless and until the last Annuitant dies prior to the Annuity Date or a Contract Owner dies prior to the Annuity Date. If yours is a Qualified Contract, your Contingent Annuitant or Contingent Owner must be your spouse. JOINT ANNUITANTS ON QUALIFIED CONTRACTS If your Contract was issued in connection with a Qualified Plan subject to Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), and you change your marital status after your Contract Date, you may be permitted to add a Joint Annuitant on your Annuity Date and to change your Joint Annuitant. Generally speaking, you may be permitted to add a new spouse as a Joint Annuitant, and you may be permitted to remove a Joint Annuitant who is no longer your spouse. You may call us for more information. 13 1035 EXCHANGES You may make your initial Purchase Payment through an exchange of an existing annuity contract. To exchange, you must complete a 1035 Exchange form, which is available by calling your representative, or by calling us at 1-800-722-2333, and mail the form along with the annuity contract you are exchanging (plus your completed application if you are making an initial Purchase Payment) to us. In general terms, Section 1035 of the Code provides that you recognize no gain or loss when you exchange one annuity contract solely for another annuity contract. However, transactions under Section 1035 may be subject to special rules and may require special procedures and record-keeping, particularly if the exchanged annuity contract was issued prior to August 14, 1982. You should consult your tax adviser prior to effecting a 1035 Exchange. SAFEKEEPING OF ASSETS We are responsible for the safekeeping of the assets of the Separate Account. These assets are held separate and apart from the assets of our General Account and our other separate accounts. FINANCIAL STATEMENTS The statement of net assets of Separate Account A as of December 31, 1999 and the related statement of operations for the year then ended and statements of changes in net assets for each of the two years in the period then ended are incorporated by reference in this Statement of Additional Information from the Annual Report of Separate Account A dated December 31, 1999. Pacific Life's consolidated financial statements as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 are set forth beginning on the next page. These financial statement should be considered only as bearing on the ability of Pacific Life to meet its obligations under the Contracts and not as bearing on the investment performance of the assets held in the Separate Account. The information in Separate Account A's Annual Report relates to variable annuity contracts other than the Contract that we have issued and that are funded by Separate Account A. INDEPENDENT AUDITORS The consolidated financial statements of Pacific Life as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein. 14 INDEPENDENT AUDITORS' REPORT - ----------------------------------- Pacific Life Insurance Company and Subsidiaries: We have audited the accompanying consolidated statements of financial condition of Pacific Life Insurance Company and Subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pacific Life Insurance Company and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Costa Mesa, California February 22, 2000 15 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 1998 - -------------------------------------------------------------------------------------- (IN MILLIONS) ASSETS Investments: Securities available for sale at estimated fair value: Fixed maturity securities $14,814.0 $13,804.7 Equity securities 295.2 547.5 Trading securities at estimated fair value 99.9 97.0 Mortgage loans 2,920.2 2,788.7 Real estate 236.0 172.7 Policy loans 4,258.5 4,003.2 Other investments 882.7 951.7 - -------------------------------------------------------------------------------------- TOTAL INVESTMENTS 23,506.5 22,365.5 Cash and cash equivalents 439.4 154.1 Deferred policy acquisition costs 1,446.1 899.8 Accrued investment income 287.2 259.3 Other assets 830.7 361.2 Separate account assets 23,613.1 15,844.0 - -------------------------------------------------------------------------------------- TOTAL ASSETS $50,123.0 $39,883.9 ====================================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Universal life and investment-type products $19,045.5 $17,973.0 Future policy benefits 4,386.0 2,480.5 Short-term and long-term debt 224.4 445.1 Other liabilities 939.2 813.3 Separate account liabilities 23,613.1 15,844.0 - -------------------------------------------------------------------------------------- TOTAL LIABILITIES 48,208.2 37,555.9 - -------------------------------------------------------------------------------------- Commitments and contingencies Stockholder's Equity: Common stock - $50 par value; 600,000 shares authorized, issued and outstanding 30.0 30.0 Paid-in capital 139.9 126.2 Unearned ESOP shares (11.6) Retained earnings 2,034.5 1,663.5 Accumulated other comprehensive income (loss) - Unrealized gain (loss) on securities available for sale, net (278.0) 508.3 - -------------------------------------------------------------------------------------- TOTAL STOCKHOLDER'S EQUITY 1,914.8 2,328.0 - -------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $50,123.0 $39,883.9 ======================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ (IN MILLIONS) REVENUES Universal life and investment-type product policy fees $ 653.8 $ 525.3 $ 431.2 Insurance premiums 483.9 537.1 526.4 Net investment income 1,473.3 1,413.6 1,325.4 Net realized investment gains 101.5 39.4 85.4 Commission revenue 234.3 220.1 146.6 Other income 144.7 112.5 97.9 - ------------------------------------------------------------------------------------------------ TOTAL REVENUES 3,091.5 2,848.0 2,612.9 - ------------------------------------------------------------------------------------------------ BENEFITS AND EXPENSES Interest credited to universal life and investment-type products 904.4 880.8 797.8 Policy benefits paid or provided 734.4 757.0 712.6 Commission expenses 484.6 387.2 305.1 Operating expenses 453.4 468.0 507.9 - ------------------------------------------------------------------------------------------------ TOTAL BENEFITS AND EXPENSES 2,576.8 2,493.0 2,323.4 - ------------------------------------------------------------------------------------------------ INCOME BEFORE PROVISION FOR INCOME TAXES 514.7 355.0 289.5 Provision for income taxes 143.7 113.5 113.5 - ------------------------------------------------------------------------------------------------ NET INCOME $ 371.0 $ 241.5 $ 176.0 ================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Accumulated Common Stock Unearned Other ------------------- Paid-in ESOP Retained Comprehensive Shares Amount Capital Shares Earnings Income (Loss) Total - ---------------------------------------------------------------------------------------------------------------------- (IN MILLIONS) BALANCES, JANUARY 1, 1997 $1,318.0 $ 379.2 $1,697.2 Comprehensive income: Net income 176.0 176.0 Change in unrealized gain on securities available for sale, net 196.0 196.0 -------- Total comprehensive income 372.0 Issuance of partnership units by affiliate $85.1 85.1 Initial member capitalization of Pacific Mutual Holding Company (2.0) (2.0) Issuance of common stock 0.6 $30.0 35.0 (65.0) Dividend paid to Pacific LifeCorp (5.0) (5.0) - ---------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 0.6 30.0 120.1 1,422.0 575.2 2,147.3 Comprehensive income: Net income 241.5 241.5 Change in unrealized gain on securities available for sale, net (66.9) (66.9) -------- Total comprehensive income 174.6 Issuance of partnership units by affiliate 6.1 6.1 - ---------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1998 0.6 30.0 126.2 1,663.5 508.3 2,328.0 Comprehensive loss: Net income 371.0 371.0 Change in unrealized gain on securities available for sale, net (786.3) (786.3) -------- Total comprehensive loss (415.3) Issuance of partnership units by affiliate 10.6 10.6 Capital contribution 3.1 3.1 Purchase of ESOP note $(13.1) (13.1) Allocation of unearned ESOP shares 1.5 1.5 - ---------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1999 0.6 $30.0 $139.9 $(11.6) $2,034.5 $(278.0) $1,914.8 ======================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------ (IN MILLIONS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 371.0 $ 241.5 $ 176.0 Adjustments to reconcile net income to net cash provided by operating activities: Amortization on fixed maturity securities (77.8) (39.4) (26.6) Depreciation and other amortization 20.5 26.0 38.3 Earnings of equity method investees (92.9) (99.0) (78.1) Deferred income taxes (8.5) (20.6) (14.4) Net realized investment gains (101.5) (39.4) (85.4) Net change in deferred policy acquisition costs (546.3) (171.9) (196.4) Interest credited to universal life and investment-type products 904.4 880.8 797.8 Change in trading securities (2.9) (14.3) (18.3) Change in accrued investment income (27.9) 3.1 (59.9) Change in future policy benefits 58.1 (9.7) (16.3) Change in other assets and liabilities 207.1 102.2 574.9 - ------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 703.3 859.3 1,091.6 - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale: Purchases (4,173.4) (4,330.5) (6,272.3) Sales 2,333.8 2,209.3 2,224.1 Maturities and repayments 1,400.3 2,221.8 2,394.6 Repayments of mortgage loans 681.0 334.9 179.3 Proceeds from sales of mortgage loans and real estate 24.4 43.3 104.4 Purchases of mortgage loans and real estate (886.3) (1,246.3) (643.7) Distributions from partnerships 138.2 119.5 91.6 Change in policy loans (255.3) (129.7) (301.4) Cash received from acquisitions of insurance blocks of business 164.9 1,215.9 Other investing activity, net 255.6 (466.6) (70.8) - ------------------------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (316.8) (1,244.3) (1,078.3) - ------------------------------------------------------------------------------------------------ (CONTINUED) SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (CONTINUED) 1999 1998 1997 - --------------------------------------------------------------------------------------------------- (IN MILLIONS) CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits $ 4,453.4 $ 4,007.0 $ 2,679.8 Withdrawals (4,322.3) (3,770.7) (2,667.3) Net change in short-term and long-term debt (220.7) 191.5 (16.5) Purchase of ESOP note (13.1) Allocation of unearned ESOP shares 1.5 Initial capitalization of Pacific Mutual Holding Company (2.0) Dividend paid to Pacific LifeCorp (5.0) - --------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (101.2) 427.8 (11.0) - --------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents 285.3 42.8 2.3 Cash and cash equivalents, beginning of year 154.1 111.3 109.0 - --------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 439.4 $ 154.1 $ 111.3 =================================================================================================== SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES In connection with the acquisitions of an annuity and an insurance block of business in 1999 and 1997, respectively, as discussed in Note 4, the following assets and liabilities were assumed: Fixed maturity securities $ 1,592.7 Cash and cash equivalents 164.9 $ 1,215.9 Policy loans 440.3 Other assets 100.4 43.4 --------- --------- Total assets assumed $ 1,858.0 $ 1,699.6 --------- --------- Policyholder account values $ 1,693.8 Annuity reserves $ 1,847.4 Other liabilities 10.6 5.8 --------- --------- Total liabilities assumed $ 1,858.0 $ 1,699.6 --------- --------- =================================================================================================== SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES As a result of the Conversion in 1997, as discussed in Note 1, $65 million of retained earnings was allocated for the issuance of 600,000 shares of common stock with a par value totaling$30 million and $35 million to paid-in capital. =================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $83.0 $127.9 $153.0 Interest paid $23.3 $ 24.0 $ 26.1 ====================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Pacific Life Insurance Company ("Pacific Life") was established in 1868 and is organized under the laws of the State of California as a stock life insurance company. Pacific Life is an indirect subsidiary of Pacific Mutual Holding Company ("PMHC"), a mutual holding company, and a wholly owned subsidiary of Pacific LifeCorp, an intermediate stock holding company. PMHC and Pacific LifeCorp were organized pursuant to consent received from the Insurance Department of the State of California and the implementation of a plan of conversion to form a mutual holding company structure in 1997 (the "Conversion"). As a result of the Conversion, $65 million of retained earnings was allocated for the issuance of 600,000 shares of common stock with a par value totaling $30 million and $35 million to paid-in capital. Pacific Life and its subsidiaries and affiliates have primary business operations which consist of life insurance, annuities, pension and institutional products, group employee benefits, broker-dealer operations, and investment management and advisory services. Pacific Life's primary business operations provide a broad range of life insurance, asset accumulation and investment products for individuals and businesses and offer a range of investment products to institutions and pension plans. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements of Pacific Life Insurance Company and Subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles ("GAAP") and include the accounts of Pacific Life and its majority owned and controlled subsidiaries. All significant intercompany transactions and balances have been eliminated. Pacific Life prepares its regulatory financial statements based on accounting practices prescribed or permitted by the Insurance Department of the State of California. These consolidated financial statements differ from those filed with regulatory authorities (Note 2). NEW ACCOUNTING PRONOUNCEMENTS On January 1, 1999, the Company adopted the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that certain costs incurred in developing internal use computer software be capitalized. Adoption of this accounting standard did not have a material impact on the Company's consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires, among other things, that all derivatives be recognized in the consolidated statements of financial condition as either assets or liabilities and measured at estimated fair value. The corresponding derivative gains and losses should be reported based upon the hedge relationship, if such a relationship exists. Changes in the estimated fair value of derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS No. 133 are required to be reported in income. The Company is required to adopt SFAS No. 133 as of January 1, 2001. The Company is in the process of quantifying the impact of SFAS No. 133 on its consolidated financial statements. 21 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) During 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." SOP 98-7 provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk under a method referred to as deposit accounting. SOP 98-7 is effective for fiscal years beginning after June 15, 1999. The Company currently plans to adopt SOP 98-7 on January 1, 2000. Adoption of this accounting standard is not expected to have a material impact on the Company's consolidated financial statements. INVESTMENTS Available for sale fixed maturity and equity securities are reported at estimated fair value, with unrealized gains and losses, net of deferred income taxes and adjustments related to deferred policy acquisition costs, included as a separate component of equity on the accompanying consolidated statements of financial condition. The cost of fixed maturity and equity securities is adjusted for impairments in value deemed to be other than temporary. Trading securities are reported at estimated fair value with unrealized gains and losses included in net realized investment gains on the accompanying consolidated statements of operations. For mortgage-backed securities included in fixed maturity securities, the Company recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. This adjustment is reflected in net investment income on the accompanying consolidated statements of operations. Realized gains and losses on investment transactions are determined on a specific identification basis and are included in net realized investment gains on the accompanying consolidated statements of operations. Derivative financial instruments are carried at estimated fair value. Unrealized gains and losses of derivatives used to hedge securities classified as available for sale are reflected in a separate component of equity on the accompanying consolidated statements of financial condition, similar to the accounting of the underlying hedged assets. Realized gains and losses on derivatives used for hedging are deferred and amortized over the average life of the related hedged assets or liabilities. Unrealized gains and losses of other derivatives are included in net realized investment gains on the accompanying consolidated statements of operations. Mortgage loans, net of valuation allowances, and policy loans are stated at unpaid principal balances. Real estate is carried at depreciated cost, net of writedowns, or, for real estate acquired in satisfaction of debt, estimated fair value less estimated selling costs at the date of acquisition if lower than the related unpaid balance. Partnership and joint venture interests in which the Company does not have a controlling interest or a majority ownership are generally recorded using the equity method of accounting and are included in other investments on the accompanying consolidated statements of financial condition. 22 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company, through its wholly owned subsidiary Pacific Asset Management LLC ("PAM"), has an approximate 33% beneficial ownership interest in PIMCO Advisors L.P. ("PIMCO Advisors") as of December 31, 1999 and 1998. In December 1997, PIMCO Advisors completed a transaction in which it acquired the assets of Oppenheimer Capital, L.P., including its interest in Oppenheimer Capital, by issuing approximately 33 million PIMCO Advisors General and Limited Partner units. In connection with this transaction, the Company increased its investment in PIMCO Advisors to reflect the excess of the Company's pro rata share of PIMCO Advisors partners' capital subsequent to this transaction over the carrying value of the Company's investment in PIMCO Advisors. The net result of this transaction was to directly increase stockholder's equity by $85.1 million. During 1999 and 1998, the Company increased its investment in PIMCO Advisors to reflect its pro rata share of the increase to PIMCO Advisors partners' capital due to the issuance of additional partnership units. For the years ended December 31, 1999 and 1998, there was a direct increase to the Company's stockholder's equity of $10.6 million and $6.1 million, respectively. During 1998, the Company also acquired the beneficial ownership of additional partnership units. Deferred taxes resulting from these transactions have been included in the accompanying consolidated financial statements. On October 31, 1999, PAM entered into an Implementation and Merger Agreement with Allianz of America, Inc. ("Allianz") and a number of other parties in which Allianz will purchase 70% of the outstanding partnership units of PIMCO Advisors. PAM is exchanging its interest in PIMCO Advisors for a beneficial economic interest in a new class of PIMCO Advisors partnership units with a cash distribution comprised of a fixed and variable return. This transaction is anticipated to close during the first half of 2000, subject to certain closing conditions and approvals. In connection with this transaction, PAM has entered into a Continuing Investment Agreement with Allianz with respect to its investment in PIMCO Advisors. The investment in PIMCO Advisors held by PAM will be subject to put and call options held by PAM and Allianz, respectively. The put option gives PAM the right to require Allianz, on the last business day of each calendar quarter, to purchase all of the investment in PIMCO Advisors held by PAM. The put option price would be the distributions per unit amount, as defined in the Continuing Investment Agreement, for the most recently completed four calendar quarters multiplied by a factor of 14.0. The call option gives Allianz the right to require PAM, on any January 31, April 30, July 31, or October 31, beginning on January 31, 2003, to sell its investment in PIMCO Advisors to Allianz. The call option price would be the distributions per unit, as defined in the Continuing Investment Agreement, for the most recently completed four calendar quarters multiplied by a factor of 14.0 if the call per unit value is at least $50. CASH AND CASH EQUIVALENTS Cash and cash equivalents include all liquid debt instruments with an original maturity of three months or less. 23 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED POLICY ACQUISITION COSTS The costs of acquiring new insurance business, principally commissions, medical examinations, underwriting, policy issue and other expenses, all of which vary with and are primarily related to the production of new business, have been deferred. For universal life, annuity and other investment-type products, such costs are generally amortized over the expected life of the contract in proportion to the present value of expected gross profits using the assumed crediting rate. Adjustments are reflected in earnings or equity in the period the Company experiences deviations in gross profit assumptions. Adjustments directly affecting equity result from experience deviations due to changes in unrealized gains and losses in investments classified as available for sale. For traditional life insurance products, such costs are being amortized over the premium-paying period of the related policies in proportion to premium revenues recognized, using assumptions consistent with those used in computing policy reserves. For the years ended December 31, 1999, 1998 and 1997, amortization of deferred policy acquisition costs included in commission expenses amounted to $131.7 million, $73.0 million and $50.2 million, respectively, and included in operating expenses amounted to $55.4 million, $33.5 million and $29.4 million, respectively, on the accompanying consolidated statements of operations. UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS Universal life and investment-type products, including guaranteed investment contracts and funding agreements, are valued using the retrospective deposit method and consist principally of deposits received plus interest credited less accumulated assessments. Interest credited to these policies primarily ranged from 4% to 8.4% during 1999, 1998 and 1997. FUTURE POLICY BENEFITS Life insurance reserves are valued using the net level premium method. Interest rate assumptions ranged from 4.5% to 9.3% for 1999, 1998 and 1997. Mortality, morbidity and withdrawal assumptions are generally based on the Company's experience, modified to provide for possible unfavorable deviations. Future dividends for participating business are provided for in the liability for future policy benefits. Dividends to policyholders are included in policy benefits paid or provided on the accompanying consolidated statements of operations. Dividends are accrued based on dividend formulas approved by the Board of Directors and reviewed for reasonableness and equitable treatment of policyholders by an independent consulting actuary. As of December 31, 1999 and 1998, participating experience rated policies paying dividends represented approximately 1% of direct written life insurance in force. REVENUES AND EXPENSES Insurance premiums are recognized as revenue when due. Benefits and expenses, other than deferred policy acquisition costs, are recognized when incurred. Generally, receipts for universal life, annuities and other investment-type products are classified as deposits. Policy fees from these contracts include mortality charges, surrender charges and earned policy service fees. Expenses related to these products include interest credited to account balances and benefit amounts in excess of account balances. Commission revenue from Pacific Life's broker-dealer subsidiaries is recorded on the trade date. 24 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEPRECIATION AND AMORTIZATION Depreciation of investment real estate is computed on the straight-line method over the estimated useful lives which range from 5 to 30 years. Certain other assets are depreciated or amortized on the straight-line method over periods ranging from 3 to 40 years. Depreciation of investment real estate is included in net investment income on the accompanying consolidated statements of operations. Depreciation and amortization of certain other assets is included in operating expenses on the accompanying consolidated statements of operations. INCOME TAXES Pacific Life is taxed as a life insurance company for income tax purposes and is included in the consolidated income tax returns of PMHC. Prior to 1998, Pacific Life was subject to an equity tax calculated by a prescribed formula that incorporated a differential earnings rate between stock and mutual life insurance companies. In December 1998, the Internal Revenue Service released Revenue Ruling 99-3 which exempts Pacific Life from this tax for taxable years beginning in 1998. Deferred income taxes are provided for timing differences in the recognition of revenues and expenses for financial reporting and income tax purposes. SEPARATE ACCOUNTS Separate account assets are recorded at market value and the related liabilities represent segregated contract owner funds maintained in accounts with individual investment objectives. The investment results of separate account assets generally pass through to separate account contract owners. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments, disclosed in Notes 5, 6 and 7, has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented may not be indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. RISKS AND UNCERTAINTIES The Company operates in a business environment which is subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, interest rate risk, investment market risk, credit risk and legal and regulatory changes. Interest rate risk is the potential for interest rates to change, which can cause fluctuations in the value of investments. To the extent that fluctuations in interest rates cause the duration of assets and liabilities to differ, the Company may have to sell assets prior to their maturity and realize losses. The Company controls its exposure to this risk by, among other things, asset/liability matching techniques which attempt to match the duration of assets and liabilities and utilization of derivative instruments. Additionally, the Company includes contractual provisions limiting withdrawal rights for certain of its products. A substantial portion of the Company's liabilities are not subject to surrender or can be surrendered only after deduction of a surrender charge or a market value adjustment. 25 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Credit risk is the risk that issuers of investments owned by the Company may default or that other parties may not be able to pay amounts due to the Company. The Company manages its investments to limit credit risk by diversifying its portfolio among various security types and industry sectors. The credit risk of financial instruments is controlled through credit approval procedures, limits and ongoing monitoring. Real estate and mortgage loan investment risks are limited by diversification of geographic location and property type. Management does not believe that significant concentrations of credit risk exist. The Company is also exposed to credit loss in the event of nonperformance by the counterparties to interest rate swap contracts and other derivative securities. The Company manages this risk through credit approvals and limits on exposure to any specific counterparty. However, the Company does not anticipate nonperformance by the counterparties. The Company is subject to various state and Federal regulatory authorities. The potential exists for changes in regulatory initiatives which can result in additional, unanticipated expense to the Company. Existing Federal laws and regulations affect the taxation of life insurance or annuity products, and insurance companies. There can be no assurance as to what, if any, cases might be decided or future legislation might be enacted, or if decided or enacted, whether such cases or legislation would contain provisions with possible negative effects on the Company's life insurance or annuity products. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 1999 financial statement presentation. 26 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. STATUTORY RESULTS The following are reconciliations of statutory capital and surplus, and statutory net income for Pacific Life, as calculated in accordance with accounting practices prescribed or permitted by the Insurance Department of the State of California, to the amounts reported as stockholder's equity and net income included on the accompanying consolidated financial statements:
December 31, 1999 1998 ---------------------- (IN MILLIONS) Statutory capital and surplus $1,219.1 $1,157.4 Deferred policy acquisition costs 1,398.6 944.5 Deferred income taxes 304.5 307.1 Asset valuation reserve 232.1 298.7 Non admitted assets 83.3 40.4 Subsidiary equity 25.2 26.5 Surplus notes (149.6) (149.6) Unrealized gain (loss) on securities available for sale, net (278.0) 508.3 Insurance and annuity reserves (845.2) (654.4) Other (75.2) (150.9) ---------------------- Stockholder's equity as reported herein $1,914.8 $2,328.0 ======================
Years Ended December 31, 1999 1998 1997 -------------------------------------- (IN MILLIONS) Statutory net income $ 168.4 $ 187.6 $ 121.5 Deferred policy acquisition costs 379.2 177.3 160.4 Deferred income taxes (2.7) 17.9 41.2 Earnings of subsidiaries (27.5) (32.8) (40.6) Insurance and annuity reserves (184.3) (145.1) (107.0) Other 37.9 36.6 0.5 -------------------------------------- Net income as reported herein $ 371.0 $ 241.5 $ 176.0 ======================================
27 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. STATUTORY RESULTS (CONTINUED) RISK-BASED CAPITAL Risk-based capital is a method developed by the National Association of Insurance Commissioners ("NAIC") to measure the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. The adequacy of a company's actual capital is measured by the risk-based capital results as determined by the formulas. Companies below minimum risk-based capital requirements are classified within certain levels, each of which requires specified corrective action. As of December 31, 1999 and 1998, Pacific Life and Pacific Life & Annuity Company, formerly PM Group Life Insurance Company, a wholly owned Arizona domiciled life insurance subsidiary of Pacific Life, exceeded the minimum risk-based capital requirements. CODIFICATION In 1998, the NAIC adopted the Codification of Statutory Accounting Principles ("Codification"). The Codification, which is intended to standardize regulatory accounting and reporting for the insurance industry, is proposed to be effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices and it is uncertain when, or if, the states of California and Arizona will require adoption of Codification for the preparation of statutory financial statements. The Company has not finalized the quantification of the effects of Codification on its statutory financial statements. DIVIDEND RESTRICTIONS Dividend payments by Pacific Life to Pacific LifeCorp in any 12-month period cannot exceed the greater of 10% of statutory capital and surplus as of the preceding year-end or the statutory net gain from operations for the previous calendar year, without prior approval from the Insurance Department of the State of California. Based on this limitation and 1999 statutory results, Pacific Life could pay $174.0 million in dividends in 2000 without prior approval. No dividends were paid during 1999 and 1998. The maximum amount of ordinary dividends that can be paid by PL&A without restriction cannot exceed the lesser of 10% of statutory surplus as regards to policyholders, or the statutory net gain from operations. No dividends were paid during 1999 and 1998. PERMITTED PRACTICE Net cash distributions received on PAM's investment in PIMCO Advisors are recorded as income as permitted by the Insurance Department of the State of California for statutory accounting purposes. 3. CLOSED BLOCK In connection with the Conversion, an arrangement known as a closed block (the "Closed Block") was established, for dividend purposes only, for the exclusive benefit of certain individual life insurance policies that had an experience based dividend scale for 1997. The Closed Block was designed to give reasonable assurance to holders of Closed Block policies that policy dividends will not change solely as a result of the Conversion. 28 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. CLOSED BLOCK (CONTINUED) Assets that support the Closed Block, which are primarily included in fixed maturity securities, policy loans and accrued investment income, amounted to $293.5 million and $311.6 million as of December 31, 1999 and 1998, respectively. Liabilities allocated to the Closed Block, which are primarily included in future policy benefits amounted to $341.8 million and $352.8 million as of December 31, 1999 and 1998, respectively. The contribution to income from the Closed Block amounted to $3.8 million, $5.1 million and $5.7 million and is primarily included in insurance premiums, net investment income and policy benefits paid or provided for the years ended December 31, 1999, 1998 and 1997, respectively. 4. ACQUISITIONS Effective July 15, 1999, Pacific Life acquired a payout annuity block of business from Confederation Life Insurance Company (U.S.) in Rehabilitation, which is currently under rehabilitation ("Confederation Life"). This block of business consists of approximately 16,000 annuitants having reserves of $1.8 billion. The assets received as part of this acquisition amounted to $1.6 billion in fixed maturity securities and $0.2 billion in cash. The remaining cost of acquiring this annuity business, representing the amount equal to the excess of the estimated fair value of the reserves assumed over the estimated fair value of the assets acquired, amounted to $74.5 million as of December 31, 1999, and is included in deferred policy acquisition costs on the accompanying consolidated statement of financial condition. Amortization of this asset for the year ended December 31, 1999 amounted to $0.4 million, and is included in commission expense on the accompanying consolidated statement of operations. On June 1, 1997, Pacific Life acquired a block of corporate-owned life insurance ("COLI") policies from Confederation Life, which consisted of approximately 38,000 policies having a face amount of insurance of $8.6 billion and reserves of $1.7 billion. The assets received as part of this acquisition amounted to $1.2 billion in cash and $0.4 billion in policy loans. This block is primarily non leveraged COLI. The remaining cost of acquiring this COLI business, representing the amount equal to the excess of the estimated fair value of the reserves assumed over the estimated fair value of the assets acquired, amounted to $27.9 million and $36.5 million as of December 31, 1999 and 1998, respectively, and is included in deferred policy acquisition costs on the accompanying consolidated statements of financial condition. Amortization of this asset for the years ended December 31, 1999, 1998 and 1997 amounted to $8.6 million, $7.7 million and $0.9 million, respectively, and is included in commission expenses on the accompanying consolidated statements of operations. During 1999, Pacific Life acquired a 95% interest in Grayhawk Golf Holdings, LLC, which owns 100% of a real estate investment property in Arizona. 29 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES The amortized cost, gross unrealized gains and losses, and estimated fair value of fixed maturity and equity securities available for sale are shown below. The estimated fair value of publicly traded securities is based on quoted market prices. For securities not actively traded, estimated fair values were provided by independent pricing services specializing in "matrix pricing" and modeling techniques. The Company also estimates certain fair values based on interest rates, credit quality and average maturity or from securities with comparable trading characteristics.
Gross Unrealized Amortized ---------------------- Estimated Cost Gains Losses Fair Value ----------------------------------------------------- (IN MILLIONS) As of December 31, 1999: -------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government authorities and agencies $ 107.7 $ 9.3 $ 1.0 $ 116.0 Obligations of states, political subdivisions 642.0 13.0 27.7 627.3 Foreign governments 285.0 10.5 6.7 288.8 Corporate securities 8,725.0 220.3 387.4 8,557.9 Mortgage-backed and asset-backed securities 5,323.8 33.7 251.1 5,106.4 Redeemable preferred stock 108.5 14.2 5.1 117.6 ----------------------------------------------------- Total fixed maturity securities $15,192.0 $301.0 $679.0 $14,814.0 ===================================================== Total equity securities $ 269.3 $ 57.0 $ 31.1 $ 295.2 ===================================================== As of December 31, 1998: -------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government authorities and agencies $ 95.6 $ 25.1 $ 120.7 Obligations of states, political subdivisions 481.9 91.3 $ 11.8 561.4 Foreign governments 253.1 28.3 4.3 277.1 Corporate securities 7,888.7 446.3 124.5 8,210.5 Mortgage-backed and asset-backed securities 4,434.7 143.1 53.0 4,524.8 Redeemable preferred stock 104.0 11.3 5.1 110.2 ----------------------------------------------------- Total fixed maturity securities $13,258.0 $745.4 $198.7 $13,804.7 ===================================================== Total equity securities $ 364.4 $202.6 $ 19.5 $ 547.5 =====================================================
30 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED) The amortized cost and estimated fair value of fixed maturity securities available for sale as of December 31, 1999, by contractual repayment date of principal, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated Cost Fair Value ----------------------- (IN MILLIONS) Due in one year or less $ 566.5 $ 572.6 Due after one year through five years 3,324.0 3,366.5 Due after five years through ten years 2,995.9 2,921.4 Due after ten years 2,981.8 2,847.1 ----------------------- 9,868.2 9,707.6 Mortgage-backed and asset-backed securities 5,323.8 5,106.4 ----------------------- Total $15,192.0 $14,814.0 =======================
Major categories of investment income are summarized as follows:
Years Ended December 31, 1999 1998 1997 -------------------------------- (IN MILLIONS) Fixed maturity securities $1,030.3 $ 929.7 $ 940.2 Equity securities 14.6 13.5 10.2 Mortgage loans 205.6 174.6 129.5 Real estate 46.5 38.1 53.6 Policy loans 158.6 161.5 144.3 Other 131.7 203.2 156.2 -------------------------------- Gross investment income 1,587.3 1,520.6 1,434.0 Investment expense 114.0 107.0 108.6 -------------------------------- Net investment income $1,473.3 $1,413.6 $1,325.4 ================================
31 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED) Net realized investment gain, including changes in valuation allowances, are as follows:
Years Ended December 31, 1999 1998 1997 ------------------------------------ (IN MILLIONS) Fixed maturity securities available for sale: Gross gain $ 89.3 $ 92.7 $ 56.3 Gross loss (72.9) (84.8) (31.1) Equity securites available for sale: Gross gain 109.0 40.9 36.1 Gross loss (52.0) (6.8) (6.2) Mortgage loans on real estate 10.1 (10.7) (4.6) Real estate 18.0 1.2 16.9 Other investments 6.9 18.0 ------------------------------------ Total $101.5 $ 39.4 $ 85.4 ====================================
The change in gross unrealized gain on investments in available for sale and trading securities is as follows:
December 31, 1999 1998 1997 --------------------------------- (IN MILLIONS) Available for sale securities: Fixed maturity $ (924.7) $(229.5) $223.5 Equity (157.2) 63.1 85.7 --------------------------------- Total $(1,081.9) $(166.4) $309.2 ================================= Trading securities $ 0.4 $ (2.5) $ (1.1) =================================
As of December 31, 1999 and 1998, investments in fixed maturity securities with a carrying value of $12.6 million and $13.0 million, respectively, were on deposit with state insurance departments to satisfy regulatory requirements. One diversified financial security, rated AA, exceeds 10% of total stockholder's equity as of December 31, 1999. 32 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
December 31, 1999 December 31, 1998 ----------------------- ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------------------------------------------- (IN MILLIONS) Assets: Fixed maturity and equity securities (Note 5) $15,109.2 $15,109.2 $14,352.2 $14,352.2 Trading securities 99.9 99.9 97.0 97.0 Mortgage loans 2,920.2 2,983.8 2,788.7 2,911.2 Policy loans 4,258.5 4,258.5 4,003.2 4,003.2 Cash and cash equivalents 439.4 439.4 154.1 154.1 Derivative instruments 43.5 43.5 176.1 176.1 Liabilities: Guaranteed interest contracts 6,365.0 6,296.3 5,665.3 5,751.0 Deposit liabilities 544.9 533.7 599.9 626.7 Annuity liabilities 1,323.3 1,304.8 1,448.0 1,430.1 Short-term debt 60.0 60.0 295.5 295.5 Long-term debt 164.4 164.3 149.6 176.0 Derivative instruments 229.5 229.5 36.0 36.0
The following methods and assumptions were used to estimate the fair value of these financial instruments as of December 31, 1999 and 1998: TRADING SECURITIES The estimated fair value of trading securities is based on quoted market prices. MORTGAGE LOANS The estimated fair value of the mortgage loan portfolio is determined by discounting the estimated future cash flows, using a year-end market rate which is applicable to the yield, credit quality and average maturity of the composite portfolio. POLICY LOANS The carrying amounts of policy loans are a reasonable estimate of their fair values because interest rates are generally variable and based on current market rates. CASH AND CASH EQUIVALENTS The carrying values approximate fair values due to the short-term maturities of these instruments. 33 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. FINANCIAL INSTRUMENTS (CONTINUED) GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES The estimated fair value of fixed maturity guaranteed interest contracts is estimated using the rates currently offered for deposits of similar remaining maturities. The estimated fair value of deposit liabilities with no defined maturities is the amount payable on demand. ANNUITY LIABILITIES The estimated fair value of annuity liabilities approximates carrying value and primarily includes policyholder deposits and accumulated credited interest. SHORT-TERM DEBT The carrying amount of short-term debt is a reasonable estimate of its fair value because the interest rates are variable and based on current market rates. LONG-TERM DEBT The estimated fair value of surplus notes is based on market quotes. The carrying amount of other long-term debt is a reasonable estimate of its fair value because the interest on the debt is approximately the same as current market rates. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Pacific Life has issued certain contracts to 401(k) plans totaling $1.7 billion as of December 31, 1999, pursuant to the terms of which the 401(k) plan retains direct ownership and control of the assets related to these contracts. Pacific Life agrees to provide benefit responsiveness in the event that plan benefit requests exceed plan cash flows. In return for this guarantee, Pacific Life receives a fee which varies by contract. Pacific Life sets the investment guidelines to provide for appropriate credit quality and cash flow matching. 34 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DERIVATIVE INSTRUMENTS Derivatives are financial instruments whose value or cash flows are "derived" from another source, such as an underlying security. They can facilitate total return and, when used for hedging, they achieve the lowest cost and most efficient execution of positions. Derivatives can also be used as leverage by using very large notional amounts or by creating formulas that multiply changes in the underlying security. The Company's approach is to avoid highly leveraged or overly complex investments. The Company utilizes certain derivative financial instruments to diversify its business risk and to minimize its exposure to fluctuations in market prices, interest rates or basis risk as well as for facilitating total return. Risk is limited through modeling derivative performance in product portfolios for hedging and setting loss limits in total return portfolios. Derivatives used by the Company involve elements of credit risk and market risk in excess of amounts recognized on the accompanying consolidated financial statements. The notional amounts of these instruments reflect the extent of involvement in the various types of financial instruments. The estimated fair values of these instruments are based on dealer quotations or internal price estimates believed to be comparable to dealer quotations. These amounts estimate what the Company would have to pay or receive if the contracts were terminated at that time. The Company determines, on an individual counterparty basis, the need for collateral or other security to support financial instruments with off balance sheet counterparty risk. Outstanding derivatives with off balance sheet risks, shown in notional or contract amounts along with their carrying value and estimated fair values as of December 31, 1999 and 1998 are as follows:
Assets (Liabilities) ------------------------------------------------ Notional or Carrying Estimated Carrying Estimated Contract Amounts Value Fair Value Value Fair Value 1999 1998 1999 1999 1998 1998 ------------------------------------------------------------------------ (IN MILLIONS) Interest rate floors, caps, options and swaptions $1,003.0 $2,653.0 $ 5.0 $ 5.0 $ 67.9 $ 67.9 Interest rate swap contracts 2,867.5 2,608.6 38.5 38.5 (23.3) (23.3) Asset swap contracts 58.1 63.2 (3.6) (3.6) (3.6) (3.6) Credit default and total return swaps 2,061.9 649.6 (43.1) (43.1) (9.1) (9.1) Financial futures contracts 676.8 608.9 Foreign currency derivatives 1,685.1 1,131.2 (182.8) (182.8) 108.2 108.2 ------------------------------------------------------------------------ Total derivatives $8,352.4 $7,714.5 $(186.0) $(186.0) $140.1 $140.1 ========================================================================
35 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DERIVATIVE INSTRUMENTS (CONTINUED) A reconciliation of the notional or contract amounts and discussion of the various derivative instruments are as follows:
Balance Terminations Beginning and Balance of Year Acquisitions Maturities End of Year ----------------------------------------------------------- (IN MILLIONS) December 31, 1999: ------------------------------------------------ Interest rate floors, caps, options and swaptions $2,653.0 $ 670.9 $2,320.9 $1,003.0 Interest rate swap contracts 2,608.6 1,226.2 967.3 2,867.5 Asset swap contracts 63.2 7.8 12.9 58.1 Credit default and total return swaps 649.6 1,617.3 205.0 2,061.9 Financial futures contracts 608.9 5,586.8 5,518.9 676.8 Foreign currency derivatives 1,131.2 874.0 320.1 1,685.1 December 31, 1998: ------------------------------------------------ Interest rate floors, caps, options and swaptions 2,730.0 160.6 237.6 2,653.0 Interest rate swap contracts 2,026.1 960.8 378.3 2,608.6 Asset swap contracts 67.4 30.3 34.5 63.2 Credit default and total return swaps 288.5 771.5 410.4 649.6 Financial futures contracts 214.1 4,108.4 3,713.6 608.9 Foreign currency derivatives 207.0 959.4 35.2 1,131.2
Interest Rate Floors, Caps, Options and Swaptions - ------------------------------------------------------- The Company uses interest rate floors, caps, options and swaptions to hedge against fluctuations in interest rates and to take positions in its total return portfolios. Interest rate floor agreements entitle the Company to receive the difference when the current rate of the underlying index is below the strike rate. Interest rate cap agreements entitle the Company to receive the difference when the current rate of the underlying index is above the strike rate. Options purchased involve the right, but not the obligation, to purchase the underlying securities at a specified price during a given time period. Swaptions are options to enter into a swap transaction at a specified price. The Company uses written covered call options on a limited basis. Gains and losses on covered calls are offset by gains and losses on the underlying position. Floors, caps and options are reported as assets and options written are reported as liabilities on the accompanying consolidated statements of financial condition. Cash requirements for these instruments are generally limited to the premium paid by the Company at acquisition. The purchase premium of these instruments is amortized on a constant effective yield basis and included as a component of net investment income on the accompanying consolidated statements of operations over the term of the agreement. Interest rate floors and caps, options and swaptions mature during the years 2000 through 2017. 36 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DERIVATIVE INSTRUMENTS (CONTINUED) Interest Rate Swap Contracts --------------------------------- The Company uses interest rate swaps to manage interest rate risk and to take positions in its total return portfolios. The interest rate swap agreements generally involve the exchange of fixed and floating rate interest payments or the exchange of floating to floating interest payments tied to different indexes. Generally, no premium is paid to enter into the contract and no principal payments are made by either party. The amounts to be received or paid pursuant to these agreements are accrued and recognized through an adjustment to net investment income on the accompanying consolidated statements of operations over the life of the agreements. The interest rate swap contracts mature during the years 2000 through 2021. Asset Swap Contracts --------------------------- The Company uses asset swap contracts to manage interest rate and equity risk to better match portfolio duration to liabilities. Asset swap contracts involve the exchange of upside equity potential for fixed income streams. The amounts to be received or paid pursuant to these agreements are accrued and recognized through an adjustment to net investment income on the accompanying consolidated statements of operations over the life of the agreements. The asset swap contracts mature during the years 2000 through 2005. Credit Default and Total Return Swaps ----------------------------------------- The Company uses credit default and total return swaps to take advantage of market opportunities. Credit default swaps involve the receipt of fixed rate payments in exchange for assuming potential credit exposure of an underlying security. Total return swaps involve the exchange of floating rate payments for the total return performance of a specified index or market. The amounts to be received or paid pursuant to these agreements are accrued and recognized through an adjustment to net investment income on the accompanying consolidated statements of operations over the life of the agreements. Credit default and total return swaps mature during the years 2000 through 2028. Financial Futures Contracts -------------------------------- The Company uses exchange-traded financial futures contracts to hedge cash flow timing differences between assets and liabilities and overall portfolio duration. Assets and liabilities are rarely acquired or sold at the same time, which creates a need to hedge their change in value during the unmatched period. In addition, foreign currency futures may be used to hedge foreign currency risk on non-U.S. dollar denominated securities. Financial futures contracts obligate the holder to buy or sell the underlying financial instrument at a specified future date for a set price and may be settled in cash or by delivery of the financial instrument. Price changes on futures are settled daily through the required margin cash flows. The notional amounts of the contracts do not represent future cash requirements, as the Company intends to close out open positions prior to expiration. Foreign Currency Derivatives --------------------------------- The Company enters into foreign exchange forward contracts and swaps to hedge against fluctuations in foreign currency exposure. Foreign currency derivatives involve the exchange of foreign currency denominated payments for U.S. dollar denominated payments. Gains and losses on foreign exchange forward contracts offset losses and gains, respectively, on the related foreign currency denominated assets. The amounts to be received or paid under the foreign currency swaps are accrued and recognized through an adjustment to net investment income on the accompanying consolidated statements of operations over the life of the agreements. Foreign currency derivatives expire during the years 2000 through 2013. 37 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCTS The detail of universal life and investment-type product liabilities is as follows:
December 31, 1999 1998 ---------------------- (IN MILLIONS) Universal life $10,807.7 $10,218.0 Investment-type products 8,237.8 7,755.0 ---------------------- $19,045.5 $17,973.0 ======================
The detail of universal life and investment-type product policy fees and interest credited net of reinsurance ceded is as follows:
Years Ended December 31, 1999 1998 1997 ------------------------------------ (IN MILLIONS) Policy fees: Universal life $509.2 $439.9 $377.5 Investment-type products 144.6 85.4 53.7 ------------------------------------ Total policy fees $653.8 $525.3 $431.2 ==================================== Interest credited: Universal life $443.9 $440.8 $368.2 Investment-type products 460.5 440.0 429.6 ------------------------------------ Total interest credited $904.4 $880.8 $797.8 ====================================
38 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES Activity in the liability for unpaid claims and claim adjustment expenses, which is included in future policy benefits on the accompanying consolidated statements of financial condition, is summarized as follows:
Years Ended December 31, 1999 1998 ------------------------- (IN MILLIONS) Balance at January 1 $137.4 $140.5 Less reinsurance recoverables 0.1 0.7 ------------------------- Net balance at January 1 137.3 139.8 ------------------------- Incurred related to: Current year 376.8 412.9 Prior years (33.8) (18.3) ------------------------- Total incurred 343.0 394.6 ------------------------- Paid related to: Current year 286.7 303.5 Prior years 77.1 93.6 ------------------------- Total paid 363.8 397.1 ------------------------- Net balance at December 31 116.5 137.3 Plus reinsurance recoverables 0.1 0.1 ------------------------- Balance at December 31 $116.6 $137.4 =========================
As a result of payment of prior years' estimated claims, the provision for claims and claim adjustment expenses decreased by $33.8 million and $18.3 million for the years ended December 31, 1999 and 1998, respectively. The reduction is primarily due to lower than anticipated settlement of claims and reduced claim adjustment expenses. 10. SHORT-TERM AND LONG-TERM DEBT Pacific Life borrows for short-term needs by issuing commercial paper. There was no commercial paper debt outstanding as of December 31, 1999. Principal of $234.9 million and interest payable of $0.6 million was outstanding as of December 31, 1998 bearing an average interest rate of 5.2%. As of December 31, 1999 and 1998, Pacific Life had a revolving credit facility of $350 million. There was no debt outstanding under the revolving credit facility as of December 31, 1999 and 1998. PAM had bank borrowings outstanding of $60 million as of December 31, 1999 and 1998. The interest rate was 6.0%, 5.1% and 6.2% as of December 31, 1999, 1998 and 1997, respectively. Outstanding debt is due and payable in 2000 and subject to renewal. The borrowing limit for PAM as of December 31, 1999 and 1998 was $100 million and $200 million, respectively. In connection with Pacific Life's acquisition of Grayhawk Golf Holdings, LLC in 1999, the Company assumed a note payable with a maturity date of May 22, 2008. The note bears a fixed rate of interest of 7.6%. The outstanding balance as of December 31, 1999 was $14.8 million. 39 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. SHORT-TERM AND LONG-TERM DEBT (CONTINUED) Pacific Life has $150 million of long-term debt which consists of surplus notes outstanding at an interest rate of 7.9% maturing on December 30, 2023. Interest is payable semiannually on June 30 and December 30. The surplus notes may not be redeemed at the option of Pacific Life or any holder of the surplus notes. The surplus notes are unsecured and subordinated to all present and future senior indebtedness and policy claims of Pacific Life. Each payment of interest on and the payment of principal of the surplus notes may be made only with the prior approval of the Insurance Commissioner of the State of California. Interest expense amounted to $11.8 million for each of the years ended December 31, 1999, 1998 and 1997 and is included in net investment income on the accompanying consolidated statements of operations. 11. INCOME TAXES The Company accounts for income taxes using the liability method. The deferred tax consequences of changes in tax rates or laws must be computed on the amounts of temporary differences and carryforwards existing at the date a new tax law is enacted. Recording the effects of a change involves adjusting deferred tax liabilities and assets with a corresponding charge or credit recognized in the provision for income taxes. The objective is to measure a deferred tax liability or asset using the enacted tax rates and laws expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. The provision for income taxes is as follows:
Years Ended December 31, 1999 1998 1997 ------------------------------------ (IN MILLIONS) Current $152.2 $134.1 $127.9 Deferred (8.5) (20.6) (14.4) ------------------------------------ $143.7 $113.5 $113.5 ====================================
40 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES (CONTINUED) The sources of the Company's provision for deferred taxes are as follows:
Years Ended December 31, 1999 1998 1997 -------------------------------------- (IN MILLIONS) Policyholder reserves $ 50.9 $(29.5) $ 20.1 Deferred policy acquisition costs 20.0 (12.6) (18.0) Non deductible reserves 4.0 28.2 (27.6) Partnership income (25.6) 20.8 Investment valuation (28.0) (24.5) 3.9 Duration hedging (29.6) 20.8 (2.6) Other (0.2) (2.6) 9.8 -------------------------------------- Deferred taxes from operations (8.5) 0.6 (14.4) Release of subsidiary deferred taxes (21.2) -------------------------------------- Deferred tax provision $ (8.5) $(20.6) $(14.4) ======================================
The Company's acquisition of a controlling interest in a subsidiary allowed such subsidiary to be included in PMHC's consolidated income tax return. That inclusion resulted in the release of certain deferred taxes in 1998. A reconciliation of the provision for income taxes based on the prevailing corporate statutory tax rate to the provision reflected in the consolidated financial statements is as follows:
Years Ended December 31, 1999 1998 1997 -------------------------------------- (IN MILLIONS) Provision for income taxes at the statutory rate $180.1 $124.2 $101.3 Amortization of intangibles on equity method investments 2.0 4.3 7.6 Non taxable investment income (7.3) (3.6) (2.6) Tax settlement (7.5) Low income housing tax credits (19.2) (3.9) Equity tax (5.0) 5.0 Other (4.4) (2.5) 2.2 -------------------------------------- Provision for income taxes $143.7 $113.5 $113.5 ======================================
41 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES (CONTINUED) The net deferred tax asset (liability), included in other assets on the accompanying consolidated statements of financial condition, is comprised of the following tax effected temporary differences:
December 31, 1999 1998 -------------------- (IN MILLIONS) Deferred tax assets Policyholder reserves $203.4 $ 254.3 Investment valuation 72.7 44.7 Deferred compensation 35.4 33.7 Duration hedging 21.1 (8.5) Postretirement benefits 9.0 8.9 Dividends 8.4 7.6 Partnership income 4.8 (20.8) Non deductible reserves 1.9 5.9 Other 3.1 5.2 -------------------- Total deferred tax assets 359.8 331.0 Deferred tax liabilities Deferred policy acquisition costs 44.0 24.0 Depreciation 2.7 2.4 -------------------- Total deferred tax liabilities 46.7 26.4 -------------------- Net deferred tax asset from operations 313.1 304.6 Unrealized (gain) loss on securities 150.8 (272.3) Issuance of partnership units by affiliate (81.1) (74.9) -------------------- Net deferred tax asset (liability) $382.8 $ (42.6) ====================
42 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. COMPREHENSIVE INCOME The Company displays comprehensive income and its components on the accompanying consolidated statements of stockholder's equity and the note herein. Other comprehensive income is shown net of reclassification adjustments and net of income tax in the accompanying consolidated statements of stockholder's equity. The disclosure of the gross components of other comprehensive income is as follows:
Years Ended December 31, 1999 1998 1997 --------------------------------------- (IN MILLIONS) Calculation of Holding Gain (Loss): ------------------------------------------------- Gross holding gain (loss) on securities available for sale $(1,179.7) $(53.8) $359.8 Deferred policy acquisition costs 43.9 (6.9) (3.1) Tax (expense) benefit 397.7 21.1 (125.1) --------------------------------------- Holding gain (loss) on securities available for sale, net of tax $ (738.1) $(39.6) $231.6 ======================================= Calculation of Reclassification Adjustment: ------------------------------------------------- Realized gain on sale of securities available for sale $ 73.4 $ 42.0 $ 55.1 Tax expense (25.2) (14.7) (19.5) --------------------------------------- Reclassification adjustment, net of tax $ 48.2 $ 27.3 $ 35.6 ======================================= Amounts Reported in Other Comprehensive Income: ------------------------------------------------- Holding gain (loss) on securities available for sale, net of tax $ (738.1) $(39.6) $231.6 Less reclassification adjustment, net of tax 48.2 27.3 35.6 --------------------------------------- Net unrealized gain (loss) recognized in other comprehensive income (loss) $ (786.3) $(66.9) $196.0 =======================================
43 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. REINSURANCE The Company has reinsurance agreements with other insurance companies for the purpose of diversifying risk and limiting exposure on larger mortality risks or, in the case of a producer-owned reinsurance company, to diversify risk and retain top producing agents. Amounts receivable from reinsurers for reinsurance of future policy benefits, universal life deposits, and unpaid losses is reported as an asset and included in other assets on the accompanying consolidated statements of financial condition. All assets associated with business reinsured on a yearly renewable term and modified coinsurance basis remain with, and under the control of the Company. Approximate amounts recoverable (payable) from (to) reinsurers include the following amounts:
December 31, 1999 1998 -------------------- (IN MILLIONS) Reinsured universal life deposits $(55.3) $(46.0) Future policy benefits 141.8 108.9 Unpaid claims 8.5 12.5 Paid claims 6.4 24.3
As of December 31, 1999, 74% of the reinsurance recoverables were from one reinsurer, of which 100% is secured by payables to the reinsurer. To the extent that the assuming companies become unable to meet their obligations under these agreements, the Company remains contingently liable. The Company does not anticipate nonperformance by the assuming companies. Revenues and benefits are shown net of the following reinsurance transactions:
Years Ended December 31, 1999 1998 1997 -------------------------------------- (IN MILLIONS) Ceded reinsurance netted against insurance premiums $ 92.8 $ 82.7 $ 70.7 Assumed reinsurance included in insurance premiums 13.9 17.2 18.1 Ceded reinsurance netted against policy fees 52.3 65.0 77.5 Ceded reinsurance netted against net investment income 211.9 203.3 204.9 Ceded reinsurance netted against interest credited 110.5 162.8 165.8 Ceded reinsurance netted against policy benefits 88.4 121.3 93.4 Assumed reinsurance included in policy benefits 8.3 17.7 12.7
44 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SEGMENT INFORMATION The Company's six operating segments are Life Insurance, Institutional Products, Annuities, Group Insurance, Broker-Dealers and Investment Management. These segments have been identified based on differences in products and services offered. All other activity is included in Corporate and Other. The Life Insurance segment offers universal life, variable universal life and other life insurance products to individuals, small businesses and corporations through a network of distribution channels that include branch offices, marketing organizations, national accounts and a national producer group that has produced over 10% of the segment's in force business. The Institutional Products segment offers investment and annuity products to pension fund sponsors and other institutional investors primarily through its home office marketing team. The Annuities segment offers variable and fixed annuities to individuals, small businesses and qualified plans through financial institutions, National Association of Securities Dealers ("NASD") firms, and regional and national wirehouses. The Group Insurance segment offers group life, health and dental insurance, and stop loss insurance products to corporate, government and labor-management-negotiated plans. The group life, health and dental insurance is distributed through a network of sales offices and the stop loss insurance is distributed through a network of third party administrators. The Broker-Dealers segment includes five NASD registered firms that provide securities and insurance brokerage services and investment advisory services through approximately 3,200 registered representatives. The Investment Management segment is primarily comprised of the Company's investment in PIMCO Advisors (Note 1). PIMCO Advisors offers a diversified range of investment products through separately managed accounts, and institutional, retail and offshore funds. Corporate and Other primarily includes investment income, expenses and assets not attributable to the operating segments, and the operations of the Company's reinsurance subsidiary located in the United Kingdom. Corporate and Other also includes the elimination of intersegment revenues, expenses and assets. The Company uses the same accounting policies and procedures to measure segment income and assets as it uses to measure its consolidated net income and assets. Net investment income and investment gains are allocated based on invested assets purchased and held as is required for transacting the business of that segment. Overhead expenses are allocated based on services provided. Interest expense is allocated based on the short-term borrowing needs of the segment and is included in net investment income. The income tax provision is allocated based on each segment's actual tax liability. Intersegment revenues include commissions paid by the Life Insurance segment and the Annuities segment for variable product sales to the Broker-Dealers segment. Investment Management segment assets have been reduced by an intersegment note payable of $100.5 million and $110 million as of December 31, 1999 and 1998, respectively. The related intersegment note receivable is included in Corporate and Other segment assets. The Company generates substantially all of its revenues and income from customers located in the United States. Additionally, substantially all of the Company's assets are located in the United States. Depreciation expense and capital expenditures are not material and have not been reported herein. The Company's significant non cash item disclosed herein is interest credited to universal life and investment-type products. 45 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SEGMENT INFORMATION (CONTINUED) Financial information for each of the business segments is as follows:
LIFE INSTITUTIONAL GROUP BROKER- INVESTMENT CORPORATE INSURANCE PRODUCTS ANNUITIES INSURANCE DEALERS MANAGEMENT AND OTHER ----------------------------------------------------------------------------------------- (IN MILLIONS) External customers and other revenue December 31, 1999 $ 502.0 $ 39.1 $ 205.0 $478.4 $253.2 $ 14.9 $ 24.1 December 31, 1998 431.9 43.2 124.0 521.2 236.1 17.0 21.6 December 31, 1997 395.6 61.4 83.3 480.6 154.0 21.2 6.0 Intersegment revenues December 31, 1999 348.5 (348.5) December 31, 1998 185.3 (185.3) December 31, 1997 143.3 (143.3) Net investment income excluding earnings of equity method investees December 31, 1999 580.2 645.1 78.3 23.4 0.9 8.3 44.2 December 31, 1998 586.5 565.5 88.6 23.1 0.9 8.0 42.0 December 31, 1997 507.2 509.6 149.4 24.9 0.8 6.2 49.2 Earnings of equity method investees December 31, 1999 (0.7) (1.2) (0.1) 107.9 (13.0) December 31, 1998 0.1 103.1 (4.2) December 31, 1997 0.2 80.7 (2.8) Net realized investment gains (losses) December 31, 1999 12.6 26.8 0.1 (0.6) 9.9 52.7 December 31, 1998 4.1 (13.6) 4.6 1.7 4.0 38.6 December 31, 1997 9.9 12.8 0.6 2.0 20.8 39.3 Total revenues December 31, 1999 1,094.1 709.8 283.3 501.2 602.6 141.0 (240.5) December 31, 1998 1,022.5 595.2 217.2 546.0 422.3 132.1 (87.3) December 31, 1997 912.7 584.0 233.3 507.5 298.1 128.9 (51.6) Income (loss) before provision for income tax December 31, 1999 178.4 111.9 73.2 30.4 11.9 62.6 46.3 December 31, 1998 151.1 74.6 34.1 10.3 9.9 60.1 14.9 December 31, 1997 132.4 98.3 23.5 28.8 6.4 24.6 (24.5) Provision (benefit) for income tax December 31, 1999 54.4 30.7 24.0 10.1 5.2 11.3 8.0 December 31, 1998 52.6 21.2 11.3 2.9 4.5 2.1 18.9 December 31, 1997 55.8 33.9 9.4 9.1 2.7 10.1 (7.5) Net income (loss) December 31, 1999 124.0 81.2 49.2 20.3 6.7 51.3 38.3 December 31, 1998 98.5 53.4 22.8 7.4 5.4 58.0 (4.0) December 31, 1997 76.6 64.4 14.1 19.7 3.7 14.5 (17.0) Interest credited on universal life and investment-type products December 31, 1999 451.4 383.8 65.1 4.1 December 31, 1998 449.6 354.1 71.0 6.1 December 31, 1997 378.8 299.8 106.2 13.0 Assets As of December 31, 1999 16,276.1 17,649.4 14,565.2 341.5 60.9 264.5 965.4 As of December 31, 1998 14,578.2 15,221.0 8,384.2 361.1 55.8 267.3 1,016.3 TOTAL --------- (IN MILLIONS) External customers and other revenue December 31, 1999 $ 1,516.7 December 31, 1998 1,395.0 December 31, 1997 1,202.1 Intersegment revenues December 31, 1999 - December 31, 1998 - December 31, 1997 - Net investment income excluding earnings of equity method investees December 31, 1999 1,380.4 December 31, 1998 1,314.6 December 31, 1997 1,247.3 Earnings of equity method investees December 31, 1999 92.9 December 31, 1998 99.0 December 31, 1997 78.1 Net realized investment gains (losses) December 31, 1999 101.5 December 31, 1998 39.4 December 31, 1997 85.4 Total revenues December 31, 1999 3,091.5 December 31, 1998 2,848.0 December 31, 1997 2,612.9 Income (loss) before provision for income tax December 31, 1999 514.7 December 31, 1998 355.0 December 31, 1997 289.5 Provision (benefit) for income tax December 31, 1999 143.7 December 31, 1998 113.5 December 31, 1997 113.5 Net income (loss) December 31, 1999 371.0 December 31, 1998 241.5 December 31, 1997 176.0 Interest credited on universal life and investment-type products December 31, 1999 904.4 December 31, 1998 880.8 December 31, 1997 797.8 Assets As of December 31, 1999 50,123.0 As of December 31, 1998 39,883.9
46 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS PENSION PLANS Pacific Life has defined benefit pension plans which cover all eligible employees who have one year of continuous employment and have attained age 21. The full-benefit vesting period for all participants is five years. Benefits for employees are based on years of service and the highest five consecutive years of compensation during the last ten years of employment. Pacific Life's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as may be determined appropriate. Contributions are intended to provide not only for benefits attributed to employment to date but also for those expected to be earned in the future. All such contributions are made to a tax-exempt trust. Plan assets consist primarily of group annuity contracts issued by Pacific Life, as well as mutual funds managed by an affiliate of Pacific Life. Components of the net periodic pension benefit are as follows:
Years Ended December 31, 1999 1998 1997 ------------------------------------ (IN MILLIONS) Service cost - benefits earned during the year $ 4.6 $ 4.0 $ 3.6 Interest cost on projected benefit obligation 11.5 10.9 10.4 Expected return on plan assets (16.3) (15.0) (12.8) Amortization of net obligations and prior service cost (1.4) (1.4) (1.4) ------------------------------------ Net periodic pension benefit $ (1.6) $ (1.5) $ (0.2) ====================================
47 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED) The following tables set forth the pension plans' reconciliation of benefit obligation, plan assets and funded status for the years ended:
December 31, 1999 1998 -------------------- (IN MILLIONS) Change in Benefit Obligation: ------------------------------------------------------------ Benefit obligation, beginning of year $177.8 $157.9 Service cost 4.6 4.0 Interest cost 11.5 10.9 Plan expense (0.3) (0.3) Actuarial (gain) loss (30.7) 11.9 Benefits paid (7.0) (6.6) -------------------- Benefit obligation, end of year $155.9 $177.8 ==================== Change in Plan Assets: ------------------------------------------------------------ Fair value of plan assets, beginning of year $195.3 $180.3 Actual return on plan assets 23.6 21.9 Plan expense (0.3) (0.3) Benefits paid (7.0) (6.6) -------------------- Fair value of plan assets, end of year $211.6 $195.3 ==================== Funded Status Reconciliation: ------------------------------------------------------------ Funded status $ 55.7 $ 17.5 Unrecognized transition asset (47.7) (3.6) Unrecognized prior service cost (2.4) (1.0) Unrecognized actuarial gain (0.8) (9.7) -------------------- Prepaid pension cost $ 4.8 $ 3.2 ====================
In determining the actuarial present value of the projected benefit obligation as of December 31, 1999 and 1998, the weighted average discount rate used was 8.0% and 6.5%, respectively, and the rate of increase in future compensation levels was 5.5% and 5.0%, respectively. The expected long-term rate of return on plan assets was 8.5% in 1999 and 1998. 48 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED) POSTRETIREMENT BENEFITS Pacific Life sponsors a defined benefit health care plan and a defined benefit life insurance plan (the "Plans") that provide postretirement benefits for all eligible retirees and their dependents. Generally, qualified employees may become eligible for these benefits if they reach normal retirement age, have been covered under Pacific Life's policy as an active employee for a minimum continuous period prior to the date retired, and have an employment date before January 1, 1990. The Plans contain cost-sharing features such as deductibles and coinsurance, and require retirees to make contributions which can be adjusted annually. Pacific Life's commitment to qualified employees who retire after April 1, 1994 is limited to specific dollar amounts. Pacific Life reserves the right to modify or terminate the Plans at any time. As in the past, the general policy is to fund these benefits on a pay-as-you-go basis. The net periodic postretirement benefit cost for the years ended December 31, 1999, 1998 and 1997 is $0.5 million, $0.7 million and $0.8 million, respectively. As of December 31, 1999 and 1998, the accumulated benefit obligation is $19.7 million and $19.3 million, respectively. The fair value of the plan assets as of December 31, 1999 and 1998 is zero. The amount of accrued benefit cost included in other liabilities on the accompanying consolidated statements of financial condition is $24.4 million and $25.3 million as of December 31, 1999 and 1998, respectively. The Plans include both indemnity and HMO coverage. The assumed health care cost trend rate used in measuring the accumulated benefit obligation for indemnity coverage was 8.0% for 1999 and 1998 and is assumed to decrease gradually to 3.5% in 2003 and remain at that level thereafter. The assumed health care cost trend rate used in measuring the accumulated benefit obligation for HMO coverage was 7.0% for 1999 and 1998 and is assumed to decrease gradually to 3.0% in 2003 and remain at that level thereafter. The amount reported is materially effected by the health care cost trend rate assumptions. If the health care cost trend rate assumptions were increased by 1%, the accumulated postretirement benefit obligation as of December 31, 1999 would be increased by 8.0%, and the aggregate of the service and interest cost components of the net periodic benefit cost would increase by 10.1%. If the health care cost trend rate assumptions were decreased by 1%, the accumulated postretirement benefit obligation as of December 31, 1999 would be decreased by 7.0%, and the aggregate of the service and interest cost components of the net periodic benefit cost would decrease by 8.9%. The discount rate used in determining the accumulated postretirement benefit obligation is 8.0% and 6.5% for 1999 and 1998, respectively. OTHER PLANS Pacific Life provides a voluntary Retirement Incentive Savings Plan ("RISP") pursuant to Section 401(k) of the Internal Revenue Code covering all eligible employees of the Company. Effective October 1, 1997, Pacific Life's RISP changed the matching percentage of each employee's contributions from 50% to 75%, up to a maximum of 6% of eligible employee compensation and restricted the matched investment to an Employee Stock Ownership ("ESOP"). ESOP contributions made by the Company amounted to $5.4 million, $5.2 million and $1.1 million for the years ended December 31, 1999, 1998 and 1997, respectively, and are included in operating expenses on the accompanying consolidated statements of operations. 49 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED) The ESOP was formed at the time of the Conversion and is currently only available to the participants of the RISP in the form of matching contributions. Pacific LifeCorp issued 1.7 million shares of common stock at $12.50 per share to the ESOP ("ESOP Shares") on September 2, 1997, in exchange for a promissory note in the amount of $21.2 million ("ESOP Note"). Interest and principal payments made by the ESOP to Pacific LifeCorp were funded by ESOP contributions from Pacific Life. On July 27, 1999, Pacific Life loaned cash to the ESOP to pay off the ESOP Note due Pacific LifeCorp. This loan is included in unearned ESOP shares on the accompanying consolidated statement of stockholder's equity as of December 31, 1999. The unearned ESOP shares account is reduced as ESOP shares are released for allocation to participants through ESOP contributions by Pacific Life. In addition, when the fair value of ESOP shares being released for allocation to participants exceeds the original issue price of those shares, paid in capital is increased by this difference and reflected as a capital contribution on the accompanying consolidated statement of stockholder's equity as of December 31, 1999. Pacific Life also has a deferred compensation plan which permits certain employees to defer portions of their compensation and earn a guaranteed interest rate on the deferred amounts. The interest rate is determined annually and is guaranteed for one year. The compensation which has been deferred has been accrued and the primary expense, other than compensation, related to this plan is interest on the deferred amounts. The Company also has performance-based incentive compensation plans for its employees. 16. TRANSACTIONS WITH AFFILIATES Pacific Life serves as the investment advisor for the Pacific Select Fund, the investment vehicle provided to the Company's variable life and variable annuity contractholders. Pacific Life charges fees based upon the net asset value of the portfolios of the Pacific Select Fund, which amounted to $69.7 million, $42.1 million and $27.5 million for the years ended December 31, 1999, 1998 and 1997, respectively. In addition, Pacific Life provides certain support services to the Pacific Select Fund for an administration fee which is based on an allocation of actual costs. Such administration fees amounted to $265,000, $232,000 and $165,000 for the years ended December 31, 1999, 1998 and 1997, respectively. PIMCO Advisors provides investment advisory services to the Company for which the fees amounted to $7.3 million, $16.9 million and $11.4 million for the years ended December 31, 1999, 1998 and 1997, respectively. Included in equity securities on the accompanying consolidated statements of financial condition are investments in mutual funds and other investments managed by PIMCO Advisors which amounted to $3.2 million and $40.3 million as of December 31, 1999 and 1998, respectively. Pacific Life provides certain support services to PIMCO Advisors. Charges for these services are based on an allocation of actual costs and amounted to $1.0 million, $1.2 million and $1.2 million for the years ended December 31, 1999, 1998 and 1997, respectively. 50 PACIFIC LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. TERMINATION AND NON COMPETITION AGREEMENTS The Company has termination and non competition agreements with certain former key employees of PAM's subsidiaries. These agreements provide terms and conditions for the allocation of future proceeds received from distributions and sales of certain PIMCO Advisors units and other non compete payments. When the amount of future obligations to be made to a key employee is determinable, a liability for such amount is established. For the years ended December 31, 1999, 1998 and 1997, approximately $53.6 million, $49.4 million and $85.8 million, respectively, is included in operating expenses on the accompanying consolidated statements of operations related to the termination and non competition agreements. This includes payments of $43.1 million in 1997 to former key employees who elected to sell to PAM's subsidiaries their rights to the future proceeds from the PIMCO Advisors units. In connection with the closing of the PIMCO Advisors transaction (Note 1), the termination and non competition agreements with certain former key employees of PAM's subsidiaries will be assumed by Allianz. 18. COMMITMENTS AND CONTINGENCIES The Company has outstanding commitments to make investments primarily in fixed maturity securities, mortgage loans, limited partnerships and other investments as follows (IN MILLIONS): Years Ending December 31: ------------------------------------------------------------ 2000 $437.0 2001 through 2004 210.8 2005 and thereafter 144.3 ------ Total $792.1 ======
The Company leases office facilities under various non cancelable operating leases. Aggregate minimum future commitments as of December 31, 1999 through the term of the leases are approximately $43.3 million. Pacific Life has a contingent liability of approximately $23 million related to the posting of an appeal bond in conjunction with one of its investments. An unrelated third party has agreed to reimburse Pacific Life for 50% of any losses incurred under the bond. In addition, Pacific Life has given a commitment for additional capital funding, as may be required, to certain of its subsidiaries. Pacific Life was named in civil litigation proceedings similar to other litigation brought against many life insurers alleging misconduct in the sale of products, sometimes referred to as market conduct litigation. The class of plaintiffs included, with some exceptions, all persons who owned, as of December 31, 1997 (or as of the date of policy termination, if earlier), individual whole life, universal life or variable life insurance policies sold by Pacific Life on or after January 1, 1982. Pacific Life has settled this litigation pursuant to a final settlement agreement approved by the Court in November 1998. The settlement agreement was implemented during 1999. Further, the Company is a respondent in a number of other legal proceedings, some of which involve allegations for extra-contractual damages. In the opinion of management, the outcome of the foregoing proceedings is not likely to have a material adverse effect on the consolidated financial position or results of operations of the Company. --------------------------------------------------------------------------- 51 FORM NO. 1618-1A -----END PRIVACY-ENHANCED MESSAGE-----