[Federal Register Volume 59, Number 20 (Monday, January 31, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2018]


[[Page Unknown]]

[Federal Register: January 31, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20031; File No. 812-8680]

 

First Fortis Life Insurance Co.; Application for Exemption

January 24, 1994.

AGENCY: Securities and Exchange Commission (The ``SEC'').

ACTION: Notice of application for exemption under the Investment 
Company Act of 1940 (the ``1940 Act'').

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APPLICANTS: First Fortis Life Insurance Company (``First Fortis''), 
Variable Account A of First Fortis Life Insurance company (``Variable 
Account''), and Fortis Investors, Inc., (collectively, the 
``Applicants'').

RELEVANT 1940 ACT SECTIONS: Order requested under section 6(c) of the 
1940 Act for exemptions from sections 26(a)(2)(C) and 27(c)(2) thereof.

SUMMARY OF APPLICATION: Applicants seek an order permitting the 
deduction of a mortality and expense risk charge for the assets of the 
Variable Account which serves as a funding medium for certain flexible 
premium deferred fixed and variable annuity contracts.

FILING DATE: The application was filed on November 15, 1993.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the Secretary of the SEC and serving 
Applicants with a copy of the request, personally or by mail. Hearing 
requests must be received by the SEC by 5:30 p.m. on February 18, 1994, 
and should be accompanied by proof of service on Applicants in the form 
of an affidavit or, for lawyers, by certificate. Hearing request should 
state the nature of the interest, the reason for the request, and the 
issues contested. Persons may request notification of a hearing by 
writing to the Secretary of the SEC.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants, c/o David A. Peterson, Esq., Fortis Benefits Insurance 
Company, 500 Bielenberg Drive, Woodbury Minnesota 55125.

FOR FURTHER INFORMATION CONTACT: Patrice M. Pitts, Attorney, or Michael 
V. Wible, Special Counsel, at (202) 272-2060, Office of Insurance 
Products (Division of Investment Management).

Applicants' Representations

    1. First Fortis was organized under New York law as a stock life 
insurance company and, for purposes of the 1940 Act, is the depositor 
of the Variable Account. The Variable Account was organized under New 
York law as an insurance company separate account and is registered 
under the 1940 Act as a unit investment trust. Fortis Series Funds, 
Inc. (the ``Fund'') is the underlying investment medium for the 
Variable Account and is registered under the 1940 Act as an open-end 
management investment company. Fortis Investors, Inc., a broker-dealer 
registered under the Securities Exchange Act of 1934, is the variable 
Account's principal underwriter.
    2. Applicants intend to offer to the public certain flexible 
premium deferred combination fixed and variable annuity contracts on a 
group of individual basis (the ``Contracts'', which term includes 
certificates issued under group contracts). Applicants represent that 
in all respects material to this application, the Contracts are 
identical to those that are subject of two currently-effective Form N-4 
registration statements filed by Fortis Benefits Insurance Company 
(``Fortis Benefits''), an affiliate of First Fortis, and Variable 
Account D of Fortis Benefits. Unlike First Fortis, Fortis Benefits is 
not authorized to sell variable annuity products in New York. 
Consequently, First Fortis will offer the Contracts in New York.
    3. Purchase payments under the Contracts may be accumulated before 
retirement, and annuity payments may be received after retirement: (i) 
On a variable basis through use of the Variable Account; (ii) on a 
fixed basis through use of First Fortis's general account; or (iii) on 
both a fixed and a variable basis. The general account interests under 
certain of the Contracts (the ``MVA Contracts'') are subject to what is 
commonly referred to as a ``market value adjustment'' in the even of 
early withdrawals.
    4. Currently, the minimum initial or subsequent purchase payment 
for a Contract that is not an MVA Contract (a ``non-MVA Contract'') is 
$50 and, for subsequent purchase payments, First Fortis guarantees that 
this minimum will never be increased to more than $100. Under MVA 
Contract, the current minimum initial purchase payment is $5,000 
($1,000 in connection with certain tax-qualified plans), and subsequent 
purchase payments must be at least $1,000.
    5. Contract owners make partial surrenders for amounts of at least 
$500 ($1,000 for MVA Contracts), and may surrender the entire Contract 
at any time prior to the annuity commencement date.
    6. Contracts holders will direct Contract payments to one of 
several subaccounts of the Variable Account. These payments then will 
be invested by the subaccounts in redeemable shares of one of the 
corresponding protfolios of the Fund, thereby making such redeemable 
shares the Variable Account's principal assets.
    7. Any state premium taxes will be paid by First Fortis according 
to New York law, and deductions will be made from the Contracts to 
reimburse First Fortis for those taxes. First Fortis currently will 
deduct the charge of premium taxes when and if a Contract is 
annuitized. The premium tax rate in New York currently is 5% of the 
amount annuitized.
    8. First Fortis allows transfers among subaccounts of the Variable 
Account or into the general account, although not more than four such 
transfers per year may be made after the annuity commencement date. 
Transfers out of the general account also are permitted before annuity 
payments begin, subject to certain limitations or conditions. Although 
First Fortis has no current intention to assess a charge for transfers, 
it reserves the right to assess a charge of not more than $25 per 
transfer prior to the annuity commencement date. No such charge will be 
designed to recover more than First Fortis's average administrative 
expenses of effecting such transfers.
    9. First Fortis will assess an administrative charge of $30 against 
each non-MVA contract at the end of each Contract year. This charge 
will not apply during the accumulation period if the Contract value at 
year end is at least $25,000. This administrative charge is designed to 
reimburse First Fortis for expenses such as those incurred in 
establishing and maintaining the records relating to a non-MVA Contract 
participating in the Variable Account. Each time the administrative 
charge is assessed, it will be deducted from each subaccount of the 
Variable Account and from the fixed account option in the same 
proportion as the then-current Contract values in these alternatives. 
First Fortis currently intends to waive this charge during the annuity 
period, but it reserves the right to institute such a charge at any 
time.
    10. Both before and after the annuity commencement date, First 
Fortis will assess each subaccount of the Variable Account a daily 
asset charge at an effective annual rate of 0.1% for administrative 
expenses.
    11. First Fortis agrees not to raise any of the administrative 
charges noted above, except to the extent set forth above. Applicants 
represent that all administrative charges under the MVA or non-MVA 
Contracts are not expected to exceed the average expected cost of 
administering the MVA and the non-MVA Contracts.
    12. Applicants represent that no sales charge will be collected or 
deducted at the time purchase payments are applied under the Contracts. 
However, a contingent deferred sales charge (the ``CDSC'') will be 
assessed on certain full or partial surrenders to help defray expenses 
incurred in the sale of the Contracts.
    13. The CDSC is a percentage of the amount of purchase payments 
surrendered that are not eligible for a free surrender, as set forth 
below: 

------------------------------------------------------------------------
                                                   Surrender charge as a
                                                  percentage of purchase
   Number of years since crediting of purchase            payment       
                     payment                     -----------------------
                                                      MVA       Non-MVA 
                                                  Contracts   Contracts 
------------------------------------------------------------------------
Fewer than 1....................................  7%........  5%        
At least 1 and fewer than 2.....................  6%........  5%        
At least 2 and fewer than 3.....................  5%........  5%        
At least 3 and fewer than 4.....................  4%........  5%        
At least 4 and fewer than 5.....................  3%........  5%        
At least 5 and fewer than 6.....................  2%........  0%        
At least 6 and fewer than 7.....................  1%........  0%        
At least 7......................................  0%........  0%        
------------------------------------------------------------------------

    14. The following amounts may be withdrawn from a Contract without 
a CDSC: (i) Any purchase payments received by First Fortis at least 
five years (Seven Years for the MVA Contracts) in advance of the 
surrender date and that have not been surrendered previously; (ii) any 
earnings that have not been surrendered previously; and (iii) in any 
Contract year, up to 10% of the purchase payments received by First 
Fortis fewer than 5 years (seven years for the MVA Contracts) in 
advance of the surrender date (whether or not the purchase payments 
have been surrendered previously).
    15. For purposes of computing the CDSC for MVA Contracts, earnings 
are deemed to be withdrawn first, then purchase payments not subject to 
a CDSC, and finally, purchase payments which are subject to a CDSC. For 
purposes of computing the CDSC for non-MVA Contracts, all purchase 
payments not subject to a CDSC are deemed to be withdrawn in advance of 
purchase payments which are subject to a CDSC; once all purchase 
payments are withdrawn, any remaining earnings can be withdrawn without 
a surrender charge.
    16. First Fortis agrees to waive surrender charges for full 
surrenders of Contracts which have been in force for at least ten 
years, provided that the amount then subject to the surrender charge is 
less than 25% of the account value of the Contract. First Fortis 
reserves the right to change or terminate this practice at any time.
    17. First Fortis will assume certain mortality and expense risks 
under the Contracts. One such mortality risk arises from First Fortis's 
agreement to pay a death benefit prior to the annuity date. The death 
benefit, if paid in a lump sum, will be the greater of (a) the sum, 
subject to certain adjustments, of all net purchase payments made, (b) 
the investors account value, or (c) the account value, subject to 
certain adjustments, as of the Contract's 5-year anniversary 
immediately preceding the date that the annuitant dies or reaches his 
or her 75th birthday. An additional mortality risk arises from First 
Fortis's agreement not to impose upon the aforementioned death benefit 
any contingent deferred sales charge if the death occurs before age 75. 
A third mortality risk arises from First Fortis's contractual 
obligation to make annuity payments for the life of the annuitant under 
options involving life contingencies. Neither the annuitant's own 
longevity, nor an improvement in life expectancy generally, will have 
an adverse effect on annuity payments received under the Contracts.
    18. In addition to mortality risks, First Fortis will assume an 
expense risk because the administrative charges may be insufficient to 
cover actual administrative expenses.
    19. First Fortis proposes to set the daily mortality and expense 
risk charge against Variable Account assets at an aggregate rate of 
1.25% per annum, with approximately 0.8% allocated to cover the 
mortality risks and approximately .45% allocated to cover the expense 
risk.
    20. If the administrative charges and the mortality and expense 
risk charge are insufficient to cover the expenses and costs assumed, 
the loss will be borne by First Fortis. If the amount deducted proves 
more than sufficient, the excess will be profit to First Fortis.

Applicants' Legal Analysis and Conclusions

    1. Applicants seek an exemption from section 26(a)(2)(C) and 
27(c)(2) of the 1940 Act to the extent necessary to permit the issuance 
and sale of the Contracts providing for a mortality and expense risk 
charge.
    2. Sections 26(a)(2)(C) and 27(c)(2), as herein pertinent, prohibit 
a registered unit investment trust and any depositor thereof or 
underwriter therefor from selling periodic payment plan certificates 
unless the proceeds of all payments (other than sales load) are 
deposited with a qualified bank as trustee or custodian and held under 
arrangements which prohibit any payment to the depositor or principal 
underwriter except a fee, not exceeding such reasonable amounts as the 
SEC may prescribe, for performing bookkeeping and other administrative 
services.
    3. Applicants state that they have reviewed publicly available 
information regarding products of other companies taking into 
consideration such factors as guaranteed minimum death benefits, 
guaranteed annuity purchase rates, minimum initial and subsequent 
purchase payments, other contract charges, the manner in which charges 
are imposed, market sector, investment options under the contracts, and 
availability to individual qualified and non-tax-qualified plans. Based 
upon this review, Applicants have concluded that the mortality and 
expense risk charge proposed here is within the range of industry 
practice for comparable annuity contracts.
    4. Applicants will maintain at their principal office a memorandum 
setting forth in detail the variable annuity products analyzed, and the 
methodology and results of Applicants' comparative review. Applicants 
will make this memorandum available to the SEC and its staff upon 
request.
    5. Should revenue from the CDSC be insufficient to cover all costs 
relating to the actual costs of distribution of the Contracts, the 
expenses will be paid from First Fortis's general account assets. If a 
profit is realized from the mortality and expense risk charge, all or a 
portion of such profit may be used to make up unrecovered sales 
expenses. First Fortis has concluded that there is a reasonable 
likelihood that the proposed distribution financing arrangements made 
with respect to the Contracts will benefit the Variable Account and the 
Contract owners. The basis for this conclusion is set forth in a 
memorandum which will be maintained by First Fortis at its principal 
office and will be made available to the SEC and its staff upon 
request.
    6. First Fortis also represents that the Variable Account will 
invest only in an underlying mutual fund which undertakes, in the event 
it should adopt any plan under Rule 12b-1 to finance distribution 
expenses, to have such plan formulated and approved by a board of 
directors, a majority of the members of which are not ``interested 
persons'' of such fund within the meaning of section 2(a)(19) of the 
1940 Act.

Conclusion

    Applicants assert that, for the reasons set forth above, the 
requested exemptions from sections 26(a)(2)(C) and 27(c)(2) of the 1940 
Act to deduct a mortality and expense risk charge under the Contracts 
meet the standards in section 6(c) of the 1940 Act. Applicants assert 
that the requested exemptions are necessary and appropriate in the 
public interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the 1940 Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2018 Filed 1-28-94; 8:45 am]
BILLING CODE 8010-01-M