[Federal Register Volume 59, Number 89 (Tuesday, May 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11155]


[[Page Unknown]]

[Federal Register: May 10, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20274; File No. 812-8782]

 

The Travelers Insurance Company, et al.

May 3, 1994.
AGENCY: Securities and Exchange Commission (``Commission'').

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

APPLICANTS:  The Travelers Insurance Company (``The Travelers'') and 
The Travelers Fund BD for Variable Annuities (``Fund BD'').

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

SUMMARY OF APPLICATION:  Applicants seek an order permitting the 
deduction from the assets of Fund BD of a mortality and expense risk 
charge imposed under certain individual flexible premium variable 
annuity contracts (``Contracts'').

FILING DATE:  The application was filed on January 21, 1994.

HEARING OR NOTIFICATION OF HEARING:  An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving Applications with a copy of the request, personally or by 
mail. Hearing requests must be received by the Commission by 5:30 p.m., 
on May 31, 1994, and should be accompanied by proof of service on the 
Applicants in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests should state the nature of the writers 
interest, the reason for request, and the issues contested. Persons may 
request notification of the date of a hearing by writing to the 
Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549. Applicants, c/o Julie E. Rockmore, 
Counsel, The Travelers Insurance Company, One Tower Square, Hartford, 
Connecticut 06183-1051.

FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel, or 
Wendell M. Faria, Acting Assistant Director, on (202) 942-0670, Office 
of Insurance Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. the complete application is available for a fee from the 
Commission's Public Reference Branch.

Applicants' Representations

    1. The Travelers, an indirect wholly-owned subsidiary of The 
Travelers Inc., is a stock life insurance company organized under the 
laws of the State of Connecticut in 1864.
    2. Fund BD was established by The Travelers on October 22, 1993 as 
a separate account under Connecticut law to fund individual and group 
flexible premium deferred variable annuity contracts issued by The 
Travelers. Fund BD is subdivided into subaccounts, each of which will 
invest its assets exclusively in the shares of one of the portfolios of 
the SBA Variable Products Series Fund, an open-end series-type 
management investment company.
    3. The Contract is an individual flexible premium variable annuity 
contract which can be purchased on a qualified or nonqualified basis. 
Purchase payments under the Contract may be allocated to the 
subaccounts of Fund BD and/or a fixed account. Upon retirement, annuity 
payments will be made on a fixed or variable basis.
    4. If either the annuitant or the Contract owner dies before the 
maturity date of the Contract, The Travelers will pay a death benefit. 
Under the standard death benefit, The Travelers will pay the greatest 
of (a) the Contract value; (b) the total purchase payments under the 
Contract; or (c) the Contract value on the fifth Contract year 
anniversary immediately preceding the receipt by The Travelers of proof 
of death, less applicable premium tax or surrenders no previously 
deducted. If the death occurs after age 75 but before age 85, the 
standard benefit will be the greatest of (a) or (b) above or the 
Contract value on the latest fifth Contract year on or before the 
deceased's 75th birthday, less applicable premium tax or surrenders not 
previously deducted. After age 85, the benefit will be the Contract 
value. Under the enhanced death benefit, The Travelers will pay the 
greater of the Contract value or a guaranteed death benefit equal to 
purchase payments (minus surrenders and applicable premium taxes) 
increased by 5% on every Contract date anniversary up to the 
anniversary following the deceased's 75th birthday, with a maximum 
benefit of 200% of purchase payments minus surrenders and minus 
applicable premium taxes. After age 75 but before age 85, the enhanced 
benefit will be the greater of the guaranteed death benefit as of the 
deceased's 75th birthday, plus additional purchase payments, minus 
surrenders and applicable premium taxes or the Contract value less 
premium taxes. After age 85, The Travelers will pay the Contract value, 
less applicable premium taxes.
    5. The Travelers will assess an annual Contract administrative 
charge of $30 under the Contracts. This charge will not be assessed 
after an annuity payout has begun, at the death of the annuitant or the 
Contract owner, or if the Contract owner has a Contract value greater 
than $40,000 on the assessment date. The Travelers also will assess the 
sub-accounts of Fund BD a daily asset charge at an effective rate of 
0.15% per annum for administrative expenses. Applicants represent that 
these charges cannot be increased during the life of the Contracts and 
that they represent reimbursement for only the actual administrative 
costs expected to be incurred over the life of the Contracts.
    6. To compensate The Travelers for assuming mortality and expense 
risks, The Travelers will deduct from the subaccounts of Fund BD an 
amount equal on an annual basis to a maximum of 1.02% of the net asset 
value of the subaccounts in connection with Contracts providing the 
standard death benefit, and a maximum of 1.30% of the net asset value 
of the subaccounts in connection with Contracts providing the enhanced 
death benefit. The Travelers estimates that in connection with the 
1.02% fee approximately 75% of the fee is for assumption of the 
mortality risk and 25% of the fee is for assumption of the expense 
risk, and in connection with the 1.30% fee approximately 80% of the fee 
is for assumption of the mortality risk and 20% of the fee is for 
assumption of the expense risk.
    7. The Travelers assumes certain mortality risks by its contractual 
obligation to continue to make annuity payments for the life of the 
annuitant under annuity options which involve life contingencies. This 
assures that neither the annuitant's own longevity nor an improvement 
in life expectancy generally will have an adverse effect on the annuity 
payments received under a Contract. The Travelers assumes additional 
mortality and expense risks by its contractual obligation to pay either 
the standard or the enhanced death benefit if either the annuitant or 
the Contract owner dies prior to the maturity date. Because the 
enhanced death benefit provides a potentially higher level of benefits 
than the standard death benefit, the mortality risks for the enhanced 
death benefit exceed those for the standard death benefit. Therefore, 
Contracts with an enhanced death benefit are assessed a higher 
mortality and expense risk charge. The Travelers assumes an expense 
risk because the administrative charge may be insufficient to cover 
actual expense.
    8. Applicants state that 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 The Travelers. 
Conversely, if the amount deducted proves more than sufficient, the 
excess will represent a profit to The Travelers. The Travelers does not 
expect to profit from the administrative charges, however, it does 
expect to profit from the mortality and expense risk charge. Any profit 
would be available to The Travelers for any proper corporate purpose, 
including payment of distribution expenses.
    9. No sales charge is collected or deducted at the time purchase 
payments are applied under the Contracts. A contingent deferred sales 
charge (``surrender charge'') will be assessed upon certain full or 
partial surrenders. A surrender charge applies if all or part of the 
Contract value is surrendered during the first six years following a 
purchase payment. The surrender charge starts at 6% of a purchase 
payment in the first, second and third years following the payment, and 
reduces to 3% in the fourth year, 2% in the fifth year and 1% in the 
sixth year following the payment. There is no charge after the sixth 
year following a purchase payment. After the first Contract year, 
Contract owners may surrender 15% of their Contract value (as of the 
beginning of the Contract year) without incurring a surrender charge 
(the ``free withdrawal amount''). The free withdrawal allowance applies 
to partial surrenders of any amount and to full surrenders except full 
surrenders where the Contract value is directly transferred to annuity 
contracts issued by other financial institutions. In addition, there is 
no charge on Contract earnings, which equal: (1) The Contract value; 
minus (2) the sum of all purchase payments received that have not been 
previously surrendered; minus (3) the 15% free withdrawal amount. 
Surrenders will be deemed to have been taken first from any applicable 
15% free withdrawal amount; next from purchase payments (on a first-in, 
first-out basis); and finally from Contract earnings (in excess of any 
15% free withdrawal amount). The Travelers does not expect that the 
surrender charge will cover sales and distribution expense incurred in 
connection with the Contracts.

Applicants' Legal Analysis

    1. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act require that 
all payments received under a periodic payment plan certificate be held 
by a qualified trustee or a custodian and held under arrangements which 
prohibit any payment to the depositor or principal underwriter except 
for the payment of a fee, not exceeding such reasonable amount as the 
Commission may prescribe, for bookkeeping and other administrative 
services.
    2. Applicants represent that the 1.02% mortality and expense risk 
charge for Contracts providing the standard death benefit is reasonable 
in relation to the risks assumed by The Travelers under the Contracts 
and is within the range of industry practice for comparable annuity 
contracts. The Travelers states that it has reviewed publicly available 
information regarding products of other companies taking into 
consideration such factors as guaranteed minimum death benefits, 
minimum initial and subsequent purchase payments, other contract 
charges, the manner in which charges are imposed, market sector, 
investment options and the availability of a product for use in 
qualified and non-qualified plans. Based on this review, The Travelers 
has concluded that the mortality and expense risk charge for Contracts 
providing the standard death benefit is within the range of charges 
determined by industry practice. The Travelers represents that it will 
maintain at its principal office, and make available upon request of 
the Commission or its staff, a memorandum setting forth in detail the 
variable annuity products analyzed and the methodology used in, and the 
results of, the comparative review.
    3. Applicants represent that the mortality and expense risk charge 
of 1.30% for the enhanced death benefit Contracts is reasonable in 
relation to the risks assumed by The Travelers under the Contracts. In 
arriving at this determination, The Travelers ran a large number of 
computer generated trials at various issue ages to determine the 
expected cost of the enhanced death benefit. First, hypothetical asset 
returns were projected using generally accepted actuarial simulation 
methods. For each asset return pattern thus generated, hypothetical 
accumulated values were calculated by applying the projected asset 
returns to the initial value in a hypothetical account. Each 
accumulated value so calculated was then compared to the amount of 
enhanced death benefit payable in the event of the hypothetical 
annuitant's or Contract owner's death during the year in question. By 
analyzing the results of several thousand such simulations, The 
Travelers was able to determine actuarially the level cost of providing 
the enhanced death benefit. Based on this analysis, The Travelers 
determined that an additional mortality risk charge of 0.28% was a 
reasonable charge for the enhanced death benefit as compared to the 
charge for the standard death benefit. The Travelers undertakes to 
maintain at its home office a memorandum, available to the Commission 
or its staff upon request, setting forth in detail the methodology used 
in determining that the additional risk charge of 0.28% for the 
enhanced death benefit is reasonable in relation to the risks assumed 
by The Travelers under the Contracts.
    4. Applicants acknowledge that the surrender charge may be 
insufficient to cover all distribution costs and that, if a profit is 
realized from the mortality and expense risk charge, all or a portion 
of that profit may be offset by distribution expenses not reimbursed by 
the surrender charge. In such circumstances, a portion of the mortality 
and expense risk charge might be viewed as providing for a portion of 
the cost relating to distribution of the Contracts. Notwithstanding 
this, The Travelers has concluded that there is a reasonable likelihood 
that the proposed distribution financing arrangements made with respect 
to the Contracts will benefit Fund BD and Contract owners. The basis 
for such conclusion is set forth in a memorandum which will be 
maintained by The Travelers at its principal office and will be 
available to the Commission or its staff upon request.
    5. The Travelers also represents that Fund BD will invest only in 
underlying mutual funds which have undertaken to have a board of 
directors or board of trustees, as applicable, a majority of whom are 
not ``interested persons'' under the Act, formulate and approve any 
plan under Rule 12b-1 to finance distribution expenses.

Conclusion

    Applicants submit for all of the reasons stated herein, that their 
request for exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the 
Act meets the standards set out in Section 6(c) of the Act and that an 
order should, therefore, be granted.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11155 Filed 5-9-94; 8:45 am]
BILLIND CODE 8010-01-M