[Federal Register Volume 59, Number 137 (Tuesday, July 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17428]


[[Page Unknown]]

[Federal Register: July 19, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20401; File No. 812-8720]

 

Chubb Life Insurance Company of America, et al.

July 12, 1994.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the 
``Commission'').

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

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APPLICANTS: Chubb Life Insurance Company of America (``Chubb Life''), 
Chubb Separate Account C (the ``Account''), any other separate account 
established in the future (the ``Future Accounts'') by Chubb Life or an 
affiliated life insurance company to support scheduled premium, single 
premium, or flexible premium variable life insurance contracts (the 
``Contracts''), and Chubb Securities Corporation (``Chubb 
Securities'').

RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the 
1940 Act for exemptions from Section 27(c)(2) of the 1940 Act and Rules 
6e-2(c)(4)(v) and 6e-3(T)(c)(4)(v) thereunder.

SUMMARY OF APPLICATION: Applicants seek an order to permit them to 
deduct from premiums received under the Contracts an amount that is 
reasonable in relation to Chubb Life's increased federal income tax 
burden resulting from Chubb Life's receipt of such premiums in 
connection with the Contracts.

FILING DATE: The application was filed on December 10, 1993. An amended 
and restated application was filed on May 27, 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 on this application 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 
Commission by 5:30 p.m. on August 8, 1994 and should be accompanied by 
proof of service on Applicants in the form of an affidavit or, for 
lawyers, a certificate of service. Hearing requests 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, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Applicants, Shari J. Lease, Esq., 
Chubb Life Insurance Company of America, One Granite Place, Concord, 
New Hampshire 03301.

FOR FURTHER INFORMATION CONTACT: Barbara J. Whisler, Senior Attorney, 
or Michael V. Wible, Special Counsel, both at (202) 942-0670, Office of 
Insurance Products, Division of Investment Management.

SUPPLEMENTARY INFORMATION: 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. Chubb Life, a stock life insurance company chartered under the 
laws of Tennessee and redomesticated in New Hampshire in 1991, is the 
depositor, for purposes of the 1940 Act, of the Account.
    2. The Account, organized under New Hampshire law as an insurance 
company separate account, is registered with the Commission as a unit 
investment trust (File No. 33-72830). The Account will fund the 
Contracts issued by Chubb Life and the Contracts will be registered 
under the Securities Act of 1933. Chubb Series Trust (the ``Trust''), a 
registered open-end management investment company (File No. 33-72834), 
will serve as the underlying investment medium for the Account. 
Applicants incorporate by reference the above-mentioned registration 
statements into the application.
    3. Chubb Securities, a registered broker-dealer under the 
Securities Exchange Act of 1934 and a member of the National 
Association of Securities Dealers, Inc., is the principal underwriter 
for the Contracts. Chubb Securities is a wholly-owned subsidiary of 
Chubb Life.
    4. The Contracts which are the subject of the application are 
flexible premium individual variable life insurance policies and 
flexible premium survivorship variable life insurance policies. 
Applicants state that the Contracts will be issued in reliance on Rule 
6e-3(T)(b)(13)(i)(B). Applicants state that Chubb Life will deduct 
1.25% of each premium payment to cover Chubb Life's estimated cost for 
the federal income tax treatment of deferred acquisition costs.
    5. Applicants state that they intend to offer the Contracts to the 
public pursuant to an offering registered under the Securities Act of 
1933. Applicants further note that they will rely upon Rule 6e-3(T) in 
connection with the offering.
    6. In the Omnibus Budget Reconciliation Act of 1990 (``OBRA 
1990''), Congress amended the Internal Revenue Code of 1986 (the 
``Code'') by, among other things, enacting Section 848 thereof. Section 
848 changed how a life insurance company must compute its itemized 
deductions from gross income for federal income tax purposes. Section 
848 requires an insurance company to capitalize and amortize over a 
period of ten years part of the company's general expenses for the 
current year. Under prior law, these general expenses were deductible 
in full from the current year's gross income.
    7. The amount of deductions that must be capitalized and amortized 
over ten years rather than deducted in the year incurred is based 
solely upon ``net premiums'' received in connection with certain types 
of insurance contracts. Section 848 of the Code defines ``net premium'' 
for a type of contract as gross premiums received by the insurance 
company on the contracts minus return premiums and premiums paid by the 
insurance company for reinsurance of its obligations under such 
contracts. Applicants state that the effect of Section 848 is to 
accelerate the realization of income from insurance contracts covered 
by that Section, and, accordingly, the payment of taxes on the income 
generated by those contracts.
    8. The amount of general deductions that must be capitalized 
depends upon the type of contract to which the premiums received relate 
and varies according to a schedule set forth in Section 848. Applicants 
state that the Contracts are ``specified insurance contracts'' that 
fall into the category of life insurance contracts, and under Section 
848, 7.7% of the year's net premiums received must be capitalized and 
amortized.
    9. Applicants state that the increased tax burden on Chubb Life 
resulting from Section 848 may be quantified as follows. For each 
$10,000 of net premiums received by Chubb Life under the Contracts in a 
given year, Section 848 requires Chubb Life to capitalize $770 (7.7% of 
$10,000) and $38.50 of this $770 may be deducted in the current year. 
This leaves $731.50 ($770 minus $38.50) subject to taxation at the 
corporate tax rate of 35% which results in Chubb Life owing $256.03 
(.35  x  $731.50) more in taxes for the current year than would have 
been owed by Chubb Life prior to OBRA 1990. This current increase in 
federal income tax will be partially offset by deductions that will be 
allowed during the next ten years as a result of amortizing the 
remainder of the $770 ($77 in each of the following nine years and 
$38.50 in year ten).
    10. In the business judgment of Chubb Life, a discount rate of 10% 
is approximate for use in calculating the present value of Chubb Life's 
future tax deductions resulting from the amortization described above. 
Applicants state that Chubb Life seeks an after tax rate of return on 
the investment of its capital in excess of 10%. To the extent that 
capital must be used by Chubb Life to meet its increased federal tax 
burden under Section 848 resulting from the receipt of premiums, such 
capital is not available to Chubb Life for investment. Thus, Applicants 
argue, the cost of capital used to satisfy Chubb Life's increased 
federal income tax burden under Section 848 is, in essence, Chubb 
Life's after tax rate of return on capital; and, accordingly, the rate 
of return on capital is appropriate for use in this present value 
calculation. To the extent that the 10% discount rate is lower than 
Chubb Life's actual targeted rate of return, Applicants submit that a 
measure of comfort is provided that the calculation of Chubb Life's 
increased tax burden attributable to the receipt of premiums will 
continue to be reasonable over time, even if the corporate tax rate 
applicable to Chubb Life is reduced, or its targeted rate of return is 
lowered.
    11. In determining the after tax rate of return used in arriving at 
this discount rate, Applicants state that Chubb Life considered a 
number of factors, including: market interest rates; Chubb Life's 
anticipated long term growth rate; the risk level for this type of 
business; inflation; and available information about the rates of 
return obtained by other life insurance companies. Chubb Life 
represents that such factors are appropriate factors to consider in 
determining Chubb Life's cost of capital. Applicants state that Chubb 
Life first projects its future growth rate based on the sales 
projections, the current interest rates, the inflation rate, and the 
amount of capital that Chubb Life can provide to support such growth. 
Chubb Life then uses the anticipated growth rate and the other factors 
enumerated above to set a rate of return on capital that equals or 
exceeds this rate of growth. Of these other factors, market
    12. Using a corporate federal income tax rate of 35% and assuming a 
discount rate of 10%, the present value of the federal income tax 
effect of the increased deductions allowable in the following 10 years, 
which partially offsets the increased federal income tax burden, comes 
to $160.40. The effect of Section 848 on the Contracts is, therefore, 
an increased federal income tax burden with a present value of $95.63 
for each $10,000 of net premiums, i.e., $256.03 minus $160.40.
    13. State premium taxes are deductible in computing federal income 
taxes. Thus, Chubb Life does not incur incremental federal income tax 
when it passes on state premium taxes to owners of the Contracts. 
Conversely, federal taxes are not deductible in computing Chubb Life's 
federal income taxes. To compensate Chubb Life fully for the impact of 
Section 848, therefore, it would be necessary to allow Chubb Life to 
impose an additional charge that would make it whole not only for the 
$95.63 additional federal income tax burden attributable to Section 848 
but also for the federal income tax on the additional $95.63 itself. 
This federal income tax can be determined by dividing $95.63 by the 
complement of the 35% federal corporate income tax rate, i.e., 65%, 
resulting in an additional charge of $147.12 for each $10,000 of net 
premiums, or 1.47%.
    14. Based on prior experience, Chubb Life expects that all of its 
current and future deductions will be fully taken. It is Chubb Life's 
judgment that a charge of 1.25% would reimburse Chubb Life for the 
impact of Section 848 on Chubb Life's federal income tax liabilities. 
Applicants represent that the charge to be deducted by Chubb Life 
pursuant to the relief requested is reasonably related to Chubb Life's 
increased federal income tax burden under Section 848, taking into 
account the benefit to Chubb Life of the amortization permitted by 
Section 848, and the use by Chubb Life of a discount rate of 10% in 
computing the future deductions resulting from such amortization, such 
rate being the equivalent of Chubb Life's cost of capital.
    15. While the application states that Chubb Life believes that a 
charge of 1.25% of premium payments would reimburse it for the impact 
of Section 848 (as currently written) on Chubb Life's federal income 
tax liabilities, the application also states, however, that Chubb Life 
believes that it will have to increase this charge if any future change 
in, or interpretation of Section 848, or any successor provision, 
results in an increased federal income tax burden due to the receipt of 
premiums. Such an increase could result from a change in the corporate 
federal income tax rate, a change in the 7.7% figure, or a change in 
the amortization period.

Applicants' Legal Analysis

    1. Applicants request an order of the Commission pursuant to 
Section 6(c) exempting them from the provisions of Section 27(c)(2) of 
the 1940 Act and Rules 6e-2(c)4)(v) and 6e-3(T)(c) (4)(v) thereunder to 
the extent necessary to permit deductions to be made from premium 
payments received in connection with the Contracts. The deductions 
would be in an amount that is reasonable in relation to Chubb Life's 
increased federal income tax burden related to the receipt of such 
premiums. Applicants further request an exemption from Rule 6e-
3(T)(c)(4)(v) of the 1940 Act to permit the proposed deductions to be 
treated as other than ``sales load'' for the purposes of Section 27 of 
the 1940 Act and the exemptions from various provisions of that Section 
found in Rule 6e-3(T)(b)(13).
    2. Section 6(c) of the 1940 Act provides, in pertinent part, that 
the Commission may, by order upon application, conditionally or 
unconditionally exempt any person, security or transaction from any 
provision of the 1940 Act if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and the provisions of the 1940 Act.
    3. Section 27(c)(2) of the 1940 Act prohibits the sale of periodic 
payment plan certificates unless the proceeds of all payments (except 
such amounts as are deducted for sales load) are held under an 
indenture or agreement containing in substance the provisions required 
by Sections 26(a)(2) and 26(a)(3) of the 1940 Act. Applicants note that 
certain provisions of Rule 6e-3(T) provide a range of exemptive relief 
for the offering of flexible premium variable life insurance policies 
such as the Contracts. Rule 6e-3(T)(b)(13)(iii) provides, subject to 
certain conditions, exemptions from Section 27(c)(2) that include 
permitting a payment of certain administrative fees and expenses, the 
deduction of a charge for certain mortality and expense risks, and the 
``deduction of premium taxes imposed by any state or other governmental 
entity''.
    4. Rule 6e-2(c)(4)(v) defines ``sales load'' charged on any payment 
as the excess of the payment over certain specified charges and 
adjustments, including ``a deduction approximately equal to state 
premium taxes''. Rule 6e-3(T)(c)(4)(v) defines `'sales load'' charged 
during a contract period as the excess of any payments made during the 
period over the sum of certain specified charges and adjustments, 
including ``a deduction for and approximately equal to state premium 
taxes''.
    5. Applicants submit that the deduction for federal income tax 
charges, proposed to be deducted in connection with the Contracts, is 
akin to a state premium tax charge in that it is an appropriate charge 
related to Chubb Life's tax burden attributable to premiums received. 
Thus, applicants submit that the proposed deduction be treated as other 
than sales load, as is a state premium tax charge, for purposes of the 
1940 Act.
    6. Applicants argue that the requested exemptions from Rules 6e-
2(c)(4) and 6e-3(T)(c)(4) are necessary in connection with Applicants' 
reliance on certain provisions of Rules 6e-2(b)(13) and 6e-3(T)(b)(13), 
and particularly on subparagraphs (b)(13)(i) of the Rules, which 
provide exemptions from Sections 27(a)(1) and 27(h)(1) of the 1940 Act. 
Issuers and their affiliates may only rely on Rules 6e-2(b)(13)(i) or 
6e-3(T)(b)(13)(i) if they meet the respective Rule's alternative 
limitations on sales load as defined in Rule 6e-2(c)(4) or Rule 6e-
3(T)(c)(4). Applicants state that, depending upon the load structure of 
a particular Contract, these alternative limitations may not be met if 
the deduction for the increase in an issuer's federal tax burden is 
included in sales load. Although a deduction for an insurance company's 
increased federal tax burden does not fall squarely within any of the 
specified charges or adjustments which are excluded from the definition 
of ``sales load'' in Rules 6e-2(c)(4) and 6e-3(T)(c)(4), applicants 
state that they have found no public policy reason for including them 
in ``sales load''.
    7. The public policy that underlies Rules 6e-2(b)(13)(i) and 6e-
3(T)(b)(13)(i), like that which underlies Sections 27(a)(1) and 
27(h)(1) of the 1940 Act, is to prevent excessive sales loads from 
being charged in connection with the sale of periodic payment plan 
certificates. Applicants submit that the treatment of a federal income 
tax charge attributable to premium payments as sales load would not in 
any way further this legislative purpose because such a deduction has 
no relation to the payment of sales commissions or other distribution 
expenses. Applicants state that the Commission has concurred with this 
conclusion by excluding deductions for state premium taxes from the 
definition of ``sales load'' in Rules 6e-2(c)(4) and 6e-3(T)(c)(4).
    8. Applicants assert that the source for the definition of ``sales 
load'' found in the Rules supports this analysis. Applicants state that 
the Commission's intent in adopting such provisions was to tailor the 
general terms of Section 2(a)(35) of the 1940 Act to variable life 
insurance contracts. Just as the percentage limits of Sections 27(a)(1) 
and 27(h)(1) depend on the definition of ``sales load'' in Section 
2(a)(35) for their efficacy, the percentage limits in Rules 6e-
2(b)(13)(i) and 6e-3(T)(b)(13)(i) depend on Rules 6e-2(c)(4) and 6e-
3(T)(c)(4), respectively, which do not depart, in principle, from 
Section 2(a)(35).
    9. Section 2(a)(35) excludes deductions from premiums for ``issue 
taxes'' from the definition of ``sales load'' under the 1940 Act. 
Applicants submit that this suggests that it is consistent with the 
policies of the 1940 Act to exclude from the definition of ``sales 
load'' in Rules 6e-2 and 6e-3(T) deductions made to pay an insurance 
company's costs attributable to its tax obligations. Section 2(a)(35) 
also excludes administrative expenses or fees that are ``not properly 
chargeable to sales or promotional activities''. Applicants argue that 
this suggests that the only deductions intended to fall within the 
definition of ``sales load'' are those that are properly chargeable to 
such activities. Because the proposed deductions will be used to 
compensate Chubb Life for its increased federal income tax burden 
attributable to the receipt of premiums, and are not properly 
chargeable to sales or promotional activities, this language in Section 
2(a)(35) is another indication that not treating such deductions as 
``sales load'' is consistent with the policies of the 1940 Act.
    10. Applicants assert that the terms of the relief requested with 
respect to Contracts to be issued through the Account or through Future 
Accounts are consistent with the standards enumerated in Section 6(c) 
of the 1940 Act. Without the requested relief, Chubb Life would have to 
request and obtain exemptive relief for each Contract to be issued 
through a Future Account. Applicants state that such additional 
requests for exemptive relief would present no issues under the 1940 
Act not already addressed in this request for exemptive relief.
    11. Applicants assert that the requested relief is appropriate in 
the public interest because it would promote competitiveness in the 
variable life insurance market by eliminating the need for Chubb Life 
or Future Accounts to file redundant exemptive applications, thereby 
reducing administrative expenses and maximizing efficient use of 
resources. The delay and expense involved in having to seek repeated 
exemptive relief would impair the ability of Chubb Life and the Future 
Accounts to take advantage fully of business opportunities as those 
opportunities arise. Additionally, Applicants state that the requested 
relief is consistent with the purposes of the 1940 Act and the 
protection of investors for the same reasons. If Chubb Life and the 
Future Accounts were required to seek exemptive relief repeatedly with 
respect to the same issues addressed in this application, investors 
would not receive any benefit or additional protection thereby and 
might be disadvantaged as a result of increased overhead expenses for 
Chubb Life and the Future Accounts.

Conditions for Relief

    1. Applicants represent that Chubb Life will monitor the 
reasonableness of the charge to be deducted by Chubb Life pursuant to 
the requested exemptive relief.
    2. Applicants represent that the registration statement for each 
Contract under which the charge referenced in paragraph one of this 
section is deducted will: (i) disclose the charge; (ii) explain the 
purpose of the charge; and (iii) state that the charge is reasonable in 
relation to Chubb Life's increased federal income tax burden under 
Section 848 of the Code resulting from the receipt of premiums.
    3. Applicants represent that the registration statement for each 
Contract under which the charge referenced in paragraph one of this 
section is deducted will contain as an exhibit an actuarial opinion as 
to: (i) the reasonableness of the charge in relation to the Account's 
increased federal income tax burden under Section 848 resulting from 
the receipt of premiums; (ii) the reasonableness of the after tax rate 
of return that is used in calculating such charge; and (iii) the 
appropriateness of the factors taken into account by Chubb Life in 
determining the after tax rate of return.

Conclusion

    Applicants submit that, for the reasons and upon the facts set 
forth above, the requested exemptions from Section 27(c)(2) of the 1940 
Act, and Rules 6e-2(c)(4)(v) and 6e-3(T)(c)(4)(v) thereunder, to permit 
Chubb Life to deduct 1.25% of premium payments under the Contracts meet 
the standards in Section 6(c) of the 1940 Act. In this regard, 
Applicants assert that granting the relief requested in the application 
would be 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. 94-17428 Filed 7-18-94; 8:45 am]
BILLING CODE 8010-01-M