[Federal Register Volume 59, Number 177 (Wednesday, September 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22732]
[[Page Unknown]]
[Federal Register: September 14, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20541; File No. 812-9048]
Chubb Life Insurance Company of America, et al.
September 8, 1994.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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applicants: Chubb Life Insurance Company of America (``Chubb Life''),
for itself and on behalf of its Chubb Separate Account VA-1 (``Chubb
Separate Account''), The Colonial Life Insurance Company of America
(``Colonial Life''), for itself and on behalf of its Colonial Separate
Account VA-2 (``Colonial Separate Account''), and Chubb Securities
Corporation (``Chubb Securities''). (Chubb Life, Chubb Separate
Account, Colonial Life, Colonial Separate Account and Chubb Securities
shall be referred to herein collectively as 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)
thereunder.
SUMMARY of application: The Applicants seek an order to the extent
necessary to permit the issuance and sale of certain individual
flexible payment deferred variable annuity contracts (the
``Contracts'') with the deduction of a mortality risk charge and an
expense risk charge.
filing date: The application was filed initially on June 7, 1994. An
amended and restated application was filed on September 1, 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 the application by writing to the
Secretary of the Commission and serving the Applicants with a copy of
the request, either personally or by mail. Hearing requests must be
received by the Commission by 5:30 p.m. on October 3, 1994, and should
be accompanied by proof of service on the Applicants in the form of an
affidavit or, for lawyers, by certificate. Hearing requests should
state the nature of the interest, the reason for the 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, D.C. 20549. Applicants, One Granite Place,
Concord, NH, 03301.
for further information contact: Patrice M. Pitts, Attorney, Office of
Insurance Products, Division of Investment Management, at (202) 942-
0670.
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. Chubb Life is a stock life insurance company chartered in 1903
under the laws of Tennessee, and redomesticated under the laws of New
Hampshire on July 1, 1991. Chubb Life is a wholly-owned subsidiary of
the The Chubb Corporation, a New Jersey corporation, and is licensed to
do business in all states except New York, as well as in Puerto Rico,
the U.S. Virgin Islands, Guam and the District of Columbia. The Chubb
Separate Account is a separate account of Chubb Life established under
the laws of New Hampshire for the purpose of funding variable annuity
contracts.
2. Colonial Life, a wholly-owned subsidiary of Chubb Life, is a
stock life insurance company chartered in New Jersey in 1897. Colonial
Life is licensed to do business in all fifty states, as well as in
Puerto Rico, the U.S. Virgin Islands, and the District of Columbia. The
Colonial Separate Account is a separate account of Colonial Life
established under the laws of New Jersey for the purpose of funding
variable annuity contracts.
3. The Chubb Separate Account and the Colonial Separate Account
(collectively, the ``Separate Accounts'') are registered with the
Commission as unit investment trust series investment companies under
the 1940 Act.\1\ Each of the separate Accounts will maintain a separate
series of units for seven subaccounts (the ``Divisions''), each of
which will invest its assets, without sales charge, in a corresponding
investment series of the UST Master Variable Series, Inc. (the
``Fund'').
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\1\Contemporaneous with the filing of this application, Chubb
Life and Colonial Life each filed a notice of registration of Form
N-8A and a registration statement on Form N-4 on behalf of the Chubb
Separate Account and the Colonial Separate Account, respectively.
The Contracts will be registered under the Securities Act of 1933 by
such Forms N-4.
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4. The Contracts are individual flexible payment deferred variable
annuity contracts. The Contracts may be purchased on a nontax-qualified
basis or purchased and used in connection with certain plans entitled
to special income tax treatment under Section 408 of the Internal
Revenue Code. The Contracts will provide for the accumulation of
capital on a variable basis only; no fixed account investment option is
offered prior to the annuity date. Payment of annuity benefits will be
available on a fixed or a variable basis, or a combination of both.
5. Chubb Life and Colonial Life (collectively, the ``Insurers'')
will deduct from the Separate Accounts an Administration Charge which
will be an amount computed and deducted daily, and equal on an annual
basis to 0.05% of the total assets of the Separate Accounts. The
Administration Charge will be imposed prior to the annuity date and,
with respect to reserves held for variable annuity payments, on and
after the annuity date. The deduction of the Administration Charge is
designed to reimburse the Insurers for the cost of administrative and
related expenses, and is not expected to be a source of profit.
Although administrative expenses may rise in the future, the Insurers
guarantee that they will not increase the amount of the Administration
Charge for outstanding Contracts.
6. Although the first twelve transfers in a Contract year will be
free of charge, the Insurers will assess a charge of $75 for the
thirteenth and each subsequent transfer in a given Contract year. The
Insurers reserve the right to reduce to eight the number of free
transfers each Contract year.
7. The transfer charge is designed to compensate the Insurers for
the administrative costs associated with processing excessive transfer
requests. The transfer charge is guaranteed not to increase for
outstanding Contracts. The Insurers reserve the right to modify such
charge, however, but such modification shall apply only with respect to
Contracts established after the effective date of such modification.
8. The Applicants proposed to rely on Rules 26a-1 and 6c-8(c) under
the 1940 Act for the exemptive relief necessary to permit the
assessment of the Administration Charge and the transfer charge. The
Insurers do not expect to recover from these charges any amount in
excess of the respective Insurer's accumulated expenses in connection
with the administrative activities for which the charges will be
assessed.
9. No sales charge will be deducted from the purchase payments as
they are made to the Contracts. Instead, a contingent deferred sales
charge (the ``Withdrawal Charge'') will be assessed in some
circumstances when a partial withdrawal is made from a Contract or when
a Contract is surrendered before the annuity date. The Withdrawal
Charge is designed as partial compensation to the Insurers for the
costs of selling and distributing the Contracts.
10. For up to four withdrawals per Contract year, the Insurers will
waive the Withdrawal Charge, if any, on an amount (the ``Free
Withdrawal Amount'') up to 10% of the Contract value as of the
valuation date that a partial withdrawal or surrender request is
received, less any previous withdrawals during the same Contract year
for which Withdrawal Charges are waived. Any unused portion of the Free
Withdrawal Amount is noncumulative and will not apply to partial
withdrawals or a surrender made in subsequent Contract years.
11. The Withdrawal Charge will be deducted as a percentage of
amounts withdrawn in a Contract year in excess of any Free Withdrawal
Amount. The applicable percentage will depend upon when the purchase
payments to which the partial withdrawal or surrender is deemed
attributable is made, as indicated in the following schedule:
------------------------------------------------------------------------
Charge as a
percentage
Number of complete years from date of purchase payment of purchase
payments
withdrawn
------------------------------------------------------------------------
0 to 1..................................................... 3.0
1+ to 2.................................................... 3.0
2+ to 3.................................................... 2.0
3+ to 4.................................................... 1.0
4+......................................................... 0.0
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The oldest previously unliquidated purchase payment will be deemed
to have been liquidated first, then the next oldest purchase payment,
and so forth. Once all purchase payments have been liquidated,
additional amounts surrendered or withdrawn will not be subject to a
Withdrawal Charge. Withdrawal Charges will never exceed 3.0% of total
purchase payments made.
12. No Withdrawal Charge will be imposed if an annuity option is
chosen or for amounts withdrawn in connection with a systematic
withdrawal program. The Withdrawal Charge also may be eliminated when
the Contracts are issued to an officer, director, employee or retired
officer, director or employee of the Insurers, Chubb Securities or
United States Trust Company of New York, the investment adviser of the
Fund, or affiliates of such companies.
13. The Applicants propose to rely on Rule 6c-8(b) under the 1940
Act for the exemptive relief necessary to permit imposition of the
Withdrawal Charge.
14. The Insurers will deduct any premium taxes or similar state or
local tax attributable to a Contract. The Applicants proposed to relay
on Rule 26a-2(d) under the 1940 Act to permit deduction of any premium
taxes from the assets of the Separate Accounts. The Insurers reserve
the right to assess a charge for any effect which the income, assets,
or existence of the Contracts, the Separate Accounts, or the Divisions
may have upon the Insurers' federal income tax, should such taxes be
incurred by the Insurers in connection with the operation of the
Separate Accounts.
15. The Insurers will compute and deduct daily, as part of the net
investment factor used to determine that value of the accumulation
units and annuity units from one valuation period to the next, a
Mortality Risk Charge equal on an annual basis to 0.55% of the total
assets of the Separate Accounts. The Mortality Risk Charge will be
assessed prior to the annuity date and, with respect to reserves held
for variable annuity payment options, on and after the annuity date.
The Mortality Risk Charge is guaranteed not to increase.
16. The mortality risk arises from each Insurer's guarantee that it
will make annuity payments in accordance with annuity rate provisions
established at the time the Contract is issued, for the life of the
Contract owner or annuitant (or in accordance with the annuity option
selected), no matter how long the annuitant lives and no matter how
long all annuitants as a class live.
17. The Insurers also will deduct an Expense Risk Charge which is
calculated by taking the Contract value (or, on and after the annuity
date, the variable annuity reserve amount) as of the first day of each
Contract month (or on the next valuation date if the first day of the
Contract month is not a valuation date), and multiplying such Contract
value (or reserve amount) by a monthly factor equal on an annual basis
to the following percentages:
------------------------------------------------------------------------
Expense
risk
Contract value as of contract month anniversary charge
percentage
------------------------------------------------------------------------
Less than $250,000.......................................... 0.30
$250,000 but less than $1,000,000........................... 0.20
$1,000,000 or greater....................................... 0.05
------------------------------------------------------------------------
The lower Expense Risk Charge ``breakpoints'' for larger Contract
values reflect the less significant expense risks associated with
larger Contracts because of lower administrative expenses on a per
Contract basis. Before the annuity date, the Expense Risk Charge is
deducted by canceling accumulation units (or fractions thereof) from
each Division in the same proportion that the value in each Division
bears to the total Contract value. On and after the annuity date, the
Expense Risk Charge is deducted from any variable annuity payments at
the time such payment are made.\2\ The Expense Risk Charge is
guaranteed not to increase.
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\2\Applicants propose to impose the Expense Risk Charge as a
monthly redemption of units from individual Contracts and as a
deduction from Variable Annuity payments because to reflect the
``breakpoint'' variations described above through the unit value
calculation is not administratively feasible. By deducting the
Expense Risk Charge as a Contract-level charge the Insurers will
avoid having to maintain three sets of unit values for each of the
seven Divisions (i.e., one set for each ``breakpoint''). The
Insurers' computer systems are not currently capable of
administering 21 distinct unit value calculations without extensive
modifications, the cost of which would otherwise be passed to the
Contract owners.
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18. The Applicants recognize that deducting an expense risk charge
on a monthly basis, at the contract level, as a redemption of units,
differs from typical industry practice for variable annuities.\3\ To
assure that the less frequent deduction of the Expense Risk Charge does
not result in such charges being effectively larger for Contract owners
than a solely daily charge at annual rates of 0.30%, 0.20% and 0.05%,
these charges will be administered monthly using monthly factors of
0.000249656, 0.0001666514 and 0.000041657, respectively, which, when
annualized equates to 29.99989%, 19.99999% and 4.99999%, respectively.
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\3\The Applicants note that the Commission recently granted
exemptive relief to a variable annuity issuer proposing to deduct a
portion of its mortality and expense risk charge as a monthly,
contract-level charge, in a manner similar to that proposed herein
by the Applicants. The Manufacturers Life Insurance Company of
America, et al., Investment Company Act Release No. 20278 (May 5,
1994) (order); Investment Company Act Release No. 20202 (Apr. 7,
1994) (notice).
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19. The expense risk assumed by each of the insurers is that the
costs of administering the Contracts and the Separate Accounts will
exceed the amount received from the Administration Charge.
20. The Applicants submit that if the Mortality Risk Charge and the
Expense Risk Charge are insufficient to cover the actual cost of the
mortality and expense risks assumed, the Insurers will bear the loss.
Conversely, if the Mortality Risk Charge and the Expense Risk Charge
prove more than sufficient, the excess will be profit to the Insurers
and will be available for any proper corporate purpose including, among
other things, payment of distribution expenses.
Applicants' Legal Analysis and Conditions
1. The Applicants request exemptions from Sections 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 with the deduction of a Mortality Risk Charge
and an Expense Risk Charge from the assets of the Separate Accounts
which serve as funding media for the Contracts.
2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, as herein
pertinent, require that all payments received under a periodic payment
plan certificate sold by a registered unit investment trust, any
depositor thereof or underwriter thereof, be held by a qualified bank
as trustee or custodian, under arrangements which prohibit any payment
to the depositor or principal underwriter expect for the payment of a
fee, not exceeding such reasonable amount as the Commission may
prescribe, for bookkeeping and other administrative services.
3. The Applicants submit that the Insurers are entitled to
reasonable compensation for their assumption of mortality and expense
risks, and represent that the daily Mortality Risk Charge of 0.55% per
annum and the maximum monthly Expense Risk Charge of 0.30% per annum is
within the range of industry practice for comparable annuity products.
The Applicants state that this representation is based upon an analysis
of publicly available information about selected comparable variable
annuity contracts currently being offered in the insurance industry,
taking into consideration such factors as current charge levels, the
manner in which the charges are assessed, the presence of charge level
or annuity rate guarantees, and the markets in which the Contracts will
be offered The Applicants represent that the Insurers will maintain at
their respective home offices, and will make available to the
Commission upon request, a memorandum outlining the methodology relied
upon in their respective analyses.
4. The Applicants acknowledge that the Withdrawal Charge under the
Contracts is expected to be insufficient to cover all costs relating to
the distribution of the Contracts. If a profit is realized from the
Mortality Risk Charge and from the Expense Risk Charge, all or a
portion of such profit may be offset by distribution expenses not
reimbursed by the Withdrawal Charge. In such circumstances, a portion
of the Mortality Risk Charge and the Expense Risk Charge might be
viewed as providing for a portion of the costs relating to distribution
of the Contracts. Notwithstanding the foregoing, the Insurers have
concluded that there is a reasonable likelihood that the proposed
distribution financing arrangements made with respect to the Contracts
will benefit the Separate Accounts and the Contract Owners. The basis
for such conclusion is set forth in a memorandum which will be
maintained by each of the Insurers at its respective home office and
will be available to the Commission upon request.
5. The Applicants represent that the Separate Accounts will invest
only in underlying mutual funds which have undertaken to have a board
of directors/trustees, a majority of the members of which are not
``interested persons'' of such funds, formulate and approve any plan to
finance distribution expenses in accordance with Rule 12b-1 under the
1940 Act.
6. The Applicants agree to the following conditions if the
requested order is granted: (i) fee tables (including examples) will
reflect all applicable charges and will permit comparison with other
contracts on the same basis as if the Expense Risk Charge were deducted
in the same manner as the Mortality Risk Charge and the Administration
Charge; (ii) all advertisements of the performance of the Divisions of
the Separate Accounts will reflect the impact of the Expense Risk
Charge, and changes in accumulation unit values will not be advertised
without so reflecting the maximum Expense Risk Charge; and (iii) if the
size of the Expense Risk Charge is discussed in advertisements or sales
literature, it will be presented in conjunction with the Mortality Risk
Charge and the Administration Charge as a total asset charge, with
disclosure that the Expense Risk Charge is deducted monthly as a
contract-level charge while the Mortality Risk Charge and the
Administration Charge are asset-based charges deducted daily.
Conclusion
The Applicants submit that for the reasons and upon the facts set
forth above, the requested exemptions from Sections 26(a)(2)(C) and
27(c)(2) of the 1940 Act to permit the deduction of the Mortality Risk
Charge and the Expense Risk Charge under the Contracts meet the
applicable statutory standards in Section 6(c) of the 1940 Act. The
applicants assert that the requested exemptions are necessary or
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.
Maragaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-22732 Filed 9-13-94; 8:45am]
BILLING CODE 8010-01-M