[Federal Register Volume 60, Number 199 (Monday, October 16, 1995)]
[Notices]
[Pages 53662-53665]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25506]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21403; File No. 812-9634]
United Companies Life Insurance Company, et al.
October 6, 1995.
AGENCY: Securities and Exchange Commission (``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: United Companies Life Insurance Company (``United Life''),
United Companies Separate Account One (the ``Account''), and United
Variable Services, Inc. (``United Variable'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemption from Sections 26(a)(2)(C) and 27(c)(2) of the
1940 Act.
SUMMARY OF APPLICATION: Applicants seek an order permitting United Life
to deduct from the assets of the Account, or from the assets of certain
separate accounts that may be established by United Life in the future
to support certain variable annuity contracts and certificates issued
by United Life (the ``Other Accounts'', collectively, with the Account,
the ``Accounts''), the mortality and expense risk charge imposed under
certain variable annuity contracts and certificates issued by United
Life (the ``Existing Contracts'') and under any other variable annuity
contracts and certificates issued by United Life which are
substantially similar in all material respects to the Existing
Contracts and are offered through any of the Accounts (the ``Other
Contracts'', together, with the Existing Contracts, the ``Contracts'').
FILING DATE: The application was filed on June 16, 1995 and amended and
restated on August 17, 1995.
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 October 31, 1995 and should be accompanied
by proof of service on Applicants in the form of an affidavit or, for
lawyers, by 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 the date of a hearing by
writing to the Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants: Judith A. Hasenauer, Blazzard, Grodd & Hasenauer, P.C., 943
Post Road East, P.O. Box 5108, Westport, Connecticut 06881.
FOR FURTHER INFORMATION CONTRACT: Barbara J. Whisler, Senior Counsel,
or Wendy Friedlander, Deputy Chief, 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 Public
Reference Branch of the SEC.
Applicant's Representations
1. United Life, a stock life insurance company domiciled in
Louisiana, is a wholly owned subsidiary of United Companies Financial
Corporation. The Account, established as a segregated asset account of
United Life on November 2, 1994 under Louisiana law, will fund the
Existing Contracts issued by United Life. The Account is, and the Other
Accounts will be, registered with the Commission as a unit investment
trust.
2. United Variable will serve as the distributor of the Existing
Contracts. United Variable, a wholly owned subsidiary of United Life,
is registered as a broker dealer under the Securities Exchange Act of
1934 and is a member of the National Association of Securities Dealers,
Inc.
3. The Accounts are comprised of subaccounts (the ``Subaccounts'').
The assets of each Subaccount initially will be invested in a
corresponding portfolio of one of seven investment companies (the
``Funds''). Currently, the Funds have eleven portfolios available to
the subaccounts for investment. Applicants state that the number and
identity of the available Funds and the funds' investment portfolios
may change.
4. The Existing Contracts are combination variable deferred fixed
and/or market value adjusted (``MVA'') annuity contracts and
certificates issued in connection with retirement plans which may
qualify for favorable tax treatment under the Internal Revenue Code of
1986, as amended. The Existing Contracts described in the application
are of two types: the ``10 Year Contract'' and the ``7 Year Contract.''
The 10 Year Contracts and the 7 Year Contracts will be offered in
different markets, and
[[Page 53663]]
differ as to the charges imposed and the death benefits provided. The
minimum initial premium, for both the 7 and the 10 Year Contracts is
$5,000 except for qualified contracts for which the minimum initial
premium is $2,000. The minimum for subsequent premiums is $500, or, if
the automatic premium check option is elected, $100.
5. The Existing Contracts provide for certain guaranteed death
benefits during the accumulation period. Applicants state that, in
states where the death benefit endorsement is approved, the death
benefit for the 10 Year Contracts will be the Contract value in the
fixed account and in the MVA account plus the greatest of (a), (b) or
(c) where:
(a) Is the Contract value in the Account as of the end of the
valuation period during which United Life receives due proof of
death and an election of payment;
(b) Is the purchase payments allocated to the Account, less any
withdrawals and transfers from the Account and any related
contingent deferred sales charge and transfer fees (the ``Net
Purchase Payments''), accumulated at 6% annually up to the first
Contract anniversary after the contract owner attains age 75, to a
maximum of two times the Net Purchase Payments;
(c) Is the highest reset value up to the date of death. The
reset value is equal to the Contract value in the Account on each
10th Contract anniversary prior to the Contract owner attaining age
85, plus purchase payments made after such Contract anniversary and
allocated to the Account after such anniversary and any related
contingent deferred sales charges and transfer fees.
6. Applicants state that, in states where the death benefit
endorsement is approved, the death benefit for the 7 Year Contracts
will be the Contract value in the fixed account and in the MVA account
plus the greatest of (a), (b) or (c) where:
(a) Is the owner's Contract value in the Account as of the end
of the valuation period during which United Life receives due proof
of death and an election of payment;
(b) Is the purchase payments allocated to the Account, less any
withdrawals and transfers from the Account and any related
contingent differed sales charge and transfer fees, accumulated at
4% annually up to the first anniversary after the owner attains age
75;
(c) Is the highest reset value up to the date of death. The
reset value is equal to the owner's Contract value in the Account on
each anniversary prior to the owner attaining age 80 plus purchase
payments made after such anniversary and allocated to the Account
less any withdrawals and transfers from the Account and any related
contingent deferred sales charges and transfer fees.
7. In states where the death benefit endorsement is not approved,
the death benefit for the Existing Contracts during the accumulation
period will be the greater of: (a) the purchase payments, less any
withdrawals and related contingent deferred sales charges; or (b) the
owner's contract value determined as of the end of the valuation period
during which United Life receives due proof of death and an election of
payment.
8. For the Existing Contracts, United Life imposes an annual
administrative charge of .15% of the average daily net asset value of
each subaccount of the Account. Applicants state that the annual
administrative charge partially compensates United Life for expenses
incurred in establishing and maintaining the contracts and the Account.
Applicants state that United Life does not intend to profit from this
charge and that the charge will be reduced to the extent that the
charge is in excess of the amount necessary to reimburse United Life
for its administrative expenses.
9. For the 10 Year Contracts, United Life deducts a contract and
certificate maintenance charge of $30 each Contract year from the
Contract value. Applicants state that the charge is designed to
reimburse United Life for expenses relating to the maintenance of the
Contracts. If a Contract is surrendered on other than a Contract
anniversary, the full charge will be deducted at the time of surrender.
No charge is deducted during the annuity period. Applicants state that
this charge has been set at a level so that, when considered in
conjunction with the .15% annual administrative charge, United Life
will not make a profit from the charges assessed for administration.
The contract and certificate maintenance charge is not assessed against
the 7 Year Contracts. Applicants state that they are relying on Rule
26a-1 under the 1940 Act with respect to the administrative charge and
the contract and certificate maintenance charge.
10. For the 10 Year Contracts, a contingent deferred sales charge
(the ``Sales Charge'') of up to 8.5% will be assessed by United Life
upon withdrawal of a portion of the Account's value or upon surrender
of the Contract within the first ten years of the Contract. The Sales
Charge is calculated at the time of withdrawal and is deducted from the
balance remaining in the Account after withdrawal. The percentage
declines depending upon how many years have passed since the withdrawn
premium was originally made by the Contract owner. For the 7 Year
Contracts, the Sales Charge may be up to 7% and will be assessed by
United Life upon withdrawal of a portion of the Account's value or upon
surrender of the Contract within the first seven years of the Contract.
11. For the 10 Year Contracts, United Life will impose a daily
charge equal to an annual effective rate of 1.52% of the value of the
net assets of the Account to compensate United Life for assuming
certain mortality and expense risks in connection with the 10 Year
Contracts. Applicants state that approximately .80% of the 1.52% charge
is attributable to mortality risk, approximately .45% is attributable
to expense risk and approximately .27% is attributable to the enhanced
death benefit. For assuming certain mortality and expense risks in
connection with the 7 Year Contracts, United Life will impose a daily
charge equal to an annual effective rate of 1.45%. Applicants state
that approximately .80% of the 1.45% charge is attributable to
mortality risk, approximately .45% is attributable to expense risk and
approximately .20% is attributable to the enhanced death benefit. The
mortality and expense risk charges for both the 10 Year Contracts and
the 7 Year Contracts are guaranteed not to increase. If the mortality
and expense risk charge is insufficient to cover actual costs of the
risks assumed, United Life will bear the loss. Conversely, if the
charge exceeds costs, this excess will be profit to United Life and
will be available for any corporate purpose, including payment of
expenses relating to the distribution of the Contracts. Applicants
state that United Life expects a profit from the mortality and expense
risk charges.
12. Applicants state that the mortality risk borne by United Life
arises from: (a) The contractual obligation of United Life to make
annuity payments regardless of how long all annuitants or any
individual annuitant may live; and (b) the guarantee of annuity
purchase rates for the annuity options under the Contracts.
Additionally, Applicants state that United Life bears a mortality risk
with respect to the death benefit and with respect to the waiver of the
Sales Charge where premiums have been held less than 10 Contract years
of the 10 Year Contracts and less than 7 Contract years for the 7 Year
Contracts. Applicants state that the expense risk that the
administrative charges assessed under the Contracts may be insufficient
to cover actual administrative expenses incurred by United Life.
13. Currently, United Life permits twelve transfers to be made each
Contract year among the subaccounts, the fixed account and the MVA
account without charge. For each transfer in excess of the number of
free transfers permitted, United Life will deduct, from the amount
transferred, a transfer fee
[[Page 53664]]
equal to the lesser of $25 or 2% of the amount transferred. Applicants
state that the transfer fee is at cost, with no anticipation of profit
to United Life.
14. Applicants state that premium taxes relating to the Contracts
may be deducted when incurred from premium payments or Account value.
Applicants state that premium taxes generally range from 0% to 4% and
that it is the practice of United Life to pay such taxes when they
become due and payable to the states.
Applicants' Legal Analysis and Conditions
1. Applicants request that the Commission, pursuant to Section 6(c)
of the 1940 Act, grant exemptions from Sections 26(a)(2)(C) and
27(c)(2) of the 1940 Act in connection with Applicants' assessment of
the daily charge for the mortality and expense risks under the
Contracts.
2. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act, in pertinent
part, 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
amount as the Commission may prescribe, for performing bookkeeping and
other administrative services of a character normally performed by the
bank itself.
3. Applicants assert that the charges for mortality and expense
risks for both the 7 and the 10 Year Contracts are reasonable in
relation to the risks assumed by United Life under the Contracts.
4. Applicants represent that the mortality and expense risk charges
are within the range of industry practice with respect to comparable
annuity products. Applicants state that this representation is based
upon Applicants' analysis of the mortality risks taking into
consideration such factors as: the guaranteed annuity purchase rates;
the expense risks; the estimated present and future costs for certain
product features; and the industry practice with respect to comparable
variable annuity contracts. Applicants represent that United Life will
maintain at its principal office, available to the Commission, a
memorandum setting forth in detail the products analyzed and the
methodology and the results of this analysis.
5. Applicants further represent that, before relying on the
exemptive relief requested in the application for the Other Contracts,
Applicants will determine that any mortality and expense risk charges
under the Other Contracts are reasonable in amount as determined by
industry practice with respect to comparable annuity products and/or
reasonable in relation to the risks assumed by United Life. Applicants
represent that United Life will maintain a memorandum setting forth the
basis for such conclusion with respect to the Other Contracts and that
the memorandum will be available to the Commission upon request.
6. Applicants state that, in determining that the portions of the
mortality and expense risk charges attributable under the 10 Year
Contracts and the 7 Year Contracts to the enhanced death benefit are
reasonable in relation to the benefits provided and are within the
range of industry practice for comparable benefits, United Life ran a
large number of computer-generated trials at various issue ages to
determine the cost of the benefit provided. In running the trials,
Applicants state that the following methodology was used: (a)
Hypothetical asset returns were projected using generally accepted
actuarial simulation methods; (b) for each asset return pattern
generated, hypothetical accumulated values were calculated by applying
the projected asset returns to the initial value in a hypothetical
account; and (c) the amount of the enhanced death benefit payable in
the event of a hypothetical owner's death was compared to the Contract
value for each year of each such trial. By analyzing the results of the
trials, an actuarial equivalent cost factor for the benefit was
derived. United Life determined from the results of the trials that the
charge of .27% for 10 Year Contracts and .20% for 7 Year Contracts
would be reasonable charges for the enhanced death benefits.
7. Applicants represent that United Life will maintain at it
principal office and available to the Commission a memorandum setting
forth in detail the methodology used in determining that the enhanced
death benefit charges in each product are reasonable in relation to the
benefits provided and are within the range of industry practice for
comparable benefits. Before relying on the exemptive relief requested
in the application for the Other Contracts, Applicants represent that
they will determine that any portion of the mortality and expense risk
charge attributable to enhanced death benefit charges under the Other
Contracts is reasonable in relation to the related risks assumed by
United Life. Applicants further represent that United Life will
maintain and make available to the Commission upon request a memorandum
setting forth in detail the methodology used in making that
determination with respect to the Other Accounts.
8. Applicants acknowledge that the Sales Charge will likely be
insufficient to cover all costs relating to the distribution of the
Contracts. To the extent distribution costs are not covered by the
Sales Charge, United Life will recover its distribution costs from the
assets of the general account. These assets may include that portion of
the mortality and expense risk charge which is profit to United Life.
Applicants represent that United Life has concluded that there is a
reasonable likelihood that the proposed distribution financing
arrangement will benefit the Account and the owners of the Contracts.
The basis for this conclusion is set forth in a memorandum which will
be maintained by United Life at its principal office and will be made
available to the Commission. Applicants also represent that, before
relying on the exemptive relief requested in the application for the
Other Contracts and the Other Accounts, the Applicants will determine
that there is a reasonable likelihood that the distribution financing
arrangement will benefit the Accounts and the investors in those
Accounts. Applicants represent that United Life will maintain and make
available to the Commission upon request a memorandum setting forth the
basis of such conclusion.
9. United Life also represents that the Accounts will invest only
in open-end management investment companies which undertake, in the
event such company adopts a plan under Rule 12b-1 of the 1940 Act to
finance distribution expenses, to have such plan formulated and
approved by either the company's board of directors or the board of
trustees, as applicable, a majority of whom are not interested persons
of such company within the meaning of the 1940 Act.
Conclusion
Applicants assert that for the reasons and upon the facts set forth
above, the requested exemptions from Sections 26(a)(2)(C) and 27(c)(1)
of the 1940 Act 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.
[[Page 53665]]
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-25506 Filed 10-13-95; 8:45 am]
BILLING CODE 8010-01-M
