[Federal Register Volume 60, Number 190 (Monday, October 2, 1995)]
[Notices]
[Pages 51507-51510]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24348]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21374; File No. 812-9646]
Northbrook Life Insurance Company, et al.
September 25, 1995.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').
ACTION: Notice of application for an amended order under the Investment
Company Act of 1940 (the ``1940 Act'').
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APPLICANTS: Northbrook Life Insurance Company (``Northbrook''),
Northbrook Variable Annuity Account II (``Variable Account''), and Dean
Witter Reynolds, Inc. (``Dean Witter'').
RELEVANT 1940 ACT SECTIONS: Amended order requested under Section 6(c)
of the 1940 Act granting exemptions from the provisions of Sections
26(a)(2)(C) and 27(c)(2) of the 1940 Act.
SUMMARY OF APPLICATION: Applicants seek to amend an order under Section
6(c) of the 1940 Act which exempted Applicants from the provisions of
Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act to the extent
necessary to permit the deduction of a mortality and expense risk
charge from the assets of the Variable Account in connection with the
issuance and sale of certain variable annuity contracts (the
``Contracts''). Applicants propose to amend the Contracts to provide an
optional enhanced death benefit and to deduct an increased mortality
and expense risk charge in connection therewith.
[[Page 51508]]
FILING DATE: The application was filed on June 28, 1995, and amended on
September 15, 1995.
HEARING OR NOTIFICATION OF HEARING: An amended 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 Applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on October 19, 1995, 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
requester's interest, the reason for the request, and the issues
contested. Persons may request notification of a hearing by writing to
the Commission's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549. Applicants, David E. Stone, Esq., Northbrook Life Insurance
Company, 3100 Sanders Road, J5B, Northbrook, Illinois 60062.
FOR FURTHER INFORMATION CONTACT:
Mark C. Amorosi, Attorney, or Wendy Finck Friedlander, Deputy Chief, 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.
Applicant's Representations
1. By order dated August 29, 1990 (the ``Order''),\1\ Applicants
received relief pursuant to Section 6(c) of the 1940 Act exempting them
from the provisions of Sections 26(a)(2)(C) and 27(c)(2) of the 1940
Act to the extent necessary to allow Northbrook to deduct from the
Variable Account the mortality and expense risk charge imposed under
the Contracts. Applicants propose amending the Contracts (the ``Amended
Contracts``) to provide an optional enhanced death benefit and to
deduct an increased mortality and expense risk charge in connection
therewith.
\1\ Release No. IC-17710 (Aug. 29, 1990).
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2. Northbrook, the depositor and sponsor of the Variable account,
is a stock life insurance company organized under the laws of Illinois
in 1978. Northbrook is a wholly-owned subsidiary of Allstate Life
Insurance Company which is a wholly-owned subsidiary of Allstate
Insurance Company. Northbrook sells annuities and individual life
insurance and is licensed to operate in the District of Columbia, all
states (except New York) and Puerto Rico.
3. The Variable Account was established by Northbrook as a
segregated investment account under the laws of Illinois on May 18,
1990, pursuant to a resolution of the Board of Directors, as a funding
medium for variable annuity contracts. The Variable Account is
registered under the 1940 Act as a unit investment trust. The Variable
Account is divided into eleven subaccounts, each of which invests
solely in a corresponding portfolio (the ``Portfolios'') of the Dean
Witter Variable Investment Series (the ``Fund''). Each Portfolio has
different investment objectives and policies and operates as a separate
investment fund.
4. Dean Witter, a member of the National Association of Securities
Dealers and New York Stock Exchange, is the principal underwriter for
the Contracts and is intended to be the principal underwriter of the
Amended Contracts. Dean Witter is a wholly-owned subsidiary of Dean
Witter, Discover & Co.
5. Applicants state that the Amended Contracts are identical to the
Contracts with the exception of the death benefit provided and the
mortality and expense risk charge imposed in connection therewith.
Under the Contracts, if the owner or the last surviving annuitant dies
prior to the payout start date, the death benefit (the ``Standard Death
Benefit'') will be the greatest of (a) the sum of all purchase payments
less any amounts deducted in connection with partial withdrawals
including any applicable early withdrawal charges or premium taxes; or
(b) the cash value on the date that Northbrook receives due proof of
death; or (c) the cash value on the most recent death benefit
anniversary less any amounts deducted in connection with partial
withdrawals, including any applicable early withdrawal charges and
premium taxes deducted from the cash value, since that anniversary. The
death benefit anniversary is every sixth contract anniversary.
6. Applicants state that under the Amended Contracts, owners may
elect an additional death benefit option (the ``Enhanced Death
Benefit'') at the time of initial purchase. If the owner dies prior to
the payout start date and has elected the Enhanced Death Benefit
option, the amount payable will be the greater of the Standard Death
Benefit or the Enhanced Death Benefit, which is calculated as follows:
(a) On the date of issue, the Enhanced Death Benefit is equal to
the initial purchase payment.
(b) On each certificate anniversary, but not beyond the certificate
anniversary preceding all owner(s)' 75th birthday, the Enhanced Death
Benefit will be recalculated as follows:
(i) The Enhanced Death Benefit as of the prior certificate
anniversary multiplied by 1.05 (which results in an increase of 5%
annually).
(c) Further, for all ages, the Enhanced Death Benefit will be
adjusted on each certificate anniversary, or upon receipt of a death
claim, as follows:
(i) The Enhanced Death Benefit will be reduced by the percentage of
any cash value withdrawn since the prior certificate anniversary.
(ii) Any additional purchase payments since the prior certificate
anniversary will be added.
The Enhanced Death Benefit will never be greater than the maximum
death benefit allowed by applicable state non-forfeiture laws. In
addition, the Enhanced Death Benefit does not apply to the death of the
annuitant if the annuitant is different from the owner.
7. Various fees and charges are deducted under the Amended
Contracts. An annual contract maintenance charge of $30 will be
deducted from cash value to reimburse Northbrook for certain
administrative expenses. This fee is guaranteed not to increase for the
duration of the Amended Contract. A daily asset-based administration
charge equal to an effective annual rate of 0.10% of the daily net
assets in the Variable Account will be deducted to cover actual
administrative expenses which exceed the revenues from the contract
maintenance charge. Applicants state that they will rely on the
provisions of Rule 26a-1 under the 1940 Act for any exemptive relief
necessary to permit the deductions for these administrative charges.
8. Northbrook reserves the right to deduct state premium taxes
relative to the Amended Contract either (a) from premium payments as
received, (b) upon a total withdrawal, or (c) at the payout start date.
Premium taxes currently range from 0% up to 3.5%.
9. Certain full or partial withdrawals will be subject to a
contingent deferred sales charge (``Early Withdrawal Charge'') during
the first six Amended Contract years as follows:
------------------------------------------------------------------------
Applicable
Number of contract years since purchase payment being withdrawal
withdrawn was made charge
percentage
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0 years................................................ 6
1 year................................................. 5
2 years................................................ 4
3 years................................................ 3
4 years................................................ 2
[[Page 51509]]
5 years................................................ 1
6 years or more........................................ 0
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Withdrawals are deemed to be from purchase payments on a first in,
first out basis. The Early Withdrawal Charge will be deducted from the
amount paid. Applicants state that there will be no Early Withdrawal
Charge on the first withdrawal of each contract year on amounts up to
the Free Withdrawal Amount, i.e., 15% of purchase payments.
10. The Early Withdrawal Charge will be used to pay sales
commissions and other promotional or distribution expenses associated
with the marketing of the Amended Contracts. Applicants state that the
Early Withdrawal Charge may not generate sufficient revenues to pay the
cost of distributing the Amended Contracts. To the extent that the
Early Withdrawal Charge is insufficient to cover all sales and
distribution expenses, the deficiency will be met from Northbrook's
general account, which may include profits derived from the mortality
and expense risk charge.
11. Shares of the Portfolios are sold to the Variable Account at
net asset value. The Fund pays its investment adviser a monthly fee for
managing its investments and business affairs. Each Portfolio bears
certain expenses.
12. A daily charge equal to an effective annual rate of 1.25% of
the net assets in the Variable Account will be deducted to compensate
Northbrook for bearing certain mortality and expense risks under the
Contracts. Of that amount, approximately 0.85% is for mortality risks
and approximately 0.40% is for the expense risk.
13. With respect to the amended Contracts, Northbrook intends to
deduct an amount which will vary depending on the death benefit option
elected by the owner. If the owner elects the Standard Death Benefit,
Northbrook intends to deduct a mortality and expense risk charge equal
on an annual basis to 1.25% of the daily net assets of the Variable
Account. If the owner elects the Enhanced Death Benefit, the mortality
and expense risk charge will be equal on an annual basis to 1.38% of
the daily net assets of the Variable Account. Of that amount,
approximately 0.98% (0.85% for the Standard Death Benefit and 0.13% for
the Enhanced Death Benefit) is for mortality risks and approximately
0.40% is for the expense risk. Only owners who elect the Enhanced Death
Benefit will be assessed the 0.13% increase in the mortality risk
charge.
14. Applicants represent that the level of the mortality and
expense risk charges is guaranteed not to increase under the Contracts
and the Amended Contracts. The mortality risk arises from Northbrook's
guarantee to cover all death benefits and to make income payments in
accordance with the income payment tables, thereby relieving the
annuitants of the risk of outliving funds accumulated for retirement.
The expense risk assumed by Northbrook is the risk that Northbrook's
actual administrative costs will exceed the amount recovered through
the administrative expense and contract maintenance charges. If the
mortality or expense risk charges are insufficient to cover the actual
costs, Applicants state that Northbrook will bear the loss. To the
extent that the charges are in excess of actual costs, Applicants state
that Northbrook, at its discretion, may use the excess to offset losses
when the charges are not sufficient to cover expenses.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act authorizes the Commission to grant
an exemption from any provision, rule or regulation of the 1940 Act to
the extent that it is 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. Sections
26(a)(2)(C) and 27(c)(2) of the 1940 Act, in relevant part, prohibit a
registered unit investment trust, its depositor or principal
underwriter, from selling periodic payment plan certificates unless the
proceeds of all payments, other than sales loads, are deposited with a
qualified bank and held under arrangements which prohibit any payment
to the depositor or principal underwriter except a reasonable fee, as
the Commission may prescribe, for performing bookkeeping and other
administrative duties normally performed by the bank itself.
2. Pursuant to Section 6(c), Applicants request that the Commission
amend the Order to grant exemptions from Sections 26(a)(2)(C) and
27(c)(2) of the 1940 Act to the extent necessary to permit Northbrook
to deduct mortality and expense risk charge of 1.38% from the assets of
the Variable Account in connection with the issuance of the Amended
Contracts for which the Enhanced Death Benefit option has been elected.
3. Applicants represent that the 1.25% mortality and expense risk
charge for the Standard Death Benefit is reasonable in relation to the
risks assumed by Northbrook under the Amended Contracts and reasonable
in amount as determined by industry practice with respect to comparable
annuity products. Applicants state that this representation is based
upon their analysis of publicly available information about comparable
industry products, taking into consideration such factors as current
charge levels and benefits provided, the existence of expense charge
guarantees and guaranteed annuity rates. Northbrook represents that it
will maintain at its home office, a memorandum, available to the
Commission, setting forth in detail the products analyzed in the course
of, and the methodology and results of, its comparative review.
4. Applicants represent that the mortality risk charge of 0.13% for
the Enhanced Death Benefit is reasonable in relation to the risks
assumed by Northbrook under the Amended Contracts. Applicants state
that in making this determination, Northbrook conducted a large number
of trials at various issue ages to determine the expected cost of the
Enhanced Death Benefit. Hypothetical asset returns were projected using
generally accepted actuarial simulation methods. 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. Each accumulated value so calculated was then
compared to the amount of the Enhanced Death Benefit payable in the
event of the hypothetical owners' death during the year in question. By
analyzing the results of several such simulations, Applicants state
that Northbrook was able to determine actuarially the level cost of
providing the Enhanced Death Benefit. Based on this analysis,
Northbrook determined that a mortality risk charge of 0.13% was
reasonable for providing the Enhanced Death Benefit. Northbrook
represents that the basis for this determination will be set forth in a
memorandum which will be maintained at its home office and will be
available to the Commission upon request.
5. Applicants acknowledge that the Early Withdrawal Charge may be
insufficient to cover all costs relating to the distribution of the
Amended Contracts. Applicants also acknowledge that, if a profit is
realized from the mortality and expense risk charge, all or a portion
of such profit may be available to pay distribution expenses not
reimbursed by the Early Withdrawal Charge. Northbrook represents that
there is a reasonable likelihood that the
[[Page 51510]]
proposed distribution financing arrangements will benefit the Variable
Account and Amended Contract owners. Northbrook represents that the
basis for that conclusion is set forth in a memorandum which will be
maintained at its home office and will be available to the Commission
upon request.
6. Northbrook represents that the Variable Account will invest only
in management investment companies which undertake, in the event they
should adopt a plan pursuant to Rule 12b-1 of the 1940 Act to finance
distribution expenses, to have a board of directors or trustees, a
majority of whom are not ``interested persons'' of the company within
the meaning of Section 2(a)(19) of the 1940 Act, formulate and approve
any such plan.
Conclusion
For the reasons set forth above, Applicants represent that the
exemptions requested 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 M. McFarland,
Deputy Secretary.
[FR Doc. 95-24348 Filed 9-29-95; 8:45 am]
BILLING CODE 8010-01-M
