[Federal Register Volume 63, Number 237 (Thursday, December 10, 1998)]
[Notices]
[Pages 68317-68321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32826]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23587; File No. 812-11338]
UNUM Life Insurance Company of America, et al.; Notice of
Application
December 3, 1998.
AGENCY: The Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order pursuant to Section 26(b) of
the Investment Company Act of 1940 (the ``1940 Act'') approving certain
substitutions of securities.
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SUMMARY OF APPLICATION: Applicants request an order to permit certain
registered unit investment trusts to substitute shares of Fidelity
Variable Insurance Products Fund II Asset Manager Portfolio and
Fidelity Variable Insurance Products Fund Growth Portfolio for shares
of Calvert Social Balanced Portfolio of Calvert Variable Series and
shares of American Century VP Capital Appreciation of American Century
Variable Portfolios Inc. currently held by those unit investment
trusts.
APPLICANTS: UNUM Life Insurance Company of America (``UNUM''), UNUM's
VA-I Separate Account (the ``UNUM Account''), First UNUM Life Insurance
Company (``First UNUM''), and First UNUM's VA-I Separate Account (the
``First UNUM Account'') (the UNUM Account, together with the First UNUM
Account, the ``Accounts'').
FILING DATE: The application was filed on October 2, 1998.
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 Secretary of the
Commission 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 December 28, 1998, 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 writer's interest, the reason for the request, and the
issues contested. Persons may request notification 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 Rosemary Moore,
Esq., UNUM Life Insurance Company of America, 2211 Congress Street,
Portland, Maine 04122. Copies to William R. Galeota, Esq., Shea &
Gardner, 1800 Massachusetts Avenue, NW., Washington, DC 20036 and
Kimberly J. Smith, Esq., Sutherland Asbill & Brennan LLP, 1275
Pennsylvania Avenue, NW., Washington, DC 20004-2415.
FOR FURTHER INFORMATION CONTACT:
Ethan D. Corey, Senior Counsel, at (202) 942-0675, or Kevin M.
Kirchoff, Branch Chief, at (202) 942-0672, Office of Insurance
Products, Division of Investment Management.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application; the complete application may be obtained for a fee from
the Public Reference Branch of the Commission, 450 5th Street, NW.,
Washington, DC 20549 (tel. (202) 942-8090).
Applicants' Representations
1. UNUM is a life insurance company originally chartered under
Maine law in 1966. UNUM is a subsidiary of UNUM Holding Company and its
wholly-owned parent company, UNUM Corporation. UNUM is the depositor
and sponsor of the UNUM Account.
2. First UNUM is stock life insurance company organized under New
York law in 1978. First UNUM is a subsidiary of UNUM Holding Company
and its wholly-owned parent company, UNUM Corporation. First UNUM is
the depositor and sponsor of the First UNUM Account.
3. On October 1, 1996, UNUM completed the sale of its tax-sheltered
annuity business to the Lincoln National Life Insurance Company
(``Lincoln National''), pursuant to an acquisition agreement with
Lincoln National (the ``Acquisition Agreement''). Under the Acquisition
Agreement, Lincoln National assumed UNUM's obligations under contracts
previously issued through the UNUM Account, and Lincoln Life & Annuity
Company of New York (``LLANY'') assumed First UNUM's obligations under
contracts previously issued through the First UNUM Account, other than
in each case those obligations under contracts held by contractowners
and/or participants who neither consented nor were
[[Page 68318]]
deemed to have consented to the assumption (``Unassumed Contracts'').
4. Separate account assets relating to the Unassumed Contracts
continue to be maintained in the UNUM Account or the First UNUM
Account, respectively. Unassumed Contracts are administered by Lincoln
National (if issued by UNUM) or LLANY (if issued by First UNUM).
5. The Unassumed Contracts are group flexible premium deferred
variable annuity contracts issued by UNUM (for the UNUM Account) or
First UNUM (for the First UNUM Account). Currently, transfers of cash
value can be made in unlimited amounts each contract year among and
between the sub-accounts available as investment options under the
Contracts without the imposition of a transfer charge. All of the
Unassumed Contracts reserve to UNUM or First UNUM, as applicable, the
right to restrict transfer privileges.
6. The UNUM Account is registered under the 1940 Act as a unit
investment trust (File No. 811-5803). The UNUM Account currently
consists of nine sub-accounts. Each sub-account currently invests its
assets exclusively in shares of the following series of the following
open-end management investment companies (``Portfolios''): Dreyfus
Stock Index Fund; Calvert Social Balanced Portfolio of Calvert Variable
Series; Small Cap Portfolio of Dreyfus Variable Investment Fund;
Fidelity Variable Money Market Portfolio; Fidelity Variable Insurance
Products Fund II (``VIP II'') Asset Manager Portfolio, American Century
VP Capital Appreciation and American Century VP Balanced of American
Century Variable Portfolios Inc.; and International Stock Portfolio of
T. Rowe Price International Series.
7. The First UNUM Account is registered under the 1940 Act as a
unit investment trust (File No. 811-6455). The First UNUM Account
currently consists of nine sub-accounts. Since inception, each sub-
account of the First UNUM Account has invested in the same Portfolios
as those available under the UNUM Account.
8. The investment objective of the Calvert Social Balanced
Portfolio, a non-diversified fund, is to achieve a total return greater
than the rate of inflation through an actively managed, non-diversified
portfolio of common and preferred stocks, bonds, and money market
instruments which offer income and capital growth opportunity and which
satisfy the social concern criteria established for the Portfolio. The
Portfolio invests in enterprises that make a significant contribution
to society through their products and services and through the way they
do business. The Calvert Social Balanced Portfolio's investment
objective is not fundamental and may be changed at any time with 60
days notice to shareholders. The Calvert Asset Management Company, Inc.
serves as the Fund's investment adviser.
9. The investment objective of the VIP II Asset Manager Portfolio,
a diversified fund, is to achieve high total return with reduced risk
over the long term. It seeks to achieve this objective by diversifying
its investments across stocks, bonds, and short-term and money market
instruments, both in the U.S. and abroad. It may invest in all types of
equity securities and short-term and money market instruments, and all
types of fixed income securities with maturities greater than one year.
Fidelity Management & Research Company (``FMR'') is the manager of the
VIP II Asset Manager Portfolio.
10. The investment objective of American Century VP Capital
Appreciation is to seek capital growth. It seeks to achieve its
investment objective by investing in common stocks (including
securities and convertibles into common stocks and other equity
equivalents) and other securities that meet certain fundamental and
technical standards of selection and have, in the opinion of its
investment manager, better than average potential for appreciation. It
seeks to stay fully invested in such securities, regardless of the
movement of stock prices generally. American Century Investment
Management, Inc. manages American Century VP Capital Appreciation.
11. The investment objective of the VIP Growth Portfolio is capital
appreciation. It pursues its objective by investing primarily in common
stocks. It is not restricted to any one type of security and may pursue
capital appreciation through the purchase of bonds and preferred
stocks. FMR is the manager of the VIP Growth Portfolio.
12. Applicants assert that the performance of the VIP II Asset
Manager Portfolio and the VIP Growth Portfolio (collectively, the
``Substitute Funds'') has been better than the performance of the
Calvert Social Balanced Portfolio and the American Century VP Capital
Appreciation (collectively, the ``Replaced Funds'') on a historical
basis. Applicants also assert that the expenses of the Substitute Funds
have been lower than those of the Replaced Funds.
13. The following chart shows the standard average annualized total
returns for the Replaced Funds for the past two years as well as the
total return for each Replaced Funds since its date of inception.
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Standard total return
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Inception of
Replaced funds portfolio
through 12/31/ 1997 (percent) 1996 (percent)
97 (percent)
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Calvert Social Balanced:
(Inception date: September 27, 1982)........................ 11.20 20.08 12.62
American Century VP Capital:
Appreciation (Inception date: November 20, 1987)............ 4.34 -3.26 -4.32
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14. The chart below provides the average annual total returns for
the Substitute Funds for the past two years as well as standard total
return since date of inception. Each Substitute Fund has outperformed
the corresponding Replaced Fund during each period shown.
[[Page 68319]]
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Total return of substitute portfolios
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Inception of
Substitute funds fund through 1997 1996
12/31/97 (percent) (percent)
(percent)
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VIP II Asset Manager Portfolio:
(Inception date: September 6, 1989)......................... 12.73 20.65 14.60
VIP Growth Portfolio:
(Inception date: October 9, 1986)........................... 17.55 23.48 14.71
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15. The chart below shows the approximate size and expense ratios
for each of the Replaced Funds for the past two years. Expense ratios
include management fees and operating expenses. Each Fund currently
pays a monthly management fee based on its average daily net assets at
the following annual rates: Calvert Social Balanced Portfolio, 0.70%
(plus or minus a fee adjustment of 0.05% to 0.15%) and American Century
VP Capital Appreciation, 1.00%. As of October 1, 1998, the management
fee for the American Century VP Capital Appreciation will be: 1.00% of
the first $500 million, 0.95% of the next $500 million, and 0.90% of
the excess over $500 million.
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Net assets at
Replaced funds December 31 Expense ratio
(in thousands) (percent)
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Calvert Social Balanced:
1996................................ $161,473 0.81
1997................................ 227,834 0.80
June 30, 1998 (inception date:
September 27, 1982)................ 275,385 0.77
American Century VP Capital
Appreciation:
1996................................ $1,313,865 1.00
1997................................ 593,698 1.00
June 30, 1998 (inception date:
November 20, 1987)................. 515,262 1.00
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16. The next chart provides the approximate size and expense ratios
for each of the Substitute Funds for the past two and one-half years.
Expense ratios include management fees and operating expenses. Each
Substitute Fund currently pays a monthly management fee. The management
fee for each Substitute Fund is calculated by adding a group fee rate
to an individual fund fee rate, multiplying the result by the Fund's
monthly average net assets, and dividing by twelve. The group fee rate
is based on the average net assets of all the mutual funds advised by
FMR, and cannot rise above 0.52%. For December 1997, the group fee rate
for each of the VIP II Asset Manager Portfolio and the VIP Growth
Portfolio was 0.29%. The individual fund fee rate for the VIP II Asset
Manager Portfolio is 0.25% and for the VIP Growth Portfolio is 0.30%.
The management fee for each Substitute Fund for the fiscal year ended
December 31, 1997 was as follows: VIP II Asset Manager Portfolio--
0.55%; and VIP Growth Portfolio--0.60%. Each Substitute Fund has lower
expense ratios, and is significantly larger in size than the
corresponding Replaced Fund for the periods shown.
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Net assets at Expense
Substitute funds December 31 ratio\1\
(in thousands) (percent)
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VIP II Asset Manager Portfolio:
1996................................ $3,641,194 0.74
1997................................ 4,399,948 0.65
June 30, 1998 (inception date:
September 6, 1982)................. 4,965,445 0.65
VIP Growth Portfolio:
1996................................ $6,086,424 0.69
1997................................ 7,729,147 0.69
June 30, 1998 (inception date:
October 9, 1986)................... 9,398,758 0.69
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\1\ FMR, the VIP II Asset Manager Portfolio or the VIP Growth Portfolio
has entered into varying arrangements with third parties who either
paid or reduced a portion of the Funds' expenses. With these
arrangements, the VIP II Asset Manager Portfolio's expense ratio for
1996 and 1997 was 0.73% and 0.64%, respectively, and the VIP Growth
Portfolio's expense ratio for each of the 1996 and 1997 was 0.67%.
17. The charts below show a comparison of the Replaced Funds' and
the Substitute Funds' total return, standard deviation and expense
ratios for the three years ended June 20, 1998.
[[Page 68320]]
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3-year Expense ratio
3-year total standard for 3 years
Replaced funds return deviation ending 6/30/98
(percent) (percent) (percent)
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Calvert Social Balanced......................................... 16.7 14.9 0.77
American Century VP Capital Appreciation........................ -0.4 20.3 1.00
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3-year Expense ratio
3-year total standard for 3 years
Substitute Funds return deviation ending 6/30/98
(percent) (percent) (percent)
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VIP II Asset Manager Portfolio.................................. 17.4 7.7 0.65
VIP Growth Portfolio............................................ 21.5 14.4 0.69
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18. The Calvert Social Balanced Portfolio is restricted in the
investments it may make by its social concern criteria. While the VIP
II Asset Manager Portfolio does not duplicate these criteria, the
Applicants assert that the VIP II Asset Manager Portfolio offers an
investment program sufficiently similar to that of the Calvert Social
Balanced Portfolio so that Unassumed Contract Owners will be able to
pursue the same long-term investment objectives (albeit without social
criteria) through the VIP II Asset Manager Portfolio, with lower fees
and expenses and lower volatility.
19. The Calvert Social Balanced Portfolio's investment objective
(total return above the rate of inflation) and the VIP II Asset Manager
Portfolio's investment objective (high total return with reduced risk
over the long-term) are substantially similar. While the policies that
they follow to achieve their objectives are not identical, they are
both domestic hybrid funds that invest in the same types of
instruments. Applicants assert that an investor in the Calvert Social
Balanced Portfolio is attempting to achieve the same long term goals as
those sought by the VIP II Asset Manager Portfolio.
20. The investment objectives of the American Century VP Capital
Appreciation (capital growth) and the VIP Growth Portfolio (capital
appreciation) are substantially similar. While each of these Funds
seeks to achieve its objective through somewhat different investment
strategies, Applicants assert that an investor in the American Century
VP Capital Appreciation is attempting to achieve the same long-term
goals as those sought by the VIP Growth Portfolio, and through the same
type of investments (equity securities).
21. As part of an overall business plan of Lincoln National and
LLANY to make the Unassumed Contracts more competitive and more
efficient to administer and oversee, Lincoln National and LLANY have
proposed to replace the Replaced Funds with the Substitute Funds. The
proposed substitutions are consistent with this business plan, involve
Portfolios with compatible investment objectives, and after the
substitution, Unassumed Contracts will be invested in Portfolios whose
performance has been better on a historical basis.
22. UNUM and First UNUM have concurred with the determination by
Lincoln National and LLANY that the Replaced Funds are good candidates
for substitution. Applicants propose that UNUM and First UNUM replace:
(a) shares of the Calvert Social Balanced Portfolio with shares of the
VIP II Asset Manager Portfolio; and (b) shares of the American Century
VP Capital Appreciation with shares of the VIP Growth Portfolio (the
``Proposed Substitution''). Applicants propose to have UNUM and First
UNUM redeem shares of each Removed Fund in cash and purchase with the
proceeds shares of the Substitute Fund identified above.
23. All owners and prospective owners of the Unassumed Contracts
will be notified of UNUM's and First UNUM's intention to take the
necessary actions, including seeking the requested order, to substitute
portfolios. The supplements will advise owners and prospective owners
that they will be unable to allocate net purchase payments to, or
transfer cash values to, the sub-accounts of the Accounts corresponding
to each of the Replaced Funds after April 30, 1999, and that on the
date of the proposed substitution (on or about April 30, 1999, after
the relief requested has been obtained and all necessary systems
support changes have been made), the Substitute Funds will replace the
Replaced Funds as the underlying investments for such sub-accounts. In
addition, the supplements will apprise owners and prospective owners
that neither UNUM nor First UNUM will exercise any rights reserved by
it under any of the Unassumed Contracts to impose restrictions or fees
on transfers until at least thirty days after the proposed
substitutions.
24. At least sixty days before the date of the proposed
substitutions, affected owners will also be provided with a prospectus
for each Substitute Fund which includes complete current information
concerning the Substitute Funds. Thus, any owner affected by the
substitutions will have received current prospectus disclosure for each
Substitute Fund at least 60 days or more in advance of the proposed
substitutions.
25. The proposed substitutions will take place at relative net
asset value with no change in the amount of any Unassumed Contract
owner's cash value or death benefit or in the dollar value of his or
her investment in any of the Accounts. Unassumed Contract owners will
not incur any additional fees or charges as a result of the proposed
substitutions nor will their rights or UNUM's and First UNUM's
obligations under the Unassumed Contracts be altered in any way. All
expenses incurred in connection with the proposed substitutions,
including legal, accounting and other fees and expenses, will be paid
by UNUM and First UNUM or Lincoln National and LLANY. In addition, the
proposed substitutions will not impose any tax liability on Unassumed
Contract owners. The proposed substitutions will not cause the
Unassumed Contract fees and charges currently paid by existing
Unassumed Contract owners to be greater after the proposed
substitutions than before the proposed substitutions. Neither UNUM nor
First UNUM currently impose any restrictions or fees on transfers under
the Unassumed Contracts, and neither will exercise any right it may
have under the Unassumed Contracts to impose restrictions on transfers
under any of the Unassumed Contracts for a period of at least thirty
days following the proposed substitutions.
[[Page 68321]]
Applicants' Legal Analysis
1. Section 26(b) of the 1940 Act requires the depositor of a
registered unit investment trust holding the securities of a single
issuer to obtain Commission approval before substituting the securities
held by the trust. Specifically, Section 26(b) states:
It shall be unlawful for any depositor or trustee of a
registered unit investment trust holding the security of a single
issuer to substitute another security for such security unless the
Commission shall have approved such substitution. The Commission
shall issue an order approving such substitution if the evidence
establishes that it is consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of
this title.
2. Applicants state that the Proposed Substitution appears to
involve a substitution of securities within the meaning of Section
26(b) of the 1940 Act and request that the Commission issue an order
pursuant to Section 26(b) of the 1940 Act approving the Proposed
Substitution.
3. The Contracts all provide to UNUM or First UNUM the right,
subject to Commission approval, to substitute shared of another open-
end management investment company for shares of an open-end management
investment company held by a subaccount of the relevant Account.
Applicants assert that the prospectuses for the Unassumed Contracts
contain appropriate disclosure of this right.
4. Applicants assert that, although there are differences in the
objectives and policies of the Replaced Funds and the Substitute Funds,
their objectives and policies are sufficiently consistent to assure
that, following the Proposed Substitution, the achievement of the core
investment goals of the affected owners invested in the Replaced Funds
will not be frustrated.
5. Applicants assert that the performance of the Calvert Social
Balanced Portfolio was lower than that of a comparable securities index
that had lower volatility (or risk), and was lower than the median of
its peer group (domestic hybrid funds) over the three year period
ending June 30, 1998. Applicants assert that the VIP II Asset Manager
Portfolio has, however, performed better than its comparable securities
index and ranks in the top decile of a similar peer group (large blend
equities) over the three-year period ending June 30, 1998.
6. Applicants assert that the performance of American Century VP
Capital Appreciation was lower than that of a comparable securities
index that had lower volatility (or risk), and was lower than the
median of its peer group (mid-cap growth equities) over the three-year
period ending June 30, 1998. Applicants assert that while the VIP
Growth Portfolio performed below the comparable securities index and
the median of its peer group (large cap equities) over the same time
period, its performance was better than that of the comparable
securities index and the median of its peer group for the one and five
year periods ending June 30, 1998, and has substantially outperformed
American Century VP Capital Appreciation in 1996, 1997 and since the
inception of the VIP Growth Portfolio.
7. Each Substitute Fund has performed favorably over the past two
years in comparison to the Replaced Fund. While past performance is not
necessarily indicative of future performance, applicants assert that
the Proposed Substitution is appropriate in light of the performance of
the Replaced Funds.
8. Applicants assert that the Proposed Substitution would
effectively consolidate the UNUM and First UNUM assets of each
Substitute Fund with those of the corresponding Replaced Fund, with the
goal of each Substitute Fund having lower future expense ratios than
the past expense ratios of the Replaced Fund. The VIP II Asset Manager
Portfolio is a larger Fund and has a lower expense ratio than the
Calvert Social Balanced Portfolio. Moreover, the Calvert Social
Balanced Portfolio is a small Fund, which has not grown significantly,
and, Applicants assert, likely does not have prospects of significant
growth. Based on these trends, the Applicants believe that the VIP II
Asset Manager Portfolio is likelier to achieve economics of scale in
the near and long term.
9. The VIP Growth Portfolio is a larger fund and has a lower
expense ratio than American Century VP Capital Appreciation. Moreover,
Applicants assert that American Century VP Capital Appreciation has
diminished in size over the past two and one-half years, while the VIP
Growth Portfolio has gained in size over the past two and one-half
years. Based on these trends, the Applicants believe that the VIP
Growth Portfolio is likelier to achieve economies of scale in the near
and long term. With the addition of the UNUM and First UNUM assets, the
size of each Substitute Fund is expected to further increase.
Conclusion
Applicants assert that, for the reasons summarized above, the
Proposed Substitution is 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. 98-32826 Filed 12-9-98; 8:45 am]
BILLING CODE 8010-01-M
