[Federal Register Volume 60, Number 235 (Thursday, December 7, 1995)]
[Notices]
[Pages 62901-62904]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29830]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC--21560; File No. 812-9660]
Connecticut General Life Insurance Company, et al.
November 30, 1995.
AGENCY: Securities and Exchange Commission (``SEC'') or
``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``1940 Act'').
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APPLICANTS: Connecticut General Life Insurance Company (``CG Life''),
CG Variable Life Insurance Separate Account A (``Separate Account''),
and CIGNA Financial Advisors, Inc. (``CFA'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act granting exemptions from Section 27(c)(2) of the 1940 Act and
Rule 6e-3(T)(c)(4) thereunder.
SUMMARY OF APPLICATION: Applicants request an order permitting the
Separate Account and any separate accounts established in the future by
CG Life to support certain group variable universal life insurance
contracts to deduct from premium payments received an amount that is
reasonably related to the increased federal tax burden of CG Life
resulting from the application of Section 848 of the Internal Revenue
Code of 1986, as amended.
FILING DATE: The application was filed on July 12, 1995. An amended and
restated application was filed on October 13, 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 Commission 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 December 26, 1995, and should be
accompanied by proof of service on 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 a hearing by
writing to the Secretary of the Commission.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, DC
20549. Applicants, c/o Michael Berenson, Esq., Jorden Burt Berenson &
Johnson LLP, 1025 Thomas Jefferson Street, N.W., Suite 400 East,
Washington, DC 20007-0805.
FOR FURTHER INFORMATION CONTACT: Barbara J. Whisler, Senior Counsel,
or Patrice M. Pitts, Special Counsel, Office of Insurance Products
(Division of Investment Management) at (202) 272-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Public
Reference Branch of the Commission.
Applicants' Representations
1. CG Life, a stock life insurance company organized in
Connecticut, is an indirect wholly-owned subsidiary of CIGNA
Corporation (``CIGNA'').
2. The Separate Account was established by CG Life under the laws
of the state of Connecticut, and is registered as a unit investment
trust
[[Page 62902]]
under the 1940 Act. The assets of the Separate Account are owned by CG
Life, but are held separately from the other assets of CG Life and are
not chargeable with liabilities incurred in any other business
operation of CG Life. The income, capital gains and capital losses
incurred on the assets of the Separate Account are credited to or
charged against the assets of the Separate Account, without regard to
the income, capital gains or capital losses arising out of any other
business CG Life may conduct.
3. The Separate Account consists of a number of subaccounts, each
of which invests exclusively in the shares of one of seven investment
portfolios of four investment companies (the ``Funds'') registered
under the 1940 Act. The number and identity of available Funds and
investment portfolios may change from time to time.
4. In the future, the Board of Directors of CG Life may establish
additional separate accounts (the ``Future Accounts'') which may serve
as funding vehicles for group variable universal life insurance
contracts issued by CG Life. The Future Accounts will be organized as
unit investment trusts and will file registration statements under the
Securities Act of 1933 and under the 1940 Act.
5. CFA will serve as the distributor and principal underwriter of
certain group variable universal life insurance contracts (the
``Contracts'') and any group variable universal life insurance
contracts made available in the future (the ``Future Contracts'')
through the Separate Account or Future Accounts. CFA is a wholly-owned
subsidiary of CG Life. CFA is registered under the Securities Exchange
Act of 1934 as a broker-dealer, and under the Investment Advisers Act
of 1940 as an investment adviser. CFA is a member of the National
Association of Securities Dealers.
6. In the Omnibus Budget Reconciliation Act of 1990, Congress
amended the Internal Revenue Code of 1986 (the ``Code'') by, among
other things, enacting Section 848 thereof. Section 848 changed the
federal income taxation of life insurance companies by requiring them
to capitalize and amortize over a period of ten years part of their
general expenses for the current year. Under prior law, these expenses
were deductible in full from the current year's gross income.
7. The amount of expenses that must be capitalized and amortized
under Section 848 generally is determined with reference to premiums
for certain categories of life insurance and other contracts
(``specified contracts''). More specifically, an amount of expenses
equal to a percentage of the current year's net premiums (i.e., gross
premiums minus return premiums and reinsurance premiums) must be
capitalized and amortized for each specified contract. The percentage
varies, depending on the type of specified contract in question, in
accordance with a schedule set forth in Section 848.
8. The effect of Section 858 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.
9. The Contracts and any Future Contracts to which a charge for the
federal tax burden related to deferred acquisition costs (the ``tax
burden charge'') will be applied are/will be among the specified
contracts. They fall/will fall into the category of life insurance
contracts under Section 848 for which 2.05% of the net premiums
received must be capitalized and amortized.
10. The increased tax burden resulting from the application of
Section 848 may be quantified as follows. For each $10,000 of net
premiums received by CG Life under the Contracts in a given year, CG
Life may capitalize $2.05 (i.e., 205% of $10,000). $10.25 of that $205
may be deducted in the current year, leaving $194.75 (i.e., $205 minus
$10.25) subject to taxation at the corporate tax rate of 35 percent.
This works out to an increase in tax for the current year of $68.16
(i.e., 0.35 x $194.75) This increased federal income tax burden will be
partially offset by deductions allowed during the next ten years as a
result of amortizing the remainder of the $205--$20.50 in each of the
following nine years, and $10.25 in year ten.
11. To the extent the capital must be used by CG Life to satisfy
its increased tax burden under Section 848, such profits are not
available to CG Life for investment. CG Life submits that the cost of
capital used to satisfy its increased federal income tax burden under
Section 848 is, in essence, its after tax rate of return on capital.
Because CG Life seeks an after tax rate of return of 15% on its
invested capital,\1\ CG Life submits that a discount rate of 15% is
appropriate for use in calculating the present value of its future tax
deductions resulting from the amortization described above.
\1\In determining the after tax rate of return used in arriving
at this discount rate, CG Life considered a number of factors
including: the cost of capital incurred by its parent, CIGNA; market
interest rates; inflation; and the market's perception of how well
CIGNA is doing.
As of December 31, 1994, 81% of the capital of CIGNA consisted
of equity, with the remainder long-term debt. CIGNA's cost of
capital can be determined using the proportions of financing
components (i.e., debt and equity) to calculate a weighted average
cost of capital. As of August 1995, the average current yield to
maturity of CIGNA's outstanding long-term debt issues was 7.67
percent. Using a corporate tax rate of 35 percent, the after tax
cost of debt for CG Life is 4.98 percent. An estimate for the cost
of equity capital for CIGNA--computed by using the Capital Asset
Pricing Model--is 15.8 percent. Using these component costs of
capital and their related proportions, the weighted average cost of
capital for CIGNA is 13.7% (i.e., [(0.19 x 0.0498) + (0.81 x
0.158]).
The remaining factors (e.g., itnerest rates, inflation, and the
market's perception of how well CIGNA is doing) are unpredictable
and can fluctuate widely over long periods of time, causing the cost
of capital to vary at any given time. Taking these factors into
account, as well as the analysis above, CG Life has concluded that
the 15% cost of capital is appropriate and reasonable to use in
calculating the tax burden charge.
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12. Using a corporate tax rate of 35 percent, and assuming a
discount rate of 15 percent, the present value of the federal income
tax effect of the increased deductions allowable in the following ten
years is $35.12. Because this amount partially offsets the increased
tax burden, Section 848 imposes an increased tax burden on CG Life
equal to a present value of $33.04 (i.e., $68.16 minus $35.12) for each
$10,000 of net premiums received under the Contracts.
13 CG Life does not incur incremental federal income tax when it
passes on state premium taxes to contract owners because state premium
taxes are deductible when computing federal income taxes. In contrast,
federal income taxes are not tax-deductible when computing an insurer's
federal income taxes. Therefore, to offset fully the impact of Section
848, CG Life must impose an additional charge that would make it whole
not only for the $33.04 additional federal income tax burden
attributable to section 848, but also for the tax on the additional
$33.04 itself. This additional charge can be computed by dividing
$33.04 by the complement of the 35% federal corporate income tax rate
(i.e., 65%), resulting in an additional charge of $50.83 for each
$10,000 of net premiums, or 0.51% of net premiums.
14. Based on its prior experience, CG Life expects that all of its
current and future deductions will be fully taken. CG Life submits that
a charge of 0.5% of net premium payments would reimburse it for the
impact of Section 848 (as currently written) on its federal tax
liabilities. CG Life represents that a 0.5% charge is reasonably
related to its increased tax burden under Section 848, taking into
account the benefit to CG Life of the amortization permitted by
[[Page 62903]]
Section 848 and the use by CG Life of a discount rate of 15% (which is
equivalent to its cost of capital) in computing the future deductions
resulting from such amortization.
15. CG Life asserts that it may choose to increase the 0.5% charge
if future changes in, or interpretations of, Section 848 or any
successor or related provisions result in a further increased tax
burden resulting from the receipt of premiums. Such an increase could
result from, among other things, a change in the federal corporate
income tax rate, a change in the 2.05% figure, or a change in the
amortization period.
Applicants' Legal Analysis
1. Section 6(c) of the 1940 Act provides, in pertinent part, that
the Commission, by order upon application, may exempt any person,
security or transaction (or any class or classes of persons, securities
or transactions) from provisions of the 1940 Act or any rules
thereunder, if and to the extent that the 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
provisions of the 1940 Act.
2. 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 Rule 6e-3(T)(c)(4)(v) thereunder to permit Applicants
to deduct form premium pavements received in connection with the
Contracts and Future Contracts an amount that is reasonable in relation
to CG 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 ``sale load'' for the purposes of Section 27 of
th3 1940 Act and the exemptions from various provisions of that Section
found in Rule 6e-3(T)(b)(13).
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. Sections 27(a)(1)
and 27(h)(1), in effect, limit sales load on periodic payment plan
certificates to 9% of total payments.
4. 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 and any Future Contracts. For example,
subject to certain conditions, Rule 6e-3(T)(b)(13)(iii) provides
exemptions from Section 27(c)(2) that include permitting the 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.''
5. Rule 6e-(T)(c)(4)(v) defines ``sales load'' charged during a
contract period as the excess of any payment made during the period
over the sum of certain specified charges and adjustments, including
``[a] deduction for and approximately equal to state premium taxes.''
Applicants submit that the proposed tax burden charge is akin to a
state premium tax charge in that it is an appropriate charge related to
CG Life's federal tax burden attributable to premiums received under
the Contracts and any Future Contracts.
6. Applicants represent that the requested exemptions from Rule 6e-
3(T)(c)(4)(v) are necessary in connection with Applicants' reliance on
certain provisions of Rule 6e-(T)(b)(13), particularly on subparagraph
(b)(13)(i), which provides exemptions from Sections 27(a)(1) and
27(h)(1) of the 1940 Act. Issuers and their affiliates may rely on Rule
6e-3(T)(b)(13)(i) if they meet the Rule's alternative limitations on
``sales load,'' as defined in Rule 6e-3(T)(c)(4). Depending on 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. Applicants acknowledge that 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 Rule 6e-
3(T)(c)(4). Nevertheless, Applicants submit that there is no public
policy reason for treating such increased federal tax burden as ``sales
load.''
7. Applicants assert that the public policy which underlies Rule
6e-3(T)(b)(13)(i), like that which underlies Sections 27(a)(1) and
27(h)(1), 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 a sales load would in no way further
this legislative purpose because such a deduction has no relation to
the payment of sales commissions or other distribution expenses.
Applicants assert that the Commission has concurred in this conclusion
by excluding deductions for state premium taxes from the Rule 6e-
3(T)(c)(4) definition of ``sales load.''
8. Applicants assert that the genesis of Rule 6e-3(T)(c)(4)
supports this analysis. In this regard, Applicants note that Section
2(a)(35) of the 1940 Act provides a scale against which the percent
limits of Sections 27(a)(1) and 27(h)(1) thereof may be measured.
Applicants submit that the Commission's intent in adopting Rule 6e-
3(T)(c)(4) was to tailor the general terms of Section 2(a)(35) of the
1940 Act to variable life insurance contracts in order, among other
things, to facilitate verification by the Commission of compliance with
the sales load limits set forth in Rule 6e-3(T)(b)(13)(i). Applicants
submit that Rule 6e-3(T)(c)(4) does not depart, in principal, from
Section 2(a)(35).
9. Applicants assert that the language of Section 2(a)(35) suggests
that the only charges or deductions intended to fall within the
definition of ``sales load'' are those that are ``properly chargeable
to sales or promotional activities.'' Because the proposed tax burden
charge will be used to pay costs attributable to CG Life's federal tax
liabilities, and such costs are not properly chargeable to sales or
promotional activities, Applicants submit that not treating the
proposed tax burden charge as sales load is consistent with the
purposes intended by the policies of the 1940 Act.
10. Applicants further assert that Section 2(a)(35) excludes from
the definition of ``sales load'' under the 1940 Act deductions from
premiums for ``issue taxes.'' Applicants submit that the exclusion of
charges for expenses attributable to federal taxes from sales load (as
defined in Section 2(a)(35)) is consistent with the policies of the
1940 Act. By extension, Applicants submit, it is equally consistent to
exclude such charges, including the proposed tax burden charge, from
the definition of ``sales load'' in Rule 6e-3(T)(c)(4).
11. For these reasons, Applicants assert that deducting a charge
from variable life insurance contract premium payments for an insurer's
tax burdens attributable to its receipt of such payments, and excluding
that charge from sales load, is consistent with the policies of the
1940 Act. Applicants submit that this is because such a deduction is an
appropriate charge related to the insurer's tax burden attributable to
the premium payments received.
12. Applicants seek the relief requested with respect to Contracts
and Future Contracts which may be issued by CG Life. Without the
requested relief, CG Life would have to request and obtain exemptive
relief for each Future
[[Page 62904]]
Contract to be issued. Such additional requests for exemptive relief
would present no issues under the 1940 Act not already addressed in
this request for exemptive relief.
13. Applicants assert that the standards of Section 6(c) of the
1940 Act are satisfied because the requested relief is appropriate in
the public interest and consistent with the purposes of the 1940 Act
and the protection of investors. Applicants submit that the requested
relief would promote competitiveness in the variable life insurance
market by eliminating the need for CG Life to file redundant exemptive
applications, thereby reducing its administrative expenses and
maximizing efficient use of its resources. Applicants further submit
that the delay and expense involved in having to seek exemptive relief
repeatedly would impair the ability of CG Life to take full advantage
of business opportunities as they arise. Moreover, if CG Life were
required to seek exemptive relief repeatedly with respect to the 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 CG Life.
Conditions for Relief
Applicants agree to comply with the following conditions for
relief.
1. CG Life will monitor the tax burden imposed on it, and
undertakes to reduce the tax burden charge to the extent of any
significant decrease in tax burden.
2. The registration statement for any Contracts and Future
Contracts under which a tax burden charge 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 CG Life's
increase federal income tax burden under Section 848 of the Code
resulting from the receipt of premiums.
3. The registration statement for any Contracts and Future
Contracts under which a tax burden charge is deducted will contain
as an exhibit an actuarial opinion as to: (i) the reasonableness of
the charge in relation to CG Life'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 used in
calculating such charge, and the relationship of that charge to CG
Life's cost of capital; and (iii) the appropriateness of the factors
taken into account by CG Life in determining the after tax rate of
return.
Conclusion
For the reasons and upon the facts set forth above, Applicants
submit that the requested exemptions from Section 27(c)(2) of the 1940
Act and Rule 6e-3(T)(c)(4)(v) thereunder--to permit the deduction of
0.5% of premium payments under the Contracts and any Future Contracts--
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, by
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29830 Filed 12-6-95; 8:45 am]
BILLING CODE 8010-01-M
