[Federal Register Volume 59, Number 89 (Tuesday, May 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11155]
[[Page Unknown]]
[Federal Register: May 10, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20274; File No. 812-8782]
The Travelers Insurance Company, et al.
May 3, 1994.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
APPLICANTS: The Travelers Insurance Company (``The Travelers'') and
The Travelers Fund BD for Variable Annuities (``Fund BD'').
RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
Act for exemptions from Sections 26(a)(2)(C) and 27(c)(2) thereof.
SUMMARY OF APPLICATION: Applicants seek an order permitting the
deduction from the assets of Fund BD of a mortality and expense risk
charge imposed under certain individual flexible premium variable
annuity contracts (``Contracts'').
FILING DATE: The application was filed on January 21, 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 by writing to the Commission's Secretary
and serving Applications with a copy of the request, personally or by
mail. Hearing requests must be received by the Commission by 5:30 p.m.,
on May 31, 1994, and should be accompanied by proof of service on the
Applicants in the form of an affidavit or, for lawyers, a certificate
of service. Hearing requests should state the nature of the writers
interest, the reason for 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, DC 20549. Applicants, c/o Julie E. Rockmore,
Counsel, The Travelers Insurance Company, One Tower Square, Hartford,
Connecticut 06183-1051.
FOR FURTHER INFORMATION CONTACT: Joyce M. Pickholz, Senior Counsel, or
Wendell M. Faria, Acting Assistant Director, on (202) 942-0670, Office
of Insurance Products, Division of Investment Management.
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. The Travelers, an indirect wholly-owned subsidiary of The
Travelers Inc., is a stock life insurance company organized under the
laws of the State of Connecticut in 1864.
2. Fund BD was established by The Travelers on October 22, 1993 as
a separate account under Connecticut law to fund individual and group
flexible premium deferred variable annuity contracts issued by The
Travelers. Fund BD is subdivided into subaccounts, each of which will
invest its assets exclusively in the shares of one of the portfolios of
the SBA Variable Products Series Fund, an open-end series-type
management investment company.
3. The Contract is an individual flexible premium variable annuity
contract which can be purchased on a qualified or nonqualified basis.
Purchase payments under the Contract may be allocated to the
subaccounts of Fund BD and/or a fixed account. Upon retirement, annuity
payments will be made on a fixed or variable basis.
4. If either the annuitant or the Contract owner dies before the
maturity date of the Contract, The Travelers will pay a death benefit.
Under the standard death benefit, The Travelers will pay the greatest
of (a) the Contract value; (b) the total purchase payments under the
Contract; or (c) the Contract value on the fifth Contract year
anniversary immediately preceding the receipt by The Travelers of proof
of death, less applicable premium tax or surrenders no previously
deducted. If the death occurs after age 75 but before age 85, the
standard benefit will be the greatest of (a) or (b) above or the
Contract value on the latest fifth Contract year on or before the
deceased's 75th birthday, less applicable premium tax or surrenders not
previously deducted. After age 85, the benefit will be the Contract
value. Under the enhanced death benefit, The Travelers will pay the
greater of the Contract value or a guaranteed death benefit equal to
purchase payments (minus surrenders and applicable premium taxes)
increased by 5% on every Contract date anniversary up to the
anniversary following the deceased's 75th birthday, with a maximum
benefit of 200% of purchase payments minus surrenders and minus
applicable premium taxes. After age 75 but before age 85, the enhanced
benefit will be the greater of the guaranteed death benefit as of the
deceased's 75th birthday, plus additional purchase payments, minus
surrenders and applicable premium taxes or the Contract value less
premium taxes. After age 85, The Travelers will pay the Contract value,
less applicable premium taxes.
5. The Travelers will assess an annual Contract administrative
charge of $30 under the Contracts. This charge will not be assessed
after an annuity payout has begun, at the death of the annuitant or the
Contract owner, or if the Contract owner has a Contract value greater
than $40,000 on the assessment date. The Travelers also will assess the
sub-accounts of Fund BD a daily asset charge at an effective rate of
0.15% per annum for administrative expenses. Applicants represent that
these charges cannot be increased during the life of the Contracts and
that they represent reimbursement for only the actual administrative
costs expected to be incurred over the life of the Contracts.
6. To compensate The Travelers for assuming mortality and expense
risks, The Travelers will deduct from the subaccounts of Fund BD an
amount equal on an annual basis to a maximum of 1.02% of the net asset
value of the subaccounts in connection with Contracts providing the
standard death benefit, and a maximum of 1.30% of the net asset value
of the subaccounts in connection with Contracts providing the enhanced
death benefit. The Travelers estimates that in connection with the
1.02% fee approximately 75% of the fee is for assumption of the
mortality risk and 25% of the fee is for assumption of the expense
risk, and in connection with the 1.30% fee approximately 80% of the fee
is for assumption of the mortality risk and 20% of the fee is for
assumption of the expense risk.
7. The Travelers assumes certain mortality risks by its contractual
obligation to continue to make annuity payments for the life of the
annuitant under annuity options which involve life contingencies. This
assures that neither the annuitant's own longevity nor an improvement
in life expectancy generally will have an adverse effect on the annuity
payments received under a Contract. The Travelers assumes additional
mortality and expense risks by its contractual obligation to pay either
the standard or the enhanced death benefit if either the annuitant or
the Contract owner dies prior to the maturity date. Because the
enhanced death benefit provides a potentially higher level of benefits
than the standard death benefit, the mortality risks for the enhanced
death benefit exceed those for the standard death benefit. Therefore,
Contracts with an enhanced death benefit are assessed a higher
mortality and expense risk charge. The Travelers assumes an expense
risk because the administrative charge may be insufficient to cover
actual expense.
8. Applicants state that if the administrative charges and the
mortality and expense risk charge are insufficient to cover the
expenses and costs assumed, the loss will be borne by The Travelers.
Conversely, if the amount deducted proves more than sufficient, the
excess will represent a profit to The Travelers. The Travelers does not
expect to profit from the administrative charges, however, it does
expect to profit from the mortality and expense risk charge. Any profit
would be available to The Travelers for any proper corporate purpose,
including payment of distribution expenses.
9. No sales charge is collected or deducted at the time purchase
payments are applied under the Contracts. A contingent deferred sales
charge (``surrender charge'') will be assessed upon certain full or
partial surrenders. A surrender charge applies if all or part of the
Contract value is surrendered during the first six years following a
purchase payment. The surrender charge starts at 6% of a purchase
payment in the first, second and third years following the payment, and
reduces to 3% in the fourth year, 2% in the fifth year and 1% in the
sixth year following the payment. There is no charge after the sixth
year following a purchase payment. After the first Contract year,
Contract owners may surrender 15% of their Contract value (as of the
beginning of the Contract year) without incurring a surrender charge
(the ``free withdrawal amount''). The free withdrawal allowance applies
to partial surrenders of any amount and to full surrenders except full
surrenders where the Contract value is directly transferred to annuity
contracts issued by other financial institutions. In addition, there is
no charge on Contract earnings, which equal: (1) The Contract value;
minus (2) the sum of all purchase payments received that have not been
previously surrendered; minus (3) the 15% free withdrawal amount.
Surrenders will be deemed to have been taken first from any applicable
15% free withdrawal amount; next from purchase payments (on a first-in,
first-out basis); and finally from Contract earnings (in excess of any
15% free withdrawal amount). The Travelers does not expect that the
surrender charge will cover sales and distribution expense incurred in
connection with the Contracts.
Applicants' Legal Analysis
1. Sections 26(a)(2)(C) and 27(c)(2) of the 1940 Act require that
all payments received under a periodic payment plan certificate be held
by a qualified trustee or a custodian and held under arrangements which
prohibit any payment to the depositor or principal underwriter except
for the payment of a fee, not exceeding such reasonable amount as the
Commission may prescribe, for bookkeeping and other administrative
services.
2. Applicants represent that the 1.02% mortality and expense risk
charge for Contracts providing the standard death benefit is reasonable
in relation to the risks assumed by The Travelers under the Contracts
and is within the range of industry practice for comparable annuity
contracts. The Travelers states that it has reviewed publicly available
information regarding products of other companies taking into
consideration such factors as guaranteed minimum death benefits,
minimum initial and subsequent purchase payments, other contract
charges, the manner in which charges are imposed, market sector,
investment options and the availability of a product for use in
qualified and non-qualified plans. Based on this review, The Travelers
has concluded that the mortality and expense risk charge for Contracts
providing the standard death benefit is within the range of charges
determined by industry practice. The Travelers represents that it will
maintain at its principal office, and make available upon request of
the Commission or its staff, a memorandum setting forth in detail the
variable annuity products analyzed and the methodology used in, and the
results of, the comparative review.
3. Applicants represent that the mortality and expense risk charge
of 1.30% for the enhanced death benefit Contracts is reasonable in
relation to the risks assumed by The Travelers under the Contracts. In
arriving at this determination, The Travelers ran a large number of
computer generated trials at various issue ages to determine the
expected cost of the enhanced death benefit. First, hypothetical asset
returns were projected using generally accepted actuarial simulation
methods. For each asset return pattern thus 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
enhanced death benefit payable in the event of the hypothetical
annuitant's or Contract owner's death during the year in question. By
analyzing the results of several thousand such simulations, The
Travelers was able to determine actuarially the level cost of providing
the enhanced death benefit. Based on this analysis, The Travelers
determined that an additional mortality risk charge of 0.28% was a
reasonable charge for the enhanced death benefit as compared to the
charge for the standard death benefit. The Travelers undertakes to
maintain at its home office a memorandum, available to the Commission
or its staff upon request, setting forth in detail the methodology used
in determining that the additional risk charge of 0.28% for the
enhanced death benefit is reasonable in relation to the risks assumed
by The Travelers under the Contracts.
4. Applicants acknowledge that the surrender charge may be
insufficient to cover all distribution costs and that, if a profit is
realized from the mortality and expense risk charge, all or a portion
of that profit may be offset by distribution expenses not reimbursed by
the surrender charge. In such circumstances, a portion of the mortality
and expense risk charge might be viewed as providing for a portion of
the cost relating to distribution of the Contracts. Notwithstanding
this, The Travelers has concluded that there is a reasonable likelihood
that the proposed distribution financing arrangements made with respect
to the Contracts will benefit Fund BD and Contract owners. The basis
for such conclusion is set forth in a memorandum which will be
maintained by The Travelers at its principal office and will be
available to the Commission or its staff upon request.
5. The Travelers also represents that Fund BD will invest only in
underlying mutual funds which have undertaken to have a board of
directors or board of trustees, as applicable, a majority of whom are
not ``interested persons'' under the Act, formulate and approve any
plan under Rule 12b-1 to finance distribution expenses.
Conclusion
Applicants submit for all of the reasons stated herein, that their
request for exemptions from Sections 26(a)(2)(C) and 27(c)(2) of the
Act meets the standards set out in Section 6(c) of the Act and that an
order should, therefore, be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11155 Filed 5-9-94; 8:45 am]
BILLIND CODE 8010-01-M
