[Federal Register Volume 60, Number 134 (Thursday, July 13, 1995)]
[Notices]
[Pages 36173-36176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17139]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21192; File No. 812-9274]
Connecticut General Life Insurance Company, et al.
July 6, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'' or the
``Commission'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (the ``1940 Act'').
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SUMMARY: Connecticut General Life Insurance Company (``CG Life''), CG
Variable Life Insurance Separate Account I (the ``Account''), any other
separate account established by CG Life in the future (the ``Other
Accounts'', collectively, with the Account, the ``Accounts'') to
support certain flexible premium variable life insurance policies which
are substantially similar, in all material respects, to the Existing
Contracts described below (the ``Future Contracts'', collectively, with
the Exiting Contracts, the ``Contracts'') and Cigna Financial Advisors,
Inc. (``Cigna'').\1\
\1\ Applicants represent that an amendment to the application
will be filed during the notice period and that such amendment will
include the description of the Applicants contained in this notice.
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RELEVANT 1940 ACT SECTIONS: Order requested under Section 6(c) of the
1940 Act for exemptions from Section 27(c)(2) of the 1940 Act and Rule
6e-3(T)(c)(4)(v) thereunder.
SUMMARY OF APPLICATION: Applicants seek an order to permit them to
deduct from premiums received under the Contracts issued by CG Life and
the Accounts a charge that is reasonable in relation to CG Life's
increased federal income tax burden resulting from the receipt by CG
Life of such premiums in connection with the Contracts.
FILING DATE: The application was filed on October 11, 1994 and amended
and restated on May 19, 1995. Applicants represent that an amendment to
the application will be filed during the notice period.
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 July 31, 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 interest, the reason for the request, and the issues
contested. Persons may request notification of a hearing by writing to
the Secretary of the SEC.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street NW., Washington, D.C. 20549. Applicants, Robert A. Picarello,
Esq., Connecticut General Life Insurance Company, 900 Cottage Grove
Road, Hartford, Connecticut 06002.
FOR FURTHER INFORMATION CONTACT:
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 Commission's
Public Reference Branch.
Applicant's Representations
1. CG Life, a stock life insurance company domiciled in
Connecticut, is a wholly owned subsidiary of CIGNA Holdings, Inc.,
which is, in turn, wholly owned by CIGNA Corporation. The Account,
established by CG Life on July 6, 1994 pursuant to Connecticut law, is
registered with the Commission as a unit investment trust. The assets
of the Account are divided among subaccounts, each of which will invest
in shares of one of five registered
[[Page 36174]]
investment companies (the ``Funds''). The Funds currently offer sixteen
portfolios for investment. Each of the Funds is an open-end diversified
management investment company registered under the 1940 Act. The Other
Accounts will be organized as unit investment trusts and will file
registration statements under the 1940 Act and the Securities Act of
1933.
2. Cigna will serve as the distributor and the principal
underwriter of the Existing Contracts. Applicants state that it is
expected that Cigna will also serve as the distributor and the
principal underwriter of the Future Contracts. Cigna is a wholly owned
subsidiary of Connecticut General Corporation which is, in turn, a
wholly owned subsidiary of CIGNA Corporation. Cigna is registered with
the Commission as a broker-dealer under the Securities Exchange Act of
1934, an investment advisor under the Investment Advisers Act of 1940
and is a member of the National Association of Securities Dealers, Inc.
3. The Existing Contracts are flexible premium variable life
insurance policies. The Existing Contracts are issued on an individual
basis only. The Future Contracts will be substantially similar in all
material respects to the Existing Contracts. The Contracts will be
issued in reliance on Rule 6e-3(T)(b)(13)(i)(B) under the 1940 Act.
Applicants state that CG Life will deduct 1.15% of each premium payment
made under the Contracts to cover CG Life's estimated cost for the
federal income tax treatment of deferred acquisition costs.
4. 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 how a
life insurance company must compute its itemized deductions from gross
income for federal income tax purposes. Section 848 requires an
insurance company to capitalize and amortize over a period of ten years
part of the company's general expenses for the current year. Under
prior law, these general expenses were deductible in full from the
current year's gross income.
5. The amount of deductions that must be capitalized and amortized
over ten years rather than deducted in the year incurred is based
solely upon ``net premiums'' received in connection with certain types
of insurance contracts. Section 848 of the Code defines ``net premium''
for a type of contract as gross premiums received by the insurance
company on the contracts minus return premiums and premiums paid by the
insurance company for reinsurance of its obligations under such
contracts. Applicants state that the effect of Section 848 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.
6. The amount of general deductions that must be capitalized
depends upon the type of contract to which the premiums received relate
and varies according to a schedule set forth in Section 848. Applicants
state that the Contracts are ``specified insurance contracts'' that
fall into the category of life insurance contracts, and under Section
848, 7.7% of the year's net premiums received must be capitalized and
amortized.
7. Applicants state that the increased tax burden on CG Life
resulting from 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's general deductions are reduced by $731.50 or (a)
$770 (7.7% of $10,000) minus (b) $38.50 (one-half year's portion of the
ten year amortization). This leaves $731.50 ($770 minus $38.50) subject
to taxation at the corporate tax rate of 35%. This results in an
increase in tax for the current year of $256.03 (.35 x $731.50). This
increase will be partially offset by deductions that will be allowed
during the next ten years as a result of amortizing the remainder of
the $770 ($77 in each of the following nine years and $38.50 in the
tenth year).
8. In the business judgment of CG Life, a discount rate of 10% is
appropriate for use in calculating the present value of CG Life's
future tax deductions resulting from the amortization described above.
Applicants state that CG Life seeks an after tax rate of return on the
investment of its capital in excess of 10%. To the extent that capital
must be used by CG Life to meet its increased federal tax burden under
Section 848 resulting from the receipt of premiums, such capital is not
available to CG Life for investment. Thus, Applicants argue, the cost
of capital used to satisfy CG Life's increased federal income tax
burden under Section 848 is, in essence, CG Life's after tax rate of
return on capital; and, accordingly, the rate of return on capital is
appropriate for use in this present value calculation.
9. Applicants submit that, to the extent that the 10% discount rate
is lower than CG Life's actual targeted rate of return, a measure of
comfort is provided that the calculation of CG Life's increased tax
burden attributable to the receipt of premiums will continue to be
reasonable over time, even if the corporate tax or the targeted after
tax rate of return applicable to CG Life is reduced. CG Life undertakes
to monitor the tax burden imposed on it and to reduce the charge to the
extent of any significant decrease in the tax burden.\2\
\2\ Applicants represent that an amendment to the application
will be filed during the notice period and that such amendment will
include the representations contained in paragraph nine of this
notice.
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10. In determining the after tax rate of return used in arriving at
the 10% discount rate, Applicants state that CG Life considered a
number of factors, including: Historical capital costs; market interest
rates; CG Life's anticipated long term growth rate; the risk level for
this type of business; and inflation. CG Life represents that such
factors are appropriate factors to consider in determining CG Life's
cost of capital. Applicants state that CG Life first projects its
future growth rate based on its sales projections, the current interest
rates, the inflation rate, and the amount of capital that CG Life can
provide to support such growth. CG Life then uses the anticipated
growth rate and the other factors enumerated above to set a rate of
return on Capital that equals or exceeds this rate of growth.
Applicants state that CG Life seeks to maintain a ratio of capital to
assets that is established based on CG Life's judgment of the risks
represented by various components of CG Life's assets and liabilities.
Applicants state that maintaining the ratio of capital to assets is
critical to offering competitively priced products and, as to CG Life,
to maintaining a competitive rating from various rating agencies.
Consequently, Applicants state that CG Life's capital should grow at
least at the same rate as do CG Life's assets.
11. Applying the 10% discount rate, and assuming a 35% corporate
income tax rate, the present value of the tax effect of the increased
deductions allowable in the following ten years amounts to a federal
income tax savings of $160.40. Thus, the present value of the increased
tax burden resulting from the effect of Section 848 on each $10,000 of
net premiums received under the Contracts is $95.63, i.e., $256.03
minus $160.40 or 1.47%.
12. State premium taxes are deductible in computing federal income
taxes. Thus, CG Life does not incur incremental federal income tax when
it passes on state premium taxes to owners of the Contracts.
Conversely, federal income taxes are not deductible in computing CG
Life's federal income taxes. To compensate CG Life fully for
[[Page 36175]]
the impact of Section 848, therefore, it would be necessary to allow CG
Life to impose an additional charge that would make CG Life whole not
only for the $95.63 additional federal income tax burden attributable
to Section 848 but also for the federal income tax on the additional
$95.63 itself. This federal income tax can be determined by dividing
$95.63 by the complement of the 35% federal corporate income tax rate,
i.e., 65%, resulting in an additional charge of $147.12 for each
$10,000 of net premiums, or 1.47%.
13. Based on prior experience, CG Life expects that all of its
current and future deductions will be fully taken. It is the judgment
of CG Life that a charge of 1.15% would reimburse CG Life for the
impact of Section 848 on CG Life's federal income tax liabilities.
Applicants represent that the charge to be deducted by CG Life pursuant
to the relief requested is reasonably related to the increased federal
income tax burden under Section 848, taking into account the benefit to
CG Life of the amortization permitted by Section 848, and the use by CG
Life of a discount rate of 10% in computing the future deductions
resulting from such amortization, such rate being the equivalent of CG
Life's cost of capital.
14. While the application states that CG Life believes that a
charge of 1.15% of premium payments would reimburse CG Life for the
impact of Section 848 (as currently written) on CG Life's federal
income tax liabilities, the application also states, however, that CG
Life believes that it will have to increase this charge if any future
change in, or interpretation of Section 848, or any successor
provision, results in an increased federal income tax burden due to the
receipt of premiums. Such an increase could result from a change in the
corporate federal income tax rate, a change in the 7.7% figure, or a
change in the amortization period.
Applicants' Legal Analysis
1. 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 the extent
necessary to permit deductions to be made from premium payments
received in connection with the Contracts. The deductions would be in
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 ``sales
load'' for the purposes of Section 27 of the 1940 Act and the
exemptions from various provisions of that Section found in Rule 6e-
3(T)(b)(13).
2. Section 6(c) of the 1940 Act provides, in pertinent part, that
the Commission may, by order upon application, conditionally or
unconditionally exempt any person, security or transaction from any
provision of the 1940 Act if and to the extent that such 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 the provisions of the 1940 Act.
Section 27(a)(2) and Rule 6e-3(T)(c)(4)
1. 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. 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. Rule 6e-3(T)(b)(13)(iii) provides, subject to certain
conditions, exemptions from Section 27(c)(2) that include permitting a
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.''
2. Rule 6e-3(T)(c)(4)(v) defines ``sales load'' charged during a
contract period as the excess of any payments made during the period
over the sum of certain specified charges and adjustments, including
``a deduction for and approximately equal to state premium taxes.''
3. Applicants submit that the deduction for federal income tax
charges, proposed to be deducted in connection with the Contracts, is
akin to a state premium tax charge in that it is an appropriate charge
related to CG Life's tax burden attributable to premiums received.
Thus, Applicants submit that the proposed deduction be treated as other
than sales load, as is a state premium tax charge, for purposes of the
1940 Act.
4. Applicants argue that the requested exemptions from Rule 6e-
3(T)(c)(4) are necessary in connection with Applicants' reliance on
certain provisions of Rule 6e-3(T)(b)(13), and particularly on
subparagraphs (b)(13)(i) of the Rule, which provides exemptions from
Sections 27(a)(1) and 27(h)(1) of the 1940 Act. Issuers and their
affiliates may only 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). Applicants state that, depending upon 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. Although 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), Applicants state that they
have found no public policy reason for including these deductions in
``sales load.''
5. The public policy that underlies Rule 6e-3(T)(b)(13)(i), like
that which underlies Sections 27(a)(1) and 27(h)(1) of the 1940 Act, 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 as sales load would not in any way further this legislative
purpose because such a deduction has no relation to the payment of
sales commissions or other distribution expenses. Applicants state that
the Commission has concurred with this conclusion by excluding
deductions for state premium taxes from the definition of ``sales
load'' in Rule 6e-3(T)(c)(4).
6. Applicants assert that the source for the definition of ``sales
load'' found in the Rule supports this analysis. Applicants state that
the Commission's intent in adopting such provisions was to tailor the
general terms of Section 2(a)(35) of the 1940 Act to variable life
insurance contracts. Just as the percentage limits of Sections 27(a)(1)
and 27(h)(1) depend on the definition of ``sales load'' in Section
2(a)(35) for their efficacy, the percentage limits in Rule 6e-
3(T)(b)(13)(i) depend on Rule 6e-3(T)(c)(4) which does not depart, in
principle, from Section 2(a)(35).
7. Section 2(a)(35) excludes deductions from premiums for ``issue
taxes'' from the definition of ``sales load'' under the 1940 Act.
Applicants submit that this suggests that it is consistent with the
policies of the 1940 Act to exclude from the definition of ``sales
load'' in Rule 6e-3(T) deductions made to pay an insurance company's
costs attributable to its tax obligations. Section 2(a)(35) also
excludes administrative expenses or fees that are ``not properly
chargeable to sales or promotional activities.'' Applicants argue that
this suggests that the only deductions intended to fall within the
[[Page 36176]]
definition of ``sales load'' are those that are properly chargeable to
such activities. Because the proposed deductions will be used to
compensate CG Life for its increased federal income tax burden
attributable to the receipt of premiums, and are not properly
chargeable to sales or promotional activities, this language in Section
2(a)(35) is another indication that not treating such deductions as
``sales load'' is consistent with the policies of the 1940 Act.
8. Applicants assert that the terms of the relief requested with
respect to Contracts to be issued through the Accounts are consistent
with the standards enumerated in Section 6(c) of the 1940 Act. Without
the requested relief, CG Life would have to request and obtain
exemptive relief for each Contract to be issued through one of the
Accounts. Applicants state that such additional requests for exemptive
relief would present no issues under the 1940 Act not already addressed
in this request for exemptive relief.
9. Applicants assert that the requested relief is appropriate in
the public interest because it would promote competitiveness in the
variable life insurance market by eliminating the need for CG Life to
file redundant exemptive applications, thereby reducing administrative
expenses and maximizing efficient use of resources. The delay and
expense involved in having to seek repeated exemptive relief would
impair the ability of CG Life and the Accounts to take advantage fully
of business opportunities as those opportunities arise. Additionally,
Applicants state that the requested relief is consistant with the
purposes of the 1940 Act and the protection of investors for the same
reasons. If CG Life were required to seek exemptive relief repeatedly
with respect to the same 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 and the Accounts.
Conditions for Relief
1. Applicants represent that CG Life will monitor the
reasonableness of the charge to be deducted by CG Life pursuant to the
requested exemptive relief.
2. Applicants represent that the registration statement for each
Contract under which the charge referenced in paragraph one of this
section 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 increased federal income tax burden under Section
848 resulting from the receipt of premiums.
3. Applicants represent that the registration statement for each
Contract under which the charge referenced in paragraph one of this
section 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 that is used in calculating such charge and the relationship
that such charge has 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.
4. Applicants undertake to rely on the exemptive relief requested
herein with respect to Future Contracts only where the contracts are
substantially similar in all material respects to the Existing
Contracts.
Conclusion
Applicants submit that, for the reasons and upon the facts set
forth above, the requested exemptions from Section 27(c)(2) of the 1940
Act and Rule 6e-3(T)(c)(4)(v) thereunder to permit CG Life to deduct
1.15% of premium payments under the Contracts meet the standards set
forth in Section 6(c) of the 1940 Act. In this regard, Applicants
assert that granting the relief requested in the application 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,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-17139 Filed 7-12-95; 8:45 am]
BILLING CODE 8010-01-M
