[Federal Register Volume 61, Number 173 (Thursday, September 5, 1996)]
[Notices]
[Pages 46871-46874]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22579]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22185; File No. 812-10060]
Connecticut General Life Insurance Company, et al.
August 28, 1996.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for exemption under the Investment
Company Act of 1940 (``1940 Act'').
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applicants: Connecticut General Life Insurance Company (``CG Life''),
CG Corporate Insurance Variable Life Separate Account 02 (``Account
02''), 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)(v) thereunder.
summary of application: Applicants request an order permitting Account
02 and any other separate account established in the future by CG Life
(the ``Future Accounts,'' collectively, with Account 02, the
``Accounts'') to support certain flexible premium variable life
insurance contracts (``Current Contracts'') or contracts which are
substantially similar in all material respects to the Current Contracts
(``Future Contracts'') issued by CG Life to deduct a charge (``federal
tax burden charge'') that is reasonable in relation to CG Life's
increased federal income tax burden resulting from the application of
Section 848 of the Internal Revenue Code of 1986, as amended.
filing date: The application was filed on March 26, 1996 and amended
and restated on August 26, 1996.
hearing or notification of hearing: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the Secretary of the SEC and serving
Applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on September 23,
1996, 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 who wish to
be notified of a hearing may request notification by writing to the
Secretary of the SEC.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549;
Applicants, Robert A. Picarello, Esq.,
[[Page 46872]]
Connecticut General Life Insurance Company, 900 Cottage Grove Road,
Hartford, CT 06152, copy to George N. Gingold, Esq., 197 King Philip
Drive, West Hartford, CT 06117-1409.
FOR FURTHER INFORMATION CONTACT:
Edward P. Macdonald, Staff Attorney, or Patrice M. Pitts, Special
Counsel, Office of Insurance Products, Division of Investment
Management, at (202) 942-0670.
SUPPLEMENTARY INFORMATION: Following is a summary of the application.
The complete application is available for a fee from the Public
Reference Branch of the SEC.
Applicants' 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.
2. Account 02, established by CG Life on February 23, 1996,
pursuant to Connecticut law, is registered with the Commission as a
unit investment trust. The assets of Account 02 are divided among
subaccounts, each of which invests in shares of a portfolio of a
registered open-end management investment company. Each of the Future
Accounts will be organized as unit investment trusts and will file
registration statements under the 1940 Act and the Securities Act of
1933.
3. CFA will serve as the distributor and the principal underwriter
of the Current Contracts. Applicants expect CFA also to serve as the
distributor and principal underwriter of the Future Contracts. CFA is a
wholly owned subsidiary of Connecticut General Corporation, which, in
turn, is a wholly owned subsidiary of CIGNA Corporation. CFA is a
member of the National Association of Securities Dealers, Inc., and is
registered with the Commission as a broker-dealer under the Securities
Exchange Act of 1934 and as an investment adviser the Investment
Advisers Act of 1940.
4. The Current Contracts are flexible premium variable individual
life insurance policies. The Future Contracts will be substantially
similar in all material respects to the Current Contracts
(collectively, Future Contracts and Current Contracts, the
``Contracts''). The Contracts will be issued in reliance on Rule 6e-
3(T)(b)(13)(i)(A).
5. CG Life will deduct 1.25% of each premium payment made under the
Current Contracts to cover CG Life's estimated cost for the federal
income tax treatment of deferred acquisition costs.
6. In the Omnibus Budget Reconciliation Act of 1990 (``OBRA
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 a life 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 gross income of the current year.
7. The amount of expenses that must be capitalized and amortized
over ten years rather than deducted in the year incurred is based 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. 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.
8. The amount of general expenses 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. The Contracts
are ``specified insurance contracts'' that fall into the category of
life insurance contracts, under Section 848, for which 7.7% of the
year's net premiums received must be capitalized and amortized.
9. The increased tax burden on CG Life 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, Section 848 requires CG Life to capitalize $770 (7.7% of
$10,000). $38.50 of this $770 may be deducted in the current year,
leaving $731.50 ($770 minus $38.50) subject to taxation at the
corporate tax rate of 35 percent. This results in an increase in tax
for the current year of $256.03 (.35 x $731.50). This current
increase in federal income tax 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 year ten).
10. 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.
CG Life seeks an after tax rate of return on the investment of its
capital in excess of 10%.\1\ 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, 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. To the extent that the 10% discount
rate is lower than CG Life's actual targeted rate of return, a margin
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 rate or targeted rate
of return is lowered. 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.
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\1\ In determining the after-tax rate of return used in arriving
at this discount rate, CG Life considered a number of factors,
including: actual historical costs CG Life has incurred for capital;
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. 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 other factors enumerated above to set a
rate of return on capital that equals or exceeds this rate of
growth. CG Life seeks to maintain a ratio of capital to assets that
is established based on its judgment of the risks represented by
various components of its assets and liabilities. 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, CG Life's capital
should grow at least at the same rate as do its assets.
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11. Assuming a 35% corporate federal income tax rate, and applying
the 10% discount rate, the present value of the federal income tax
effect of the increased deductions allowable in the following 10 years
is $160.40. Because this amount partially offsets the increased federal
income tax burden, Section 848 imposes an increased federal income tax
burden on CG Life with present value of $95.63 (i.e., $256.03 minus
$160.40, or 0.96%) for each $10,000 of net premiums.
12. State premium taxes are deductible when computing federal
income taxes. Thus, CG Life does not incur incremental federal income
tax when it passes on state premium taxes
[[Page 46873]]
to owners of the Contracts. Federal income taxes, however, are not
deductible when computing CG Life's federal income taxes. To compensate
CG Life fully for the impact of Section 848, therefore, it would be
necessary to allow CG Life to impose an additional charge that would
make it 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% of net premiums.
13. Based on prior experience, CG Life expects that all of its
current and future deductions will be fully taken. A charge of 1.25% of
net premium payments would reimburse CG Life for the impact of Section
848 on its federal income tax liabilities, taking into account the
benefit of CG Life of the amortization permitted by Section 848 and the
use by CG Life of a discount rate of 10% (the equivalent of CG Life's
cost of capital) in computing the future deductions resulting from such
amortization.
14. Although a charge of 1.25% of net premium payments would
reimburse CG Life for the impact of Section 848 (as currently written)
on its federal income tax liabilities, CG Life 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 as a consequence of 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) under 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.
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. Applicants note that
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. 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
governmental entity.''
4. 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.''
5. Applicants submit that the proposed federal tax burden charge 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 federal tax burden charge should be treated as other than
``sales load,'' as is a state premium tax charge, for purposes of the
1940 Act.
6. Applicants maintain 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-3(T)(b)(13), and 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) only 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.
Applicants acknowledge that a deduction for an insurance company's
increased federal tax burden related to deferred acquisition costs 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 federal tax burden charge as ``sales
load.''
7. Applicants assert that the public policy underlying Rule 6e-
3(T)(b)(13)(i), like that underlying 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 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 state that the Commission has concurred in this
conclusion by excluding deductions for state premium taxes from the
definition of ``sales load'' in Rule 6e-3(T)(c)(4).
8. Applicants assert that the source for the definition of ``sales
load'' found in Rule 6e-3(T) supports this analysis. Applicants state
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 this regard, Applicants note that
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-(T)(b)(13)(i) depend on Rule
6e-3(T)(c)(4), which does not depart, in principle, from Section
2(a)(35).
9. Applicants assert that Section 2(a)(35) also excludes from
``sales load'' administrative expenses or fees that are ``not properly
chargeable to sales or promotional activities''. Applicants submit that
this suggests that the only deductions intended to fall within the
definition of ``sales load'' are those that are properly chargeable to
such activities. Because the proposed federal tax burden charge will be
used to compensate CG Life for its increased federal income tax burden
attributable to the receipt of premiums, and such cost is not properly
chargeable to sales
[[Page 46874]]
or promotional activities, Applicants submit that this language of
Section 2(a)(35) is another indication that not treating such federal
tax burden charge as ``sales load'' is consistent with 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 from
``sales load'' of charges attributable to federal tax obligations is
consistent with the policies of the 1940 Act.
11. 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.
12. 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 or
Future Accounts to file redundant exemptive applications, thereby
reducing administrative expenses and maximizing efficient use of
resources. The delay and expense involved in having to seek exemptive
relief repeatedly would impair the ability of CG Life and the Future
Accounts to take advantage fully of business opportunities as those
opportunities arise.
13. Applicants state that the requested relief is consistent with
the purposes of the 1940 Act and the protection of investors for the
same reasons. If CG Life and the Future Accounts 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 Future Accounts.
Conditions for Relief
1. Applicants agree to comply with the following conditions for
relief.
a. CG Life will monitor the reasonableness of the federal tax
burden charge to be duducted pursuant to the requested exemptive
relief.
b. The registration statement for each Contract under which the
federal 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 increased federal
income tax burden under Section 848 of the Code resulting from the
receipt of premiums.
c. The registration statement for each Contract under which the
federal 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 that is used in
calculating the federal tax burden 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.
2. Applicants undertake to rely on the exemptive relief requested
herein with respect to Future Contracts only if such contracts are
substantially similar in all material respects to the Contracts
described in the Application.
Conclusion
For the reasons summarized above, Applicants represent that the
requested relief from Sections 27(c)(2) of the 1940 Act and Rule 6e-
3(T)(c)(4)(v) thereunder is necessary or appropriate in the public
interest and otherwise meets the standards of Section 6(c) of the 1940
Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-22579 Filed 9-4-96; 8:45 am]
BILLING CODE 8010-01-M
