[Federal Register: December 3, 2002 (Volume 67, Number 232)]
[Notices]
[Page 72001-72005]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03de02-127]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-25833; File No. 812-12862]
Integrity Life Insurance Company, et al.
November 26, 2002.
AGENCY: Securities and Exchange Commission (the ``Commission'').
ACTION: Notice of an application for an order of approval pursuant to
Section 26(c) of the Investment Company Act of 1940, as amended (the
``Act'').
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Applicants: Integrity Life Insurance Company (``Integrity''),
Separate Account I of Integrity Life Insurance Company (``Integrity
Separate Account I''), Separate Account II of Integrity Life Insurance
Company (``Integrity Separate Account II''), National Integrity Life
Insurance Company (``National Integrity''), Separate Account I of
National Integrity Life Insurance Company (``National Integrity
Separate Account I''), and Separate Account II of National Integrity
Life Insurance Company (National Integrity Separate Account II'')
(collectively, the ``Applicants'').
Summary of Application: Applicants seek an order approving the
proposed substitution of shares of the Franklin Income Securities
Portfolio for shares of the Janus Aspen Balanced Portfolio, shares of
the Franklin Growth and Income Securities Portfolio for shares of the
Janus Aspen Capital Appreciation and Janus Aspen Core Equity
Portfolios, shares of the Franklin Mutual Shares Portfolio for shares
of the Janus Aspen Strategic Value Portfolio, and shares of the
Fidelity VIP Money Market Portfolio for shares of the Janus Aspen Money
Market Portfolio (the ``Substitution'').
Filing Date: The application was filed on July 25, 2002 and amended
on November 22, 2002.
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 must be received by the
Commission by 5:30 p.m. on December 20, 2002, 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 requester'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 Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549-0609. Applicants, P.O. Box 740074,
Louisville, Kentucky, 40202-3319.
FOR FURTHER INFORMATION CONTACT: Alison Toledo, Senior Counsel, or
Lorna MacLeod, Branch Chief, at (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
Public Reference Branch of the Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0102 (202-942-8090).
Applicants' Representations
1. Integrity is a stock life insurance company organized under the
laws of Ohio. Integrity is a subsidiary of Western and Southern Life
Insurance Company, a mutual life insurance company originally organized
under the laws of Ohio in 1888.
2. Integrity Separate Account I was established under Ohio law in
1986. Integrity Separate Account I is registered under the Act as a
unit investment trust and is used to fund variable annuity contracts
issued by Integrity. Three variable annuity contracts funded by
Integrity Separate Account I are affected by this application.
3. Integrity Separate Account II was established under Ohio law in
1992. Integrity Separate Account II is registered under the Act as a
unit investment trust and is used to fund variable annuity contracts
issued by Integrity. One variable annuity contract funded by Integrity
Life Separate Account II is affected by this application.
4. National Integrity is a stock life insurance company organized
under the laws of New York. National Integrity is a direct subsidiary
of Integrity and an indirect subsidiary of Western and Southern Life
Insurance Company.
5. National Integrity Separate Account I was established under New
York law in 1986. National Integrity Separate Account I is registered
under the Act as a unit investment trust and is used to fund variable
annuity contracts issued by National Integrity. Three variable annuity
contracts funded by National Integrity Separate Account I are affected
by this application.
6. National Integrity Separate Account II was established under New
York law in 1992. National Integrity Separate Account II is registered
under the Act as a unit investment trust and is used to fund variable
annuity contracts issued by National Integrity. One variable annuity
contract funded by National Integrity Separate Account II is affected
by this application (all eight variable annuities contracts affected by
this application are hereinafter collectively referred to as the
``Contracts'').
7. Purchase payments under the Contracts are allocated to one or
more subaccounts of the Separate Accounts. Income, gains and losses,
whether or not realized, from assets allocated to the Separate Accounts
are, as provided in the Contracts, credited to or charged against the
Separate Accounts without
[[Page 72002]]
regard to other income, gains or losses of Integrity and National
Integrity, as applicable. The assets maintained in the Separate
Accounts will not be charged with any liabilities arising out of any
other business conducted by Integrity or National Integrity, as
applicable. Nevertheless, all obligations arising under the Contracts,
including the commitment to make annuity payments or death benefit
payments, are general corporate obligations of Integrity and National
Integrity. Accordingly, all of the assets of each of Integrity and
National Integrity are available to meet its obligations under its
Contracts.
8. Each of the Contracts permits allocations of accumulation value
to available subaccounts that invest in specific investment portfolios
of underlying mutual funds. Each Contract offers between 56 and 63
portfolios. All of the Contracts offer the five portfolios of the Janus
Aspen Series that are the subject of the Substitution (the ``Replaced
Portfolios''). The Fidelity VIP Money Market Portfolio, which is
proposed as the Replacement Portfolio for the Janus Money Market
Portfolio, is also available under all of the Contracts. Before the
date of the Substitution, three portfolios of the Franklin Templeton
Variable Insurance Products Trust (together with the Fidelity VIP Money
Market Portfolio, the ``Replacement Portfolios''), which are proposed
as the Replacement Portfolios for four of the Replaced Portfolios, will
be added to the Contracts as investment options. In addition, included
in the Contracts are several alternative fixed interest rate options
that are available to contract owners.
9. Each of the Contracts permits transfers of accumulation value
from one subaccount to another subaccount at any time prior to
annuitization, subject to certain restrictions and charges described
below. No sales charge applies to such a transfer of accumulation value
among subaccounts.
10. The Contracts permit up to twelve free transfers during any
contract year. A fee of $20 may be imposed on transfers in excess of
twelve transfers in a contract year. Transfers must be at least $250,
or, if less, the entire amount in the subaccount from which value is to
be transferred. A variety of automatically scheduled transfers are
permitted without charge and are not counted against the twelve free
transfers in a contract year.
11. Each of the Contracts reserves the right, upon notice to
contract owners and compliance with applicable law, to add, combine or
remove subaccounts, or to withdraw assets from one subaccount and put
them into another subaccount, and this reserved right is disclosed in
each Contract's prospectus.
12. On an ongoing basis, Integrity and National Integrity review
the performance of the portfolios underlying the Contracts. During the
past several years, the Replaced Portfolios have not maintained the
level of performance that was the basis for their inclusion in the
Contracts. These unfavorable performance records have occurred on an
absolute basis, as well as relative to comparable portfolios with other
investment advisers. This performance record may be attributable to
certain changes that were occurring at the investment adviser to the
Replaced Portfolios.
13. The poor performance results realized by the Replaced
Portfolios have led to a significant decrease in Applicants' assets
under management advised by Janus Capital Corporation. Since a peak of
$279 million in August 2000, Applicants' assets under management in the
non-money market Replaced Portfolios have decreased to $158 million as
of June 30, 2002, a decline of 43%. Moreover, the Replaced Portfolios
have also had net outflows for at least the past year, a situation
mirrored at the Janus retail fund level. Investors withdrew $4.7
billion from the Janus retail funds during the second quarter of 2002.
14. Due to the poor performance of the Replaced Portfolios in
recent years, Applicants propose the following substitutions of shares:
------------------------------------------------------------------------
Replaced portfolio Replacement portfolio
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Janus Aspen Balanced Portfolio......... Franklin Income Securities
Portfolio.
Janus Aspen Capital Appreciation Franklin Growth and Income
Portfolio. Securities Portfolio.
Janus Aspen Core Equity Portfolio...... Franklin Growth and Income
Securities Portfolio.
Janus Aspen Strategic Value Portfolio.. Franklin Mutual Shares
Portfolio.
Janus Aspen Money Market Portfolio..... Fidelity VIP Money Market
Portfolio.
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15. In each case, shares of each class of the Replaced Portfolios
will be substituted by shares of the corresponding class of the
Replacement Portfolios. Therefore, service class shares of the Replaced
Portfolios will be substituted by the equivalent class of shares of the
Replacement Portfolios (i.e., Class 2 shares of the portfolios of the
Franklin Templeton Variable Insurance Products Trust and Service Class
shares of the Fidelity VIP Money Market Portfolio). In addition, in the
case of three of the Replacement Portfolios whose institutional class
shares are also offered under prior versions of the Contracts funded by
Integrity Separate Account II and National Integrity Separate Account
II, shares of the corresponding class of shares of the Replacement
Portfolios will be used to replace the institutional shares of the
relevant Replaced Portfolio (i.e., Class 1 shares of the portfolios of
the Franklin Templeton Variable Insurance Products Trust and Initial
Class shares of the Fidelity VIP Money Market Portfolio).
16. Janus Capital Corporation serves as the investment adviser to
each of the Replaced Portfolios. Franklin Templeton Investments serves
as the investment adviser to each of the portfolios of the Franklin
Templeton Variable Insurance Products Trust. Fidelity Management and
Research Company serves as the investment adviser to the Fidelity VIP
Money Market Portfolio. None of the Applicants are affiliated with any
of the investment advisers to the Replaced or Replacement Portfolios.
17. The 2001 expenses for each of the Replaced and Replacement
Portfolios are shown below in Chart A. Historical performance as of
June 30, 2002 is included in Chart B.
18. The Janus Aspen Balanced Portfolio seeks long-term capital
growth, consistent with capital preservation and balanced by current
income. It is a diversified portfolio that pursues its objective by
normally investing 40-60% of its assets in securities selected
primarily for their growth potential and 40-60% of its assets in
securities selected primarily for their income potential. The portfolio
normally invests at least 25% of its assets in fixed-income securities.
19. The Franklin Income Securities Portfolio seeks to maximize
income while maintaining prospects for capital appreciation. Under
normal market conditions, the portfolio will invest in both debt and
equity securities. The
[[Page 72003]]
portfolio seeks income by investing in corporate, foreign, and U.S.
Treasury bonds. In its search for income producing growth opportunities
the portfolio invests in common stocks with attractive dividend yields
of companies from a variety of industries such as electric utilities,
oil, gas, real estate and consumer goods.
20. The Janus Aspen Capital Appreciation Portfolio seeks long-term
growth of capital. It is a non-diversified portfolio that pursues its
objective by investing primarily in common stocks selected for their
growth potential. The portfolio may invest in companies of any size,
from larger, well-established companies to smaller, emerging growth
companies.
21. The Janus Aspen Core Equity Portfolio seeks current income and
long-term growth of capital. It normally emphasizes investments in
common stocks, and growth potential is a significant investment
consideration. The portfolio tries to provide a lower level of
volatility than the S&P 500 Index. Normally, it invests at least 80% of
its net assets in equity securities selected for growth potential.
Eligible securities include domestic and foreign common stocks,
preferred stocks, securities convertible into common stocks or
preferred stock such as convertible preferred stocks, bonds,
debentures, and other securities with equity characteristics.
22. The Franklin Growth and Income Securities Portfolio seeks
capital appreciation with a secondary goal to provide current income.
Under normal market conditions, the portfolio will invest at least 65%
of its total assets in a broadly diversified portfolio of equity
securities that the portfolio's manager considers to be financially
strong, but undervalued by the market. The portfolio may invest in real
estate investment trusts but does not intend to invest more than 15% of
its assets in these trusts.
23. The Janus Aspen Strategic Value Portfolio seeks long-term
growth of capital. It is a non-diversified portfolio that pursues its
objective by investing primarily in common stocks with the potential
for long-term growth of capital using a ``value'' approach. The
``value'' approach the portfolio manager uses emphasizes investments in
companies believed to be undervalued relative to their intrinsic worth.
24. The Franklin Mutual Shares Securities Portfolio seeks capital
appreciation with a secondary goal of income. Under normal market
conditions the portfolio will invest at least 65% of its total assets
in equity securities of companies that the manager believes are
available at market prices less than their value based on certain
recognized objective criteria. The portfolio currently intends to
invest up to approximately 25% of its total assets in foreign
investments.
25. The Janus Aspen Money Market Portfolio seeks maximum current
income to the extent consistent with stability of capital. The
portfolio will invest in high-quality, short-term money market
instruments that present minimal credit risk. The portfolio may invest
only in U.S. dollar denominated instruments.
26. The Fidelity VIP Money Market Portfolio seeks to earn a high
level of current income while preserving capital and providing
liquidity. It invests only in high-quality, U.S. dollar denominated
money market securities of domestic and foreign issuers, such as
certificates of deposit, obligations of governments and their agencies,
and commercial paper and notes.
Chart A.--2001 Portfolio Expenses
[In percent]
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Total
Other annual Mgmt. fee Net total
Portfolio Mgmt. fee 12b-1 fee expenses operating reduction annual
expenses expenses
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Service Class Shares to Class 2 or
Service Class Shares:
Janus Balanced................ .65 .25 .01 .91 ........... ...........
Franklin Income Securities.... .49 .25 .04 .78 ........... ...........
Janus Capital Appreciation.... .65 .25 .01 .91 ........... ...........
Janus Core Equity............. .65 .25 .40 1.30 ........... ...........
Franklin Growth and Income.... .48 .25 .03 .76 ........... ...........
Janus Strategic Value......... .65 .25 .70 1.60 (.10) 1.50
Franklin Mutual Shares........ .60 .25 .19 1.04 ........... ...........
Janus Money Market............ .25 .25 .09 .59 ........... ...........
Fidelity Money Market......... .18 .25 .12 .55 ........... ...........
Institutional Class Shares to
Initial Class or Class 1 Shares:*
Janus Balanced................ .65 .00 .01 .66 ........... ...........
Franklin Income Securities.... .49 .00 .04 .53 ........... ...........
Janus Capital Appreciation.... .65 .00 .01 .66 ........... ...........
Franklin Growth and Income.... .48 .00 .03 .51 ........... ...........
Janus Money Market............ .25 .00 .09 .34 ........... ...........
Fidelity Money Market......... .18 .00 .10 .28 ........... ...........
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*Applicable only to older Contracts offered by certain registration statements.
Chart B.--Portfolio Performance As of June 30, 2002
[In percent]
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Portfolio YTD 1 year 3 year 5 year 10 year
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Service Class Shares to Class 2 or Service
Class Shares:
Janus Balanced............................. -3.34 -4.68 0.69 10.72 N/A
Franklin Income Securities................. -0.52 -2.04 4.87 5.52 8.09
Janus Capital Appreciation................. -7.05 -15.90 -8.04 10.72 N/A
Janus Core Equity.......................... -7.12 -12.63 -4.29 12.16 N/A
[[Page 72004]]
Franklin Growth and Income................. -4.09 -6.06 1.11 6.39 10.86
Janus Strategic Value...................... -9.59 -15.22 N/A N/A N/A
Franklin Mutual Shares..................... -3.89 -7.83 4.98 7.69 N/A
Janus Money Market......................... -- 2.55 4.69 4.87 N/A
Fidelity Money Market...................... -- 2.46 4.69 4.96 N/A
Institutional Class Shares to Initial Class or
Class 1 Shares:*
Janus Balanced............................. -3.19 -4.44 0.67 10.79 N/A
Franklin Income Securities................. -0.46 -1.90 5.12 5.70 8.17
Janus Capital Appreciation................. -6.90 -15.69 -7.45 11.16 N/A
Franklin Growth and Income................. -4.02 -5.87 1.32 6.55 10.95
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*Applicable only to older Contracts offered by certain registration statements.
27. The Substitution will take place at the portfolios' relative
net asset values determined on the date of the Substitution in
accordance with Section 22 of the Act and Rule 22c-1 thereunder with no
change in the amount of any contract owner's cash value or death
benefit or in the dollar value of his or her investment in any of the
subaccounts. Accordingly, there will be no financial impact on any
contract owner. The Substitution will be effected by having each of the
subaccounts that invests in the Replaced Portfolios redeem its shares
at the net asset value calculated on the date of the Substitution and
purchase shares of the respective Replacement Portfolios at the net
asset value calculated on the same date.
28. The Substitution will be described in supplements to the
prospectuses for the Contracts (``Stickers'') filed with the Commission
and mailed to contract owners. The Stickers will give contract owners
notice of the Substitution and will describe the reasons for engaging
in the Substitution. The Stickers will also inform contract owners with
assets allocated to a subaccount investing in the Replaced Portfolios
that no additional amount may be allocated to those subaccounts on or
after the date of the Substitution. In addition, the Stickers will
inform affected contract owners that they will have the opportunity to
reallocate accumulation value:
[sbull] Prior to the Substitution from the subaccounts investing in
the Replaced Portfolios, and
[sbull] For 30 days after the Substitution from the subaccounts
investing in the Replacement Portfolios,
to subaccounts investing in other portfolios available under the
respective Contracts, without the imposition of any transfer charge or
limitation and without diminishing the number of free transfers that
may be made in a given contract year.
29. The prospectuses for the Contracts, as supplemented by the
Stickers, will reflect the Substitution. Each contract owner will be
provided with a prospectus for the Replacement Portfolios before the
Substitution. Within five days after the Substitution, Integrity and
National Integrity will each send affected contract owners written
confirmation that the Substitution has occurred. The confirmation will
remind contract owners that they have 30 days from the date of the
Substitution to make a transfer from the subaccounts investing in the
Replacement Portfolios to subaccounts investing in other portfolios
under the Contracts without paying a transfer charge or diminishing the
number of available free transfers.
30. Integrity and National Integrity, as applicable, will pay all
expenses and transaction costs of the Substitution, including all
legal, accounting and brokerage expenses relating to the Substitution.
No costs will be borne by contract owners. Affected contract owners
will not incur any fees or charges as a result of the Substitution, nor
will their rights or the obligations of the Applicants under the
Contracts be altered in any way. The Substitution will not cause the
fees and charges under the Contracts currently being paid by contract
owners to be greater after the Substitution than before the
Substitution. The Substitution will have no adverse tax consequences to
contract owners and will in no way alter the tax benefits to contract
owners.
31. Applicants believe that their request satisfies the standards
for relief of Section 26(c) of the Act, as set forth below, because the
affected contract owners will have:
(a) Contract values allocated to a subaccount invested in a
Replacement Portfolio with an investment objective and policies
substantially similar to the investment objective and policies of the
Replaced Portfolio;
(b) In all cases the Replacement Portfolios have superior or equal
performance for the three years ended June 30, 2002 to that of the
Replaced Portfolios; and
(c) Total annual expenses that are lower than those of the Replaced
Portfolio.
Applicants' Legal Analysis
1. Section 26(c) of the Act makes it 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 approves the substitution. The Commission will approve
such a 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 the Act.
2. The purpose of Section 26(c) is to protect the expectation of
investors in a unit investment trust that the unit investment trust
will accumulate shares of a particular issuer by preventing
unscrutinized substitutions that might, in effect, force shareholders
dissatisfied with the substituted security to redeem their shares,
thereby possibly incurring either a loss of the sales load deducted
from initial premium payments, an additional sales load upon
reinvestment of the redemption proceeds, or both. Moreover, in the
insurance product context, a contract owner forced to redeem may suffer
adverse tax consequences. Section 26(c) affords this protection to
investors by preventing a depositor or trustee of a unit investment
trust that holds shares of one issuer from substituting for those
shares the shares of another issuer, unless the Commission approves
that substitution.
3. The purposes, terms and conditions of the Substitution are
consistent with the principles and purposes of Section 26(c) and do not
entail any of the abuses that Section 26(c) is designed to
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prevent. Applicants have reserved the right to make such a substitution
under the Contracts and this reserved right is disclosed in each
Contract's prospectus.
4. Substitutions have been common where the substituted portfolio
has investment objectives and policies that are similar to those of the
eliminated portfolio, current expenses that are similar to or lower
than those of the eliminated portfolio, and performance that is similar
to or better than that of the eliminated portfolio.
5. In all cases the investment objectives and policies of the
Replacement Portfolios are sufficiently similar to those of the
corresponding Replaced Portfolios that contract owners will have
reasonable continuity in investment expectations. Accordingly, the
Replacement Portfolios are appropriate investment vehicles for those
contract owners who have contract values allocated to the Replaced
Portfolios.
6. In addition, the Replacement Portfolios have lower annual
expenses than the Replaced Portfolios and superior or equal performance
for the three years ended June 30, 2002. Integrity and National
Integrity will not increase separate account fees and charges of the
subaccounts that invest in the Replacement Portfolios for those
contract owners who were contract owners on the date of the
Substitution for a period of one year from the date of the Substitution
except to the extent of any increase in premium or similar taxes
charges by a state or other locality.
7. Moreover, Integrity and National Integrity will not receive, for
three years from the date of the Substitution, any direct or indirect
benefit from the Replacement Portfolios, their advisers or
underwriters, or from affiliates of the Replacement Portfolios, their
advisers or underwriters, in connection with the assets attributable to
the Contracts affected by the Substitution, at a higher rate than
Integrity and National Integrity received from the Replaced Portfolios,
their advisers or underwriters, or from affiliates of the Replaced
Portfolios, their advisers or underwriters, including without
limitation Rule 12b-1 fees, shareholder service, administrative, or
other service fees, revenue sharing or other arrangements. The
Substitution and the selection of the Replacement Portfolios were not
motivated by any financial consideration paid or to be paid to
Integrity or National Integrity or their affiliates by the Replacement
Portfolios, their advisers or underwriters, or their affiliates.
8. The Substitution will not result in the type of costly forced
redemption that Section 26(c) was intended to guard against and, for
the following reasons, is consistent with the protection of investors
and the purposes fairly intended by the Act:
(a) Each of the Replacement Portfolios is an appropriate portfolio
to which to move contract owners with values allocated to the Replaced
Portfolios because the portfolios have substantially similar investment
objectives and policies.
(b) The costs of the Substitution, including any brokerage costs,
will be borne by Integrity and National Integrity and will not be borne
by contract owners. No charges will be assessed to effect the
Substitution.
(c) The Substitution will be at the net asset values of the
respective shares without the imposition of any transfer or similar
charge and with no change in the amount of any contract owner's
accumulation value.
(d) The Substitution will not cause the fees and charges under the
Contracts currently being paid by contract owners to be greater after
the Substitution than before the Substitution and will result in
contract owners' contract values being moved to a Replacement Portfolio
with lower total annual expenses.
(e) All contract owners will be given notice of the Substitution
prior to the Substitution and will have an opportunity for 30 days
after the Substitution to reallocate accumulation value among other
available subaccounts without the imposition of any transfer charge or
limitation and without being counted as one of the contract owner's
free transfers in a contract year.
(f) Within five days after the Substitution, Integrity and National
Integrity will send to its affected contract owners written
confirmation that the Substitution has occurred.
(g) The Substitution will in no way alter the insurance benefits to
contract owners or the contractual obligations of Integrity and
National Integrity.
(h) The Substitution will have no adverse tax consequences to
contract owners and will in no way alter the tax benefits to contract
owners.
Conclusion
Applicants request an order of the Commission pursuant to Section
26(c) of the Act approving the Substitution. Section 26(c), in
pertinent part, provides that the Commission shall issue an order
approving a substitution of securities if the evidence establishes that
it is consistent with the protection of investors and the purposes
fairly intended by the policy and provisions of the Act. For the
reasons and upon the facts set forth above, the requested order meets
the standards set forth in Section 26(c) and should, therefore, be
granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-30531 Filed 12-2-02; 8:45 am]
BILLING CODE 8010-01-P