Active Bulletin Notices



 PENNSYLVANIA INSURANCE DEPARTMENT NO. 1994-12
 

 DATE: October 3, 1994
 SUBJECT: Separate Account Modified Guaranteed Annuity
 TO: Presidents of All Life Insurance Companies and Fraternal Benefit Societies Authorized To Write Business in the Commonwealth of Pennsylvania
 FROM: Gregory S. Martino, Deputy Insurance Commissioner

The purpose of this notice to inform companies that the Pennsylvania Insurance Department will now consider for approval separate account modified guaranteed annuity coverage. Such insurance will be considered for approval as a special form of variable annuity. When providing separate account modified guaranteed annuity coverage, companies shall comply with applicable laws, regulations, guidelines, rules and the requirements of this notice.

DEFINITIONS

A separate account modified guaranteed deferred annuity contract is an individual deferred annuity contract, the underlying assets of which are held in a separate account, and the values of which are guaranteed if held for guarantee periods specified in the contract. The contract provides for adjusted cash surrender values that are based on a market value adjustment formula if held for shorter periods. The formula may, or may not, reflect the value of assets held in the separate account. The assets underlying the contract shall be in a separate account during the guarantee period or periods when the contract owner can surrender the contract for cash.

A separate account modified guaranteed immediate annuity contract is an individual immediate annuity contract, the underlying assets of which are held in a separate account. The contract provides for adjusted cash surrender values that are based on a market value adjustment. The formula may, or may not, reflect the value of assets held in the separate account. The assets underlying the contract shall be in a separate account during the period when the contract owner may elect to commute the contract.

Adjusted cash surrender values are the cash values less any surrender charge and after application of a market value adjustment.

Adjusted commutation values are the commutation values after application of a market value adjustment. Adjusted commutation values are hereafter referred to as adjusted cash surrender values for purposes of this notice.

Cash surrender values are the cash values less any surrender charge and prior to the application of a market value adjustment.

Cash values are the cash values prior to the application of any surrender charge and a market value adjustment.

Company is a life insurance company or fraternal benefit society.

Commutation values are the commutation values prior to the application of a market value adjustment. Commutation values are hereafter referred to as cash surrender values for purposes of this notice.

Excess interest is interest that is not guaranteed and is over and above interest at any guaranteed rate in the contract including any guaranteed rate in addition to a minimum guaranteed rate.

Interest credits are all interest that is credited to the contract.

Net adjusted cash surrender values are the cash values less any surrender charge and after application of a market value adjustment, less any outstanding indebtedness.

Net adjusted commutation values are the commutation values after the application of a market value adjustment, less any outstanding indebtedness. Net adjusted commutation values are hereafter referred to as net adjusted cash surrender values for purposes of this notice.

Prominent type is, for example, all capital letters, contrasting color, underlined or otherwise differentiated from the other type in the form.

Separate account is a separate account established pursuant to Section 406.2 of The Insurance Department Act or pursuant to the corresponding section of the Insurance Laws of the state of domicile of a foreign or 'alien insurer.

AUTHORITY OF INSURER TO ISSUE SEPARATE

ACCOUNT MODIFIED GUARANTEED ANNUITY COVER

LICENSING AND APPROVAL To DO BUSINESS

A company may not solicit or issue in this Commonwealth a separate account modified guaranteed annuity contract unless each of the following conditions have been met:

1) The company is licensed to do a life and annuities business in this Commonwealth.

2) The company has obtained the written approval of the Commissioner for the issuance of separate account annuity (includes variable) contracts in this Commonwealth.

SALES MATERIAL

A company authorized to transact separate account modified guaranteed annuity business in this Commonwealth shall not use any sales material, advertising material, or descriptive literature or other materials of any kind in connection with its separate account modified guaranteed annuity business in this Commonwealth which is false, misleading, deceptive or inaccurate.

Any sales material, advertising material, descriptive literature or other materials of any kind shall clearly disclose that the coverage being solicited is annuity coverage.

The sales material for a deferred annuity contract shall clearly disclose that cash surrender values under the contract may increase or decrease in accordance with a market value adjustment, prior to a date or dates specified in the contract. If the sales material illustrates an increase in values due to a market value adjustment, it shall also illustrate a decrease in values due to a market value adjustment. The sales material shall also include a description of the manner, if any, in which the death benefit will be affected by the market value adjustment.

The sales material for an immediate annuity contract shall clearly disclose that commutation values under the contract may increase or decrease in accordance with a market value adjustment. If the sales material illustrates an increase in values due to a market value adjustment, it shall also illustrate a decrease in values due to a market value adjustment.

Before any company solicits or issues any separate account modified guaranteed annuity contract in this Commonwealth, the Commissioner may require the filing of a copy of any prospectus or other sales material to be used in connection with the marketing of that insurer's separate account modified guaranteed annuity contract.

REPORTS TO COMMISSION

Any company authorized to transact the business of separate account modified guaranteed annuities in this Commonwealth shall submit to the Commissioner, in addition to other materials which may be required by this notice or applicable laws, regulations, guidelines or rules, the following:

1) A separate account annual statement, which shall include the business of its separate account, modified guaranteed annuities.

2) Prior to use in the Commonwealth, the information required by the Information Furnished to Applicants section of this notice.

3) Such additional information concerning its separate account modified guaranteed annuity operations or separate accounts, as the Commissioner shall deem necessary.

AUTHORITY OF COMMISSIONER TO DISAPPROVE

Any material required to be filed with and approved by the Commissioner shall be subject to disapproval if at any time it is found by the Commissioner not to comply with the standards established by this notice.

FILING REQUIREMENTS

The filing requirements applicable to separate account modified guaranteed annuities shall be those filing requirements otherwise applicable under Pennsylvania insurance laws, regulations, guidelines and rules with respect to individual annuity contract form filings to the extent appropriate with the following additions.

ACTUARIAL MEMORANDUM

The company shall submit an actuarial statement that the market value adjustment formula provides reasonable equity to both the contract owner and the company. The company shall submit an actuarial memorandum indicating the basis for the market value adjustment formula and the basis for the statement that the formula provides reasonable equity to the contract owner and the company.

If the market value adjustment provision refers to an index outside the control of the company, the actuarial memorandum shall indicate the reasonableness of the index. Any request for approval of the substitution of an index outside the control of the company for another such index shall include an actuarial memorandum indicating the reasonableness of the substitute index.

A modification of the market value adjustment formula or any rates or factors used in the formula is subject to the Department's approval. Any modification shall be applied only to new issues, except if the rate or factor used in the formula is no longer available. If the market value adjustment formula is revised, the request for approval shall include an actuarial memorandum submitted in accordance with the requirements of this section of the notice. If any rates or factors used in the formula are revised, the request for approval shall include an actuarial memorandum indicating the reasonableness of the revised rate or factor.

For a deferred annuity contract, the company shall submit a demonstration that the cash surrender values and paid-up annuity benefits comply with the minimum standards of Section 410C of the Insurance Company Law.

The company shall file all surrender charges and guaranteed interest rates for each of the currently available guarantee periods. Any subsequent additional guarantee periods and the guaranteed interest rates and surrender charges for such periods or any revisions in previously filed surrender charges shall be filed for approval. Guaranteed interest rates shall never be less than the statutory minimum rate of 3%.

The actuarial memorandum shall include the methodology, including a numerical example, of the calculation of the reserves.

SUBMISSION LETTER

The submission letter of a separate account modified guaranteed annuity filing shall disclose the following:

1) The form being filed provides separate account modified guaranteed annuity coverage.

2) The underlying assets of the contract are held in the separate account.

CONTRACT REQUIREMENTS

All of the provisions of Section 410B and Section 410C of the Insurance Company Law and other applicable sections of the Pennsylvania insurance laws, regulations, guidelines and rules apply to separate account modified guaranteed annuities with the following additions and notes.

ADDITIONS

NOTE

RESERVE LIABILITIES

Reserves in the separate account for separate account modified guaranteed annuity contracts shall not be less than the reserves established in accordance with the methods and valuation standards defined in Section 301 of the Insurance Department Act with the following exception [during the guarantee period].

(1) The reference interest rate shall be defined as an annual rate equal to Moody's Bond Yield Average-Monthly Average Corporates, as published by Moody's Investors Service, Inc., for the month ending on or immediately preceding the date of valuation.

2) The weighting factor defined in Section 301(c) (2)(C)(ii) is modified to be .90.

3) The weighting factors defined in Section 301(c) (2)(C)(iii) are modified as follows.

Duration (years) Weighting Factors

10 or less .90

More than 10, but not more than 20 .90

More than 20 .90

The interest rate used in determining the minimum standard for the valuation of modified guaranteed annuities shall equal either 1) the annual market yield to maturity of the assets in the separate account on the date of valuation, less a margin of 1/2% for adverse deviation and investment expenses; or 2) the Moody's Corporate Bond Yield Average-Monthly Average Corporates, as published by Moody's Investors Service, Inc., for the month ending on or immediately preceding the date of valuation, less a margin of 1/2% for adverse deviation and investment expenses.

In order for a company to change the method of determining the minimum valuation interest rate from method 1) to method 2) or vice versa, the company shall obtain approval from the Insurance Commissioner of Pennsylvania.

As a minimum, the separate account reserve shall be no less than the aggregate adjusted cash surrender value.

A separate statement of actuarial opinion is required on the adequacy of the separate account reserves based on an asset adequacy analysis. In preparing the statement of actuarial opinion, the appointed actuary shall consider the market value adjustment formula, the interest guarantees and the degree to which projected cash flow of assets and liabilities are matched. If the valuation interest rate is determined on aforementioned method 2), the appointed actuary shall also consider the difference between the internal rate of return and the valuation interest rate.

SEPARATE ACCOUNT

The following requirements apply to the establishment and administration of modified guaranteed annuity separate accounts by any domestic company.

ESTABLISHMENT AND ADMINISTRATION OF SEPARATE ACCOUNTS

Any domestic company issuing separate account modified guaranteed annuities shall establish one or more separate accounts pursuant to Section 406.2 of The Insurance Company Law.

If no law or other regulation provides for the custody of separate account assets and if the company is not the custodian of the separate account assets, contracts for custody of the assets shall be in writing and the commissioner has authority to review and approve both the terms of the contract and the proposed custodian prior to the transfer of custody.

The company may not, without the prior written approval of the Commissioner, employ in a material connection with the handling of separate account assets a person who:

1) Within the last 10 years has been convicted of a felony or a misdemeanor arising out of the conduct of the person involving embezzlement, fraudulent conversion or misappropriation of funds or securities or involving violation of 18 U.S.C. SS 1341, 1342 or 1343.

2) Within the last 10 years has been found by any state regulatory authority to have violated or has acknowledged violation of any state insurance law involving fraud, deceit or knowing misrepresentation.

3) Within the last 10 years has been found by Federal or State regulatory authorities to have violated or has acknowledged violation of Federal or State securities laws involving fraud, deceit or knowing misrepresentation.

A person with access to the case, securities or other assets of the separate account shall be under bond in an amount of not less than $100,000.

VALUATION OF SEPARATE ACCOUNT ASSETS

Investments of the separate account shall be valued at their market value on the date of valuation, or at amortized cost if it approximates market value.

AMOUNTS IN THE SEPARATE ACCOUNT

The company shall maintain in each separate account assets with a market value, or at amortized cost if it approximates market value, at least equal to the valuation reserves and other contract liabilities with respect to such account.

INVESTMENT ASSETS

Assets held in any separate account relating to separate account modified guaranteed annuities shall be limited to cash, government securities or other investments with a readily ascertainable market value.

ASSET TRANSFERS

Sales, exchanges or other transfers of assets may be made by a company between its separate accounts or between another investment account and one or more of its separate accounts.

WITHDRAWAL ADEQUACY

The separate account shall have sufficient net investment income and readily marketable assets to meet anticipated withdrawals under policies funded by the account.

INVESTMENT PLAN

A domestic company's formal investment plan, as required by Section 404.1(c) of the Insurance Company Law, shall include a discussion of the company's investment strategy for its modified guaranteed annuity products.

INFORMATION FURNISHED TO APPLICANTS

A company soliciting or issuing in this Commonwealth any separate account modified guaranteed annuity contract shall deliver to the applicant for the contract coincident with or prior to the execution of the application a summary explanation of the principal features of the contract. The summary explanation shall be in non-technical terms and shall explain the principal features of the contract, including a description of the manner in which the cash surrender values will be affected by the market value adjustment and the factors which affect such variation. The summary explanation of a deferred annuity contract shall also include a description of the manner, if any, in which the death benefit will be affected by the market value adjustment. The explanation shall include a notice of the contract provision concerning a right to return the contract.

The requirements of this section shall be deemed to have been satisfied to the extent that a disclosure containing information required by this section is delivered, in the form of one of the following.

1) A prospectus included in a registration statement which satisfies the requirements of the Securities and Exchange Commission.

2) The information and reports required by the Employee Retirement Income Security Act of 1974, if the policies are exempted from the registration requirements of the Securities Act of 1933.

3) A summary explanation that provides the information required by this section.

APPLICATIONS

Any application for a separate account modified guaranteed deferred annuity contract shall contain, immediately preceding the signature line, a statement that cash surrender values under the contract may increase or decrease in accordance with a market value adjustment prior to a date or dates specified in the contract. Any application shall also contain a statement of the effect, if any, that a market value adjustment has on the death benefit. The statement(s) shall appear in prominent type.

Any application for a separate account modified guaranteed immediate annuity contract shall contain, immediately preceding the signature line, a statement that commutation values under the contract may increase or decrease in accordance with a market value adjustment. The statement shall appear in prominent type.

REPORTS TO CONTRACT OWNERS

Any company issuing in this Commonwealth separate account modified guaranteed annuity contracts shall provide each separate account modified guaranteed deferred annuity contract owner, without charge, at least annually, a report, which will keep such contract owner, advised of the status of the contract. The end of the current report period shall be not more than 2 months previous to the date of the mailing of the report. Such report shall include the following, if applicable:

1) The beginning date and ending date of the current report period.

2) The cash values at the end of the previous report period and at the end of the current report period.

3) The adjusted cash surrender values at the end of the previous report period and at the end of the current report period.

4) A disclosure that the cash values are prior to the application of any surrender charge or market value adjustment.

5) A disclosure of the surrender charge and market value adjustment used to determine the adjusted cash surrender values.

6) A disclosure that, in accordance with the market value adjustment formula, the adjusted cash surrender value may increase or decrease prior to the next annual report. If any guarantee period would expire prior to the next annual report, a disclosure as to when a market value adjustment would not be applied.

As an alternative to the reporting required by 3) and 5), any such report may provide cash surrender values with a prominent type disclosure that all values are prior to the application of the market value adjustment formula. In addition, the alternative report shall state that the adjusted cash surrender values are available upon request. The alternative report shall supply instructions as to how to obtain this information. One of the methods of obtaining the information is by use of a toll free company number. Any company using this alternative reporting shall make such information available to the contract owner within two business days of the inquiry at no charge to the contract owner.

ILLUSTRATIVE-REPORT

If an illustrative report is provided to a contract owner, the report shall disclose in prominent print in close proximity to the projected cash values that the projected cash values are subject to a surrender charge and a market value adjustment as provided in the contract.

FOREIGN COMPANIES

If the law or regulation in the place of domicile of a foreign company provides a degree of protection to the contract owners and the public which is substantially similar to that provided by this notice, the Commissioner, to the extent the Commissioner deems it appropriate, may consider compliance with such law or regulation as compliance with this notice.

AUTHORIZATION OF AGENTS

No person, corporation, partnership or other legal entity may sell or offer for sale in this Commonwealth any separate account modified guaranteed annuity contract registered as a security with the Securities and Exchange Commission unless licensed to sell separate account annuities in this Commonwealth. If any separate account modified guaranteed annuity contract is not registered as a security with the Securities and Exchange Commission, no person, corporation, partnership or other legal entity may sell or offer for sale in this Commonwealth such contract unless licensed to sell life insurance and annuities or separate account annuities.

RESERVATION OF RIGHTS

The Department reserves the right at any time to impose standards for separate account modified guaranteed annuities in addition to the standards established by this notice

Section 410E of The Insurance Company Law applies as written to a separate account modified guaranteed annuity contract. The contract owner shall receive a full refund of the premium payments made if the contract is returned within 10 days of receipt of the contract. A market value adjustment may not be applied to the premiums paid.

1) The cash surrender values and paid-up annuity benefits of a deferred annuity contract shall comply with the minimum standards of Section 410C of the Insurance Company Law.

The commutation values of an immediate annuity contract shall equal at least the present value of the remaining payments computed using an interest rate no more than it (100 basis points) higher than the interest rate used in computing the annuity benefits.

2) The contract shall contain sufficient information to determine the cash surrender values and paid-up annuity benefits.

3) For a deferred annuity contract, the death benefit or the determination of the death benefit may be affected by a market value adjustment. Any supplemental benefit based on the contract death benefit, such as an accelerated death benefit, may be affected by a market value adjustment.

4) The complete market value adjustment formula, used in determining adjusted cash surrender values, shall be stated and guaranteed in the contract and shall be applicable for both upward and downward adjustments.

5) A deferred annuity contract shall contain a table of cash surrender values for the lesser of 20 years or the number of years to the maturity date elected by the contract holder at issue or the automatic maturity date if the contract does not provide for election. Additionally, a deferred annuity contract that does not designate 65 as the maturity date in permanent, non-variable print shall disclose the cash surrender value at age 65 if such value is not shown in the table. The table shall be based on the interest rate or rates and maximum expense and surrender charges guaranteed at issue. If the contract allows for alternative interest rate guarantee periods after the initial interest rate guarantee period, the table shall be based on the default renewal periods provided in the contract. For contracts that require premiums to be paid after issue, the table shall be based on the stipulated fixed premium; for contracts that permit (but do not require) premiums to be paid after issue, the table shall be based on specified assumed level premiums payable at least once each year. The table shall contain a statement to the effect that the cash surrender values illustrated are subject to a market value adjustment.

6) If (i) surrender charges are a function of a time period other than the period since issue of the contract, and (ii) the schedule of surrender charges for all possible interest rate guarantee periods is not shown in the contract, the contract shall disclose in a prominent location on the table of values page that the values reflect the surrender charges shown on page of the contract, that any new schedule of surrender charges not shown in the contract will be furnished to the contract owner prior to the date it becomes effective and that the values beginning the year will be reduced by the application of the additional surrender charges.

7) If the market value adjustment provision refers to an index outside the control of the company, the market value adjustment provision shall provide for substitution if the index is discontinued. The provision shall provide that such substitution is subject to the Department's approval. The request for approval shall include an actuarial memorandum indicating the reasonableness of the substitute index.

8) A contract may provide that the interest credited during a guarantee period may exceed the interest rate guaranteed for that period. The interest credited shall not exceed by more than 1/2 of 1% the guaranteed interest rate. Guaranteed interest credits in any market value adjustment guarantee period shall be reasonably related to the average guaranteed interest credits over that period of time.

9) A contract may provide that if no considerations have been received under a contract for a period of 2 full years and the portion of the paid-up annuity benefit at maturity on the plan stipulated in the contract arising from considerations paid prior to such period would be less than $20 monthly, the company may at its option terminate such contract by payment in cash of the greater of the cash value or the cash value after application of the market value adjustment.

10) A contract may provide for guarantee periods of different specified lengths of time. At the end of the initial guarantee period, the contract may provide for subsequent guarantee period(s) of different specified lengths of time. If the contract does not disclose the available initial and subsequent guarantee periods of time, the company shall supply to the Department certification(s) as to the guarantee periods of time available at issue of the contract and subsequently available. The Department shall be notified of any changes in the certified guarantee periods. The contract shall disclose that any guarantee period shall not exceed 10 years. If the annuitization value is subject to a market value adjustment, the contract shall also disclose that a guarantee period shall not extend more than 6 months beyond the annuitization date in effect at the time the guarantee period is elected.

If at the end of any guarantee period the contract provides for subsequent guarantee periods of different specified lengths of time, the contract owner shall have the option of electing a guarantee period for any of the available lengths of time. The contract shall provide for a default option if the contract owner does not elect a guarantee period and shall provide that the default option shall not extend the guarantee period more than 6 months beyond the annuitization date in effect at the time the guarantee period is elected.

11) Any contract loan provision shall be constructed so that separate account modified guaranteed annuity contract owners who have not exercised such provisions are not disadvantaged by the exercise thereof of other separate account modified guaranteed annuity contract owners.

12) Amounts paid to the contract owners upon the exercise of any contract loan provision shall be withdrawn from the separate account and shall be returned to the separate account upon repayment.

13) A provision allowing contract owners to make partial withdrawals may be included. The partial withdrawal provision shall be constructed so that separate account modified guaranteed annuity contract owners who have not exercised the provision are not disadvantaged by the exercise thereof by other separate account modified guaranteed annuity contract owners.

14) The cover page of a deferred annuity contract shall contain a statement that cash surrender values may increase or decrease in accordance with a market value adjustment prior to a date or dates specified in the contract. The cover page shall also contain a statement of the effect, if any, that a market value adjustment has on the death benefit. The statement(s) shall appear in a prominent location in prominent type on the cover page.

The cover page of an immediate annuity contract shall contain a statement that commutation values may increase or decrease in accordance with a market value adjustment. The statement shall appear in a prominent location in prominent type on the cover page.

15) The brief description of the contract shall disclose that the coverage provided is annuity coverage.

16) A deferred annuity contract shall provide that the contract owner shall be sent, without charge, at least annually a report, which will serve to keep such contract owner advised of the status of the contract.

17) A contract issued on a participation basis shall provide for the payment of dividend amounts in cash and for the application of the dividend to any stipulated payment or payments to the company under the contract. In addition, a contract may offer the following additional dividend options.

A) The amount of the dividend may be deposited in the general account at a specified minimum rate of interest.

B) The amount of the dividend may be deposited in the separate account at a specified minimum rate of interest subject to a market value adjustment.