Question
(redacted)
September 19, 1990
BY TELECOPY
Mr. Jeff Dahnke
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Avenue, NW, Room 303
Washington, D.C. 20580
Dear Mr. Dahnke:
This letter is to follow-up on our telephone conversation regarding how a life insurance company or life insurance holding company should treat "separate account assets" and "annuity and other fund deposits" in determining "annual net sales and total assets" for purposes of the size-of-person test.
As I explained to you during our telephone conversation, separate account assets are reflected on the balance sheet of a life insurance company or on the consolidated balance sheet of a life insurance holding company as a separate item with an offsetting entry for separate account liabilities. Separate accounts are established under the insurance laws of the various states. Although a separate account may or may not be registered as a unit investment trust under the Investment Company Act of 1940, this inquiry relates only to separate accounts which are so registered. The separate accounts which are themselves registered as unit investment trusts, invest the assets from the sale of variable life and annuity products in shares of specified funds or unit investment trusts.
By law and for statutory accounting purposes, the assets and liabilities of the separate accounts are clearly identified and distinguished from other assets and liabilities of the insurance company. For your information we have enclosed a copy of Section 2933 of the Delaware Insurance Code which authorizes separate accounts. The attached statutory language is representative of separate account authorizations in other state insurance codes.
Separate account assets applicable to policies and contracts cannot be charged with liabilities arising out of any other business the insurance company may conduct. Although for reporting purposes separate account assets are reflected on the balance sheet (with an offsetting entry for separate account liabilities), the separate accounts are treated as separate entities under the Investment Company Act of 1940 and separate audited financial statements are required and prepared for them.
Separate account assets are carried at net asset value, which approximates market value, and generally represent policy owner and contract owner funds maintained in the accounts to meet specific investment objectives and unamortized deferred policy loads and other charges due the insurance company from policy owners and contract owners over a specified period. Net investment income and realized and unrealized capital gains and losses related to the separate account assets are not reflected in the statements of operations of an insurance company or insurance holding company.
We understand that the Commission has changed its position as stated in Interpretive Letter No. 98, permitting the netting of an asset and a liability in applying the size-of-person test, where an asset has an identical offsetting liability specifically related to the asset. However, we believe the facts with respect to registered separate accounts are significantly different that those dealt with in Interpretive Letter No. 98. Unlike the advertising monies dealt with in Interpretive Letter No. 98, separate accounts constitute specific assets segregated pursuant to express statutory authority. By law, separate account assets allocable to policies and contract obligations are not subject to the general liabilities of the insurance company and must be separately identified, and the income, gains and losses thereon are separately accounted for. The separate account is legally a separate fund and the contract holders look to the separate account to satisfy their contract rights; no one else, including the other policyholders and other creditors of the insurance company have any rights against the funds in the separate accounts allocable to such contract liabilities. In effect, the separate accounts represent separate mutual funds established by the insurance company. Treating separate account assets as assets of the insurance company for purposes of the size-of-person test is akin to treating the assets of a mutual fund as assets of the funds investment adviser.
Interpretive Letter No. 96 states that title insurers that file asset balance sheets under the format of the National Association of Insurance Commissioners (NAIC) Annual Statement Blank for Title Insurance (Form 9) may use admitted value on their most recent Form 9 for their total assets under 801.11(c)(2). We note that life insurance companies using the NAIC Annual Statement Blank for Life and Accident and Health Insurance (Form 1) must report total assets excluding separate accounts, reflecting the fact that funds in the separate account which are allocable to contract liabilities are not available to satisfy the claims of other policyholders and other creditors. In substance, the separate accounts stand in the position of reinsurer of a portion of the insurance companys risk. Clearly, the reserves of a reinsurer would not be considered assets of the original insurer. Similarly, the assets of the separate accounts, which are analogous to the reserves established by a reinsurer, should not be viewed as assets of the insurance company for purposes of the size-of-person test. Interpretive Letter No. 96 provides that life insurance companies that in their last regularly prepared annual report of operations used the format of Form 1 should refer to total net premiums written (i.e., net of reinsurance ceded) as their annual net sales within the meaning of 801.11(c)(1). Total net premiums written is reflected on line 20(d) of Exhibit 1-Part 1, Premiums and Annuity Considerations and carried over to line 1 of the Summary of Operations on Form 1.
"Annuity and other fund deposits" are amounts paid by contract owners to the insurance company under an annuity contract or other insurance policy. A contractually determined portion of annuity and other fund deposits received by the insurance company must be deposited in the separate accounts. Unlike premiums, the annuity and other fund deposits and transfers to separate accounts items are reflected separately on the Summary of Operations section of Form 1 at line 1A and line 24A. However, under generally accepted accounting principals they are netted in reporting revenue. Since Interpretive Letter No. 96 permits the insurance company to net reinsurance payments against gross premiums for purposes of the annual net sales determination, it seems appropriate that the insurance company would also net the amount of transfers to separate accounts against annuity and other fund deposits. Such offset is analogous to the treatment of reinsurance provided by Interpretive Letter No. 96 and reflects the same underlying economic reality (i.e., a portion of the economic risks associated with the contract are transferred to the separate account in the same way reinsurance transfers certain risks to the reinsurer).
We request that the Commission concur in our analysis that transfers to separate accounts may be netted against annuity and other fund deposits for purposes of determining annual net sales under 801.11(c)(1) and that separate account assets of a life insurance company should not be included in determining total assets of such company for purposes of 801(c)(2).
Please direct any questions you may have regarding this letter to the undersigned or (redacted) of this office.
Very truly yours,
(redacted)
(redacted)
cc: (redacted)