Annuity Investors Life Insurance Company, et al., Notice of Application, 49412-49415 [E9-23277]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 74, Number 186 (Monday, September 28, 2009)]
[Notices]
[Pages 49412-49415]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-23277]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-28909; 812-13612]


Annuity Investors Life Insurance Company, et al., Notice of 
Application

September 22, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order pursuant to Section 6(c) of 
the Investment Company Act of 1940 (the ``Act'') granting exemptions 
from Sections 2(a)(32) and 27(i)(2)(A) of the Act and Rule 22c-1 
thereunder for the recapture of certain bonus credits.

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Applicants: Annuity Investors Life Insurance Company (``Annuity 
Investors Life''), Annuity Investors Variable Account C (``Variable 
Account C''), and Great American Advisors, Inc. (``GAA'').

Summary of Application: Applicants seek an order to permit, under 
specified circumstances, the recapture of certain Bonuses (defined 
below) applied to Purchase Payments (defined below) made under: (1) 
Certain deferred variable annuity contracts and certificates, described 
herein, that Annuity Investors Life has issued, currently issues, or 
will issue through Variable Account C under a registration statement 
field with the Commission under Securities Act of 1933 File No. 333-
148459 (the contracts and certificates, including applicable data pages 
and endorsements, are collectively referred to herein as the ``Current 
Bonus Contracts''); and (2) deferred variable annuity contracts and 
certificates, including applicable data pages and endorsements, other 
than Current Bonus Contracts that Annuity Investors Life may issue in 
the future (``Future Bonus Contracts,'' and together with the Current 
Bonus Contracts, the ``Contracts'') through Variable Account C, through 
any of its existing separate accounts (together with Variable Account 
C, the ``Current Accounts''), or through any future separate account of 
Annuity Investors Life (``Future Accounts,'' and together with the 
Current Accounts, the ``Accounts''). Such Future Bonus Contracts will 
be substantially similar to the Current Bonus Contracts in all material 
respects. Applicants also request that the order being sought extend to 
any other Financial Industry Regulatory Authority (``FINRA'') member 
broker-dealer controlling or controlled by, or under common control 
with Annuity Investors Life, whether existing or created in the future, 
that serves as a distributor or principal underwriter of the Contracts 
offered through the Accounts (``Future Underwriters'').

DATES: Filing Dates: The application was filed on December 12, 2008, 
and an amended and restated application was filed on April 14, 2009 and 
September 18, 2009.

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 should be received by the Commission by 
5:30 p.m. on October 19, 2009, 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 may request notification of a hearing by writing to the 
Secretary of the Commission.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090. Applicants, c/o Annuity Investors Life 
Insurance Company, 525 Vine Street, 7th Floor, Cincinnati, OH 45202, 
Attn: Karen McLaughlin, Esq. Copy to: Richard Choi, Jorden Burt LLP, 
1025 Thomas Jefferson Street, Suite 400 East, Washington, DC 20007.

FOR FURTHER INFORMATION CONTACT: Michael L. Kosoff, Attorney, or Harry 
Eisenstein, Branch Chief, Office of Insurance Products, Division of 
Investment Management, at (202) 551-6795.

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number or an applicant 
using the Company name box, at https://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. Annuity Investors Life desires the flexibility, and is 
requesting exemptive relief, to recapture Bonuses of up to 5% of each 
Purchase Payment credited to Purchase Payments under a Contract if the 
owner returns the Contract for a refund during the free-look period. In 
addition, Annuity Investors Life is seeking exemptive relief to enable 
it to recapture the amount of any Bonus of up to 5% of each Purchase 
Payment credited to a Purchase Payment made under a Contract within the 
12 month period that ends on the Death Benefit Valuation Date.\1\
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    \1\ The Death Benefit Valuation Date means the earlier of (1) 
the date that the Company has received both due proof of death and a 
written request with instructions as to the form of the death 
benefit or (2) the Death Benefit Commencement Date, which is the 
first day of the first payment interval for a death benefit that is 
paid as periodic payments or the date of payment for a death benefit 
that is paid as a lump sum.
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    2. Annuity Investors Life is a wholly owned subsidiary of Great 
American Life Insurance Company, which is a wholly owned subsidiary of 
Great American Financial Resources, Inc. (``GAFRI''). GAFRI is a wholly 
owned subsidiary of American Financial Group, Inc., a publicly traded 
holding company. Annuity Investors Life serves as depositor of Variable 
Account C, which was established on November 7, 2001. Annuity Investors 
Life may establish one or more Future Accounts for which it will serve 
as depositor.
    3. Great American Advisors, Inc. (``GAA'') is the principal 
underwriter of the variable annuity products issued by Annuity 
Investors Life. GAA is a wholly owned subsidiary of Great American 
Financial Resources, Inc. GAA is registered with the Commission as a 
broker-dealer under the Securities Exchange Act of 1934 (``Exchange 
Act'') and is a member of FINRA. The Contracts are offered or will be 
offered through registered representatives of GAA or others who are 
registered broker-dealers under the Exchange Act and FINRA members, and 
who have entered into selling agreements with GAA or any Future 
Underwriter. GAA or any Future Underwriter may act as principal 
underwriter for any Current or Future Bonus Contracts issued through 
any of the Accounts.
    4. Each of the Accounts is or will be a segregated asset account of 
Annuity Investors Life that is or will be

[[Page 49413]]

registered with the Commission as a unit investment trust under the Act 
to the extent required thereby. Each of the Accounts funds or will fund 
the variable benefits available under the Contracts issued through that 
Account. Units of interest in the Accounts are registered or will be 
registered under the Securities Act of 1933 (``1933 Act'') to the 
extent required thereby. Annuity Investors Life, on behalf of itself 
and Variable Account C, filed a Form N-4 registration statement 
relating to the Current Bonus Contract on January 4, 2008 (File No. 
333-148459), which was declared effective on April 30, 2008.
    5. Annuity Investors Life may issue Future Bonus Contracts through 
its Current Accounts or Future Accounts. That portion of the assets of 
the Current Accounts that is equal to the reserves and other contract 
liabilities with respect to the Current Accounts is not chargeable with 
liabilities arising out of any other business of Annuity Investors 
Life, as the case may be. Any income, gains or losses, realized or 
unrealized, from assets allocated to any Current Account are, in 
accordance with the Contracts, credited to or charged against the 
Current Account, without regard to other income, gains or losses of 
Annuity Investors Life, as the case may be. The same will be true of 
any Future Accounts of Annuity Investors Life.
    6. The Current Bonus Contracts (file no. 333-148459) are individual 
or group flexible premium deferred annuity contracts that may be issued 
on a tax-qualified or non-tax-qualified basis. Presently, the Current 
Bonus Contracts may be purchased with a minimum initial Purchase 
Payment of $20,000. A Current Bonus Contract owner may make additional 
Purchase Payments, subject to a $50 minimum. The current maximum single 
Purchase Payment under a Current Bonus Contract is $1,000,000 without 
prior approval from Annuity Investors Life. These maximums and minimums 
may be different for Future Bonus Contracts, and may be prospectively 
changed by rider or endorsement for Current Bonus Contracts. Any such 
changes also would be disclosed in the applicable prospectus(es). A 
``Purchase Payment'' under the Current Bonus Contract means the amount 
received by Annuity Investors Life after the deduction of applicable 
premium or other taxes. Future Bonus Contracts will be substantially 
similar in all material respects to the Current Bonus Contracts.
    7. Each time Annuity Investors Life receives a Purchase Payment 
from an owner of a Current Bonus Contract during the first 10 Contract 
Years (as defined in the Current Bonus Contract), it will credit to the 
owner's account value a bonus (``Bonus'') equal to 4% of each Purchase 
Payment (5% if the Bonus Base Amount, as defined in the Current Bonus 
Contract, equals or exceeds $250,000). The Bonus Base Amount at any 
point in time is equal to the total of all Purchase Payments that 
Annuity Investors Life has received since the Contract effective date, 
before deduction of premium tax or other taxes; less all withdrawals 
since the Contract effective date. The Bonus Base Amount does not 
include any bonuses paid on Purchase Payments.
    8. The Bonus will be allocated according to the allocation 
instructions in effect for Purchase Payments under the particular 
Current Bonus Contract, and will generally be deemed to be a Purchase 
Payment thereunder.
    9. Annuity Investors Life will fund Bonus amounts from its general 
account assets. Annuity Investors Life will recapture from a Current 
Bonus Contract owner: (1) Any Bonus previously credited if the owner 
returns the Current Bonus Contract for a refund during the free-look 
period; and (2) the amount of any Bonus credited to a Purchase Payment 
made under a Current Bonus Contract within the 12 month period that 
ends on the Death Benefit Valuation Date, as defined in the Current 
Bonus Contract. The owner of an individual Current Bonus Contract may 
cancel it before midnight of the 20th day following the date the owner 
receives it unless a longer period is required by State law. If the 
owner cancels the Current Bonus Contract during the applicable time 
period, it will be void, and Annuity Investors Life will refund the 
Purchase Payment(s) in full, less the Bonus amounts credited to the 
Purchase Payment(s) and plus or minus any investment gains or losses 
under the Current Bonus Contract as of the end of the valuation period 
during which the returned Contract or the cancellation request is 
received by Annuity Investors Life (unless a return of Purchase 
Payments is required under State law).
    10. Current Bonus Contract owners may allocate their Purchase 
Payments to any of the available sub-accounts or fixed account options. 
Each sub-account invests in shares of a corresponding registered 
investment company or series thereof (each, a ``Portfolio'').
    11. The Current Bonus Contracts provide for various optional living 
benefits, surrender options, annuity benefits, and annuity payout 
options, as well as transfer privileges among the Portfolios, dollar 
cost averaging, and other features. The Current Bonus Contracts contain 
the following charges: (1) A contingent deferred sales charge based on 
the number of full years elapsed between the date of receipt of the 
Purchase Payment and the date that the request for withdrawal, 
surrender, or annuitization was received equal to a maximum of 9% of 
Purchase Payments (including any Bonuses credited thereto) withdrawn, 
surrendered, or annuitized, declining to 0% after eight years, which 
may be waived in certain circumstances as disclosed in the prospectus 
for the Current Bonus Contract; (2) a $30 annual Contract maintenance 
fee, which may be waived in certain circumstances as disclosed in the 
prospectus for the Current Bonus Contract; (3) a mortality and expense 
risk fee at an effective annual rate of 1.40% (1.60% with enhanced 
death benefit rider); (4) an administration charge at an effective 
annual rate of 0.15%, which may be waived where Annuity Investors Life 
incurs reduced sales and servicing expenses; (5) a current transfer fee 
of $25 for each transfer in excess of twelve in any Contract year; (6) 
any applicable State and local government premium taxes; and (7) 
optional living benefit rider charges currently ranging, depending on 
the rider selected, from an annual rate of 0.40% to 0.95% of the 
benefit base amount determined under the Contract. In addition, assets 
invested in the Portfolios are charged with annual operating expenses 
of those Portfolios. All such fees and charges, and circumstances under 
which such fees and charges may be reduced or waived, are described in 
greater detail in the ``Charges And Deductions'' section of the 
prospectus contained in the Form N-4 Registration Statement for file 
no. 333-148459 of Annuity Investors Life and Current Accounts that has 
been incorporated by reference into the Application.

Applicants' Legal Analysis

    1. Section 6(c) of the Act authorizes the Commission to exempt any 
person, security or transaction, or any class or classes of persons, 
securities or transactions from the provisions of the Act and the rules 
promulgated thereunder, if and to the extent that such exemption is 
necessary or appropriate in the public interest and consistent with the 
policy and provisions of the Act.
    2. Section 27(i) of the Act provides that Section 27 does not apply 
to any registered separate account funding variable insurance 
contracts, or to the sponsoring insurance company and principal 
underwriter of such account, except as provided in paragraph (2) of the 
subsection. Paragraph (2) provides that it shall be unlawful for any

[[Page 49414]]

registered separate account funding variable insurance contracts or a 
sponsoring insurance company of such account to sell a contract funded 
by the registered separate account unless such contract is a 
``redeemable security.''8 Section 2(a)(32) of the Act defines 
``redeemable security'' as any security, other than short-term paper, 
under the terms of which the holder, upon presentation to the issuer, 
is entitled to receive approximately his proportionate share of the 
issuer's current net assets, or the cash equivalent thereof.
    3. Rule 22c-1 under the Act prohibits a registered investment 
company issuing any redeemable security, a person designated in such 
issuer's prospectus as authorized to consummate transactions in any 
such security, and a principal underwriter of, or dealer in, such 
security, from selling, redeeming, or repurchasing any such security 
except at a price based on the current net asset value of such security 
which is next computed after receipt of a tender of such security for 
redemption or of an order to purchase or sell such security.
    4. Applicants request exemptions pursuant to Section 6(c) from 
Sections 2(a)(32), and 27(i)(2)(A) of the Act and Rule 22c-1 thereunder 
to the extent deemed necessary to permit Applicants to recapture: (1) 
Any Bonus previously credited if the owner returns the Current Bonus 
Contract for a refund during the free-look period; and (2) the amount 
of any Bonus credited to a Purchase Payment made under a Current Bonus 
Contract within the 12 month period that ends on the Death Benefit 
Valuation Date, as defined in the Current Bonus Contract. Applicants 
believe that the requested exemptions are appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act.
    5. Applicants also request that the Commission, pursuant to Section 
6(c) of the Act, grant the above exemptions with respect to the Current 
Bonus Contracts and any Future Bonus Contracts funded by the Current 
Accounts or Future Accounts that are issued by Annuity Investors Life 
and underwritten or distributed by GAA or any Future Underwriters. 
Applicants undertake that Future Bonus Contracts funded by the Current 
Accounts or by the Future Accounts which seek to rely on the order 
issued pursuant to this Application will be substantially similar in 
all material respects to the Current Bonus Contracts. Applicants submit 
that their request for an order that applies to the Current Accounts or 
any Future Accounts established by Annuity Investors Life, in 
connection with the issuance of the Current Bonus Contracts and Future 
Bonus Contracts that are substantially similar in all material respects 
to the Current Bonus Contracts described herein, and that are 
underwritten or distributed by GAA or any Future Underwriter, is 
appropriate in the public interest. Applicants submit that such an 
order would promote competitiveness in the variable annuity market by 
eliminating the need to file redundant exemptive applications, thereby 
reducing administrative expenses and maximizing the efficient use of 
Applicants' resources as well as those of the Commission. Investors 
would not receive any benefit or additional protection by requiring 
Applicants to repeatedly seek exemptive relief that would present no 
issue under the Act that has not already been addressed in this 
Application. Further, having Applicants file additional applications 
would impair their ability quickly and effectively to take advantage of 
business opportunities as they arise.
    6. Applicants submit that the recapture of the Bonuses will not 
raise concerns under sections 2(a)(32), and 27(i)(2)(A) of the Act, and 
rule 22c-1 thereunder. The amounts recaptured will equal the Bonuses 
paid for by Annuity Investors Life out of its general account assets. 
Therefore, the Bonus recapture provisions described herein will not 
deprive a Contract owner of his or her proportionate share of the 
issuer's current net assets.
    7. Applicants represent that under the terms of the Current Bonus 
Contract a Contract owner's interest in the amount of the Bonus 
allocated to his or her annuity account value upon receipt of an 
initial Purchase Payment is not vested if the Contract is returned 
during the applicable free-look period. Similarly, under the terms of 
the Current Bonus Contract a Contract owner's interest in the amount of 
any Bonuses allocated upon receipt of any Purchase Payments made during 
the 12 month period ending on the Death Benefit Valuation Date is not 
vested. Until or unless the amount of any Bonus is vested, Annuity 
Investors Life retains the right and interest in the Bonus amount, 
although not in the earnings attributable to that amount. Thus, when 
any Bonus amounts are recaptured, Annuity Investors Life is simply 
retrieving its own assets. Since the Contract owner's interest in the 
Bonus is not vested, the Contract owner has not been deprived of a 
proportionate share of the applicable Account's assets.
    8. With respect to the Bonus recapture upon the exercise of the 
free-look privilege, the Applicants assert that it would be patently 
unfair to allow a Contract owner to exercise that privilege and retain 
a Bonus amount under a Contract that has been returned for a refund 
after a period of a few weeks or days. If Annuity Investors Life could 
not recapture the Bonus, individuals could purchase a Contract with no 
intention of retaining it, and simply return it for a quick profit.
    9. Furthermore, Applicants assert that the recapture of the amount 
of any Bonus credited to a Purchase Payment made under a Current Bonus 
Contract within the 12 month period that ends on the Death Benefit 
Valuation Date, as defined in the Current Bonus Contract, is designed 
to afford Annuity Investors Life with a measure of protection from 
anti-selection. The risk here is that the Contract owner could make 
very large Purchase Payments shortly before death, thereby leaving 
Annuity Investors Life less time to recover the cost of the Bonuses, to 
its financial detriment.\2\
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    \2\ Annuity Investors Life intends to recover the cost of the 
Bonuses applied from the revenue from the charges imposed under the 
Current Bonus Contracts, which are described earlier in this 
Application. Annuity Investors Life may use any excess to recover 
distribution costs relating to the Current Bonus Contracts and as a 
source of profit.
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    10. Applicants submit that the recapture of a Bonus might be viewed 
as resulting in the redemption of redeemable securities for a price 
other than one based on the current net asset value of the Accounts. 
Applicants contend, however, that recapture of any Bonus would not 
violate Rule 22c-1.
    11. Applicants maintain that the recapture does not involve either 
of the problems that Rule 22c-1 was designed to prevent, namely (i) the 
dilution of the value of outstanding redeemable securities of 
registered investment companies through their sale at a price below net 
asset value or their redemption or repurchase at a price above it, and 
(ii) other unfair practices such as speculative trading practices.\3\ 
These problems were the result of backward pricing, the practice of 
basing the price of a mutual fund share on the net asset value per 
share determined as of the close of the market on the previous day. 
Backward pricing allowed investors to take advantage of increases in 
net asset value that were not yet reflected in the price, thereby 
diluting the value of outstanding mutual fund shares.
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    \3\ See Adoption of Rule 22c-1 under the Act, Investment Company 
Act Release No. 5519 (Oct. 16, 1968).
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    12. Applicants also maintain that the proposed recapture of the 
Bonus poses no threat of dilution. To effect a

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recapture of a Bonus, Annuity Investors Life will redeem interests in 
the Contract owner's annuity account at a price determined on the basis 
of current net asset value of the relevant Account. The amount 
recaptured will equal the amount of the Bonus that Annuity Investors 
Life paid or will pay out of its general account assets. Although 
Contract owners will be entitled to retain any investment gain 
attributable to the Bonus, the amount of such gain will be determined 
on the basis of the current net asset value of the relevant Account. 
Thus, no dilution will result from the recapture of the Bonus. The 
second problem that Rule 22c-1 was designed to address, namely, 
speculative trading practices calculated to take advantage of backward 
pricing, also will not occur as a result of the recapture of the Bonus.
    Because neither of the problems that Rule 22c-1 was designed to 
address is found in the recapture of the Bonus, Rule 22c-1 should have 
no application to any Bonus under the Current Bonus Contracts or Future 
Bonus Contracts. However, to avoid any uncertainty as to full 
compliance with the Act, Applicants request exemptions from the 
provisions of Rule 22c-1 to the extent deemed necessary to permit them 
to recapture the Bonus under the Current Bonus Contracts and Future 
Bonus Contracts.
    13. Applicants assert that the Bonus is and will be attractive to 
and in the interests of investors because it will allow Contract owners 
to apply 104% or 105%, as the case may be, of their Purchase Payments 
to work for them in their selected investment options. Also, any 
earnings attributable to the Bonus will be retained by the Contract 
owner, and the principal amount of the Bonus also will be retained if 
the contingencies set forth in this Application are satisfied, i.e., 
the Contract is not returned for a refund during the free-look period 
and the Bonus is not credited to a Purchase Payment made under the 
Contract within the 12 month period that ends on the Death Benefit 
Valuation Date.
    14. Further, Applicants submit that the recapture of any Bonus only 
applies in relation to the risk of anti-selection against Annuity 
Investors Life. In the context of the contingencies described in this 
Application, anti-selection can generally be described as a risk that 
Contract owners obtain an undue advantage based on elements of fairness 
to Annuity Investors Life and the actuarial and other factors it takes 
into account in designing the Contracts. Annuity Investors Life 
provides the Bonuses from its general accounts on a guaranteed basis. 
Thus, Annuity Investors Life undertakes a financial obligation that 
contemplates the retention of the Contracts by its owners over an 
extended period, consistent with the long term nature of retirement 
planning. Annuity Investors Life generally expects to recover its 
costs, including Bonuses, over an anticipated duration while a Contract 
is in force. The right to recapture Bonuses credited to Purchase 
Payments made within the 12 month period ending on the Death Benefit 
Valuation Date protects Annuity Investors Life against the risk that 
Contract owners will contribute larger amounts shortly before death, 
while avoiding Contract charges over the long term. With respect to 
refunds paid upon the return of Contracts within the free-look period, 
the amount payable by the applicable Annuity Investors Life must be 
reduced by the allocated Bonuses. Otherwise, purchasers could apply for 
Contracts for the sole purpose of exercising the free-look refund 
provision and making a quick profit.

Conclusion

    For the reasons summarized above, Applicants submit that their 
exemptive request meets the standards set out in Sections 6(c) of the 
Act, namely, that the exemptions requested are necessary or appropriate 
in the public interest and consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
Act, and that, therefore, the Commission should grant the requested 
order.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-23277 Filed 9-25-09; 8:45 am]
BILLING CODE 8010-01-P