degree of Federal regulation. As we all know from experience, once Federal regulation starts, there is no telling where it will stop.

Furthermore, entirely apart from SEC regulation, if the life companies go into this business aggressively, their ownership of common stock would inevitably increase and thus increase the possibility of accusation of control of industry. We all remember the investigation conducted 20 years ago by the Temporary National Economic Committee, and we know that we are now faced with another study of the question of whether there is any concentration of economic power in our business. This study is being undertaken by the Antitrust and Monopoly Subcommittee of the U.S. Senate Judiciary Committee and is to be conducted by Senator Joseph C. O'Mahoney of Wyoming, who also headed the TNEC.

Our business came through the TNEC study with flying colors when it was demonstrated that the common stock holdings of the life insurance business were negligible. However, if our life insurance companies ever put themselves in the position, through ownership of common stocks or otherwise, of being justly accused of controlling any segment of American industry, the prospect of further Federal regulation would be greatly increased.

I personally do not believe it to be in the interest of the life insurance business for our companies to sell mutual funds or variable annuities. The two, in my opinion, are basically the same. When there are downswings in the stock market, as there have been in the past and as there surely will be in the future, those retired people depending upon income from variable annuities are bound to be hurt. This could bring grief to many people, and if it does, the reputation of our business is also bound to be hurt.

Furthermore, for the life insurance companies on any large scale to sell variable annuities could be interpreted as an admission that the life insurance business no longer believes in its own product of guaranteed dollars. This strikes at the very foundation of our business, and would be extremely discouraging in our Nation's fight against inflation. No matter what anyone may say to the contrary, it seems to me that the most effective sales argument for the variable annuity rests squarely on the premise that we are faced with inevitable future inflation.

Notwithstanding how I personally feel about this important matter, I would like very much to know the feelings of our industry as a whole. Accordingly, I am sending this same letter to the presidents of all U.S. member companies of the American Life Convention, the Life Insurance Association of America, and the Life Insurers Conference, to ask them their views.

I hope you will be willing to complete and return the attached questionnaire in the enclosed envelope. I also hope that, regardless of what my feelings may be, you will let me have your frank opinion.

I shall be glad to let you know the outcome of this survey, and assure you that if it is your wish and you so indicate, your individual reply will be held in confidence and that your answer will be used only in the aggregate with all other replies.

Sincerely yours,

President.

P.S.-In order that you may have before you a more complete discussion of both sides of the question, I am enclosing herewith copies of statements made on September 29, 1958, before the Joint Insurance Committee of the Massachusetts Legislature by our vice president, Mr. Charles G. Dougherty, and by Mr. Richard J. Congleton, general atorney of the Prudential Insurance Co. of America.

F.W.E.

QUESTIONNAIRE

Please answer the following question by making a check in the appropriate space.

1. Under present conditions, do you believe that it would be in the best interests of the life insurance business for life insurance companies to sell individual variable annuities to the general public? [] Yes [] No

Other comments (attach additional pages if necessary):

[] Check here if you wish your reply to be held in confidence.

STATEMENT BY RICHARD J. CONGLETON, GENERAL ATTORNEY, THE PRUDENTIAL INSURANCE CO. OF AMERICA, NEWARK, N.J.

In support of the proposed substitute for house bill No. 1560, at the public hearing on September 29, 1958, before the insurance committee of the Massachusetts Legislature

My name is Richard J. Congleton. I am general attorney of the Prudential Insurance Co. of America, a mutual life insurance company organized under the laws of the State of New Jersey.

We appreciate the opportunity to appear here today to present our position on the variable annuity and to urge passage of the proposed substitute for house bill No. 1560. We are anxious to be of whatever help we may in your consideration of the methods suggested for assisting the citizens of Massachusetts to provide for a retirement income which would offer some opportunity for participation in the growth of the national economy and, at the same time, be less susceptible to the impact of inflation on the purchasing power of the dollar.

The life insurance industry has, for many years, furnished the people of this country with protection against the economic contingencies of life. Insurance enables the individual to protect himself and his family through the exercise of self-reliance and initiative. Down through these years, the life insurance industry has recognized its responsibility to encourage this self-reliance, thrift, and initiative by making available to the great mass of people of this country plans under which they may provide for their own security.

It is part of that responsibility to expand and adapt available services to meet the public's need for new forms of coverage.

It seems unnecessary for us to spend much of our time proving that such a need exists today. The public urgently requires a new economic weapon, some means of supplementing and notice I said supplementing, not replacingthe traditional forms of retirement programing which provide fixed dollar incomes substantially at the mercy of reductions in dollar purchasing power. The report of the recess commission (Senate No. 815, August 1958) recognizes the grave problem confronting life insurance companies, employers, and citizens of providing retirement benefits that are adequate in our modern economy. Probably no segment of our population has suffered so much from loss of purchasing power, and has been so defenseless against it, as our retired people. Those who have had to depend on a fixed dollar retirement income during the past few decades have learned to their misfortune that they were given no guarantee of a financially secure old age. Based on the Consumer Price Index of July 1958, a person who retired in 1940 on a pension of $2,500 annually, would have to receive $5,170 today to have the same purchasing power. His "1940 model" income today has an equivalent purchasing power of $1,209.

I think we can conclude from this that you cannot rely alone on the selection of a particular number of dollars, projected many years into the future, in the hope that it will be enough. We have no way of knowing what the dollar will buy in terms of bread, milk, and shoes 20, 30, or more years from now.

How many of your own relatives and friends have been caught by this dollar shrinkage? Certainly they are fortunate to have had a retirement income at all; but they would have been much happier if this income had kept pace to some extent with the expanding economy and the increased cost of living.

We can't dispose of this situation by ignoring its existence. The number of people living past age 65, as well as the life expectancy of those who attain that age, has been steadily and significantly increasing since the turn of the century. If the problem is great today, it is going to be magnified in the future as the number and proportion of senior citizens increases.

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The great pooling and redistribution system which is private insurance has always had the means readily at hand to meet new demands for protection as they arise. We believe the answer to the present problem lies in the issuance of variable annuity contracts by life insurance companies. We're convinced this is the best approach yet suggested. Even though some questions may remain unresolved-and questions can always exist or be created-we insist it is an approach worth trying.

This is not, as has been charged, a suggestion that inflation be embraced. We are not preaching its inevitability. We don't know what the future holds any more than does anyone else. But the economists tell us that future inflation is a possibility-a good possibility-and, since it is such, our experience has taught us it is a hazard against which we must attempt to protect ourselves. I think it would be proper at this point for me to explain briefly what a variable annuity is and why it is an annuity, so we'll have a solid basis on which to discuss the matter further.

Any annuity, fixed-dollar or variable, may be described as a contract which provides an income to continue for the lifetime of the annuitant by consuming a principal sum with earnings thereon exactly over the uncertain duration of such lifetime. Normally, annuity contracts call for a relatively long period of payments by the annuitant to the company, during which period the principal sum is accumulated. These payments are invested by the company as received, to provide the maximum benefit later on.

In the fixed-dollar contract, among other things, the company guarantees the amount of earnings it will receive on these payments at a conservatively set interest rate it is reasonably sure of maintaining through investment in fixeddollar securities. At the annunity date, the annuitant stops making payments and begins receiving benefits in amounts established by a predetermined contractual formula.

As a result of this procedure, annuitants have not had the same opportunity for participation in the expansion of the national economy available to others. The variable annuity is an attempt to correct this situation. Its one distinguishing feature is that the company does not assume a rate of return on investments. Therefore, it is not necessary to invest in securities which limit both the rate of interest and the opportunity to participate in economic growth. Instead, the assets attributable to variable annuity contracts can be invested in equities as the benefits will be keyed directly to the actual investment results. The value of common stocks fluctuates, as does the income they produce, and the actual extent of the variation cannot be predicted in advance. Benefits therefore will vary as the value of the assets varies, and exhaustive economic studies show that in the past this variation corresponded reasonably-not perfectlyto variations in the prices of consumer goods.

Our economists have tested this theory in every conceivable situation during the past 77 years. Probably the most important result emerging from these investigations is the finding that using a 15-year accumulation period (the minimum period of accumulation under the Prudential proposal for an individual deferred annuity) and a 15-year retirement period (the present life expectancy of a male aged 65), there has not been a single instance during the past 77 years when the annuitant would have failed to secure a higher total retirement benefit under a common stock annuity than under a fixed-dollar annuity.

There have been in the past and from time to time there probably will be in the future comparatively short periods when stock prices and consumer prices move in opposite directions. But, as demonstrated by our latest charts (attached as exhibits A and B), the variable annuity would have provided outstanding protection even in such periods-including the current economic situation.

Much has been said by the opponents of variable annuities about the newness-the untried character-of this concept. Actually, and I can quote here from the supplemental statement of Orville Graham, "it must be appreciated that the variable annuity is not a theory but a fact." It is, at most, the latest outgrowth of a continuing search for better ways to accomplish retirement objectives-a search necessitated by the fact that the traditional plans have one basic flaw: The fixed benefits they provide rapidly become inadequate under the impact of inflation.

Various remedies have been tried. Industry, as well as the Federal Government, States, counties, and municipalities-all large-scale employers in their

own right-have been continually confronted with the problem of providing effective retirement programs. Social security benefits have been increased four times (as recently as last month)-the rate of tax has more than doubled-in order to provide a minimum floor of economic security. Many industrial plans have been revised to increase pension benefits but adjustments tend to be belated and are not automatic or dependable. Despite adjustments, existing plans are still fighting a losing batle against loss of purchasing power and the rising cost of even subsistence.

Out of the search for answers, a growing interest in equity investments has evolved. In the field of corporate pension planning, a marked trend has developed toward uninsured trusteed pension plans with increased use of common stock investments. On another level, several insurance companies now offer a combination plan involving the purchase of annuities and mutual fund shares, to secure some benefit from both fixed-dollar and equity-type investments. In addition, various mutual funds have come up with schemes in attempts to offer some solution to the problem.

The most interesting thing about all these plans or approaches, I think, is that in every case, after careful study and consideration, the solution suggested has been something which is as close to a variable annuity as the company involved was legally authorized to write.

But because a person planning for his retirement needs an income that not only will respond to changes in purchasing power but will be one that he cannot outlive, every suggestion other than the variable annuity falls short of the mark. At best, these other approaches do not provide a combination of the annuity principle and the opportunity for participation in the expansion of the national economy during the entire lifetime of the individual. In most cases they do not involve the annuity principle at all.

This annuity principle is not at all mysterious. It is simply an assumption by the life insurance company of the risk of how long each individual is going to live just as life insurance is the assumption of the risk, by the insurance company, of when the individual is going to die.

But the nature of this assumption of risk is such that only a life insurance company-legally authorized to employ life contingency principles and technically skilled in their application-can write any kind of annuity, fixed or variable. Because this is so, and because there is an urgent public need for this kind of protection, we believe they should be permitted to make the variable annuity available.

There are already a number of variable annuity plans in operation. College Retirement Equities Fund is one example. CREF, as it is called, was organized in 1952 by the New York Legislature as a companion organization to Teachers Insurance and Annuity Association. As recommended by a commission composed of educators and leading businessmen, its purpose is to provide college staff members with a variable annuity which could respond more flexibly to changes in the economy.

Three life companies: Variable Annuity Life Insurance Co. (July 1955); Equity Annuity Life Insurance Co. (July 1956)-both of the District of Columbia; and Participating Annuity Life Insurance Co. (August 1954) of Rogers, Ark., have been formed to sell variable annuities to the general public. Variable Annuity Life Insurance Co. has since been licensed in West Virginia, Kentucky, and Arkansas. Equity Annuity Life Insurance Co. was also recently admitted in Kentucky and in North Dakota.

The seemingly continuous need for periodic adjustment of pension benefits has spawned considerable interest in the variable annuity. On the governmental level, the State of Wisconsin last year moved to end this cycle. Acting upon the recommendation of the Governor's Retirement Study Commission, which in its August 1, 1956, report found the variable annuity to be the "most promising" means of overcoming the serious defect in conventional retirement plans, the legislature unanimously enacted three bills, subsequently signed by the Governor. The purpose of these laws is to incorporate the variable annuity principle into the retirement systems for State employees, State teachers, and Milwaukee teachers on much the same basis as CREF.

The State of New York, according to State Controller Arthur Levitt, has commenced studying the feasibility of introducing a variable annuity plan for the New York State Employees Retirement System.

If, then, the variable annuity is a fact, it seems fair to ask how, in fact, it has been working. CREF is an excellent example-it has been in operation

the longest and its president, Mr. William Greenough, recently summarized the first 6 years of its operation:

"CREF now has 39,000 participants in the premium-paying stage, and 300 persons receiving annuities. Its total assets are $55,900,000, and premiums plus

dividend income average over $1,500,000 a month.

"Over 80 percent of the new persons coming under college retirement plans with us elect concurrently to go into CREF as well as TIAA. As a matter of fact, the figure was 85 percent last month (April 1958); about the highest ever reached. Of the total participants in CREF, 9 out of 10 have elected to put half of their money in the new common stock fund, the other 10 percent splitting about evenly between one-fourth and one-third.

"During these last 2 years of mediocre common stock performance, with recurrent substantial fears on the part of the general public as to the future, we have detected no shifting of CREF participants out of CREF, no attempts to 'guess' the market, no development of 'cold feet.' This pertains not only to individuals but to colleges-not a single college that has approvd CREF participation for its staff members has rescinded such approval."

Incidentally, despite last year's period of falling stock prices and a rising cost of living, the combined TIAA-CREF benefit to annuitants, figured on the provision of $100 monthly from the "fixed" side and $100 monthly from the "equity" side, has been scarcely disturbed-$299 per month in 1957; $298 monthly in 1958.

There has been another recent development which bears some mention here, particularly since most of the oppostion to the variable annuity, emanating from the securities industry, has concerned not the concept but the agency by which the sale of such contracts would be regulated. On May 22, 1958, the U.S. Court of Appeals, affirming the decision of the lower (district) court, ruled that the sale of variable annuities by life insurance companies did not come within SEC jurisdiction. Recognizing that "the most important risk the purchaser desires to shift when he buys an annuity is the risk that he will live longer than his funds will last" the court found that "Variable Annuity Life Insurance Co., by the fact of issuing an annuity policy, does assume the risk of when the annuitant will die" and concluded:

"The Variable Annuity Life Insurance Co. contracts have many qualities of the traditional business of insurance. They depart from the tradition only in their attempt to solve a problem badly in need of solution. Unless we confine insurance, by definition, to what has actually been done in the past under the name of insurance, and invent a new and distinctive anme for this new business which so greatly resembles insurance, we should not contradict the insurance commissioners" who have expressed th official opinion "that the business of Variable Annuity Life Insurance Co. is the business of insurance."

Application to the U.S. Supreme Court for writ of certiorari has been filed by both the SEC and the NASD.

What does the substitute for House bill No. 1560 provide:

(1) It authorizes Massachusetts life insurance companies to establish separate variable annuity accounts.

(2) It provides strong regulatory authority over both domestic and foreign insurers selling variable annuity contracts in the Commonwealth.

(3) It gives to the commissioner of insurance many regulatory powers, some of the most important of which are

(a) No company can go into the variable annuity business until it has satisfied the commissioner that its conditions and methods of operation are such that they will not be hazardous to the public or to its policyholders in the Commonwealth.

(b) No agent can sell variable annuities until he takes a special examination on that subject and receives the necessary certificate from the commissioner.

(c) Any contract for a variable annuity shall contain a statement of the essential features of the procedure to be followed by the company in determining the dollar amount of variable benefits or other contractual payments or values thereunder.

(d) Any variable annuity contract shall contain in bold type on its first page a clear statement that benefits are on a variable basis.

(e) The commissioner is given control not only of the form of the contract but must find that its provisions are not unjust, unfair, inequitable, ambiguous, misleading, or likely to result in misrepresentation or contrary to law.