- 11 -
Under the constant loan interest rate scenario, the
projections assumed that the interest rate paid by petitioner on
policy loans remained constant at 11.06 percent3 for the life of
the pool. Amounts to be credited to petitioner on borrowed cash
value were set at 40 basis points below the 11.06 percent being
charged to petitioner.4 Thus, the borrowed cash value would be
credited at 10.66 percent. The remaining cash value was credited
at 4 percent. The January 27, 1993, memorandum explains that "A
COLI Pool generally works best when the interest rate on policy
loans is highest."5 The projections under the constant loan
interest rate scenario were also based on the following
assumptions:
Corporate tax bracket 38%
Population (number of insured
employees) 38,000
Premium $3,000 per life
Mortality assumption 100% of 1983 GAM1
Fee $8 per participant
annually
1The mortality assumption "GAM" was not defined in the proposal.
Ultimately, petitioner and AIG agreed upon using the 1980 Commissioners
Standard Ordinary Mortality Table B to estimate mortality.
3The 11.06-percent rate was based on Moody's Baa rate from
November 1992, which was 8.96 percent. Coventry converted it to
an arrears rate and added 1 percent to reach 11.06 percent.
4This is referred to as "loan spread". The Jan. 27, 1993,
memorandum explains: "An effective COLI Pool should have a small
'spread' between the interest rate charged on policy loans and
the amounts credited to borrowed cash values."
5The rate in effect for the MSP policies was 8.41 percent.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011