similar sales practices in Canada qualify as "standard industry behavior", and regulators look the other way
Targeting the Elderly: Annuity tactics under fire
Sunday, June 04, 2006
By Joe Gardyasz,
joegardyasz@bpcdm.com
Imagine that an insurance agent contacts your elderly mother or grandmother who’s living in Florida or California, purporting to be an expert in living trusts. He persuades her to provide him with detailed information on her investment portfolio, and after gaining her trust, advises her to move a significant portion of her savings into an annuity, without telling her that she’ll only be able to access 10 percent of her money per year without incurring a surrender charge.
This scheme, according to lawsuits brought by both state regulators and private attorneys, has allegedly been used to sell sell hundreds of millions of dollars in annuities to elderly residents who needed short-term investments or immediate income, not a long-term investment that would, in some instances, lock up their savings longer than they would be expected to live.
Take the case of Murray Cheves. When he was 90, the California resident was sold a $100,000 annuity issued by American Investors Life Insurance Co., a subsidiary of Des Moines-based AmerUs Group Co. The annuity had surrender charges that were effective for 10 years from the issue date. After Cheves died a year later, his heirs had to pay the $11,000 surrender charge.
“When you start hearing these stories, it really gets heart-wrenching,” said Scott McNamara, senior staff counsel for the enforcement bureau of the California Department of Insurance. In February 2005, the department and the California attorney general filed suit against AmerUs, seeking $110 million in restitution and damages on behalf of thousands of California seniors.
In the Cheves case, which became a national class-action suit, AmerUs reached a $6.24 million settlement in November.
AmerUs officials deny any wrongdoing and say their policies ensure their clients meet suitability standards for the products being sold.
American Equity Investment Life Investors Co. of West Des Moines, which is the nation’s second-largest issuer of indexed annuities, is also the subject of lawsuits alleging inappropriate sales of those products. The company is now appealing a proposed settlement in one of those cases, which involved approximately 28,000 seniors in Florida. That settlement, according to an attorney representing the plaintiffs, would require American Equity to waive all penalties for early withdrawal of savings and increase the value of each person’s account by 2 percent when it’s annuitized.
American Equity officials did not respond to phone calls from the Business Record. However, according its most recent quarterly filing with the SEC last month, the company is “currently a defendant in several purported class action lawsuits alleging improper sales practices,” and also said it has “denied all allegations in these lawsuits and intends to vigorously defend against them,” and that it “does not believe the lawsuits will have a material adverse effect on its business, financial condition or results of operations.”
In its first-quarter earnings release, the company also said it monitors its sales practices “on a continuous basis” and was among the first in the index annuity issuers to ndustry to adopt writers to require a suitability review of sales of annuities to consumers of all states.
No more free lunches?
The annuity industry continues to be the subject of scrutiny at both the federal and state levels. On May 8, the U.S. Securities and Exchange Commission and the North American Securities Administrators Association announced a joint national initiative aimed at cracking down on investment fraud against seniors. Those efforts will include targeted examinations to detect abusive sales tactics, aggressive enforcement of securities laws in cases of fraud against seniors and active investor education and outreach.
“As the nation’s assets increasingly are held by older Americans, fraudsters can be expected to follow Willie Sutton’s example and go where the money is,” SEC Chairman Christopher Cox said in a press release. “That’s why the SEC’s partnership with state regulators to safeguard the assets of older Americans is so important.”
Federal and state regulators, in coordination with the National Association of Securities Dealers, have already initiated on-site examinations of firms in Florida that sponsor “free lunch” investment seminars for seniors, which are often used as a first step in pitching annuities that are unsuitable for elderly investors.
At the same time that some Iowa insurers are defending themselves against serious allegations of wrongdoing, they’re taking what Iowa regulators say is an active role to strengthen rules governing the sale of annuities. About 34 percent of the indexed annuity products sold in the United States are issued by Iowa-based insurance companies.
“Many of our Iowa companies have moved to suitability standards before it’s been enacted [at the state level],” said Tom Alger, a spokesman for the Iowa Insurance Division, who said his agency has not taken any legal actions against Iowa-based companies that issue annuities. “We’re looking at this [issue] very actively, and with the participation of Iowa-based producers, which at least at this point are showing a great deal of cooperation.”
In California, the case brought against AmerUs by the insurance department and attorney general is in mediation, and is expected to either reach a settlement or go to trial within the next couple of months, McNamara said.
Living trust mills
The primary reason the state of California decided to pursue the case, he said, was AmerUs’ ownership of Family First Estate Planning and Family First Insurance Services through its American Investors Life Insurance subsidiary. Two of Family First’s owners, John Owen and Nick Michaels, had operated a “living trust mill” operation in California called Alliance of Mature Americans, which the state had shut down several years ago, McNamara said.
“We had never had that direct relationship between a trust mill and an insurer, which was what motivated us to bring this case,” he said. Family First Estate Planning drew up the living trust documents, while Family First Insurance Services sold the annuities. “My recollection is (Family First) sold something like 20,000 trusts,” McNamara said. “Of those, about 6,000 to 7,000 people bought annuities. Some of those consumers bought more than one annuity.”
That suit, and a half-dozen similar class-action suits filed against AmerUs in other states, are currently going through a consolidated discovery process in the U.S. District Court for the Eastern District of Pennsylvania before the cases are sent back to their respective states for trial.
“The complaints allege, among other things, the unauthorized practice of law involving the marketing of estate or financial planning services, the lack of suitability of the products, the improper manner in which they were sold, including pretext sales and non-disclosure of surrender charges, as well as other violations of the state consumer and insurance laws,” according to a statement by AmerUs in its latest quarterly report.
An AmerUs official declined to comment directly on the litigation, but said the company has taken “a leadership role” in working with the Insurance Marketplace Standards Association in developing suitability standards for the annuities industry.
“We certainly do believe products should be suitable and we want our consumers to be happy with the products,” said Chris Littlefield, senior vice president and general counsel for AmerUs. “We’ve certainly communicated to IMSA that we will follow these standards and that we have followed them … to make sure our consumers get suitable products.”
Because AmerUs adheres to maximum issue ages for its annuities, “I can tell you with great confidence that we’ve never sold 20-year policies to 85-year-olds,” Littlefield said. “Of the 15,000 independent agents that sell our products, can I tell you that they’re all doing the right thing? No. But our total complaints are less than 1 percent of all policies sold. We have extreme confidence that suitable products are being sold to seniors because we have maximum issue ages and surrender policies, and we don’t want business that generates litigation.”
Deceptive practices alleged
In November, the AmerUs reached a settlement in the Cheves class action suit filed in California which alleged that American Investors, Family First Estate Planning and Family First Insurance Services had engaged in deceptive practices related to sales of annuities to seniors. The allegations in this case involved claims of breach of contract, misrepresentation, unfair competition and deceptive trade practices.
American Investors is also among the insurers named in a suit filed by the Pennsylvania attorney general’s office that alleges that the company engaged in a living trust mill operation targeting seniors in that state. A second suit alleges that companies that sold AmerUs annuities were engaged in a similar scheme.
“We believe that, if not the parent companies, that one or more of the subsidiaries may be training people in the trust mill approach to these sales,” said Thomas Devlin, a senior deputy attorney general in the AG’s charitable trust and organizations section.
“These sales could be done legitimately,” Devlin said, but because of the lucrative commissions involved, “there’s tremendous temptation to cut corners. The potential to exert duress and pressure are pretty substantial, we believe.”
In Florida, a law firm with offices in Fort Lauderdale and Orlando began representing elderly residents in annuities cases five years ago with a case against American Equity Investment Life Insurance, which grew into a national class-action suit. The firm, Gordon Hargrove & James P.A., has filed approximately 40 annuity-related lawsuits that have either been settled or remain active.
“Agents, without proper training and supervision, have been foisting themselves upon seniors with products that don’t meet the needs of seniors for liquidity and flexibility,” said Cristina Pierson, a shareholder with the firm, which is also the co-lead counsel coordinating the AmerUs cases in Pennsylvania.
“The companies are preparing materials that are misleading, and are making material omissions in their presentations,” she said. “These are very complicated, complex products; there are a lot of moving parts. There are a lot of complex definitions that incorporate a lot of other complicated definitions. Even if the agents are experienced, it’s not a guarantee they can make these presentations. The companies aren’t training, and they’re not providing monitoring and supervision.”
Pierson said her firm has also filed individual suits against American Equity on behalf of clients who were either outside the scope of the class, or whose treatment was so outrageous that they wished to file individual claims. It also has two individual cases pending in state district court against AmerUs. In addition, it has “quite a few” cases against Allianz Life Insurance Co. The firm has also reached six settlements with Sioux Falls-based Midland National Life Insurance Co., whose annuity division is based in West Des Moines, and has two more annuity cases pending against that company, she said.
“I think you can see from the number of companies and number of lawsuits that there is an epidemic in the sales and marketing of indexed annuities,” she said. “Hopefully, taking this action will get the attention of not only the companies but also the regulatory agencies that govern these products and companies. Otherwise the epidemic is going to get worse.”
Jack Marrion, founder of Advantage Compendium Ltd., a St. Louis research and consulting firm that has tracked the annuity industry for the past 10 years, said he believes the increase in lawsuits is tied to the industry’s tenfold growth in the past decade. None of the suits he has seen appear to be a threat to the credibility of annuities as an investment vehicle, he said.
“I’ve read 15 of the suits, and not one says an index annuity was bad,” he said. “It alleges bad behavior by an agent, or they make claims that are just really strange.”
In analyzing all the complaints filed against annuity issuers in 2004, Marrion found an average of one complaint for roughly each $650 million of sales of both index and variable annuity sales. In 2005, however, the frequency of index annuity complaints increased to one for each $259 million in sales, compared with one complaint for each $729 million in sales of variable annuities.
Despite the increase, the level of complaints for index annuities is still lower than for many other insurance products, he said.
Brian Atchinson, president and CEO of the Insurance Marketplace Standards Association, said a primary concern of his organization is that agents selling annuities really understand the complex products. The IMSA has about 140 member companies that represent approximately 60 percent of the annuity marketplace.
“Iowa has been a leader among the states” in that effort, he said. In March, the state’s insurance division organized a briefing on annuities for the National Association of Insurance Commissioners. The division also asked IMSA to work with some of its member companies in Iowa to develop a model set of best practices, which were issued last month, for how indexed annuities are marketed and sold. Those standards address the measures agents must take to gather information and determine suitability for an annuity product, disclosure of both benefits and disadvantages of the product and agent training.
At the federal level, the SEC has said its regional offices will work closely with state and local law enforcement agencies to exchange information to help identify and bring administrative, civil and criminal actions to shut down scams targeting senior investors.
The SEC has produced a “senior care package” of brochures for seniors which is available on its Web site at
www.sec.gov. Also, the North American Securities Administrators Association plans to expand the investor education materials for seniors available through its online senior investor resource center, which can be accessed by visiting
www.nasaa.org and clicking on “investor education.”