Class action litigation looms as new hurdle for EIA insurers

Feb 26, 2007 @ 8:24 am

By Gary S. Mogel

NEW YORK — Add class action litigation to the regulatory controversies, bad press and other woes plaguing insurers that sell equity index annuities.

A magistrate for the U.S. District Court for the District of Hawaii in Honolulu this month recommended certification of a class action against Sioux Falls, S.D.-based Midland National Life Insurance Co. The class members — estimated at 600 to 700 — all were Hawaii residents 65 and older when they purchased Midland EIAs between May 2001 and May 2005.

There also is a potential national class action — currently in the deposition phase — against Midland in the U.S. District Court for the Central District of California in Los Angeles. It has been filed in the same court as a case certified in December against industry leader Allianz Life Insurance Company of North America in Minneapolis. If the California Midland case is certified, the class size of the two cases combined will be more than 200,000, according to legal papers. Each involves claims similar to those in the Hawaii class action.

Midland is the third-largest seller of EIAs, with a 9.6% market share, according to annuity research firm Advantage Compendium Ltd. in St. Louis. Allianz is first, with a market share of 26.1%.

Jim Bickerton: Midland's EIAs
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Jim Bickerton: Midland's EIAs "froze" assets of older investors, he says.

Penalties outlive investors

“Midland’s surrender periods were up to 15 years in the future, which was longer than many of the annuity purchasers could be expected to live,” said Jim Bickerton, a partner with Honolulu law firm Bickerton Lee Dang & Sullivan LLLP, which filed the Hawaii suit. The annuities also contained surrender charges, interest adjustments, caps and spreads that, in effect, “froze” the assets of older investors, he said.

A phone message left for Midland spokesman Jim Greenfield was not returned. But the insurer’s law firm spoke on the company’s behalf.

“This is more of a product defect attack on equity index annuities in general than [an attack] on Midland,” said Robert “Bo” Phillips, a Los Angeles-based attorney with Reed Smith LLP of Pittsburgh. He noted that the magistrate in the Hawaii case initially denied class certification nine months ago but changed his mind after the theory of the case was recast by the testimony of an expert witness for the plaintiffs, Craig McCann.

In March of last year, Mr. McCann, president of Securities Litigation and Consulting Group Inc. in Fairfax, Va., wrote a report, “An Overview of Equity-Indexed Annuities,” that was highly critical of EIAs and the insurers that sell them.

“If you look at Mr. McCann’s work, I think it is fair to characterize it as a broadside attack on EIAs,” Mr. Phillips said. The Hawaii case has become “a suitability theory dressed up in an expert’s opinion.”

“It is my understanding that the case was first brought under a suitability theory that made a class action inappropriate, because it would have required individualized determinations of each investor’s circumstances,” Mr. McCann said. But his testimony and prior work in this area was used to show that the products may have been fraudulent or defective, making the theory of the case more conducive to a class action, he added. Mr. McCann also is an expert witness in the two California cases.

Marketing brochures concealed the large sales commissions and insurer profits that the annuities generated, Mr. Bickerton said. In many instances, the older investors were enticed by Midland or its representatives to surrender or borrow against life insurance policies in order to buy the EIAs, he added.

“The problem with Midland is that they are very anti-hypothetical; they don’t let their agents demonstrate to clients how the annuity investments will perform,” said Dorice Maynard, vice president of Premium Producers Group LLC in Santa Ana, Calif., an EIA-rating firm. “But some of their products are good performers, and they have a wide range of indexes to choose from.”

More legal troubles

“As for most Allianz products, clients can’t get their cash back out unless they annuitize the contracts,” Ms. Maynard added.

Potential class actions are hanging over the heads of several other EIA insurers.

AmerUs Group Co. in Des Moines, Iowa, the No. 2 EIA insurer with a 9.8% market share, may face class actions in California, Kansas and Pennsylvania if the classes are certified. There are several other cases in which class certification is being contested — insurers being sued are Conseco Inc. in Carmel, Ind., Fidelity and Guaranty Life Insurance Co. (part of Old Mutual Financial Network) in Baltimore and Sun Life Financial Inc. in Toronto.

EIA insurers are dealing with litigation on other fronts, as

well. In January, Minnesota Attorney General Lori Swanson sued Allianz in state court, demanding that it offer refunds to older clients for which the products were “unsuitable.”

Litigation and other EIA problems, including uncertainty over whether they will be regulated

at the federal or state level,

have taken their toll on industry sales.

Sales for the first three quarters of 2006 were $19.5 billion, compared with $20.4 billion for the corresponding period a year earlier — a 5% decline — according to Beacon Research Publications Inc. in Evanston, Ill. Fourth-quarter and full-year numbers are not yet available.

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