Equity index issuer pins slump on NASD

Aug 14, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - The nation's third-largest seller of equity index annuities is pointing a finger at NASD for a 32% drop in annuity sales during the second quarter.

Sales of annuities at American Equity Investment Life Holding Co. plummeted to $517.7 million during the quarter, from $761.3 million in the second quarter of 2005, according to the West Des Moines, Iowa-based company.

In its earnings release, American Equity blamed part of that drop on NASD, which it said has "overstepped its bounds" by attempting to regulate equity index annuities.

Last August, Washington-based NASD issued guidance to brokers on the sale of such annuities. In that guidance, it said that broker-dealers have a responsibility to supervise the sale of equity index annuities by their advisers, even though these annuities aren't registered under federal securities laws.

NASD "created confusion and unwarranted impediments to sales" by agents with dual licenses to sell both insurance products and securities, American Equity said in its earnings release.

The insurer said that it will "explore courses of action to remedy the situation," but it didn't indicate what that action might be.

"We have no other comments beyond what is in the earnings release," said a spokeswoman for American Equity.

NASD declined to comment.

American Equity is unlikely to be the only insurer to see sales of equity index annuities slow. In addition to regulatory uncertainty, rising interest rates are hurting sales for many of the top companies, industry observers say.

Sales of equity index annuities totaled $6.6 billion in the first quarter, up 1.6% from the amount in the fourth quarter and 6.5% from that of the first quarter of 2005, according to Beacon Research Publications Inc. in Evanston, Ill.

About $27 billion worth of such annuities were sold in last year, up from about $22 billion in 2004, according to Beacon.

NASD's guidance may be putting a damper on sales of equity index annuities, some industry observers say.

"When NASD issued that notice, they created unprecedented market confusion," said Mike Tripses, chairman of the National Association for Fixed Annuities in Milwaukee.

Equity index annuities aren't a "jump ball" when it comes to their securities status, he added.

"They are not investments as defined by the securities laws," Mr. Tripses said. "EIAs are highly regulated under state insurance laws, as is appropriate for insurance products."

That may be so, but most insurers appear to be hoping for the best but bracing for the worst as NASD and the Securities and Exchange Commission appear to be on the verge of increasing their scrutiny of equity index annuities.

Although it believes that equity index annuities are insurance products and will continue to be regulated by the states' insurance departments, AmerUs Group Co. in Des Moines, Iowa - another top-five EIA insurer - is developing contingency plans for possible increased federal oversight.

"We do not believe that the SEC will rule that these are registered securities," said Thomas Godlasky, chief executive of AmerUs.

If the SEC does, Amer-Us expects to spend up to $4 million on additional regulatory filings and to register up to half its producers with the SEC, he added.

Equity index annuities already are subject to comprehensive regulation by state insurance departments, which impose exten- sive and detailed capital requirements unlike anything imposed on issuers of securities products, said Dave Sipprell, president of the fixed-annuity and fixed-index-annuity line for Allianz Life Insurance Company of North America in Minneapolis, the largest EIA provider.

"Since fixed indexed annuities are insurance products, we believe that state insurance regulators are best equipped - in terms of both their expertise and their regulatory authority - to establish the rules governing how these products should be sold," he added.

"We're neutral regarding the regulation of EIAs," said John Kawauchi, vice president of business development for Nationwide Financial Services Inc.

The Columbus, Ohio-based insurer is less dependent than many of its competitors on sales of equity index annuities, ranking about 15th nationally, though it is fifth in sales through the bank channel, he noted.

In addition, much of Nationwide's producers already are registered to sell securities, so the com- pany doesn't anticipate large compliance costs, Mr. Kawauchi said.


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