Allianz Life Insurance girds for annuity battle on its home turf

Jan 15, 2007 @ 12:01 am

By Gary S. Mogel

NEW YORK — To some industry insiders, a lawsuit filed last week against Allianz Life Insurance Company of North America is political opportunism; to others, it’s a regulatory coup.

Lori Swanson, a Democrat sworn in as Minnesota’s attorney general Jan. 2, sued the insurer in Hennepin County district court for allegedly violating state laws by selling “unsuitable” annuities to people over age 70.

She wants the Golden Valley, Minn.-based insurer to offer refunds to purchasers of the allegedly unsuitable annuities — mainly equity index annuities. Allianz has 26% of the U.S. EIA market, according to Advantage Compendium Ltd., a St. Louis research firm.

Several insurers doing business in Minnesota currently are under investigation for similar abuses, Ms. Swanson said during a press conference. And other states may emulate her suit if it proves successful, observers say.

“We strongly disagree with these allegations, and we are confident that we have complied with Minnesota law and will vigorously defend this position,” Doug Reynolds, chief operating officer of Allianz, said in a prepared statement.

Allianz did not adequately disclose that annuity investments could be tied up for 15 years with hefty early withdrawal penalties, failed to properly supervise annuity sales and paid agents overly lucrative commissions, the suit claims.

This is not the first time that Allianz has come under regulatory fire for alleged annuity sales abuses. In December, Washington-based NASD fined the insurer’s broker-dealer subsidiary — Minneapolis-based Questar Capital Corp. — $5 million for inadequate supervision of brokers who sell annuities.

Playing to the crowd

Annuity defenders say that Ms. Swanson was motivated more by making a name for herself “Spitzer-style” than by a desire to protect the state’s elderly consumers. Others applaud her for expanding the fight against insurer malfeasance to the annuity side of the business after former New York Attorney General Eliot L. Spitzer — now that state’s governor — exposed property-casualty abuses.

Minnesota’s attorney general “is trying to ride the perceived tide of negative sentiment about annuities to some political benefit,” said Richard Dunnagan, owner of Dunnagan Retirement Services LLC in Raleigh, N.C.

“Lori Swanson is the protégé of an anti-big-business bulldog and is looking for a quick victory — and Allianz is a great target because of its size and hard-nosed reputation,” said a financial executive in the Minneapolis area, who asked not to be identified. “Discontent with the insurance industry runs deep within the AG office, and this would be a nice public relations victory,” he added.

Ms. Swanson’s predecessor and former boss, Mike Hatch, has agreed to remain in the attorney general’s office as her assistant after losing his gubernatorial bid against incumbent Tim Pawlenty, a pro-big-business Republican.

Several calls to the attorney general’s office seeking comment weren’t returned.

Some see the suit as inevitable, given Allianz’s aggressive sales tactics.

“Allianz captured significant market share with a strategy

to create ever-more-gimmicky contract designs and pay high commissions to agents,” said David Macchia, chief executive of Wealth2k Inc., a Hingham, Mass., strategic-marketing firm for annuities. “Sales practices which fail to place consumers’ best interests first simply won’t survive.”

“It’s a good thing for the industry that someone is looking into this,” said Tim Kaminski, an investment executive with Security Investment Solutions in Hibbing, Minn. “I refuse to sell equity index annuities because of their long surrender periods.”

“Elderly customers invested their life savings in deferred annuities that wouldn’t mature until they would be dead,” Ms. Swanson said in a statement. “Some forfeited large penalties to get at their money sooner.”

Negotiations DOA

The parties have vastly different stories about the negotiations that preceded the suit. Ms. Swanson claims that Allianz ignored letters seeking settlement, while executives contend that their requests for a meeting were denied by the attorney general’s office.

Allianz sold 4,900 annuities worth $260 million to people over age 70, she said in the press conference, during which a 73-year-old man who had invested $40,000 in an Allianz annuity related how he had to pay a $6,000 surrender penalty to withdraw money for medical bills.

Although several states have attempted to protect elderly residents from deceptive annuity sales practices through regulation and litigation, it is rare for one to attempt to rescind an entire block of contracts. In 2005, Massachusetts regulators convinced Charlotte, N.C.-based Bank of America Corp. to give consumers age 78 or older the choice of rescinding annuities without being charged any penalties.

“Attorney generals in other states may take up this cause if they have the resources — Spitzer put us on that road. But my concern is that sometimes the benefits of these suits don’t trickle down to the consumers that need help,” said Rod Heggy, a securities attorney with Federman & Sherwood in Oklahoma City.

“These broad product sweeps set a bad precedent,” said a financial planner in New Jersey, who asked not to be identified. “If the adviser didn’t do a good job in determining suitability, go after the adviser, not the insurance company.”

Gary S. Mogel can be reached at

gmogel@crain.com.

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