Hartford Life comes out swinging at rivals swiping annuity-holders

Hartford Life Inc., the nation’s No. 2 seller of annuities, is mounting an offensive against competitors who have been seducing its customers away with generous bonuses.

In an application to the Securities and Exchange Commission filed last month, Connecticut-based Hartford seeks approval to make counteroffers to its customers, a practice not permitted under SEC rules.

The likely entry of Hartford — as well as Nationwide Financial Services Inc., which launched its bonus offering last week — comes as both the SEC and NASD Regulation Inc. are focusing on the suitability of brokers switching investors into bonus annuities that carry higher surrender fees and steeper asset-based charges which can quickly consume the benefit of the upfront bonus.

Hartford wants to contact customers directly to offer to exchange their existing annuity contract with a new one that includes an immediate credit equal to 2% of their account balance. Hartford officials declined to discuss the application.

Bonus annuities — in which insurers offer to add a 1%-to-4% immediate credit to account deposits to entice purchases — have emerged over the last two years as one of the industry’s hottest sellers. Insurers typically recoup the bonuses by imposing new surrender penalties and higher asset-based fees.

Hartford, with $69 billion in annuity assets, is one of several insurers that has seen its business eroded by upstarts like American Skandia Inc. and Pacific Life Insurance Co. The company has lost more than $2.5 billion — nearly 31,000 accounts — in annuity business in three years by customers switching into competitors’ offerings, according to its SEC application. More than $631 million of those withdrawals moved into bonus-sweetened contracts.

Last month, the SEC sent letters to American Skandia in Shelton, Conn., Golden American Life Insurance Co. in West Chester, Pa., Pacific Life in Newport Beach, Calif.and other big sellers of bonus annuities.

According to an American Skandia spokeswoman, the SEC requested annuity sales data for two years along with copies of prospectuses and marketing and promotional materials.

A dozen insurance companies — from American Skandia and Pacific Life to ING Groep’s Golden American Life and Manufacturer’s Life Insurance Co. of North America — sell such policies or are planning to in the near future.

Also suffering redemptions as bonus sales have soared are Nationwide Financial Services Inc., Lincoln National Corp. and AXA Financial Inc., which have annuities no longer subject to steep surrender charges. Such fees have deterred switching.

Investment companies are barred from making direct exchange offers if their customers would be subject to a second commission.

Enter, raiders

Still, Hartford argues that the rule has opened the door for insurers to raid each other using bonus programs, while barring established companies from counter-offering with their own bonuses — even if they include more favorable terms.

In a speech at an insurance industry conference in November, Paul Roye, director of the SEC’s division of investment management, acknowledged these concerns. He said he expects to recommend that the commission allow Hartford and other insurers to pitch their customers with bonus offers directly in exchange for improved “clear English” disclosure of the potential downside of such switches, and insurers’ increased involvement in assuring the exchanges meet suitability requirements.

Hartford’s proposed bonus contract would saddle purchasers with a new seven-year back-end sales charge of as much as 7% on withdrawals that go beyond a preset annual limit or if the withdrawal isn’t related to a specific list of health-related issues.

“Bonus programs are an area where I would urge variable annuity issuers not to wait for the commission to come knocking on your door,” warned Mr. Roye in his speech.

Another issue sure to put pressure on bonus programs and other sales gimmicks are accounting rules presently under consideration that would require insurers to expense the cost of such inducements as they are paid out, rather than amortizing such costs over 10 to 15 years, which is the current industry practice.

The American Institute of Certified Public Accountants has formed a task force that expects to release a draft containing its recommendations later this year. “This has been one of the most hotly watched topics that the task force has addressed,” says John Pintozzi, a partner with Deloitte & Touche LLP in Chicago and member of the task force.

The new rules — which likely wouldn’t become effective until 2002 — would crimp earnings for big bonus annuity sellers for several years and prompt insurers to attach vesting periods to the bonuses.