Annuity FYI Visitor Blog

California Insurance Commissioner Steve Poizner urges seniors to be careful to avoid annuity scams, according to press release “Commissioner Poizner Announces License Suspension; $15,000 Fine for Company’s Deceptive Practices Targeting Seniors.”  The Annuity Services Insurance Center was punished for using “deceptive advertising practices” that targeted the elderly in California.  Over 200,000 unsolicited letters were mailed out to residents of California starting in 2004.  The letters were misleading and used wording to make people think that they may have an annuity ready for distribution.  It wasn’t stated that the letters were not from the recipients actual insurance company or any affiliate.  Annuity Services Insurance Center is banned from operating in California for 5 years.  They have also received fines and cease and desist orders in numerous other states.

In order to protect senior citizens from annuity scams, Commissioner Poizner listed some important tips in the press release.  Sales pitches that are high pressure and tell you that the offers will not last are usually not valid.  Anything that makes you uncomfortable should also be avoided.  Many scam artists try to scare you into doing something before you run out of time.  Unfortunately, this leads to making decisions before any research is done and can be financially devastating.  Any licensed agent is happy to show you all of their credentials, so if someone is acting shady they probably are.  Just in most areas of life, if an offer seems too good to be true, most likely it is.  Steer clear of annuity scams directed at the elderly by taking your time and doing a lot of research.

The U.S. Securities and Exchange Commission’s Rule 151A might be thrown out by the U.S. Court of Appeals for the D.C. Circuit, according to “Court May Toss 151A Order” by Arthur D. Postal of National Underwriter.  The SEC’s proposed rule would classify indexed annuities as securities, allowing the SEC to apply the same rules that they do with variable annuities and other securities starting in January of 2011.  Last January, insurers filed a lawsuit against the SEC in an attempt to stop Rule 151A from being implemented.

In July an appeals court ruled that while the SEC does have the authority to apply the securities rule to indexed annuities, they “had failed to properly show the effect of Rule 151A on efficiency, competition, and capital formation.”  The appeals court said that the rule needed to be reconsidered.  Old Mutual Financial Life Insurance Company filed a motion of their own requesting that insurers have at least 2 years to comply with Rule 151A if it does take effect.  Instead, the court decided to require additional briefing from both Old Mutual and the SEC and said that they will address the issue of completely vacating the rule altogether.  It looks like the court battles will wage on for indexed immediate annuities and other EIA’s to determine whether they will be classified as securities in the future.

It looks like there are some questionable practices going on with the financial strength rating institutions, according to “CalPERS Gives Rating Agencies an FFF” by Kerry Pechter in the Retirement Income Journal. Investors and advisers alike have historically put a lot of faith in the ratings from Fitch, Standard & Poor’s, and Moody’s.  The companies rate the financial strength of annuities, bonds, and bond funds through a letter value system.  Unfortunately, a lawsuit filed by California’s state employee pension fund (CalPERS) alleges that the companies have been biased in their ratings process by using an “issuer pay” model.  This model basically blurs the lines between the rating and the compensation received by the rating institutions.  They stand to receive a higher financial payout with better ratings since they are paid by the debt issuers that they rate.

CalPERS lost close to $1 billion by investing in Structured Investment Vehicles (SIVs) that had the highest long-term debt ratings at the time.  They believe that these ratings institutions negligently misrepresented the SIVs because of the issuer pay model pressuring them to give high ratings so they would get large returns.  All three ratings companies have promised to look into the issues and make changes if necessary, but also believe that the losses can be attributed to a difficult economic environment and “natural actions.”  The possibility exists that although the system used by these institutions may have been unethical, it may very well still be legal which would negate any lawsuit.  This makes it more important than ever to do your research in order to find the best annuities, bonds, and stocks for your portfolio.

In “NAIC backs bill to reverse SEC’s Rule 151A annuities regulation” by Keith Martin, he states that the National Association of Insurance Commissioners does not agree with the Securities and Exchange Commission’s rule classifying indexed annuities as securities.  The article, from IFA web news, says that the NAIC supports the proposed Indexed Annuities and Insurance Products Classifications Act of 2009.  Two Representatives brought this Act about to overturn Rule 151A and resolve some issues unclear from the Securities Act of 1933.

The backing from NAIC’s CEO Therese Vaughan represents insurance regulators from the entire United States and its territories.  They believe that Rule 151A is needless and that it actually takes away from both the NAIC and the states’ work updating indexed annuities when issues arise.  Vaughan said that “Rule 151A ignores the fact that, at their core, indexed annuities are insurance products that guarantee purchasers’ principal and a minimum rate of return.”  She and the NAIC think that state regulators should maintain their ability to monitor indexed annuities and that there are many vague points that will hurt consumers’ security.

An article by Reuters’ Jonathan Stempel further emphasizes the importance of responsibility when selling variable annuities. The Financial Industry Regulatory Authority (FINRA) has fined Fifth Third Securities about $2 million (including $250,000 in restitution) for unsuitable sales of variable annuity products to the elderly, whom are least likely to benefit from them–their long surrender periods, expensive fees, and swings in value make them less than ideal for retirement.

However, FINRA claims that 42 Fifth Third brokers sold or exchanged over 250 identical variable annuity policies between 2004-2006, without consideration of each individual’s circumstances and investment goals. Such a strategy is unlikely to end well for many investors. On a positive note, while Fifth Third has not admitted wrongdoing, it has agreed to hire a consultant to reform its training and supervision practices so something similar never reoccurs.