Midland National Settles With Minn. Over Unsuitable Sales of Indexed Annuities

Midland National Life Insurance Co. has become the latest company to settle a lawsuit brought by Minnesota's attorney general for allegedly selling an unsuitable type of deferred type of equity-indexed annuities to senior citizens.

Attorney General Lori Swanson said she's now resolved her suits with the top four sellers of these annuities in the United States. The other companies that settled are two Aviva USA units: AmerUs Life Insurance Co. and American Investors Life Insurance Co.; Allianz Life Insurance Company of North America; and American Equity Investment Life Insurance Co.

The settlements with Midland National and an affiliated company, North American Company for Life and Health Insurance, approved in Hennepin County District Court, are based on previous accords reached with the other companies, the attorney general's office said. The settlements "are a win for the affected seniors, who will now be able to request their money back, with interest and without penalty, during these turbulent economic times," Swanson said in a statement. No monetary amount of the deals were listed.

In a statement, Esfand Dinshaw, president of Midland National's annuity division, said the company did not enter into a consent judgment and said the company "strongly disputed and continues to dispute" the attorney general's office's investigation.

The complaint against Midland National alleged it sold unsuitable deferred equity-indexed annuities by misrepresenting or failing to disclose the terms of these complex retirement-income products. The annuities weren't suitable for some seniors because they could lock up the funds a senior invested for 10 to 14 years, the attorney general charged. They may have included early surrender penalties of up to 25% of the amount a senior invested if he or she needed to access their money to pay for medical costs or living expenses before the surrender period ended, Swanson alleged. In some cases, the surrender period may have been longer than a senior's life expectancy, the attorney general maintained.

Under the settlements, Minnesota consumers who were age 65 or older and bought a deferred equity-indexed annuity from either of the companies between Jan. 1, 2001 to Dec. 15, 2008 can submit a claim for a full refund, without penalties. If the companies' sale wasn't suitable or was based on misrepresentations, they must offer a refund of their premium, without surrender charges or penalties, plus 4.15% interest compounded annually.

For future sales, Midland National and North American must ask and obtain more information from seniors on their application to determine if the annuity is suitable. This information includes whether the senior has sufficient liquid assets and disposable income to pay for ongoing living expenses and emergencies without access to all of the money that would be paid into the annuity.

Midland National "has always been an industry leader in adopting protections that help assure each annuity contract is suitable for the customer," Dinshaw said. "To help assure that sales are proper, Midland National has, for a long time, had suitability review procedures and a dispute resolution process unique among insurance companies."

Under the Aviva USA companies' settlements, announced in October, seniors in Minnesota were to be able to make refund claims involving about 4,500 policies with an estimated value of about $250 million. AmerUs Life and American Investors Life also agreed to pay the state $375,000 (BestWire, Oct. 24, 2008).

Debate surrounds these financial products. In June, the U.S. Securities and Exchange Commission proposed a rule, 151A, that would define certain indexed annuities as securities products. Under the rule, these annuities — currently regulated as insurance products — would be treated as securities if amounts payable by the insurer are more likely than not to exceed amounts guaranteed under the contract. Insurance carriers would need to refile the products with the SEC and offer them via a prospectus (BestWire, Oct. 13, 2008). The SEC is expected to decide on its proposed rule soon.

With an indexed annuity, an insurer invests most of the principal in bonds to ensure the policy will generate a small annual return, but the insurer uses a small portion of the premium to buy options in a stock market index, primarily the S&P 500 index. Options that are exercised can result in additional interest credited to a policy, potentially more than an investor might achieve through other fixed-income investments.

Midland National Life currently has a Best's Financial Strength Rating of A+ (Superior).

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])