Minnesota Fines American Equity $275,000 in Cross-Border Annuity Sales Case

The Minnesota Department of Commerce fined an Iowa-based life insurer $275,000 for allegedly selling annuity contracts that state didn't approve. People who bought these annuities from American Equity Investment Life Insurance Co. faced higher surrender charges and less favorable terms, the department said.

Minnesota law requires that any annuity contract issued to a state resident is presented on a form the department approved. However, between 2002 and November 2008, American Equity allegedly issued 541 annuity contracts in the state on unauthorized forms.

Wendy Waugaman, president and chief executive officer of American Equity Investment Life Holding Co. (NYSE: AEL), told BestWire the situation involved cross-border sales, where Minnesota residents traveled to another state such as Iowa or Wisconsin or elsewhere to buy one of the company's annuities that aren't available in their own state.

They would travel to another state, where they may own a property or a business there, and would apply for the policy and it would be issued under the laws of the nonresident state, Waugaman said. If someone came from Minnesota to Iowa to apply for a policy available in Iowa, American Equity would issue that policy in Iowa under Iowa law, she said.

In most states, that is permitted, Waugaman said. However, Minnesota won't permit its residents to buy insurance products in another state and thinks it's protecting its residents by imposing requirements that limit the company's ability to sell certain types of products in their state, she said.

This wasn't a situation where polices were being misrepresented or unsuitable "because all of these would have gone through our suitability reviews," Waugaman said. "Its purely a case that Minnesota does not approve of policies that have a longer surrender charge period even if they come with additional benefits."

American Equity Investment Life was the third-biggest seller of equity-indexed annuities in the United States in the fourth quarter of 2009, with sales of $800.8 million and an 11.3% market share, according to AnnuitySpecs.com (BestWire, March 1, 2010).

The department said American Equity also must change the contracts at issue to shorten and reduce the surrender charge provisions to comply with Minnesota law, which generally allows up to a 9% surrender charge for a nine-year period. The insurer also must reimburse policyholders who surrendered their contracts before the department's consent order.

Minnesota is one of a few states that doesn't want its residents "to have the full range of choices that are available in other states," Waugaman said. It does that for public policy reasons, and while American Equity disagrees, it will abide by its law, she said.

Most states acknowledge that their residents can travel from state to state and buy products unavailable in their home states, Waugaman said.

The department said American Equity also must create and maintain procedures to ensure that only policies filed and approved by the department are issued to Minnesota residents. 

American Equity Investment Life Insurance Co. currently has a Best's Financial Strength Rating of A- (Excellent).

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