The Annuity Racket

The Annuity Racket

By Francis X. Gilpin

Associate Editor

At 85 years old, Evelyn K. Edwards couldn't have looked to be the best prospect to buy a deferred annuity. But a sales agent for American Investors Life Insurance Co. visited Edwards at her Sarasota home in 2003 with an application in hand.

The agent persuaded Edwards to spent $27,000 on a flexible premium deferred annuity policy.

How long would Edwards have to wait to reap any gains from her investment?

Edwards wouldn't see a dime from American Investors Life Insurance until 2018, unless she was willing to pay big surrender charges. If Edwards was still alive when the policy matured, she would be within about a month of celebrating her 101st birthday.

What kind of insurer would sell an elderly woman an annuity that matures at a future date well beyond her life expectancy?

An insurer that is getting hit from many sides on the legal front. The latest assault comes from the Tampa law firm of James Hoyer Newcomer & Smiljanich PA.

Last month, James Hoyer partners Christa L. Collins, John Yanchunis and J. Andrew Meyer filed to certify Edwards as representative of a class of American Investors Life Insurance clients who are the victims of an alleged racketeering enterprise.

Along with American Investors Life Insurance, the defendants named in the lawsuit filed on behalf of Edwards in U.S. District Court in Tampa include AmerUs Annuity Group Co., a wholly owned subsidiary of AmerUs Group Co. and the corporate parent of American Investors Life Insurance.

AmerUs Group, a publicly traded holding company based in Iowa, is one of the 20 biggest sellers of annuities in America, according to the James Hoyer lawsuit.

Co-counsel with James Hoyer for the plaintiff are lawyers from two prominent California law firms: the firm of famed San Diego securities litigator William S. Lerach and the firm of former San Francisco City Attorney Louise H. Renne.

The Tampa lawsuit follows class-action claims filed against AmerUs or its subsidiaries in California, Kansas, Pennsylvania as well as another filed in Florida earlier this summer. A California court granted statewide certification in May for one of the class actions filed there in 2003.

In addition to the plaintiff's bar, the attorneys general in California and Pennsylvania are seeking injunctions against AmerUs units.

The common theme of the litigation is that AmerUs insurance sales representatives sold investment products to retirees that were unsuitable for their clients.

In Los Angeles County Superior Court, California Attorney General Bill Lockyer wants American Investors Life Insurance and other insurers to pay more than $40 million in civil penalties and a minimum of $70 million in restitution.

"The perpetrators of this fraud deceived seniors into using their hard-earned retirement nest eggs to buy unneeded annuities that actually undermined their financial security," Lockyer said in February at the time of his office's lawsuit. "Living trust mills such as this one violate not only the law, but the trust of their elderly victims."

California Insurance Commissioner John Garamendi has joined Lockyer's office in the California investigation of American Investors Life Insurance.

In the Tampa suit, American Investors Life Insurance sales agent Christopher Grant Cary took an initial premium payment of $12,000 from Edwards in April 2003. Another $15,000 premium payment was due a short while later.

An annuity is a contract between an insurance company and the buyer. In exchange for lump sum or installment premium payments, the buyer eventually receives a minimum benefit after a specified number of years.

Edwards bought an annuity that earns a rate of return, prior to her collecting income from it, which is tied to the performance of a particular batch of equities, such as the Standard & Poor's 500 stock index.

But Edwards cannot receive any of her tax-deferred annuity earnings for 15 years and cannot access her money for 10 years without incurring surrender charges that start at 12% of what she has paid in, according to the lawsuit.

"This is putting your money in jail," says Robert North, an investigator for the James Hoyer firm, who is assisting Collins, Yanchunis and Meyer with the litigation.

The lawsuit states that the health of Edwards has been in decline since her 2003 purchase of the annuity. She no longer can live by herself in Sarasota. Edwards, now 88, has moved into an assisted-living facility in upstate New York.

The type of annuity contract that Cary sold to Edwards can create complicated estate problems after her death, according to the lawsuit.

What was in it for Cary, a 32-year-old life insurance salesman from Fort Lauderdale? With no pre-trial discovery yet, court records do not disclose Cary's earnings from the sale. But North says annuity sales agents typically get 8% commissions. If that was true in Sarasota, Cary's commission would have been $2,160.

Until recently, AmerUs has done well by selling annuities, too.

Between 2002 and 2004, operating income from the company's accumulation, or annuity, products grew 36% while the life insurance segment moved up only 8%. More than half of the company's operating income came from accumulation products last year.

But the traditional life insurance business has been catching up so far this year, according to regulatory filings by AmerUs. Year-over-year operating income from life insurance grew 25% during the first two quarters of 2005 versus only 10% growth for accumulation products.

Michael H. Miller, general counsel for AmerUs Annuity Group, told the Review that his company gets complaints from only about 1% of its customers.

"There's a high degree of satisfaction with our products," says Miller.

AmerUs lets annuity purchasers retrieve a small portion of their money - up to 10% each year without surrender charges - before the date of maturity, according to Miller.

"There is liquidity availability throughout," says Miller, who adds that some elderly favor equity-indexed annuities to avoid probate.

Des Moines-based AmerUs has tried to reassure investors. "The Company believes it has appropriate defenses against these lawsuits and intends to vigorously defend its position," AmerUs stated in a recent regulatory filing.

While AmerUs doesn't expect the various lawsuits and investigations to have a material effect on its operations, a major credit rating agency isn't as certain.

Moody's Investor Services Inc. has a negative outlook for AmerUs, according to an Aug. 3 news release. A negative outlook means the ratings for the debt of AmerUs and its subsidiaries could be lowered, if certain trends continue.

Moody's likes the relatively high profit margins that AmerUs enjoys from selling equity-indexed products, like the one Edwards purchased. But the rating service states that it "remains concerned about AmerUs' almost exclusive reliance on index products at a time when the products are coming under increasing legal and regulatory pressure."

Credit analysts at Moody's pointed to a federal lawsuit filed in Orlando federal court earlier this summer. In that case, a 71-year-old Brevard County woman turned over $155,000, which was most of her retirement nest egg, to an AmerUs subsidiary after the company invited her to a luncheon seminar in 2004. The woman, Dorothy L. Eddy, won't start receiving annuity payments until she is 95 years old, according to the lawsuit.

AmerUs points out that insurance industry rater A.M. Best Co. raised its outlook last year from negative to stable, same as Standard & Poor's Corp.