SEC to Inspect Insurers’ Sales of Variable Annuities

The Securities and Exchange Commission has found signs of possible sales abuses by insurance companies selling variable annuities, prompting it to initiate an unprecedented inspection of 13 insurers.

“We want to take an even harder look at annuity sales practices in the industry and at companies’ supervisory systems,” said Lori A. Richards, head of the SEC’s compliance inspections and examinations office.

Aetna Inc., Travelers Group Inc., Equitable Cos. and American General Corp., all among the nation’s largest sellers of annuities, confirmed that they are under inspection and said they are cooperating with the SEC. Aetna and American General executives said their sales practices are proper; the other insurers declined to comment further.

Overall sales of variable annuities, a hybrid insurance and mutual fund product most often sold by insurers and brokerages, rose nearly 40% last year to about $70 billion, according to the National Assn. for Variable Annuities. Individual variable annuities accounted for 11% of the $258.8 billion in life insurers’ premium income in 1995, the American Council of Life Insurance said.

Richards said routine SEC examinations of a small sample of insurers last year turned up preliminary indications of several types of potential sales violations, including:

* “Churning,” or failure to tell customers of costs involved in replacing their annuity contract with another one.

* Failure to disclose that agents receive a commission if one annuity contract is used to finance purchase of another one.

* Sale of annuities that aren’t suitable for customers’ financial goals.

The SEC review also caused concern that some insurers’ supervision of annuity sales practices might be too lax, Richards said.

A copy of a Dec. 12 letter sent to insurers by the SEC says the agency’s enforcement staff is also involved in the first “sweep,” or broad inspection, of variable annuity sales that began in December.

Richards declined to comment on the letter or the recipients’ identities. She was interviewed after Bloomberg News independently obtained a copy of the letter.

Variable annuities, sold by salespeople who must have both an insurance and a brokerage license, typically offer a fixed death benefit. In addition, they offer deferred monthly payments whose value hinges on the performance of tax-deferred mutual fund investments made within the annuity.

The SEC’s letter to insurers, which requested annuity sales records and data from July 1994 to June 1996, “should not be construed as an adverse reflection” or an indication “that any violation of law has occurred,” the letter states.

Even so, securities experts said the involvement of the SEC enforcement staff in the inspections suggests the gravity of the agency’s concerns about the issue.

“It means the SEC thinks the problem is a hell of a lot more serious than usual,” said Joseph I. Goldstein, a Washington attorney who was SEC associate enforcement director from 1987 to 1995.

Inspections are normally handled solely by Richards’ staff, which can then refer serious cases to the enforcement division for further investigation, Goldstein said. Enforcement investigations sometimes lead to fines and permanent bars from the industry.

SEC enforcement director William McLucas, who co-signed the Dec. 12 letter, also declined to comment.

American General defended the sales practices of its Houston-based unit, Variable Annuity Life Insurance Co., the nation’s No. 2 seller of variable annuities last year.

“We believe our sales representatives are among the most highly trained in the industry, and we are committed to conduct business to the highest standards of honesty, integrity and professionalism,” American General spokesman John Pluhowski said.

Andrew Schwartz, a spokesman for Hartford, Conn.-based Aetna Retirement Services, an Aetna unit, also defended his company’s record. “We’ve paid a lot of attention to compliance issues and we take them very seriously,” he said.

New York-based Travelers and New York-based Equitable said they were cooperating with the SEC but declined to comment further.