Debra Speyer In The News - Star Tribune, October 1, 2007

Did Allianz mislead older buyers on annuity sales?
The company is accused of not explaining deferred payoffs on an annuity tied to the stock market.

Thomas Lee and Chris Serres

Last year, to celebrate a successful product launch, executives rolled out the "money machine" inside the Golden Valley headquarters of Allianz Life Insurance Company of North America.

Workers lucky enough to catch a ball thrown into the crowd were invited to take a turn inside the game show-style booth, where dollars shot out by an electric blower floated in the air, waiting to be pocketed, former employees recall.

The machine might have served as a symbol for Allianz itself for much of this decade, when it became a national leader in the sale of a type of annuity linked to the stock market. Between 2001 and 2005, the firm's net written premiums soared from $2.4 billion to $13.2 billion.

The sales culture that produced those results is now at the center of investigations by insurance regulators in two states, a lawsuit by Minnesota Attorney General Lori Swanson and six private lawsuits alleging that Allianz misled thousands of investors. They accuse the company of glossing over the complex nature of its annuities and locking older buyers into contracts that they may not live to see fully pay off.

The annuity at issue, called equity-indexed, would gain if stocks went up but promised to protect buyers in a down market. For a time after the Sept. 11, 2001, attacks, when interest rates on bank savings accounts were falling fast and many retirees were scrambling to preserve their incomes, it was Allianz's hottest product.

"We're growing so fast that we're having difficulty projecting how much space we need," then-CEO Mark Zesbaugh said in December 2004.

Not a 'huge systemic problem'

The current CEO, Gary Bhojwani, testified this month on Capitol Hill that Allianz runs a clean operation. Less than 1 percent of its annuity buyers have filed complaints, he added.

"If you look at the magnitude of the company, if you look at the number of transactions, I think the data says there's not this huge systemic problem," he said in a recent interview with the Star Tribune.

In court documents, Allianz maintains that it never intentionally misled investors, and that the terms of its annuities were clearly spelled out in sales documents. The company also defends its sales practices, saying that the rewards and commissions it offered agents are not substantially different than those at other insurers.

"I don't know how you could buy one of these [annuities] and not know the restrictions," said Neil McKay, chief actuary at Allianz. "I've seen them all from the inside, I've seen them from the outside, and I don't see how you can ever not know."

Court filings by the plaintiffs and interviews with regulators and former agents describe a sales culture in overdrive, with agents given extra-large commissions and perks ranging from Rolex watches to boats.

Gertrude Berle, an 87-year-old Hector, Minn., resident was persuaded by an Allianz agent to invest her life savings of nearly $50,000 in an annuity, with an immediate 5 percent bonus, according to an affidavit filed in support of Swanson's lawsuit. Berle will be older than 100 before she can get all her money out of the annuity, including the bonus, the affidavit says.

Other Allianz customers tell similar stories of being promised immediate bonuses, only to learn later that the payoffs required waits of 10 years or longer.

"It was a half-crooked deal, if you ask me," said one buyer, Joseph Wallace, 73, of Coon Rapids, who has asked Swanson's office to investigate. "The agent went through [the contract] at about 90 miles per hour."

Hubertus Kuelps, a spokesman for Allianz, said the company doesn't comment on individual cases, due to privacy concerns. "The company takes complaints seriously and customers should come forward to complain if they feel a sale is inappropriate," he said.

Catching the wave

Bob MacDonald, the outspoken and unorthodox CEO who founded Allianz's predecessor company, LifeUSA, likens the eventual success of equity-indexed annuities to an ocean wave.

"We were able to spot the wave coming, get ready, get paddling, and when the wave broke, we were able to ride it in," he said.

The wave was partly the company's creation, though, and it took awhile to build.

MacDonald founded LifeUSA in 1987. At the time, business was dominated by major insurers who primarily sold traditional annuities -- conservative investments that offered a guaranteed income stream usually tied to low-yield government bonds.

LifeUSA was a small player, a place where employee milestones were marked with pizza outside the CEO's office.

MacDonald, who in 2005 published a book called "Cheat to Win: The Honest Way to Break All the Dishonest Rules in Business," tried to set LifeUSA apart by specializing in equity-indexed annuities.

At first, many agents and customers rejected them as too complex, MacDonald said.

To make them more appealing, LifeUSA offered prospective customers cash bonuses on their investments.

To boost sales, LifeUSA bought partial stakes in about a dozen independent marketing organizations, or IMOs, which pool insurance agents into large sales groups. LifeUSA agreed to pay bonuses to the IMOs based on how well their agents did at selling its annuities.

"It gave us shelf space," MacDonald said.

Allianz SE of Germany, which bought LifeUSA in 1999, today owns 10 leading IMOs, representing about 70,000 agents. When rates on bank certificates of deposit fell dramatically between 2001 and 2002, Allianz and its army of agents offered senior citizens what appeared to be an attractive alternative.

"Allianz designed and marketed annuities that made people believe they were getting something special," said David Macchia, president and chief executive of Wealth2k Inc., a marketing consulting firm in Hingham, Mass., that advises major insurers.

Allianz marketed the bonuses it offered customers -- typically 5 to 10 percent of the premium -- as "immediate." On some annuities, the company also marketed "guaranteed" yields of 14 percent or more the first year, according to one lawsuit filed on behalf of a group of investors.

Some insurance experts contend those claims were misleading, because buyers often had to hold the contracts for 15 years for the bonus and returns to be fully credited.

In December, the California Department of Insurance identified more than 100 people, all senior citizens, who made "financially disadvantageous" deals in swapping existing annuities for Allianz products.

"Allianz has failed to adequately train its agents as to what constitutes a proper and improper replacement annuity," the California regulators said in a court proceeding.

'Dazzled by the money'

Insurers typically pay lower than normal commissions on annuity sales to buyers older than 65 because the firms stand to forfeit the money if the buyer dies.

Allianz says it follows that same principle with almost all of its products.

Internal Allianz documents provided by one of the plaintiffs' attorneys suing the company set out a different policy.

"When you sell to an 80 year old ... You get the full commission," one of the documents says. "This means the commission will not be reduced like most of our competitors on older clients," another says.

Agents who sold Allianz indexed annuities also received commissions of as much as 9 percent. Other insurers offered 5 to 7 percent on similar sales, according to several agents.

"It was real easy for agents to get dazzled by the money," said Dorice Maynard, vice president of Premium Producers Group LLC, a consulting and software company in Orange, Calif., that works closely with agents. "There was a big push for seniors."

Big producers also could get big perks.

"Allianz offers additional compensation on top of your commissions ... We call it 'Producer Perks.' ... You call it 'Cars ... Planes ... Hot Tubs ... Whatever you want,'" said one sales document.

MacDonald said the outsize commissions were a sign the company had "lost its soul." The focus on sales, he said, meant "everything else is being thrown to the winds."

MacDonald, 64, resigned from Allianz in August due to a difference in philosophy over the firm's direction. "The lawsuits that you're seeing and things like that are symptoms of a bigger problem," he said.

Some annuity buyers say they now regret their decisions to buy from Allianz.

Wallace of Coon Rapids and his wife, JoAnn, 69, a retired teacher, said they invested $62,000 in an Allianz annuity. The couple had hoped it would serve as a savings account to pay for travel.

Several months later, Joseph Wallace said, he called his agent and discovered he could withdraw only 10 percent in the first year without penalty. The Wallaces also learned they would have to keep the annuity for 15 years in order to avoid penalty.

They've had to cancel a trip to Australia and New Zealand, and the 73-year-old said he fears he won't live long enough to see the annuity pay off.

"At my age, I could be belly up tomorrow," he said.

Carol Roberts, 58, a church administrator from Shoreview, said she invested $30,000 of her savings in three Allianz annuities five years ago.

Roberts said the agent told her the 10 percent bonus would help her overcome her stock market losses after 9/11. The agent didn't explain that the bonus would be available only if she agreed to keep the annuity for at least five years and then receive annual payments for another 10 years, Roberts maintains.

She cashed out this year, which reduced her net gain over five years to 4 percent, she said.

"I would have done better leaving my money where it was," she said.

Heavier scrutiny by regulators

By 2005, regulators were beginning to take interest in equity-indexed annuities.

That June, the National Association of Securities Dealers (NASD) recommended that brokers closely supervise such sales, citing their complex nature.

The notice, along with a recovery in the stock market, had a chilling effect on demand for indexed annuities. Allianz's net written premiums fell 20 percent last year to $10.5 billion.

Zesbaugh, the CEO who presided over Allianz's growth surge, left the job last November, citing personal reasons. Two former company executives believe the drop in sales played a part in his departure.

The NASD fined Allianz's brokerage subsidiary, USAllianz Securities, $5 million last year for widespread record-keeping and compliance violations, a major penalty for that type of infraction.

According to the NASD, USAllianz didn't have enough trained supervisors from 2001 to 2006 to oversee its thousands of brokers. (The brokers sold equity-indexed annuities as well as some products that insurance agents are not allowed to sell). Supervisors frequently didn't know which brokers they were responsible for, and many brokers could not name their supervisors, the NASD said.

At the end of 2004, USAllianz employed only four compliance officers to monitor 800 to 900 brokers nationwide, the NASD said. The company also didn't keep records of broker e-mails, the NASD said.

Allianz executives insist that the NASD settlement was an isolated case and that the company has fixed those problems.

CEO Bhojwani said the company has gone beyond industry standards to prevent unsuitable sales.

Allianz said it was the first insurer in the nation six years ago to require potential customers to sign a detailed document, or "statement of understanding," describing an annuity's terms and risks.

Allianz also now requires that every annuity buyer fill out a "suitability form" that includes questions about net worth, objectives and liquid assets. Out of the 3,000 applications Allianz receives per week, the company red-flags 5 to 10 percent for further scrutiny. About 20 percent of that total are rejected as unsuitable, Bhojwani said.

The company recently created the position of chief suitability officer, reporting directly to Bhojwani and charged with requiring agents to follow a code of conduct. Beginning sometime after October the company plans to call every new annuity buyer age 75 or older to make sure they understand the product and to offer a full refund if requested.

"I feel deeply that even one unsuitable sale, even one customer who feels like they got something they didn't want or didn't understand or what have you, even one is not something that we're happy about," Bhojwani said.

Attorney General Swanson said Allianz hasn't done enough. For example, she said the company's suitability form doesn't anticipate future changes in a customer's income and expenses, key factors in making a long-term investment.

"Allianz is intentionally remaining ignorant to give them some cover so they can continue to sell annuities," Swanson said.

Debra Speyer, a Philadelphia investor-rights attorney who formerly worked in the enforcement division of the NASD, is skeptical that the company can avoid creating angry buyers.

Allianz's annuities "are so complicated that you almost need a Ph.D. to understand them," she said. "No amount of forms will make them understandable."

tlee@startribune.com 612-673-7744 cserres@startribune.com 612-673-4308

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