Most insurance company executives view banks as tremendous markets for their fixed annuities. But Robert W. MacDonald sees only disaster.
Over a plate of scrambled eggs and sausages at a midtown Manhattan hotel, the insurance executive explained why he has shied away from the bank market.
"It's too risky to develop and sell the products the banks are most willing to sell," said Mr. MacDonald, the 53-year-old chairman of Life USA Holding Inc., a $4.1 billion-asset insurer in Minneapolis.
The chief complaint of this industry gadfly: the current crop of annuity products is designed too liquid and too cheaply priced. He fears customers will cash out earlier than expected, and underwriters won't have the money to meet their obligations.
While others in the insurance industry don't always like what Mr. MacDonald says, they concede that his warnings should be considered as the industry develops a close working relationship with banks.
"He's a controversial guy," says Michael McCoy, senior vice president overseeing sales through banks at Security First Group, Los Angeles. "But he's a good reminder for us in the industry to keep us focused on the original intent of the product."
Others connected with the insurance industry also recognize that Mr. MacDonald is raising some needed caution flags.
"I'm not going to say there aren't companies out there willing to take some kind of risk up front to develop a relationship with banks," said Lawrence Mayewski, an analyst at the rating agency A.M. Best Co., Oldwick, N.J.
At the same time, Mr. Mayewski described Mr. MacDonald as being "unfair," to describe companies as teetering on insolvency.
But the criticism hasn't stopped Mr. MacDonald from using conference appearances and the media to challenge his industry's approach to marketing annuities.
He argues that too many industry executives are designing products that are so cheap and easy to sell that whatever revenues they sacrifice in the short run will be more than compensated for by volume in the long run.
To meet that end they have constructed fixed annuities to be "simple enough to meet the banker's marketing IQ," he said. These annuities are being sold as alternatives to CDs, he said.
"The banks don't care, because they don't understand the business," he says.
What he fears most is that the underlying portfolios of fixed annuities, which invest in long-term bonds, won't match what in his mind is quickly becoming a short-term liability.
He compares the current environment to the savings and loan scandal of the 1980s. S&Ls invested most of their assets in long-term, fixed-rate mortgages, while most of their liabilities were in short-term, demand deposits, he said.
"The potential is there for that type of disaster to happen, and who are the customers going to turn to?" he asked.
Mr. MacDonald is used to playing a provocative role. In the early 1980s, he lashed out at the insurance industry and the company he worked for at the time, ITT Corp., for creating whole life insurance, a product that takes risk with an investment component.
He was president of ITT Life Insurance Co., a unit of ITT Hartford Life Insurance Co., the subsidiary spun off a year ago by ITT Corp. Mr. MacDonald's maverick style got him in trouble, and he left ITT after making an unsuccessful bid to buy the unit he oversaw.
Several bankers dismiss Mr. MacDonald's remarks, saying their own due- diligence efforts will protect them from choosing poorly designed products that stand to hurt their relationship with customers.
"We do everything humanly possible to prevent that," said Richard J. Imhoff, a trust officer at Empire Bank in Springfield, Mo. "We constantly review the company."
And some bankers flat-out disagreed that their customers buy fixed annuities as alternatives to CDs. Instead, customers seek the tax-deferred growth feature of the product, which requires a customer's staying power.
Some sales executives at insurance companies challenged Mr. MacDonald's doomsday S&L comparison. "We're extremely comfortable with the way we've designed our annuities," said Security First's Mr. McCoy.
Others say Mr. MacDonald is making a mountain out of a molehill when he complains the underlying bond investments are not matched properly with liability that comes with a fixed annuity product.
"There may be companies out there that don't understand the mismatch, but clearly most of the major providers in the bank marketplace manage that very well," said Bradley J. Powell, president of the institutional marketing group at Jackson National Life Insurance Co.
Mr. MacDonald continues to sell his own products with high up-front commissions in order to recoup expenses quickly. "You can never fully protect yourself," he said. "But it's better than being naked."