A Lipper Inc. analysis of redemption rates in the mutual funds underlying insurers' variable annuities has found suggestively high turnover rates in funds used by many major companies, some of them already known to be under regulatory scrutiny.
Lipper senior analyst Don Cassidy said his company examined funds in which redemptions equaled 250% of average net assets or more during a year and those in which redemptions roughly equaled sales. When a fund met both criteria, "you've got something that needs an explanation," he said in this week's Securities Industry News, a Thomson Media publication.
Redemption rates rose steadily from 1999 through 2002 but then dropped sharply in 2003, Mr. Cassidy noted, the year the fund trading scandals emerged. To explain the rising redemption rates in the early years of the decade, Mr. Cassidy said, " ... it pretty much comes down to frequent trading, probably by hedge funds and some individuals." Frequent in-and-out trading in mutual funds, so-called market timing, is one of the questionable practices attacked by regulators.
Mr. Cassidy said he thinks the regulators' net could be cast wider in the annuity industry than it has been in the mutual fund industry. "You are looking at a higher proportion of firms in the industry being involved" than in mutual funds, he told Securities Industry News.
Variable annuity issuers whose underlying funds met both redemption criteria are Aegon, Allianz, American Skandia (now owned by Prudential Financial), Axa Financial Inc., Conseco, First American Insurance, GE Financial, Hartford Financial Services Group Inc., ING Group NV, John Hancock, Jackson National Life, Liberty, MetLife Inc., Ohio National, Prudential Financial, and Travelers Life and Annuity.
Conseco this year became the first insurance company charged with facilitating market timing. The Hartford has reported in its first-quarter 10Q filing that the Securities and Exchange Commission's enforcement division had "commenced an investigation of the company's variable annuity and mutual fund operations." It had no comment on the Lipper analysis.
Mike Kachel, the vice president of corporate communications at Genworth Financial (the name the company took after being spun off by GE Financial), said, "In our variable annuity prospectus, we have restrictions in place to limit frequent transfers. We took steps well in advance of these public discussions to minimize frequent trading."
Prudential and, through it, American Skandia, which Pru bought last year, had no comment on the Lipper analysis. Liberty Mutual Group and Travelers likewise had no comment.
The following companies did not respond to phone calls seeking comment: Aegon NV, Allianz, Axa Financial, First American Insurance, ING Group, John Hancock, Jackson National Life, MetLife, and Ohio National.
Variable annuities are typically sold as retirement savings products to investors of relatively modest means. In the Conseco case, the SEC said of it and Inviva, a company that bought Conseco's annuity business, that they had "misleadingly represented, among other things, that the annuities were not designed for professional market timing organizations. In fact, the insurance companies affirmatively marketed and sold the annuities to professional market timers."
Among companies besides The Hartford that have confirmed regulatory requests for trading documents are MetLife, Prudential, Lincoln National Corp., ING Group, and Aegon.
Nationwide Financial, a big annuity provider both in banks and other channels, does not appear on the Lipper list but has said it, too, has received regulators' requests for documents.
A version of this article originally appeared in Securities Industry News. American Banker reporters Lee Ann Gjertsen and Matt Ackermann contributed additional reporting.
