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$2.1 million annuity settlement with Nationwide Life

February 03, 2010

$2.1 million annuity settlement with Nationwide Life

For Immediate Release: Wednesday, February 3

Minnesota, four other states reach $2.1 million annuity settlement with Nationwide Life

(ST. PAUL, MN) Five state insurance regulators, including the Minnesota Department of Commerce, have entered into a $2.1 million settlement with Nationwide Life Insurance Co. and Nationwide Life and Annuity Insurance Co. relating to the alleged unsuitable sale of Nationwide Life variable annuities to clients of Kansas-based financial advisory firm, Waddell & Reed Inc.  Minnesota's portion of the settlement is $403,577.

The multi-state settlement, which in addition to Minnesota includes Kansas, California, Missouri and Wisconsin, is the latest example of state insurance regulators working to ensure market fairness and the suitability of annuity sales.  In December, the National Association of Insurance Commissioners adopted a model regulation for suitability in annuity transactions.  One of the provisions of the model requires that insurance producers or insurers recommending the purchase or exchange of an annuity have reasonable grounds for believing that the recommendation is suitable for the consumer.  Minnesota was a member of the working group that drafted the new annuity model law.  In addition, the Minnesota Department of Commerce has worked with the Financial Industry Regulatory Authority (FINRA), Iowa and North Dakota to establish uniformity in the regulation of annuities across different regulatory bodies.

Though the violations outlined in the settlement pertain to the sale of Nationwide Life annuities by Kansas-based financial adviser Waddell & Reed Inc., regulators from the five states assert that Nationwide Life and Nationwide Life and Annuity did not take the required steps to ensure that Waddell's supervision and control were adequate.

In entering into this settlement, Nationwide Life does not admit to the allegations made by regulators that it violated any law or regulation.

In 2000, Waddell & Reed asked Nationwide Life and Nationwide Life and Annuity to develop two variable annuity products for Waddell & Reed's clients.  The firm's advisers started offering the two new products - the Waddell & Reed Advisors Select Plus Annuity and the Waddell & Reed Select Annuity - to its clients around January 2001.  At the firm's recommendation, many of the firm's clients purchased the new annuities to replace the variable annuity policies from United Investors Life Insurance Co. (UILIC) that they held in their portfolios.

Waddell & Reed advisors allegedly recommended variable annuity exchanges without having reasonable grounds for believing that the recommendations were suitable for their customers.  As a result, many customers, including several in Minnesota, were allegedly harmed by the exchange.  At the urging of Waddell & Reed and its financial advisors, customers surrendered 6,742 UILIC annuities worth about $616 million.  Of the customers that made an exchange, 4,937 incurred surrender charges totaling more than $9.6 million.  Customers exchanging their policies were also allegedly at risk of recovering a lower death benefit during the term of the annuity.  A significant number of policies were allegedly replaced for reasons that benefitted the financial adviser, not the customer.

In June 2005, the Minnesota Department of Commerce and the Kansas Commissioner of Insurance issued a consent order against Waddell & Reed, censuring the firm for its conduct.  The firm was ordered to pay civil money penalties of $145,291.70 to Kansas and $68,110.85 to Minnesota.  That two-state order, in conjunction with a 2004 order issued by FINRA, required that Waddell & Reed establish an $11 million fund from which restitution would be made to clients who made the exchange.  The firm was also ordered to hire an independent consultant to distribute the restitution payments.

Nationwide settlement details
Additional remedies for consumers who surrendered their UILIC Advantage II variable annuity policy in exchange for a purchase of a Select or Select Plus variable annuity policy include:

Nationwide will offer to reimburse the consumer for any surrender charge they may have incurred by exchanging policies
The option to rescind some of the riders the consumer may have purchased in conjunction with their annuity
An increase of the death benefit to 103 percent of first year premiums plus 100 percent of subsequent premiums for those who purchased a Select Plus variable annuity with the Extra Value Rider
Affected consumers will soon receive a notice from Nationwide Life informing them of their restitution options.  Consumers have 60 days from the day of delivery to respond.

Consumer tips:
Before replacing an annuity policy, consumers should consider the following:

  • Replacing or liquidating an annuity or life insurance policy can have hidden costs and tax consequences. Be aware that some policies may contain surrender charges and/or cancellation penalties.

  • Don't be pressured to make an immediate decision. Unscrupulous agents may prey on your "time fears." They may try to convince you to change coverage quickly without giving you the opportunity to do adequate research.

  • Many state laws require a suitability analysis before the sale or replacement of any annuity product. A suitability analysis should include an evaluation of your financial position, income needs and the cost of liquidating any assets.

Other tips can be found at: .

Similar actions taken by the Minnesota Department of Commerce

  • In October 2007, the Department fined American Investors Life Insurance Co. and two of its subsidiaries $1.4 million for allegedly using deceptive sales practices and selling annuities that were not suitable for Minnesota consumers.

  • In April of 2006, the Department fined Conseco Insurance $2.5 million for allegedly deceptive sales practices and violations of Minnesota's suitability laws.

  • In April of 2005, the Department fined Pacific Life Insurance Co. $950,000 for allegedly deceptive sales practices and violations of Minnesota's suitability laws.