Annuities: The Other Variable in Abusive Fund Trading

The question then becomes: Which insurers offer these Janus Aspen funds? At least 10, according to Barron's Web site, which lists variable annuity accounts and the funds within them -- among them offerings from Conseco (CNO Quote), ING, Lincoln, MassMutual, and Citigroup's(C Quote) Travelers.

Therefore, in such instances, it's difficult to pinpoint where the abusive trading may be taking place within the various annuity accounts -- only Janus and the various annuity providers know where the money originates and the trading activity, and efforts to obtain further information from Janus and several variable annuity providers were unsuccessful. However, all of the owners of the funds suffer from the excessive trading -- even if they own them through another variable annuity.

In other instances, determining where potential international market-timing of funds was taking place was less onerous. For instance, the Panorama Series Trust Oppenheimer International Growth fund, which had $62.8 million in net assets and $345.3 million in redemptions, is sold exclusively in MassMutual variable annuities as part of the privately held insurer's Panorama funds.

Certain MassMutual variable annuities also included other funds that turned up on the red flag list, including the Janus Aspen Worldwide Growth fund and the Scudder EAFE Equity Index fund. MassMutual was provided with the data and a list of questions about its annuity business, but didn't return calls for comment.

Several other insurers and fund firms were provided with the relevant data and asked to comment. A spokeswoman for Hartford, whose Hartford HLF International Opportunities fund turns up on the list and whose annuities include a handful of the funds on the list, declined to comment specifically on the data. However, the spokeswoman, Cynthia Michener, said the nation's largest variable annuity provider has taken "increasingly tough measures to deter market-timing, including the recent introduction of fair valuation in an effort to take away the incentive to trade abusively in international funds."

Officials at ING were provided with the data on the four ING funds that turn up on the red flag list as well as questions regarding the Security Life of Denver's Estate Designer variable annuity, which counts seven red flag funds among its 25 offerings. The spokeswoman declined to comment on the specific question but said it's the firm's "policy to discourage inappropriate market-timing activity."

A spokesman for Invesco parent Amvescap declined to comment. Attempts to reach Fidelity early Friday morning weren't immediately successful, but in the firm's prospectus for its VIP funds, which are used by several annuity providers, Fidelity said the fund "does not permit market timing because short-term or other excessive trading into or out of the fund may harm performance," adding, "the fund may reject any purchase orders that, in FMR's opinion, may be disruptive to the fund."

A spokesman with Jackson National Life said the insurer identified certain variable annuity subaccounts with unusually high redemption rates and the firm's board of trustees "immediately began discussions around Fair Value Pricing procedures."

By early 2003, the procedures were established and the funds in question saw substantial drops in redemption rates to below the industry average. "Jackson National Life is committed to protecting the best interests of all its customers and the financial professionals who do business with the company," spokesman Tim Padot said.

While it isn't yet clear whether some insurers, like the mutual funds in the Canary Capital scandal, deliberately set up proprietary relationships with a select few clients that undermined the rest of their annuity holders, it is clear that some unwitting variable annuity providers may have been caught prepared to respond to the improper market-timers within their funds.

"My firm has practices in place, such as software, to sniff market-timing out -- we will politely but firmly put an end to it," said one official in the variable annuity business. "But insurance companies are historically technically ignorant; they haven't invested in the systems to combat it."