Axa Equitable Life Insurance Company was fined $20m by a New York State regulator on Monday who charged that Axa changed variable annuity (VA) contracts without properly explaining the implications of the change to insurance regulators. That strategy change affected tens of thousands of New Yorkers who hold VAs through Axa.

“Insurers have a fundamental responsibility to be clear and upfront with their regulators, particularly when a company’s actions can impact the retirement savings of tens of thousands of New Yorkers,” New York Governor Mario Cuomo said in announcing the fine. “Unfortunately, Axa did not meet that basic test, and today’s action should send a signal that failing to do so is simply unacceptable.”

The change allowed Axa to employ a “tactical manager” strategy which was designed to use derivatives to reduce VA funds’ equity exposure. The goal was to smooth both new and existing VA funds’ returns during periods of high market volatility. The change was initially requested by Axa in 2009 through 2011 and was subsequently approved by the New York Department of Financial Services. But the strategy also had the effect of limiting the gains that accrued to policyholders’ accounts.

Opaque disclosures
The Department of Financial Services charged that when Axa desired to change the strategy behind its VAs, it should have more clearly and adequately explained the significance of the changes so that investors could have been better protected, such as through the installation of an “opt-in” program. The regulator charged that Axa made these changes unilaterally to both existing VA contracts and new ones.

In a statement posted to its website, Axa said, “At Axa Equitable, we are proud to be a leader in introducing product innovations that respond to consumer needs. This includes routinely making changes and enhancements within our products, including the introduction of investment options with the managed volatility strategy to adapt to market conditions.” The insurer continued: “At all times, Axa Equitable contract-holders are free to make investment decisions that suit their individual needs, with access to a full menu of options in their products that vary by asset class and investment strategy.”

Benefits suppressed

The New York Department of Financial Services – Financial Fraud & Consumer Protection Division, which sanctioned Axa, noted that the tactical manager strategy suppressed the value of certain guarantee benefits that were eligible for “resets” when the policyholders’ account value rose. “Many policyholders invested in variable annuities, including variable annuities with guaranteed living and death benefits, because they were interested in making more aggressive investments to capture market rises,” the regulator said in its sanction agreement with Axa.

The New York Department of Financial Services was created in October 2011 and granted the collective functions and authority formerly held by the New York State Banking Department and the separate New York State Insurance Department.

Click here to read the New York State Department of Financial Services’ decision.