Ohio National Life Insurance Co. is weathering a legal storm after announcing late last year that it will no longer pay ongoing “trail” commissions to brokers and advisers who sold and serviced its variable annuities from 2012 through 2018.
At least 10 lawsuits have been filed in federal courthouses around the country since the insurer and its affiliates curtailed the payments to tens of thousands of brokers and stopped selling the annuities.
According to court filings, Ohio National and its subsidiaries sold more than $10 billion in new variable annuities between those years, with between 50,000 and 75,000 independent broker-dealers being paid regular commissions until the insurer unilaterally terminated its contracts with them last year.
The lawsuits claim Ohio National breached agreements under which the brokers were guaranteed to receive trail commissions until the annuities were surrendered or annuitized—i.e. converted into fixed, regular payments by the purchaser.
Ohio National declined to comment, but it has raised a simple defense in one early motion for summary judgment: The payments were only to be made while the selling contracts were in force. Once the contracts were terminated, the insurer no longer had any obligation to honor them.
The tide of litigation began in September when Ohio National sent “termination letters” to broker-dealers saying it was cancelling their contracts to sell variable annuities and would no longer pay the commissions on existing annuities effective Dec. 12.
In one of the first lawsuits, Texas broker Lance Browning filed a putative class action in Ohio’s Southern District on Nov. 6 asserting that the cancellation of his commissions would cost him nearly $90,000 a year on existing annuities he sold.
Two days later, Arkansas-based financial brokerage and financial advisory firm Veritas Independent Partners filed another putative class action in Ohio’s Southern District. Since then, other broker-dealers have filed complaints in Alabama, California, Indiana, Massachusetts, Minnesota, Mississippi, New Jersey and Texas.
They name Ohio National Life insurance, Ohio National Life Assurance Corp., Ohio National Equities Inc. and Ohio National Financial Services Inc. as defendants.
The contracts at issue involved annuities with a “Guaranteed Minimum Income Monthly Benefit Rider,“ which promise a monthly retirement payment regardless of how well the underlying investments perform.
The brokers and dealers were offered several options for what percentage of their commissions they would take up front and how much would be paid in an ongoing trailing commission. According to selling agreements cited in the cases, the trailing commissions were to be paid “until the contract is surrendered or annuitized.”
But, in the words of the Veritas complaint, the insurer “concluded the pool of Ohio National’s GMIB Annuity Contracts were unprofitable,” and that it was in its best interest to exit as many as possible.
Where it could not do so, “Ohio National decided to eliminate paying commission obligations” regardless of its contracts with the brokers and dealers, Veritas claims.
The insurer’s parent company, Ohio National Financial Services, may have been under some financial pressure at the time of the decision: In September, both Moody’s and Standard & Poor’s downgraded the insurer’s credit rating outlook to “negative,” although both remain relatively strong at A and A2, respectively.
Ohio National announced that same month it would “exclusively focus on growing its life and disability income insurance product lines going forward,” citing a “continuously changing regulatory landscape, the sustained low interest rate environment, and the increasing cost of doing business, as well as growth opportunities and the company’s competitive strengths.”
In October, it promoted senior vice president Rocky Coppola to chief financial officer, and in November elevated former vice chairman and chief administrative officer Barbara Turner to new president and COO.
In a November article for ALM publication ThinkAdvisor, broker-dealer adviser Jon Henschen wrote that “Ohio National’s $24.9 billion worth of variable annuity contracts equates to 59 percent of its total assets” and, like other insurers, “is under financial duress due to offering overly generous guarantees in the [variable annuity] contracts it sold in years past.”
In a motion for summary judgment in the Veritas litigation, Ohio National pointed to language in the selling agreement noting that it “remains in force and will be paid on a particular contract [individual annuity] until the contract is surrendered.”
“Such language unequivocally establishes that the termination of the selling Agreement also terminated any obligation of the [Ohio National] contracting parties to continue paying trail commissions as to individual variable annuity products,” said the Jan. 21 motion, filed by Marion Little and Christopher Hogan of Columbus’ Zeiger, Tigges & Little.
The agreement contained a provision allowing it to be terminated “at the option of any party upon 60 days written notice to the other parties,” it said, which was met by the Sept. 21 termination letters.
The Veritas litigation was filed by James Hadden, Geoffrey Moul, Brian Murphy and Joseph Murray of Columbus’ Murray Murphy Moul & Basil, who did not respond to a request for comment.
In the Browning case, Ohio National filed for judgment on the pleadings, arguing the plaintiff was not a party to agreement between the insurer and the company he was under contract with, meaning has no standing to bring a claim.
Concilla said he reviewed several of the selling agreements Ohio National had with its broker-dealers, and that—while there are differences among them—“they all basically say, ‘Here’s our product, you’re going to sell it, we’ll pay you commissions and our obligation to pay extends beyond the life of the contract.’”
Some of the agreements contain a provision reserving Ohio National’s right to change the commission rate, which he said is not unusual. But the agreements did not give Ohio National the right to simply stop paying the commissions and keep the money.
Concilla noted that the broker-dealers were offered the option of taking a larger up-front lump commission and smaller trailing commissions, or bigger commissions over the life of the annuity. Concilla added it made no sense for any of them to selected the latter if there were the possibility of the insurer simply cutting them off.
Concilla said the lawyers in the various cases have been in contact, but there has been no discussion on consolidating the litigation.
Concilla said that Ohio National was not alone in getting out of the annuity business.
“Other companies are no longer offering them,” he said. “But none have told their broker-dealers, ‘we’re no longer going to pay you for the products you sold.’”
Ohio National preceded its termination program by repeatedly pressuring annuity holders to cash them out and invest in other options, Concilla said.
“I knew about it early because I own some of these contracts,” he said.
Concilla said he bought the annuities when he heard that he could get a guaranteed 6 percent annual return on his investment with a higher percentage if the market went up, but that the rate of return would stay the same even if the market dipped.
“I thought it was a good addition to my portfolio,” he said.
Once Ohio National decided to get out of the annuities business, he said the insurer sent him several letters urging him to dump them in favor of another investment option, which he declined to do.
“I think [Ohio National] finally realized it wasn’t a good deal for them, but it was a good deal for the buyers,” he said.