Insurance Companies Are Pro & Con

THE insurance industry is embroiled this week in a first-class row over the variable annuity, the newest gadget in financial security. The word that caused the trouble is "variable," which means that the premiums are invested in common stocks and that payments vary according to the rise or fall in stock values and dividends, instead of being paid in fixed amounts. The big advantage of the variable annuity is that in periods of inflation, when the purchasing power of the dollar depreciates, stock prices and dividends more than make up the difference by their rise.

While the insurance industry argued, the Securities & Exchange Commission last week joined the fracas, seeking to compel the only company now selling the new annuities to the general public to register with the SEC. Three days later, top insurance men thronged a hearing room in the New Jersey state senate and wrangled over three bills which have already received state assembly approval to legalize sale of variable annuities by insurance companies in New Jersey.

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Strongest proponent of the variable annuity is President Carrol Shanks of Prudential Insurance, second largest U.S. insurance company (which is incorporated in New Jersey). He argued that conventional, old-line annuities have failed to do their job in the past quarter-century, now attract few purchasers. The reason, other supporters point out, is that a purchaser of a guaranteed annuity in 1932 today receives only half its face value in purchasing power. On the other hand, had he been able to buy a variable annuity, he would now receive 245% of the initial amount, more than enough to compensate for inflation. Over the long pull, argue the bill's advocates, the variable annuity is a better earner than the old-fashioned type, e.g., during the past 20 years, while life-insurance investments brought an average annual yield of 3.31%, the yield and appreciation on common stocks averaged 10.58% annually. Says Prudential's Shanks: "We believe in the long-run future of our great productive enterprises. There is certainly nothing radical in suggesting that our retired people should have a chance to participate in that future."

Strongest opponent of the variable is the world's biggest insurance company, Metropolitan Life. President Frederic W. Ecker argues that the variable annuity would undermine the entire industry by implying that life-insurance companies no longer believed in their own product of guaranteed dollar investments; in place of the traditional sure thing, it would offer speculation in the stock market. Says Ecker: "We want to see nothing done which will cause a loss of confidence in the life insurance business. I don't want to be answering letters from policyholders which say: 'Last year you paid me $100 a week; now you're paying me only $80 a week. How come?' "

New York Stock Exchange President Keith Funston made another objection: adoption of the annuities might make insurance "a vehicle for avoiding taxes on common stock investments." Funston explained that while individual investors pay capital gains taxes plus 16% to 87% tax on dividend income, insurance companies are exempt from capital gains and pay only an estimated 7.8% on net investment income. This might turn variable annuities into a tax dodge, he said, and "might even spark congressional action to reduce or remove the advantageous tax treatment of all life insurance companies."

The National Association of Security Dealers and various mutual funds are also opposed. Both groups ask that if life-insurance companies are to compete with them for stock-market investors, they be subject also to the same SEC rules and regulations. The thought of this gives some old-line insurance men the shivers; they see SEC regulation as the first step in eventual total federal regulation of the life-insurance business.

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Prudential is going ahead with its variable annuity plans in the expectation that the New Jersey legislature will approve the required legislation. Even a court ruling putting variable annuities under the SEC, said Shanks, "would not alter our plans for this new field. We would then comply with SEC requirements just as we now comply with all laws to which we are subject." According to an Indiana University survey, 95 other life-insurance companies are also preparing to issue variable annuities in the next year or so.

So far, little more than 100,000 Americans are covered by variable annuity plans, such as the pioneer College Retirement Equities Fund (started four years ago for college personnel only), the Boeing Airplane variable plan, and half a dozen others. All are restricted nonprofit groups. If the commercial insurance companies want to try variable annuities, it seems likely that they will have to accept regulation by the SEC. Then they will be able to offer both types of annuities to their customers.

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