NERA Expert Testimony Recognized as Class Certification is Denied in Variable Annuities Fee Case

14 February 2008

Washington, DC/14 February 2008 -- Testimony and empirical work by NERA expert Dr. Robert Mackay contributed significantly to and was cited extensively in a decision issued this week denying class certification in a variable annuity case.

On Tuesday, Magistrate Judge Caroline Craven rejected the testimony of plaintiffs' expert witness and issued a 63-page recommendation denying plaintiffs' request for class certification in AC Brooks vs. The Lincoln National Life Insurance Company and Lincoln Financial Distributors, Inc., a proposed lawsuit alleging that Lincoln National Life Insurance Co. withheld key information about its variable deferred annuities products when selling those products to individuals and groups.

Plaintiffs initially filed a proposed class action against Lincoln in February 2003 on behalf of customers who purchased either an individual variable deferred annuity contract or a certificate to a group variable deferred annuity. The case alleged that Lincoln violated Section 10(b), Section 20(a), and Section 29(b) of the Exchange Act by omitting material information when it sold variable annuities, an investment tool for accumulating tax-deferred savings that can come with various insurance benefits and that later may be used to purchase an immediate annuity. Plaintiffs argued that the main benefit of variable annuities, tax deferral, is unnecessary when annuities are purchased for investments in qualified retirement plans, such as 401(k) plans, and that variable annuities are sold with higher fees that are not justified by any additional benefits provided relative to investments such as mutual funds.

Lincoln retained NERA Senior Vice President Dr. Robert Mackay to testify about the ways in which variable annuities can be suitable investments for investors in qualified plans by offering unique features which reduce the risks of investing for retirement. These additional features, which expose the insurance companies to costs and risks not borne by mutual fund companies, help to explain the additional costs of investing in variable annuities. Second, Dr. Mackay testified that no support could be found for plaintiffs' theory that variable annuity fees are an implicit payment for tax deferral. A study conducted by Dr. Mackay finds that variations in the tax redundancy disclosures have no impact on fees. Further, Dr. Mackay testified that the variable annuity marketplace is highly competitive and in a competitive market variable annuity issuers can charge for actual product features, not for tax deferral.

In additional testimony, Dr. Mackay also argued that the testimony of plaintiffs' expert should be excluded as it failed to include support for assertions about how the variable annuity marketplace functions and provided no way to replicate the analysis that led to the conclusions of the plaintiffs' expert. As an example, Dr. Mackay testified that the plaintiffs' expert provided no estimate of the size of the implicit charge for tax deferral and provided no methodology for estimating the charge.

While finding the opposing expert qualified to testify, Judge Craven nevertheless threw out his expert report for lacking a sound basis for his conclusions, particularly in the light of NERA's empirical work and substantive arguments. Judge Craven also found that individual claims in the case predominated over common ones because, for example, individual investors relied on suggestions made by the representatives who sold variable deferred annuities based on individual investors' circumstances, not scripted sales pitches. Therefore, Judge Craven also denied the plaintiffs' motion for class certification

NERA Economic Consulting (, founded in 1961 as National Economic Research Associates, is a unit of the Oliver Wyman Group, an MMC company.

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