Otto v. Variable Annuity Life Insurance Co.
United States Court of Appeals for the Seventh Circuit
814 F.2d 1127 (7th Cir. 1986)
Variable Annuity Life Insurance Company (VALIC) (defendant) sold fixed annuities offering 4% interest for ten years then 3.5% thereafter, holding customer funds in a separate account invested in mortgages and bonds, with any excess interest paid at VALIC's discretion; Beverly Otto (plaintiff) bought such an annuity in 1975 and later brought a class action claiming VALIC failed to disclose how it calculated excess interest (whether by the banding method or the new-money method) or how it maximized returns. The district court granted VALIC summary judgment, an appellate panel initially affirmed, but on rehearing VALIC asserted it had the unfettered right to freely alter past interest bands.
Whether a fixed annuity that initially satisfies the SEC's three-part regulatory test for an insurance product nonetheless qualifies as a security once the issuer claims unfettered discretion to retroactively alter the interest terms already credited to policyholders.