WHICH ANNUITY PARTNER TO KEEP? BANK MERGERS SQUEEZING INSURERS

Scale giveth and scale taketh away.

The securities-distribution units of big banks have grown to the size where more are launching their own variable annuities, offering insurers a new avenue into the prized bank channel as underwriters of these bank-branded products.

But the consolidation fever gripping the size-obsessed banking industry could soon cut out some of these insurers — from titans like Hartford Life to smaller players like Pacific Life Insurance Co. — who risk losing the hard-won bank relationships as merging institutions are forced to decide between partners.

While bank mergers are raising the stakes for the insurance industry, the outlook is rosier for the combining banks. Heightened competition should enable them to negotiate better pricing and service from insurers.

And don’t worry too much about insurers: Those who win the big-money game — $10 billion in annuities were sold through banks last year — could well make up for the reduced fees with bigger sales volumes.

Take the recently announced blockbuster mergers of NationsBank Corp. with BankAmerica Corp., and Banc One Corp. with First Chicago NBD Corp. Not only will these players need to decide how to merge their proprietary mutual-fund families, they also may be among the first banks to do the same with their variable annuities, which essentially are mutual funds that grow tax-deferred within an insurance contract.

“As you get more and more consolidation of banks, certainly the product lines will follow,” says Glen Milesko, chairman and chief executive of Banc One Insurance Group, headquartered in Milwaukee. “It’s just common sense.”

Hartford Life is by far the nation’s largest seller of annuities through banks. It underwrites the proprietary variable products of Charlotte, N.C.-based NationsBank, which rolled out its variable annuity just one month ago, as well as First Chicago, which has been selling its own branded product for four years.

But Columbus, Ohio-based Nationwide Financial Services Inc., the No. 2 player in the bank channel, underwrites the three-year-old variable product of neighbor Banc One, the acquirer of First Chicago.

Perhaps most vulnerable is Newport Beach, Calif.-based Pacific Life, which underwrites BankAmerica’s variable annuity, launched just a year ago. San Francisco-based BankAmerica makes up a whopping 50% of Pacific Life’s bank business, a small but growing part of the insurer’s annuity distribution, according to Kenneth Kehrer, an industry consultant in Princeton, N.J.

Pacific Life referred questions to BankAmerica, which declined comment. Hartford couldn’t make an official available and a Nationwide official couldn’t be reached.

Banks accounted for 11% of the $87 billion in total variable-annuity sales last year, according to annuity tracker VARDS. The share is projected to climb to 14% by 2000.

Still, only 18 banks — most of them among the nation’s largest — offer proprietary variable annuities. That number should grow, though. Of 135 of the biggest banks surveyed by Cambridge, Mass., market research firm Market Metrics Inc., 16% say they’re likely in the next two years to launch private label variable annuities.

scale and distribution

“There are two things at work here,” says Melissa Neal, a Market Metrics analyst. “There are going to be more banks with the scale to make these ventures economically attractive. It’s also another distribution channel for the mutual funds (the banks) already have.”

That’s because the same mutual fund portfolios the banks offer are being cloned into variable annuity subaccounts.

Banks usually sell no more than three insurers’ variable annuities, which makes it difficult for newcomers to get shelf space. So the trend toward proprietary bank annuities opens the doors to more players. But these newly won relationships are threatened as banking mergers continue.

“The bank merger activity means there are going to be big winners and big losers (among vendors),” says Robert B. Wilcox, president of Wilcox & Associates, a New York marketing consultant for banks.

In a way, the mergers are creating a nice problem for banks. Melding two annuity product lines into one may spur a bidding war to keep the business between the respective insurers, resulting in more lucrative fee-sharing arrangements for banks.

Today, insurers typically get the lion’s share of revenues from bank variable annuities. That’s because insurers get most of the mortality and expense, or M&E, fees paid for the insurance wrapper, which average about 1.4% of assets a year. For these products, banks are paid the asset-management fee, which typically is in the 0.5% to 0.75% range.

$1.2 million in fees

So, for example, with $200 million in First Chicago’s variable annuity, Hartford gets most of the $2.8 million generated annually through the 1.4% M&E fee. First Chicago’s take, then, is roughly $1.2 million via the asset-management fees, which range from 50 to 70 basis points.

Meanwhile, Banc One’s variable annuity pulled in $170 million last year. This year in April alone, sales were $30 million, Mr. Milesko says. And, as a kicker, the product is the only variable annuity Banc One sells, so Nationwide has Banc One’s variable-annuity distribution all to itself.

With Banc One’s annuity managing nearly $500 million, Nationwide’s annual take, assuming it gets most of the 1.25% M&E fee, is more than $6 million.With Banc One and First Chicago together, the insurance fee potential nears $9 million.