Annuities have gone, in just a few years, from occasional offerings to a key component of banks' investment product repertoire.

The products are producing fee income, strengthening relationships with customers, and helping banks in their shift from just being purveyors of loans and deposit accounts to being providers of comprehensive financial services.

Today, banks account for $18.4 billion, or 24%, of the industry's $76 billion of annual sales, an increase from volume of $7 billion in 1989.

Indeed, from tiny Desert Community Bank in Victorville, Calif., to Citicorp in New York City, financial institutions have embraced annuities and earned millions of dollars of fee income in the process.

On the legal front, banks won a sanction in January when the U.S. Supreme Court ruled that annuities are not insurance products and can be sold by banks.

Florida's insurance department, which had been a chief regulatory foe of banks' annuity activities, now says it will defer to the Supreme Court ruling.

But other states - and independent insurance agents - remain committed to limiting, or even preventing, banks' sales of annuities. Most recently, the U.S. Court of Appeals for the 11th Circuit ruled that states have the power to oversee insurance sales, reopening the door for them to hinder annuity sales.

Industry observers say it may take another Supreme Court ruling, or federal legislation, to establish finally whether bank agencies or state insurance departments have the authority to oversee annuity sales.

On Capitol Hill, House Commerce Committee Chairman Thomas J. Bliley, R- Va., is preparing legislation that would put insurance oversight power squarely in the hands of states.

At the same time, two Glass-Steagall reform measures - one promoted by the Clinton administration and the other backed by Senate Banking Committee Chairman Alfonse M. D'Amato, R-N.Y. - would let banks strengthen their alliances with insurance companies.

While the measures are debated, banks show no sign of slowing down, even in states that try to make it tough for sales. More banks than ever are aligning themselves with investment product marketing firms that sell annuities in branches. Banks get a share of the proceeds in a number of ways, including through lease payments.

Investment marketers like Essex Corp., Independent Financial Marketing Group, Invest Financial Corp., and James Mitchell & Co. have all been instrumental in getting banks into the annuity business and keeping regulators at bay.

Banks themselves have been making solid inroads with customers. Consumers are becoming accustomed to seeing annuities advertised alongside mutual funds to spotlight banks' versatility as financial product providers. And banks don't want to lose that growing identity, experts say.

Annuities fill a niche for people who are planning for retirement or some other big future need, like their children's college education. About 22% of those contacted in a 1994 American Banker/Gallup consumer survey said they were interested in buying annuities from their main bank, and 7% said they had done so.

The products generally come in two forms, both of which allow customers to tuck away investments on a tax-deferred basis.

Fixed annuities supply a stable rate of return, much like certificates of deposit. Variable annuities are for the more daring investor who seeks higher returns than fixed annuities offer, in exchange for assuming more risk in the underlying mutual fund investments.

Insurance companies like the idea of banks, with their broad customer base, putting annuities in their product mix. Some of the industry's heaviest hitters, including ITT Hartford Life Insurance Cos. and Aetna Life & Casualty Co., have set up units dedicated to assisting banks.

This popularity with insurers gives banks leverage. They are able to squeeze out bigger commissions and other concessions, like marketing support, in return for providing shelf space.

Some insurers have gone a step further. Holden Group, a Los Angeles insurance company, last year gathered a group of bankers and asked them to craft a customer-friendly annuity.

The result? A product with a higher interest rate and lower surrender fee for customers who decide to cash out early.

And just this winter, Western National Life Insurance Co., Houston, let Summit Bancorp. and First Union Corp. be investment advisers for fixed annuities the banking companies will market.

Insurers usually handle money management chores for fixed annuities, even those sold through banks. But executives at Western National said solidifying relationships with bank clients was worth the trade-off of losing some management fees.

Banks are also earning fee income by managing their own variable annuities. The first to do so was Fleet Financial Group, in early 1993. Since then, the products have been launched or put in the works at more than a dozen banks - including Wells Fargo & Co. and First of America Bank Corp.

The jury is still out on whether these banks and future entrants will be able to amass enough sales to make the products profitable.

Indeed, industry experts say, some banks may have to settle for the control they get from overseeing their own annuities.

In the near future, these observers say, more banks will enter the annuity business. Community banks will team up with investment marketing firms that obtain annuities from insurers. And larger banks will continue linking their own mutual funds to variable annuities as a way of leveraging in-house management.

Experts also say that annuities, while continuing to gather steam, will help banks diversify into other investment products, most notably life insurance.

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