When Manulife Financial Corp. bought John Hancock Financial Services Inc., industry experts were skeptical whether the deal would give the Toronto insurer what it really wanted - penetration in the bank channel.
But a year after the purchase closed, the Canadian company has adopted the Hancock brand for its products in the United States, and it says a unit focused on third-party marketing has gained a foothold for the company's variable annuities in the bank channel.
Fred Nicholas, the president of Hancock's bank channel, said that in the past year Manulife has employed Essex Corp., the third-party marketer Hancock owned, to distribute Manulife variable annuities through the bank channel. Essex has hired 25 wholesalers to increase sales in the channel.
Essex, which Hancock had bought five years before the Manulife deal, was the second-largest third-party marketer of annuities through banks when the deal closed, trailing only Independent Financial Marketing Group of Purchase, N.Y., which is owned by Sun Life Financial Inc.
Manulife had $5.23 billion of variable annuity sales last year, Mr. Nicholas said, and $300 million of this was through banks. At Dec. 31 Manulife had $32 billion of variable annuity assets under management and $15 billion of fixed annuity assets
"This is a good start, considering the strategy has been in place for only a year," Mr. Nicholas said. "We have gone from zero sales to make a significant run. We have increased market share significantly, and we have only just begun."
Bob Cassato, the president of Wood Logan, which provides sales and marketing support for variable and fixed annuities and college savings products sold by Hancock in the United States, said Manulife has made a good start, despite the fact that distribution through banks is only 6% of its total business. Bank sales should contribute 10% to 12% of sales this year, he said, and reach the industry average of 20% within five years.
"Our bank distribution strategy was really born from opportunity and everything falling in line at the right time," Mr. Cassato said. "We have taken the variable annuity business expertise of Manulife and brought it to the bank channel with Hancock's brand and Essex's distribution. We have created synergy through this transaction."
Analysts were skeptical that Manulife could have this success when it made its $11 billion deal for Hancock, the big Boston financial services company. At the time, Hancock sold fixed annuities through banks but was considered a nonplayer in the bank variable annuity market.
Manulife was a successful distributor of variable annuities, but its reputation seemed limited to Canada.
A year later, analysts have changed their tune.
"It is a good start," said Kenneth Kehrer, the president of Kenneth Kehrer & Associates, a Princeton, N.J., consulting firm that tracks annuity sales through banks. "It is extremely difficult for variable annuity companies to break into the bank channel. A lot of companies have tried, and most have had disappointing results in the past few years."
Mr. Kehrer said it is becoming more difficult to enter the bank channel because banks are using fewer providers. His research shows that the typical bank sells variable annuity products from seven underwriters, he said, down from eight in 2003.
"You are looking at trying to get in the door when the door is getting smaller," he said. "You have to work to get on the shelf at the biggest banks. The top 12 banks account for something like 80% of variable annuity sales in the channel."
Mr. Nicholas said Manulife has had success in signing up large banks because it moved into the bank channel at precisely the right time. Before the acquisition, Essex had primarily been distributing fixed annuities through the bank channel. After the deal closed, its focus moved squarely to variable annuities.
"We are finding a lot of success with larger banks that have been in the business of selling variable annuities for some time," he said. "We are finding the reception is quite strong, and we are able to go in and increase sales."
Mr. Cassato said variable annuity sales have grown in the bank channel recently because the product is extremely attractive to conservative bank investors, especially since fixed-income yields have fallen in the past year.
Manulife introduced the Principal Plus Variable Annuity in June, he said, and sales rose further. The product guarantees investors' principal.
"Bank reps have really taken to this version of the annuity product," Mr. Cassato said. "It is really in direct competition with fixed annuities but with a much larger upside and a guarantee against loss."
The principal-protected product was 70% of all Manulife's variable annuity sales by December, he said, and made up 80% of variable annuity sales in the first quarter.
"Banks are the perfect channel for these products," Mr. Cassato said. "Risk-averse customers find this product very, very attractive. When you consider it against a mutual fund, which has risk, or a fixed annuity, with a lower yield, this is the ideal product for this marketplace."
Mr. Nicholas said Manulife and Hancock would continue developing the variable annuity platform. The company will continue developing its wholesalers, he said, and then try to cross-sell products, including 529 college savings plans, to its bank customers.
"We chose to focus first on the variable annuity business. We want to build our mass there through banks," he said. "We added some banking relationships in the fourth quarter, and we added more in the first quarter and even more in the second quarter. As they mature, and their relationship with us matures, we'll bring them more products."
Hancock introduced its Principal Plus For Life variable annuity rider last Friday, which lets clients withdraw up to 5% of their initial payment each year for 20 years regardless of market performance; it also guarantees payments for the life of the older owner.
The rider also doubles the automatic bonus to clients who do not need their money right away. This adds 5% per year in any of the first 10 contract years when no withdrawals are made and guarantees up to 150% of a client's original payments. Clients also can increase their guaranteed payments, if markets rise, through an optional step-up provision that lets them lock in gains every three years.
