More than a dozen banking companies have jumped into managing variable annuities in the five years since Fleet Financial Group paved the way with a pioneering offering. But one-Mellon Bank Corp.-stands above the pack.
Mellon's Dreyfus Funds unit managed $4.2 billion in variable annuities- more than two-thirds of the $6.1 billion in bank proprietary annuities as of Sept. 30, according to data from Lipper Analytical Services, Summit, N.J.
That puts Mellon far ahead its nearest rival, Washington Mutual Inc., which managed $614 million. The Seattle-based thrift company's variable annuities grew sixfold with the recent acquisition of Great Western Financial Corp., which managed the Sierra Variable Trust annuities.
Annuities are tax-deferred insurance contracts that invest in securities to generate an income stream. Variable annuities, which typically invest in mutual funds, produce returns that fluctuate with market conditions, while fixed annuities pay a guaranteed yield.
Observers said Pittsburgh-based Mellon owes its commanding lead among banks in the variable annuity business to its extensive distribution network. According to the company, between 35% and 40% of its variable annuity sales have come from banks other than Mellon; the balance is split about evenly between Dreyfus and unaffiliated brokers. Financial planners are the fastest growing group selling its annuities.
"Dreyfus is one of the best-known names in financial services, probably second only to Merrill Lynch," said Lawrence S. Kash, vice chairman of distribution at Dreyfus. "It helps us open doors."
Big banks began flocking into annuity management in 1992, when Boston- based Fleet teamed with American Skandia Life Assurance Corp. to develop a proprietary family. As of Sept. 30, Fleet had $127 million in four Galaxy VIP portfolios.
Thrifts have been in the business longer-two of Washington Mutual's Composite annuities date to 1987.
Dreyfus, too, managed variable annuities before it became affiliated with Mellon in 1994: it launched its first, a stock-index portfolio that now holds $1.7 billion of assets, in September 1989. But its variable annuity assets have more than quadrupled since the merger, the Lipper data show.
Banks that manage variable annuities often include a mix of mutual funds-their own and those of other fund managers-in the portfolios, noted Valerie Jordan, a bank insurance consultant in Belchertown, Mass. For banks whose proprietary funds lack a household name, this approach builds credibility, because the funds included in a variable annuity must pass muster with the insurance company that underwrites the annuity.
Mr. Kash of Dreyfus agreed. "Many insurance companies come to us because they want to use that name with their products," he said.