Selling fixed annuities has been one of the real success stories of bank investment programs. Can underwriting the investments be far behind?

In a fixed annuity, an underwriter pays out income based on an interest rate it guarantees to the annuity contract holder. Fixed annuities don't come with life insurance, so underwriters don't have to take bets on how long people will live.

"That will be one of the first products (banks) go to, because an annuity looks like a long-term CD," said Richard Bowman, president of U.S. Bancorp's insurance agency.

But banks can't completely ignore mortality rates, Mr. Bowman warned. Part of underwriting annuities is figuring out how long your contract holder will live once the income payments are due. If contract holders live longer than the underwriter expects, the underwriter will clearly lose money.

"Banks keep seeing this as an investment product, but it becomes an insurance product once the customer annuitizes," he said.

The issue of whether banks should underwrite fixed annuities took on new urgency last month when the Office of the Comptroller of the Currency said it would allow banks to create operating subsidiaries for nontraditional businesses - such as underwriting.

That sent many banks searching for ways to underwrite insurance products. Fixed annuities seemed like a logical place to start because they are less complicated to understand than life insurance, some bankers say.

"With annuities, you don't have to worry about having a staff of actuaries," said Moira Murray, a vice president overseeing annuity sales at St. Paul Bancorp, Minnesota. "You just need to have financial professionals who know how to figure out how to invest so you can pay the interest rate the customer expects."

Regardless, some bankers say underwriting any insurance product is for large banks only. "I couldn't see how the smaller banks could compete," said J. Paul Phelan Jr., product manager at $2.7 billion-asset Provident Bancorp., Baltimore. "I wouldn't think the small banks would have the expertise in place to administer that."

Large banks already have big treasury departments or asset management operations that are equipped to run such operations, he said.

But banks are still trying to determine how profitable underwriting annuities could be. Insurance companies say they make about one and a half times as much money underwriting life insurance as fixed annuities.

After all, annuities are generally held for only seven years, so the underwriter is investing for only seven years. But a life insurance policy is often in force for a good 50 to 70 years.

"There's a myth that there's a tremendous profit in underwriting annuities," said Gary Warden, senior vice president in charge of bank sales at Commercial Union Life Insurance Co., Boston. "But it's not true - unless you have an investment department that's better than I've ever seen."

Though many insurance companies say they will fight any bank's move into underwriting, Mr. Warden, who used to head retail sales at Bank of Oregon, says he isn't worried.

"Banks have an inherent ability to take a profitable business and lose money at it," he said.

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