Managing variable annuities becomes a priority for banks.

Banks are embracing a new investment product with the passion they once reserved for mutual funds.

Their new darling is the variable annunity, which enables banks to offer customers the performance potential of a mutual fund -- and a tax break to boot.

Many banks have been big sellers of variable annuities and their more staid cousins, fixed annuities. But until 18 months ago, no bank had managed a variable annuity.

Fleet Financial Corp. changed all that in January 1993, when it launched the Galaxy Variable Annuity as an extension of its Galaxy family of mutual funds.

Others Will Follow

Today, at least a dozen major banks manage variable annuities, or have firm plans to do so. Three of them -- Keycorp, Norwest Corp., and Chase Manhattan Corp. -- have jumped into the fray in just the past month.

And industry observers said they expect many of the 100-plus banks that now manage their own mutual funds to follow suit. That's because these banks can clone fund portfolios to create investment options for their variable annuities. They also must line up an insurance company as a partner to underwrite the annuity contracts, a role off-limits to most banks.

By launching their own variable annuities, banks hope to reap investment management fees while gaining greater control over their offerings. They say demand for the investments is already strong, and will remain so for many years to come.

"As taxes continue to rise, annuities will continue to grow as retirement and investing vechicles," said Thomas Munsell, senior vice president at Fleet Investment Services, a unit of the Providence, R.I., banking company.

The banking industry's success, however, is anything but ensured. Annuities are costly to manage and administer, putting banks that enter the field under intense pressure to operate efficiently.

Many Obstacles

Additionally, banks that want to sell annuities must navigate a sea of conflicting state and federal laws. The Supreme Court agreed this month to hear a closely watched case involving NationsBank Corp. The bank is challenging a lower court ruling that banned it from selling annuities in all but the smallest towns.

But while there are some formidable obstacles, banks clearly are determined to stake out a place for themselves in the rapidly growing annuities market.

Last year, $24.6 billion of variable annuities were sold to retail customers, up 50% from $16 billion in 1992, according to Kenneth Kehrer, president of a Princeton, N.J., consulting firm that bears his name.

And while banks accounted for just 11.5% of total sales in 1993, they more than doubled their volume to $2.82 billion, from $1.35 billion a year before.

By the turn of the century, banks' share of variable annuity sales could jump to 20%, says Rick Carey, editor of VARDS Report, a variable annuity research service in Roswell, Ga.

Fleet Leads the Way

Fleet, widely acknowledged as the banking industry's pacesetter in annuities, sold about $50 million of variable annuities to trust and private banking customers between January 1993 and March 1994.

Since then, the bank has expanded its sales efforts to include retail customers and has posted another $20 million in sales, Mr. Munsell said.

"We had a slow start, but we met expectations," he said. "Now, we're very pleased with the increased volume."

Great Western Financial, which rolled out its annuity on a broad scale a year ago, already has done more than $100 million of sales, according to industry sources.

Managing annuities can be costly. Industry sources say it takes several hundred thousand dollars to organize a variable annuity. And banks can't generally expect to break even until they have amassed at least $100 million in an annuity.

That's why many banks press the insurers that underwrite the annuity contracts to put up a share of the start-up costs. So far, insurers have been only too happy to comply, because they see sales of annuities through banks as a very promising source of new business.

"Banks have a tremendous customer base," said James W. Rowan, vice president at insurer SunAmerica Inc., Los Angeles. This makes the bank channel "very important to us," Mr. Rowan said.

Norwest certainly found this to be the case after disclosing plans to create a variable annuity. More than a dozen insurers responded to the banking company's request for proposals, said Lee Chase, Vice president in charge of Norwest's retail mutual funds.

Not Profitable for All

Despite banks' growing clout, some industry observers wonder if financial institutions would be better off sticking to selling other companies' annuities, not their own.

"It's going to be very difficult for banks to make money managing annuities," said David Nadig, senior consultant at Cerulli Associates, Boston. He said few banks will to generate enough sales to justify managing a product that has very narrow profit margins.

The first wave of banks to launch annuities will be watched closely by those still on the sidelines.

"The results aren't in yet," said Jonathan Randall, annuity and insurance product manager at PNC Corp., Pittsburgh. "But, yes, the products could end up giving banks a competitive edge."

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