Annuities sales by national banks could get an unexpected boost in the wake of a recent federal court ruling.

The decision, handed down last month by the U.S. Court of Appeals for the District of Columbia Circuit, affirmed that national banks in towns of fewer than 5,000 people may market insurance nationwide.

The ruling has received wide attention, with observers saying it will open the door for banks to sell life insurance. But some experts say its immediate effect has been to provide a clear path for banks to sell annuities.

Immunity from State Bans Seen

The appellate ruling gives national banks some immunity from state prohibitions on using their employees to sell annuities, said Melanie Fein, a partner with the Washington law firm of Arnold & Porter.

Banks could set up insurance subsidiaries in towns with populations of less than 5,000 and use employees of those units to sell annuities throughout their branch systems , Ms. Fein said.

Kenneth Kehrer, president of a Princeton, N.J., consulting firm that tracks the annuities business, said he is aware of 17 states that prohibit bank employees from offering annuities.

Annuities are insurance contracts that invest in a pool of securities or mutual funds to provide a steady stream of income to investors.

Earnings Tax-Deferred

The earnings on annuity investments are tax-deferred until the funds are tapped. That has made annuities one of the most popular investment products for retirement planning.

Last year, $12.2 billion of fixed and variable annuities were sold through banks. This year, sales should top $15 billion, Mr. Kehrer said.

Having their own employees sell these products would enable banks to hold onto more fee income. Currently, many banks get around the state restrictions by contracting with nonbank marketing companies to sell annuities in bank offices. The tradeoff is that the banks have to share profits with their partners.

Foresees Challenges by States

A top executive of one such firm said he doesn't think many banks will sever their ties to marketing companies.

"There will still be a need for people to provide access to the Products and training for employees," said Michael McCoy, senior vice president at Holden Group, a California marketer of investment products.

"Some state insurance commissioners are bound to challenge banks, no matter what."

For years, banks have faced challenges in offering annuities and other insurance products, fighting wars with insurance agents who don't want to see their turf invaded.

|Solid Fallback Position'

But with the additional firepower of the appeals court ruling, banks could have more confidence about the go-ahead from the Office of the Comptroller of the Currency to set up smalltown insurance subsidiaries, Ms. Fein said.

The ruling also would give national banks "a solid fallback position" if the Comptroller's office loses another court case, one specifically involving annuities, she added.

In this case, insurance industry groups are suing the Comptroller's office over its 1990 decision to allow annuity sales by NCNB National Bank of North Carolina, predecessor of NationsBank.

Fleet Defers to States

Some bankers are softpedaling the court decision, saying it will not change the way they do business.

Fleet Financial Group had to navigate the requirements of various New England states to begin selling its own variable annuities early this year.

Despite the court ruling, the bank plans to continue deferring to the individual state powers, said Peter Herlihy, a vice president with Fleet Investment Services. "We don't see this as a green light to ignore them."

Proprietaries May Grow

Fleet is among a handful of banks that manage so-called proprietary annuities. Most banks simply distribute annuities that outside insurance companies supply.

But this may change as a result of the ruling, said one insurance industry executive.

"The easing of restrictions has to make it easier for the banking industry as a whole to get involved on the proprietary side of things," said Ron Hansen, a senior vice president at SunAmerica, a Los Angeles supplier of mutual funds and annuities.

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