When it comes to annuities, the bank channel is crowded. Its difficult for a nonplayer to break in unless it buys an existing distributor.
That is exactly what Sun Life Financial Services of Canada Inc. did last year when it bought Keyport Life Insurance Co., the seventh-largest distributor of annuities through banks in 2001. The deal closed in October.
Sun Life had no fixed annuity sales to speak of before its acquisition of Keyport and the third-party marketer Independent Financial Marketing Group, which distributes Keyport and other annuity providers annuities to banks.
If youre a company trying to expand into the U.S., regardless of the channel, its very difficult because its a very formidable marketplace, said Donald A. Stewart, chairman and chief executive officer of Toronto-based Sun Life. The easiest way to do it is an acquisition.
And the Keyport acquisition saved Sun Life from what would have been a particularly frustrating year in the bank channel since investors were avoiding variable annuities and buying the more conservative fixed products. Sun Lifes variable annuity sales through banks fell by 44% last year, to $287 million.
We saw this purchase as an important expansion of our access and product line, Mr. Stewart said. Weve expanded into the very important bank channel. Everyone touches the bank frequently; they have many products with their bank and go to their bank.
We also know that when youre primarily VA, as we were, it tends to put pressure on a relationship and on us. Its much better when you turn to more than one product, which we can do. Before, we had no presence in fixed annuities.
Craig Whitehead, a senior consultant at Chicago-based Milliman USA, said Sun Life did the right thing in expanding its annuity offerings.
There are some companies that offer only variable annuities because its a more stable product profit, Mr. Whitehead said, but then you can always take a huge sales hit when the market shifts. There are also companies that only play in the fixed arena, and they get creamed when there is a squeeze in the fixed annuity profits.
Companies that have both can hedge their bets, Mr. Whitehead added.
If I have both fixed and variable annuities, with suitable, strong products, I can always be there, Mr. Whitehead said. With a quality portfolio of products, I can tell a story no matter what the product looks like.
Robert Donohue, a vice president and senior analyst at Moodys Investors Service in New York, agreed with Mr. Whitehead. If Im a bank, Id have a relationship with a company that is more adaptable in all market conditions, he said. I dont have to find another provider.
He added that annuity providers with both products retain their customers better.
When the equity markets are down, and variable annuities dont sell well, a lot of that money has found its way to the fixed annuity market, Mr. Donohue said. If youre competitive on both, youll keep the money. If you arent, you wont, and there is no guarantee youre going to get it back.
Meanwhile, Mr. Stewart at Sun Life said he is not ruling out further acquisitions to build up the variable annuity business even more but that this is not at the top of his agenda.
Our focus is still Keyport because there are still some back-office systems that need to be integrated, Mr. Stewart said. Another acquisition would have to be a perfect fit. Were not going to pay for channel access. We already have that.
He predicted, as many in the industry have, that the market will consolidate.
In the last 10 years weve gone from 2,000 life insurance entities to about 1,300, Mr. Stewart said. Thats still a lot of players. First, well see the smaller companies combine and then well see other, bigger mergers. We can see the number of insurers cut in half over the next few years.
