STAKES RAISED AS INSURERS VIE FOR BANK SALES: ANNUITY COMMISSIONS TOP 7%

As competition gets hotter, leaders in the variable annuity industry are watching warily as more of their competitors lift already-high sales commissions for annuity sales through banks.

Hartford Life Inc. and Columbus, Ohio-based Nationwide Financial Services Inc. — the top two marketers through banks — already have followed their smaller competitors by offering outsized fixed returns to investors who opt to gradually invest their nest eggs in annuities.

For now, the big two are holding their commissions at typical levels — between 5.5% and 6.25% of sales. If the commissions — approaching or exceeding 7% — offered by companies like Toronto-based Manulife Financial and Jackson National Life Insurance Co. of Atlanta become commonplace, however, Hartford and Nationwide may feel compelled to follow suit.

What’s more, insurers increasingly appear to be “buying” market share in the profitable variable annuity field at the same time they’re starting to respond to pressures to bring down high annuity fees. That raises questions about whether the industry’s profitability will erode.

Industry observers don’t believe the higher commissions represent the beginning of a long-term upward trend. They note that most of the commissions are special deals that will expire soon.

But as insurers continue to rely more on banks as distributors, providers of variable annuities — essentially mutual funds offered within a tax-deferred insurance product that provides a death benefit — clearly are becoming more aggressive, whether on sales commissions or more costly product features, these observers say.

“When you’ve got a very competitive marketplace for things like incentive trips, you’ve got to compete with that if you want to keep your market position,” says Brad Powell, president of Jackson National’s institutional marketing group.

Commission specials may become more common now that a National Association of Securities Dealers’ ban on annuity providers’ offering brokers trips to sunny spots for reaching certain sales levels is about to take effect.

Some examples: Jackson National is offering a 7.75% commission through March, up from the normal rate of 6.25%; Sun Life of Canada’s Futurity annuity is offering 7% for a limited time, again up from 6.25%; and SunAmerica Inc.’s Polaris annuity is offering a 7% special, up from 6%.

The only permanent commission hike thus far has come from Manulife, which hiked its rate from 6% to 6.5%.

Houston-based American General Corp. also has been aggressively wooing banks, chiefly by offering to cover their costs of launching the proprietary variable annuities it underwrites, but also through higher commissions.

John A. Graf, president of American General’s retirement services division, declines to say what commission rates his firm has negotiated recently with new bank partners like Chicago-based Bank One Corp.

But he allows: “We will get very aggressive with a Bank One because the economies of scale are just enormous when you work with a Bank One or a First Union.”

No commission deals American General reaches will keep the firm from achieving at least a 15% return on equity, however, he says. If a bank wants a higher commission, it may have to give up some product features.

The scramble for bank business is par for the course, says Kenneth Kehrer, a Princeton, N.J., consultant who tracks annuity sales through banks quarterly.

“Competition will get more and more intense,” he says. “You have a lot of variable annuity providers that have a tremendous appetite for business. Some have even said they want to triple their business by 2001.”

That said, Mr. Kehrer doesn’t believe there will be an insurer stampede toward higher commissions, particularly as fees come down.

“We saw some movement toward reduced mortality-and-expense fees late last year,” he says. “The competitive pressures (on commissions) are going the other way” — that is, down. (Mortality-and-expense, or M&E, fees typically cover the cost of the death benefit and other insurance portions of the annuity, as well as commissions.)

Equally present, though, are the competitive pressures on insurers to get their products in banks’ sales networks and then to convince bank brokers to sell them. Bank consolidation only intensifies it, as insurers vie for the attention of fewer banks, which typically will accept the wares of no more than three annuity providers on their shelves.

Rumors abound that some insurers are dangling commissions of 8% or higher to certain banks (while keeping their general commission rate within industry norms).

hartford resisting urge

“There are lot of people who want to get in (to the bank distribution market),” says Bruce Ferris, Hartford’s director of investment product sales. “People are trying to attract new relationships.”

Hartford, with more than $50 billion in its variable annuities, thus far has resisted the urge to hike commissions.

Like many of its competitors, though, the undisputed market leader in bank sales is offering above-market rates to investors who gradually put their money into annuities.

Such dollar-cost-averaging plans allow individuals nervous about stock market gyrations to invest their nest egg gradually — typically in monthly increments over six or 12 months — paying them interest up to 12% on the portion that’s waiting to be invested.

Dollar-cost-averaging plans aren’t new, but the sky-high rates have come into play only in the last six months or so — just in time to reassure investors skittish after the market volatility last year.

Eighteen of 20 insurers surveyed by Mr. Kehrer have the high-rate dollar-cost-averaging programs. Hartford is offering 8% for a 12-month plan and 10% for a six-month plan.

“It’s very expensive to get into this business; it’s more expensive to stay,” Mr. Ferris says. “It’s a scale game.”