Among the first banking companies to take advantage of the leeway granted by Gramm-Leach-Bliley, J.P. Morgan Chase & Co. is underwriting an insurance product.
Chase Life and Annuity Co., a unit of the New York banking company, is selling its J.P. Morgan Chase Fixed Annuity alongside three other fixed annuities offered by third parties in its bank branches in New York, Connecticut, New Jersey, and Texas.
We feel like this is a natural, said Paul Petrylak, the president and CEO of Chase Life and Annuity. With GLB and regulation changes, we thought it made sense to do this. We thought starting with a fixed annuity made the most sense.
The 1999 financial reform law barred banking companies from underwriting insurance products but let a new structure called a financial holding company offer all three forms of financial services: banking, securities, and insurance, which it can also underwrite. Morgan Chase is one of roughly 600 banking companies that have adopted the new structure. Chase Life and Annuity was acquired in 1999 as a shell, and this is its first product offering.
Weve spent the last two years setting up the infrastructure and getting product approvals, Mr. Petrylak said.
A fixed annuity is the closest to a banking product, so its a good idea to see how this performs first, Mr. Petrylak said, adding that Chase may issue a variable annuity, too. We are looking at it, but I cant say if and when its going to happen, he said.
The new product could be bad news for Aegon, GE, and Allstate, the three providers that distribute fixed annuities through Chase, according to Len Savage, a senior vice president at the ratings agency Fox-Pitt, Kelton Inc., a unit of Swiss Re Group in New York.
But Mr. Petrylak said there is room for both Chases annuity and the outside carriers products, though he added that his company obviously wants to hold on to a bigger share of its customers assets. The outside carriers have very good products, he said, and all of these products, including ours, are different. Were giving the customers another choice.
Bill Waldie, managing director, product development and industry relations at Transamerica Financial Institutions Inc., the unit of Aegon that distributes the Dutch insurers products through banks, would not comment on Chases annuity. Im glad they say they still depend on us, he said, and were very committed to helping Chase win. They are an important partner.
Rob Shore, the senior vice president of financial institutions at Glenbrook Life and Annuity, an Allstate unit, declined through a spokeswoman to comment. And the insurance unit of General Electric made no one available to comment before press time.
Two analysts said more banks may follow Chases lead, but a third pointed out that fixed annuities are unattractive as bank-underwritten products because their rate of return may be just half that of banking products.
The fixed annuity is similar to a CD, which banks already design, said Fox-Pitts Mr. Savage. The main difference is, a fixed annuity is tax-deferred, while a CD is not. But the products are managed similarly, and I would say, Sure, others will do this as well.
If you were Chase, would you sell your fixed annuity or another companys fixed annuity? Mr. Savage asked, referring to the probable impact on Chases three big annuity providers. This cant be good news for them. And I can see some other banks with Chases capability doing the same thing.
Craig Whitehead, a senior consultant at Milliman USA in Chicago, said, This is putting the outside carriers in a tough competitive stance. Chase cant afford to launch a program like this without bringing their own clients to the table.
Mr. Whitehead said traditional annuity carriers should watch Chases experience carefully because it could start a trend they will not like.
No question, I can see other banks doing this, Mr. Whitehead said. This is the first time Ive seen it, and I figured it would be one of the bigger players like Chase, but there are other big banks that could go in this direction as well.
However, Kenneth Kehrer, the president of the Kenneth Kehrer Associates consulting firm in Princeton, N.J., said he does not expect many copycats in the short term.
I dont see much of a taste for this, Mr. Kehrer said. Generally, a fixed annuity has had an unsatisfactory rate of return for a bank. Lots of fixed annuity carriers report a rate of return between the high single digits and low double digits. In banking, products can have high teens or low 20s rates of return.
Mr. Whitehead said, though, that he expects Chase and other banking companies to design their own variable annuities.
There are a couple of reasons why creating their own variable annuities would be a good long-term strategy for banks, he said. First, it extends the banks brand name into really being in insurance, instead of being just one product. Second, as with todays annuity providers, its good strategy to offer both. It gets them out of the cycle of selling one or the other, and when the product doesnt sell, theyre out of the business.
Mr. Whitehead called variable annuities another natural extension for a bank. If you can sell mutual funds, you can sell variable annuities, just like if you offer CDs, you can offer fixed annuities, he said. Clearly, Chase has all the capabilities in the world.
Mr. Kehrer said he does not think banks have a great appetite for variable annuities either.
Five to 10 years ago, variable annuities were more profitable than fixed annuities, Mr. Kehrer said. But competition has driven the profitability of variable annuities down as well. Banks can get almost just as much out of working out marketing agreements with annuity providers, where a banks funds are included in the insurers products. Then they drive up their assets without having to deal with all the start-up costs.
