I'll Take A Cd With That Life Policy, Please

Insurers move into banking, but benefits are far from certain

In December, 77-year-old Arthur Miller was shopping around for somewhere to reinvest $20,000 when he chanced on an unlikely place--his insurance company. The retired gas station owner from Elk Grove Village, Ill., found out from his State Farm Mutual Automobile Insurance Co. agent that the insurer had started an online bank--one that offered 6.6% interest, federally insured, on certificates of deposit instead of the 4.4% Miller was getting at his regular bank. More important, he was pleased that his agent took the time to explain the bank's products. "I was sick of the lack of service at my bank," Miller says. So he bought a State Farm Bank CD.

The Bloomington, Ill., insurer is counting on just that kind of relationship between agents and clients as it embarks on an ambitious thrust into banking nationwide. By yearend, State Farm Bank expects to be operating in all 50 states, after a cautious 11-state rollout last year that has already netted some $380 million in assets and 36,000 accounts. "Our agents' offices are the physical locations where customers get introduced to the bank, and that's a major advantage we have over traditional online banks," says Stan Ommen, the bank's CEO.

After a slow start, American International Group, Metropolitan Life, and Allstate are also moving into banking in a big way this year. They're all taking advantage of the Financial Services Modernization Act of 1999, which tore down the Glass-Steagall Act's barriers between banks and other financial outfits. But instead of merging with big banks--as Travelers did with Citibank to form Citigroup--many insurance companies are spending hundred of millions to buy small banks as launching pads or have acquired thrift licenses that will let them start their own banks from scratch.

Insurers know they can't sit idly by and watch banks steal their customers with insurance products of their own. So some of the moves are frankly defensive. For instance, MetLife bought the tiny Grand Bank of Kingston, N.J., in August and intends to rename it MetLife Bank. "Getting into banking will give us the ability to retain customers long-term," says Judy E. Weiss, a MetLife executive vice-president who will be the bank's chief executive.

Industry execs with long memories recall that insurers stubbed their toes when they tried to offer savings-bank services in the 1970s. But that was in a stagnant, high-inflation era, long before automated teller networks and the Internet. The public today is more accustomed to banking remotely, so insurers don't have to set up branches, and they plan much more aggressive marketing.

TOUGH ACT. Even so, some companies remain deeply skeptical that the multimillion-dollar push can succeed. Hartford Financial Services Group, for example, is avoiding retail bank products altogether. "You can't do both [insurance and banking] well," says Ramani Ayer, Hartford's chairman. Cross-selling of financial services sounds easy, but is notoriously difficult to execute. Even at Citigroup, which has been working at cross-selling for two years now, success has proved elusive.

One insurer making headway is Principal Financial Group in Des Moines, Iowa, which got a jump by launching an online bank in February, 1998. It has scooped up $475 million in deposits, operates 40,000 accounts, and is now making profits. But it remains small-fry: It's just the 552nd-largest savings bank in the U.S. Principal Bank's chief exec, Steven J. Ollenburg, now intends to broaden marketing beyond the parent's insurance base.

Whether insurers can carve out a large, profitable slice of the banking market remains a big question. But if the insurers continue to offer higher interest rates and better service than banks, customers could wind up far better off. As retiree Miller found with State Farm, it sometimes pays to think of your insurance agent as a bank teller.

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