Principal Financial Group has not been a big player in the bank market, but that may be about to change.

For the last two months, with no fanfare, the Des Moines company has been pitching a new program to community banks that have retail deposits of $2 billion or less. Its offering: a full line of insurance and investment products, plus the assistance of Principal’s career agents — all tailored for the banks’ small-business clients.

“It’s tough for the smaller banks to compete — to offer all the products, from annuities to life insurance, mutual funds, and 401(k) plans,” said Steve Parrish, second vice president of individual markets at Principal Financial, which plans to demutualize in late 2001 or early 2002. “For us, the idea is to get to bank business not by trying to come up with a new product with the best interest rate, but by helping the banks themselves compete.”

The career agents are being encouraged, but not required, to seek out community banks that have relationships with owners of small businesses — with two to 1,000 employees. Principal will support the agents by providing marketing tools for the full product line, which includes life insurance and annuities, mutual funds, retirement plans, and mortgages. Depending on the bank’s needs, the agent could work full-time in a bank branch or drop by periodically.

Will this go over with the banks?

Leton Harding, executive vice president at $360 million-asset First Bank and Trust Co. in Abingdon, Va., said it will. His company already offers insurance and investments through a network of independent agents. Otherwise, he said, “we would investigate” Principal’s program.

“A lot of community banks have had a tough time getting into the business” because selling insurance and investment products is “a different beast,” Mr. Harding said. “There is a great deal to learn, and it takes a long time to understand it. This sort of program will help community banks.”

He also said Principal is doing the right thing by putting the captive agents in the forefront. “It’s the local agents who know their community, and have built their business based on the needs of their area,” he said.

In the past, independent insurance agencies have established relationships with local community banks, but insurance companies, especially those with captive agents, generally have not led or implemented such efforts.

“If a community bank wants to offer financial planning, estate planning or business continuation planning, we can be the company that does that for them,” Mr. Parrish said. “They need the help, and we want to strengthen our relationships with banks. This is the best way for us to do that.”

Principal Financial also owns a federally chartered online thrift, Principal Bank.

Kenneth Kehrer, president of Kenneth Kehrer Associates in Princeton, N.J., said Principal Financial’s plan could work. The company’s strength, he said, is offering investment and insurance products to small businesses, and community banks need help in developing those businesses.

John A. Martin, a bank insurance consultant in Frelinghuysen, N.J., and a former insurance executive at Chase Manhattan Corp.’s insurance group, said Principal can get a big sales payoff if it builds a solid community bank base.

“If they can set up a consistent program across the country, all those small numbers will add up,” Mr. Martin said. “But no one has figured that out yet. No one has built that program.”

But Mr. Kehrer said it is not yet cost-effective for an insurer to go after community bank relationships.

“Only about one-third of all community banks offer investment and insurance products now, so the opportunity to find the relationship is there,” he said. And it costs as much to build a relationship with a community bank as with a large bank, and working with smaller banks lacks the possibility of enormous premium rewards, he said.

First Bank and Trust’s Mr. Harding stressed that Principal has to be patient. “They can’t expect results right away.”

William Reid, president of ICBA Financial Services Corp. in Memphis, an operating subsidiary of the Independent Community Bankers of America in Washington, said insurers have failed to understand the type of company that does business with a community bank. Typically, the small businesses insurers target have 50 to 100 employees.

“In the heartland, the average community bank spends much of its time servicing small businesses with six or fewer employees,” Mr. Reid said. “The opportunity is there,” he said, “if an insurance or investment company could set reasonable administrative costs.”

Mr. Kehrer pointed to another stumbling block: Many community banks are reluctant to stray from their core.

“It’s hard to galvanize some of these banks, because they’ve done business one way for a long time and they don’t like change,” he said.

But Mr. Martin said community banks know they will have to enter the insurance business.

“I know in the New York area they’re still trying to figure out what to do,” he said. “They’re all grappling with it, but they all know larger banks are after their business, and they can’t sit still.”

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