St. Paul Federal Bank for Savings may pale in size against behemoths like Wells Fargo and Bank One, but the Chicago thrift holds its own as one of the most effective marketers of variable annuities.

Banks have become the fastest-growing distributors of variable annuities, contributing to what Morningstar estimates is an increase from $23 billion in sales in 1990 to $326 billion in 1996. The historic rise in the stock market is the main spur to this growth, but that only tells part of the story at St. Paul, the largest independent thrift in Illinois. Most of the credit belongs to the $4.6 billion-asset thrift's retail strategy of equipping its 52 branches with an investment adviser, its executives say.

Through its Investment Network Inc. subsidiary, St. Paul employs 35 full-time licensed investment advisers and eight associates. Each of the bank's branch managers are also licensed brokers, and at smaller branches where customer traffic doesn't justify a full-time rep, the branch manager is the sole generator of investment sales.

"We think that is one of the big factors in our success over the years," says Gerald Thomas, president of INI. "We get the buy-in from the branch network and they've got a piece of the action."

The commitment to on-site expertise also lets customers know they can find the services they need at any branch they visit. "We wanted to make the sale of an investment product part of the branch experience, and not something extraneous," said Donald Ross, St. Paul's senior vice president of retail banking.

This approach appears to have paid off. According to research by Kenneth Kehrer, a consultant in Princeton, N.J., St. Paul's variable annuity sales penetration in 1996 amounted to 0.8% of retail deposits, compared to the average for banks of 0.4%. Mr. Kehrer's research, conducted in collaboration with Alliance Capital, studied 67 institutions that together accounted for 46% of all bank annuity and mutual fund sales.

"Most studies show that the hybrid approach of a dedicated staff plus the platform shows the greatest productivity and better results," said Michael D. White, a consultant in Radnor, Pa. According to Mr. White's statistics, St. Paul's sales of fixed and variable annuities reached $66.2 million last year, a 134% increase from 1995's $28.3 million. That performance ranked St. Paul 14th among thrifts. St. Paul executives would not comment on these figures but Mr. Thomas noted that 1997 variable annuity sales represented 39% of total annuity volume.

Variable annuities have been part of INI's menu since 1989. Growth has been steady, mostly among older customers close to retirement who like the tax benefits and the flexibility of shifting assets from stock to bonds to money market accounts. Mr. Ross says variable annuities now account for 40% of investment sales; this year will be the most successful yet, with a gain of 35% over 1996.

Despite the strong sales, variable annuities are far from becoming the center of the bank's investment marketing effort. Advisers are trained to fit bank products, such as mutual funds, fixed annuities, IRAs, and CDs to the customer and not the other way around.

Each customer is considered against the framework of the bank's profiling of life stages, which considers age, income, retirement goals, marital status, and descendants. "We leave it to our salespeople to determine what is appropriate according to the needs of the client," Mr. Thomas says.

St. Paul has also conducted focus groups and contracted an outside marketing firm to help it expand customer segmentation. Examples of life- stage marketing that will become more important at St. Paul are those targeting middle-age empty nesters and grandparents eager to help out their financially strapped children to meet their grandchildren's needs.

"We are also trying to get younger customers who are looking ahead to different life events such as funding a child's college education," Mr. Thomas said. "There are riches in niches." In-branch merchandising and regular direct mail promotions round out the bank's promotional efforts.

Another spoke in the targeted-marketing campaign is investment seminars. Three to four are planned for next year, with presentations geared to female investors and tax planning. The seminars also raise the potential of reaching beyond the bank's existing customer base.

Life-stage marketing corresponds with the philosophy of one of St. Paul's variable annuity insurance underwriters. W. Timothy Toole, national accounts manager at Kemper's insurance products division, says his company spends $2 million a year to fine-tune its customer analyses. (St. Paul also markets variable annuities underwritten by The Hartford.) Putting these tools to use will help banks reach what Mr. Toole estimates will be 20% of the variable annuities market by the year 2000.

INI's Mr. Thomas says both underwriters have much to do with the strength of the bank's sales of variable annuities. With The Hartford, it has the advantage of a widely recognized name in the marketplace and the expertise of Wellington Management. Kemper excels with versatile products that can be customized according to investors' needs and preferences, Mr. Thomas said.

Mr. Kehrer noted that life-stage marketing was not the only key to booming sales. "Banks successful in selling mutual funds longer than others have higher variable annuity sales penetration," he says. "They have a customer base that is comfortable with mutual fund investing."

Nevertheless, these banking relationships need extra care, especially in preparation for the end of the phenomenal bull market. "The most important thing is to reduce customer expectations," said Mr. Thomas, adding that consumers may have become accustomed to high returns.

"It's easy to forget that 10 years ago there was a crash," Mr. Ross added. Looking ahead, Mr. Ross notes that the inevitability of smaller returns can actually be a marketing advantage if customers fully understand the flexibility of annuity investments to respond to economic conditions.

The better customers are able to weather the ups and downs of investing, the higher will be St. Paul's long-term revenues from variable annuities, Mr. Ross said. A variable annuity sale typically generates a 6% up-front commission compared with between 3.5% and 4% for mutual funds plus a trailer commission calculated in basis points and paid for each year the assets are maintained by the bank. Steady income from trailer commissions depends on keeping investors happilyserviced for the life of the contract.

St. Paul is not too worried about its skills in customer relations. After 10 years in the investment business, Mr. Ross says, customers have come to trust the bank's investment advice. "Customers know we have their best interests at heart and we won't sell them a product they don't want. We have a track record now and customers know they've been served well."

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