Japan: Where Financial Security Is One Sexy Beast

Hartford pioneered Japan's annuity market. Nobody's laughing at it any more

When Hartford Life Insurance decided to (HIG ) start operations in Japan back in 1999, Tokyo hardly seemed a great bet for a financial firm. The Nikkei stock index was in a long descent that didn't bottom out until April, 2003. Japan's Big Three securities companies were in the red, and Japanese insurers were dogged by a "negative spread" between low returns and high payments to policyholders. "A lot of people thought we were out of our minds," says Gregory A. Boyko, head of Hartford's international operations. But it turned out Hartford had something to offer that appealed to the risk-averse soul of the Japanese investor: the variable annuity.

Today, Hartford and its stag logo have spread across Japan like a prairie fire. The amount invested in variable annuity insurance policies has grown from near zero in 2001 to $40 billion, and Hartford has 29% of it. That's a testament to the company's good timing; the sale of annuities was permitted for the first time in 1999. But it's also a tribute to the Connecticut company's savvy rollout. Instead of setting up its own retail network, it has struck distribution agreements with more than 50 banks and brokers, including No. 1 broker Nomura Securities Co. (NMR ) and top lender Mizuho Bank. Hartford keeps vendors happy by providing call center support, hand-out materials, and training for their sales staff.

The biggest selling point for investors has been the principal guarantee offered first by Hartford -- and later by rivals. Also, in Japan variable annuities have several tax advantages, such as tax-free access to capital gains during the life of the policy. The policies typically vest in 10 to 20 years, after which investors can withdraw the money in installments or leave it where it is. According to Hartford, the average return in 2004 was 6.96% after fees. "It's a simple concept," says Timothy Schiltz, the head of Hartford's Japan operations. "[Investors] take the leap of faith to invest for the long term, and we guarantee the principal."

What could dim variable annuities' luster? Another bear market. That's because the principal is invested in portfolios of stocks and bonds, which could leave sellers of principal-guaranteed variable annuities under water if the market goes down. "These business models are dependent on the market situation," warns Mitsumasa Okamoto, an analyst at Nomura Securities. "If the stock market declines, profitability will be squeezed." For now, though, annuities are a money gusher. Hartford's Japan operations moved into the black two years ahead of schedule in 2003.


Japan's investors, however, might want to take a close look at the fees they're paying. Hartford, for instance, typically charges from 2.1% to 2.4% in insurance fees each year, plus annual management fees of up to 1.5% -- making their products more expensive than most mutual funds. "People are fed up with zero-interest rates, but I don't think they have enough knowledge to make a comparison between financial products," says Kiyoshi Kimura, director of the Japan Association of Individual Investors.

Hartford, a private company, doesn't disclose its earnings, but it sold $7.1 billion in variable annuities in Japan last year. After Hartford, Japan's next biggest player is Mitsui Sumitomo CitiInsurance Life, a joint venture between Mitsui Sumitomo Insurance Co. and Citigroup that has just over half of Hartford's market share. The next frontier is Europe. On Apr. 7, Hartford launched a business in Britain modeled on its success in Japan. This time nobody thinks its execs are out of their minds.

By Ian Rowley in Tokyo, with Chester Dawson in New York

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