HARTFORD’S HIGH HOPES: INSURER LOOKS BEYOND VARIABLE ANNUITIES TO MUTUAL FUNDS

No longer content with its eye-popping success in the variable annuity market, Hartford Life Inc. has set its sights on the mutual fund business.

The nation’s sixth largest life-insurance company is betting that the formula that made it No. 2 in variable annuities — farming out money management and pushing product through a vast third-party distribution network — will propel it to the top ranks of mutual funds.

The move comes as Hartford faces tougher competition in the fast-growing variable annuity business that has eroded its market share (and that of the industry’s other biggest players). Yet it also comes as the mutual fund business becomes increasingly packed.

When Hartford hitched its star in the 1980s to variable annuities — mutual funds wrapped in an insurance contract — the skies were wide open. But when it entered the mutual fund business in 1996, it was up against established fund powerhouses with tens of billions under management, as well as rival insurers, from SunAmerica Inc. to New York Life, that also are seeking to make a name for themselves in the fund market. Aetna Inc., which rolled out a fund family in the past month, is the latest entrant.

“I would be concerned if they are hoping for the same level of success that they saw in the annuities business,” says David Kaytes, managing vice president of First Manhattan Consulting Group in New York.

So far, however, Hartford’s fund foray is off to a promising start. Launched in July 1996, its Hartford Funds hit sales of $1 billion in January, a record for a startup family with no inhouse distribution, according to New York-based Strategic Insight, a mutual firm research and consulting firm.

Hartford is using the same investment management firm that runs its top-selling Director variable annuity, Boston-based Wellington Management Co., for its equity and balanced funds. Bond and money market funds are managed in-house.

Within five years, the Simsbury, Conn.-based firm hopes to be one of the 10 largest players among fund shops that distribute through third parties like brokerage firms, banks and independent broker dealers, according to Hartford’s David N. Levenson, vice president and director of mutual funds.

It now has about $1.6 billion in fund assets — a pittance compared to even the 10th largest player among such companies, Evergreen Funds, which had assets of $30.8 billion as of March 31, according to Boston-based consultant Financial Research Corp.

By contrast, in the variable annuity business, Hartford has almost $60 billion under management, making it the No. 2 player as measured by total assets, behind New York’s Teachers Insurance and Annuity Association-College Retirement Equities Fund.

“We are hoping to become one of the top nonproprietary mutual fund companies within the industry; we have the right infrastructure,” says Mr. Levenson, who joined the firm in 1995 from Fidelity Investments, where he pitched the company’s investment services to insurance companies.

While Hartford is making strides in the fund business, the firm and other large players in the variable annuity arena are losing market share to mid-sized purveyors, according to a report by J.P. Morgan Securities Inc.

market share slips

As measured by new sales, Hartford’s market share shrunk to 11.43% in the first nine months of 1997, down from 12.98% for the same period in 1996, according to the report. About two-thirds of the company’s 1997 net income of $306 million on revenues of $4.7 billion came from two products, fixed and variable annuities, up from three-fifths the previous year.

“They have maxed the amount of Hartford variable annuities they can sell through existing broker dealers and banks,” says Colin W. Devine, an insurance industry analyst at Salomon Smith Barney, owned by competitor Travelers Group, which is slated to merge with Citicorp. “They’ve hit the same glass ceiling we have: You can’t seem to get the house brand above 40% (of sales).”

Still, robust earnings would make Hartford an attractive acquisition target if its majority owner, Hartford Financial Services Group (formerly ITT Hartford), puts it up for sale, says Mr. Devine. The Hartford put 20% of the insurance company on the block in May 1997, and in the nine months following the IPO, the stock shot up 52% to $43. Since then, it has crept up only about 11% to $47, which Mr. Devine attributes to its peaking distribution capabilities.

Hartford officials insist they are not seeking to reduce the company’s reliance on annuities — even though its mutual fund sales are expected to rival variable annuity sales within the next five to 10 years. Instead, they say they’re leveraging Hartford’s existing strengths.

“The company still believes there is a lot of opportunity to grow in the variable annuity business,” says Mr. Levenson.

By choosing Wellington to run its funds, Hartford has become the second-largest retail client for the Boston-based money management company, whose No. 1 retail client is Vanguard Group. Hartford’s mutual funds are patterned after the portfolios underlying its Director variable annuity.

Unlike the low-cost, no-load funds Wellington manages for Vanguard, the Hartford funds are sold through commission-based intermediaries, a distribution channel already clogged with thousands of mutual funds. And even the company’s fund wholesaler, Planco of Paoli, Pa., concedes that one of the biggest challenges is getting brokers to think of Hartford as a mutual fund provider.

While many insurers have acquired other firms to gain distribution outlets for their wares, Hartford says it has no plans to do so. In fact, back in the 1980s it sold its stakes in three brokerage firms, Wheat First Butcher Singer, Piper Jaffray Inc. and Thomson McKinnon & Co.

“We just do not want to be in the distribution business,” Mr. Levenson explains.

Hartford also must take care not to cannibalize variable annuity sales with its mutual funds. And it must ensure such usually plain-vanilla offerings stand out in a crowd.

What’s more, it is offering only one subadviser while some annuity providers who have entered the fund business are trying to distinguish themselves by using multiple firms.

“We don’t want to create ‘me too’ products,” says J. Steven Neamtz, executive vice president for SunAmerica Asset Management, the adviser to SunAmerica’s year-and-a-half-old Style Select funds, each co-managed by three different subadvisers.

back to basicS

Hartford expects to add a high-yield bond fund and a global equity fund in October, but has no plans to introduce any sector or niche funds, according to Mr. Levenson. Unlike SunAmerica and American Skandia, Hartford hasn’t introduced a death benefit for its mutual funds.

The company’s “back-to-basics” approach is designed to appeal to Main Street investors — the folks who are the ones pouring billions into mutual funds these days — and Mr. Levenson notes that the typical fund investor has different needs than an annuity buyer. Annuities are long-term, tax-deferred retirement savings vehicles, while mutual funds have a variety of uses, ranging from education to short-term savings.

Sales of Hartford’s Director variable annuity swelled 36% in 1997, even though the company introduced mutual funds in mid-1996. “It’s the presence and the reputation of the Hartford which is really making the difference” in terms of sales, he says.

But even if Hartford reaches its ambitious goal, it and other annuity sellers won’t be able to pull in the same fat profits from mutual fund sales that it generates on higher-cost variable annuities.

Says consultant Mr. Kaytes: “The warning shot is, Be aware that the margins in annuities are much richer than they are in mutual funds.”

[More: Top 25 providers of variable annuities, ranked by assets]