SunAmerica Inc. will introduce a novel annuity next month that promises customers all the gains of the stock market with none of the downside risk.
On June 10, SunAmerica will begin nationwide sales of the annuity, which carries a seven-year term and invests in a combination of commercial paper and S&P 500 futures contracts.
The Los Angeles-based financial services company expects this hybrid annuity, called IndexAmerica, to appeal to reluctant bank customers who have considered variable products but so far haven't mustered the courage to buy them.
Now bank brokers can ask those investors "how would you like to participate in the equities market with absolutely none of the market risk," said John P. Sousa 4th, executive vice president for bank sales at SunAmerica.
Mr. Sousa expects many customers to say "yes," and projects $10 million in weekly sales within nine months.
Like a typical fixed annuity, SunAmerica's index annuity will guarantee a minimum yearly return, expected to be 3% per year, Mr. Sousa said. Most of the annuity assets will be invested in commercial paper, but 10% to 15% will be used to buy seven-year S&P 500 futures contracts to capture any stock market gains, Mr. Sousa said.
The stock market's recent heady performance and the growing interest in equities among even the most conservative consumers may help the product succeed.
"It holds out a lot of promise because it's a variable annuity with training wheels," said Kenneth Kehrer, president of Kenneth Kehrer Associates, Princeton, N.J. He predicts that as many as a dozen companies will release products similar to SunAmerica's index annuity this year.
Banks have experimented with indexed certificates of deposit in the past. While these CDs promised risk-free equity returns, they proved to be a novelty that quickly faded.
"Everything that's a little bit different needs to be sold," Mr. Sousa said. "On the CD side there was never much of a commission to serve as an incentive." By contrast, SunAmerica's annuity will feature a 5 or 5.5% commission, Mr. Sousa said.
But brokers will have to work hard to earn their money, Mr. Kehrer said.
"It's the kind of product that takes a lot of education by the saleperson - brochures are not enough."
And that's on top of convincing many prospective annuity buyers that fixed-income products alone often aren't sufficient to beat inflation.
"To get people to focus on the benefits of equity investing is a real task," said Joseph Cooney, president of First Security Investment Services, Salt Lake City. "Many bank customers are just too conservative to think about risking principal."
But an index annuity may be the bridge that helps some bank customers overcome their natural reluctance.
First Security has been selling an index annuity offered by Keyport Life Insurance Co. for six months, Mr. Cooney said. That product, as well as one offered by Lincoln National Corp., differs from SunAmerica's index annuity as it limits the returns it pays to purchasers.
SunAmerica's product, by contrast, carries a 100% participation rate and no earnings cap, which means investors profit from whatever gains the S&P 500 makes over the term of the annuity.
Mr. Cooney said the index product has been successful. But, he conceded: "It's not the easiest thing in the world to explain."