The 2nd quarter 2008 should turn out to be a good one for fixed annuity sales. And unless conditions change significantly, it also looks like 2008 will be a better year than the industry has seen for sometime.

The 2nd quarter’s economic environment resembles that of the 1st quarter 2008, which was favorable for fixed annuities according to sales results tracked by Beacon Research.

Like money market mutual funds, fixed annuity sales benefited from a flight to safety in reaction to a litany of economic woes that pointed toward recession. The housing contraction deepened and the credit crunch worsened. Consumer confidence fell and spending weakened. Bankruptcies and foreclosures skyrocketed. March unemployment figures approached a three-year high.

In the 1st quarter 2008, there were also inflationary pressures from the weak dollar and rising commodities prices. In reaction, the equities market was turbulent and trended downward. The S&P 500 dropped 10% (145 points) from the 1st quarter’s beginning to its end.

Conservative investments of all kinds looked good in comparison.

Interest rates generally fell during the 1st quarter 2008. Falling rates are usually negative for fixed annuity sales. But this time around, short-term rates fell more than long-term rates, thanks mainly to 3 rate cuts by the Federal Reserve totaling 200 basis points.

As a result, the yield curve (the spread between 1- and 10-year Treasuries) steepened dramatically. This gave fixed interest annuities a competitive rate advantage over Treasuries, money market mutual funds and, most importantly, bank certificates of deposit.

Also, sales of book value products (fixed interest annuities without market-value adjustments) rose nearly 25% from the previous quarter. Book value products are the predominant fixed annuity type sold in banks. Sales typically take off when they have a rate advantage over CDs. Thanks to broker-dealer production, fixed interest annuities with MVAs were up 11.5% quarter-on-quarter. (See table.)

Fixed interest annuity growth was enough to push the 1st quarter’s total sales 7.2% above the 4th quarter 2007, even though sales results for the other 2 product types–index annuities and single premium immediate annuities–were down.

The 1st quarter sales of index annuities dropped 11.5% from 4th quarter 2007. Because these products credit mainly based on changes in equities indices, it’s not easy to sell their upside potential return when most forecasts point to a bad year for the stock market. The vast majority of 1st quarter 2008 promotions we’ve seen stressed downside protection instead. Results probably would have been significantly worse if not for these products’ heavily promoted guaranteed lifetime withdrawal benefits, in particular.

Sales of single premium immediate annuities were down a less dramatic 4.9% quarter-on-quarter. This might seem strange because the oldest baby boomers started turning 62 in 1st quarter 2008, and many of those choosing to retire will need the monthly income that SPIAs can provide to supplement Social Security payments. But long-term rates fell from the prior quarter and SPIA payouts decreased as a result. This, in turn, dampened sales. Also, many purchases were likely postponed because the market expected rates to rise (and indeed they have).

Because of the rising rate environment, the 2nd quarter looks a lot like the 1st quarter for fixed annuity sales, only better.

The long-term trend in equities prices is downward and the market remains turbulent. The same economic problems remain. There is a continued flight to safety, as occurred when 10-year Treasury sales surged on June 5, 2008. And though the yield curve has widened and narrowed, it’s been in pretty good shape through mid-June.

All of this points to another good quarter for fixed interest annuities. Higher long-term rates should improve SPIA sales too, but rising rate expectations may hold sales below what they otherwise would be.

Index annuity results are more difficult to predict. Cap rates in the products have increased as high as 10% in some cases; this should provide a boost. But will consumers be attracted by upside potential during difficult stock market conditions, especially when credited rates of 5% are readily available on fixed rate annuities? Even if sales of these products drop again, though, this probably won’t be enough to prevent another increase in overall sales.

So far, this article has omitted comparison to 1st quarter 2007 results. Some readers may think this strange, since period-to-period comparisons are the norm in discussions of this kind. But the 2 periods have almost nothing in common. In 2007, the 1st quarter was the worst for fixed annuities since the Beacon Research Fixed Annuity Premium Study began in 2003. Yield curve inversion and a strong equities market made it very difficult for fixed annuities to compete in the same period last year. The only similarity is that credited rates were low by historical standards.

But 2nd quarter conditions do seem to resemble those of the 3rd quarter 2004. On June 6, 2008, the yield curve was steeper than at any time since that quarter. The equities market was volatile with a downward bias back then, too. And the unemployment rate was 5.5% in both October 2004 and May 2008.

It’s encouraging to note that total estimated fixed annuity sales were $23.1 billion in 3rd quarter 2004–that’s 23% above 1st quarter 2008. Only time will tell if this year will see quarterly sales at that level. But 2008 is shaping up to be the most interesting and dynamic year for fixed annuities in quite some time.

Jeremy Alexander is chief executive officer of Beacon Research, a fixed annuity data and application service provider in Evanston, Ill. His e-mail address is Jeremy@beaconresearch.net