Estimated fixed annuity sales of $24.6 billion set a 5-year record in the second quarter of 2008. The third quarter results should be strong as well, even though some conditions will have changed.

Conservative investments like fixed annuities generally do well during troubled economic periods like 2nd quarter 2008. That’s not to say it was a totally gloomy quarter. Durable goods orders and productivity rose. The trade deficit narrowed on strong export performance and this fueled growth in the Gross Domestic Product. Equities prices improved somewhat.

But the economy continued to struggle with the same woes that beset 1st quarter 2008. Inflationary pressures increased with rising commodities prices and a weak dollar. Unemployment rose and consumer confidence fell to new lows. The credit crunch worsened, with predictions of huge bad loan write-offs yet to come. The housing market crisis deepened. These conditions motivated a continued, though less pronounced flight to safety.

Fixed annuities benefit from such flights to safety when they have a competitive advantage over conservative alternatives. They had such an advantage in 2nd quarter 2008, even though the yield curve flattened because short-term rates rose more than long-term rates.

Of course, sales were strongest in April, when the yield curve was steepest and lower in each successive month. But estimated June sales were still well ahead of any month in 1st quarter 2008 or 2nd quarter 2007.

Both market value-adjusted and non-MVA (book value) fixed rate annuities did well. Credited rates of 5% were heavily promoted, with frequent comparison to lower rates on bank certificates of deposit. Estimated MVA sales rose 54.4% from the prior quarter, and book value results were almost one-third ahead. Compared to 2nd quarter 2007, there was eye-popping growth of 104.8% for non-MVA and 89.2% for MVA annuities.

The S&P 500 index ended the 2nd quarter 90 points (6.6%) lower than it was on April 1, 2008, but the general trend was upward.

This helped indexed annuities, which overcame negative publicity from an ill-informed Dateline NBC televised report and other sources (as well as regulatory uncertainty) to make a 20.1% comeback from 1Q 2008.

Indexed annuity results also benefited from higher cap rates and heavily-promoted guaranteed lifetime withdrawal benefits, sweetened by premium bonuses and generous step-ups. Guarantees of premium were promoted as well, to an extent not seen previously. Sales were 4.5% ahead of 2nd quarter 2007–impressive because equities prices were significantly higher last year.

Estimated single premium immediate annuity sales were up 15.3% quarter-to-quarter. Slightly higher long-term rates helped, but demand from the oldest baby boomers was the main factor. More promotion of inflation-adjusted payouts may have had an impact as well. Results were 29.5% above the same period last year.

As of early September 2008, more volatility has marked the 3rd quarter. Equities prices slid from June through mid-July as conditions soured. Consumer confidence hit another all-time low. Mutual fund flows indicated another flight to safety. Then, on August 8, oil prices dropped on a stronger dollar. The stock market rallied and consumer confidence improved. Things were certainly looking up until the stock market dropped 3% on September 3, reacting to bad news on employment and retail sales. And, in contrast to 2nd quarter 2008, interest rates have been falling.

So why expect 3rd quarter 2008 to be another good one for fixed annuity sales? For one thing, indexed annuities should benefit from the August equities market rally, along with continued high cap rates and attractive GLWBs. Also, conditions favor fixed rate annuities. The yield curve hasn’t changed much, so these products have had a continued competitive rate advantage. And although interest rates have been dropping in general, it wasn’t hard to find fixed annuities crediting 5% in July and August.

It’s true that many annuity issuers lowered rates in September. But advance announcements of upcoming rate drops probably stimulated “get them while you can” sales in the 2nd half of August; most of these sales will be booked in September.

What’s more, SPIAs are likely to do well mainly because of underlying demand.

Probably the biggest unknown at this point is whether and when the Securities and Exchange Commission will decide that indexed annuities are securities. But this is not likely to have a big impact on sales in 3rd quarter 2008 or the remainder of the year. Even if the SEC decision occurs in September, as initially announced, implementation will be delayed for some time by legal challenges and may be avoided altogether.

Of course, should indexed annuities eventually become classified as securities, sales can be expected to fall substantially. To prepare for this possibility, many of the major indexed annuity carriers are focusing new attention on fixed rate products.

But it is also the case that fixed annuity issuers of all kinds are responding to market conditions. For instance, a number of book value annuities were introduced in 3rd quarter 2008, a level of new product activity that hasn’t been seen for some time. As both a reflection of and a stimulus to demand, this bodes well for these products through the rest of 2008. This is good for fixed annuity sales in general, because book value annuities now generate about half of all sales.