Predictions that tax code changes would stunt the growth of variable annuity sales at banks and other brokers were premature.

When long-term capital gains taxes were lowered in August, many industry watchers concluded that mutual funds would be more attractive than variable annuities, and that investment dollars would flow from the latter to the former.

But Limra International, an insurance industry trade group, said it has not worked out that way. Preliminary estimates from the group show variable sales increased 25% in the third quarter of 1997 from the same quarter a year before, reaching a record $21 billion.

At banks, which sell just a small portion of all variables, third- quarter sales were up 40% from the third quarter of 1996. Third-quarter sales were up 16% from the previous quarter at banks, according to Kenneth Kehrer Associates, Princeton, N.J.

That's good news for bankers, because selling variable annuities is far more profitable than selling mutual funds.

At Washington Mutual Inc.'s investment unit, WM Financial Services, variable annuity sales are going strong, said president Pamela Dawson.

The company is not only selling more variables, it is selling more of them as a percentage of its investment products, said Ms. Dawson.

When the tax law was signed, many in the industry simply jumped to the conclusion that variables would suffer, Ms. Dawson said.

"But very quickly after that there was communication 'this isn't going to happen,'" she said.

Through the third quarter, the Seattle-based thrift sold $151 million of variables-21% of its sales of investment products, a category including mutual funds and fixed annuities.

In the same period in 1996, variable sales of $95 million accounted for 14% of thrift's investment product business.

Variable sales grew even more in this year's third quarter, taking up 26% of the investment product pie.

Even those who argue that mutual funds are the better investment concede that variable annuities are selling well.

The reason is "incredibly good salespeople," said Harold Evensky, a partner in the Coral Gables, Fla., accounting firm of Evensky, Brown, Katz & Levitt. "There's no earthly way they could have gotten better with the new tax act."

Mutual funds have traditionally had a lower top tax rate than variables. But the promise of tax-deferred growth made variables more attractive long- term investments, despite higher fees.

The tax bill signed into law in August sliced the maximum long-term capital gains tax to 20% from 28%.

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