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Large life insurers' stocks improve modestly following rate announcement

Share price movement for the largest life insurers was muted the day after the Federal Reserve announced its widely anticipated hike to a key interest rate that promises relief to companies' earnings.

The SNL Insurance Index declined 0.12% to 862.48 for the week ended Dec. 15, and the S&P 500 edged up 0.11% to 2,262.03.

The 25-basis-point increase in the Fed's benchmark federal funds rate should boost the financial performance of life insurers who rely on long-term, fixed-income investments to fund insurance obligations and sell annuities, said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute.

"Just as it would help banks, it would help insurance companies to provide insurance payments and credits at a higher level," Weisbart said in an interview. The Fed outlook projecting six more rate hikes into 2018 further brightens the industry's near-term prospects, he said.

"It just suggests that this is going to be less of a stressed environment ... and more of a normal relationship from the point of view of interest-bearing products," Weisbart said.

Life insurers tend to hold 75% of their investment holdings in bonds, whose yields should improve with higher rates, Moody's said in a report released after the announcement. However, long-term yields mean more to life insurance companies, and they will be looking for continued momentum behind gains in 10-year Treasury yields. They have gone up nearly 100 basis points since the summer, Moody's said in a Dec. 14 report.

"Should the rise in short-term rates translate into higher, sustainable long-term rates, the profitability of older annuity blocks — fixed and immediate annuities and structured settlements — should gradually begin to improve, along with currently depressed levels of sales," Moody's said in the report.

If interest rates continue to rise, life insurers will also better avoid reserve charges and returns will move closer to companies' assumptions, Moody's said. The sector still needs a sharp rise in rates to improve its financial metrics, a scenario that Moody's does not expect. The rating agency assigned a negative outlook to the industry in a November report.

Sandler O'Neill analyst John Barnidge likes the prospects of life insurance companies, whose shares have improved meaningfully for two quarters. Even before the Federal Reserve announcement, the rise in interest rates was enough to benefit the sector, and the administration of President-elect Donald Trump promises a relaxed regulatory environment, Barnidge wrote in a Dec. 13 note to clients. MetLife Inc. is uniquely positioned to benefit from the trends, the analyst said.

"[Many] investors have been underweight life insurers given the low interest rate environment, and as they reweight towards the group, we believe they will move to companies like [MetLife], which are large-cap, liquid life insurers," Barnidge said. He maintained his "buy" rating on MetLife and initiated a fiscal year 2018 EPS estimate of $6.30.

Prudential Financial Inc. executives said during a Dec. 15 conference call to discuss guidance that interest rate sensitivities contributed to its lower return-on-equity expectation for fiscal year 2017. A return to more normalized rates could take the ROE outlook back to the 13% to 14% range given for previous long-term guidance, CEO John Strangfeld said.

Prudential's shares declined amid the reports that Wells Fargo & Co.'s account fraud scandal might have included sales of Prudential's MyTerm insurance policies, which Prudential subsequently suspended. A company executive said during the guidance call that the sales generated about $4 million in annual new premium business through the distribution partnership with Wells Fargo, and that Prudential does not gauge the importance of the issue in financial terms, according to a transcript of the call.

Prudential's shares picked up about 3% in value the day of the call, and closed the week up 1.00% to $107.08. MetLife's shares gained about 1.5% the day after the Federal Reserve announcement and finished down 0.19% for the week to $57.28.

Lincoln National Corp. gained nearly 2% for the day and closed the week with a 0.97% decline to $67.47. Genworth Financial Inc. closed the day a fraction of a percentage point lower than it began, and fell 5.92% for the week to $3.97.