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Some life insurers' stocks dip ahead of fiduciary rule's June 9 rollout

Some life insurers' stocks led industrywide losses during the week leading up to the June 9 rollout of the Labor Department's Conflict of Interest Rule.

For the week ending June 8, the SNL Insurance Index fell 0.41% to 920.09, while the S&P 500 was down 0.22% to 2,433.79.

Since its 2015 introduction, the Labor Department's fiduciary rule has been targeted by lawmakers and industry parties. In the week leading up to its initial phase-in, the fiduciary rule has caused some trouble for life insurers' stocks, said Sandler O'Neill analyst John Barnidge, who expects some product shelf space reduction to go into effect for June 9.

American Equity Investment Life Holding Co. saw the largest drop among insurers tracked by S&P Global Market Intelligence for the week, with shares down 5.49% to $23.91. The company was downgraded to a "market perform" rating from an "outperform" rating by FBR & Co. analyst Randy Binner in a June 7 note.

Binner pointed to the company's dependence on selling indexed annuities, which are covered under the fiduciary rule's best-interest contract. Many in the industry expected a further delay of the rule beyond the June 9 implementation date, but Binner wrote that the downgrade is a reflection of "growing concerns about the ability to fix or significantly alter the [Labor Department] rule."

"The final rule may still be changed, and most attention will be on the removal of the [best-interest contract] and/or the legal liability, but the path over the next several months will be rockier and more uncertain than we initially anticipated," he wrote in the note.

Binner said American Equity Investment Life Holding has been banking on a change or repeal of the best-interest contract, as the company's shares have risen 46% since the presidential election, compared to its peers' 15% rise during the same period. Fellow life insurers like Prudential Financial Inc. and Lincoln National Corp. are also adversely exposed to the fiduciary rule's uncertainty, according to Binner.

Prudential Financial shares slid 0.95% to $105.41 for the week. Lincoln National shares were up 0.67% to $66.22 for the week.

In an investor day meeting June 6, Prudential Financial's president of annuities, Lori Fouche, said that only two of the company's major distributors have decided to not operate under the best-interest contract exemption, a much-debated part of the Labor Department's fiduciary rule.

"We have also seen some slowdown in our sales due to the rule itself, given the uncertainty, with the greatest slowdown occurring in our banks and wirehouse channels," she said.

The Labor Department is now performing a review of the rule, and many in the industry are hoping for possible changes and a partnership with the Securities and Exchange Commission. On June 2, SEC Chairman Jay Clayton revealed that the regulator would "welcome" working with the Labor Department on a fiduciary rule.

The rule would be repealed if the Financial CHOICE Act, which was passed by the U.S. House of Representatives by a 233-186 vote June 8, becomes law. The Financial CHOICE Act is not expected to pass a vote in the Senate in its current form, however.

The industry may also see a break from the White House's continued efforts to advocate for tax reform, Barnidge said, largely thanks to former FBI Director James Comey's June 8 testimony to the Senate Intelligence Committee regarding his tenure working under President Donald Trump.

"If the Trump administration is caught up in having to deal with the fallout from [the testimony], their agenda is probably sidetracked for quite some time," he said.

Meanwhile, one of the largest gains for the week came from AmTrust Financial Services Inc. The jump came a week after AmTrust shares fell before eventually recovering following news of a $300 million private placement by certain members of the company's board.

Shares of AmTrust Financial were up 4.14% to $14.08 during the week.