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American Equity Investment shares bounce back after decline from Labor rule's release


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American Equity Investment shares bounce back after decline from Labor rule's release

'sstock rose for the week ended April 14 following a sharp decline in the previous week after the federal governmentreleased its final fiduciary ruleaddressing the sale of retirement products.

The SNLInsurance Index rose 2.47% on the week to 739.95, and the S&P 500 rose 1.72%to 2,082.78.

Adoptionof the rule will go intoeffect with a phase-in period starting in April 2017, with full implementation takingeffect Jan. 1, 2018. The rule broadens the types of financial advisers viewed asfiduciaries and adds new obligations for removing potential conflicts of interestin guiding clients toward retirement investments. It also streamlines the processfor selling some commission-based products under a new Best Interest Contract Exemptionand allows for grandfathering of existing investments.

Indexedannuities, which were originally left out of the Best Interest Contract Exemption,were added to the list of products that can be sold only by advisers who agree tomeet higher consumer protections. That could be a concern especially for AmericanEquity Investment because the majority of the company's product mix is in indexedannuities.

FBR &Co. analyst Randy Binner noted in a recent research note that selling indexed annuitiesunder the best interest contract will increase legal liability and decrease commissions,and he expects a 30% to 50% decline in sales at American Equity Investment startingin the second quarter of 2017. He expects the company and the retirement industryto file lawsuits on procedural and substantive matters, but he thinks the fiduciaryrule has likely been carefully crafted to hold up to a legal challenge.

RaymondJames analyst Steven Schwartz agreed that the U.S. Department of Labor could facelegal repercussions due to the part of the rule concerning indexed annuities, buthe said such lawsuits have a reasonable chance of overturning that part of the rule,which he thinks is "arbitrary and capricious" because there were veryfew comments in the proposal and there was no discussion with regard to the issueduring the hearing.

"Ifyou just take a look at the [MetLifeInc.] decision, clearly I think the DOL did less work with regard tomoving indexed annuities to the BIC than the [Financial Stability Oversight Council]did in naming MetLife to be systemically important," Schwartz said in an interview.

Schwartzestimated that there could be a 50% decline in sales for American Equity Investmentafter the rule is implemented. He does not believe the company could add new productsin the near term to offset a possible decline in sales of indexed annuities.

"Certainly[adding new products] is a very long-run thing. You could not do that immediately,and the company does not really have the expertise," Schwartz said. "Indexedand traditional fixed annuities are what they do. Honestly, I believe they do itbetter than anybody, but that is all they do. That is all they want to do."

However,the Raymond James analyst expects the demand for indexed annuities to continue inthe near term before the implementation of the DOL rule and believes them to be"very attractive products" in the current market environment. "Theremight even be a fire sale, where agents really try to push the product before therules change, so the very near term I think is going to be very good for the company,"he said.

Schwartzbelieves the decline in American Equity Investment's shares might have been overdoneas the stock was selling at less than the value of the company in runoff, and therebound in the stock price comes as a result of that acknowledgment.

AmericanEquity Investment's shares finished the week up 16.14% at $15.11.

's shares sawa rise of 8.33% during the week to $26.01. The company recently announced that ithas agreed to acquireCIFG Holding Inc., the parent of CIFGAssurance North America Inc., for an expected $450 million in cash.

BTIGLLC analyst Mark Palmer said in an April 14 research note that Assured Guaranty'sacquisition of CIFG Holding and the addition of its insured exposures to the portfoliowill have an impact on the company equivalent to adding new business. He said thecompany's opportunities to write new insurance are limited by persistently low interestrates that undermine the value proposition linked to municipal bond insurance.

Lifeinsurers' stocks rose during the period, with Principal Financial Group Inc. up 6.23% to $41.46, rising 9.25%to $40.99 and Genworth Financial Inc.up 9.06% to $2.77. Prudential FinancialInc. was up 8.72% to $76.29, and CNOFinancial Group Inc. rose 7.96% for the week to $18.45.