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For life insurers, a reversal of fortunes in 2016

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For life insurers, a reversal of fortunes in 2016

After collapsing on two separate occasions in 2016, life insurance stocks soared after the presidential election, finishing the year far higher than the wider market.

The SNL U.S. Insurance Index, which tracks life and health insurers and brokers, was down more than 22% in February. After recovering somewhat, the index was down again, by about 14%, in late June.

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But that narrative reversed in the second half of the year, with life insurers making steady gains leading up to the conclusion of the presidential race Nov. 9. While Donald Trump's victory saw stocks across the financial sector rise, life writers spiked far higher than other insurers.

The SNL life index finished the year through Dec. 28 with a total return of 25.39% in a reversal of its bottom in February. The broader SNL Insurance Index gained 19.78% to 859.61, while the S&P 500 rose 12.5% to 2,249.92 in total return.

Signs that the era of ultra-low interest rates may be nearing a close, plus the expectation of a lighter regulatory presence under President-elect Trump's administration, were largely behind the life sector's outperformance, Sandler O'Neill + Partners Managing Director Paul Newsome said in an interview. The yield on the 10-year Treasury note hit a record low under 1.4% in July, dragging life insurance stocks down with it. But the T-note yield also rose rapidly following the election, reaching nearly 2.6% on Dec. 16.

The election of Trump, whose campaign frequently attacked government regulation as a source of American economic malaise, does not signal the removal of current regulations so much as a lowering of the odds that the federal government's presence in the insurance sector will grow, Newsome said. The president-elect has largely chosen business leaders and politicians critical of regulation for key Cabinet and agency positions.

"It's actually more the elimination of the threat" of heavier regulation, Newsome said. "We continue to have a lot of buy recommendations on the life insurance sector. We think there's more benefit to come."

The Federal Open Market Committee raised the baseline funds rate range by 25 basis points in December. It also raised its expectations for further hikes in 2017, with three increases now projected for the year instead of the two indicated in its September statement.

Lincoln National Corp. was among the biggest winners in the sector, rising 32.51% to $66.60 per share during the period. MetLife Inc.'s gains were more subdued, with an increase of 11.95% to $53.97 per share. Health Insurance Innovations Inc., an insurance broker focusing on the life sector, finished the year at $18.25 per share for a total return of 172.4%.

One regulation that may face major changes, the Department of Labor's Conflict of Interest Rule, weighed heavily during the year on some life insurers that focus on annuity sales. American Equity Investment Life Holding Co. lost nearly half of its market value by February and remained down for the rest of the year before recovering after the election. The stock closed Dec. 28 with a total return to date of negative 5.9%.

Andrew Puzder, the nominee for secretary of Labor, has not commented publicly on the so-called fiduciary rule, which would require salespeople and advisers in the asset management and life insurance sectors to hold a fiduciary responsibility to customers. But his opposition to a larger federal presence in private markets aligns with policies Trump has endorsed, and another Trump adviser, Anthony Scaramucci, has said the new administration would go after the rule.

Primerica Inc., another life insurer that has had to adapt to the fiduciary rule, finished the year with a total return of 48.9%.

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