The U.S. Department of Labor (DOL), on May 23, 2017, announced that its Fiduciary Rule -- created under the Obama administration and whose implementation was delayed under the Trump administration -- will now move forward with a partial implementation beginning on June 9, 2017 and full implementation set for January 1, 2018. The rule expands the definition of who is an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). In its current form, the rule would elevate all financial professionals who work with retirement plans or who provide any level of retirement advice to the level of a fiduciary. Essentially this means that anyone selling retirement products (like a stockbroker or an insurance agent) would no longer just have a legal duty to provide advice that is suitable; they would be elevated to the highest legal obligation embedded in a fiduciary relationship. While this rule has broad-reaching ramifications for many areas within the financial services industry, CFRA thinks the resolution of this issue removes a degree of uncertainty that depressed sales of annuities in recent periods.

Individual and group annuities (both fixed and variable) are a core line of business for life insurers, accounting for more than 53% of the life insurance industry's written premiums in 2016. Uncertainty surrounding the use of variable annuities (VAs) -- including a tentativeness from both advisers and consumers -- was a primary factor in the double-digit decline in VA sales in 2016. That trend, along with a lot of uncertainty as the DOL rule remained unresolved, continued into 2017, and first quarter 2017 annuity sales fell by 12% on a 15% drop in fixed annuity sales and 8% lower VA sales, year to year. Given that we are two-thirds into the second quarter of 2017, our outlook for second quarter VA sales trends remains muted amid this ongoing uncertainty.

However, our positive fundamental outlook on the life insurance industry reflects our view that a rise in interest rates (which has already helped margins and will continue to do so, in our view), coupled with an improved labor market and some favorable demographic trends (including the maturing of millennials) are positive drivers for the life insurance industry. These positive factors have been offset to a large degree by uncertainty surrounding implementation of the DOL Rule. Resolution of this issue will enable insurers to alter their product and compensation structures to comply, in our view. Moreover, firms have already spent considerable resources to implement the rule in its current form. Implementation without significant changes is actually a positive since its resolves the uncertainty surrounding this issue. Of course, the other related issue is the degree to which the rule will be enforced. Based on publicly available information we have analyzed, CFRA expects no enforcement actions to occur until after the full implementation in early 2018. Practically speaking, however, we see the potential of greater litigation as a potential downside to this rule -- more so than the potential for more regulatory actions.

Highlighted in the implications box are a number of firms whose stocks we view as undervalued in light of the positive catalysts we see from a more favorable macroeconomic and interest-rate environment, now aided by the resolution of this regulatory uncertainty. For investors seeking to gain exposure to the insurance industry through ETFs, three to consider are the Guggenheim Investments S&P 500 Pure Value ETF (RPV 58 Marketweight); Hartford Multifactor U.S. Equity ETF (ROUS 27 Marketweight); and iShares US Insurance ETF (IAK 60 Marketweight).

Risks to our thesis and recommendation include significant changes (and additional uncertainty) to the current format of the DOL rule, a significant and rapid change in the direction of interest and inflation rates and a deterioration in the macroeconomic environment.