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Life Insurance Stocks Look Cheap Ahead of Q4 Earnings

NEW YORK (TheStreet) -- Earnings season begins this week for U.S. life insurers, and some investors have been skittish over disappointing job creation numbers and the industry's exposure to emerging markets.

The life insurance sector had a spectacular 2013, with the Dow Jones U.S. Life Insurance Index rising 63%. The index has pulled back 7% this year through Tuesday's close at 635.04. Quite a bit of last year's lift was provided by a very strong stock market, as well as rising long-term interest rates.

Long-term rates rose significantly last year as investors anticipated the eventual tapering of the Federal Reserve's "QE3" purchases of long-term bonds. The bond purchases had been running at a net monthly rate of $85 billion since September 2012. Following its December policy meeting, the Federal Open Market Committee announced that beginning in January, the bond purchases would be reduced by $10 billion to $75 billion a month.

The FOMC this afternoon is expected by most economists to reduce the monthly bond purchases by another $10 billion to $65 billion. The continued tapering could set up another solid ride for life insurers, assuming the concerns over emerging markets and Japan don't blow up any further.

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"Heading into 4th quarter earnings, we expect the impact of +10% equity markets to continue to drive both higher reported and core underlying results for life insurers with variable annuity and asset management/retirement exposure," wrote Credit Suisse analyst Thomas Gallagher in a note to clients on Tuesday.

"While these trends have been a clear positive for underwriting results and balance sheets within the group, the dynamic of having annuities' earnings run rates increase 20-30% despite several companies (including MET, PRU, and LNC) trying to reduce exposure to VA as a percentage of overall business mix has likely furthered the sense of urgency for some to grow in other businesses," Gallagher added.

When considering the weak performance for life insurers so far this year, Deutsche Bank analyst Yaron Kinar in a Tuesday client note wrote, "overseas pressure will not derail the developed market recovery, and we therefore view the risk-off trade as temporary. If anything, we look at YTD performance as having created attractive entry points." The group certainly appears cheaply valued, with several major names trading for less than nine times consensus 2015 earnings-per-share estimates.

Life insurance companies begin reporting their fourth-quarter earnings this week, although the biggest U.S. names will make their announcements in February:

Hartford Financial Services Group (HIG) is scheduled to announce its fourth-quarter results on Feb. 3, with analysts polled by Thomson Reuters on average estimating earnings of $433 million, or 90 cents a share, compared to $1.03 a share during the third quarter and 54 cents a share during the fourth quarter of 2012. "In addition to providing 4Q results, HIG will also provide its 2014 earnings outlook which we expect to be supportive of our $3.62 estimate," Gallagher wrote. He rates Hartford "outperform," with a $38 price target, and estimates the company's earnings will grow slightly to $3.75 a share in 2015. Shares of Hartford Financial Services Group closed at $33.51 and trade for 8.6 times the consensus 2015 EPS estimate of $3.88.

Principal Financial Group (PFG) is scheduled to report fourth-quarter results on Feb. 3, with a consensus earnings estimate of $278 million, or 93 cents a share, increasing from 90 cents the previous quarter and 82 cents a year earlier. "Our 4Q13 [operating return on equity] estimate of 12.1% implies an 11.9% return for the year, slightly above the 11.6% target return for the year. We anticipate a slowdown in buybacks, to $23mm," Kinar wrote. He rates Principal Financial Group a "hold." Principal's shares closed at $44.30 Tuesday and traded for 10.3 times the consensus 2015 EPS estimate of $4.30. The consensus 2014 EPS estimate is $3.90.

AFLAC (AFL) will announce its fourth-quarter results on Feb. 4. Analysts expect the company to report earnings of $643 million, or $1.39 a share, down from $1.47 in the third quarter and $1.48 during the fourth quarter of 2012. Gallagher expects the company's pretax earnings in Japan to decline 19% sequentially to $799 million for the fourth quarter, "driven downwards by the seasonally higher benefit ratio and expense ratio," along with a $25 million drag on pretax earnings from a decline in the value of the yen. Gallagher has a neutral rating on AFLAC, and estimates the company will earn $6.03 a share for 2014, with EPS growing to $6.32 in 2015. AFLAC's shares closed at $62.45 Tuesday and trade for 9.5 times the consensus 2015 EPS estimate of $6.56.

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