10 Buy-Rated Insurance Stocks with up to 40% Upside

NEW YORK ( TheStreet) -- By any measure insurance stocks are cheaply priced, and with industry names avoiding having regulatory targets on their backs, investors should take a second look at the group.

Starting with a list of U.S. insurance stocks rated a "buy" by TheStreet Ratings, we have pared down the group to companies with at least one sell-side "buy" recommendation that we could verify, and names with three-month average daily trading volume of over 50,000 shares.

TheStreet's proprietary stock ratings model produces a composite rating that incorporates a stock's performance and volatility, incorporating technical and fundamental analysis.

We've included information on the estimates provided by property and casualty carriers for catastrophe losses related to the tornados and floods that have caused so much damage over the past two months in the Southeast and Midwest.

Gavin Magor, a senior financial analyst with Weiss Ratings, said he doesn't "expect property and casualty insurers to have a breakout year, as we have already seen substantial claims from flooding, snow melt and tornados, and we have only just entered the hurricane season."

Magor said that life insurers "depend almost entirely on investment income for profitability, and 2011 is not shaping up to be a good year if we look at the performance of the stock market."

For a health insurance industry in flux, Magor says "the bigger the better, as small insurers will continue to struggle."

All 10 of these stocks are trading very cheaply relative to forward earnings.

Of course, when considering consensus price targets, it's important to keep overall sentiment in mind. Many analysts with neutral ratings don't provide a price target, and only six of these ten insurance stocks have a majority of analysts rating them a buy.

The following are the 10 buy-rated and actively traded insurance companies, with the most upside implied by mean price targets among analysts polled by FactSet. All data was provided by SNL Financial:

10. Unum Group

Shares of Unum Group ( UNM) of Chattanooga, Tenn., closed at $24.96 Tuesday, returning 11% over the previous year.

The company provides group and individual disability insurance in the U.S. and the United Kingdom, as well as life insurance, long-term care insurance and group benefit plans.

In May, the company announced that beginning in the third quarter, its quarterly dividend payout would increase to 10.5 cents a share, from 9.3 cents. Based on the higher payout, the shares have a forward dividend yield of 1.68%.

Unum Group reported first-quarter net income of $225.4 million, or 72 cents a share, down from $229.8 million, or 69 cents a share, in the first quarter of 2010, as improvements in U.S. operations were more than offset by lower revenue in the UK and in the company's Colonial Life unit.

Thomas Gallagher of Credit Suisse said in May after Unum announced its first quarter results, that the company's "Excess capital remains at strong levels." Gallagher has a neutral rating for Unum Group, with a $28 price target.

Unum repurchased 8.6 million shares during the first quarter for $223.6 million, and as of March 31, was authorized to repurchase an additional $920.7 million worth of shares.

Unum Group's shares are trading for 7.5 times the consensus 2012 earnings estimate of $3.29 a share, among analysts polled by FactSet. Based on a mean 12-month price target of $30.18, also among analysts polled by FactSet, the shares have 21% upside.

Out of 15 analysts covering Unum Group, four rate the shares a buy, while the remaining analysts all have neutral ratings.

9. Prudential Financial

Shares of Prudential Financial ( PRU) of Newark, N.J., closed at $62 Tuesday, returning 10% over the previous year. Based on a quarterly payout of 29 cents, the shares have a dividend yield of 1.85%.

Prudential is one of the largest U.S. insurance holding companies, with $599 billion in assets as of March 31, and operates in three segments: U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International Insurance and Investments.

First-quarter net income of financial services businesses attributable to Prudential Financial, Inc., was $589 million or $1.20 a share, increasing from $536 million, or $1.45 a share in the first quarter of 2010.

On June 8, after Prudential announced a $1.5 billion share buyback authorization that runs through June 30, 2012, John Nadel of Sterne Agee reiterated his "buy" rating for Prudential with a price target of $75, saying the announcement was "modest positive in that the deployment will likely be a bit earlier than we had anticipated."

Nadel is enthusiastic about Prudential, saying the company has one of the "best business mixes" among insurers, and to deliver returns on equity in the "low to mid teens" over the next few years, "with less reliance on improving macro conditions, especially relative to some peers."

Prudential's first-quarter return on equity (ROE) was 7.48%, according to SNL Financial.

The shares are trading for 7.8 times the consensus 2012 earnings estimate of $7.76 a share. The mean price target among analysts polled by FactSet is $75.44, implying 22% upside.

Overall analyst sentiment for Prudential is very strong. Out of 20 analysts covering the company, 17 rate the shares a buy, while the remainder have neutral ratings.

8. Principal Financial Group

Shares of Principal Financial Group ( PFG) of Des Moines, Iowa, closed at $29.54 Tuesday, returning 19% from a year earlier. This was the best one-year total return among the 10 buy-rated insurance stocks discussed here.

The company provides retirement and investment services, and life insurance, worldwide. Principal is in the midst of a transition as it exits the group medical insurance business, agreeing in September for United Healthcare to renew group medical insurance coverage for its customers.

First-quarter operating earnings were $231.8 million, or 71 cents a share, compared to 221.4 million, or 69 cents a share, in the first quarter of 2010.

After the first-quarter results were reported in May, Wells Fargo Securities analyst John Hall reiterated his neutral rating for Principal, with a valuation range of $32 to $36, saying that although "the company's retirement-oriented business mix warrants a premium relative to its peers," the company's legacy businesses "will suppress the its ROE and valuation relative to historical levels."

The shares are trading for 8.6 times the consensus 2012 earnings estimate of $3.40 a share, which is the highest forward P/E ratio among the 10 insurance companies discussed here. The mean price target among analysts is $35.97, implying 22% upside.

Out of 16 analysts covering Principal Financial Group, four rate the shares a buy, 12 have neutral ratings, and one analyst recommends selling the shares.

7. Allstate Corp.

Shares of Allstate Corp. ( ALL) of Cook, Ill., closed at $29.69 Tuesday, returning 2% from a year earlier. Based on a quarterly payout of 21 cents, the shares have a dividend yield of 2.83%.

On June 16, Allstate announced that its estimated catastrophe losses for May totaled $600 million, after previously announcing an estimated $1.4 billion in catastrophe losses in April. It will obviously be a difficult second quarter for the property and casualty insurer, with multiple floods and a slew of tornados causing damage in several states in the Southeast and Midwest. In comparison, the company's catastrophe losses totaled $648 million in the second quarter of 2010.

First-quarter net income was $519 million, or 97 cents a share, with catastrophe losses totaling $333 million. Earnings improved from $120 million, or 22 cents a share in the first quarter of 2010, when catastrophe losses totaled $648 million.

In the wake of Allstate's announcements of catastrophe losses for April and May, JPMorgan Chase analyst Matthew Heimermann on June 20 lowered his second-quarter operating earnings estimate by 71 cents to a loss of $1.22 a share, and his full-year 2011 estimate by 74 cents to earnings of $1.41 a share, saying that "relative to peers, the reported losses in May appear in line to slightly-better than we would have guessed."

Heimermann has an "overweight" or "buy" rating on Allstate's shares, with a $40 price target.

The shares trade for eight times the consensus 2012 earnings estimate of $3.72 a share. The mean price target among analysts is $37.11, implying 25% upside.

Out of 23 analysts covering Allstate, 11 rate the shares a buy, while the remaining 12 analysts all have neutral ratings.

6. Meadowbrook Insurance Group

Shares of Meadowbrook Insurance Group ( MIG) of Southfield, Mich., closed at $9.73 Tuesday, returning 11% over the previous year. Based on a quarterly payout of four cents, the shares have a dividend yield of 1.64%.

The company provides risk management consulting, claims administration and handling, loss control and prevention, and reinsurance placement, as well as property and casualty insurance coverage.

First-quarter net operating income was $14.5 million, or 27 cents a share, compared to $16.8 million, or 30 cents a share a year earlier. An 11% increase in total revenue to $193.5 million was more than offset by increases in losses and policy acquisition expenses.

The company on May 2 reiterated its earnings guidance for 2011, saying that operating income would range between $53.0 million to $58.5 million, or between $1.00 per share and $1.10 per share.

On May 3, BGB Securities analyst Kenneth Billingsley reiterated his "buy: rating for Meadowbrook, saying he expected the company to "the company to continue to generate an ROAE in excess of 10% for 2011 and 2012," which "outperforms ROAE expectations for the P&C industry in the current environment." Billingsley's target price for Meadowbrook Insurance is $13.00.

The shares trade for 8.3 times the consensus 2012 earnings estimate of $3.72 a share. The mean price target among analysts is $12.25, implying 26% upside for the shares.

Four of the five analysts covering Meadowbrook Insurance Group rate the shares a buy, while the remaining analyst has a neutral rating.

5. Assurant

Shares of Assurant ( AIZ) of New York closed at $35.44 Tuesday, down 1% from a year earlier. Based on a quarterly payout of 18 cents, the shares have a dividend yield of 2.03%.

The company provides a variety of services, including life, disability, credit and health insurance, employee benefits services and property and casualty coverage.

During the first quarter, Assurant repurchased 4.4 million shares, at an average price of $39.22. As of March 31, the company was authorized to buy back an additional $665 million worth of shares.

Assurant on June 2 estimated that catastrophe losses in April and May would range between "$65 million to $75 million, pre-tax and net of reinsurance."

Assurant announced on June 21 that its reinsurance expenses for 2011 would be total an estimated $219 million, increasing from $194 million in 2010, reflecting "an increase in coverage due in part to higher levels of exposure."

On June 22, the company announced that it had purchased SureDeposit from Converge Services Group in an all-cash transaction. SureDeposit provides surety bonds that provide an alternative to cash deposits in the rental market. Assurant CEO Robert Pollock said that SureDeposit was "an excellent strategy fit" with the company's Specialty Property segment and would "be modestly accretive to earnings from the start." Pollock said Assurant had paid "less than $50 million" to acquire SureDeposit.

First-quarter net operating income was $139.3 million, or $1.37 a share, declining from $154.3 million, or $1.32 a share, in the first quarter of 2010. The earnings decline "reflecting a decline in premiums in all of the businesses," the company said.

Wells Fargo Securities analyst John Hall has a "Market Perform" or neutral rating on Assurant, saying after the company reported its first-quarter results that "the company has a good track record of successfully developing new specialty insurance businesses, which we believe is reflected in AIZ's valuation." After an industry conference earlier this month, Hall said in a report that "a regulatory overhang appears to affecting AIZ's valuation, in our view," from the scrutiny of providers of force-placed insurance on properties collateralizing mortgages.

The shares trade for 6.5 times the consensus 2012 earnings estimate of $5.36 a share. The mean price target of $45.40 among analysts polled by FactSet implies 28% upside for the shares.

Out of 10 analysts covering Assurant, two rate the shares a buy, seven have neutral ratings and one analyst recommends selling the shares.

4. Lincoln National Corp.

Shares of Lincoln National Corp. ( LNC) of Radnor, Pa., closed at 27.49 Tuesday, returning 5% over the previous year.

The company provides various life insurance, annuity, retirement income products and employer-sponsored services.

Lincoln National reported first-quarter net income from operations of $349 million, or $1.08 a share, increasing from $276 million, or 83 cents a share, a year earlier. Among the first-quarter highlights was a 12% year-over-year increase in life insurance sales, to $159 million.

The company repurchased $2.4 million shares for $75 million during the first quarter. The company said in May that it expected "to repurchase an additional $100 million to $150 million of common stock over the remainder of 2011."

After the first-quarter results were announced, Macquarie (USA) Equities Research analyst Mark Finkelstein reiterated his neutral rating for Lincoln National, with a $33 price target, saying that "virtually every factor seemed to break in LNC's favor this quarter, leading to all around strong results."

Although the analyst sees "longer-term upside to shares," he sees the shares "trading in-line on a relative basis when considering LNC's less diversified business model and higher leverage to macro volatility than peers."

The shares trade for 6.4 times the 2012 consensus earnings estimate of $4.21 a share. The mean price target among analysts polled by FactSet is $35.75, implying 30% upside.

Out of 18 analysts covering Lincoln National, 10 recommend buying the shares, while the remaining analysts all have neutral ratings.

3. MetLife

Shares of MetLife ( MET) of New York closed at $42.03 Tuesday, returning 7% over the previous year. Based on a quarterly payout of 19 cents, the shares have a dividend yield of 1.76%.

MetLife provides insurance, annuities, and employee benefit programs internationally. The company is also a bank holding company, with its MetLife Bank, NA subsidiary having $15.5 billion in total assets as of March 31, and a national mortgage lending business.

The company estimate on June 10 that catastrophe losses for April and May would range between $160 million and $180 million.

For the first quarter, MetLife reported operating earnings of $1.4 billion, or $1.33 a share, increasing from $864 million, or $1.04 a share, in the first quarter of 2010.

Factoring in taxes, dividends on preferred shares and a $146 redemption premium -- paid when the company repurchased 6.9 million preferred shares that had been issued to AM Holdings LLC in connection with MetLife's acquisition of American Life Insurance Company and Delaware American Life Insurance Company (together, "Alico") in November 2010 -- First-quarter net income available to common shareholders was $830 million, or 78 cents per diluted share, compared to 805 million, or 97 cents a share, a year earlier.

The company said that "premiums, fees & other revenues of $11.0 billion, reflecting a full quarter of Alico results, up 27% over the first quarter of 2010 and up 15% over the fourth quarter of 2010."

Following the earnings announcement, JPMorgan analyst Jimmy Bhullar reiterated his "Overweight" or "buy" rating for MetLife, with a $51 price target," saying the first-quarter results were "mixed but slightly better than anticipated," as "international sales were strong," while "top-line growth in the U.S. division was poor."

The shares trade for 7.1 times the consensus 2012 earnings estimate of $5.81 among analysts polled by FactSet. A mean price target of $55.38 implies 32% upside for the shares.

Overall sentiment for MetLife is very strong, with 17 out of 19 analysts rating the shares a buy. The two remaining analysts have neutral ratings.

2. American Equity Investment Life Holding Co.

Shares of American Equity Investment Life Holding Company ( AEL) of West Des Moines, Iowa, closed at $12.54 Tuesday, returning 16% from a year earlier.

The company provides annuities and life insurance products.

First-quarter operating income was $30.6 million, or 47 cents a share, increasing from $25.8 million, or 43 cents a share, in the first quarter of 2010. The company said that first-quarter 2011 results included "one-time reserve adjustment which increased operating earnings by $2.7 million, or $0.04 per diluted share."

Sandler O'Neill analyst John Barnidge on Monday reiterated his "Buy" rating on American Equity Investment Life, with a $16 price target, saying the company had sufficient capital to "sustain 10% sales growth," and describing the company as "product leader in regards to innovation of index annuities," adding that "the typical gestation period for rolling out products can be as short as one to three months."

on June 15, SunTrust Robinson Humphrey analyst Mark Hughes reiterated his "Buy" rating for American Equity Investment Life, with a $17 price target, "based on the company's demonstrated ability to capture market share in the growing index annuity market." According to Hughes, "the company's market share for index annuities has risen steadily from 2% at the start of 2009 to almost 7% in the recent first quarter," which "points to persistent cultivation of distribution that should continue to pay off in future periods and contrasts with large peers' inconsistency, a negative among agents."

The shares trade for 5.8 times the consensus 2012 earnings estimate of $2.13 a share. A mean price target of $16.75 among analysts polled by FactSet implies 34% upside for the shares.

1. Aflac

Shares of Aflac ( AFL) of Columbus, Ga., closed at $45.20 Tuesday, returning 3% from a year earlier. Based on quarterly payout of 30 cents, the shares have a dividend yield of 2.65%.

The company provides supplemental health and life insurance, in addition to other health and life insurance products.

Aflac on June 23 announced that for the second quarter it would recognize a pretax loss on the sale of investments related to Greece and Ireland, totaling $165 million. The company also said it would recognize $445 million in pretax impairment losses on investments in Portuguese banks.

Following Aflac's announcement on "derisking" its balance sheet, Credit Suisse analyst Thomas Gallagher reiterated his "Outperform" or "buy" rating for Aflac, with a 12-month price target of $65, estimating that "the total after tax loss will be $397mm, representing an ~$0.84 per share EPS hit." The analyst also said that the shares already "reflect the impact of the derisking strategy."

Aflac's shares are trading for seven times the consensus 2012 earnings estimate of $6.40 a share. A mean price target of $63.24 among analysts polled by FactSet implies 40% upside.

Out of 17 analysts covering Aflac, 13 rate the shares a buy, while the remaining analysts all have neutral ratings.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

To submit a news tip, send an email to: tips@thestreet.com.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

More from Opinion

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Amazon's Assault on Grocery Stores Will Have a Profound Impact on Many

Amazon's Assault on Grocery Stores Will Have a Profound Impact on Many

It's Dumb to Think There Aren't Already Monopolies in Big Tech

It's Dumb to Think There Aren't Already Monopolies in Big Tech

Google's EU Battles Are Hardly a Reason to Panic

Google's EU Battles Are Hardly a Reason to Panic