5 Life Insurance Stocks With Up to 64% Upside

NEW YORK ( TheStreet) -- The stocks of profitable life insurers are trading at historically low multiples, providing wonderful long-term opportunities for investors as the sector flies under the radar.

With the financial news media fixated on the endless mortgage travails of Bank of America ( BAC) and the almost nonstop flow of regulatory interpretations of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it's easy to forget that some niches of the financial sector are pretty darn healthy despite stubborn unemployment and continually low interest rates.

Credit Suisse analyst Thomas Gallagher said last week that although some investors consider life insurance to be one of the most "structurally challenged financial subsectors" because of the effect of low interest rates on investment portfolios, "the group appears to be trading as if the true economic impact is more severe."

With many life insurers trading well below book value -- while facing much less risk than similarly priced banks that face unknown risks from mortgage putback lawsuits (like Bank of America) and much smaller regulatory targets on their backs -- Gavin Magor, a senior analyst with Weiss Ratings, says "investors are looking at a pretty good deal" for healthier sector players. Although the sector as a whole "should be trading at a discount to book value because of asset quality uncertainty, this is a solid industry, that is financially very viable," he says."

Using data provided by SNL Financial, TheStreet has identified the five actively traded U.S. life insurers with the most upside potential based on consensus price targets among analysts. Most of the names are trading well below tangible book value and are also trading at forward price multiples even lower than the largest U.S. banks.

Bank of America -- which arguably faces the highest level of uncertainty among the nation's largest banks -- closed at $7.23 on Friday, or six times the consensus 2012 earnings estimate of $1.23 a share, among analysts polled by FactSet. Three of the five profitable life insurers discussed here trade at even lower multiples.

Here are the five actively traded insurance companies with the most upside implied by mean price targets among analysts polled by FactSet:

5. Prudential Financial

Shares of Prudential Financial ( PRU) of Newark, N.J., closed at $51.45 Friday, down 12% year-to-date.

Based on a mean 12-month price target of $71.33 among analysts polled by FactSet, the shares have 39% upside potential.

Prudential is one of the largest U.S. insurance underwriters, with $613 billion in total assets as of June 30. The company operates in three segments: U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International Insurance and Investments. According to SNL Financial, Prudential ranked fourth among U.S. life insurance carriers, with 6.6% market, with $4.9 billion in direct premiums written during the first half of 2011.

The company announced on Sept. 15 the approval of Chinese regulators of Prudential's new joint venture with Fosun International, which is expected to begin operations in the fourth quarter.

Prudential reported second-quarter earnings of $831 million, or $1.68a share, increasing from $798 million, or $170 a share, during the second quarter of 2011. Sterne Agee analyst John Nadel said in August, after the second-quarter results were announced, that Prudential was "a top pick in an increasingly attractive group," with a core return on equity of 12.1%, and raised his 2011 earnings-per-share estimate to $6.80 from $6.50, while raising his 2012 EPS estimate to $7.65 from $7.62. Nadel also increased his price target for the shares to $81 from $79.

The shares trade for 6.5 times the consensus 2012 EPS estimate of $7.75 among analysts polled by FactSet, and 0.7 times tangible book value, according to SNL.

Out 18 analysts covering Prudential, 16 rate the shares a buy, while the remaining two analysts have neutral ratings.

4. Ameriprise Financial

Shares of Ameriprise Financial ( AMP) of Minneapolis closed at $45.07 Friday, down 21% year-to-date.

Based on a mean 12-month price target of $65.75 among analysts polled by FactSet, the shares have 46% upside potential.

The company is had $135 billion in total assets as of June 30, operating in four divisions: Advice & Wealth Management (including full-service brokerage and banking services), Asset Management, Annuities, and Protection.

Ameriprise repurchased $366 million in common shares during the second quarter, with another $2.17 billion authorized for additional buybacks as of June 30.

The company reported second-quarter operating earnings of $328 million, or $1.31 a share, increasing from $272 million, or $1.03 a share, in the second quarter of 2010. Operating net revenues increased 14% year-over-year, to $2.6 billion, reflecting in part the company's acquisition of Columbia Management in April 2010. CEO Jim Cracchiolo said that Ameriprise saw its "operating return on equity reach an all-time high of 14.5 percent."

After the second-quarter results were announced, John Nadel of Sterne Agee lowered his 2011 EPS estimate to $5.10 from $5.31 and his 2012 estimate from $6.38 to $6.15, while reiterating his neutral rating for Ameriprise.

The shares trade for seven times the consensus 2012 EPS estimate of $6.38 among analysts polled by FactSet, and 1.3 times tangible book value, according to SNL.

Out 10 analysts covering Ameriprise Financial, six rate the shares a buy, three have neutral ratings and one analyst recommends selling the shares.

3. MetLife

Shares of MetLife ( MET) of New York closed at $33.04 Friday, down 26% year-to-date.

Based on a mean 12-month price target of $50.53 among analysts polled by FactSet, the shares have 53% upside potential.

MetLife provides insurance, annuities, and employee benefit programs internationally. The company is also a bank holding company, with its MetLife Bank, NA subsidiary having $16.5 billion in total assets as of June 30, and a national mortgage lending business.

The company led all U.S. life insurers with a 10.4% market share in $7.7 billion in direct premiums written during the first half of 2011, according to SNL Financial.

MetLife reported second-quarter net income of $1.2 billion, or $1.13 a share, declining from $1.5 billion, or $1.84 a share, in the second quarter of 2010. The lower bottom-line number mainly resulted from a reduction in after-tax gains on derivatives to $189 million in the second quarter, from $782 million a year earlier.

MetLife reported second-quarter operating earnings of $1.3 billion, or $1.24 a share, increasing from $914 million, or $1.10 a share, a year earlier. Total operating revenues increased 33$ year-over-year to $16.9 billion, reflecting the company's acquisition of American Life Insurance Company and Delaware American Life Insurance Company (together, "Alico") in November 2010.

On Aug. 1, Bank of America Merrill Lynch analyst Edward Spehar reiterated his "Buy" rating on MetLife, with a price objective of $59, saying that the company's management "should adopt a more aggressive stance on share repurchase," while saying "the good news is capital management is likely in 4Q11," and that his "estimates through 2013 assume that almost half of earnings will be distributed to shareholders in a combination of dividends and share buybacks."

The shares trade for 5.6 times the consensus 2012 EPS estimate of $5.78 among analysts polled by FactSet, and 0.9 times tangible book value, according to SNL.

All 16 analysts covering MetLife rate the shares a buy.

2. American Equity Investment Life

Shares of American Equity Investment Life Holding Co. ( AEL) of Des Moines, Iowa, closed at $9.42 Friday, for a year-to-date decline of 25%.

Based on a mean 12-month price target of $15.40 among analysts polled by FactSet, the shares have 63% upside potential.

American Equity Investment Life has the smallest balance sheet among the life insurers covered here, with $28.6 billion in total assets as of June 30. The company specializes in fixed annuity products.

Second-quarter net income was $18.3 million, or 31 cents a share, compared to a net loss of $1.5 million, or three cents a share, in the second quarter of 2010. Results for the most recent quarter included a $22 write-down in the fair value of derivative investments. A year earlier, the company recorded a much larger derivative write-down of $208.7 million.

On an operating basis, American Equity Investment Life earned $29 million, or 45 cents during the second quarter, compared to $29.2 million, or 48 cents a share, a year earlier.

Jeffries analyst Daniel Furtado initiated his firm's coverage of American Equity Investment Life Holding Co. on August 1 with a "Buy" rating and a $12.50 price target, saying he expects "the 10-year Treasury yield to modestly increase in 2012, driving valuation higher," since "Investment spread is the primary driver of equity returns."

The shares trade for a low 4.6 times the consensus 2012 EPS estimate of $2.04 among analysts polled by FactSet, and just 0.5 times tangible book value, according to SNL.

With such low price multiples to forward earnings and tangible book value, it's no surprise that all five analysts covering American Equity Investment Life Holding Co. have by ratings on the shares.

1. Lincoln National Corp.

Shares of Lincoln National Corp. ( LNC) of Radnor, Pa., closed at $19.20 Friday, declining 31% year-to-date.

Based on a mean 12-month price target of $31.40 among analysts polled by FactSet, the shares have 64% upside potential.

According to SNL Financial, Lincoln National ranked fifth among U.S. life insurers with a 4% market

on $3 billion in direct premiums written during the first half of 2011.

The company had $202 billion in total assets as of June 30. Second-quarter net income available to common stockholders was $324 million, or $1.01 a share, increasing from $104 million, or 33 cents a share, in the second quarter of 2010, when Lincoln National repaid $950 in federal bailout funds received through the Troubled Assets Relief Program, or TARP, and reported $149 million in preferred stock dividends and discount accretion.

Second-quarter income from operations was $349 million, or $1.09 a share, increasing from $290 million, or 86 cents a share, as revenue improved across all business lines.

The company repurchased 5.1 million shares during the second quarter, for $150 million.

Following the second-quarter earnings announcement, Bank of America Merrill Lynch analyst Edward Spehar reiterated his "Buy" rating for Lincoln National, with a $41 price objective, saying the company had "no material balance sheet risk based on current conditions," and that he saw "Lincoln returning 35% of earnings to shareholders in 2011, primarily through share buyback, up from an insignificant distribution (2%) in 2010."

The shares trade for 4.8 times the consensus 2012 EPS estimate of $4.16 among analysts polled by FactSet, and 0.6 times tangible book value, according to SNL.

Out 16 analysts covering Lincoln National, 10 rate the shares a buy, while the remaining six analysts have neutral ratings.

>>To see these stocks in action, visit the 5 Life Insurance Stocks With Up to 64% Upside portfolio on Stockpickr.

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

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

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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.

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