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.

"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.

Ameriprise Financial (AMP) will report earnings on Feb. 4. Analysts expect earnings of $360 million, or $1.81 a share, compared to $1.91 the previous quarter and $1.71 a year earlier. "We expect AMP will continue to return capital at a healthy clip, as we estimate a buyback amount of $375mm in the quarter in addition to a $100mm dividend, for $475mm total capital return," Gallagher wrote. He has a neutral rating on Ameriprise and estimates the company will earn $7.93 a share during 2014, with EPS rising to $8.85 in 2015. Ameriprise Financial's shares closed at $106.54 Tuesday and traded for 11.7 times the consensus 2015 EPS estimate of $9.10.

Lincoln National (LNC) will announce its fourth-quarter results on Feb. 5, with a consensus earnings estimate of $346 million, or $1.28 a share, compared to $1.34 in the third quarter and $1.10 during the fourth quarter of 2014. Kinar rates Lincoln National a "buy," with a $56 price target, and expects 17% year-over-year earnings growth for the company from rising stock prices and yields on U.S. Treasury bonds. Lincoln National's shares closed at $47.82 Tuesday and traded for 8.2 times the consensus 2015 EPS estimate of $5.84.

Prudential Financial (PRU) is scheduled to report its earnings on Feb. 5, with analysts expecting earnings of $1.029 billion, or $2.33 a share, compared to $2.94 in the third quarter (when the company's pretax earnings saw a net benefit of $398 million from one-time items), and $1.69 during the fourth quarter of 2012. "We estimate PRU will have a solid 4Q13 as a result of higher equity markets in the US and Japan, earning $2.33 of EPS in the quarter," Gallagher wrote. He rates Prudential "outperform," with a $95 price target, and estimates Prudential will earn $9.26 a share in 2014, with EPS growing to $10.04 in 2015. Prudential's shares closed at $84.46 Tuesday and traded for 8.5 times the consensus 2015 EPS estimate of $9.99.

MetLife (MET) will report on Feb. 12. Analysts expect fourth-quarter earnings of $1.478 billion, or $1.30 a share, compared to $1.34 the previous quarter and $1.25 a year earlier. Kinar rates the stock a "buy," with a $59 price target. "Our operating EPS estimate is essentially flat YoY and a two pennies below Consensus, as 5% earnings growth is largely offset by an increase in share count, reflecting the conversion of $1 bil in equity units in 2013." MetLife has been waiting to announce share buybacks, as CEO Steven Kandarian has repeated said he is looking for "clarity" from the Federal Reserve on how the regulator will treat non-bank systemically important financial institution (GSIFI). MetLife's shares closed at $49.63 Tuesday and traded for 8.1 times the consensus 2015 EPS estimate of $6.12.

American International Group (AIG) will announce its fourth-quarter results on Feb. 13. Analysts on average expect earnings of $1.402 billion, or 95 cents a share, compared to 96 cents in the third quarter and 20 cents a share during the fourth quarter of 20120, when the company recorded a $4.4 billion write-down on the planned sale of its International Lease Finance Corp. (ILFC) subsidiary. Please see AIG Is 'Top Long Pick' Among P&C Insurers for a discussion of the company's property and casualty insurance business.

"We continue to expect AIG to have adverse development of $300mm to $400mm (1-1.5 points on the [life insurance] Combined Ratio) per year going forward, but think an improvement of this trend represents a catalyst as the benefits of more conservatively reserving on recent accident years works its way through," Gallagher wrote. The combined ratio is an insurer's claims and expenses divided by its earned premiums. A ratio below 100% indicates an underwriting profit.

Gallagher rates AIG "outperform," with a price target of $59, estimating the company will earn $4.67 a share during 2014. AIG's shares closed at $48.46 Tuesday and traded for 9.7 times the consensus 2015 EPS estimate of $5.02.

The following chart shows the outperformance the Dow Jones U.S. Life Insurers Index against the S&P 500 since the end of 2011:

 
^DJUSIL Chart> data by YCharts

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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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