Solid Road Ahead for 3 Life Insurers

After a slow ride, things are gradually improving for life insurers. This year life insurers have shown good performance, led by evolving external forces and improved internal operating fundamentals.

Among the external forces – benign credit environment, a constructive stock market and improved employment picture, have cushioned the industry. While a benign credit environment lowers balance sheet risk and higher equity markets have led to an increase in assets under management, a decline in unemployment has boosted the demand for life insurance products.

Internal factors such as improving business mix, diversifying across new geographies expanding distribution network, reducing exposure to volatile involuntary forces, and disciplined capital management have helped the life insurers.

Some of the themes that will affect the players in this industry in 2014 are:

Fed QE Taper a Boon

The Fed quantative easing program which is expected to come to an end in early 2014 and lead to a rise in interest rates, will be a tailwind for life insurers. Since life insurers rely heavily on investment income from their conservative investment portfolios, an eventual increase in interest rates will boost their investment income, which has been suffering over the past many years, thanks to low interest rates.

Economic Stability and Demographics to Spur Demand

The gradually improving economy will spur life insurance purchases. As the financial protection and savings needs of customers increase, retirement and life insurance purchases, which were put on hold during the financial downturn, will be urgently needed. Along with the improving economy, the life insurers are poised to benefit from the growing demand for guaranteed retirement savings products from baby boomers.

Rising Equity Markets

Equity markets heavily influence the value of an insurer’s retirement plan assets under administration, which are a significant component from which administrative fee revenues are derived. An improved equity market this year have resulted in increases in the value of the assets under administration in the retirement plans, which has enhanced insurer’s ability to earn administrative fee revenues derived from the value of those assets. Further improvement equity market will enhance the profitability of the VA portfolio and earnings from Asset Under Management.

Strong Returns This Year

Investors in life insurers have had a good year. The Dow Jones U.S. Life Insurance Index has risen 57% this year, compared to a 24% increase for the S&P 500. Among the broader finance sector life insurers have also left behind bank as KBW Bank Index has risen 30%.

Three Life Insurers Looking Bright

While many life insurers in the Zacks coverage look attractive, we have picked up three companies based on their valuation and earnings performance. The industry Price/Book ratio is 1.54, P/E ratio 9.07x and ROE is 8%.

StanCorp Financial Group Inc. (SFG) Zacks Rank #1 (Strong Buy)

Price/Book: 1.36

ROE: 9.9%

P/E: 12.9

StanCorp Financial has delivered a positive earnings surprise of 28.3% over the past four quarters and the stock has jumped 73% year till date. The Zacks Consensus Estimates long term EPS growth of 13.1%.

Prudential Financial Inc. (PRU), Zacks Rank: 2 (Buy)

Price/Book: 1.16

ROE: 11.5%

P/E: 9.07

Prudential hold place among top insurers in U.S. The company has posted strong earnings for all the three quarters of 2013, delivering a positive earnings surprise of 26%. Shares have also surged 60% year to date. The Zacks Consensus Estimates long-term EPS growth of 14.2% The company’s high-return Japanese business, a broad asset management business, and a top market position in the nascent large-case pension risk transfer business will drive long term growth.

American Equity Investment Life Holding Co. (AEL) Zacks Rank: 2 (Buy)

Price/Book: 1.14

ROE: 9.8%

P/E: 11.1

American Equity Investment has delivered a positive earnings surprise of 24.8% over the past four quarters and the stock is up a whopping 95% year till date. The Zacks Consensus Estimates long term EPS growth of 10.0%.

To Sum Up

A mix of all the factors – improving industry trends, solid earnings performance, attractice valuation – makes these three life insurers ideal to be included in an investment portfolio.