While all stocks were beaten down after the recession, it was financial institutions that took some of the biggest hits. Many investors have since returned to the banks they once held, but not all parts of the industry have recovered.
Life insurance companies were ravaged during the recession partly because people wanted nothing to do with financial companies, but there were other reasons too. Falling interest rates and negative market returns affected guaranteed life products and the reserves used to pay out policies were being stretched thin. These companies had a lot to deal with and many investors didn’t want to stick around for the problems to get worked out.
It appears, though, that the worst is behind this sector. It’s unlikely interest rates will fall further and many have cut poor performing businesses and have expanded more lucrative and less capital intensive divisions, such as wealth management.
There are lot of companies to choose from, both in Canada and the U.S., but one of the most promising ones is MetLife (NYSE: MET). According to Bloomberg, 70% of analysts think it’s a buy and many think the stock, which is trading at $42 can reach $50 or more over the next 12 months.
Cathy Seifert, an analyst at S&P Capital IQ, has a $46 target on MetLife. She thinks that an improving U.S. economy will boost insurance sales, while a better labour market will result in more group life revenues.
The company also has a robust international division—MetLife’s “growth engine,” says Seifert—which should generate double-digit earnings growth. Expect strong growth out of Latin America, says Jimmy Bhullar, an analyst with J.P. Morgan. In Q1 its Latin American division made $143 million in after-tax earnings, which was above analyst estimates. It’s Asian division also made $333 million, also exceeding estimates.
Steven Schwartz, an analyst at Raymond James, points out that the company has seen a turnaround in its investments, which took a big hit after the recession. At the beginning of May the company announced that it saw a net realized gain on investments of $161 million versus a loss of $145 million the year before.
As markets recover and its international business expands, MetLife’s earnings will almost certainly grow. In a May 6 note, Schwartz increased the company’s earnings per share targets for 2013 and 2014 to $5.45 and $5.55, respectively. Its 2012 EPS was $5.28. He also raised his price target on the company from $44 to $47. Bhuller also expects return on equity to expand. It’s ROE is currently at 11%, which is in line with other insurers, but that should increase to 12% in 2014, partly due to its growing Latin American business.
As markets recover it’s getting harder and harder to find value buys, which is why investors should consider this stock. Seifert points out that the stock is still cheap— “shares are undervalued on both a relative and historical basis,” she says—and with a 2.57% yield it’s also a decent income play. Its price has climbed about 30% year-to-date, but many experts think we’re still at the early stages of the insurance industry recovery.
For more investing insights, follow Bryan on Twitter @bborzyko.