Prudential (NYSE:PRU), American Equity (NYSE:AEL) FBR's Top 2011 Insurance Picks

When compared with financial stocks in 2010, life insurance stocks had a good year, and even with some headwinds in 2011, FBR Capital sees room for insurers to continue to grow, with their top picks being Prudential (NYSE:PRU) and American Equity (NYSE:AEL).

FBR said, "2010 was a good year for life insurance stocks compared to their financial counterparts as their relatively limited regulatory risk and transparent invested-asset exposure gave investors more reasons to be constructive on the space. However, these stocks, on average, remain at a discount to book value as fears from low interest rates and macroeconomic headwinds continued to weigh on top- and bottom-line growth. These are real concerns that investors should take into account. However, we believe there is still room for life insurers’ valuations to grow, given a clearer path to capital return. Our operating outlook for life insurers assumes minimal constraints related to return of excess capital via acquisitions, share buybacks, and increased dividends. We tend to be overweight more mortality and annuity exposed names that have relatively predictable results and can catch some tailwind from the aging population.

"Prudential (Outperform) is our top pick as the company screens as being one of the best capitalized with $2.5 billion of excess capital through YE11. While capital deployment may be left to a minimum in 2011 due to the integration of Star-Edison and managing rating agency expectations for targeted capital structures, we believe the excess capital story for PRU will build through 2011 and ROE expectations for 2012 will exceed 12%.

"American Equity (Outperform) is our top pick for the small-cap life insurers, as it remains one of the only true growth stories in the space (outside of AFL) yet it is still trading at a discount to our hypothetical run-off valuation of $13. Our $16 price target is 1.0x YE11 BV ex-AOCI of $16.20 and a discount to our regression analysis, which indicates a $17 price target, as we currently forecast 13%-plus ROEs on a forward basis."

Prudential closed Friday at $58.09, up $0.73, or 1.27 percent. American Equity closed at $12.76, up $0.13, or 1.03 percent.