American Equity's Dept. Of Labor Concerns 'Seem Overblown,' JPMorgan Upgrades

American Equity Investment Life Holding

has been the worst performing stock in the life sector losing 34 percent compared to the group's 1 percent loss on fears of credit losses. On top of it, the Department of Labor fiduciary rule has hurt the stock. However, JPMorgan analysts, Pablo Singzon and Jimmy Bhullar, believe the concerns appear to be overblown in respect of American Equity. Therefore, the two analysts preferred to upgrade the stock to an Overweight rating from Neutral. However, the price target has been slashed to $20 from $23.00 due to lower EPS estimations. According to the two analysts, "AEL's current stock price undervalues its in-force book and ascribes no value to new sales. Our price target of $20 implies upside of 25%." They added, "We believe that the value of AEL's in-force book can range from $16 to $21. We assume a base case of $18. In our view, additional conservatism in our valuation is not merited given AEL's lack of tail risk and its ability to re-price liabilities annually. While AEL's products have a living benefit rider, we feel it is less onerous than its VA equivalent." The brokerage forecasted American Equity to generate substantially lower sales if the implementation of the DOL rule is not delayed or halted by lawsuits filed by several industry groups. However, the two analysts' expect new business momentum in the non-agency channel and a shift to traditional fixed annuities from index among independent agents to partially offset the decline, resulting in sales, i.e. net of reinsurance of roughly $3 billion in 2017 and 2018, down from $6.6 billion in 2016. Singzon and Bhullar said, "We estimate that this level of sales is equivalent to about $2 per share of new business value. Capital deployment a potential positive catalyst… We are trimming EPS estimates due to lower sales." On Friday, the stock traded 3.29 percent down.