It has been a while since there has been much great to say about the banking and financial sector leaders. That said, the woes of the big banks might not pertain to some of the key non-bank financials. According to BofA Merrill Lynch, life insurance stocks are now undervalued entering 2019 and are already discounting a notable deterioration in credit conditions, falling stocks prices and interest rates. And for contrarians, the analyst team believes that overall investor sentiment is negative for the group even though earnings per share estimates have not come down materially.

Merrill Lynch does admit that risk remains in its forecasts, but valuations look quite reasonable even if earnings per share (EPS) estimates came down by 20%. The firm also noted that the market has overly punished several companies which are well capitalized, have effective risk management, and are deploying capital through buybacks and accretive acquisitions. Another boost here is that the firm sees credit concerns being overdone even if larger credit losses would limit the growth in book value.

The team at Merrill Lynch made several industry sector changes to targets and ratings on Wednesday, but the two notable calls were in shares of Lincoln National Corporation (NYSE: LNC) and MetLife, Inc. (NYSE: MET).

The call in Lincoln National stands out because Merrill Lynch named the carrier as its top pick for the year. The firm has a Buy rating and a $74 price objective, but that is $1 lower than the pre-call price objective. Its shares have been down more than 30% over the last year despite earnings that were close to initial expectations. That is worse than the drop in the S&P 500 at -6% and worse than 21% drop in the S&P Life and Health Insurance Index. The Merrill Lynch report said:

2019 estimates have been generally stable for most of the year, despite the weak stock performance. We see the potential for multiple expansion from low levels due to a mix shift away from businesses that are sensitive to capital markets, efficiency gains over the next two years, and shareholder friendly de-risking actions.

MetLife was raised to Buy from Neutral and Merrill Lynch raised its price objective to $53 from $50 in its call. The new price target is based upon valuations of 8.5-times the firm’s 2020 EPS estimate and on a sum-of-the-parts approach. The firm’s report said:

We believe that quality concerns will continue to diminish and the market has not fully appreciated the notable change in business mix following the Brighthouse spin. Cost savings should aid EPS growth as should ongoing buybacks.

Shares of Lincoln National were last seen up 3% at $57.55 late on Wednesday, versus a 52-week range of $48.07 to $86.68. That $74 price objective is higher than the Thomson Reuters consensus estimate of $71.60, and Lincoln has a dividend yield of about 2.7%.

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MetLife’s stock was trading up about 2.4% at $45.10 at $45.12 late on Wednesday. It has a 52-week range of $37.76 to $55.21, and the higher Merrill Lynch price objective of $53 is against a consensus analyst target price of $50.81. MetLife’s dividend yield is closer to 3.8%.

Additional target price changes were made in the call, but the only other one which saw a hike was Aflac Inc. (NYSE: AFL). Merrill Lynch raised its price objective up to $51 from $47 to reflect its defensive business and continued margin strength. Aflac shares were last seen up 1.1% at $46.90. The insurer has a consensus analyst target price of $46.86 and a 52-week range of $41.41 to $48.19.

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