I've been bullish on Aflac (NYSE: AFL) since last summer, when the stock had been beaten down in response to the European debt crisis. Since that time shares of Aflac have rallied more than 35%, though I believe the stock is still trading at a significant discount to fair value. 

Aflac isn't the only cheap insurance name out there; I'll also dig a bit into the investment cases for MetLife (NYSE: MET) and AIG (NYSE: AIG)

Earnings beat
Last July, Aflac reported Q2 earnings that beat analyst estimates and reflected the benefits of the company's new investment strategy. 

Operating income, which strips out the volatile investment results, came in at $1.62 per share compared to estimates calling for $1.51. Adding back results from the investment portfolio, Aflac earned $1.90 per share, 84% higher than the $1.03 the company earned last year during Q2, when it took a $0.48 per charge due to impairments on some European debt holdings. 

Reinvigorated investment portfolio
The impressive results from the investment portfolio are particularly important considering management's decision to shakeup the allocation strategy during 2012. After hiring Goldman Sachs to review its portfolio, the company opted to increase its allocation to higher yielding US corporate bonds and further reduce its exposure to risky European debt.

In Q2 2012, the company's new money yields on its Japanese portfolio were only about 2%, though the recent rise in Japanese interest rates pushed new money yields in Aflac's Japanese investment portfolio to over 3% during Q2 2013. 

During the first half of 2013, Aflac allocated the majority of its new investment funds to the investment program, where new money yields were 3.7%. The entire US investment portfolio earned an average of 6.11% during Q2. By allocating more of its cash flows to higher yielding US corporates, Aflac is generating improved returns while maintaining a very low-risk profile.

Aflac generates about $15 billion a year of investable free cash flow, so the ability to produce reasonable yields on investments could have an enormous impact on consolidated earnings. I believe the market is just beginning to become aware of the rapidly growing cash pile in the investment portfolio and the beneficial impact of rising interest rates in the US. 

Cheap Valuation
The 5-year average P/E multiple for shares of Aflac is 11, though even at that multiple, the shares would be trading at nearly a 50% discount to the broader market.

During the Q2 conference call, management announced full-year 2013 operating income guidance of $6.10 at the midpoint. Currently trading at $62 per share, investors are paying about ten times earnings for the insurance business while giving the investment portfolio a value of essentially zero

The total value of long-term investments at Aflac is over $105 billion. As rates in the US normalize, the underlying value of the investment portfolio will increase substantially. If Aflac can earn 4-5% annually on its entire portfolio, that equates to about $500 million in additional net income, or over $1 per share. 

Assuming the company meets midpoint guidance for $6.10 this year, and adding roughly $1 in normalized investment portfolio earnings, Aflac is set to generate more than $7 in underlying earnings. If the stock were to trade at the 5-year average P/E of 11, the shares would be valued at $77, nearly 25% upside from current prices. 

Considering the cheap relative valuation, the company's $600 million share buyback plan and the 2.2% dividend, the stock looks like a bargain even after its recent run.  

Another insurer
MetLife (NYSE: MET) trades at only 8.6 times estimated 2014 EPS and 90% of stated book value, and the life insurer's recent Q2 EPS reflected an 11% jump in operating income. The company has a massive $374 billion invested in fixed income securities, making it a definite beneficiary of the recent rise in longer-term interest rates. MetLife's Asian operations were particularly strong in Q2, as operating income was up 27% on a constant currency basis. 

Over the past five years, MetLife has traded at an average of roughly 16 times trailing earnings. With current estimates calling for $5.60 in 2013 EPS, the potential upside if the market starts to assign a higher multiple speaks for itself. I like MetLife up to 12-13 times this year's earnings, which implies a share price of $70 at the midpoint, or 40% higher than current prices.

Back from the dead...
Despite gaining more than 30% year-to-date, AIG still appears to be trading at a modest discount to fair value. AIG trades at 11.5 times next year's earnings and at only 70% of book value, while most of its competitors trade at or above book value.

AIG recently surprised investors with a plan to buyback $1 billion worth of its stock, in addition to a modest dividend that equates to .80% at current prices. Analyst estimates are calling for $4.17 in EPS this year, which would be 6.1% higher than 2012's earnings. Stock buybacks and improvement in the underlying insurance businesses will continue to drive shares of AIG higher, though the upside for the stock appears to be weaker relative to shares of Aflac or MetLife.

Given the market's failure to assign an appropriate value to the ultimate earnings power of Aflac's investment portfolio, I believe Aflac offers the best chances for double digit returns over the next year or so. Additionally, the $600 million stock buyback and steadily growing 2.2% dividend are substantial sweeteners.

MetLife's deep discount to its historical P/E, growing international business, and rate sensitive portfolio are three great reasons to be loading up on shares of the insurer.

While I don't see quite as much upside in shares of AIG, I'm excited about the prospect for increased stock buybacks and dividend payouts as the balance sheet continues to be repaired.

Aflac is my favorite in play in the life/supplementary insurance business, but you can't go wrong with any of these three names, especially as interest rates begin to normalize.