Thanks to the recent credit crisis, much of which was its own doing, the financial services industry has experienced one of the most volatile operating environments in its history. Fortunately, a heavy dose of government stimulus and calmer capital markets have brought the majority of industry leaders from the brink of disaster to much more normal business conditions.

In the insurance space, American International Group (NYSE: AIG) was a significant contributor to fanning systemic risk flames throughout the entire financial system. The culprit was its Financial Products division and its disastrous foray into credit default swaps. Both of these are primary reasons AIG remains on the hook for repaying well in excess of $100 billion to the U.S. Federal Reserve and Treasury Department. This need to pay back Uncle Sam has provided a small handful of savvy competitors the opportunity to acquire some of AIG’s most appealing divisions at what could turn out to be very fortuitous prices.

In a transaction announced on March 8th, MetLife (NYSE: MET) put itself in a position to be a prime beneficiary of AIG’s unwinding when it announced it would acquire the American Life Insurance Company division, also known as ALICO, in a transaction worth $15.5 billion. The deal is expected to close by the end of the year and is a potential game changer for MetLife and its shareholders.

Prior to the deal, MetLife was in a recovery mode of its own. The company posted $7.8 billion in largely unrealized investment losses in 2009 that should reverse in subsequent quarters as liquidity continues returning to equity and fixed income markets. These losses led to negative net income of $2.4 billion, or -$2.94 per diluted share. However, operating earnings, which exclude investment losses, was a positive $2.4 billion, or $2.94 a share.

These bottom line figures are a far cry from the more than $5.00 a share MetLife reported in earnings in 2007, but help illuminate earnings potential during the next couple of years as market conditions recover. Additionally, management expects ALICO to add between $0.45 and $0.50 in earnings by 2011, or once the transaction closes. This should put earnings comfortably back above pre-credit crisis levels of several years ago.

Growth potential will be vastly improved with ALICO. Currently, MetLife operates primarily in the United States and Mexico. The company is the largest life insurer in these markets, but it is not growing very fast. ALICO adds exposure to many emerging markets in Central and Eastern Europe, developing regions in Latin America and even Russia. Perhaps most importantly, the deal greatly increases MetLife’s presence in Japan, the second largest life insurance market. And although this market is very mature, it adds a potential cash cow with which to grow business in the 50 countries ALICO operates. MetLife will instantly become a top-five insurance provider in many global markets.

MetLife will acquire ALICO at about 1.2 times book value — a fair value for ALICO and could prove to be a steal, should it boost overall premium and profit growth. Given its size and conservative reputation, shares of MetLife have historically traded in excess of book value and reached a peak of nearly twice book value in 2008 just before credit problems gained steam.

A general rule of thumb is to buy insurance stocks below book value and look to sell at two times book value or greater. Overall, this places MetLife at approximately fair value, though there is considerable upside once integration risks subside, unrealized losses in its investment portfolios reverse course and consistent earnings growth returns.

Over the long haul, the addition of ALICO should greatly enhance MetLife’s ability to grow operating earnings. Added geographic breadth also reduces over-reliance on one market, which greatly hurt the company during the credit debacle. That will change come 2011, making MetLife a preeminent global life insurer and the stock should be kept high on your watch list. Overall, it’s not unreasonable to see MetLife eventually trading as high as 1.5 times book, representing an upside of about +30% from current levels, with further upside potential as ALICO is added into the corporate fold.