Seeing Buys Among the Beaten-Down Insurers

When an industry starts to experience this type of carnage and the stocks are all down 50% or more for the year, I cannot resist doing some shopping for the quality stocks that could lead a rebound. Eventually the credit market carnage will abate, and the turmoil will likely remove some of the excess underwriting capacity from the P&C market as well.

The life industry may struggle a little harder, but investors' equity losses could lead to increased interest in fixed-return products offered by the industry. I am almost always early on these shopping expeditions, so you may want to sell puts to enter positions or just wait out the inevitable short-term drawdown I usually experience.

On the property and casualty side, my favorite stock is still Cincinnati Financial (CINF - commentary - Cramer's Take). The midwestern insurance company is still turning in a strong performance in a very weak market. In its most recent quarter, the company had operating profits of 45 cents a share compared with 66 cents a year ago. In addition, Cincinnati Financial booked gains of over $1 a share from repositioning its portfolio. The company sold virtually all of its financial-services stocks, booking a gain of $472 million in doing so.

Operating profits suffered in the quarter because of catastrophic losses, primarily from Hurricane Ike. In a period when many insurers took massive write-downs, the company reported that book value dropped just one half of one percent to $28.87. The company has strong management and an extensive agency of networks and should do very well when the operating and investment environment improves. As a bonus, the stock pays a healthy dividend, yielding 6.5%. In its recent conference call, the company stated that it had ample capital to maintain that yield.

I am somewhat less enthusiastic about the life insurance companies right now, but I do believe MetLife (MET - commentary - Cramer's Take) is worth a look at these levels. Its latest earnings report showed a drop in earnings of 40%, but parts of the business were very strong. Institutional business revenue was up 30% in the quarter, and international business grew by 7%. A 17% drop in variable annuity sales hurt the individual business.

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At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.