Seeing Buys Among the Beaten-Down Insurers

The wheels have seemingly come off the bus for insurance stocks. Shares of Hartford Financial Group (HIG - commentary - Cramer's Take) dropped 50% on Thursday as the company reported the worst quarter in its 198-year history. The main driver of losses was the investment portfolio. The company had $2.2 billion of investment losses in the three months.

Industry leader Prudential (PRU - commentary - Cramer's Take) reported its fifth consecutive quarterly loss on the same day. On Friday, Cigna (CI - commentary - Cramer's Take) shares dropped sharply in response to poor earnings.

The carnage is not limited to just the life and health insurance companies. Property and casualty leader Allstate (ALL - commentary - Cramer's Take) has seen its stock drop over 50% this year. Fitch lowered the company's credit rating last week as a result of continuing losses in the investment portfolio.

The reasons for the industry decline are fairly obvious. Net premiums for property and casualty have been basically flat, and the underwriting lessons of the last decade have stayed with most companies, so underwriting losses are not the trouble. A few companies have been hit by gulf storms and midwestern flooding this year, but for the most part the basic business has been profitable.

It is the investment portfolios that are killing the property and casualty companies. They were heavily invested in the fixed-income market, particularly the mortgage-backed securities markets. They have lost staggering amounts of money as a result of the housing crisis. Those with an equity bent to their portfolio have not done well either, as the stock market is enduring the worst bear market since the 1970s.

It is worse for the life insurance companies. They have the same investment portfolios as their property ad casualty brethren and also have to face sales declines in some of their most popular product lines. Variable annuity sales in particular are going to be hard hit by the weakness in the stock market. Many of the life companies have already or will need to raise additional capital to strengthen their balance sheets. There has even been talk of allowing certain insurance companies to access the Fed balance sheet through the TARP program.

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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.