Understanding the Financial Sector: Insurance Companies

In addition to Berkshire and AIG, other stocks worth researching in this category are Allianz AZ, Travelers TRV, Allstate ALL, Hartford HIG, Loews LTR, ACE ACE, Chubb CB and Progressive PGR.

As a reminder, research involves reading the company's financial statements and reports, listening to earnings conference calls and keeping current on company news.

Surety, Title and Mortgage: With the risks associated with mortgage-backed securities and the housing bust, this is the dreg of the insurance industry right now.

If you been paying attention to the insurance business at all, the just the mention of MBIA MBI, MGIC MTG or Ambac ABK will probably give you shivers down your spine.

These insurers are referred to as the "monoline" insurers. Had they remained in the monoline business of insuring tax-exempt bonds, then they would have remained strong and viable companies. However, they morphed into "duoline" companies and began to insure mortgage-backed securities, in addition to their conventional business of insuring municipal securities.

As a result, these insurers are now taking huge write-downs and are capital constrained.

Then there are the PMI (private mortgage insurance) companies which are feeling the pinch from mortgage delinquencies. These include Radian Group RDN, PMI Group PMI and Triad Guaranty TGIC.

Some other companies in this group which may not have the same issues and you may want to investigate are Fidelity National FNF, First American FAF, Old Republic and ORI.

Again, because of the complex pricing of mortgage-backed securities, it's hard to know what is lurking underneath the surface of these companies' financial numbers, so be very careful.

Health Care: These insurers provide for reimbursement of medical and dental expenses for the insured as covered by a health care plan.

The challenge with this group is the never-ending battle between rising health care costs and reimbursement levels.

While there are some solid companies like UnitedHealth UNH, the entire group is struggling as earnings woes have swept through this business. These earnings warnings have been caused by increased costs -- much of which was attributed to a severe and late flu season

Other companies in this group include WellPoint WLP, Aetna AET, Cigna CI, Humana HUM, Coventry Health Care CVH and Health Net HNT.

Reinsurers: While Berkshire is also a large reinsurer, others in this category of insurance include Swiss Re, Munich Re and ACE ACE.

Brokers: These companies typically just sell insurance, but may also have investment management businesses or may keep some insurance risks on their books, so do your homework.

Some of the largest companies in this category are Marsh & McLennan MMC, Willis Group WSH, Brown & Brown BRO, Arthur J. Gallagher AJG and Aon AOC.

As you can see, the insurance business is quite complex. With this complexity comes significant investment research. However, from that hard work you may be able to find some attractive investment opportunities amid this broad industry group.

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