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5 Buy-Rated Insurance Stocks for Long-Term Investors

NEW YORK ( TheStreet) -- TheStreet Ratings has identified the five buy-rated insurance stocks with the largest market capitalization, and it is a very solid group of companies.

Insurance stocks have risen with the market this year, although the group has been outperformed by the banks, which tend to get much more media coverage. Of course the banks have gone from bust to boom, while the boring insurance companies tended to just keep earning money right through the credit crisis.

Here's a telling quote from Berkshire Hathaway (BRK.B) CEO Warren Buffett, from his annual letter to shareholders late last month:

"Our insurance operations continued their delivery of costless capital that funds a myriad of other opportunities. This business produces "float" - money that doesn't belong to us, but that we get to invest for Berkshire's benefit. And if we pay out less in losses and expenses than we receive in premiums, we additionally earn an underwriting profit, meaning the float costs us less than nothing. Though we are sure to have underwriting losses from time to time, we've now had nine consecutive years of underwriting profits, totaling about $17 billion. Over the same nine years our float increased from $41 billion to its current record of $70 billion. Insurance has been good to us."

Indeed it has, over the very long term.

Three of the five names trade below tangible book value, according to Worldscope data supplied by Thomson Reuters, while only one -- Berkshire Hathaway -- approaches a valuation of two times tangible book value.

Only one -- again, Berkshire Hathaway -- trades above 10 times its consensus 2012 earnings estimate, among analysts polled by Thomson Reuters.

Three out of the five saw lower returns on equity (ROE) in 2011 than in 2010, with the flat yield curve in the prolonged low-rate environment taking its toll. Real Money contributor Roger Arnold -- the chief economist for ALM Advisors -- said on Wednesday that "declining U.S. sovereign bond yields and a shrinking spread between the fed funds rate and the 10-year Treasury yield indicates that profit margins of insurance companies' float returns are under pressure."

Arnold also pointed out that with the baby boomer population aging and "beyond the peak demographic age for purchasing life and health insurance," demand for these insurance products is declining, and insurers are being forced to compete by lowering prices.

According to Arnold, the insurance industry "is caught between the proverbial rock and a hard place, as both premiums and returns on premiums are under pressure and look to be for many years. "

Of course, rates will not stay down forever, and long-term investors could be looking at bargains right here, after all, at the end of 2007, before the credit crisis, these names all traded at much higher multiples to tangible book value.

Gavin Magor -- a senior financial analyst with Weiss Ratings -- says that Arnold is "absolutely right on interest rates, because property and casualty insurers make their money on investments, adding that "traditionally, P&C companies look to break even on the premiums and take the cash from the premiums to purchase investment securities. They are really struggling, especially when they are not breaking even on the underwriting business, because they got whacked from claims last year."

"Life insurers on the other hand, are in it for the long term, typically buying bonds and holding them until maturity," says Magor, who adds that this group "is not going to be ass affected by the low rates as P&C."

Regarding the stock performance of the large insurers, Magor says the group "tends to lag behind the banks, even though the risk is actually lower than the banks."

Magor's bottom-line for investors is "an all-lines P&C insurer is not a good bet, but Life is worth a look if undervalued and Health is a gamble that could pay off big time if the company is large enough and the U.S. Supreme Court rules in the administration's favor" when President Obama's health care mandate is challenged.

TheStreet Ratings places its emphasis on long-term total returns, as well as revenue trends and capital strength and dividends, while also considering short-term performance, financial stability and volatility.

Here are the five buy-rated insurance companies with the largest market capitalization, ordered by ascending upside, based on consensus price targets:
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