Insurance Stocks Suffer Rising 'Short' Interest

NEW YORK (TheStreet) -- Insurance stocks more than tripled from the market low in March through the end of last year, four times the pace of the S&P 500 Index. This year, they're struggling. Here are the five insurance stocks with the biggest gains in short interest in the past seven days, suggesting investors increasingly are becoming more bearish on the companies.

5. MBIA ( MBI): New York-based bond insurer.

Seven day change in short interest ratio: 2.76

Financial Fundamentals: The company's third-quarter negative return on average equity of 14.1% was better than the negative 16.9% of rival insurer Assured Guaranty ( AGO). Policy reserves of 2.3 times equity compares with Assured's 3.2. Negative 40% net income as a percentage of revenue beats the peer average of negative 93%.

Market Indicators: Price-to-book value of 40% compares with insurers' average of 92%. The stock has risen 33% this year, a rapid increase that may have led to increased short interest. Still, the stock is 18% less than analysts' consensus price target.

News: Earnings will be released March 1. MBIA has a $500 million tax-recovery benefit, unaffected by ownership changes in 2009.

4. Ambac Financial Group ( ABK): New York-based bond insurer.

Seven day change in short interest ratio: 2.8

Financial Fundamentals: The company's third-quarter negative equity of $2.8 billion reflected a $900 million improvement from the end of 2008. Operating losses continue, at a reduced rate of $1 billion versus $3.4 billion in the second quarter. Debt-to-total-capital of 415% compares with the peer average of 52.9%.

Market Indicators: The stock is trading at 40% of normal levels. A beta of 2.2 highlights the volatile nature of this speculative stock. (One is a correlation with the broader market.) Analysts' consensus price target is 35% higher.

News: Earnings will be released in early March. Reuters reported that Blackstone ( BX) is leading a restructuring. Ambac announced protective action for $4.5 billion in tax benefits on losses taken against predatory purchasers. A wait-and-see approach on the results is the safest bet. Don't bet blindly.

3. CNA Financial ( CNA): Chicago-based property and casualty insurance subsidiary of Loews ( L).

Seven day change in short interest ratio: 3.63

Financial Fundamentals: Third-quarter return on average equity of minus 1.3% compares poorly to the peer average of 9.2%. Policy reserves were 3.4 times equity, higher than the 2.2 of rivals. Debt-to-capital of 15.5% was close to the 15% average.

Market Indicators: Book-value-per-share rose 29% in the third quarter, but the price has dropped 36% in 12 months, compared with insurers' average rise of 46%. Trading at 66% of book price, the stock appears cheap and is 10% below analyst' consensus price target.

News: Regulatory accounting changes benefited Travelers ( TRV), the second-largest company in residential mortgage-backed securities, by about $600 million. CNA is No. 1, suggesting it may reap a significant benefit. With a short interest ratio of 18.2, CNA's stock could see a massive leap if fourth-quarter results are reasonable. Earnings will be released Monday.

2. NYMAGIC ( NYM): New York-based property and casualty insurer.

Seven day change in short interest ratio: 4.82

Financial Fundamentals: Third-quarter return on average equity was 6.9, in line with that of peers. Policy reserves of 3.2 times equity are above the 2.2 group average. Net income at 6.99% of revenue was better than the 5.92% average.

Market Indicators: A price-to-earnings ratio of 2.3 is significantly below the 9.1 average of insurers. The stock price is at 65% of book value, less than the 92% average of rivals. The price is also 37% below analysts' consensus price target.

News: At an investors conference in January, Chief Executive Officer A. George Kallop was pushed to move 24% of the $671 million investment portfolio away from hedge funds. Citing static bond investing as not being smart, Kallop declined -- and so did the stock. The company's earnings release date hasn't been scheduled.

1. FBL Financial Group ( FFG): Iowa-based life and annuities insurance group.

Seven day change in short interest ratio: 6.74

Financial Fundamentals: Third-quarter policy income fell 23% from the previous quarter. Return on average equity of 4.28% compares with the peer average of 0.91%. Debt-to-total-capital of 30.58% is seven times that of rivals.

Market Indicators: The price-to-earnings ratio of 8.5 is slightly below the 9.1 insurance average. Price-to-book-value of 65.4% is well below the 92% average. The stock is trading at a 5.7% premium to analysts' consensus price target of $17.

News: It's been a tough start for newly confirmed Chief Executive Officer James Hohmann. Earnings will be released Feb. 11. The company has one of the highest short ratios of all insurers at 27.43.

Gavin Magor is the senior analyst responsible for assigning financial-strength ratings to insurance companies. He conducts industry analysis and supports consumer products. Magor has more than 22 years of international experience in operations and credit-risk management, commercial lending and analysis. His experience includes international assignments in Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.

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