Hungry Mr. Market Eyes Insurers

By Todd Shriber | February 25, 2009 AAA

Financial stocks have been the epicenter of the current market meltdown. Asset managers, banks, brokers and mutual fund companies all have shed significant chunks of their value, or disappeared altogether, in the wake of the bear market. Either overshadowed by the banks and brokerage firms, or conspicuous by their absence from the talk of endangered financials until recently, have been insurance companies. Insurance firms of all stripes have been hammered, much like their banking brethren. And there appears to be more pain in the offing for shares of these companies.

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Investors need look no further than Warren Buffett's Berkshire Hathaway (NYSE: BRK-A, BRK-B) as an example of how bad things are for insurance companies. Sure, Berkshire owns businesses ranging from candy makers and jewelers, to furniture makers and Dairy Queen, but it is classified as an insurance company Berkshire's list of business units reveals plenty of insurance companies, so it is no wonder that its shares closed at a five-year low of $75,600 on Monday February 24.

Investors should steer clear of other major insurance companies, too. They are:



Hartford Financial Services Group (NYSE:HIG)


MetLife (NYSE:MET)


Aflac (NYSE:AFL)


High On Hartford? Please Stop Now!
Hartford Financial Services, one of the largest U.S. property and casualty insurers, can't manage to get out of the way of a seemingly endless tide of bad news. For shareholders of this stock, this truly is a case of "if it's not one thing, it's another." Almost two years ago to the day, Hartford shares flirted with $100. Now they reside in the seedier side of town, languishing around $8 and even going as low as $5.75 on February 20. (To get better acquainted with this industry, read Intro To Insurance: Property And Casualty Insurance.)

A favorable report in Barron's earlier this month wasn't enough to jolt Hartford's shares, as they are off almost 50% since the article ran. It's a wonder the shares haven't performed worse this month, given that both Moody's and Standard and Poor's (S&P) downgraded Hartford's credit ratings. Then, to make matters worse, it lost access to its federal commercial paper lending facility, which has forced the company to repay the $375 million it borrowed as part of the program.

More bad news? Coming right up! Hartford also took a $597 million goodwill write-down on its fourth quarter earnings. The company's stout cash position of almost $43 billion may be the one positive here, but the stock is just too risky to recommend. Frankly, more bad news could be right around the corner.

The Same Old Song And Dance
MetLife has suffered much in the same vein as Hartford, but not quite as badly. That said, MetLife's outlook was recently revised by ratings service Fitch. For some reason, S&P says 2009 could be a good year for MetLife, using the dubious phrase "flight to quality" as its motivations. This assessment begs the question: If there are quality places to fly to in this market, why aren't more investors booking tickets?

In a desperate search for positives, we can point to MetLife's 3.5% dividend yield and a trailing 12-month P/E ratio of 5.2. It is also possible that MetLife could benefit from the failings of its main competitors, including AIG (NYSE:AIG) and Prudential (NYSE:PRU), and that its strong cash position could make it a buyer in a consolidating industry.

At this point, however, MetLife isn't a tale of "best of breed", but one of "least bad among its peers".

If It Walks Like A Duck...
Aflac may be one of the most recognizable insurance companies in America, if for no other reason than the ubiquitous duck that stars in its commercials. On February 20, the stock was upgraded by Morgan Stanley, but there was a significant amount of put writing in the options market on Aflac's shares, signaling that investors may be holding large short positions in the stock. (For more on what this means, read Options Basics: Introduction.)

As noted at Investopedia earlier this month, part of Aflac's problems revolve around hybrid securities issued by imperiled European financial firms. To shed simple light on a complex issue, Aflac is essentially valuing these hybrid issues at a far higher worth than the market is trading them. Only time will tell if this problem comes home to roost on Aflac's shares. The company booked $655 million in investment losses last year, compared with just $17 million in 2007.

Aflac trades at less than 1.2 times book value and at 6.5 times trailing 12-month earnings. A nifty 6.6% dividend yield could be a point of attraction for the stock, especially at $17, but it's probably best to take a wait-and-see approach here.

Bottom Line: No Need To Be Involved Here
Now that the banks and brokers have been crushed, Mr. Market appears to have turned his attention to insurance companies. Stay out of his way! How many times in the past year has a stock looked cheap only to fall further? Too many to count. Knowing that, don't be a sucker for these insurance companies. (Learn more in The Industry Handbook: The Insurance Industry.)

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