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Dear Mr. Berko:

Dear S.L.:

The life and property/casualty insurance industry is in high dudgeon. Negative investment returns have catapulted insurers’ income statements into the loss column, and the industry might not recover for at least two years.

Our weak economy, continued heavy unemployment, an extremely volatile stock market and foundering international economies have placed a curse on industry growth and confidence. Many cash-tight policyholders are canceling their contracts and using the premiums to maintain their standard of living, while others are raiding their cash values to pay all sorts of bills.

This challenging macroeconomic environment, including serious revenue declines, negative to extremely low returns on invested premiums and potential diminution of their asset bases does not bode well for the industry. Making matters worse, the ongoing credit crisis has crippled the liquidity of most life and casualty insurers, especially those that need to raise capital.

As a result, many life and casualty insurance issues have been hit by lightning and now trade between 40 percent and 70 percent of their market values some six months ago. So, no, I wouldn’t be a buyer of life or casualty insurers in this market – even at today’s prices. However, there are a number of excellent issues trading at values that, just a year ago, I would not have believed possible.

Certainly MetLife Inc. (MET-$32) is on my favorites list, even though it recently announced a 40 percent drop in earnings, and even though it might not get its $800 million investment back from Lehman Bros. and AIG. MET is on my favorites list because it recently raised $2.3 billion through a 75-million-share stock offering and might use some of those proceeds to bid for a weakened rival. Though I would buy MET, I would wait for the price to go lower.

Hartford Financial Services Group Inc. (HIG-$15.15), also on my favorites list, is down from its 12-month high of $98 and is a “must buy,” even though it reported the worst quarter in its 200-year history. This huge property/casualty insurer reported a $2.6 billion loss. But HIG still has a strong balance sheet, plenty of capital and should easily be able to maintain its double-A rating. HIG’s Japanese division is dragging its feet. Huge payouts to flood victims in Wisconsin, Illinois and Missouri have been unexpectedly high. A possible cut in its $1.28 dividend has punished the market value of this classy insurer. Still, I’d buy, but not at the current price.

Prudential Financial Inc. (PRU-$28.64), also on my favorites list, is the third-largest life insurance company in the nation, with $12 billion in premium income and $1.8 trillion of life insurance in force. Prudential has a solid balance sheet and is using some of its huge cash position to buy back $2 billion of its stock. I think PRU’s board will continue its share buyback program, especially considering that today’s price is significantly lower than its high price of $90 in September 2008. If the PRU board believes its stock is a good investment at the current price, I won’t disagree.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service