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Thesis: Insurers have had their investment returns savaged . Generally they rely on investing premium income until the policy has to be paid out. This strategy appears to be low risk – until the Fed dictates near 0% as a return on billions of dollars being placed ( traditionally in the bond market ) and the recession cuts demand for business loans. In addition natural disasters and competion wear at the pricing model.

The overall health of the U.S. insurance industry has improved to some extent in the recent quarters, after enduring pricing pressures and reduced insured exposure for quite some time. The market turmoil resulting from the Great Recession forced many companies to take immense write-downs, but those memories are fast becoming a thing of the past.

Caveat

Continued soft market conditions, shrinking businesses, a still-high unemployment rate, uncertain fiscal policy and legislative challenges are threatening insurers’ ability to rebound to the historical growth rate. The industry continues to be challenged by subdued premium volume growth in a perked up economy as well as a massive healthcare restructuring.

Though there are signs of economic recovery, its sluggish pace is expected to continue at least through the first half of 2012. Also, structural economies of scale have pushed the industry toward consolidation. As a result, inter-segment competition within the industry has alleviated. Moving forward, maintaining profitability after complying with regulatory requirements could be a painful task.

OPPORTUNITIES

We remain positive on Phoenix Companies, Inc. (PNX) andProAssurance Corporation (PRA) with a Zacks #1 Rank (short-term Strong Buy).

Other insurers that we like with a Zacks #2 Rank (short-term Buy) include AMERISAFE, Inc. (AMSF), Manulife Financial Corporation (MFC), Ace Limited (ACE), Markel Corporation(MKL), OneBeacon Insurance Group, Ltd. (OB), Progressive Corporation (PGR), RenaissanceRe Holdings Ltd. (RNR),Prudential Financial, Inc. (PRU), Horace Mann Educators Corporation (HMN) and MetLife, Inc. (MET).

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