About 15 years ago I was held prisoner of war in Hartford, Conn., at a large, rookie broker re-education facility. While trudging to class each day, I passed by the headquarters of quite a few famous insurance companies. All were familiar except one: Phoenix.

I did some research and learned that, at the time, it was a mutual company (owned by the policy holders) and not publicly traded. However, its investment management arm did trade publicly via master limited partnership (MLP) units. They were clearly trading at a deep discount to their actual value, so I bought what few shares I could. In less than a year, after collecting a couple dividend payments, Phoenix bought back all of the units they didn’t own and I made a nice little profit.

Fast forward to now. Phoenix (NYSE: PNX) has long since demutualized. The investment arm was spun off a couple of years ago as a free-standing entity: Virtus (Nasdaq: VRTS). Phoenix’s common shares trade at an abysmal sub-$3.00 level The company just can’t seem to get out of its own way. The insurance company’s financial strength rating has been cut to an embarrassing “Ba2” by Moody’s. While the company narrowed its loss by 76% year-over-year, the past three years have been earnings-negative.

Why bother? Despite the dismal appearance, Phoenix is sitting on more than $21 billion in assets and the stock trades at 0.14 times sales. Effectively, you’re paying $0.14 for every dollar of revenue. I’ve read multiple reports that put Phoenix’s book value between $11 and $21. Even if you stay conservative and go with the lower estimate, the company’s common stock trades at $0.23 on the dollar. Value doesn’t get much deeper.

But, it’s hard to get excited about a life insurance company founded in 1851 that has been consistently losing money for the past three years, right? Maybe. However, M&A activity in the insurance sector may start heating up soon. Contrary to earlier reports, capitalism isn’t dead just yet. Markets are functional again and capital is flowing smoothly. Look at the rumored, huge, stupid money IPO‘s for companies like Facebook and Groupon.

While not nearly as sexy (if you actually consider online coupons and knowing which Jonas brother your niece prefers sexy), insurance company mergers will happen much sooner than later. Insurance, especially life insurance, is an economy of scale business. The larger, more dominant players are going to absorb weaker, less healthy competitors for assets and a larger share of distribution. Phoenix fits the latter profile. Do we know that for sure? No. But the numbers sure do look attractive. The common stock trades at around $2.60. The average analyst estimate forecasts Phoenix turning earnings positive in 2011 with $0.43 a share. That would put the price-to-earnings ratio (P/E) at 5.9. If those stars line up, that’s still an extremely cheap valuation. But Phoenix turning earnings positive is a BIG if.

Owning a two-dollar stock that pays no dividend will require patience and some intestinal fortitude, both of which are in short supply among many investors. Buying something on takeover speculation is just that: speculation. There’s another way to play the Phoenix idea for the somewhat squeamish and get paid decently in the process.

Action to Take –> The Phoenix Co. Inc. 7.45% QUIBS (NYSE: PFX) (Quarterly Interest Bonds) currently trade around $19.00 a share with a par value of $25. That puts the current yield at about 9.8%. Not bad. The “baby bonds” (named so because of the $25 issue price as opposed to the traditional $1,000 face value of a regular bond) are callable at any time within 30 days at par. That’s a 30% pop if called. Throw in the yield, and that’s a boastful total return on a bond.

Owning PFX is hardly a sure thing. The QUIBS carry a genuine junk rating of B3/CCC+. If your fixed income pre-requisites include an investment-grade rating, don’t bother. PFX notes are unsecured and unsubordinated. In the event the company goes belly up, you’ve got a better place in line than if you were holding the common stock, but don’t expect too much.

Phoenix’s namesake is based on a myth that involves both resurrection and fiery destruction. The common shares offer the buyer an opportunity to own the company at less than a quarter of its tangible book value. A takeout even at half of book is better than a double. If it doesn’t happen, hope that the company can turn itself around. If not? Congratulations, you’re stuck with a two-dollar stock or less. PFX, on the other hand, gives the holder the opportunity of a better than 9% yield. But your upside is capped. That’s respectable, but certainly no double if the bonds are called, and the specter of default always looms. Both approaches are interesting. However, unlike the company’s bread and butter, there are no guarantees.