“Insurance is sold, not bought.”

This old saying may be true from the consumer side. From the shrewd investor’s point of view, however, it’s an entirely different story. Legendary value investor Shelby Cullom Davis, for instance turned $50,000 into a fortune of $800 million dollars by buying the stocks of deeply undervalued insurance companies during the dull markets of post-World War II. And if you’re a Warren Buffett stalker, then no one has to tell you about the obscene wealth he has created for himself and fellow Berkshire Hathaway (NYSE: BRK-B) shareholders through the company’s ownership of auto insurer GEICO and other insurance operations.

Despite the fact that Davis had a bit of an edge, since got his chops when he served as deputy superintendent of insurance for the state of New York,  the pattern with insurance companies and successful value investors is clear. And the common denominators for a winning investment in the insurance segment are cash and patience. Well-run insurance companies have the cash, while a successful investor supplies the patience.

With this in mind, I went looking for undervalued insurance companies that have the potential to turn the money of patient investors into small fortunes. My search led me to two companies MetLife Inc. (NYSE: MET) and Hartford Financial Services Group (NYSE: HIG). Both are staid names in the U.S. insurance industry, both tracing their roots back to the 19th century.

When the housing bubble burst and the wheels of the financial system fell off in 2008-2009, most financial companies took it on the chin. MetLife and Hartford weren’t spared. Hartford shares tumbled more than 90%. MetLife outperformed, breaking through $12 during that time, though shares also took a sharp hit.

But both stocks have recovered nicely since then. MetLife trades for about $32 a share, while Hartford is knocking on $18 a share. And their price-to-earnings (P/E) multiples are still priced for the bargain basement. How cheap? How do 30–40% discounts to the S&P 500’s P/E multiple of roughly 16 sound? At these levels, the patient value investor could be rewarded handsomely.

Here’s a more detailed look at each of these insurers…

MetLife
Market cap.: $33.8 billion
P/E multiple: 6.0

Leveraging its brand association with everyone’s favorite beagle, Snoopy, MetLife has a sturdy ship to sail through the uncharted waters of today’s market environment. While MetLife’s property and casualty business (P&C) contributes only $3.6 billion(about 7%) to the company’s $52 billion revenue mix, the life and retirement product business is much more important to the company’s bottom line. As a result, MetLife has decided to focus on capturing a greater share of the retirement-savings business, thanks to innovations in its fixed and variable annuities, as well as other investment products. The company is also expanding its core business through acquisition. Most recently, it purchased the life and annuity business of The Travelers Cos. Inc. (NYSE: TRV).

The company is also tightening up internally. Owning a federally-chartered bank helped MetLife through the dark days of the panic of 2008 (allowing them access to the Federal Reserve’s discount window to ensure liquidity), but things have improved now and it doesn’t make much sense to hang on to such a low-return, high-risk business. As such, MetLife has announced the sale of MetLife Bank’s depository and forward mortgage businesses.

MetLife is also sitting on $17.4 billion dollars in cash. Eventually, it’ll have to do something with all that money. The three best choices are returning it to shareholders in the form of a dividend increase, buying back shares or using it for more acquisitions. I’d like to think the first two are the most probable options.

MetLife’s shares trade at about $32, with a forward P/E ratio of about 7 and a 2.2% dividend yield. EPS in 2012 are projected to be $5.15. With a mere 15% P/E expansion to just eight times 2012 earnings, a 12-month price target of $41.22 is reasonable. Adding in the dividend, this comes to a 27% total return.

Assuming the stock hits this conservative target, shares would still trade at an 8% discount to book value.

Hartford
Market cap.: $7.8 billion
P/E multiple: 7.6

Hartford is one of the nation’s largest commercial insurance writers (44% of $22.3 billion in total revenue), which includes P&C as well as group benefits. Owning its own niche seems great, but when its reserves are taking hits due to P&C losses, well, it doesn’t look so great any more. Hartford has taken accident and catastrophic losses of $127 million for the current year. This has put a constraint on capital going forward, although the company has the necessary reserves to cover this beating.

At the same time, Hartford has many factors working in its favor. The most notable is the high level of institutional ownership of the company’s shares. About 89% of all outstanding shares are held by mutual funds and other institutions, with the largest being hedge-fund wizard John Paulson’s firm —  Paulson & Co. —  with a 9.1% stake.

Another strength of this stock is Hartford’s penetration into small businesses. The company plans to ramp up its cross-selling efforts to increase distribution of its wealth-management and retirement products to its commercial customers. Wealth management comprises 20% of the business, but Hartford wants to see this contribution grow. Analysts also suggest that a likely scenario would be for Hartford to either spin off or sell its P&C business outright. This means there is value just waiting to be unlocked.

Shares are already just plain dirt cheap, trading at a 35% discount to their tangible book value. Hartford shares trade at a forward P/E ratio of 5.6 and a dividend yield of about 2.2%. A 12-month price target of $23 is achievable with a 20% P/E ratio expansion. Factoring in the dividend would bring the total return to 33%. Again, like MetLife, shares would still have a low single-digit earnings multiple and trade a 46% discount to their tangible book value.

Risks to Consider: The macro risks to Hartford and MetLife are the usual suspects: rock-bottom interest rates that hamper the performance of the companies’ substantial investment portfolios, turbulent and uncertain financial markets and economies, and an even more unpredictable regulatory environment. Specifically, the large commercial mortgage-backed securities position in Hartford’s portfolio is low-quality, which leaves the company vulnerable to further credit writedowns. The specific risk MetLife faces is due to stubbornly low-interest rates which hinder its ability to maintain attractive rates on the living benefits of its annuities and retirement products.

Action to Take –> Beat-up insurance stocks with low single-digit P/E ratios won’t scream up to double-digit territory overnight. Deep-value investing, especially in the insurance sector, is a waiting game in which only the very patient investors are likely to win.

Hartford is the more aggressive pick, as its headwinds are a bit stiffer than MetLife’s, but the company has turned in consistent return on equity of 11%. This combined with the potential sale of its P&C business and other assets would serve as a catalyst. Of the two, MetLife looks to be the stronger contender.