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As the Dow declines, insurance stocks drop more.

Companies including MetLife and Prudential Financial are scheduled to publish third-quarter earnings by the end of next week, so higher volatility -- even nervousness -- can be expected.

But are investors making a smart move by unloading insurers? The past three months, when the stock-market rally powered along while the economy probably started growing again for the first time in a year and a half, helped separate insurance winners from losers. In other words, now is not the time to get out of the industry as another push upward is likely on the way.

Hartford Financial Services and Genworth Financial , which have fallen as much as 16 per cent in the past week, don't deserve such punishment. Hartford is up seven-fold from a low in early March, while Genworth has jumped 11-fold.

Some selling of stocks has occurred to lock in investment gains, although volume is at 77 per cent of its average. There has been a rise in shorting -- investors betting on declines -- with an average short interest ratio of 4.7 versus 4.6 for the month. Investors don't entirely believe that insurers' third-quarter results will indicate a positive end for the year. Maybe it's all too good to be true.

After all, Standard & Poor's on Tuesday put seven mortgage-insurance companies on credit watch with negative implications because of recent results from MGIC and Old Republic International . Those included PMI Group, Radian Group and, more surprisingly, Genworth.

The catch-all approach reflects S&P's belief that earnings will be lower than expected and that it misjudged the market in previous reviews. S&P said it may reduce or affirm ratings at previous levels, depending on analyses of third-quarter results.

Still, if Ameriprise is any indicator of the future, investors are being too cautious. Ameriprise exceeded analysts' expectations, with earnings of $1 a share, much higher than the consensus of 64 cents.

Hartford and Genworth, in particular, stand out as opportunities. The companies' price-to-book values are 76 per cent and 42 per cent, respectively. If quarterly earnings show an improvement, their book values will rise, and their share prices will have to keep pace.

If investments haven't performed as well as expected -- insurers have been lowering risks, after all -- results may come up short. For longer-term investors, however, that shouldn't be a problem. As soon as investment returns rebound, so will asset values. That's why seeking out undervalued shares now would give investors a lead on the market.

There's no reason returns won't improve in the medium term. Consider Conseco , whose shares have dropped 13 per cent in a week. Conseco is trading at less than 44 per cent of its book value.

Unless you're a pessimist by nature, how long can book values be depressed by the financial crisis? For those less risk-averse, take a look at Radian, down 46 per cent in a month, and PMI, down 39 per cent. The two companies were hurt by rival MGIC's poor third-quarter results. Nervous investors are creating opportunities for you.

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