Insurance companies serve as the backbone of risk management, providing essential protection and financial security for individuals and businesses. Still, investors are uneasy as insurers face challenges from catastrophic events and potential regulatory changes. These doubts have certainly contributed to the industry’s recent underperformance - over the past six months, insurance stocks were flat while the S&P 500 was up 23.9%.
A cautious approach is imperative when dabbling in insurance stocks as many are sensitive to catastrophic events and economic cycles. Keeping that in mind, here are three insurance stocks we’re swiping left on.
Selective Insurance Group (SIGI)
Market Cap: $4.57 billion
Founded in 1926 during the early days of automobile insurance, Selective Insurance Group (NASDAQ: SIGI) is a property and casualty insurance company that sells commercial, personal, and excess and surplus lines insurance products through independent agents.
Why Do We Avoid SIGI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 10.4% annually over the last five years
- Forecasted revenue decline of 17.7% for the upcoming 12 months implies demand will fall even further
- Earnings per share lagged its peers over the last two years as they only grew by 9.2% annually
At $75.61 per share, Selective Insurance Group trades at 1.3x forward P/B. If you’re considering SIGI for your portfolio, see our FREE research report to learn more.
Radian Group (RDN)
Market Cap: $4.52 billion
Founded during the housing boom of 1977 and weathering multiple real estate cycles since, Radian Group (NYSE: RDN) provides mortgage insurance and real estate services, helping lenders manage risk and homebuyers achieve affordable homeownership.
Why Does RDN Fall Short?
- Insurance offerings face significant market challenges this cycle as net premiums earned contracted by 3% annually over the last five years
- Costs have risen faster than its revenue over the last two years, causing its combined ratio to worsen by 23.4 percentage points
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 1.5% annually while its revenue grew
Radian Group’s stock price of $33.39 implies a valuation ratio of 1x forward P/B. Dive into our free research report to see why there are better opportunities than RDN.
Mercury General (MCY)
Market Cap: $4.25 billion
Founded in 1961 and maintaining a network of over 6,300 independent agents across the country, Mercury General (NYSE: MCY) is an insurance company that primarily sells automobile insurance policies through independent agents in 11 states, with a strong focus on California.
Why Do We Think Twice About MCY?
- Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
- Muted 1.6% annual book value per share growth over the last five years shows its capital generation lagged behind its insurance peers
- Below-average return on equity indicates management struggled to find compelling investment opportunities
Mercury General is trading at $76.81 per share, or 2x forward P/B. Check out our free in-depth research report to learn more about why MCY doesn’t pass our bar.
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