Insurance providers use their expertise in risk assessment to help protect assets while offering consumers peace of mind through comprehensive coverage options. Still, investors are uneasy as insurers face challenges from catastrophic events and potential regulatory changes. These doubts have certainly contributed to insurance stocks’ recent underperformance - over the past six months, the industry’s 9.6% gain has fallen behind the S&P 500’s 13% rise.
While some insurers have strong balance sheets and diversified product offerings that enable them to thrive in any environment, the odds aren’t great for the ones we’re analyzing today. With that said, here are three insurance stocks we would avoid.
Stewart Information Services (STC)
Market Cap: $2.00 billion
Founded in 1893 during America's westward expansion when property records were often disputed, Stewart Information Services (NYSE:STC) provides title insurance and real estate services, helping homebuyers, sellers, and lenders verify property ownership and protect against title defects.
Why Does STC Give Us Pause?
- Stagnant net premiums earned over the last five years suggest the firm needs alternative growth strategies
- Expenses have increased as a percentage of revenue over the last five years as its pre-tax profit margin fell by 7 percentage points
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 10.3% annually
Stewart Information Services’s stock price of $65.67 implies a valuation ratio of 1.2x forward P/B. Read our free research report to see why you should think twice about including STC in your portfolio.
CNA Financial (CNA)
Market Cap: $13.71 billion
With roots dating back to 1853 and majority ownership by Loews Corporation, CNA Financial (NYSE:CNA) is a commercial property and casualty insurance provider offering coverage for businesses, including professional liability, surety bonds, and specialized risk management services.
Why Do We Pass on CNA?
- Large revenue base constrains its growth potential, as seen in its unexciting 6% annualized increases in net premiums earned over the last two years fell below our expectations for the insurance sector
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 2.1% annually while its revenue grew
- Products and services are facing significant credit quality challenges during this cycle as book value per share has declined by 2.4% annually over the last five years
CNA Financial is trading at $51.43 per share, or 11x forward P/E. Check out our free in-depth research report to learn more about why CNA doesn’t pass our bar.
American Financial Group (AFG)
Market Cap: $12 billion
With roots dating back to 1872 and a business model that empowers local decision-making, American Financial Group (NYSE:AFG) is an insurance holding company that specializes in commercial property and casualty insurance products for businesses through its Great American Insurance Group.
Why Should You Sell AFG?
- 3% annualized net premiums earned growth over the last two years lagged behind its insurance peers
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 4.7% annually
- Policy losses and capital returns have eroded its book value per share this cycle as its book value per share declined by 2.5% annually over the last five years
American Financial Group’s stock price of $144.85 implies a valuation ratio of 2.3x forward P/B. Read our free research report to see why you should think twice about including AFG in your portfolio.
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