Insurance companies serve as the backbone of risk management, providing essential protection and financial security for individuals and businesses. These institutions have benefited from improved pricing power and robust premium growth, so it’s no surprise the industry has posted a 13% gain over the past six months, nearly mirroring the S&P 500.
Although insurers have produced good results, only a handful will thrive over the long term as insurtech disruptors are rapidly taking market share from the incumbents. Keeping that in mind, here are three insurance stocks we’re passing on.
Selective Insurance Group (SIGI)
Market Cap: $5.27 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 Does SIGI Worry Us?
- Estimated sales decline of 1.2% for the next 12 months implies a challenging demand environment
- Expenses have increased as a percentage of revenue over the last five years as its pre-tax profit margin fell by 5.1 percentage points
- Incremental sales over the last five years were less profitable as its 4.3% annual earnings per share growth lagged its revenue gains
At $88.57 per share, Selective Insurance Group trades at 1.5x forward P/B. Read our free research report to see why you should think twice about including SIGI in your portfolio.
Essent Group (ESNT)
Market Cap: $6.10 billion
Serving as a crucial bridge between homebuyers and the American dream of homeownership, Essent Group (NYSE:ESNT) provides private mortgage insurance and title services that enable lenders to offer home loans with down payments of less than 20%.
Why Are We Hesitant About ESNT?
- Growth in insurance policies was lackluster over the last two years as its 1.8% annual growth underperformed the typical financial institution
- Expenses have increased as a percentage of revenue over the last two years as its pre-tax profit margin fell by 9.8 percentage points
- Performance over the past two years shows its incremental sales were less profitable, as its 1.9% annual earnings per share growth trailed its revenue gains
Essent Group is trading at $67.25 per share, or 1x forward P/B. Check out our free in-depth research report to learn more about why ESNT doesn’t pass our bar.
AXIS Capital (AXS)
Market Cap: $7.27 billion
Founded in the aftermath of the 9/11 attacks when insurance capacity was scarce, AXIS Capital Holdings Limited (NYSE:AXS) is a global specialty insurer and reinsurer that provides coverage for complex risks across property, liability, professional lines, cyber, and other specialty markets.
Why Does AXS Give Us Pause?
- Annual revenue growth of 6.7% over the last five years was below our standards for the insurance sector
- 6.1% annualized net premiums earned growth over the last five years lagged behind its insurance peers
- Earnings per share lagged its peers over the last two years as they only grew by 8.8% annually
AXIS Capital’s stock price of $99.61 implies a valuation ratio of 1.2x forward P/B. To fully understand why you should be careful with AXS, check out our full research report (it’s free).
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