Insurance firms play a critical role in the financial system, offering everything from property coverage to life insurance and specialized risk solutions. Market leaders have certainly capitalized on strong underwriting results and rising investment income to boost profitability, helping fuel a 2.6% gain for the industry over the past six months. This performance has closely followed the S&P 500.
Regardless of these results, investors must exercise caution as many insurers are sensitive to catastrophic events and economic cycles. On that note, here are three insurance stocks we’re swiping left on.
Lincoln Financial Group (LNC)
Market Cap: $5.90 billion
Founded in 1905 by a group of Fort Wayne, Indiana businessmen who named the company after Abraham Lincoln, Lincoln National Corporation (NYSE: LNC) provides insurance, retirement plans, and wealth management products through its subsidiaries, operating under four main segments: Annuities, Life Insurance, Group Protection, and Retirement Plan Services.
Why Do We Avoid LNC?
- Insurance products are facing market challenges during this cycle, as seen in its flat net premiums earned over the last four years
- Book value per share tumbled by 13.2% annually over the last five years, showing insurance sector trends are working against its favor during this cycle
- Underwhelming 7.6% return on equity reflects management’s difficulties in finding profitable growth opportunities
Lincoln Financial Group’s stock price of $34.55 implies a valuation ratio of 0.7x forward P/B. To fully understand why you should be careful with LNC, check out our full research report (it’s free).
Lemonade (LMND)
Market Cap: $3.09 billion
Built on the principle of giving back unused premiums to charitable causes selected by policyholders, Lemonade (NYSE: LMND) is a technology-driven insurance company that offers homeowners, renters, pet, car, and life insurance through an AI-powered digital platform.
Why Do We Think Twice About LMND?
- Earnings growth underperformed the sector average over the last four years as its EPS grew by just 6.3% annually
- Annual book value per share declines for the past five years show its capital management struggled during this cycle
- Negative return on equity shows management lost money while trying to expand the business
At $42.25 per share, Lemonade trades at 6.9x forward P/B. If you’re considering LMND for your portfolio, see our FREE research report to learn more.
AXIS Capital (AXS)
Market Cap: $7.64 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 Fall Short?
- 3.8% annual revenue growth over the last five years was slower than its insurance peers
- Annual net premiums earned growth of 2.5% over the last two years was below our standards for the insurance sector
- Low return on equity reflects management’s struggle to allocate funds effectively
AXIS Capital is trading at $97.11 per share, or 1.3x forward P/B. Check out our free in-depth research report to learn more about why AXS doesn’t pass our bar.
Stocks We Like More
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