Insurance providers use their expertise in risk assessment to help protect assets while offering consumers peace of mind through comprehensive coverage options. Market leaders have certainly capitalized on strong underwriting results and rising investment income to boost profitability, helping fuel a 12.3% gain for the industry over the past six months. This performance has closely followed the S&P 500.
Nevertheless, investors should tread carefully as many insurers are cyclical due to their exposure to claims risk and regulatory changes. With that said, here are three insurance stocks we would avoid.
Globe Life (GL)
Market Cap: $13.57 billion
With roots dating back to 1900 and a rebranding from Torchmark Corporation in 2019, Globe Life (NYSE: GL) is an insurance holding company that offers life insurance, supplemental health insurance, and annuity products through various distribution channels.
Why Are We Cautious About GL?
- 4.5% annual revenue growth over the last two years was slower than its insurance peers
- Growth in insurance policies was lackluster over the last five years as its 5% annual growth underperformed the typical financial institution
- Book value per share tumbled by 1.1% annually over the last five years, showing insurance sector trends are working against it during this cycle
Globe Life is trading at $176.44 per share, or 2.1x forward P/B. Dive into our free research report to see why there are better opportunities than GL.
Equitable Holdings (EQH)
Market Cap: $14.62 billion
Tracing its roots back to 1859 as one of America's oldest financial institutions, Equitable Holdings (NYSE: EQH) provides retirement planning, asset management, and life insurance products through its two main franchises, Equitable and AllianceBernstein.
Why Are We Wary of EQH?
- Annual sales growth of 1.3% over the last five years lagged behind its insurance peers as its large revenue base made it difficult to generate incremental demand
- Expenses have increased as a percentage of revenue over the last two years as its pre-tax profit margin fell by 15 percentage points
- Policy losses and capital returns have eroded its book value per share this cycle as its book value per share declined by 178% annually over the last five years
At $52.42 per share, Equitable Holdings trades at 6.4x forward P/E. If you’re considering EQH for your portfolio, see our FREE research report to learn more.
First American Financial (FAF)
Market Cap: $7.81 billion
Tracing its roots back to 1889 when California was experiencing its first major real estate boom, First American Financial (NYSE: FAF) provides title insurance, settlement services, and risk solutions for residential and commercial real estate transactions across the United States and internationally.
Why Does FAF Fall Short?
- Insurance offerings face significant market challenges this cycle as net premiums earned contracted by 1.9% annually over the last five years
- Flat earnings per share over the last five years underperformed the sector average
- Annual book value per share growth of 2.8% over the last five years was below our standards for the insurance sector
First American Financial’s stock price of $76.52 implies a valuation ratio of 1.3x forward P/B. Check out our free in-depth research report to learn more about why FAF doesn’t pass our bar.
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