Insurance firms play a critical role in the financial system, offering everything from property coverage to life insurance and specialized risk solutions. Furthermore, favorable market conditions have supported premium growth and investment income, a trend that has enabled the industry to return 10.4% over the past six months, almost identical to the S&P 500.
Nevertheless, investors should tread carefully as many insurers are cyclical due to their exposure to claims risk and regulatory changes. Taking that into account, here are three insurance stocks that may face trouble.
Horace Mann Educators (HMN)
Market Cap: $1.92 billion
Founded in 1945 and named after the 19th-century education reformer known as the "father of American public education," Horace Mann Educators (NYSE: HMN) is an insurance company that specializes in providing auto, property, life, and retirement products tailored for educators and other public service employees.
Why Do We Avoid HMN?
- Growth in insurance policies was lackluster over the last five years as its 6.4% annual growth underperformed the typical financial institution
- Annual book value per share declines of 3.3% for the past five years show its capital management struggled during this cycle
- ROE of 6.8% reflects management’s challenges in identifying attractive investment opportunities
At $47.38 per share, Horace Mann Educators trades at 1.2x forward P/B. To fully understand why you should be careful with HMN, check out our full research report (it’s free).
Hartford (HIG)
Market Cap: $37.77 billion
Recognizable by its iconic stag logo that dates back to 1810, The Hartford (NYSE: HIG) provides property and casualty insurance, group benefits, and investment products to individuals and businesses across the United States.
Why Are We Wary of HIG?
- Large revenue base constrains its growth potential, as seen in its unexciting 5.2% annualized increases in net premiums earned over the last two years fell below our expectations for the insurance sector
- Estimated sales growth of 2.9% for the next 12 months implies demand will slow from its two-year trend
- Scale is a double-edged sword because it limits the firm’s capital growth potential compared to its smaller competitors, as reflected in its below-average annual book value per share increases of 6.7% for the last five years
Hartford’s stock price of $138.80 implies a valuation ratio of 1.8x forward P/B. If you’re considering HIG for your portfolio, see our FREE research report to learn more.
Stewart Information Services (STC)
Market Cap: $1.50 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?
- Net premiums earned contracted by 1% annually over the last five years, showing unfavorable market dynamics this cycle
- Costs have risen faster than its revenue over the last five years, causing its pre-tax profit margin to decline by 7.9 percentage points
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 13% annually while its revenue grew
Stewart Information Services is trading at $49.25 per share, or 0.9x forward P/B. Check out our free in-depth research report to learn more about why STC doesn’t pass our bar.
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