Insurance firms play a critical role in the financial system, offering everything from property coverage to life insurance and specialized risk solutions. But concerns about claims severity and tightening regulations have tempered enthusiasm, limiting the industry’s gains to 7.5% over the past six months. This return lagged the S&P 500’s 16.6% climb.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Keeping that in mind, here is one insurance stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Two Insurance Stocks to Sell:
MGIC Investment (MTG)
Market Cap: $5.3 billion
Founded in 1957 when the modern mortgage insurance industry was in its infancy, MGIC Investment (NYSE: MTG) provides private mortgage insurance that protects lenders when homebuyers default on their loans, enabling borrowers to purchase homes with smaller down payments.
Why Are We Hesitant About MTG?
- Insurance policy sales contracted this cycle as net premiums earned decreased by 1.5% annually over the last five years
- Estimated sales for the next 12 months are flat and imply a softer demand environment
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 8.4% annually
MGIC Investment is trading at $26.18 per share, or 1.1x forward P/B. Check out our free in-depth research report to learn more about why MTG doesn’t pass our bar.
Chubb (CB)
Market Cap: $125.5 billion
Dating back to when a Civil War veteran created a frost-proof water meter, Chubb Limited (NYSE: CB) provides commercial and personal property and casualty insurance, reinsurance, and life insurance products to a diverse client base across 54 countries.
Why Do We Think Twice About CB?
- Outsized scale creates growth headwinds as its 6.8% annualized net premiums earned increases over the last two years underperformed other financial institutions
- Costs have risen faster than its revenue over the last five years, causing its pre-tax profit margin to decline by 1.7 percentage points
- Earnings per share lagged its peers over the last two years as they only grew by 16.9% annually
Chubb’s stock price of $328.81 implies a valuation ratio of 1.6x forward P/B. Read our free research report to see why you should think twice about including CB in your portfolio.
One Insurance Stock to Buy:
Progressive (PGR)
Market Cap: $120.5 billion
Starting as a small auto insurance company in 1937 with a pioneering focus on high-risk drivers, Progressive (NYSE: PGR) is a major auto, property, and commercial insurance provider that offers policies through independent agents, online platforms, and over the phone.
Why Are We Bullish on PGR?
- Impressive 15.9% annual revenue growth over the last two years indicates it’s winning market share this cycle
- Net premiums earned surged by 14.9% annually over the past two years, reflecting strong market share gains this cycle
- Stellar return on equity showcases management’s ability to surface highly profitable business ventures
At $207.13 per share, Progressive trades at 3.4x forward P/B. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More
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