Insurance companies serve as the backbone of risk management, providing essential protection and financial security for individuals and businesses. Market leaders have certainly capitalized on strong underwriting results and rising investment income to boost profitability, helping fuel a 13.2% gain for the industry over the past six months - 8.7 percentage points higher than 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 is one resilient insurance stock at the top of our wish list and two we’re steering clear of.
Two insurance stocks to sell:
American Financial Group (AFG)
Market cap: $12.94 billion
With roots dating back to 1872 and a business model that empowers local decision-making, American Financial Group (NYSE: AFG) is an insurance holding company that specializes in commercial property and casualty insurance products for businesses through its Great American Insurance Group.
Why Do We Think AFG Will Underperform?
- Growth in insurance policies was lackluster over the last two years as its 2.5% annual growth underperformed the typical financial institution
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 11% annually
- Products and services are facing significant credit quality challenges during this cycle as book value per share has declined by 1.6% annually over the last five years
American Financial Group’s stock price of $156.43 implies a valuation ratio of 2.5x forward P/B. Dive into our free research report to see why there are better opportunities than AFG.
AXIS Capital (AXS)
Market cap: $7.74 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 Are We Hesitant About AXS?
- Net premiums earned expanded by 6.2% annually over the last five years, falling below our expectations for the insurance sector
- Incremental sales over the last two years were less profitable as its 6.4% annual earnings per share growth lagged its revenue gains
- 9.8% annual book value per share growth over the last two years was slower than its insurance peers
AXIS Capital is trading at $107.94 per share, or 1.3x forward P/B. If you’re considering AXS for your portfolio, see our FREE research report to learn more.
One insurance stock to buy:
HCI Group (HCI)
Market cap: $2.39 billion
Starting as a Florida "take-out" insurer that assumed policies from the state-backed Citizens Property Insurance Corporation, HCI Group (NYSE: HCI) provides property and casualty insurance, primarily homeowners coverage, while leveraging proprietary technology to improve underwriting and claims processing.
Why Are We Bullish on HCI?
- Strong 21.1% annualized net premiums earned expansion over the last five years shows it’s capturing market share this cycle
- Performance over the past two years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 46.4% outpaced its revenue gains
- Annual book value per share growth of 44% over the last two years was superb and indicates its capital strength increased during this cycle
At $191.91 per share, HCI Group trades at 2.1x forward P/B. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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