Insurance companies serve as the backbone of risk management, providing essential protection and financial security for individuals and businesses. These institutions have benefited from improved pricing power and robust premium growth, so it’s no surprise the industry has posted a 13.2% gain over the past six months, beating the S&P 500 by 8.7 percentage points.
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 we would avoid.
Mercury General (MCY)
Market cap: $4.68 billion
Founded in 1961 and maintaining a network of over 6,300 independent agents across the country, Mercury General (NYSE: MCY) is an insurance company that primarily sells automobile insurance policies through independent agents in 11 states, with a strong focus on California.
Why Do We Think Twice About MCY?
- Sales trends were unexciting over the last two years as its 5.7% annual growth was below the typical insurance company
- Capital trends were unexciting over the last five years as its 5.5% annual book value per share growth was below the typical insurance firm
- ROE of 9.8% reflects management’s challenges in identifying attractive investment opportunities
Mercury General is trading at $84.45 per share, or 7.3x forward P/E. Dive into our free research report to see why there are better opportunities than MCY.
Enact Holdings (ACT)
Market cap: $6.57 billion
Playing a critical role in helping first-time homebuyers access the housing market, Enact Holdings (NASDAQ: ACT) provides private mortgage insurance that enables lenders to offer home loans with lower down payments while protecting against borrower defaults.
Why Do We Avoid ACT?
- Insurance offerings faced market headwinds this cycle, reflected in stagnant net premiums earned over the last five years
- Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
- Earnings growth underperformed the sector average over the last two years as its EPS grew by just 4.8% annually
At $47.77 per share, Enact Holdings trades at 1.2x forward P/B. Read our free research report to see why you should think twice about including ACT in your portfolio.
Hamilton Insurance Group (HG)
Market cap: $3.64 billion
Founded in 2013 and operating through three distinct underwriting platforms across four countries, Hamilton Insurance Group (NYSE: HG) operates global specialty insurance and reinsurance platforms across Lloyd's, Ireland, Bermuda, and the United States.
Why Does HG Fall Short?
- Estimated sales decline of 2.2% for the next 12 months implies a challenging demand environment
- Pre-tax profit margin didn’t move over the last two years, showing it couldn’t increase its efficiency
Hamilton Insurance Group’s stock price of $37.15 implies a valuation ratio of 1.2x forward P/B. Check out our free in-depth research report to learn more about why HG doesn’t pass our bar.
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