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 12.3% 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. With that said, here are three insurance stocks best left ignored.
RLI (RLI)
Market Cap: $5.88 billion
Founded in 1965 and named after its original focus on "replacement lens insurance" for contact lens wearers, RLI (NYSE: RLI) is a specialty insurance company that underwrites property, casualty, and surety products through wholesale brokers, independent agents, and carrier partnerships.
Why Does RLI Worry Us?
- Expenses have increased as a percentage of revenue over the last five years as its pre-tax profit margin fell by 5.2 percentage points
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 9.1% annually
- Muted 5% annual book value per share growth over the last two years shows its capital generation lagged behind its insurance peers
RLI’s stock price of $64.05 implies a valuation ratio of 3.4x forward P/B. Dive into our free research report to see why there are better opportunities than RLI.
Employers Holdings (EIG)
Market Cap: $896 million
With roots in Nevada and a strong concentration in California where 45% of its premiums are generated, Employers Holdings (NYSE: EIG) is a specialty provider of workers' compensation insurance focused on small and select businesses engaged in low-to-medium hazard industries across the United States.
Why Are We Bearish on EIG?
- Insurance offerings faced market headwinds this cycle, reflected in stagnant net premiums earned over the last two years
- Efficiency has decreased over the last five years as its pre-tax profit margin fell by 24.5 percentage points
- Earnings per share fell by 22.7% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
At $49.88 per share, Employers Holdings trades at 1x forward P/B. If you’re considering EIG for your portfolio, see our FREE research report to learn more.
Assured Guaranty (AGO)
Market Cap: $3.33 billion
Serving as a financial safety net for over $11 trillion in debt service payments since its founding in 2003, Assured Guaranty (NYSE: AGO) provides credit protection products that guarantee scheduled payments on municipal bonds, infrastructure projects, and structured finance obligations.
Why Do We Steer Clear of AGO?
- Insurance offerings face significant market challenges this cycle as net premiums earned contracted by 3.8% annually over the last five years
- Pre-tax profits fell over the last two years as its sales dropped and it struggled to adjust its fixed costs
- Performance over the past two years shows each sale was less profitable as its earnings per share dropped by 17.2% annually, worse than its revenue
Assured Guaranty is trading at $75.80 per share, or 0.6x forward P/B. Read our free research report to see why you should think twice about including AGO in your portfolio.
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