3 Insurance Stocks with Open Questions

Insurance companies serve as the backbone of risk management, providing essential protection and financial security for individuals and businesses. But worries about an economic slowdown and potential claims deterioration have kept sentiment in check, and over the past six months, the industry’s 6.8% return has trailed the S&P 500 by 15.9 percentage points.

Investors should tread carefully as many of these insurers are also cyclical, and any misstep can have you catching a falling knife. Taking that into account, here are three insurance stocks we’re steering clear of.

Jackson Financial (JXN)

Market Cap: $7.03 billion

Spun off from British insurer Prudential plc in 2021 after more than 60 years as its U.S. subsidiary, Jackson Financial (NYSE:JXN) offers annuity products and retirement solutions that help Americans grow and protect their retirement savings and income.

Why Does JXN Fall Short?

1. Net premiums earned expanded by 2.8% annually over the last two years, falling below our expectations for the insurance sector
2. Expenses have increased as a percentage of revenue over the last four years as its pre-tax profit margin fell by 33.9 percentage points
3. Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term

At $100.81 per share, Jackson Financial trades at 0.6x forward P/B. Read our free research report to see why you should think twice about including JXN in your portfolio.

First American Financial (FAF)

Market Cap: $6.19 billion

Tracing its roots back to 1889 when California was experiencing its first major real estate boom, First American Financial (NYSE:FAF) provides title insurance, settlement services, and risk solutions for residential and commercial real estate transactions across the United States and internationally.

Why Do We Avoid FAF?

1. Insurance offerings faced market headwinds this cycle, reflected in stagnant net premiums earned over the last two years
2. Day-to-day expenses have swelled relative to revenue over the last four years as its pre-tax profit margin fell by 12.1 percentage points
3. Flat earnings per share over the last five years lagged its peers

First American Financial’s stock price of $60 implies a valuation ratio of 1.1x forward P/B. Check out our free in-depth research report to learn more about why FAF doesn’t pass our bar.

Cincinnati Financial (CINF)

Market Cap: $25.89 billion

Founded in 1950 by independent insurance agents seeking stable market options for their clients, Cincinnati Financial (NASDAQ:CINF) provides property casualty insurance, life insurance, and related financial services through independent agencies across 46 states.

Why Does CINF Give Us Pause?

1. Sizable revenue base leads to growth challenges as its 6.8% annual revenue increases over the last five years fell short of other insurance companies
2. Day-to-day expenses have swelled relative to revenue over the last four years as its combined ratio increased by 8.4 percentage points
3. Estimated book value per share growth of 6.4% for the next 12 months implies profitability will slow from its two-year trend

Cincinnati Financial is trading at $164.77 per share, or 1.8x forward P/B. Dive into our free research report to see why there are better opportunities than CINF.

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