BHF - 3 Sorry Insurance Stocks to Sell in May While You Still Can
2024-05-30 09:18:41 ET
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
Financial and financial technology stocks have had a decent run ever since interest rates rose. The Financial Select Sector SPDR Fund (NYSEARCA: XLF ) is an exchange-traded fund that tracks 71 equities in the financial sector, including banking and insurance companies. The ETF has $39 billion in assets under management and has risen 28% over the past 12 months, edging out the S&P 500 .
Similarly, the ARK Fintech Innovation ETF (NYSEARCA: ARKF ), which holds 33 fintech stocks , skyrocketed 44% over the same period.
Insurance stocks have done particularly well. Elevated interest rates made buying a car or a house more difficult and have, in turn, increased the likelihood of defaults. To combat this risk, insurers across the board have significantly raised their premiums, which effectively boosted top-line growth figures and widened profit margins.
However, not every insurance stock is a “buy” right now. These three insurance stocks are severely underperforming their peers.
Lemonade (LMND)
Lemonade (NYSE: LMND ) is an online insurance platform that leverages artificial intelligence to deliver a variety of insurance products. These include home insurance, car insurance, life insurance, and even insurance for pets. Lemonade prides itself in giving back to communities in the form of donations of its unused premiums to nonprofit organizations.
Furthermore, Lemonade has been able to expand to geographies beyond the U.S. That is, potential customers can access Lemonade’s services in Germany, the Netherlands, France, and the U.K.
Despite that success, Lemonade’s share price has fallen more than 79% over the past three years, underperforming both peer insurance companies and the broader indices. The platform’s higher loss ratios , which in the world of insurance translates to paid insurance claims, remain elevated only until recently . Revenue growth figures have also begun to slow down as individuals broadly pull back spending on new cars and homes. This leaves investors wandering about Lemonade’s perpetual losses and when they’ll convert to profits.
On a year-to-date basis, LMND has crept up just over 2%.
Humana (HUM)
Humana (NYSE: HUM ) offers health insurance. The provider offers medical and specialty insurance products in the U.S. The company has an established relationship with key government health insurance programs, Medicaid and Medicare, and has contracts with several states to provide Medicaid benefits.
Humana’s overall platform has been relatively successful. The insurance company boasts revenue north of $100 billion in 2023 and a net income of $2.5 billion.
Unfortunately, Humana has not courted the favor of investors recently. In fact, shares slumped more than 23% in 2024 and even more if we zoom out 12 months. For the insurer’s earnings report for the fourth quarter of 2023, Humana reported a GAAP net loss of $4.42 per share. This primarily had to do with losses related to Medicare Advantage costs that had risen due to higher inpatient utilization.
Recent news that Centers for Medicare and Medicaid Services, a government agency, would only slightly increase its contributions to private insurance plans from 2024 to 2025, also battered Humana’s share price. This will eventually translate to lower margins amidst higher medical costs across the board.
Rising medical costs and slimmer margins can only mean continued poor performance for HUM shares.
Brighthouse Financial (BHF)
Based in North Carolina and founded in 1863, Brighthouse Financial (NASDAQ: BHF ) offers annuities and life insurance products. Brighthouse’s annuities include a mix of variable, fixed, and index-linked contracts, and the firm’s life insurance products are pretty standard as well, encompassing term, universal, whole, and variable life insurance categories.
For its fourth-quarter earnings report, Brighthouse reported a net loss of $942 million, which had ballooned nearly 9 times over from a year-over-year perspective. Brighthouse attributed the losses to a drop in the value of the company’s financial hedges. Many financial companies, especially insurance companies, hedge certain risks via derivative contracts linked to the performance of bonds, and given the way equities markets rallied in 2023, the loss on hedge products made sense, although they left investors unimpressed.
However, Brighthouse’s problems do not end there. The firm’s first-quarter report this year missed Wall Street’s revenue targets. Relatively flat growth in the company’s annuity product seems to be the blame.
BHF shares have fallen more than 18% since the start of the year, making it one of the worst performers in the insurance sector.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines .
Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.
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