Economists are forecasting multiple benchmark interest rate hikes by the Fed this year, given 40-year high inflation rates currently. The anticipated increase in interest rates bodes well for financial institutions like insurance companies because they will help these companies generate better revenues.

Higher bond yields increase risk-free returns, thus benefiting insurance companies, which invest in high-grade fixed-income instruments to meet their promised returns to policyholders. Investors’ interest in the insurance stocks is evidenced by the SPDR S&P Insurance ETF’s (KIE) 18.1% gains over the past year.

However, not all insurance stocks are well poised to generate good returns. We think insurance stocks Trupanion, Inc. (TRUP) and Lemonade, Inc. (LMND) look overvalued at their current price level. Thus, it could be wise to avoid these fundamentally-weak insurance stocks.

Trupanion, Inc. (TRUP)

TRUP in Seattle, Wash., provides medical insurance for cats and dogs on a monthly subscription basis in the United States, Canada, Puerto Rico, and Australia. The company operates through Subscription Business and Other Business segments. It serves pet owners and veterinarians.

TRUP’s net loss widened 100% year-over-year to $7 million for the fourth quarter, ended Dec. 31, 2021. The company’s loss per share widened 88.8% year-over-year to $0.17. Also, its operating cash flow declined 30% year-over-year to $5.20 million.

In terms of forward EV/S and P/S, TRUP’s respective 4.01x and 4.13x are higher than the 2.98x and 3.35x industry averages. Also,  its 11.18x forward P/B  is 819.6% higher than the 1.22x industry average.

Analysts expect TRUP’s EPS for its fiscal year 2022 to decrease 227% year-over-year to $2.91. The stock has declined  33.6% in price over the past three months to close the last trading session at $91.43.

TRUP’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, which equates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

It has an F grade for Value and a D grade for Growth, Stability, Sentiment, and Quality. It is ranked #85 out of 86 stocks in the D-rated Medical – Services industry. Click here to see the rating of TRUP for Momentum.

Click here to checkout our Healthcare Sector Report for 2022

Lemonade, Inc. (LMND)

LMND in New York City provides various insurance products in the United States and Europe. Its insurance products cover stolen or damaged property and personal liability. The company also offers renters, homeowners, pets, life insurance products, and landlord insurance policies. In addition, it operates as an agent for other insurance companies.

For the third quarter, ended Sept. 30, 2021, LMND’s net loss widened 114.8% year-over-year to $66.40 million. The company’s total expenses increased 106.8% year-over-year to $99.90 million. Also, its loss per share widened 89.4% year-over-year to $1.08.

In terms of forward EV/S and P/S, LMND’s respective 13.18x and 15.69x are higher than the 2.98x and 3.35x industry averages Furthermore, its 1.99x forward P/B is 64% higher than the industry 1.22x average.

LMND’s EPS is expected to remain negative for this year and next year. Over the past year, the stock has declined  80.3% in price year-over-year to $31.25.

LMND’s POWR Ratings reflect these bleak prospects. It has an overall F rating, equating to a Strong Sell.

The stock has an F grade for Value and Stability and a D grade for Growth, Sentiment, and Quality. Within the Insurance – Property & Casualty industry, it is ranked last. To see the rating of LMND for Momentum, click here.

TRUP shares were trading at $77.35 per share on Thursday afternoon, down $14.08 (-15.40%). Year-to-date, TRUP has declined -41.41%, versus a -7.42% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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