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Why These 3 Insurance Stocks Are Underperforming: Lemonade, Humana, and Brighthouse Financial

While many insurance stocks are surging thanks to higher premiums, some companies in the sector are not performing as well. Financial and financial technology stocks have generally enjoyed a good run since interest rates rose. The Financial Select Sector SPDR Fund (NYSE ARCA),  an exchange-traded fund tracking 71 equities in the financial sector, including banking and insurance companies, boasts $39 billion in assets under management and has risen 28% over the past 12 months, surpassing the S&P 500. Similarly, the ARK Fintech Innovation ETF (NYSE ARCA), holding 33 fintech stocks, skyrocketed 44% in the same period.

 

Insurance stocks, in particular, have benefited from elevated interest rates, which have made buying a car or house more challenging, increasing the likelihood of defaults. To mitigate this risk, insurers have raised their premiums significantly, boosting top-line growth figures and widening profit margins. However, not every insurance stock is a “buy” right now. Here are three insurance stocks that are severely underperforming their peers: Lemonade, Humana, and Brighthouse Financial.

Lemonade (LMND)

Lemonade (NYSE) is an online insurance platform leveraging artificial intelligence to deliver various insurance products, including home, car, life, and pet insurance. Lemonade is also known for its social responsibility efforts, donating unused premiums to nonprofit organizations.

 

Despite its innovative approach and expansion into international markets like Germany, the Netherlands, France, and the U.K., Lemonade’s share price has fallen more than 79% over the past three years. This underperformance is stark compared to peer insurance companies and broader indices. A key issue for Lemonade has been its high loss ratios, which, in the insurance world, translate to higher paid insurance claims. Although these loss ratios have recently shown signs of improvement, revenue growth has begun to slow as individuals pull back on spending for new cars and homes.

Investors remain concerned about Lemonade’s perpetual losses and question when these might convert to profits. On a year-to-date basis, LMND has seen a modest increase of just over 2%.

Humana (HUM)

Humana (NYSE) offers health insurance products, including medical and specialty insurance, primarily within the U.S. The company has strong ties with key government health insurance programs, Medicaid and Medicare, and has contracts with several states to provide Medicaid benefits. Humana has reported substantial revenues, exceeding $100 billion in 2023, with a net income of $2.5 billion.

 

Despite this solid revenue performance, Humana’s stock has not fared well recently. Shares have slumped more than 23% in 2024 and have seen a greater decline over the past 12 months. In its fourth-quarter 2023 earnings report, Humana posted a GAAP net loss of $4.42 per share, primarily due to rising Medicare Advantage costs associated with higher inpatient utilization.

Additionally, recent news that the Centers for Medicare and Medicaid Services would only slightly increase its contributions to private insurance plans from 2024 to 2025 has further hurt Humana’s share price. Rising medical costs and slimmer margins suggest continued poor performance for HUM shares in the near future.

Brighthouse Financial (BHF)

Brighthouse Financial (NASDAQ), based in North Carolina and founded in 1863, offers annuities and life insurance products. Brighthouse’s annuities include variable, fixed, and index-linked contracts, and its life insurance products encompass term, universal, whole, and variable life insurance categories.

 

For its fourth-quarter earnings report, Brighthouse posted a net loss of $942 million, a nearly ninefold increase year-over-year. The losses were attributed to a drop in the value of the company’s financial hedges. Many financial companies, especially insurers, hedge certain risks via derivative contracts linked to the performance of bonds. Given the equities market rally in 2023, the losses on these hedge products were somewhat expected but still left investors unimpressed.

Brighthouse’s problems did not end there. The company’s first-quarter report this year missed Wall Street’s revenue targets, with relatively flat growth in its annuity products largely to blame. Consequently, BHF shares have fallen more than 18% since the start of the year, making it one of the worst performers in the insurance sector.

Analysis and Outlook

Lemonade: Struggles with High Loss Ratios and Slowing Revenue Growth

Lemonade’s innovative platform and international expansion have not translated into stock market success. High loss ratios have been a significant concern, indicating that the company has been paying out more in claims than it is comfortable with. While there has been some recent improvement, the overall revenue growth slowdown is troubling. As consumers pull back on big-ticket purchases like cars and homes, Lemonade’s growth prospects become more uncertain.

For Lemonade to turn things around, it needs to improve its loss ratios further and find ways to boost revenue. This might involve exploring new markets or product lines, optimizing pricing models, and improving customer retention. Until these changes are evident, investors may remain wary of LMND stock.

Humana: Impacted by Rising Costs and Regulatory Changes

Humana’s significant involvement with Medicare and Medicaid makes it particularly sensitive to changes in government policy and healthcare costs. The recent GAAP net loss and rising inpatient utilization costs have been a double blow. Moreover, the slight increase in contributions from the Centers for Medicare and Medicaid Services does little to offset rising medical costs, which could continue to pressure margins.

For Humana to regain investor confidence, it must manage its costs more effectively and find ways to optimize its Medicare Advantage plans. Additionally, any positive regulatory changes or government support could provide a much-needed boost. Until then, HUM shares might continue to face downward pressure.

Brighthouse Financial: Hedging Losses and Flat Product Growth

Brighthouse Financial’s significant hedging losses and flat annuity product growth have been major setbacks. The reliance on derivative contracts for risk management has backfired in a rising equity market, leading to substantial financial losses. Furthermore, the company’s failure to meet revenue targets in the first quarter signals deeper issues in product demand and growth strategy.

To improve its standing, Brighthouse needs to reassess its hedging strategy and find ways to stimulate growth in its annuity and life insurance products. This might involve introducing new, more attractive products, expanding its customer base, or enhancing its sales and marketing efforts. Without these changes, BHF shares are likely to remain under pressure.

Conclusion

While many insurance stocks have benefited from higher premiums due to elevated interest rates, not all have thrived. Lemonade, Humana, and Brighthouse Financial are examples of insurance stocks that have significantly underperformed their peers.

Lemonade struggles with high loss ratios and slowing revenue growth. Humana is burdened by rising healthcare costs and insufficient regulatory support. Brighthouse Financial faces substantial losses from its hedging strategies and flat product growth. These challenges underscore the importance of carefully selecting investments in the insurance sector.

Investors should closely monitor these companies for signs of improvement, such as better loss ratios for Lemonade, cost management for Humana, and product growth for Brighthouse. Until such changes are evident, it may be wise to consider other, more stable options within the insurance industry.

Keywords: Lemonade stock, Humana stock, Brighthouse Financial stock, insurance stocks, financial performance, fintech stocks, higher premiums, loss ratios, revenue growth, Medicare Advantage, hedging losses, annuity products, investment strategy, insurance sector.


Tyrik Torres has been studying and participating in financial markets since he was in college, and he has a 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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