Although The Hanover Insurance Group (currently trading at $177.54 per share) has gained 11.4% over the last six months, it has trailed the S&P 500’s 21.1% return during that period. This may have investors wondering how to approach the situation.

Is now the time to buy The Hanover Insurance Group, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.

Why Is The Hanover Insurance Group Not Exciting?

We're cautious about The Hanover Insurance Group. Here are three reasons why THG doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

In general, insurance companies earn revenue from three primary sources. The first is the core insurance business itself, often called underwriting and represented in the income statement as premiums earned. The second source is investment income from investing the “float” (premiums collected upfront not yet paid out as claims) in assets such as fixed-income assets and equities. The third is fees from various sources such as policy administration, annuities, or other value-added services.

Unfortunately, The Hanover Insurance Group’s 6.2% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the insurance sector.

2. Net Premiums Earned Point to Soft Demand

Insurers sell policies then use reinsurance (insurance for insurance companies) to protect themselves from large losses. Net premiums earned are therefore what's collected from selling policies less what’s paid to reinsurers as a risk mitigation tool.

The Hanover Insurance Group’s net premiums earned has grown at a 5% annualized rate over the last two years, worse than the broader insurance industry and in line with its total revenue.

3. Growing BVPS Reflects Strong Asset Base

In the insurance industry, book value per share (BVPS) provides a clear picture of shareholder value, as it represents the total equity backing a company’s insurance operations and growth initiatives.

Although The Hanover Insurance Group’s BVPS increased by a meager 2% annually over the last five years, the good news is that its growth has recently accelerated as BVPS grew at an impressive 19.7% annual clip over the past two years (from $62.51 to $89.59 per share).

Final Judgment

The Hanover Insurance Group isn’t a terrible business, but it doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 1.8× forward P/B (or $177.54 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward a top digital advertising platform riding the creator economy.

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