When building wealth through the stock market, one of the most straightforward strategies is buying excellent companies and holding them for the long haul. When looking for top-notch stocks, you want to find stellar businesses with positive catalysts that can drive growth in the future.
One industry often overlooked by investors is insurance brokers. Insurance brokers are in a good position to profit by helping customers find insurance policies that fit their risk tolerance. Two insurance brokers with excellent future growth prospects are Marsh & McLennan (MMC -0.51%) and Goosehead Insurance (GSHD -0.82%).
1. Marsh & McLennan Companies
Marsh & McLennan advises companies on risk, strategy, and workplace issues. The company helps companies manage risk and connects them with insurers that help mitigate those risks. Risk and insurance services make up 60% of Marsh & McLennan's total revenue, with consulting services making up the rest.
What makes Marsh & McLennan special is that it is a trusted advisor to companies looking to navigate risk and other issues like employee compensation, retirement plans, and the adoption of greener business practices. This constant demand helps the insurance broker's earnings grow consistently. In the last decade, Marsh & McLennan's revenue has grown at a 6% compound annual growth rate (CAGR), while its net income has grown at a 13% CAGR.
Marsh & McLennan also has a few tailwinds benefiting its business today. For one, rising insurance prices have benefited the business. That's because Marsh & McLennan earns a commission on its customers' premiums paid to the insurers it connects them to. According to the Marsh Global Insurance Market Index, insurance prices increased 9% from last year, and insurance prices have increased for 19 quarters in a row.
The company has also benefited from strong demand for its services in an uncertain economic environment. In recent years, companies have had to deal with supply chain issues, inflationary pressures, volatility in capital markets, and a transition to greener energy sources. Dan Glaser, CEO of Marsh & McLennan, told investors that "when the world is unsettled, demand for our services rises."
Marsh & McLennan is well positioned to succeed through any market cycle, so the prospect of a recession doesn't concern the company too much. According to Glaser, the company has grown its earnings per share (EPS) during every recessionary period since 1962, making it an excellent stock to buy and hold.
2. Goosehead Insurance
Goosehead Insurance is an agency that sells insurance policies through its corporate headquarters and its franchisees. The company has invested heavily in technology to aggressively onboard franchisees, which it sees as its path to explosive long-term growth. Since 2019, its corporate-channel premiums have grown at a 31% CAGR, while its franchise premiums have grown at a 52% CAGR.
The company sees the franchise channel as its golden ticket for long-term earnings because of the revenue-sharing structure. During the initial franchise agreement, which lasts about ten years, Goosehead earns royalties of 20% from its franchisee. Goosehead's royalties then jump to 50% when a franchisee renews their contract.
Goosehead's franchise count is up 25% in the second quarter compared to last year, bringing its total franchisees to 1,344. The company has seen excellent growth this year on the top line, with total revenue up 36% to over $94 million. Operating expenses ticked up too, mainly from employee compensation payments, and general and administrative costs. As a result, Goosehead has a net loss of nearly $2 million after posting a net profit of $1 million through six months last year.
It's important to remember that Goosehead incurs higher expenses for newer franchisees as they onboard and train employees on the business. However, in the long run, franchise fees can be pretty lucrative for Goosehead, which is why I think the stock can be an excellent holding for the long haul.