Financial stocks have faced volatility in recent months, with the collapse of a few regional banks causing concern among investors. However, insurers don't face similar risks to banks and can have the potential to be more resilient in turbulent times.
Insurance stocks can make solid investments because of their constant demand and ability to grow alongside the economy or during inflationary periods. Two attractive insurance stocks you should consider today are Markel (MKL -1.17%) and Goosehead Insurance (GSHD 0.27%).
1. Markel
Markel writes insurance policies on hard-to-place risks in the specialty insurance market. It focuses on a property & casualty insurance market segment called excess & surplus (E&S) coverage. This type of insurance differs from standard insurance policies.
Standard policies are highly regulated, and most products are uniform. As a result, major P&C insurers like Progressive, Allstate, or Chubb end up competing on price. Those same regulations don't bind E&S insurers like Markel. Instead, Markel competes with other E&S insurers based on availability and expertise. It has more flexibility in pricing its policies and isn't subjected to the same policy forms as traditional insurers.
Insurers' ability to grow alongside the economy and during inflationary periods makes them solid investments. Markel grew its insurance premiums by 11.8% in the first quarter to nearly $2 billion and has achieved solid revenue and free cash flow growth over the last several years.
MKL Revenue (TTM) data by YCharts.
While Markel's insurance business is solid, there's another aspect that makes the company appealing -- its investment portfolio. Markel has often been called a baby Berkshire Hathaway because of its large investments in the U.S. stock market. At the end of the first quarter, Markel had a $23 billion investment portfolio, with $8.1 billion invested in equities. The remainder of its portfolio is in fixed-maturity bonds and available-for-sale short-term investments.
Its large investment portfolio was a drag on earnings last year due to declining prices in equities and bonds. In the first quarter of last year, its investments resulted in a loss of $358 million and caused a net loss of $49 million. This year a rebound in stock prices has its investments up $373 million, with net income improving to $538 million.
Markel is an intriguing company. It has done a solid job of underwriting sound insurance policies for years, and its investment portfolio gives it another lever that can boost its growth long-term, making it a solid stock to buy today.
2. Goosehead Insurance
Goosehead Insurance is an agency that sells insurance, like homeowners and automotive, to individuals. Founded in 2003, Goosehead uses a franchise-based business model to distribute insurance products. The company leverages technology to onboard franchisees quickly and efficiently. The proof is in the pudding, and since 2019, its total franchise count has grown by 31%, compounded annually.
What makes Goosehead appealing is its long-term growth opportunity. Its key to long-term success is finding quality franchisees and keeping them on board, which should ultimately lead to higher profit margins. That's because of the way its revenue-sharing agreements are structured.
Each franchise agreement has a 10-year term with two optional five-year renewal terms. During the initial franchise agreement, Goosehead earns a 20% royalty on any commissions a franchisee generates. However, if those franchisees renew after the initial 10-year period, Goosehead's royalty payments bump up to 50% of a franchise's commissions. Because of this structure, the company incurs costs upfront for onboarding and training franchisees but is positioned for more significant profits on higher margins long term.
GSHD Revenue (TTM) data by YCharts.
Since going public in 2018, Goosehead's total revenue has grown 429%, providing evidence in favor of the company's strategic growth strategy of building out its agent network. Net income growth has been more uneven as the company incurs increasing costs as it scales up.
The stock has traded at a premium because of its rapid growth and now trades at a price-to-sales ratio of 5.9, well below its average P/S ratio of 11.7 since going public in 2018. Goosehead has done a solid job of building its franchise network, and its revenue-sharing model has positioned it for potentially tremendous long-term growth, making it a solid stock to buy today and add to over time.
