2 Top Insurance Stocks to Buy in May

Financial stocks have faced volatility in recent months, with the collapse of several regional banks causing concern among investors. However, insurers do not face the same risks as banks and may 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 with the economy or during inflationary periods. Two attractive insurance stocks to consider today are Markel (MKL -0.30%) and Goose Head Insurance. (GSHD -0.41%).

1. Markel

Markel writes insurance policies for hard-to-place risks in the specialty insurance market. It focuses on a property and casualty insurance market segment called excess and excess (E&S) coverage. This type of insurance differs from standard insurance policies.

Standard policies are highly regulated and most products are unified. As a result, the big P&C insurers like Progressive, Allstateor Chub after all, they compete on price. These same provisions do not bind E&S insurers like Markel. Instead, Markel competes with other E&S insurers based on availability and experience. It has more flexibility in pricing its policies and is not subject to the same policy forms as traditional insurers.

The ability of insurers to grow in tandem with the economy and during inflationary periods makes them solid investments. Markel grew its insurance premiums 11.8% in the first quarter to nearly $2 billion and has seen solid revenue and free cash flow growth over the past few years.

MKL Revenue (TTM) data from YCharts.

While Markel’s insurance business is solid, there’s another aspect that makes the company attractive — its investment portfolio. Markel is often referred to as a baby Berkshire Hathaway because of his large investments in the American stock market. At the end of the first quarter, Markel had an investment portfolio of $23 billion, with $8.1 billion invested in stocks. The rest of his portfolio is in fixed-maturity bonds and short-term available-for-sale investments.

Its large investment portfolio stumbled on gains last year as stock and bond prices fell. 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, recovering stock prices boosted investment by $373 million, with net income improving to $538 million.

Markel is an intriguing company. It has done a solid job of underwriting solid insurance policies over the years, and its investment portfolio gives it another lever that can fuel its long-term growth, making it a solid stock to buy today.

2. Goose Head Insurance.

Goosehead Insurance is an agency that sells insurance, such as homeowners and auto, to individuals. Founded in 2003, Goosehead uses a franchise-based business model to distribute insurance products. The company uses technology to onboard franchisees quickly and efficiently. The proof is in the pudding and since 2019 the total number of franchises has grown by 31% compounded annually.

What makes Goosehead attractive is the opportunity for long-term growth. The key to long-term success is finding quality franchisees and keeping them on board, which should ultimately lead to higher profit margins. This is due to 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% fee on all commissions generated by the franchisee. However, if these franchisees renew after the initial 10-year term, Goosehead’s royalty payments increase to 50% of franchise commissions. Because of this structure, the company incurs initial costs to onboard and train franchisees, but is positioned for greater profits at higher margins in the long term.

GSHD Earnings Chart (TTM).

GSHD Earnings Data (TTM) from YCharts.

Since going public in 2018, Goosehead’s total revenue has grown 429%, a testament to the company’s strategic growth strategy of building an agent network. Net income growth is more uneven as the company incurs increasing costs as it grows.

The stock traded at a premium due to its rapid growth and now trades at a P/S ratio of 5.9, well below the average P/S ratio of 11.7 since going public in 2018. Goosehead has done a solid job building its franchise network and its revenue-sharing model position it for potentially huge long-term growth, making it a solid stock to buy today and add to over time.

Courtney Carlsen has positions with Allstate and Progressive. The Motley Fool has positions in and recommends Berkshire Hathaway, Goosehead Insurance and Markel. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.

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