When investors think about growth stocks today they tend to be drawn towards the exciting names in the technology sector. But investing in growth companies, particularly at the quality end of the scale, should be about much more than that.
Financial companies, for instance, are often seen as risky and cyclical, buffeted by the shifting fortunes of domestic economies and interest rate levels. But not all companies within the sector fit this mould.
Take casualty insurance. Today, the insurance cost of everything from global warming to climate change mitigation and terrorism insurance is going up. More people are paying to cover more things. It is a good structural organic growth story.
Exposure is often gained via the big insurers – the companies who underwrite the risk. But these are prone to write-offs and sudden and unexpected losses, as things can and do go wrong – and the insurers are on the hook for them.
We much prefer to invest in the low-key businesses that are core to the insurance industry, but lack the risks the underwriters face. Below are two under-the-radar stocks that make boring, in the best sense of the word, brilliant.
Gallagher
It may not be a household name, but Gallagher is one of the leading insurance brokers in the world. Its core business model is very simple: it helps arrange policies between insurers and clients, and it takes a percentage of premiums in return. That means it gets all the benefit of higher inflation (the value of the items insured) without the downside of higher claim costs.
Strategically, Gallagher is well placed. Unlike its bigger rivals, it focuses on mid-sized corporates, which typically pay between $100k and $2.5m for their insurance, translating into roughly $10k to $250k of annual revenues per company for Gallagher. Importantly, these companies tend to pay commissions, which can rise around 10%-15% when premium prices increase.
As a business with very low capital needs, Gallagher can convert much of the revenue it makes into cash flow, which it often uses to make further bolt-on acquisitions – it completed 12 such deals in the third quarter of 2023 with $57m of estimated annualised revenue. This increased scale gives Gallagher more negotiating power with underwriters, allowing it to offer very competitive pricing to clients.
As demand for insurance worldwide grows and the appreciation for risk increases, Gallagher has extremely good long-term growth prospects.
Verisk Analytics
Verisk is the largest go-to provider of information and analytics to the casualty insurance industry in the US. It is, in effect, the Bloomberg of the insurance world. It uses technology and artificial intelligence (AI) to collect and analyse information to support insurers to correctly price their products. It collects sensitive information from insurers which in turn subscribe to access its unique database and analytics.
Verisk has data about millions of commercial and residential properties in the US – it knows what material a building is made of, how likely it is to flood and how quickly, on average, a fire engine would take to reach it – which it sells to insurance companies to enable them to accurately price risk and reduce fraud.
Despite the value of this data, it is a small budget item for insurers, which gives Verisk inherent pricing power. Around 80% of its revenue is recurring and, as it is heavily integrated into workflows, it is unlikely ever to be turned off.
With an established team of data scientists and software engineers, Verisk is also well positioned to capitalise on the AI revolution – changing weather patterns and cyber security in particular are strong growth areas for the business.
Insurance data may sound boring, but with its stock up around 30% year-to-date, Verisk’s returns are anything but.
Gerrit Smit is manager of the Stonehage Fleming Global Best Ideas Equity fund. The views expressed above should not be taken as investment advice.