KNSL - Kinsale Capital Group: A Booming Business In A Unique Niche

2023-07-20 07:06:37 ET

Summary

• Kinsale Capital Group, a specialty insurance company, has seen a price return of about 560% over the last five years, 72% over the last 12 months, and 45% YTD.
• The company is set to benefit from the growing specialty insurance market, which is predicted to reach $279 billion by 2031, with a CAGR of 10.6%.
• Despite potential risks related to catastrophic events, unexpected claims, and economic downturns, the company's strong financial performance and future growth prospects make it an attractive investment.

Investment Thesis

Kinsale Capital Group ( KNSL ) is a specialty insurance company that operates in the property and casualty market. With its unique underwriting expertise and disciplined approach, it has garnered increasing attention from investors, given its excellent short- and long-term performance. To elaborate this assertion empirically, KNSL has a price return of about 560% over the last five years, 1bout 72% over the last 12 months, and about 45% YTD. This shows that the company is on a solid upward trajectory which I believe will continue, given the company’s solid fundamentals.

I believe the company is poised for a solid upward trajectory given its unique business niche, which it exploits effectively given its low expense structure achieved through automation. Given this outstanding competitive advantage and underwriting expertise, I believe the company will leverage the growing insurance market and keep its solid performance in the long run.

Business Overview

The company primarily focuses on risks associated with excess and surplus lines of insurance in the US. This segment serves customers with specific and specialized coverage needs that are typically not covered by standard insurance policies. The company has carved a niche market for itself by offering custom-tailored solutions to its target customers. Using a network of independent insurance brokers as its primary distribution channel, the company distributes and sells insurance products in about 50 states , the District of Columbia, the Commonwealth of Puerto Rico, and the United States Virgin Islands.

It offers a wide variety of insurance policies. Commercial property, small business casualty, construction, excess casualty, etc., are just some of the commercial lines it provides. In the personal lines sector, the firm’s personal insurance segment also provides coverage for a limited number of homeowners. Below is the company’s revenue distribution per business line.

The Market Opportunity

The specialty insurance market offers significant growth opportunities. According to a report by Allied Market Research, the global specialty insurance market is projected to reach $279 billion by 2031, growing at a CAGR of 10.6%, driven by increasing risks associated with emerging industries and technological advancements. As Kinsale targets specific customer needs and niches, it is poised to benefit from capturing a portion of this expanding market.

With this global growth, it is interesting to note that the US has a significant share of the global insurance industry. Several metrics, including premium volume, number of employees, and insurance firm revenues, distinguish the American insurance sector as a global leader . In my view, this positions the company in a prime position to reap the benefits of the growing market, which I believe narrows down to individual companies like KNSL, which has a competitive advantage in the low-cost structure and also high efficiency achieved through automation.

Down to the US E&S market growth, which is the niche of KNSL, Direct statutory premiums written in E&S have climbed for the last 11 years , with direct statutory premiums written hitting $76 billion in 2021, marking the fourth consecutive year of double-digit growth. As a result, the E&S lines market in the United States presently accounts for 8% of the total P/C insurance business in the United States. Prior to 2019, E&S accounted for 5% of the overall P/C market.

Over the past few years, shifts in risk appetite among admitted carriers have led to an increase in the number of harder-to-place or volatile accounts written in the E&S market, which is better able to accommodate these risks thanks to looser pricing and policy form restrictions. This leeway allows for more creative and individualized underwriting of high-risk situations.

Below is data from the company’s IR presentation showing the market growth over time.

KNSL Underwriting Expertise

What sets Kinsale apart from its competitors is its proven underwriting discipline. The company emphasizes risk selection and pricing, allowing it to maintain a favorable combined ratio, a key metric in the insurance industry representing the sum of claims expenses and operating costs compared to premium revenue. Kinsale’s combined ratio has consistently remained below the industry average, highlighting its strong underwriting capabilities.

In addition to this, the company has a diverse set of risks across the E&S market, including some difficult risks where they believe pricing may be attractive. In my view, this diversity helps them distribute risk to different revenue streams, which will go a long way in ensuring the company has a stable revenue stream since there is no risk of total collapse should one stream fail.

Financials: Growth In Cash Flow and Earnings

Following the company’s expertise and growing market, KNSL has been excelling financially in revenues and profits . With this in mind, I’m attracted by the company’s growing EPS and cash flows. Earnings growth is arguably the most crucial factor, as rising profits are the ultimate goal for most investors. Moreover, double-digit earnings growth is preferred by growth investors and frequently indicates the company’s promising future.

Investors should go beyond KNSL.’s 45.7% EPS growth rate in the past three years and focus on the company’s estimated growth . This year, it is projected a 23.75% increase in earnings per share for the company, much outpacing the industry average of -1.61%

While it’s true that all businesses need a steady stream of cash flow, companies with an eye toward expansion will benefit most from experiencing above-average increases in their cash flow. This is because companies that experience an increase in cash flow can extend their operations without resorting to more costly forms of financing. KNSL has a YoY cash flow from operations of 44.75% compared to the industry median of 0.38%.

How About Future Performance?

Despite the importance of looking at how a firm has performed in the past, I believe that prospective projections and estimates should be taken into account when making investment decisions. In light of this, I believe that KNSL has a promising future, as seen by its impressive projected growth rates . Besides these promising forward growth rates, the consensus estimates and revisions are all pointing out to a successful future. To be specific, EPS estimates have been trending up, which speaks volumes about the company’s future earnings.

In addition to the upward revisions to EPS, other metrics have shown a similar pattern, indicating that the future is bright for this company, and as a result, I expect its price return to continue trending up in the following quarters and fiscal years.

My Investment Case

KNSL has consistently demonstrated its ability to thrive in a competitive market by leveraging its underwriting expertise and disciplined approach. The company’s strong financial performance, dedicated niche focus, and capacity to adapt to changing market demands make it an attractive investment opportunity. With a five-year total return of 568%, this company is a real wager, which should motivate investors to board.

Looking at its valuation metrics, the company is trading at a PE ratio of 47.73 and a PB ratio of 10.71, which are way above the industry medians of 9.76 and 1.08, respectively. While the obvious conclusion here could be that the company is overvalued, I believe that its premium price is justified by its strong financial performance and future growth prospects. Considering the company’s strong fundamentals and the promising market opportunity, I don’t expect its shares to dip anytime soon. As a result, I think the opportunity here is for current investors to increase their stake and capitalize on the current momentum.

However, like any investment, there are inherent risks associated with investing in Kinsale. Since the company operates in the property and casualty insurance market, it faces potential risks related to catastrophic events, unexpected claims, and economic downturns. Investors should be wary of these risks as they improve their stake in this company.

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