Kinsale Capital Group - unique focus, outstanding execution
Kinsale Capital Group, Inc. (KNSL) is a specialty insurance company, focused exclusively on the excess and surplus (E&S) insurance lines in the United States.
The company was founded in 2009 and listed on 28 July 2016. Since the listing, the company has returned 47.47% compounded annual growth (CAGR) to shareholders. This is a quality business that fits neatly into our portfolio as an emerging quality company that is owner operated.
Specialty insurance is designed to cover rare and/or expensive specialty items or events. The company uses its underwriting expertise to write coverages for hard-to place small and mid-sized business risks. This is a niche market in short term insurance and KNSL is the only publicly traded, US insurer that focus exclusively on this market.
The company was founded by Michael Kehoe who is still the CEO and owns approximately 4% of the company. He was previously the CEO of James River Group, a direct competitor. The CFO, Bryan Petrocelli has been with the company since inception.
Source: Kinsale investor presentation
Key reasons why we find Kinsale an attractive investment opportunity:
Experienced owner operator – the founder is managing the business with most of his wealth in the shares of the business. Taking Michael Kehoe’s previous position into consideration he has been the CEO of this type of business for 25 years.
Source: Kinsale investor presentation
Growing market segment – According to AM Best, the pre-eminent rating agency for the insurance industry, the E&S market for direct written premiums have grown 10.3% CAGR over the last 10 years vs 4.8% CAGR in the Property and Casualty (P&C) insurance segment.
Disciplined underwriting – all underwriting and claims handling, for all 50 states, is done in-house, centrally, at head office. No delegated underwriting authority. As they have freedom on price and form, they can decide annually what risks to take on at what price. Last year, they received approximately 605,000 new business submissions. Of those submissions, Kinsale issued approximately 419,000 quotes for a new quote ratio of 69.3% and bound 43,000 policies for a new policy to a new submission ratio of 7.1%. Their gross underwriting margin is one of the best in the industry at 45.4% up from 41.9% the historical 5-year average.
Re-insurance – The company has a prudent re-insurance policy with approximately 20% of the annual risk assumed and the premiums written reinsured with a spread of highly rated re-insurers.
Disciplined cost control – Management has a key focus to keep the expense ratio (non-underwriting costs) as a low with a 5-year average expense ratio of 22.4%.
Best in class combined ratio – The combined ratio is the Loss ratio + the expense ratio as a percentage of total premiums written with a 5-year average of 78.5%.
Entrepreneurial business culture with close alignment between management and staff – Stock based compensation amounts to 3.04% of Net income, which is an acceptable level. All senior management incentive packages are linked to owner centric metrics. Variable compensation plan for employees is based on underwriting profits generated, not gross policies written. All 568 staff work at head office Richmond, Virginia.
“Show me the incentive and I will show you the outcome.”
Proprietary technology – that drives cost control and enable KNSL to quickly collect and analyse data and provide quotes to brokers in 24 hours, an industry first. Faster quotes translate to faster payment, equates to a more satisfied distribution channel.
Source: Kinsale investor presentation
Capital allocation and intensity – The Kinsale team has a great track record for capital allocation achieving an operating return on equity of 28.9%. Capital intensity is extremely low with CAPEX/Revenue at 0.5%. There was significant investment in IT and systems from 2016 to 2019, providing Kinsale some of their competitive advantage.
Valuation - At the current share price of USD 392.62, our valuation of Kinsale, at a discount rate of 10% and terminal growth rate of 3% indicates an implied growth rate in Net Income of 12.25% over the next 10 years. Working with a margin of safety our outlook is that KNSL will grow its net earnings between 16% to 25% over the next 5 to 10 years. Provided this growth in EPS materialises, the current share price is attractive.
The major risk to KNSL is whether it can keep up the impressive growth in net earnings over the next few years without incurring significant underwriting losses. With managements track record and their stated intent to continue growing market share based on sound underwriting, we believe KNSL to be a quality company at a reasonable price.
(Note: We have used net income as a conservative proxy of owners free cash flow as the free cash flow does not exclude the reserves for unpaid losses and loss adjustement.)
Sources: KNSL annual financial statements, investor presentations and shareholder proxy, financial ratios and data from Finchat.io.
Disclaimer: The information provided on this page is for informational purposes only and should not be interpreted as investment advice or as a recommendation to buy or sell any stocks. It merely reflects our views on the companies we have analysed and in certain instances in which we have invested or whose shares we have divested. Please note that the past performance is not indicative of future outcomes and should not be relied upon as such.