Is Kinsale Capital Stock a Buy?

When building long-term wealth through the stock market, it is important to find high-quality companies that are capable of sustainable growth, no matter what the economy throws at them. Kinsale capital (KNSL -5.29%) is one such company that has consistently delivered remarkable returns for its shareholders.

The company may not be a household name, but its shares have risen steadily since its initial public offering (IPO) in 2016. Since then, the stock has delivered investors an annual return of about 49% – enough to turn a $10,000 investment into a nice handsome sum today. $263,100.

Kinsale Capital exhibits a robust business model and strong ability to assess and price risk. This is why it could still be a good buy for investors today.

Why insurers should be part of your portfolio

Investing in insurance companies isn’t exciting, but they can be a solid part of your diversified portfolio. Don’t just take my word for it, though. Warren Buffett, one of the most successful long-term investors in the world, has invested heavily in insurance companies over the past sixty years. Berkshire Hathaway. He called those investments ‘a very large part of Berkshire’s value.”

What makes insurance investments attractive is the steady demand for the product and the insurer’s pricing power. There is strong demand from businesses and people who want to protect themselves from full-blown disasters, such as hurricanes, tornadoes, floods, cyber attacks or liability for product defects.

This steady demand for insurance coverage ensures that insurers will always be in business. It also gives insurers power pricing power in times of rising prices. As rising costs affect every insurer, the industry can increase the premiums charged to customers and fend off inflationary pressures. This pricing power is especially noticeable among insurers who have even better insurance.

Kinsale is one of the best in terms of price risk

As an excess and surplus (E&S) insurance company, Kinsale covers risks that other insurers will not cover, and has done an excellent job. Kinsale writes policies on risks that traditional insurers do not cover. Because the E&S sector is not as tightly regulated, it has more flexibility in determining what it reimburses and how much it charges.

Since the IPO, this has been Kinsale’s average annual return combined ratio has been 81%. In other words, the insurer earns $19 in underwriting profits for every $100 in premiums collected.

This excellent underwriting ability translates directly into strong margins. Since 2016, Kinsale’s profit margin has averaged 19.7%, well above insurers like Progressive (13.8%) and Chubb (7.2%), two solid insurers in the traditional property and casualty insurance market.

KNSL profit margin data Ygraphs

What’s next for Kinsale Capital?

Insurance companies are influenced by several factors, such as the pricing environment, competition and their ability to continue to do so endorse profitable policy while maintaining a competitive advantage. In this case, market conditions are important.

Insurers are currently faced with challenging market conditions, also known as a ‘hard’ market. This is due to rising damage costs, which are the result of rising costs due to inflation and the increasing frequency or severity of extreme weather events. In such a market, insurers have more flexibility to increase premiums and be more selective about the risks they take, which directly benefits E&S insurers like Kinsale.

According to a report from Swiss Re, tough insurance market conditions are likely to persist this year. However, the reinsurance The company believes conditions will begin to ease in 2025. According to the report:

“We see insurance outcomes turning positive, supported by high premiums, rising risks and declining claims growth as inflation subsides. Investment returns will continue to benefit from higher interest rates, while the cost of capital will remain broadly stable.”

Is Kinsale a buy?

If there’s one thing that makes investors hesitant about investing in Kinsale today, it’s its valuation. The insurer is priced at 29 times earnings, well above the industry average of 15.9 times earnings. That said, Kinsale Capital is growing rapidly, so its high valuation compared to the industry seems justified. However, the stock could be vulnerable if growth slows.

Overall, Kinsale Capital has shown excellent underwriting since going public just under a decade ago, and it continues to fire on all cylinders. Analysts predict sales will grow 29% this year and another 20% next year. Given its excellent adoption and continued growth, I think Kinsale remains an excellent stock for long-term investors today.