Insuring the “Uninsurable” Pays Off

Insurance companies don’t like the unknown. 

Their business relies on predictable, controlled losses.

Which is what makes Kinsale Capital Group (KNSL) such an oddball.

Kinsale specializes in excess and supply insurance, or E&S, the market for insuring things standard carriers won’t insure.

And it’s helped the company’s shares gain over 800% since its 2016 IPO.

The recent 22% pullback got the attention of a lot of financial pros who’d been eyeballing the stock for months, according to our TrackStar data.

While the valuation isn’t stellar, the growth is phenomenal.

So is this stock right for your portfolio?

Kinsale’s Business

Insurance is a pretty basic business.

Customers pay premiums, and claims are paid.

Insurers make money so long as they pay out less than they receive.

To create predictability in cash flows, insurers perform vast statistical analysis so they know who to insure and who to avoid.

Some folks come with high risk, an adverse loss history, or just something so unusual the risk can’t be easily quantified. These people become Kinsale’s customers.

So far, this business has worked incredibly well.

Kinsale wrote premiums across a diverse range of industries that grew at phenomenal rates:

Source: Kinsale Investor Relations

What makes Kinsale unique is it exclusively writes E&S policies. That can add risk, but as the financials below highlight, there is a lot of potential gain.

Financials

Source: Stock Analysis

Kinsale boasts an average revenue growth of more than 30% annually. 

Its ability to write policies for everything from cannabis companies to marine transportation gives a leg up in an underserved market.

Insurance margins change over time based on claims and payouts. So, it’s important to look at the performance over multiple years, specifically at operating and profit margins.

Notably, both have improved in recent years despite a route in the bond markets, where insurers park excess cash.

Valuation

Source: Seeking Alpha

Kinsale’s multiples don’t look cheap.

However, Progressive (PGR) trades at similar earnings and cash multiples. But Progressive’s price-to-book is significantly cheaper.

Markel (MLK) and Travelers (TRV) all trade at 2/3 the valuation of Kinsale. 

The difference between all of these companies…growth.

Growth

Source: Seeking Alpha

Kinsale’s revenue growth trounces its peers.

Only Markel comes close and still falls short of Kinsale’s incredible +38% average growth for the last five years.

Plus, Kinsale expects to continue this trend next year.

Profitability

Source: Seeking Alpha

Notably, Kinsale’s net income margins dominate its peers. That’s helped it deliver the best returns on equity, assets, and total capital in the group.

But what really stands out is the 72% free cash flow margin. That’s likely to decline in the coming years, but is impressive nonetheless.

Our Opinion 7/10

Although Kinsale is a fabulous company, this statement from the last earnings call stands out:
“We also like to remind investors that extraordinary growth rates that we’ve experienced for the last 5 years are an anomaly in a mature industry…we believe the longer-term growth rate for Kinsale will moderate to the 10% to 20% range…”

This direct quote from the CEO isn’t a forecast but an observation.

Yet, it explains the big drop in the stock after its Q3 earnings release.

We believe the best way to play a stock like Kinsale is to buy this stock and short a competitor like Progressive. This allows you to benefit from Kinsale’s higher growth for as long as it lasts, given that the two companies’ valuation is similar.

• GameStop’s Transformation Catches Fire
• Are Alternative Investments a gray area? The Alt can add some color
• Is Marathon Digital the Way to Play Crypto?
• Why Financial Pros Like This Tiny Bond ETF