Drastic changes have hit the insurance industry in the past few years, especially the coronavirus pandemic. While it's been a challenge for most insurers, there have been opportunities for those skilled in excess and surplus insurance -- coverage for customers that may have unappealing or hard-to-define risks or have lost their coverage elsewhere. One company that's navigated the treacherous waters skillfully has been Kinsale Capital Group (KNSL -16.43%), which has posted impressive growth in a difficult space.
Insurers are tightening underwriting standards, increasing their premiums, and limiting coverage options available to some customers. Many experts expect this trend to continue over the next year, which has caused some in the industry to restructure their books or cancel some programs altogether. But Kinsale's CEO, Michael Kehoe, said his company has actually benefited. A history of conservative practices has placed Kinsale on solid footing to take advantage of the environment, which has helped drive solid profit growth and strong stock price appreciation to boot.
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A treacherous insurance market is an opportunity for Kinsale
Kinsale is an excess and surplus insurance specialist, and it's uniquely suited for this challenging time because of its discipline. As more aggressive competitors have had to reduce their risk, they've found themselves unable to provide certain coverage. This ultimately works to Kinsale's benefit, as it has stepped up to fill the gap, helping grow its share of the specialty insurance market while increasing premiums, which is driving bottom-line growth.
Property and casualty insurers have faced challenges resulting from what's called a hardening of the market. Among their challenges have been the coronavirus pandemic, which hit some insurers with unprecedented payouts; low interest rates, which make it harder to generate extra income through investing activity; and a rise in natural disasters, including the active hurricane season, flooding, and wildfires in recent years.
In a hard market, insurers tighten underwriting standards, increase premiums, and limit coverage options. This is ultimately causes dislocations in the insurance market and creates headaches for some insurers -- and opportunities for others, such as Kinsale.
According to AM Best, a U.S.-based credit rating agency that specializes in the insurance industry, coronavirus-driven market dislocation creates attractive opportunities for insurers in some lines of business. As insurers respond to elevated claims and capacity constraints, AM Best expects rate hardening to accelerate in the short term. As a result, the agency has seen more business flowing to wholesale markets, with favorable trends and opportunities in specialty, U.S. excess and surplus lines, and reinsurance.
Kinsale has capitalized on the current conditions
In the third quarter, Kinsale saw 25% growth in submissions -- or insurance proposals submitted to the company for consideration -- which is consistent with the prior quarter. While Kinsale doesn't provide policies for all submissions received, it does give the company more coverage types to choose from as it looks to expand its insurance book. Meanwhile, premium rates have gone up around 10% to 12% during the quarter, which has contributed to further bottom-line growth.
In addition, net written premiums were $122 million in Q3, an increase of 41% compared to the same quarter last year. This helped drive 56% growth in revenue over the same quarter last year.
Stellar growth is nothing new for Kinsale. In 2019, the company grew gross written premiums by 41% compared with 2018 figures, and almost 75% when compared with 2017. Kinsale got a big boost from a variety of sources, with the fastest growth in construction, up 40%; its small-business division, up 42%; and commercial property, up 218% as of the end of 2019 compared with 2018. Growth in these areas is expected to continue, and management has plans to roll out additional product lines related to aviation, product recalls, and commercial auto coverage.
Conservative practices are key to thriving in a hard market
Kinsale's loss reserves have been a big component of management's goal to maintain a conservative balance sheet. This focus on conservative loss reserve estimates has resulted in a favorable combined ratio. Combined ratio is a key insurance metric that shows losses and expenses as a percentage of total premiums earned. Anything under 100% means a company is earning a profit on underwriting. Kinsale has come in at 84% to 85% from 2017 to 2019.
In the first nine months in 2020, Kinsale's combined ratio is a solid 88.8%. However, this has ticked up to 97% for the third quarter because of higher catastrophe losses due to Hurricane Laura, Hurricane Sally, and the California wildfires. Investors will want to pay attention to Kinsale's combined ratio going forward, as more natural disasters could hurt growth going forward.
Kinsale is an insurer positioned well for future success
Kinsale's management team expects stellar growth to continue as dislocations accelerate. Even when the level of dislocation does abate, management expects the growth rate to normalize, still remaining in the low double digits.
Because of the current environment for insurance companies, and Kinsale's ability to meet the needs of its customers during this difficult time, the company is positioned well in its sector and could reward investors very nicely in the process.
