Investors can find stellar growth stocks in any industry if they know where to look. Some of the best growth stocks are those operating in overlooked industries, like insurance.
Ignoring the investment potential in this industry is a mistake. While insurance companies may not be as flashy as technology stocks or offer potentially huge future industry growth like cannabis stocks, they still deserve a spot in your portfolio. In fact, one of Warren Buffett's favorite industries to invest in is insurance because insurance companies tend to be cash-generating machines.
One under-the-radar growth stock is Kinsale Capital (NYSE:KNSL), an insurer that focuses on hard-to-place risk. As a result, the company has done an excellent job achieving high profit margins and impressive earnings growth. It's a growth stock you don't want to miss out on.
Writing insurance for underserved markets
Kinsale Capital is a property and casualty insurer founded in 2009 and operating in the U.S. that focuses exclusively on excess and surplus (E&S) lines of coverage. E&S policies provide insurance for things standard carriers won't cover because they might be unusual or risky.
The company targets small-to-medium-sized businesses. It offers terms on a variety of risks that include those with new or high hazard operations and businesses that have poor loss histories or are located in high-risk venues. It writes policies across a variety of markets, but the largest revenue producer is construction coverage, where it underwrites policies relating to new residential construction, remodeling, renovation, and commercial construction. It also underwrites policies for small business risks, excess casualty, mobile homes, and product liabilities, to name a few.
An industry with high profit margins
Kinsale focuses on E&S policies because of its lower loss ratios and higher margins. These policies are written on unusual or high-risk situations. Because many other insurers may not write policies for these types of coverage, it gives companies in the space a little more wiggle room on pricing the policies. This can be quite profitable for those who understand the risks and are critical of any risks they take on.
For example, in 2020, Kinsale received 461,000 new business submissions. It gave quotes to 300,000 of these submissions and ended up with 31,000 new policies -- only 6.7% of total submissions.
This selectiveness is one of Kinsale's greatest strengths and why it has achieved stellar profitability ratios. In the third quarter, its combined ratio came in at 75.7%. (The combined ratio is a crucial metric that insurance companies use to measure profitability. A ratio under 100% means the company's underwriting profitable policies, while a ratio above 100% means it's losing money on them.)
Through three quarters this year, its combined ratio is 78.1%, an improvement on its 88.8% combined ratio last year.
Kinsale is one of the best at what it does
Kinsale credits its proprietary technology platform, combined with years of expertise, to quickly collect and analyze data and price difficult-to-price business risks.
From 2015 through 2020, Kinsale Capital has posted a combined ratio of 83%. To put this into perspective, Chubb, one of the world's largest insurers, which focuses on property and casualty insurance, posted an average combined ratio of 92.1% during that same period. More auto-focused insurers like Progressive and Allstate have seen combined ratios of 91.5% and 92.5% during this time. This illustrates the strength of Kinsale's business and is exactly why the E&S market presents a great investment opportunity.
Kinsale's revenue came in at $165 million in the third quarter, up 35% from last year, while net written premiums of $171 million were up 40% from last year. Bottom-line growth was stellar, as well, with net income growing 146% to $36.6 million in the quarter -- yet another sign of the strength of Kinsale's platform and how well it can price risk.
What you should watch for in the industry
One thing investors should know is that earnings for E&S insurers like Kinsale could be more volatile than the standard insurance market because insurance markets can go through phases that are known as soft markets and hard markets. A soft market happens when insurers are competing for business, and premium growth is generally very low. This type of market can hurt E&S insurers like Kinsale because more insurers compete for customers, and standard insurance companies could be more likely to cover these risks.
However, when a market hardens, E&S insurers do well. Insurance markets harden when claims activity is high and policies are hard to come by. In this scenario, E&S insurers can see faster growth than standard insurers.
We're currently experiencing a hardened insurance market, which has been the case since at least 2019 due to increased weather-related events, elevated claims from the COVID-19 pandemic, and inflationary pressures. This hard market should serve as a tailwind for Kinsale, which has established itself as one of the best E&S insurers over the years -- making the company worthy of a spot in any investor's portfolio.