One way to make life-changing wealth in the stock market is by investing in growth stocks. Growth stocks are excellent companies that increase revenue and earnings faster than their industry. These companies have distinct competitive advantages that allow them to compound their profits, and compound returns for shareholders in the process.

One growth stock that has crushed the market over the past five years is Kinsale Capital Group (KNSL 0.21%). The specialty insurance company stands heads and shoulders above its industry. Here's the secret to its success.

Writing insurance policies on hard-to-place risks

Kinsale Capital Group writes insurance policies on hard-to-place risks, focusing on the excess and surplus (E&S) insurance market.

Companies use E&S policies to insure themselves against risks that traditional insurers don't cover. For example, Kinsale writes policies that cover small businesses, construction, product liability, and professional liability, to name a few.  

A construction worker reviews a sheet in front of a property under construction.

Image source: Getty Images.

Kinsale Capital's secret to success

Kinsale's secret to success is its built-up knowledge of hard-to-place risks, covering policies many other insurers won't touch. Because E&S insurers like Kinsale write unique policies, they can outperform the broader insurance industry. E&S insurers can make for excellent investments because they have higher profit margins and lower loss ratios than others in the industry. One way you can evaluate an insurance company is through the combined ratio.

The combined ratio is a metric that shows how profitably an insurer is writing policies and is the total expenses and claims losses divided by premiums taken in. A ratio below 100% means a company is writing profitable policies; the lower the percentage, the better.

From when Kinsale went public in 2016 through 2021, it has averaged a spectacular 82% combined ratio. To put this in perspective, the combined ratio for the broader property and casualty insurance industry was 99% during that same period.

A bar chart shows Kinsale Capital's combined ratio versus the property and casualty industry average.

Data sources: Kinsale 10-K Filings, National Association of Insurance Commissioners. Chart by author.

Pay attention to this to see if growth is slowing down

Kinsale Capital has been on a tear, but you should be aware that insurers can go through periods of "hard" markets and "soft" markets.

Right now, the market is hard, which means insurers can charge higher premiums and be more selective about the policies they are willing to cover. Insurance markets have been hard for over a decade now, benefiting E&S insurers like Kinsale, which don't face as much competition. 

If insurance markets were to soften, premium growth would slow, and insurers would be willing to cover a broader range of policies. This increased competition could hurt E&S insurers.

For this reason, investors should pay attention to Kinsale's combined ratio and profit margins. If the combined ratio begins trending well above its five-year average over several quarters in a row, it could be a sign that the company's growth is slowing down.

Investor takeaway

Since going public in 2016, Kinsale's total revenue has grown at a 40% compound annual growth rate (CAGR), while its net income has grown at a 33% CAGR. This impressive growth is why Kinsale has crushed the S&P 500's returns over five years, 608% to 84%.

Growth has continued in 2022, as Kinsale grew its net written premiums by 47% from last year. Net income decreased 13% from last year due to lackluster investment performance and an uptick in claims losses and expenses. However, Kinsale posted a stellar combined ratio of 77.8%, an improvement from the first half when it posted a 79.5% ratio -- a positive sign that its core business continues to perform.  

Kinsale Capital excels at writing policies on hard-to-place risks, and insurance markets will likely remain hard as inflationary pressures persist, making this stock an excellent addition to any investor's portfolio.