When investing for the long haul, you want to buy stock in quality companies with strong competitive advantages that can withstand the test of time. Kinsale Capital (KNSL -17.31%) is one such example. Kinsale writes insurance policies beyond those standard insurers cover and has done a stellar job as a company and as a stock since going public in 2016.
Over the past five years, Kinsale's business has benefited from tailwinds, and its stock has delivered investors a 53% average annual return. With the stock surging again after its recent earnings, is it too late for investors to buy? Here's what you should know about Kinsale Capital before buying.
Kinsale is a top player in this specialty industry
In the world of property and casualty insurance (P&C), there are two types of companies. Traditional insurers offer coverage for standard policies such as automotive or homeowners insurance. Specialty insurers, also known as excess and surplus insurers (E&S), write policies on those harder-to-place risks. The E&S market is where Kinsale makes its name.
Kinsale underwrites insurance for niche markets like small business casualty, construction, professional liability, aviation, recall products, etc. What makes E&S insurers appealing investments is that they aren't bound to the same limitations traditional insurers face.
Standard insurance policies are highly regulated, specifying what they can cover and how much they can charge. As a result, companies compete in a cutthroat industry where price is king. On the other hand, Kinsale writes policies covering unique risks and has more flexibility about what it will cover and how much it can charge for those policies.
Best in class at writing profitable policies
Its blend of growth with prudent underwriting has made Kinsale a stellar investment. Since 2019, Kinsale's written premiums have grown from $390 million to nearly $1.6 billion, a 41.6% compound annual growth rate. The company has managed this growth while maintaining stellar underwriting and high profit margins.
KNSL Revenue (TTM) data by YCharts
In insurance, the difference between winners and losers is who can take in more in premiums than they pay out in claims costs and expenses. No one has done it as well as Kinsale has over the past several years.
The combined ratio is one measure that shows an insurer's underwriting ability, and the ratio takes claims plus expenses divided by premiums taken in. The industry average combined ratio has been around 99% in the past decade, showing that insurers earn around $1 in profit for every $100 of premiums written.
Kinsale posted a combined ratio of 75% last year and has averaged 81% since going public in 2016. In other words, for every $100 in premiums written, Kinsale makes $19 in profit -- a staggering number in the highly competitive industry.
Can Kinsale's staggering growth continue?
Kinsale has excelled at creating policies for hard-to-place risks. Its growth has been exceptional, and it has been one of the top insurers that have taken advantage of favorable trends in the industry. Last year, its net written premiums grew 35%, while net income surged by 94%.
One thing to remember when investing in Kinsale is whether its growth will continue at such a stellar pace. The stock trades at a price-to-earnings ratio of 41.5, which is quite expensive but reflects Kinsale's solid growth thus far.
KNSL PE Ratio data by YCharts
However, Kinsale's rapid rate of growth may not continue. That was the theme following its third-quarter earnings when the stock price dropped 20% in a single day. Even CEO Michael Kehoe says its longer-term growth will likely slow down more toward 10% to 20% "as market competition returns to normal in the years ahead."
Is Kinsale stock a buy?
Kinsale's growth has been stellar, and investors' returns have been quite impressive. It can continue to be a stellar investment, but returns of 53% annualized aren't something investors should be accustomed to. However, Kinsale remains a strong long-term stock, and ongoing double-digit growth is nothing to scoff at.
Over several years, the specialty insurer has proven its underwriting is unmatched, and I think it can continue to succeed. Still, its stock is a little expensive, so you may be better off buying a little bit today and adding to it over time if it takes a dip from here.
