Kinsale Capital Group(NYSE: KNSL) is a niche player in the multitrillion-dollar property and casualty (P&C) insurance industry. The company specializes in excess and surplus (E&S) lines, which insure against odd and hard-to-assess risks. Kinsale Capital has made money hand over fist, and so have shareholders.
The stock has returned an astounding 2,500% despite only going public in 2016. An initial $10,000 investment is worth more than $260,000 today. A multibagger stock like that can set you up for life.
But that was then, and this is now. Does Kinsale Capital still possess this type of investment upside today?
What is excess and surplus insurance?
Insurers may look complex, but the business is fundamentally simple. An insurance company sells protection against financial loss from a given event. For example, auto insurance protects you from the financial loss of totaling your vehicle if you're in an accident.
Traditional insurance companies use vast amounts of data and analytics to evaluate risks and price your insurance so that they make money most of the time. Insurance companies have become so good at it that most P&C insurance is highly competitive. It's become a commodity because most insurers offer similar coverage at the similar prices.
Excess and surplus insurance is a niche within the P&C industry. It covers risky or unique cases that most insurance companies won't. Some examples include:
- Buildings in flood or forest fire zones
- An athlete or celebrity who wants to insure themselves against injury
- Businesses with unique risks, like hazardous waste removal or deep-sea diving
Kinsale Capital's entire business is E&S insurance; it's the only publicly traded company that can say that.
The gold mine and the skilled miner
So, is going all in on an oddball insurer a good or a bad thing?
E&S insurance is riskier than the basic policies traditional insurers sell. However, since there is less competition, specialty insurers enjoy superior underwriting margins. The P&C industry averaged a net loss ratio of 73.6% from 2001 to 2022 versus 69.3% among surplus lines. The net loss ratio reflects premiums collected versus claims paid, so the lower the percentage, the more profitable the underwriting.
And among specialty insurers, Kinsale Capital stands out:
Image source: Kinsale Capital Group.
It operates the most profitably (lowest combined ratio) among its peer group. Kinsale credits its success to its proprietary in-house data and technology stack.
You could say that E&S insurance is a gold mine and that Kinsale Capital is the best at digging for that gold.
Does Kinsale still have big investment potential?
Kinsale's best-in-class operating performance in a niche industry has generated impressive top- and bottom-line growth and substantial investment returns during the past decade:
KNSL Revenue (TTM) data by YCharts
The good news is that the future looks bright, too. Kinsale has only captured about 1.1% of the E&S industry market share. That could easily expand because Kinsale's efficiency (low net and combined ratios) means it can charge less than competitors and still make money. Additionally, E&S insurance has steadily grown from about 4% of P&C premiums in 2002 to roughly 12% as of 2022. In other words, Kinsale can grow in two ways: It can eat more of the pie, and the pie itself can get larger.
Kinsalel's success is reflected in its $11 billion market cap. Investors looking for another 2,500% in total returns may be waiting longer, though, because it's easier to grow from $300 million to $11 billion than from $11 billion to $250 billion or more. It's just what usually happens with large numbers.
That said, Kinsale Capital could continue to beat the broader market. Analysts estimate the company's earning will grow by an average of 15% annually for the next three to five years, and the stock's price-to-earnings growth ratio (PEG) of 2 implies a reasonable multiple for that growth if you're a long-term investor.
The best way to make money in Kinsale Capital is to buy and hold it and let the company do what it does best -- dig for gold in the growing and lucrative E&S insurance market. As long as Kinsale stays on its game, the stock can realistically help build life-changing wealth during the next 10 to 20 years.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinsale Capital Group. The Motley Fool has a disclosure policy.
