Kinsale Capital Group, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Kinsale Capital Group is a specialty insurance company focused on the excess and surplus (E&S) market in the U.S, offering a niche and diversified range of insurance products through a network of independent brokers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Kinsale Capital Group, Inc. (KNSL) is a specialty insurance company focusing on the excess and surplus (E&S) market in the United States. This market is characterized by unique and often complex risks that standard insurance companies often avoid. KNSL acts as an intermediary between these niche insurance risks and the capital that wants to be deployed against them. It specializes in underwriting hard-to-place risks and provides insurance for businesses who require coverage which isn’t available in the standard insurance market because of their unique needs or risk profiles. This means they compete on providing niche insurance products, and not on lowest prices, which usually helps with maintaining high profitability.

Here’s a breakdown of KNSL’s operations:

Core Operations: KNSL’s primary business is underwriting and issuing E&S insurance policies for various lines of coverage across numerous states. They serve a wide variety of clients, often focusing on hard-to-place or unusual risks.
Distribution: KNSL does not sell directly to consumers, instead they sell through a network of independent brokers, which reduces the overhead and costs associated with having a large sales force.
Geographic Focus: Kinsale is based in the USA and the majority of their revenue comes from the United States.
Underwriting Process: KNSL employs a tech-driven, data-focused approach to underwriting, which allows it to quickly assess risks and produce tailored policies for its clients.
Target Clientele: Insureds and producers in specialty insurance lines. A diverse range of clients, including property, casualty, workers compensation, professional liability, healthcare, and others.
Competitive Landscape: The E&S insurance market is highly fragmented, with a large number of small firms rather than a few dominant players. However, there is a high concentration among specialty insurance brokers.

The company’s primary competitive strengths include specialized expertise, proprietary technology, efficient operations, and low expenses.

Industry Trends:

Growth in the E&S Market: The E&S market is showing growth for several reasons, including rising risks and complexity, increasing awareness for specialized insurance products.
Technological Advancements: Insurtech platforms and technological innovation are making for speedier and more accurate underwriting processes.
Consolidation: the E&S market is likely to consolidate because it’s very fragmented and there are many smaller and medium-sized players.
Regulatory Environment: The regulatory landscape is always important, due to risk and the complexity of the product, but it’s always evolving.

Moat Analysis:

KNSL’s moat, while not as wide as some mature mega companies, it is present. We’d rate its moat as 3/5, indicating a narrow moat. This rating is based on the following analysis:

Specialized Expertise and Brand: KNSL has significant expertise in underwriting specialty risks, making it difficult for newcomers to replicate their capabilities easily.
Distribution Network: The fact that KNSL relies on independent brokers to sell their products, rather than building an in-house sales team provides better scale and focus.
Proprietary Technology: While hard to prove this gives KNSL a huge moat, they use technology to analyze large amount of data and offer tailored products. They mention having a “unique” platform and “data-driven” approach, but most players in tech use this kind of wording. But the amount of data analyzed may be so large that the moat is meaningful. This tech component makes them scale more rapidly than most players in the industry, reducing operating costs.
Low-Cost Operator: Their expense ratio (operating expenses divided by net earned premiums) is among the lowest in their niche. That provides them with a structural advantage.
Not a Commodity: Insurance, especially specialty insurance is not a commodity and pricing for these products comes more from the assessment of risk, than of lowest prices.

This competitive advantage gives them more pricing power than a regular insurance company that sells commodity products, and helps generate high returns in the industry, which can translate into higher profitability than peers. The key concern is the moat is fragile, since any competitor can use the same technologies in their core processes and since regulatory approval isn’t that much of a competitive advantage, so long as the company adheres to regulations and laws. There is also always risk of a new entrant coming up and being the preferred insurer or re-insurer in a certain market.

Legitimate Moat Risks & Business Resilience

Changing Regulations: Insurance regulations are complex, subject to change, and may significantly affect KNSL’s profitability and business model. If some new insurance regulations come into force, their business model may be completely unprofitable and unsuited for growth.
Competition: The E&S insurance market is competitive with both new and old players, and increasing competition could squeeze KNSL’s pricing power and profit margins and lower their returns on equity.
Large Claims: Large claim events could cause losses that are too heavy for KNSL to absorb, threatening their equity position and potentially their solvability. These events can be an unpredicted natural disaster or a class-action lawsuit. Although these companies buy reinsurance to reduce these risks, it doesn’t mean they are always successful in mitigating the risks and avoiding losses. This is also true of high legal and court costs of complicated litigations.
Economic Downturns: Economic recessions could reduce demand for their offerings due to less companies doing business, which means less premiums for KNSL.
Technological Changes: Fast-paced technological changes could mean that KNSL needs to constantly update its proprietary technologies, which can put pressure on margins, or it can be disrupted by another insurer implementing better tech quicker and more effectively.
Low Interest Rates Low interest rates affect the yield at which KNSL is able to reinvest its premium income. Thus, lower rates could lower the returns the company generates.

KNSL’s business is moderately resilient due to its diverse client base, good history in the industry and its tech-driven business. However, large claims, increased competition, and new regulations are key sources of uncertainty that may damage their business, that’s why it’s important to keep a close eye on their earnings.

Financial Analysis

Here’s an overview of Kinsale Capital Group’s financials, mainly derived from its 2024 Q3 report. This overview provides a snapshot of the company’s key financial metrics and performance indicators.

Growth: Kinsale Capital has been performing well since it’s foundation, with high revenue growth for all its businesses. The recent nine months report showed a 32.2% increase in gross written premium. However, premium growth is cyclical and dependent on the market cycle.
Revenues: Premium revenues are derived from four main business units: Commercial Property, Excess and Casualty, Professional Liability, and General Insurance. The most recent reports show that total revenues increased by 29.6% year-over-year, with Commercial Property leading the growth, followed by Excess and Casualty. Growth in net written premiums has been relatively stable between 2020 and 2022, increasing 25.9% annually on average. However, growth has started accelerating since, with a 42.7% increase in 2023.
Profitability: The company shows high profitability metrics and its net income in Q3 increased by 29.2% YOY, showing good operating results in the recent times, which helps improve investors view. However, recent earnings call notes that the underlying profitability is down slightly due to lower margins. They also expect an increase in tax burden, which is likely to affect next year’s results.
ROIC: They are achieving high returns on invested capital, with an average of more than 25%.
Expense Ratio: Kinsale maintains a low expense ratio compared to its peers, mainly because they use a network of independent brokers to sell their products. For 2024, this ratio was 20.2%, whereas for their competitors, this ratio is about 30%.
Capitalization: Kinsale maintains a reasonably high capitalization. However, it’s still important to track their debt-to-equity ratio to make sure they are not taking on excessive leverage, especially since the current insurance market is in an uptrend and prices have been increased to levels that are not sustainable in the long-term.
Investments: Most of their investment portfolio is in highly-liquid bonds, but the company is also increasing its investment into equities. Returns on investment in recent years have been negative due to interest rate hikes and increased treasury yields. They report to keep some exposure in equities, which means that a decline in the stock market could affect their returns.

In general, Kinsale appears to be a very profitable company with high growth numbers, but it’s highly tied to fluctuations in the market as a whole. Their investment portfolio and debt structure should be watched carefully.

Recent Concerns/Controversies:

Concerns about high interest rates: Since they invest a lot of their money into long term debt, the recent rise in interest rates have affected the returns on investment.
Softening prices: The E&S market has been in a ‘hard market’ for several years, meaning that prices were high and insurers could easily raise their prices. The recent reports indicate the market is softening, and prices are starting to fall. There’s concern about how KNSL will react to this slowdown of growth.
Increased reinsurance expenses: With recent increases in premiums, the companies in this field are also seeing increased premiums for reinsurance. KNSL is no different. Their reinsurance expenses grew over the last few quarters. This could lead to squeezed margins.
Increased frequency of large claims: There are also some indications that there has been an increase in claim frequency, which negatively impacts their margins.

Understandability Rating:

We give KNSL an understandability rating of 3/5.

Moderate Complexity: The insurance business model can be difficult to understand due to the complexity of its products and finances. Furthermore, it’s a specialty insurance business, which has an even more complicated and niche business model.
Accounting Complexity: While the core operations are relatively straightforward, the accounting of an insurance company, such as deferred taxes and reinsurance agreements can be complex.
Industry Knowledge: Understanding the E&S insurance market requires an understanding of industry-specific jargon and operations. Investors new to the insurance business may be confused.

Balance Sheet Health Rating:

KNSL has a balance sheet health rating of 4/5.

Solid Capitalization: They have a conservative debt-to-equity ratio, and a positive shareholder’s equity figure.
Liquidity: The firm has a reasonable amount of cash and other liquid assets to meet immediate obligations, but is less than the previous years due to higher investments and lower earnings.
Debt: They have a mixture of debt, which includes credit facilities, fixed-rate notes, and debt-like items such as employee options. Their debt-to-equity ratio is quite high, but there are no apparent solvency risks.
Unrealized gains/losses: Although it’s not a major concern, KNSL’s exposure to market fluctuation remains a key source of risk.

In summary, while most of their assets are highly liquid, the company should watch their debt position carefully, in case the current market fluctuations prove to be a longer-term problem.

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