When building long-term wealth through the stock market, it's important to find high-quality companies capable of sustained growth regardless of what the economy throws at them. Kinsale Capital (KNSL -0.15%) is one such company that has consistently delivered remarkable returns to its shareholders.
The company may not be a household name, but its stock has steadily climbed since its 2016 initial public offering (IPO). Since then, the stock has returned investors around 49% compounded annually -- enough to turn a $10,000 investment into a cool $263,100 today.
Kinsale Capital exhibits a robust business model and a strong ability to assess and price risk. Here's why it could continue to be a good buy for investors today.
Why insurers should be a part of your portfolio
Investing in insurance companies isn't exciting, but they can be a solid part of your diversified portfolio. Don't just take my word for it, though. Warren Buffett, one of the world's most successful long-term investors, has invested heavily in insurance companies in his six decades leading Berkshire Hathaway. He called those investments "a very large chunk of Berkshire's value."
What makes insurance investments appealing is the steady demand for the product and the insurer's pricing power. Robust demand comes from businesses and people wanting to protect themselves from unmitigated disasters, such as hurricanes, tornadoes, flooding, cybersecurity attacks, or product defect liabilities.
This steady demand for insurance coverage ensures that insurers will always have business. It also gives insurers strong pricing power during times of rising prices. Because rising costs affect every insurer, the industry can raise its premiums charged to customers and fend off inflationary pressures. This pricing power is especially noticeable in insurers with stellar underwriting even more.
Kinsale is one of the best at pricing risk
As an excess and surplus (E&S) insurance company, Kinsale covers risks other insurers won't and has done a stellar job. Kinsale writes policies on risks that traditional insurers don't cover. Because the E&S industry isn't as tightly regulated, it has more flexibility on what it will cover and how much it will charge.
Since going public, Kinsale's average annual combined ratio has been 81%. In other words, the insurer earns $19 in underwriting profit for every $100 in premiums collected.
This stellar underwriting ability translates directly to strong margins. Since 2016, Kinsale's profit margin has averaged 19.7%, well above insurers like Progressive (13.8%) and Chubb (7.2%), which are two solid underwriters in the traditional property and casualty insurance market.
KNSL Profit Margin data by YCharts
What's next for Kinsale Capital
Insurance companies are affected by various factors, such as the pricing environment, competition, and their ability to continue to underwrite profitable policies while maintaining a competitive edge. In this case, market conditions matter.
Insurers are currently facing challenging market conditions, often referred to as a "hard" market. This is due to rising claims costs, which result from rising costs due to inflation and increasing frequency or severity of extreme weather events. In such a market, insurers have more flexibility to raise premiums and be more selective about the risks they assume, which directly benefits E&S insurers like Kinsale.
According to a report by Swiss Re, hard market conditions in the insurance market will likely continue this year. However, the reinsurance company believes conditions will start to ease in 2025. According to the report:
"We see underwriting results turning positive, supported by high premium rates, rising exposures, and easing claims growth as inflation moderates. Investment returns will continue to benefit from the higher interest rates, while the cost of capital will remain broadly stable."
Image source: Getty Images.
Is Kinsale a buy?
If there is one thing that may make investors pause about investing in Kinsale today, it is its valuation. The insurer is priced at 29 times earnings, well above the industry average of 15.9 times earnings. That said, Kinsale Capital is growing quickly, so its high valuation compared to the industry appears justified. However, the stock could be vulnerable if its growth slows down.
Overall, Kinsale Capital has displayed stellar underwriting since going public just under a decade ago, and it continues firing on all cylinders. Analysts project sales will grow 29% this year and another 20% next year. Given its stellar underwriting and ongoing growth, I think Kinsale remains an excellent stock for long-term investors today.
