Last year, the S&P 500 index posted its worst year since 2008. Things have gotten off to a better start this year, but investors are still nervous about another potential sell-off.
One stock that bucked the bear market is Kinsale Capital Group (KNSL -0.16%). While the S&P 500 has lost 6% in the past year, Kinsale Capital has delivered investors an impressive 64% gain.
The company enjoyed tailwinds that boosted its insurance business, but its impressive growth goes back for years. Kinsale enjoys a distinct advantage, making it a stellar growth stock that investors should consider today.
Kinsale has delivered exceptional growth to its investors
Kinsale Capital writes excess and surplus (E&S) insurance policies. These policies got their name because they cover things traditional insurers won't touch. Kinsale writes policies on hard-to-place risks, including small businesses, construction, product, and professional liability.
What makes Kinsale impressive is how its business consistently churns out profits, leading to excellent returns for its investors. Since going public in July 2016, Kinsale's stock has delivered investors a return of almost 1,700%. The S&P 500 index is up about 107% in that same period.
The secret behind Kinsale's strong performance
Kinsale's secret sauce is in its management team and homegrown tech platform. It's executives have decades of experience in the industry, and they leveraged this knowledge in creating its proprietary digital platform.
Data reigns supreme in the day and age of machine learning and artificial intelligence (AI). Insurers with the most data can better understand the risks of the policies they are writing and price them appropriately for customers. Kinsale combines its years of experience while routinely collecting new data to analyze trends.
Its digital platform also allows it to handle quotes and claims efficiently. Through this platform, Kinsale can respond to most quote submissions in less than 24 hours while handling hundreds of thousands of transactions with just 447 employees.
You can see Kinsale's competitive advantage when analyzing its combined ratio, a key metric that measures the profitability of an insurer's policies. The combined ratio takes any expenses plus claims costs divided by the total premiums collected. Ideally, a company collects more premiums than it pays out in claims and expenses, so a ratio below 100% is desirable.
From 2016 to 2022, Kinsale's combined ratio averaged 81%. This is an awe-inspiring figure, considering the industry average combined ratio is 100%. Its years of outperformance are a testament to its tech platform and management's ability to incorporate what they've learned and interpret its ever-growing database.
Data source: Kinsale Capital 10-K filings, National Association of Insurance Commissioners. Chart by author.
Why insurers can be a hedge against stubborn inflation
Insurance companies can be excellent stocks to consider for a number of reasons. Insurance is always in demand as people seek to protect themselves and their businesses against catastrophic losses. The steady demand also makes many insurers attractive hedges against inflation in the economy.
Insurers collect money up front and pay out claims as they come in during a policy period. Good insurers can quickly respond if claims exceed the premiums collected by raising premiums on customers when they renew.
Insurance is a cyclical business that can go through long periods of growth or contraction. We're currently in a so-called hard insurance market, which can benefit insurers. Hard markets mean insurers can raise prices and be selective about the policies they'll cover, which helps widen profit margins and drive growth.
However, if more companies enter the market or try to gain market share, the increased competition could have insurers competing on price and expanding the type of policies they will cover to drive growth. This could lead to a soft market, which ultimately pressures insurers' bottom line.
Is Kinsale a good buy today?
Increasing losses from catastrophes, including extreme events such as hurricanes, wildfires, or flooding, could keep insurance markets hard for the foreseeable future. Rising inflation around the world will be another contributor to hard markets.
Kinsale Capital has achieved stellar growth since going public, increasing its gross written premiums by 34% compounded annually. That growth continued last year, as gross written premiums increased 44%, driving net income gains.
Data source: Kinsale Capital regulatory filings. Chart by author.
Kinsale management sees the favorable backdrop for E&S companies continuing, and the company expects solid inflows of new business and pricing power that keeps it ahead of loss trends. With hard insurance markets likely to persist, today is an excellent opportunity for investors to add shares of Kinsale Capital.
