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Today I'll be sharing a complete breakdown of the company Kinsale Capital.

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Kinsale Capital – A Full Breakdown & Analysis

Key Metrics

EV/EBIT – 40x

Market Cap – $8.23B

D/E – 0.24

5-Year Dividend Growth Rate – 15.74%

Dividend Yield – 0.16%

Dividend Payout Ratio – 6.84%

Years Of Dividend Growth – 6

Return On Equity – 25%

FCF Yield – 6.70%

Earnings Per Share (TTM) – $7.89

Highlights

Company Profile

Kinsale Capital is an insurance company that focuses exclusively on the excess and surplus lines ("E&S") market in the U.S.

E&S lines insure organizations that have hard-to-place risks and struggle to obtain coverage from a traditional insurer. They often include newly established companies or industries, high-risk operations, or companies with poor loss histories.

Kinsale Capital targets classes of business where their underwriters have extensive experience allowing them to compete effectively and earn attractive returns.

Kinsale’s core client focus is small to medium-sized accounts, which they believe are subject to less competition and have better pricing.

Strengths

Strong Financial Performance And Growth Trajectory

Kinsale Capital has consistently reported strong financial results, with revenue and earnings growth outpacing the industry average.

Its continued focus on small, underserved clients has led them to grow operating earnings by nearly 47% each of the past 5 years!

Focus On Specialty Insurance Products

Kinsale Capital specializes in providing insurance coverage for hard-to-place risks, such as excess and surplus lines.

The firm divides its underwriting into 5 categories: Casualty, Specialty Casualty, Property, Professional Lines, and Transportation.

Here are some of the industries Kinsale Capital provides insurance for:

• Aviation

• Cannabis

• Construction

• Auditoriums and theaters

• Axe throwing

• Bowling alleys

• Campgrounds and RV parks

• Convention or performing arts centers

• Country/tennis/golf clubs

• Escape rooms

• Equestrian centers

• Family entertainment and amusement centers

• Firearm stores

• Go-karting, batting cages, and mini-golf

• Gyms and fitness centers

• Hunt clubs

• Museums

• Ocean Marine

• Paintball and laser tag facilities

• Race tracks or ATV parks

• Rage rooms

• Resorts

• Shooting ranges

• Special events

• Tourist attractions

• Zoos and aquariums

These businesses are places people go to every day, but due to the nature of their business, insurers often over look them as clients.

That’s where Kinsale can step in and take advantage.

Now, here’s the breakdown of Kinsale’s performance by segment:

Niche Market Position With Low Competition

Since Berkshire Hathaway’s buyout of Alleghany in 2022, Kinsale is now the only publicly traded insurer in the E&S industry.

Kinsale Capital's focus on specialty insurance products has allowed it to carve out a niche market position with relatively little competition.

By focusing on small to medium-sized clients, Kinsale is able to cater to more niche clients that larger insurance firms can’t service.

Strong Underwriting Expertise And Risk Management

Kinsale Capital has a team of experienced underwriters who are skilled at managing risk exposure and pricing policies accordingly.

All of their underwritings are done in-house, meaning they can retain more of their profit by not having to pay an outside company for underwriting.

Kinsale also ranks second lowest among competitors in the metric of combined ratio (losses and expenses).

Both its losses and expenses are lower than most of its competitors and the company has only suffered a catastrophic loss ratio of 0.6%.

High Efficiency

Kinsale Capital employs just 375 people and they are an extremely efficient bunch.

Net Income per Employee rounds out to $344,400 compared to the sector median of $91,490.

They’re also extremely committed to providing A+ customer service.

In 2022, Kinsale was able to quote 70% of the 600,000+ submissions it received. A typical insurance company usually is only able to quote 10-20% of submissions.

They also provide quick response times — emails are answered within 2 hours!

In the insurance business, some customers will just choose the company with the lowest rate.

Kinsale believes their customer service sets them apart from other insurance companies, and the numbers don’t lie.

Weaknesses

Concentrated In The U.S. Market

Kinsale Capital operates solely in the United States, which leaves the business open to the ebbs and flows of the U.S. insurance market.

If the U.S. were to experience a natural disaster or a policy change that affects insurance companies, larger, more diversified firms with a global presence would be able to handle it better than Kinsale.

Dependence On Key Talent

The success of Kinsale Capital is closely tied to the expertise and experience of its key employees, making talent retention and succession planning critical.

Kinsale might have to pay higher salaries to retain their extremely efficient employees, and that will be reflected in the company's profits.

Also, if many of the 375 employees were to leave, there’s no telling if Kinsale could recover from that.

Opportunities

Growing Demand For Specialty Insurance Products

The global specialty insurance market was valued at $104.7 billion in 2021 and is projected to reach $279 billion by 2031, growing at a CAGR of 10.6% from 2022 to 2031 (source: Allied Market Research).

Expansion Into International Markets

Kinsale Capital could expand into international markets to diversify its revenue streams and reduce its dependence on the U.S. market.

It would be difficult to do since each country has its own laws that a small company like Kinsale would have to learn and manage, but it would provide opportunities to grow its revenues and client base.

Advancements In Technology To Improve Underwriting And Risk Management

Kinsale Capital could leverage advancements in technology to improve its underwriting and risk management practices, which could lead to more efficient operations and better risk management.

The digital nature of its underwriting platform allows the firm to learn, scale, and optimize for efficiency.

This keeps costs low and allows employees to spend more time with their clients, contributing to the top-notch customer service we’ve discussed.

Also, AI. Enough said.

Threats

Competition From Larger Insurance Companies

Kinsale Capital faces intense competition from larger insurance companies that have greater resources and market presence.

A big insurance company like Progressive or Allstate has a wider reach and stronger brand recognition than Kinsale.

If a bigger insurer were to start offering E&S coverage, it could be detrimental to Kinsale’s business.

Catastrophic Events

Kinsale Capital's business could be affected by natural disasters and catastrophic events that lead to significant losses.

Catastrophic events include hurricanes, earthquakes, tornadoes, floods, wildfires, and more.

These catastrophic events aren’t something anyone can control, but investors should be aware of the risks they could impose on Kinsale if they must pay out any claims related to them.

Recent Financial Performance

Key Financial Metrics And Ratios

Kinsale Capital reported Q1 2023 earnings on April 27, 2023.

Here are the highlights:

• Net income increased by 75.5% compared to the first quarter of 2022

• Net operating earnings  of $56.8 million increased by 50.6% compared to the first quarter of 2022

• Gross written premiums increased by 45.6% to $357.6 million compared to the first quarter of 2022

• Net investment income increased by 127.7% to $20.7 million compared to the first quarter of 2022

• Underwriting income was $51.6 million in the first quarter of 2023, resulting in a combined ratio of 78.2%

• Annualized operating return on equity was 29.1% for the three months ended March 31, 2023

The Dividend Breakdown

Kinsale’s 5-year Dividend Growth Rate (CAGR) is 15.74%, much higher than the Financial sector median of 7.49%.

Their Dividend Payout Ratio is 6.84%, which is extremely low. Kinsale has only been playing a dividend for 6 years so it’s in its early stages of dividend growth. Their low payout ratio gives the company a ton of room to raise its dividend in the future.

Its Dividend Yield is 0.16%, which is very low in the grand scheme of things, especially when bonds and high-yield savings accounts are paying upwards of 4%. However, Kinsale is a company in its early stages of dividend growth.

In my opinion, Kinsale is not a company to buy for today’s yield. The real value lies within the dividend growth and capital appreciation to come over time.

The Thesis

Kinsale Capital is a provider of insurance coverage for a variety of niches that are often overlooked by the bigger insurance companies.

Kinsale is able to deliver extremely efficient results which stem from its proprietary underwriting process and phenomenal customer service.

With the ability to sell specialty insurance to companies in overlooked niches, provide efficient service, and keep expenses low, Kinsale Capital should be able to grow profits and dividends for years to come.

Valuation

Kinsale Capital is trading at a 40x EV/EBIT ratio.

This is not cheap by any stretch, but let’s take this number with some perspective.

Kinsale has traded at an average EV/EBIT of 35.17x over the past 5 years.

I’m using Kinsale’s 5-year average EV/EBIT of 35.17x for my calculations because I don’t feel as though the firm has any true competitors.

When using relative valuation multiples like EV/EBIT, it's beneficial to have similar firms to compare to, but in this case, I can’t find a reasonable comparison that is publicly traded.

I then took the average EV/EBIT of 35.17 and multiplied it by Kinsale’s trailing twelve months EBIT of $199,848,000 to find a new enterprise value of $7,028,654,160.

The next step would be to divide that new enterprise value by the number of shares outstanding which is 23,150,000.

By using this 5-year average, I arrived at a price point of $303.61 per share. If I account for a 10% margin of safety, I arrive at a price point of $273.25.

I’ll likely buy a few shares at $303.61 and really build out my position at $273.25.

Below are my calculations:

Final Thoughts

Kinsale Capital provides an interesting investment opportunity.

For dividend growth investors, today’s dividend is really small at just a 0.16% yield.

However, with a small dividend payout ratio of just 6.84%, the company has a huge runway to keep increasing its dividend for years to come.

I believe Kinsale boasts a strong moat, it caters to a very underserved niche of industries that are overlooked, yet used every day by Americans.

It also has quality customer service which is key in the insurance business where people are looking to talk to people to help solve their problems.

And lastly, its proprietary underwriting technology has led to a low loss ratio and has kept the business very profitable.

When I see Kinsale Capital, I see a winner and I can’t wait to buy some shares.

What do you think about Kinsale Capital?

Do you own it? Would you like to? What price would you buy it?

Let me know in the comments!

I hope you liked this breakdown. If you did, please tell a friend about this newsletter!

Until next time,

Dr. “Due Diligence” Dividend

Links And Memes

Here are some of the best things I saw this week:

• A hilarious thread by Jack Raines that finally gets to the bottom of the age-old question, if BlackRock owns everything, who owns BlackRock?

• Men, let’s tap into our ancient ability to use our balls for sonar.

• A thread of fake Apple products made by MidJourney.

And as always, some memes:

Thanks for reading, if you liked this issue please tell a friend!