Thans for sharing (ps. also long Kinsale). Main short term worry is the market turning more 'soft' in the next years which could result in some temporary headwind. Nothing to worry about long term, but something to be mindful. Solid growth (but lower than expected by Wall Street) usually results in agressive price movements which could offer attractive entry/expansion points for the diligent buyer.
Jan, thank you for your comment. The Excess and Surplus insurance lines are a niche area in which Kinsale excels. It believes that it only has a little over 1% of that market at present, but its differentiated operating model provide it with a competitive advantage which will enable it to gain greater share. Kehoe has a medium to long term goal of capturing somewhere in the order of 15% of that market. If he is successful, that is an enormous amount of growth from where we are now. Even if he is only partially successful then we are still looking at a business that grows by several orders of magnitude. That is the kind of buy-and-hold investment I like to have in my portfolio.
The insurance market has challenging years from time to time, but Kinsale has a superior actuarial pricing model as explained by Kehoe in the videos embedded in my analysis. As such, there is far less chance of mispricing. In any event, with a combined ratio of 75%, it has plenty of headroom to absorb a higher than average wave of claims. If the market suffers a bad period, for whatever reason, that could be a good thing for Kinsale because it shakes out the weaker players in the market and leaves more share for the likes of Kinsale. The evolution of any industry requires challenging times to purge the market of weak participants (survival of the fittest).
In my book, 'Fabric of Success', I focus on the golden threads that run through the tapestry of every uber successful businesses. I look for these same traits in the companies that I analyze before making an investment, as that stacks the odds of success very much in my favour. I see many of them in Kinsale and in its CEO, Kehoe - hence my investment.
You are long Kinsale, so I guess you see them also. Best of luck with your investments.
Quick question what position of your portfolio is Kinsale, thank you for the write up. Just stumbled onto your Substack and I’m like a kid in a candy store. I own a position in Vistry and it was nice to read about all the different perspectives. In addition I like how you incorporate super investors and their famous ideas into your write ups!
Kinsale is a new position in my portfolio and it accounts for ~5% currently. I anticipate that it will become a more significant portion over time as it compounds in value and I may increase my investment.
Thank you for your kind words. I am pleased you enjoy my Substack. Please spread the word and share it with others. I am trying to grow my investment community.
I recently wrote up Haivision (which despite yesterday's pull back in price, still remains a very high conviction investment in my portfolio). That opportunity only arose when a member of this Substack group reached out to me and asked me to analyze Haivision. Until that time I had never heard of the company.
By growing the community, we can all benefit from sharing ideas and knowledge, so please introduce it to others and spread the word.
Rates are dropping and we’re going into soft market. Let’s see how this business performs. So far we’ve seeing the Covid inflation fueled surge in the best part of the cycle. When the tide goes out…
I don't believe rates are dropping. Have you seen the bond markets recently? The market has shifted its position on the chances of Fed cuts in 2025.
It is far more likely that inflation will spike again, particularly with Trump's new economic policies, necessitating rate hikes.
JP Morgan has forecast higher rates and Treasury bond markets seem to be confirming that.
In any event, the property and casualty insurance industry is cyclical, with periods of "soft" markets characterized by intense price competition and excess capacity, followed by "hard" markets with higher premium rates and reduced underwriting capacity.
However, Kinsale Capital Group is a specialty insurer focused on the Excess and Surplus (E&S) insurance market, which has demonstrated strong underwriting performance, with industry-leading combined ratios, even during periods of market softening.
While the insurance industry as a whole is sensitive to interest rate fluctuations and market cycles, Kinsale Capital appears to have navigated these challenges well, leveraging its niche focus and operational efficiency to deliver consistent outperformance.
A very constructive analysis, thank you, and timely for me, as I've been watching Kinsale for some weeks. Do you have any insight please James into Kinsale's exposure to property insurance in the fire-ravaged area of LA? This tragedy could wipe out a niche player with over-exposure to a locality.
There have been no statements from Kinsale about the fires to date. The situation is fluid and still unfolding.
However, JPMorgan analyst Jimmy Bhullar says insurance industry losses from the Los Angeles fires will be confined mostly to the "homeowners’ insurance businesses" at Allstate (ALL), Travelers (TRV), and Chubb (CB). He says the homeowners’ line will bear most of the losses. Reinsurers such as Arch Capital (ACGL) and RenaissanceRe (RNR) are exposed as well.
Kinsale is not in the homeowners insurance business.
He goes on to say that to a lesser extent there will be losses for "commercial property businesses" insurance lines at Travelers, AIG (AIG), Chubb, and Kinsale Capital (KNSL).
Bear in mind that Kinsale has a focus on providing customized insurance solutions in the excess and surplus (‘E&S’) sector. E&S insurance is a specialized type of coverage designed for risks that are too high or unique for traditional insurance companies to underwrite - as such, it is likely to avoid most of the losses sustained by conventional insurers of homes and property.
Have you found a reason for the sharp price fluctuations over the last year? I couldn't find any news that would explain it, and the insider transactions don't look unusual either.
You ask why Kinsale Capital has seen sharp price fluctuations.
Relative to its peers, Kinsale is capitalized at high multiples. This can result in profit taking by some. However, the unit economics and differentiated operating model at Kinsale deserve a premium in my opinion. This is a company that is not only growing rapidly, but operating with outstanding efficiency (just look at its combined ratio and its cost structure).
Many investors jump in and out of investments which, according to legendary investor Phil Fisher, is a mistake.
Fisher explained that every $1,000 that he invested in Motorola in 1957 grew over time to be worth $1,993,846. It wasn’t linear, there were ups and downs along the way, but it was fundamentally a great business that was worth holding. He pointed out that had it been a private unlisted company, he would never have considered selling it - so he viewed its public company status and the stock market as nothing more than an unwelcome distraction to be ignored.
Fisher explained that had he sold Motorola because he thought it was overpriced at any time along the way, the chances are that he would not have known when to get back in, and so would have missed a tremendous profit.
Back to Kinsale, as I explain in this analysis, if growth continues as anticipated, this multiple is actually very low. However, short-term myopic investors who jump in and out of investments cause price volatility.
Amazon serves as a great example. If you had invested $10,000 when it listed on the New York Stock Exchange in 1997, that investment would be worth over $25 million today. However, the path to those extraordinary gains was anything but smooth. Amazon shares started trading at $18, skyrocketed to over $100, and then collapsed to just $6 within the first four years of trading. Many investors would have bailed out during this volatile period when, in fact, they should have stayed the course. Once again, this highlights the importance of time, patience and discipline if meaningful growth is the aim.
One final thought, zoom out on the Kinsale Capital share price chart. Looking at data over the short term magnifies the noise in the data. Taking a more holistic view you will see that there isn't so much noise - the trend is there for all to see.
I've had Kinsale on my watch list for a while, but haven't had time to look into it myself. So thank you for this very interesting report.
Newbie question: For banks and insurance companies, I always see a big difference between cash flow and profit in the stock screener (FACTSet Data). I would explain this by saying that the difference is due to the number of claims that the insurance company has to pay out?
Dividends: I share your view that these are a waste for such growth companies. In some other reports, you have partially successfully dissuaded the respective management from this approach. Have you already tried this with Kinsale?
Banks and insurance companies have pretty different cash conversion rates, and it all comes down to how they run their businesses and handle risks. Banks usually have higher conversion rates, compared to insurance companies, which makes sense when you look at how they operate and interact with customers.
For banks, they deal with customers more often for things like savings accounts, loans, and credit cards, which helps boost their conversion rates. However, this setup comes with higher liquidity risks since they have to juggle short-term liabilities (like deposits people can pull out anytime) with long-term assets (like loans).
On the other hand, insurance companies play the long game. They collect premiums and invest them to cover future payouts when something insured happens. Their cash flow is way steadier since they don’t have to worry about people withdrawing money on demand (bank customers can take out money anytime, while insurance payouts only happen when a claim is made. )
Regulations also shake things up. Banks are more tightly regulated and can lean on central banks for help with liquidity if they need to. Insurance companies have rules to follow too, but they don’t face the same immediate pressure since their liabilities are more predictable and spread out over time.
All these differences explain why banks and insurance companies have such different cash conversion rates.
On the dividends question, I haven't discussed this with management at Kinsale to date. They seem to be managing capital allocation pretty well and reducing the amount paid out as dividends. In 2017 they had a payout ratio of over 20% and that has sequentially reduced year on year, down to 4.2% in the last full financial year, and likely to be closer to 3.3% this year.
Bear in mind that Michael Kehoe has stated emphatically that the company has no interest in M&A at this time - so it needs no capital for that purpose. It has enough capital to maintain strong organic growth as shown in the past. It's debt levels are prudent - Debt/Equity =12.8% and Net Debt/EBITDA = 0.14x, so it doesn't need to prioritize debt repayments. That leaves repurchases of stock and dividends, and Kinsale has been doing both. If the share price were to drop for any exogeneous reason (macroeconomic or geopolitical) then it would probably shift more capital to repurchases, but at current valuations it is probably striking the right balance.
There are companies that produce so much cash that they can do everything that they need to do for the benefit of the business and still have cash left over. Apple is one, Kinsale may be another. For these companies, paying a small dividend is acceptable.
Thans for sharing (ps. also long Kinsale). Main short term worry is the market turning more 'soft' in the next years which could result in some temporary headwind. Nothing to worry about long term, but something to be mindful. Solid growth (but lower than expected by Wall Street) usually results in agressive price movements which could offer attractive entry/expansion points for the diligent buyer.
Jan, thank you for your comment. The Excess and Surplus insurance lines are a niche area in which Kinsale excels. It believes that it only has a little over 1% of that market at present, but its differentiated operating model provide it with a competitive advantage which will enable it to gain greater share. Kehoe has a medium to long term goal of capturing somewhere in the order of 15% of that market. If he is successful, that is an enormous amount of growth from where we are now. Even if he is only partially successful then we are still looking at a business that grows by several orders of magnitude. That is the kind of buy-and-hold investment I like to have in my portfolio.
The insurance market has challenging years from time to time, but Kinsale has a superior actuarial pricing model as explained by Kehoe in the videos embedded in my analysis. As such, there is far less chance of mispricing. In any event, with a combined ratio of 75%, it has plenty of headroom to absorb a higher than average wave of claims. If the market suffers a bad period, for whatever reason, that could be a good thing for Kinsale because it shakes out the weaker players in the market and leaves more share for the likes of Kinsale. The evolution of any industry requires challenging times to purge the market of weak participants (survival of the fittest).
In my book, 'Fabric of Success', I focus on the golden threads that run through the tapestry of every uber successful businesses. I look for these same traits in the companies that I analyze before making an investment, as that stacks the odds of success very much in my favour. I see many of them in Kinsale and in its CEO, Kehoe - hence my investment.
You are long Kinsale, so I guess you see them also. Best of luck with your investments.
Quick question what position of your portfolio is Kinsale, thank you for the write up. Just stumbled onto your Substack and I’m like a kid in a candy store. I own a position in Vistry and it was nice to read about all the different perspectives. In addition I like how you incorporate super investors and their famous ideas into your write ups!
Kinsale is a new position in my portfolio and it accounts for ~5% currently. I anticipate that it will become a more significant portion over time as it compounds in value and I may increase my investment.
Thank you for your kind words. I am pleased you enjoy my Substack. Please spread the word and share it with others. I am trying to grow my investment community.
I recently wrote up Haivision (which despite yesterday's pull back in price, still remains a very high conviction investment in my portfolio). That opportunity only arose when a member of this Substack group reached out to me and asked me to analyze Haivision. Until that time I had never heard of the company.
By growing the community, we can all benefit from sharing ideas and knowledge, so please introduce it to others and spread the word.
Rates are dropping and we’re going into soft market. Let’s see how this business performs. So far we’ve seeing the Covid inflation fueled surge in the best part of the cycle. When the tide goes out…
I don't believe rates are dropping. Have you seen the bond markets recently? The market has shifted its position on the chances of Fed cuts in 2025.
It is far more likely that inflation will spike again, particularly with Trump's new economic policies, necessitating rate hikes.
JP Morgan has forecast higher rates and Treasury bond markets seem to be confirming that.
In any event, the property and casualty insurance industry is cyclical, with periods of "soft" markets characterized by intense price competition and excess capacity, followed by "hard" markets with higher premium rates and reduced underwriting capacity.
However, Kinsale Capital Group is a specialty insurer focused on the Excess and Surplus (E&S) insurance market, which has demonstrated strong underwriting performance, with industry-leading combined ratios, even during periods of market softening.
While the insurance industry as a whole is sensitive to interest rate fluctuations and market cycles, Kinsale Capital appears to have navigated these challenges well, leveraging its niche focus and operational efficiency to deliver consistent outperformance.
A very constructive analysis, thank you, and timely for me, as I've been watching Kinsale for some weeks. Do you have any insight please James into Kinsale's exposure to property insurance in the fire-ravaged area of LA? This tragedy could wipe out a niche player with over-exposure to a locality.
There have been no statements from Kinsale about the fires to date. The situation is fluid and still unfolding.
However, JPMorgan analyst Jimmy Bhullar says insurance industry losses from the Los Angeles fires will be confined mostly to the "homeowners’ insurance businesses" at Allstate (ALL), Travelers (TRV), and Chubb (CB). He says the homeowners’ line will bear most of the losses. Reinsurers such as Arch Capital (ACGL) and RenaissanceRe (RNR) are exposed as well.
Kinsale is not in the homeowners insurance business.
He goes on to say that to a lesser extent there will be losses for "commercial property businesses" insurance lines at Travelers, AIG (AIG), Chubb, and Kinsale Capital (KNSL).
Bear in mind that Kinsale has a focus on providing customized insurance solutions in the excess and surplus (‘E&S’) sector. E&S insurance is a specialized type of coverage designed for risks that are too high or unique for traditional insurance companies to underwrite - as such, it is likely to avoid most of the losses sustained by conventional insurers of homes and property.
Have you found a reason for the sharp price fluctuations over the last year? I couldn't find any news that would explain it, and the insider transactions don't look unusual either.
You ask why Kinsale Capital has seen sharp price fluctuations.
Relative to its peers, Kinsale is capitalized at high multiples. This can result in profit taking by some. However, the unit economics and differentiated operating model at Kinsale deserve a premium in my opinion. This is a company that is not only growing rapidly, but operating with outstanding efficiency (just look at its combined ratio and its cost structure).
Many investors jump in and out of investments which, according to legendary investor Phil Fisher, is a mistake.
Fisher explained that every $1,000 that he invested in Motorola in 1957 grew over time to be worth $1,993,846. It wasn’t linear, there were ups and downs along the way, but it was fundamentally a great business that was worth holding. He pointed out that had it been a private unlisted company, he would never have considered selling it - so he viewed its public company status and the stock market as nothing more than an unwelcome distraction to be ignored.
Fisher explained that had he sold Motorola because he thought it was overpriced at any time along the way, the chances are that he would not have known when to get back in, and so would have missed a tremendous profit.
Back to Kinsale, as I explain in this analysis, if growth continues as anticipated, this multiple is actually very low. However, short-term myopic investors who jump in and out of investments cause price volatility.
Amazon serves as a great example. If you had invested $10,000 when it listed on the New York Stock Exchange in 1997, that investment would be worth over $25 million today. However, the path to those extraordinary gains was anything but smooth. Amazon shares started trading at $18, skyrocketed to over $100, and then collapsed to just $6 within the first four years of trading. Many investors would have bailed out during this volatile period when, in fact, they should have stayed the course. Once again, this highlights the importance of time, patience and discipline if meaningful growth is the aim.
It will help you to read this: https://rockandturner.substack.com/p/lessons-in-growth-stock-valuation
One final thought, zoom out on the Kinsale Capital share price chart. Looking at data over the short term magnifies the noise in the data. Taking a more holistic view you will see that there isn't so much noise - the trend is there for all to see.
I hope that this helps.
I've had Kinsale on my watch list for a while, but haven't had time to look into it myself. So thank you for this very interesting report.
Newbie question: For banks and insurance companies, I always see a big difference between cash flow and profit in the stock screener (FACTSet Data). I would explain this by saying that the difference is due to the number of claims that the insurance company has to pay out?
Dividends: I share your view that these are a waste for such growth companies. In some other reports, you have partially successfully dissuaded the respective management from this approach. Have you already tried this with Kinsale?
Banks and insurance companies have pretty different cash conversion rates, and it all comes down to how they run their businesses and handle risks. Banks usually have higher conversion rates, compared to insurance companies, which makes sense when you look at how they operate and interact with customers.
For banks, they deal with customers more often for things like savings accounts, loans, and credit cards, which helps boost their conversion rates. However, this setup comes with higher liquidity risks since they have to juggle short-term liabilities (like deposits people can pull out anytime) with long-term assets (like loans).
On the other hand, insurance companies play the long game. They collect premiums and invest them to cover future payouts when something insured happens. Their cash flow is way steadier since they don’t have to worry about people withdrawing money on demand (bank customers can take out money anytime, while insurance payouts only happen when a claim is made. )
Regulations also shake things up. Banks are more tightly regulated and can lean on central banks for help with liquidity if they need to. Insurance companies have rules to follow too, but they don’t face the same immediate pressure since their liabilities are more predictable and spread out over time.
All these differences explain why banks and insurance companies have such different cash conversion rates.
On the dividends question, I haven't discussed this with management at Kinsale to date. They seem to be managing capital allocation pretty well and reducing the amount paid out as dividends. In 2017 they had a payout ratio of over 20% and that has sequentially reduced year on year, down to 4.2% in the last full financial year, and likely to be closer to 3.3% this year.
Bear in mind that Michael Kehoe has stated emphatically that the company has no interest in M&A at this time - so it needs no capital for that purpose. It has enough capital to maintain strong organic growth as shown in the past. It's debt levels are prudent - Debt/Equity =12.8% and Net Debt/EBITDA = 0.14x, so it doesn't need to prioritize debt repayments. That leaves repurchases of stock and dividends, and Kinsale has been doing both. If the share price were to drop for any exogeneous reason (macroeconomic or geopolitical) then it would probably shift more capital to repurchases, but at current valuations it is probably striking the right balance.
There are companies that produce so much cash that they can do everything that they need to do for the benefit of the business and still have cash left over. Apple is one, Kinsale may be another. For these companies, paying a small dividend is acceptable.