Kinsale Capital Reaping The Benefits Of Excellence Of Execution

 

It’s early and hyperbolic to proclaim Kinsale Capital (KNSL) the best there is or will be in excess & surplus underwriting, but clearly management has figured out a winning formula, as Kinsale has managed to grow premiums at a compound rate of over 36% across the last four years, while growing underwriting income at close to 50% and continually posted modest positive reserve developments. Better still, the company is still a small fish in a big, growing pond, and I don’t see much that would impair Kinsale’s future growth rate.

Valuation is tricky and I won’t be surprised to see comments along the lines of “no way I’d ever pay 7x book”. Given double-digit core earnings growth potential, though, I don’t think Kinsale is necessarily overvalued, and the best-run companies have a way of making expensive-looking valuations look not-so-expensive with the benefit of hindsight (cf. W. R. Berkley (WRB)).

 

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Kinsale Capital Reaping The Benefits Of Excellence Of Execution

Argo Leveraging Its Specialty Focus And Tech Investments

There’s still work to do, but Argo Group (ARGO) management has already started to deliver some of the promised benefits of the company’s multiyear tech investment program. The combination of Argo’s historically strong position in specialty insurance (particularly excess & surplus) and its improving customer service is boosting premium growth, while improved analytics and automation are starting to benefit underwriting and expenses.

Up about 20% from my last update, Argo has definitely exceeded my expectations, as the market has reacted strongly to an insurance story where pricing isn’t such a challenge (fellow E&S underwriter Kinsale (KNSL) has done well too) and where expense leverage is starting to drive visibility into much better earnings. The faster progress with earnings leverage has improved my valuation outlook for the shares, but it’s harder to see how the stock is substantially undervalued even if an adjustment process in the International segment is closer to the end than the beginning.

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Argo Leveraging Its Specialty Focus And Tech Investments

Kinsale Capital Producing Great Growth From A Great Model

A pure-play excess & surplus underwriter with a strong management team, excellent technology, and a large addressable market opportunity, Kinsale Capital (KNSL) has posted some very strong premium growth in 2017 and 2018 along with good underwriting ratios. While Kinsale may well find that it needs to raise some capital to maintain its growth, I believe this company could be looking at a five to 10-year run of well above-average growth.

The “but”, as is often the case with quality growth, is valuation. Kinsale still has some upside from here if it can, in fact, deliver high teens adjusted earnings growth, but that’s a demanding bar and the shares are certainly not cheap by more conventional metrics.

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Kinsale Capital Producing Great Growth From A Great Model