Kinsale Capital: Making Insurance Sexy

Kinsale Capital (KNSL) is a strong, high-growth company that will likely compound for years to come, founded in 2009 by CEO Michael Kehoe, who has showcased exceptional entrepreneurial skills within the insurance industry. Identifying inefficiencies in the market, he envisioned a company that would adopt a fundamentally different approach to excess and surplus (E&S) underwriting. His goal was to create a business that stood out from the competition by combining in-house underwriting expertise with the strategic use of technology and data analytics.

What makes Insurance a good Investment?

A bank may be described as having a government license to borrow money cheaply, while being able to lend it out at a premium, generating healthy returns on someone else’s capital - what a great business! This explains why Warren Buffett has long been enthusiastic about investing in banks, including notable names like Bank of America, Goldman Sachs, JP Morgan and Wells Fargo.

Another great business type is a casino because the odds are always skewed in favor of the operator and against the players, ensuring durable profitability. To borrow a Charlie Munger metaphor, it’s like entering a butt-kicking competition against a one-legged man - you simply can’t lose!

Now, imagine merging the best features of banking, enhancing them, and combining them with the advantages of running a casino. What do you get? An insurance business.

While a bank is able to access capital at preferential rates, an insurance company receives insurance premiums at zero cost. These are collected upfront and held for an extended period before being used to pay claims with the surplus released to profit at the expiry of the policies. This capital pool, which Buffett refers to as ‘Float’, can be invested to generate additional returns for shareholders, on top of the profits that flow from the core insurance business. So in this respect it is a superior model to that of a bank.

In relation to the underwriting of insurance policies, if done properly the odds are even more favorable than those available to casino operators. The house edge, or mathematical advantage a casino has over players in a gambling game, is the percentage of total bets made by players that the casino will retain as profit. Whether playing Blackjack, Baccarat or Craps this is no more than 2%, while a Roulette table operates with a 2.7% advantage in favour of the house. The casino’s long-term profitability lies in consistently applying these slight edges over a large volume of bets. Insurance companies operate on exactly the same basis, but their advantage can be 10% or more.

Insurance offers a distinct advantage: unlike bank deposits, loans, or casino visits, which are purely discretionary, insurance is often required by law or regulation. This legal mandate ensures relatively stable demand and minimizes the cyclical nature of the industry. Insurance investments often are some of the best performing stocks during recessions because of this.

Finally, in very general terms, traditional banking growth is constrained because lending is anchored to the size of the deposit base. In contrast, the insurance industry is unconstrained because insurance premiums on the book of underwritten risk are priced to cover insurance claims and generate profits.

This highlights why Buffett considers insurance companies a cornerstone of the Berkshire Hathaway empire and why it has been a critical driver of its exceptional returns over the years.

Kinsale’s Business

Kinsale operates in the Excess & Surplus (E&S) lines insurance market. E&S insurance is a specialized type of coverage designed for risks that are too high or unique for traditional insurance companies to underwrite. Kinsale is able to operate in this segment of the market, which is underserved by traditional insurers, enabling it to flourish with lower competition while generating more attractive margins.

Kinsale’s journey began in the aftermath of the 2008 financial crisis, perhaps by luck or maybe by strategic design, in a more constrained market environment. During a deep recession, when the competition has battened-down its hatches, it becomes far easier for new entrants to gain traction and win business.

Since then, Kinsale has achieved remarkable growth, expanding its product portfolio to include general liability, professional liability, and property insurance, among other lines. This diversification has reinforced its position in the E&S marketplace. The company writes specialty commercial insurance in 50 states and the District of Columbia.

In 2016, Kinsale went public on the New York Stock Exchange, which provided additional capital for expansion and allowed the company to further invest in technology and talent acquisition.

Kehoe retains a 3.82% stake in the company worth about $430 million at today’s share price, so he certainly has skin in the game. Moreover, Kinsale fosters an owner mindset across its workforce, with both management and employees encouraged to participate in equity ownership, aligning everyone with the company’s long-term vision.

Insurance is a commodity business where customers are primarily influenced by price and exhibit little loyalty to specific companies. To thrive in such a market, Kehoe has broken from convention in his operating model to create a cost advantage, a technology advantage, and a specialization advantage.

1. The Cost Advantage

The ‘expense ratio’ in insurance jargon is a measure that captures OPEX including employee salaries, sales commissions, advertising costs, admin and other general expenditure as a percentage of earned insurance premiums.

Kinsale has an expense ratio of around 20%. To put that in context, its immediate competitors, including Lloyd’s of London, have expense ratios ranging from mid 30% up to 40%. This speaks to the efficiency achieved by Kehoe in his operations.

Conventional wisdom, which has shaped the operations of most insurers, is that outsourcing of underwriting reduces costs by eliminating the need for maintaining a full in-house underwriting department while enabling the company to adjust its underwriting capacity as it experiences fluctuations in workload due to seasonality and other factors. In other words, it was designed to enable insurers to streamline operations and respond to market changes with greater agility.

Kehoe rejects this operating model and has departed from this convention, recognizing that outsourcing of underwriting comes with an embedded conflict of interest. As Charlie Munger used to say, ‘show me the incentives, and I’ll tell you the outcome.’ In this case, the incentives in the industry were wrong and the outcomes were unfavorable. Delegating underwriting to salespeople, often third-party brokers, creates a misalignment of interest because they are paid based on premium volume, not based on profitability. This causes them to focus entirely on volume, ignoring the risk versus reward dynamic that drives profitability.

Kinsale never delegates underwriting, which is a model analogous to that deployed by Geico and Progressive in the personal-auto insurance market. Not only are expense ratios improved, but loss ratios are also better due to risk being more accurately priced. In combination, this explains Kinsale’s significant outperformance.

Furthermore, as the Kinsale business has grown and enjoyed the benefits that flow from economies of scale, it has gradually reduced its expense ratio. This enables it to be more competitive on pricing, which delights customers, wins market share and drives profitability through volume growth.

2. The Technology Advantage

Technology is at the heart of Kinsale’s winning formula.

By leveraging predictive modeling and advanced data analytics, it can forecast market trends and make informed decisions regarding pricing and underwriting, ensuring that it aligns products with customer needs more effectively.

By integrating technology into the development of new insurance products, Kinsale is able to offer innovative solutions that address emerging risks in various industries. This positions the company favorably against competitors that may take longer to innovate or adapt.

This very disciplined approach to underwriting and its robust risk management practices helps Kinsale to mitigate losses and enhance profitability.

Kinsale has also implemented digital platforms to streamline its operations, improve customer interactions and expedite claims processing. It has introduced self-service portals and mobile applications that allow clients to access information conveniently. This automation has reduced manual errors and sped up responses, providing a superior experience for customers when compared to competitors with more traditional, slower processes.

Finally, the data analytics enable it to swiftly adapt its pricing strategies based on prevailing market conditions. This agility enables Kinsale to remain competitive even in fluctuating environments, allowing it to capture market share from competitors that may be slower to adjust.

3. The Specialization Advantage

Kinsale focuses on smaller insurable risks, a segment with far less competition. While larger industry players compete intensely for high-value deals, driving margins lower, Kinsale capitalizes on overlooked smaller opportunities that offer higher profitability.

A key differentiator is Kinsale’s ability to create bespoke insurance products tailored to the specific needs of niche clients, setting it apart from competitors that predominantly offer generalized solutions.

This advantage is amplified by the less sophisticated competition in this segment. Traditional insurance operations are often bureaucratic and process-driven, stifling innovation and resulting in mediocrity.

In contrast, Kinsale thrives under the leadership of a founder passionate about optimizing operational efficiency. The company’s disciplined management, strategic focus, and commitment to innovation are remarkable.

Conclusion

Kinsale Capital is carving out a distinctive position in the insurance market through its focus on niche segments, agile pricing strategies, and commitment to disciplined underwriting. By harnessing technology in data analytics, digital platforms, and innovative product development, Kinsale outpaces its competitors and offers superior services to its clients.

It operates in a higher margin segment of the industry, operating in the lowest percentile in relation to costs, with a long growth runway ahead of it. Kinsale exemplifies a growth-oriented company with a robust operational model in the insurance sector. It offers superior revenue and EPS growth compared to its peers, alongside an optimistic market outlook. However, the valuation is high relative to sector averages, which is why I do not own the company, YET.

The share price has recently recovered from a pull back and is heading toward its high of $548, I do not own the company today. Kinsale is one of the top companies on my watchlist for 2025, hoping for a good opportunity in the future to buy this compounder and hold for the long haul.