Stock Pitch Presentation

Kinsale Capital Group

(KNSL)

Current Price($264.47)

Date – 01/20/2023

Recommendation: Buy (3%)

Presented by: Jashan meet

Company Overview

Company Overview

Company Highlights

Valuation & Share Price Performance

• Description/Profile: Kinsale Capital Group, Inc., a specialty insurance company, provides property and casualty insurance products in the United States.
• Business Strategy: Focused exclusively in the Excess & Surplus lines market; concentrate on hard-to-place risks and to maintain adequate rate levels for the risks that it underwrites; maintain a contrarian risk appetite; and leverage investment in technology to drive efficiencies
• Revenue Segments:
• Sector: Finance  
• Sub-Industry: Property and Casualty Insurance

Key Financial Overview (example)

Market Cap: $6.104 B

Beta (5Y Monthly): 0.89

Core Segment Revenues ($mm) Q1 FY’22 (Multinational Exposure)

PE Ratio: 43.58

EPS : 6.07

Dividend Yield: 0.20%

Debt to Equity Ratio: 2.98

Return on Equity: 23.6%

Shares of Kinsale have gained 19.9% in the past year, compared with the industry's increase of 2.2%.

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Revenue Breakdown

Segments and Core Drivers

• Excess Casualty - 14.3% GWP in 2021, increased by 42.7%, for the year ended. December 31, 2021, over the prior year.
• Small Business - 14.7% GWP in 2021, increased by 34.6%.
• Commercial Property - 10.3% GWP in 2021, increased by 52.0%.
• Allied Health - 7.7% GWP in 2021, increased by 57.6%.
• Products Liability - 7.2% GWP in 2021, increased by 43.8%.

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Industry Overview

PE ratio

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KNSL PE is above industry average and competitors, so may seem expensive. But, growth prospects are more than its competitors.

Competitors

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KNSL combined ratio is one of the lowest amongst specialty insurer peers while achieving leading growth among peers.

The measure of profitability to understand how an insurance company is performing in its daily operations and is by the addition of two ratios, i.e., underwriting loss ratio and expense ratio.

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It excludes investment income.

Investment Thesis

Investment Thesis 1

Kinsale is poised to benefit from the growing and progressively dislocated E&S market.

Kinsale currently only has a 1% share of the overall E&S market, which has grown by 6% annually and is incredibly fragmented, leaving a tremendous growth runway ahead for the company.

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Increased Submissions Due to Favorable Conditions in the P&C Insurance Industry

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Investment Thesis 2

Continued Focus on the E&S Market

Kinsale is the only publicly-traded, pure-play E&S investment opportunity.

Investment Thesis 3

Stock Performance & Historical dividend

The company’s trailing 12-month return on equity (ROE) reinforces its growth potential. Its operating ROE of 24.6% expanded 450 basis points year over year in the first nine months of 2022 and remained above the industry’s ROE of 6.7%, reflecting its tactical efficiency in using its shareholders’ funds.

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Banking on solid cash flow, the company has increased dividend since 2017 at a five-year CAGR (2016-2022) of 14.6%.

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Investment Thesis 4

Improvement in Investment Income

Net investment income has been an important component of the company’s top-line growth. Net investment income witnessed a CAGR of 27.6% in the last seven years (2015-2021) and another 49.3% in the first nine months of 2022. In a rising rate environment, growth in investment portfolio generated from the investment of positive operating funds since Dec 31, 2020. With the Fed hiking interest rate by already five times this year to date and a greater number of hikes expected in near term, it is believed that investment of the company’s excess operating funds is likely to create a robust investment portfolio in the days ahead.

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Scotty Screener

Pass-7, Fail-3

Valuation

Valuation

Unlevered Discounted Cash Flow Analysis

Kinsale managed to grow its premiums at a compound rate of over 36% across the last four years, while growing underwriting income at nearly 50%.

Recommendation & Price Target

DCF Price Target: $317.40

Current Share Price(1/20/2023): $264.47

(Exit multiple = 4.5 Industry Avg)

Upside: 20%

Analyst range: $230-$350 (WSJ)

Average: $305.

Industry Risk & Regulations

Risks

Escalating Costs to Dent Margins: Kinsale Capital has been witnessing increase in expenses, over the past few years. The increase was due to higher losses and loss adjustment expenses, underwriting, acquisition and insurance expenses and other expenses. A hike in expenses can cause margin contraction. Expenses increased 42% in the first nine months of 2022. The company should strive to generate higher revenue growth rate compared with the rise in expenses, otherwise margin will be impacted.

Inflation Could Affect Margins: Kinsale Capital remains concerned that continued inflation will extend hard market conditions. This in turn will stress insurers’ margin as they look to improve the same with increased rates. The company estimates price inflation to affect medical cost, wages, construction costs and legal costs.

Stretched Valuation: The company’s valuation remains stretched at the current level. Looking at its price-to-book ratio, which is the best multiple for valuing insurers, investors might not want to pay any further premium. Kinsale Capital currently has a trailing 12-month P/B of 9.63X higher than the industry average of 1.52X.

Future Outlook

Guidance and Projections

Future Growth, Predictions, Analyst Recommendations

The E&S market has seen significant growth and generated better underwriting results than the broader P&C industry .

“The E&S market remains well positioned to report strong premium growth from ongoing favorable pricing trends despite headwinds from a weaker economy and heightened competition from newer market entrants,” said Senior Director Douglas Pawlowski.

Fitch Ratings, Inc.

Q&A