Kinsale Capital Group (NYSE: KNSL) has been a spectacular investment over the years, with the stock up more than 1,800% since its 2016 initial public offering. But Kinsale's latest quarter, though solid, included at least some hint that growth could be slowing.
Investors are taking gains after the results, sending shares of Kinsale down 17% in Friday trading.
Is the Kinsale growth engine slowing?
Kinsale is an insurance company focused on the obscure. The company writes policies for businesses that most insurers shy away from, things like ax-throwing venues and cannabis dispensaries. That kind of insurance, known as excess and surplus, or E&S, can be more complex to write but tends to be more lucrative than industry norms for those who do it well.
By all accounts, Kinsale does it better than most. The company reported operating earnings of $3.31 per share in the most recent quarter, easily topping the $2.84-per-share consensus and well above the $1.43 per share the company reported a year ago. Net income increased by 130.8% year over year, and gross written premiums increased by 33% to $377.8 million.
Kinsale's combined ratio, a measure of profitability in the insurance industry, was 74.8%. Lower numbers are better, and E&S insurers tend to focus on keeping their combined ratios under 100%.
"Our third quarter results reflect continued growth and profitability," CEO Michael Kehoe said in a statement. "We remain confident that our model of disciplined underwriting and technology-enabled low costs provides an enduring competitive advantage that will lead to continued value creation over the long term."
But the numbers weren't quite as good as previous quarters. For example, gross written premiums in the second quarter were up 58.2% to $438.2 million, implying that momentum slowed in the most recent three months.
Down nearly 20%, is Kinsale stock a buy?
It is worth noting that even with Friday's dramatic declines Kinsale shares are still up 36% for the year, more than quadrupling the gains of the S&P 500 in 2023.
The results were not as bad as the stock reaction would suggest. Kinsale's latest quarter shows a company that is still a best-in-class operator that continues to grow and take share from competitors.
But Kinsale is not a bargain stock. Even after the decline Friday Kinsale trades at about 9.5 times its book value. Other large insurers with a major presence in the E&S space, companies including Markel Group, James River Group Holdings, and American International Group, all trade between 0.8 and 1.4 times book.
The future is still bright for Kinsale, but as it grows it will become harder for the company to post stellar numbers. Current economic uncertainty, and the stress it is likely causing to small-business start-ups, could also be playing a part.
For long-term holders, Kinsale remains an attractive investment. But if Friday's reaction is any indication, investors need to understand that as the company continues to grow it is going to be harder for the stock to defy the laws of gravity, and there could be more volatility up ahead.
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Lou Whiteman has positions in Kinsale Capital Group and Markel Group. The Motley Fool has positions in and recommends Kinsale Capital Group and Markel Group. The Motley Fool has a disclosure policy.
