Here’s 1 Under-The-Radar Stock That Could Help You Crush Inflation

Market volatility has been high for months now. With rising inflation and rising interest rates, investors are evolving in an economic environment that has not been seen for 40 years.

The prudent investment course to follow in such a situation is to look for solid companies that can withstand inflationary pressures. A company that could perform well is Kinsale Capital Group (KNSL 2.93%). The company operates in the insurance sector, which Berkshire Hathaway CEO and Chairman Warren Buffett likes – and has displayed a strong history of measuring his risk to achieve exceptional results.

Image source: Getty Images.

Make money from hard to place risks

Kinsale Capital Group is a property and casualty insurance company focused on the Excess and Excess (E&S) insurance market. E&S insurance is a special type of insurance for risks that are more difficult to place in the traditional insurance market.

Kinsale underwrites a range of insurance cover, the largest being in construction, small business and excess lines of cover. One aspect that makes Kinsale attractive is its focus on serving the E&S insurance market only. The E&S market has been growing at a faster rate than the broader P&C market, and has done so for the past decade.

A graph shows the growth of the P&C and E&S insurance markets.

Image source: Kinsale Capital Group.

E&S policies can be attractive due to their lower loss ratios, which lead to higher profit margins. Because these policies cover hard-to-place risks, many insurance companies choose not to pursue them. This provides an excellent opportunity for an insurer who can adequately measure risk in these unusual or high risk situations, and this is where Kinsale thrives.

Kinsale is very selective about the policies it will accept

Kinsale Capital receives hundreds of thousands of insurance claims every year. Last year, the company received 520,000 quotes and issued 347,000 quotes. Of these citations, only 36,000 new policies were created, or 6.9% of the total submissions. This scrutiny and Kinsale’s aggressive pricing is why the company has such good risk management.

One of the ways insurance companies measure their risk management is the combined ratio. The combined ratio is simply the losses plus the expenses incurred by an insurer, divided by the total premiums earned. A ratio below 100% is ideal because it means the company is writing profitable policies, and the lower the ratio the better. Since its IPO in 2016, Kinsale’s combined ratio has averaged 82% compared to the P&C industry average of around 99%.

A graph shows Kinsale Capital's combined ratio against the industry since 2016.

Data source: Kinsale Capital, Statista. Table by author.

How Kinsale could benefit from inflation

In the first quarter, Kinsale saw its net earned premiums increase by 45% compared to last year, while its combined ratio stood at 79%. The company was boosted by the reopening of the economy and inflationary pressures, which led to higher premiums.

According to Kinsale’s chief operating officer, Brian Haney, “the effects of the massive and abrupt increase in the money supply may take longer to be felt in the economy than many people had thought and will cause likely disruption and pain in the insurance industry, which will serve to prolong the hard market.”

When Haney talks about a tough market, he’s talking about the current phase of the insurance market. Insurance markets go through weak and difficult market phases. In a weak market, insurers compete for business and premium growth tends to be low. This kind of environment would hurt an E&S insurer like Kinsale. In a tough market, insurers are tightening underwriting standards and premiums are rising, which may benefit Kinsale.

An expensive stock that is worth its price

Investors should be aware that Kinsale Capital has a price-earnings ratio of 30. This is at the high end of insurance stocks, but it is indicative of the company’s rapid growth and high margins.

Over the past five years, Kinsale has grown its underwriting income by over 31% compounded annually. It has done an excellent job of managing its risks in the niche E&S market, helping it deliver higher profit margins compared to traditional P&C insurers. Over the last five years, Kinsale’s average profit margin was 18.1%, ahead of Chubbis 13.6% and progressiveis 8.9%.

A chart shows Kinsale Capital's profit margin against other insurance stocks over five years.

KNSL data by YCharts.

We are currently experiencing a hardened insurance market due to increased weather-related events, increased pandemic-related claims and inflationary pressures. This tough market should continue to be a tailwind for Kinsale – making the company worthy of a place in any investor’s portfolio – even at today’s high valuation.

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