The best insurer in the world: Here's why!
Kinsale Capital Group
Since 2022, our co-founder Bouke has been invested in Markel, and while he loves the philosophy of the company and the management team, it falls short in one area: Markel is a legacy player that relies on outdated and inefficient systems.
Last month Bouke analyzed a company that is the exact opposite: Kinsale Capital Group. Their founder Michael Kehoe launched a secret weapon: their in-house built IT-platform.
In this article, Bouke will explain why it is so important to be super-efficient as an insurer, especially in the small written premium market that Kinsale is operating in.
A brief introduction
Kinsale is active in the Excess & Surplus lines market (~$120 B TAM). And what makes them so special is that the in-house build technology platform allows them to operate way more efficiently than competitors like Markel, Lloyds of London, Berkshire Hathaway and AIG.
While most competitors use decade old software/systems, Kinsale began immediately with building their own tech stack. For about seven years, a group of programmers have been building what is the backbone of Kinsale today: their web-based IT platform.
Why Kinsale’s IT-Platform is crucial
Kinsale’s in-house IT platform helps the employees to assess risks quicker, determine better pricing, and does a ton of operational tasks automatically. As a result, Kinsale doesn’t need to recruit top-tier (and the most expensive) senior underwriters. A significant portion of Kinsale’s workforce consists of university graduates who, with the support of the company’s advanced IT platform, achieve underwriting results that outperform those of industry veterans.
Because Kinsales doesn’t need to hire the most expensive senior underwriters and is more efficient than competitors, Kinsale’s expense ratio is best-in-class. While most competitors have an expense ratio between 30-40%, Kinsale has an 20.6% expense ratio. Because of this, Kinsale can charge lower prices for their policies, and by doing this, win market share. Simply put: the more efficient an insure operates, the lower the expense ratio is.
Insurance is basically a commodity, and CEO Kehoe is well aware of this:
“In commodity businesses like insurance, your customers care about costs more than anything. And so, to have a low cost structure means we can offer more competitive pricing to the business owner, but at the same time deliver better returns to our stockholders”. - Kinsale CEO, Michael Kehoe
The low expense ratio is an enormous benefit for Kinsale.
While low costs are clearly what customers care about most, they also carry the greatest danger. It’s all too tempting for insurance executives to underprice risk in order to boost short-term profits and hit bonus targets. But that temptation comes at a steep price. History is full of insurers (and their shareholders) who suffered because management chased quick wins instead of sustainable underwriting.
That’s why two things points below are extremely important:
Michael Kehoe his team aren’t focused the next quarter, but on the next decade
Kehoe was CEO of another insurance company, James River Group, before founding Kinsale. He recognized that the company was not in good shape, and eventually decided to leave, using the lessons he learned to build a top-tier insurance company from the ground up. Today, with over 30 years of experience in the insurance industry, he has demonstrated that he can assess risks accurately while maintaining fast growth.
Kehoe owns roughly 4% of the shares outstanding, worth about $450 million. Besides that he has plenty skin-in-the-game, he sees Kinsale also has his ‘child’: he has built the company from scratch and he holds it dear. This level of personal investment and attachment is key to long-term succes.
Kinsale has to be efficient and keep costs low
Kinsale operates in a niche segment of the insurance world: the small-premium end of the Excess & Surplus market. Here is why it is essential to be cost-efficient: if your operating costs (buildings, systems, people) are $14,000 but you write a premium for only $15,000, you're barely breaking even. It is not worth writing the premium due to the low (or zero) profit and the risk involved.
Kinsale thrives in this industry because it was built to thrive in this specific industry. Kinsale specializes in processing small premiums quickly and cost-efficient. In FY 2024, with just 660 employees, they handled 881,000 submissions and quoted 590,000 of them. Here you can see the power of Kinsale’s IT-System
Whether legacy competitors and new entrants can replicate Kinsale’s model is a question we’ll explore in our premium analysis, available exclusively for TDI-Premium members (join here). Additionally, we’ll assess whether the 25 P/E ratio reflects a justified premium, or if investors are overpaying for this company.
We hope that this article taught you more about a quality company you didn’t know yet.
Have a wonderful day and happy investing.
The Dutch Investors.