When building long-term wealth through the stock market, it’s important to find high-quality companies capable of sustained growth no matter what the economy throws at them. Kinsale Capital (KNSL -5.29%) is one such company that has consistently delivered outstanding returns to its shareholders.

The company may not be a household name, but its stock has risen steadily since its initial public offering (IPO) in 2016. Since then, the stock has returned investors about 49% compounded annually — enough to turn an investment of 10,000 USD in a $263,100 investment today.

Kinsale Capital exhibits a robust business model and a strong ability to assess and price risk. Here’s why it could continue to be a good buy for investors today.

Why Insurers Should Be Part of Your Portfolio

Investing in insurance companies isn’t exciting, but they can be a solid part of your diversified portfolio. Don’t take my word for it though. Warren Buffett, one of the world’s most successful long-term investors, invested heavily in insurance companies during his six decades at the helm Berkshire Hathaway. He called those investments “a very large portion of Berkshire’s value.”

What makes insurance investments attractive is the constant demand for the product and the pricing power of the insurer. Strong demand comes from businesses and individuals looking to protect themselves from unmitigated disasters such as hurricanes, tornadoes, floods, cyber security attacks or product liability.

This constant demand for insurance coverage ensures that insurers will always have business. It also provides strong insurers pricing power during periods of rising prices. As rising costs affect every insurer, the industry can increase its premiums charged to customers and avoid inflationary pressures. This pricing power is especially visible in stellar underwriting insurers and above.

Kinsale is one of the best in price risk

As an excess and surplus (E&S) insurance company, Kinsale covers risks that other insurers won’t and has done an excellent job. Kinsale writes policies on risks that traditional insurers do not cover. Because the E&S industry is not as tightly regulated, it has more flexibility in what it will cover and how much it will charge.

Since going public, Kinsale’s annual average combined report was 81%. In other words, the insurer earns $19 in underwriting profit for every $100 in premiums collected.

This stellar underwriting capacity translates directly into strong margins. Since 2016, Kinsale’s profit margin has averaged 19.7%, well above insurers such as Progressive (13.8%) and Chubb (7.2%), which are two solid insurers in traditional property and accident the insurance market.

KNSL profit margin given by YCharts

What’s next for Kinsale Capital

Insurance companies are affected by various factors such as the pricing environment, competition and their ability to continue subscribe profitable policies while maintaining a competitive advantage. In this case, market conditions matter.

Insurers are currently facing difficult market conditions, often referred to as a “tough” market. This is due to rising claims costs, which result from rising costs due to inflation and an increase in the frequency or severity of extreme weather events. In such a market, insurers have more flexibility to raise premiums and be more selective about the risks they take, which directly benefits E&S insurers like Kinsale.

According to a report by Swiss Re, tough conditions in the insurance market are likely to continue this year. However, the reinsurance The company believes conditions will begin to ease in 2025. According to the report:

“We see underwriting results turning positive, supported by high premium rates, rising exposures and reduced claims growth as inflation moderates. Investment returns will continue to benefit from higher interest rates, while the cost of capital will remain broadly stable.”

Image source: Getty Images.

Is Kinsale a buy?

If there’s one thing that can make investors pause about investing in Kinsale today, it’s its valuation. The insurer is priced at 29 times earnings, well above the industry average of 15.9 times earnings. That said, Kinsale Capital is growing fast, so its high valuation relative to the industry seems justified. However, the stock could be vulnerable if its growth slows.

Overall, Kinsale Capital has shown excellent underwriting since going public just under a decade ago and continues to run on all cylinders. Analysts project sales to grow 29% this year and another 20% next year. Given its stellar underwriting and continued growth, I think Kinsale remains an excellent stock for long-term investors today.