When creating long-term wealth through the stock market, it is important to find high-quality companies that can experience sustained growth, regardless of economic challenges. Kinsale Capital (NYSE:KNSL) is one of those companies that has consistently generated remarkable returns for its shareholders.

The company may not be a household name, but its shares have been steadily climbing since its initial public offering (IPO) in 2016. Since then, the stock has returned investors about 49% compounded annually, which is enough to turn a $10,000 investment into $263,100 today.

Kinsale Capital features a robust business model and 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. But don’t just take my word for it. Warren Buffett, one of the world’s most successful long-term investors, invested heavily in insurance companies during his six decades of leadership. Berkshire Hathaway. He called these investments “a very large part of the value of Berkshire“.

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 wanting to protect themselves against absolute catastrophes, such as hurricanes, tornadoes, floods, cybersecurity attacks, or product defect liabilities.

This constant demand for insurance coverage ensures that insurers will always have business. This also gives insurers a strong pricing power during periods of rising prices. As rising costs affect all insurers, the industry can increase premiums charged to customers and fend off inflationary pressures. This pricing power is particularly visible among insurers whose underwriting is even more exceptional.

Kinsale is one of the best when it comes to price risk

As an excess and surplus (E&S) insurance company, Kinsale covers risks that other insurers do not and has done an outstanding job. Kinsale underwrites 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 covers and how much it charges.

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

This excellent underwriting capacity translates directly into strong margins. Since 2016, Kinsale’s profit margin has averaged 19.7%, well above insurers like Progressive (13.8%) and Chub (7.2%), which are two strong subscribers in the Traditional property and casualty insurance market.

KNSL profit margin data by Y Charts

What’s next for Kinsale Capital

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

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

According to a Swiss Re report, difficult conditions in the insurance market are expected to continue this year. However, the reinsurance the company estimates that conditions will begin to ease in 2025. According to the report:

Image source: Getty Images.

Is Kinsale a buy?

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

Overall, Kinsale Capital has shown exceptional subscription since its IPO just under a decade ago, and it continues to be firing on all cylinders. Analyst project sales will increase 29% this year and another 20% next year. Given its exceptional underwriting and continued growth, I believe Kinsale remains excellent stock for long-term investors today.

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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool holds positions with and recommends Kinsale Capital Group. The Motley Fool has a disclosure policy.