Kinsale Capital (KNSL)- Potentially Undervalued Insurance Compounder

Wanted to do a write up on my thesis & valuation for Kinsale Capital (KNSL), a specialty insurer focused exclusively on the excess & surplus (E&S) market.

DISCLAIMER: I do hold a position as of recently.

My core thesis is that KNSL is a high-quality specialty insurer with durable underwriting advantages, strong capital efficiency, and long-term compounding potential that may still be undervalued relative to the sustainability of its underwriting economics and ROE. Despite a strong run up in the last 3-4 years share price has compressed across the last 3-6 months, which seem to reflect nervous macro sentiment around pricing conditions and catastrophe environments as opposed to a break down in business fundamentals.

Business-wise, what stands out to me is that the growth appears operationally supported rather than driven by aggressive underwriting. Historically, KNSL has maintained an excellent combined ratio while still compounding premiums and earnings at attractive rates.

MOAT: KNSL appears to possess several competitive advantages that may support durable long-term returns. Pricing power in the E&S insurance market is generally stronger than in commoditized insurance lines because policies often involve complex or unusual risks requiring specialized underwriting expertise. The company also benefits from broker relationships and reputation, where responsiveness and underwriting consistency matter even without traditional consumer brand strength. While network effects appear relatively weak, switching costs may still be moderate because brokers and clients tend to remain with insurers they trust operationally. The most compelling advantage I can see, however, is likely cost efficiency, as KNSL has historically maintained a very low expense ratio relative to peers, giving the company flexibility in pricing while preserving underwriting profitability. In addition, the specialized nature of the E&S market itself may create structural barriers that are difficult for more generalized insurers to replicate effectively.

ECONOMICS: In 2024, Kinsale reported a combined ratio of 76.4%, meaning it generated a substantial underwriting profit before investment income, with a loss ratio of 55.8% and an expense ratio of roughly 20.6%. Through the first nine months of 2025, underwriting performance remained strong, with a combined ratio of 77.5%, a loss ratio of 56.9%, and an expense ratio of 20.6%. Operating ROE was 29.2% in 2024 and 25.4% for the first nine months of 2025, which is unusually high for an insurer and suggests strong capital efficiency. The key economic attraction is that Kinsale is not relying solely on investment income to create value; underwriting itself is profitable, while float provides an additional compounding mechanism over time. That combination of profitable underwriting, low expense structure, strong ROE, and float generation makes the business economics particularly attractive.

RETURN ON CAPITAL: As alluded to, return on capital is one of the areas where KNSL appears particularly strong from a value perspective. KNSL has historically generated excellent ROE, with operating ROE around 29.2% in 2024 and 26.4% in 2025, which is unusually strong and consistent for a financial company. Importantly, these returns do not appear heavily debt-driven, suggesting the company is generating high profitability through disciplined underwriting and operational efficiency rather than excessive leverage. That combination of high returns, consistency, and relatively conservative balance sheet management is one of the strongest aspects of the investment thesis.

VALUATION: My valuation uses a 20 year free cash flow DCF. I will say that I appreciate for insurers FCF can be less clean for a valuation approach, due to the float, reserves and underwriting cycles that can invalidate more linear models. I have used a fairly conservative discount rate to compensate.

Current Stock price (at time of writing): $305.1 IV: $483.29 (~36% discount)

Figures: FCF (millions): 1,013 Debt (millions): 224 Cash and ST investments (millions): 223 Discount Rate: 11% Shares outstanding (millions): 23.06

Growth rates Yrs 1-5: 5% Yrs 6-10: 4% Yrs 11-20: 2.5%

I appreciate that the DCF extrapolates favourable underwriting conditions for 20 years so should be taken with a pinch of salt. I’d want to watch combined ratios carefully going forward as the most important metric. That being said, KNSL has historically operated in the mid/high 70s range which is extraordinary. Any feedback or criticism on the valuation would be welcomed.

A few RISKS to watch out for: If competition increases or pricing conditions soften combined ratios and ROE could revert to industry averages. Also because KNSL has historically traded at premium multiples, even modest deterioration in underwriting performance, reserve development, or premium growth could lead to significant valuation compression despite the business remaining fundamentally strong.