Kinsale Capital Deep Dive Part 3

Investment case Kinsale Capital

Hi Partner 👋

I’m Pieter and welcome to a 🔒 subscriber-only edition 🔒 of Compounding Quality.

In case you missed it:

1. 10 Stocks to own forever

2. My 5 favorite stocks right now

3. Kinsale Capital Deep Dive Part 2

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Kinsale Capital might be one of the best companies I’ve ever seen

✅ Healthy balance sheet and great capital allocation skills
✅ Attractive business model with plenty of growth potential
✅ Kinsale Capital managed to create a LOT of shareholder value in the past

Let’s dive into Kinsale’s fundamentals today.

Does Kinsale Capital have a healthy balance sheet?

In the insurance industry, the financial strength ratio from A.M. Best is probably the most important thing to look into.

Ratings range from "A++" (Superior) to "F" (In Liquidation).

Kinsale Capital has an “A” (excellent) rating. This is the third-highest rating issued by A.M. Best.

The data confirm that Kinsale Capital is in good financial shape:

• Interest Coverage: 38.3x (Interest Coverage > 15x? ✅)

• Net Debt/FCF: 0.1x (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 0.0% (Goodwill/assets not too large? < 20% ✅)

Source: Finchat

How much capital does the company need to operate?

The less capital a company needs to operate, the better.

Here’s what things look like for Kinsale Capital:

• CAPEX/Sales: 0.5% (CAPEX/Sales < 5%? ✅)

• CAPEX/Operating Cash Flow: 0.8% (CAPEX/Operating CF? < 25% ✅)

Kinsale Capital’s capital intensity is very low. This is something we love to see.

Source: Finchat

Is Kinsale Capital a great capital allocator?

Capital allocation is the most important task of management.

We like to invest in companies that put the money of shareholders to use at attractive rates of return.

Remember the formula for ROIC:

            ROIC = NOPAT / Total Invested Capital
            Wherein Invested Capital = Total Debt + Total Equity + Non-Operating Cash

When you look at Kinsale’s ROIC, you get the following:

Source: Finchat

These numbers do not look great at first sight. Do they?

But ROIC is actually the wrong metric for Kinsale Capital.

Here’s why…