Kinsale Capital faces cyclicality and competitive pressures
The bear case argued for Kinsale Capital highlights that despite its phenomenal track record, the company operates in a cyclical commodity industry where high returns are likely to attract strong competition and normalize over time.
The argument
The speakers discussed how growth is slowing down and cyclicality makes it difficult to assess where the bottom is. They argued that because Kinsale sells a commodity product, its high returns on equity could eventually normalize from 25%-30% down to 15%-20% as competitors replicate their strategy or force price reductions.
The thesis, stress-tested
✓ What validates it
- ✓A decline in return on equity (ROE) toward the 15% to 20% range
- ✓Loss of one of the top five distributing brokers
- ✓A material increase in loss ratios following a catastrophic weather event
▸ Risks discussed
- ▸Cyclical downturns pushing growth investors to exit
- ▸Competitors entering the market to compete on price
- ▸Underwriting discipline weakening or mispricing risk classes
- ▸Catastrophic tail events like hurricanes impacting loss ratios
- ▸High broker concentration with the top five brokers accounting for over half of premium volume
- ▸Declining interest rates reducing fixed-income investment income
- ▸Key person risk regarding founder Michael Kehoe
Hear it yourself
"Workflows, but that doesn't mean that they can't compete with Kinsale more closely, even if it means poor returns for them, which might mean that Kinsale brings their prices down even further, which could mean lower, but still strong returns on equity. Think ROE of say 15% to 20% instead of 25% to 30%."
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