This small cap insurance stock could be a great investment for dividend growth

Kinsale Capital Group (NASDAQ: KNSL) is far from a household name, but it’s definitely worth a closer look at for long-term investors.

In this fool live Video clip, recorded October 25, Matt Frankel, contributor, explains what Kinsale does and why this is such a great investment opportunity.

Matt Frankel: So it’s an insurance company, but it’s not the company you would call if you want to buy, say, auto insurance or home insurance.

Kinsale specializes in the unusual. If you wanted to open a marijuana dispensary near your new home, Jason, Kinsale might be the business you would call. If Jon wanted to start a demolition business over there in Florida, maybe this is the business you would call because it’s a risk a lot of insurers wouldn’t even try to start valuing. These are really hard to assess the risks. I mentioned the marijuana dispensaries. It’s just an emerging industry and there is simply no data on how risky they are. Demolition companies, as I just mentioned, are just a very high risk business. Someone is going to get hurt doing demolitions. These are the kinds of risks Kinsale specializes in. It’s really hard to be good, but it really pays off if you’re good at it.

I want to share one thing and I want to go over this one quickly because there are a lot of questions I want to address. The yellow bar in this graph is Kinsale’s profit. This is called the combined ratio in insurance. Picture 100% means you are breaking even when it comes to underwriting. This means that you cost what you pay for or exactly what you take. The average ensures that specialty insurance their combined ratio was just under 96%, which means their underwriting margin was around four percent from 2016 to 2020..

It may sound small, but most insurance companies invest the money they receive before paying it and also generate a lot of investment income. They are happy to roughly achieve even underwriting. Kinsale’s average combined ratio was 83.5%, which means they have about four times the average specialty insurance margin even before investment income is factored in. It is a really profitable business if you are good at it. This table that shows you how good they are at it.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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