Kinsale Capital presents a compelling opportunity in the specialty insurance space, particularly after the recent 25% pullback. What catches our eye is their pure-play focus on the excess and surplus (E&S) lines market, where they've carved out a unique niche in small to medium-sized risks that larger players typically overlook.

The numbers tell an impressive story - they've achieved a 39% CAGR across key metrics over five years, with margins that frankly put most insurers to shame. Their combined ratio sits at 79.5% as of Q1 2024, with an industry-leading expense ratio of 20.8%. What's particularly interesting is how they've managed to maintain these metrics while growing their book substantially.

The secret sauce here appears to be their technology infrastructure. Unlike legacy players who are hamstrung by decades-old systems cobbled together through acquisitions, Kinsale built their platform from scratch. This gives them a significant operational advantage - they can process submissions and provide quotes within 24 hours, something their competitors struggle with. They're handling over 735,000 submissions annually with just 574 employees, which is remarkably efficient.

Their focus on small accounts (average premium ~$15,000) is particularly clever. While most competitors chase larger policies, Kinsale has found a sweet spot where competition is less intense. They're essentially operating in plain sight - the business is too small for major players to bother with, yet too sophisticated for smaller players to handle efficiently.

What really stands out is their approach to risk management. Unlike many insurers who outsource underwriting to MGAs, Kinsale keeps everything in-house. This gives them better control over their book and allows them to price risk more accurately. A telling anecdote was when they lost a firearms manufacturer policy to an MGA who misclassified it as a sporting goods distributor and underpriced it by two-thirds - exactly the kind of sloppy underwriting Kinsale avoids.

The market opportunity remains substantial. Despite their impressive growth, Kinsale only has about 1.25% market share in the E&S space. The E&S market itself has grown from 3% of P&C premiums in 1988 to 12% in 2022, suggesting a secular trend in their favor. This reminds us of Progressive's journey in auto insurance, where they gradually took share from larger, less nimble incumbents.

Management's alignment with shareholders is strong, with insiders owning 5.6% of shares. CEO Michael Kehoe and COO Brian Haney's experience at James River Insurance gave them valuable insights into both what works and what doesn't in this space. Their compensation is tied to underwriting profit, combined ratio, and operating ROE - exactly what we want to see.

That said, without disclosing too much, Kehoe is an excellent founder. He once affirmed:

“Business culture significantly influences how people behave within an organization. It’s admittedly hard to quantify, but Kinsale is an entrepreneurial startup, even after 14 years in business. We consider ourselves owner-operators, and many of us have invested significant amounts of our net worth in the company, managing it as if it were our money. This mindset has been a significant contributor to our success.”

Key risks to monitor include potential technology catch-up from competitors, though this seems unlikely given the industry's poor track record with system integration. The E&S market's inherent volatility and potential softening of the current hard market conditions could pressure growth rates. There's also execution risk if they decide to move upstream to larger accounts, which would likely require higher broker commissions.

Bottom line: Kinsale represents a rare combination of a defensible competitive position, strong management alignment, and a large market opportunity. The recent pullback provides an attractive entry point for what could be a multi-year compounder. This is the kind of business that doesn't look obviously cheap but has the potential to grow into its valuation and then some.