Intro

The global SME specialty risk market remains underserved since large insurers avoid the high volume of small, low-premium policies. At the same time, rapid advances in technology, in part due to improvements in AI, are beginning to reshape how risk is underwritten and distributed. When these efficiencies are paired with a scalable, data-driven, capital-light model built on recurring fee-based revenues that can hold up even in downcycles, the result is intriguing. The company I examine here is still early in its journey, with limited history and real downside risk. Yet it holds the potential to become a compelling force in reshaping the specialty insurance industry for the better.

• Company name: Accelerant Holdings

• ISIN: KYG008941083

• Ticker: NYSE: ARX

• Type: Owner-Operator

• Stock Price: $ 20 USD

• Market cap: $ 4.4 billion

• Review date: Sept 2025

Investment thesis

Accelerant Holdings (ARX) is a founder-led, tech-driven specialty insurance platform that connects carefully selected program underwriters with long-term risk capital providers such as insurers, reinsurers, and institutional investors. By combining modern technology, niche underwriting expertise, and trust-based relationships, ARX has built a risk exchange designed to make specialty risk transfer more efficient. In just a few years, the platform has scaled to ~$3.8bn of written premium and reached profitability in 2024, addressing a large and underserved segment of the P&C market: SME specialty risks. Following its IPO earlier this year, however, shares fell ~30%, erasing the debut premium and leaving the stock at ~14.3x forward EV/EBITDA and ~12x P/B. Scepticism still dominates, but if management executes and the business shifts toward more independent cash-generative growth, ARX could deliver IRRs north of 20% by 2030.

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Background

ARX was founded in 2018 in the Cayman Islands by three industry veterans Jeff Radke (CEO), Chris Lee-Smith (Head of Distribution), and Frank O’Neill (CUO) after decades at firms like Argo, Swiss Re, Guy Carpenter, WTW, and Aon. Backed by private equity group Altamont Capital (still holding a majority stake), the trio set out to fix what they knew firsthand: The specialty insurance value chain was bloated, fragmented, and riddled with data asymmetry and cost inefficiencies.

The insurance value chain is rarely straightforward. A single policy can pass through multiple hands before the risk finally settles on the balance sheet of an insurer or more often a reinsurer. In specialty lines, the path is even more complex: Risk often winds its way through retail brokers, wholesalers, MGAs, and reinsurance brokers. Each intermediary can add genuine value, given the expertise required to place nuanced and unusual risks. But this layering also creates friction — extra fees, loss of data, slower processes, and diluted transparency. To make matters worse, many traditional players still operate on outdated legacy systems, leading to poor data quality, inaccurate risk pricing, and an inability to serve certain niches effectively.

Source: Accelerant

ARX’s answer to this problem is a technology-driven platform ‘Exchange Risk’ that matches specialist underwriters (or so-called Managing General Agents (MGAs)/Managing General Underwriter (MGUs)) with long-term capital providers. The model is designed to align incentives, lower costs, and provide better data and smarter insights.

It’s meant to be a “win-win-win”: (i) ‘supply side’: MGAs, who perform underwriting on behalf of an (re-)insurer, get analytics, distribution management, operational and regulatory support, and most importantly, reliable long-term underwriting capacity; (ii) ‘demand side’: insurers and reinsurers gain access to a hard-to-access and high-quality balanced portfolios to bring more diversification and profitability to their book; (iii) end policyholders benefit from faster, broader and simpler risk coverage.

Source: Accelerant

In many ways, ARX resembles a modern, scaled-down Lloyd’s of London. Like Lloyd’s, it is less an insurance company than a marketplace, connecting specialist underwriters with capital providers. The difference, of course, is scale and maturity: Lloyd’s carries centuries of tradition and roughly $70bn of premiums, while ARX is still young and far smaller. Its technology may help reduce bureaucracy and provide cleaner data, but it has yet to prove that this leaner model can deliver the same depth of trust and staying power that makes Lloyd’s unique.

With that ambitious idea, ARX set out to address genuine industry pain points, and growth came quickly. The company launched in Europe in 2018, added its first insurance carrier a year later, and by 2020 had entered the U.S. market with both admitted and Excess & Surplus (E&S) carriers, each carrying an ‘A-’ (Excellent) rating from A.M. Best.

In 2021, ARX added another layer by creating Mission Underwriters, an in-house incubator that gives entrepreneurial underwriters the tools and infrastructure to launch their own MGAs. It was a natural extension of the platform — helping talented people focus on underwriting while ARX takes care of the heavy lifting.

A year later came Flywheel Re, a Bermuda-based sidecar seeded with roughly $175m of capital from four institutional investors on a three-year term. When that facility expired in mid-2025, ARX renewed and upsized capacity with new partners — which management has indicated include QBE and Tokio Marine — extending the arrangement through June 2028. What makes Flywheel Re distinctive is its design. Rather than being confined to high-volatility Nat Cat exposures, as most sidecars are, Flywheel Re reinsures ARX’s own carriers on a quota share basis across a diversified specialty portfolio. The result is access to capital that combines diversification, predictability, and stability bringing balance to the ‘demand side’ of the ARX platform, and fair access to balanced portfolio of specialty risks for more sophisticated capital providers chasing uncorrelated returns.

One of the key differentiators of ARX is its technology backbone. Unlike many incumbents weighed down by legacy IT, ARX runs on a proprietary system built from scratch. Management notes that nearly a third of its ~475 employees are engineers, data scientists, and product specialists focused on building a tech-enabled marketplace. Data flows directly from MGAs, TPAs, and independent third-party sources, ranging from weather and climate data to financial and demographic inputs. This information is cleaned, structured into a single dataset, and then made available as actionable insights to all members on the platform. By March 2025, ARX had ingested over 79 million rows of data across 21,000 unique attributes, adding close to 9 million new rows each month. The benefits are clear: Unusual transparency, real-time portfolio monitoring, smarter pricing, lower distribution costs, and ultimately better loss ratios. Management has also begun showcasing AI use cases, such as (i) predicting claims with recovery potential (boosting gross loss ratios by ~1%), and (ii) risk indexing that improves loss distribution and price-risk matching (adding up to ~5% improvement).

To sum up, ARX has scaled by growing both sides of its marketplace — incubating and attracting MGAs with solid track records, while also drawing in capital from carriers, reinsurers, and institutional investors. This two-sided growth has fueled rapid expansion and challenged the traditional insurance model by widening access to capital and enabling underwriters to deploy it more efficiently.

Today the platform spans 22 countries, trading $3.8bn in premiums across 500 products, with 248 MGA members and 98 risk partners. On July 24, 2025, ARX capped its journey with an IPO on the NYSE marking both a milestone and the beginning of a new phase of its growth story.

Industry backdrop

ARX is tapping into a large and growing addressable market: Small and medium-sized businesses in commercial P&C biased towards a low-volatility and low-frequency risk profile. The SME commercial market is yet highly fragmented and underserved by traditional carriers. Management estimates the SME P&C risk pool at about $117bn in 2022, while the broader specialty P&C market across the US, Europe, Australia, and Canada is closer to $250bn.

Since ARX’s platform is centred around serving MGAs, let’s spend some time to better understand who they are and why they became so embedded into the insurance value chain over the past years.

What is an MGA?

An MGA is a specialized insurance intermediary with delegated authority from an insurer. Unlike a broker, it can underwrite policies, price risk, and sometimes handle claims without taking the risk on its own balance sheet. MGAs typically design niche “programs” (e.g. for contractors, cyber, or liability lines) and scale them into portfolios of similar risks that are attractive to insurers and reinsurers. This focus and scalability explain why MGAs have become such powerful growth engines in distribution.

As P&C insurance industry moves towards higher specialisation and cost efficiency, the MGA market size reached nearly $100bn in 2024 according to Gallagher Re.

Source: Aon.

So why are MGAs thriving today?

There may be plenty of good reasons, but the ones that stand out to me are the following:

• Reinsurers chasing profitable growth. Traditional insurers have grown too large and diversified, while reinsurers were left with capital-heavy tail risks, turning into kind of a ‘shock absorbers’. To rebalance portfolios and access steadier, low-severity specialty risks, reinsurers are increasingly turning to MGAs and fronting carriers.

• Technology tailwinds. Tech-driven advancements, data analytics, and AI allow MGAs to run lean operations and design innovative products incumbents avoided because of high servicing costs. Backed by private equity, many MGAs scaled rapidly into niches where legacy carriers were too slow to compete.

• Magnet for talent. The combination of equity ownership, higher compensation, and entrepreneurial freedom has pulled underwriting talent away from traditional monolith balance sheet carriers into MGAs.

• Shift toward bespoke cover. The share of the E&S market in overall P&C has tripled from ~4% in 2001 to 12% in 2023 according to AM Best, reflecting growing demand for tailored, non-standard solutions — an MGA sweet spot.

• Operational efficiency. Roughly 30% of each premium dollar in insurance still goes to expenses. MGAs (with some notable exceptions!) have proven they can deliver lower loss ratios and run more cost-efficiently, a critical advantage as the insurance cycle begins to soften.

  

  Source: Historical MGA loss ratios, Aon.

• Alternative capital. Pension funds and asset managers increasingly seek returns uncorrelated with the broader financial markets. MGAs, often paired with fronting carriers, now offer them access to diversified specialty risk (beyond narrow Nat Cat exposure) on a multi-year basis.

One may argue that this shift to MGAs is temporary, but to me it appears to be rather structural. Heightened demand for specialty insurance, growing reliance on innovation and efficiency, and the influx of both reinsurer and institutional capital all point in one direction: MGAs are no longer a niche corner of insurance but an important growth engine.

Business model

At its core, ARX is a platform for seamless risk transfer. Since inception in 2018, ARX exchange written premium have grown more than 200% per year, reaching $3.8bn in the twelve months to June 2025.

The rapid growth was driven in part due to growing amount of MGAs or so called ‘members’ joining the platform, amounted to 248 in June 2025.

A typical MGA or a ‘member’ who joins the platform is small but sharp: $10–40m of premiums, 15–30 people, and an average of 15 years’ underwriting experience. They focus on niches, incl. property owners, contractors liability, surety, commercial multi-peril and other. ARX selects its MGAs through an apparently strict due diligence process MGA with the below set of criteria:

• 3-to-5 year underwriting track record

• Predominantly commercial, low-limit SME risk focus

• Underwriter-led culture with focus on profitable business

• Premium volume of $3m to $100m

• Robust data capture and ability to share it within the platform

• Long-term commitment

Source: Accelerant (S-1 filing).

Many MGA members remain affiliated with ARX, though the mix is shifting toward more independents as the platform scales. Some are incubated as “mission members” (31 of 248), starting fresh MGAs under ARX’s umbrella. Others are “owned members” (16 of 248), where ARX holds minority stakes to align incentives and share in earnings. Together, they contributed ~$1.1bn or 30% of premiums over the last twelve months.

ARX’s success and the benefits of scale ultimately hinge on its ability to attract high-quality MGAs that can deliver consistently strong underwriting results to capital providers. Management highlights that MGA members post gross loss ratios in the mid-50s, well below the industry average of 60–70%. It’s an encouraging figure, but one that deserves scrutiny: How much of this performance reflects current-year underwriting discipline versus prior-year reserve releases, whether favorable or unfavorable?

Turning to the risk capital providers, which amounted to 98 in June 2025. The platform now counts 79 reinsurers, 13 insurers, and 4 institutional investors who participate through Flywheel Re, a Bermuda sidecar. The mix of capital, i.e. traditional and alternative, brings stability to the ARX business flow, but at the same time may cause competitive pressure among capacity providers which may somewhat strain their relationships with traditional reinsurers.

As a platform built around underwriting, ARX has developed multiple revenue streams, of which key elements are:

1. Risk Exchange: A fee on exchange premiums (approx. 7-8%), paid by capital providers for sourcing, managing, and monitoring portfolios.

2. MGA Operations: Commissions on exchange premium from fully or partially owned MGAs (approx. 18%).

3. Underwriting: Ceding commissions from reinsurers plus underwriting results on the small share of risk retained by ARX’s own carriers (approx. 3% on gross earned premium). Simply put, here ARX acts as a hybrid fronting carrier.

Since launch in 2018, revenue has compounded at more than 55% per year, reaching about $742m in the twelve months to Q2 2025.

The mix is outlined above: Roughly 40% from ceding commissions, 35% from net earned premiums on retained risk, 15% from direct MGA commissions, and the remaining 10% from investment income and gains. Adjusted EBITDA stands at $179m with operating margins approaching 20%, gradually expanding as the platform scaled.

As to now, the in-house insurance operations sit at the heart of the platform. Strong results here are essential: Underperformance not only pressures ARX’s own P&L but could also discourage external risk capital providers from joining. So it’s worth pausing to examine how good ARX’s underwriting really is.

Since ARX was IPO-ed only recently, we have just a three-year window of detailed disclosure. In 12-months to June 2025 the company wrote $3.4bn of gross premium, retaining only about 7% and ceding the rest to reinsurers and alternative capital providers. Management targets a net retention of around 10%, enough to demonstrate ‘skin in the game’ while still keeping balance sheet exposure limited. Apparently, the sidecar Flywheel Re takes over roughly 30% of ceded premium.

In 2024, ARX generated $225m of net earned premium, growing at about 25% per year, with a net loss ratio near 73%. That figure is broadly in line with industry averages (typically 60–75% depending on the line of business) but compares unfavourably to best-in-class specialty carriers in the SME commercial space like Kinsale, which runs closer to the mid-50s.

ARX does not disclose a full combined ratio on its retained specialty book, but given the loss ratio, it is likely in the 95–100% range. Reserve development has also been a modest headwind. Since inception, ARX reported unfavourable development with roughly 4%-pts of net earned premiums added each year. Management exited certain liability and property lines in the UK and Europe to stem the drag. Still, the long-tail nature of liability means some of that pain could linger. Something to watch with caution.

Taken together, ARX’s underwriting performance is solid enough to deliver profitable results for its risk partners, but not exceptional when viewed in isolation. Its true value lies less in stand-alone underwriting process and more in how the insurance operations integrate into the broader ARX risk exchange model.

Management & culture

When it comes to leadership, I like the fact that ARX was launched by three industry veterans: Jeff Radke (57), Chris Lee-Smith (57), and Frank O’Neill (52). Each brings more than three decades of experience from global insurers and brokers such as Guy Carpenter, WTW, Aon, Swiss Re, and Argo Group. The company’s leadership combines deep insurance pedigree with a start-up mindset — a mix that is rare and valuable.

Jeff Radke, now CEO, offers a particularly instructive backstory. He once led PXRE, a Bermuda reinsurer specializing in catastrophe and excess-risk business, taking over from his father Gerald in 2003. After Hurricanes Katrina, Rita, and Wilma inflicted severe losses, PXRE went into run-off and was eventually merged into Argo Group, where Radke worked closely with Chris Lee-Smith. It is hard not to see that experience leaving its mark: ARX today deliberately avoids Nat Cat tail risks, reflecting scars earned the hard way.

Now comes the part of the story where things get more complicated. ARX completed its IPO on July 24, 2025, pricing at $21 per share and raising about $400m in proceeds from new shares. Another ~$400m came from existing shareholders who sold part of their stake.

Post-IPO, the shareholder base is dominated by Altamont Capital, a California-based private equity firm with +$4bn AUM and reputation for being founder-friendly and operationally engaged. The PE fund owns around 41% of the economic interest but controls nearly 77% of the votes via Class B super-voting shares (10 votes per share). This makes Accelerant a “controlled company” under NYSE rules.

Source: My estimate based on 10-Q and S 1/A filings.

The founders themselves still own close to 30% of the economics, though only about 5.5% of the votes. If newly granted RSUs and options are fully vested and exercised, their stake could rise toward ~38% (economics) and ~8% (voting). Other notable investors include Baring (a global investment manager owned by MassMutual) and Eldridge (a company owned by Todd Boehly), both minority holders and also participants in the Flywheel Re sidecar.

This ownership setup cuts both ways. On the positive side, ARX’s capital and long-term orientation gave management the runway to build ARX methodically, without rushing for short-term results. On the negative side, governance is tilted heavily toward Altamont Capital. Public shareholders have limited say in board composition, strategic decisions, or potential related-party deals. There is also the looming risk of share dilution (ca. 200m shares with a lock-up of 180 days pointing to January 2026) as well as share overhang as the private fund eventually sells down its position.

The most sensitive governance issue so far has been related-party transactions. Following Q2 2025 results, ARX’s stock dropped by almost 30%, erasing its post-IPO premium. The main trigger: Investor unease around a link to Hardon Specialty Insurance, a fronting insurer launched by the same majority shareholder Altamont Capital. Hardon accounted for $170m or 16% of ‘independent members’ exchange premium in Q2, raising questions about ARX’s reliance on an affiliate of its controlling shareholder. Management insists these arrangements are arm’s length and points out that Hardon’s share of premiums should decline as the platform diversifies. Still, the optics of such concentration have weighed on confidence, with some investors asking whether ARX can truly stand on its own in attracting third-party risk capital.

Culturally, ARX feels different from the average insurer. It combines the entrepreneurial energy of a fintech with the rigor of underwriting discipline. Radke describes the mission as “bringing transparency, data, and shared incentives back… serving MGUs as important partners… making it easier and more efficient to exchange risk.”

The company runs with a partner-centric, lean and decentralized style. Most of employees work remotely. Decisions are data-driven, but the emphasis is on alignment: MGAs are treated less like counterparties and more like members of a shared ecosystem. This orientation has made ARX attractive to entrepreneurial underwriters seeking a home where their expertise is valued.

To conclude here, the leadership team is strong, with founders still holding a meaningful economic stake. Yet real control lies with Altamont Capital, whose dual-class structure and related-party dealings have already raised concerns. The cultural DNA of ARX is promising — transparent, analytical, entrepreneurial — but questions of governance and independence remain unresolved, and these weigh heavily on the stock.

Competition

There are no true public comparables with the same ‘risk exchange’ model as ARX. Still, a few players echo parts of the approach. Trisura (TSX: TSU) is a fast-growing fronting carrier in the U.S. and Canada, retaining little risk and ceding most to reinsurers, structurally similar to ARX’s carriers, though without the broader exchange layer. Ryan Specialty (NYSE: RYAN) operates as a wholesale broker and MGA platform; it doesn’t take balance sheet risk, but its MGUs and program business place it firmly in the same ecosystem. BRP Group (NASDAQ: BWIN) is primarily a broker, yet its MGA/MGU segment also targets SME specialty programs, though with less of an exchange feel. Beyond the public names, there are long-standing MGA operators such as State National (acquired by Markel in 2017), as well as newer privately held MGA and fronting companies.

Valuation

ARX currently trades at forward multiples of ~14x EV/EBITDA, ~30x P/E, and ~12.6x P/B. These levels reflect high investor expectations for scalable growth. Relative to peers, the valuation sits toward the upper end.

A simple sum-of-the-parts framework helps me break the business down:

1. Risk Exchange: Fees based on the volume of exchange written premium

2. MGA operations: Net commission on the volume of exchange written premium placed by partially or fully owned MGAs

3. Insurance operations: Underwriting result on retained specialty risk and ceding commission on ceded business to risk partners

4. Off-balance sheet value of incubated MGAs: As of June 2025, Accelerant held equity interests worth about $40m in affiliated MGAs/TPAs, and management has guided to its first minority stake sale by year-end—likely generating $25–30m of incremental adjusted EBITDA.

From this, I see three broad outcomes:

• Base case:

  If ARX compounds revenue at ~35% through 2030 and reaches ~$3.6bn, with ~15% net margins, net income would be ~$450m ($2.20 EPS). At 13x earnings, that implies a $5.8bn market cap, or $28 per share (IRR of 6%).

• Blue sky:

  Should the platform exceed expectations, building trust as the dominant MGA ecosystem, revenues could top $6bn with ~20% margins, yielding $1.0–1.2bn in net income ($4.90 EPS). At 15x earnings, this suggests ~$15bn market cap, or $74 per share (IRR of 27%).

• Pessimist case:

  If growth stalls or underwriting falters, net income might be just $70m by 2030. At 13x, that equates to ~$1.1bn market cap, or $5/share (IRR –24%), or $5 per share (IRR of -24%)

A simple sensitivity of forward EPS growth to interest rates:

Source: My calculation assuming 10 years forward EPS growth. No terminal value.

Why does the opportunity exist?

In part because investors remain cautious. Governance is heavily tilted toward Altamont Capital, which retains over 70% of voting rights and has related-party ties that unsettle some. The stock’s float is limited. Memories of past “insurtech 1.0” debacles (remember Lemonade, Hippo, Vesttoo?) still haunt the sector. The model itself straddles MGA, carrier, and tech platform, making it harder to slot neatly into analyst coverage. And as a young public company, with profitability only since 2024, ARX has yet to build the multi-year track record many institutions prefer, especially at a time when the broader P&C cycle may be turning away from a hard market.

Catalysts:

Continued earnings growth, scale expansion with existing partners, adding new geographies (e.g. Canada or Australia) or new partners like captives, reduction on related-party reliance, fresh analyst coverage, potential index inclusion (Russell 2000/Midcap), or Altamont Capital broadening the float with new strategic investors.

Key risks

• Governance overhang (PE controlling +70% voting rights, dual class of shares, complex related party relationships)

• ‘Smart money cashing out’ post IPO lock-up period

• Pullback from MGAs & risk capital providers (poor underwriting, competitive concerns, fraud, etc.)

• Regulatory & compliance risk (tighter regulation of MGAs industry and fronting carriers)

• Competition

• Valuation

Summary:

Accelerant reflects the shifting dynamics of specialty insurance, where technology and data are taking on a larger role. The company combines innovation with disciplined underwriting and is benefiting from favourable industry tailwinds. Still, questions linger around governance, related-party reliance, and whether profitable scale can truly be sustained. These are challenges that time and greater transparency may resolve, but for now they keep the story clouded. For me, that places Accelerant firmly on the ‘watch list’. If management continues to execute, the scepticism weighing on the stock today could become the source of tomorrow’s opportunity.

If you know the company well or see it differently, I’d be glad to exchange views.

Disclaimer: The material and analysis in details herein is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. All facts and statistics are from sources believed reliable, but are not guaranteed as to accuracy, completeness or timeliness in the information. The author has or had positions in the company and her positions may change over time without notice.

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Those of you who have read my previous posts on Kinsale and Markel will have noticed my particular interest in the Excess & Surplus (E&S) insurance market. Despite the recent surge in P&C market valuations I still believe it is a nice pond to fish. Driven by economic expansion, emergence of new risks, digitalisation, energy transition, and factors related to climate change the sector is poised to grow at least in line with GDP, if not more. With this in mind, I am looking for well-managed insurers with a bias towards founder/owner-led businesses run by great people focused on the long-term value creation. Here is another candidate to consider.

• Company name: International General Insurance Holdings Ltd.

• Ticker: NASDAQ: IGIC

• Type: Owner-Operator

• Stock Price: $ 24.4 USD

• Market cap: $ 1.1 billion

• Review date: December 2024

Investment thesis

International General Insurance Holdings Ltd. (IGIC) is a Bermuda-based niche P&C insurer with a superior underwriting track record of consistent and disciplined profitable growth. Under the leadership of a highly invested and aligned founding family with over 30% ownership stake, IGIC has delivered annual total returns in excess of 30% and an average ROE of +15% since going public in 2020. This has been predominantly funded by operating cashflows aided by organic growth. Despite its past success, a debt-free balance sheet and ample future growth opportunities in the global specialty (re-)insurance markets, IGIC trades at a significant discount to its peers and the broader market.

Source: Own analysis. Data for 2020 begins with IGI's going public dated March 18, 2020 and assumes reinvestment of dividends.

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Background

IGIC is a Bermuda-domiciled company with origins in the Middle East in Amman, Jordan. Although it has only been a public company for four years, the insurer’s history dates back to more than 20 years of steady and consistent growth under the leadership of the Jabsheh family.

Back in 2001, energy-insurance veteran Wasef (82) founded a small insurer with a starting capital of $25m, while his son Waleed (48) joined him shortly afterward. The focus was on providing risk coverage against accidents for onshore and offshore oil drillers as well as downstream refining facilities in the Middle East. Since then the company has evolved from a tiny niche monoliner writing $10m premiums from energy lines to a multinational P&C insurer with ca. $700m of gross premium written active in 25 P&C lines of business in 200 countries.

The transition did not happen in one go. IGIC has pursued two decades of slow and steady expansion with the ‘underwriting first’ philosophy in mind. Management maintained a laser-like focus on writing profitable policies rather than chasing growth at all costs.

Once it laid down a strong foundation of disciplined underwriting in the domestic market, it began expanding internationally. In 2007, IGIC entered the UK market with the acquisition of SR Bishop Underwriting (renamed to North Star Underwriting). From 2005 to 2016, the company grew its premiums almost tenfold from $25m to $240m through further expansion into Europe, Asia and South America. As another major milestone, IGIC made its way to the US in 2017, cautiously seizing the opportunity as premium rates expanded in the US E&S market.

More recently, the company acquired Energy Insurance Oslo, a Norwegian managing general agent (MGA), which has been an exclusive service provider to IGIC since its launch. In addition as of May 2024, IGI rents a company ‘box’ (330A) at the Lloyd’s marketplace to enhance its distribution capabilities of insurance and reinsurance business globally (not a part of Lloyd’s syndicate as a regulated unit).

Naturally, by spreading its geographic footprint IGIC has also added new lines of business such as professional indemnity, marine cargo, ports and shipping terminals, financial institutions and treaty reinsurance. The company has transitioned from a small Middle Eastern insurer to a mid-sized global specialty player with eight offices and +460 employees worldwide.

Despite its Jordanian origins, IGIC is legally a Bermuda company, which owns a holding company based in Dubai International Financial Centre (DIFC), a self-regulated zone outside the United Arab Emirates. This intermediate holding company owns IGIC’s main operating entities in the UK, Bermuda and Dubai, as well as a back-office arm in Jordan. As a result, IGIC’s insurance operations are regulated by respected local authorities like the Bermuda Monetary Authority (BMA) and the UK Financial Conduct Authority (FCA), which underline the insurer’s international profile.

Since its inception, IGIC has only raised capital twice, including $75m from a private placement in 2007 and ca. $40m of proceeds from going public in 2020. The rest has been achieved organically, which is quite impressive.

The IGIC as a public company was born in a merger with SPAC. This fact may discourage some institutional investors from digging any further, but I have no such concerns for the following reasons:

- This was a purpose-built insurance SPAC (Tiberius Acquisition Corp).

- The SPAC sponsors are seasoned professionals in the insurance industry. M. Gray (CEO, Gray Insurance Company) and A. Poole (Diamondback Capital Management, SAC Capital and Swiss Re) have not only maintained their original position in IGIC, but have increased their holdings in recent years. The total combined stake is close to ca. 7.3% according to YE2023 filings.

- There is no SPAC baggage left to dilute the interests of the current shareholders. When IGIC went public through a merger with Tiberius, it issued private and public warrants and earnout shares to the original owners and SPAC sponsors. The warrants were subsequently purchased and redeemed in 2023 and all earnout shares are now fully vested (vesting at a share price of between $11.5 and $15.25 and well above the SPAC offering price of $10).

- The founding Jabsheh family has not only remained operationally active, but has also retained its majority shareholding. Wasef serves as a Chairman (prior to July 2023 as a CEO) and three of his sons are currently working in IGIC, incl. Waleed (48) as CEO, Hatem (45) as COO and Ahmed as IR representative.

Since going public, IGIC has delivered solid total returns of threefold, growing at +30% per annum and outpacing the S&P 500 benchmark, particularly in the past year.

Unique geographic and business mix

First things first, let’s start with how IGIC earns its money. Since 2017, the insurer has profitably grown its premium earned to ca. $450m at an annual rate of 20% aided largely by organic growth. Today, IGIC offers 25 lines of business in 200 countries operating from 8 operating offices. The insurer’s focus is on commercial facultative business, no personal lines involved.

Source: IGIC, own analysis.

The company’s bread and butter business is short-tail insurance (ca. $250m or 53% of 2023 net premiums), which refers to policies that cover claims that are settled in a relatively short period of time, typically less than 12 months. This segment covers energy (offshore, onshore, power and renewables), commercial property, construction, general aviation, port and terminals, marine cargo and other. The advantage for IGIC of writing short-tail policies is that they offer short turnaround time, higher visibility on claims outcome, and the ability to react faster to dynamic market conditions. This segment is core to IGIC’s business model and will like to grow further.

Another pillar of IGIC’s revenues is long-tail insurance, which accounts for just over $150m or 35% of 2023 net premiums. Most of this comes from professional indemnity and financial institutions. Examples of risks involved include professional malpractice claims arising from errors and omissions (E&O) and poor choices or committed negligence by directors and officers (D&O). Generally, long-tail business claims payout pattern stretches beyond 12 months with final settlements occurring multiple years after the policy is written. As a result, one can assume that IGIC deals with a higher degree of uncertainty in determining its claims liability. Does this translate into a higher risk? Not necessarily, if the company specialises in the respective sub-segment and has a distinct edge in assessing the underlying risks. So far, IGIC has grown its long-tail segment at healthy rates and started scaling down its business as of 2020 as the industry’s premium rates start losing momentum.

Source: IGIC, own analysis.

The remaining 9% of premiums come from reinsurance, the sale of insurance to insurers. After years of poor results due to the heavy burden of unprecedented natural catastrophe losses and wider reserving issues in some US casualty lines, the average return on equity of global reinsurers was 6%, below their cost of capital (see Guy Carpenter’s report). As a result, the reinsurance market braced for a surge in pricing. That’s when IGIC decided to seize the opportunity, tripling its reinsurance since 2017 from $17m to ca. $50m. This segment is currently the brightest growth pillar of the IGI’s portfolio.

Source: IGIC, own analysis.

To date, IGIC has demonstrated a solid track record of diversifying its portfolio not only by line of business but also by geography. More than half of the insurer’s premiums come from the UK (28% of GWP), Europe (12%) and North America (13%), with the remainder of the business spread across Asia Pacific (13%), the Middle East (9%), Central and South America (11%) and Africa (5%). As you may note, IGIC’s unique geographic profile allows it to benefit from enhanced diversification and reduce the inherent volatility of its underwriting results.

Source: IGIC, own analysis.

Roughly two-thirds of the business is written in-house, while 24% is delegated to third-party MGAs and the remaining 9% is reinsurance. Unlike Kinsale, which does not delegate its underwriting authority to third parties, IGIC uses external underwriters. Why so? Probably to have easier access to new markets and/or lines of business in a cost-effective manner. Based on the company’s IR comments there is an in-house team which manages MGA accounts and ensures strict guidelines for delegated underwriting.

‘Underwriting first’ model

Throughout its more than 20-year history, IGIC has done a masterful job of expanding its footprint and entering new lines of business. What’s behind this success?

First and foremost, disciplined underwriting with a clear understanding of its own capabilities. The company refers to its ‘underwriting first’ philosophy, which prioritises profitability over volume growth.

Indeed, IGIC has demonstrated a solid track record. Since 2016, its underwriting income has grown at a CAGR of +25% to around $100m, with only losses reported in 2017, the year of higher than expected weather-related losses from hurricanes Harvey, Irma and Maria.

Source: IGIC, own analysis.

This is also evidenced by more than a decade of consistent reserve releases, which amounted to ca. $ 170m since 2016, or an average of 8.5% of earned premiums.

Source: IGIC, own analysis.

When entering new markets and lines of business, IGIC proves to be cautious about scaling volumes, choosing to build local market expertise without compromising its core business. For example, after more than seven years in the US market, IGIC has restricted itself to short-term lines of business, avoiding writing some of the commonly perceived ‘toxic’ long-tail US casualty lines affected by rising social and economic inflation (e.g. commercial auto, excess and umbrella). In addition, the insurer writes policies on a claims-made basis, which means that claims can only be made during the period covered by the policy and cannot surprisingly emerge years after. This provides greater certainty as to the ultimate amount of IGI’s insurance liabilities and enhances the company’s ability to respond promptly to new opportunities.

Second, the discipline to manage cycles skillfully, scaling back business in soft market years and deploying more excess capital when rates are favourable. IGIC stands out as a nimble player that seeks out market dislocations and shifts capacity to the lines with the strongest rate momentum and highest margins.

To illustrate this, let’s look at the years from 2014 to 2016, when the market was going through a difficult period. As the chart below shows, IGIC not only reduced its retained premiums by writing less business on a gross basis, but also increased its use of external reinsurance, thereby removing risk from its balance sheet (see the difference between gross and net premiums). It’s good to see that the management is not shy to scale down the business and behaves rationally, demonstrating remarkable discipline and patience.

Source: IGIC, own analysis.

In another example of cycle management, from 2017 IGIC seized the opportunity by scaling up its US operations and driving premium growth when E&S premium growth rates were in the double-digits. During this period IGIC’s US written premium grew 80-fold from $2m in 2017 to $90m in 2023. In addition, the company has seen notable market dislocation in reinsurance in recent years, IGIC doubled down on the reinsurance business taking advantage of the favourable rate momentum.

How does IGIC perform against the competition? Given the insurer’s unique geography and business profile, it’s difficult to find direct peer comparisons, but I’ve managed to select a few. Over the past eight years, IGIC’s average combined ratio has been remarkably close to 88%, the second only after Kinsale’s 81% and well below 100% (read ‘profitable underwriting’).

Source: Own analysis based on companies’ filings. *For comparative reasons HSX includes Hiscox London Market segment only, ACGL includes Insurance and Reinsurance segments (excl. Mortgage insurance), HG's combined ratio is 5y average as data available only since 2019.

The IGIC's remarkable combined ratio was the result of a relatively low loss ratio of ca. 49%, well below its peers. This is truly impressive.

Source: Own analysis based on companies’ filings. *For comparative reasons HSX includes Hiscox London Market segment only. HG's loss ratio is undiscounted 5y average as the data available only from 2019.

When it comes to cost efficiencies, IGIC is in the middle of the pack. Although one might think that IGIC has an embedded cost advantage with staff based in places such as Jordan, Dubai and Malta, the company’s international growth ambitions mean that more new underwriting talent is being recruited in higher-cost locations such as London and Bermuda.

Source: Own analysis based on companies’ filings. **For comparative reasons HSX includes Hiscox London Market segment only. HG's expense ratio is undiscounted 5y average (available from 2019 only).

As a result, the superior underwriting combined with solid investment performance translated into very strong profitability for the entire group, with an average ROE of approx. 12%.

Source: IGIC, own analysis.

Boring investments

Like many traditional insurance companies, IGIC has a relatively conservative investment profile. Over 95% of its $1.15bn of invested assets are in bonds, term deposits, cash and other short-term investments. The bond portfolio has an average credit rating of ‘A’ rating and a duration of ca. 3.4 years, which roughly matches its insurance liabilities. This means that the risk of loss from credit defaults or interest rate movements is relatively low.

At the year-end 2023, the investment yield amounted to ca. 3.9%. Since 2016, the blended return on invested assets has averaged close to ca. 2%. To avoid any doubt, the IGIC’s investment strategy is not about maximizing investment returns, but protecting a solid capital base for the ‘underwriting first’ business. That’s why a few percentage points of the company’s steady investment returns add nicely to its excellent underwriting results.

Highly invested management

IGIC’s success as one of the best underwriters in the industry is largely due to the leadership of the founding Jabsheh family. What sets them apart from their peers? In my opinion, it is underwriting discipline, entrepreneurial spirit, patience and self-awareness.

So what to like about IGIC’s management?

Aligned interests: The company has been built from the ground up by the father (Wasef) and his son (Waleed), who are heavily invested in the business, both financially and emotionally. The two of them together own around 32.3% of the company at year end of 2023 or the equivalent of ca. +$350m (Wasef 31.2% and Waleed 1.1%).

Heartbeat in insurance: Both leaders have extensive backgrounds in the industry. Prior to IGIC, Wasef successfully started new companies and sold them to larger established insurance players. In 1989, he established Middle East Insurance Brokers and two years later founded International Marine & General Insurance Co., both taken over by Houston Casualty Company (HCC), now a subsidiary of Tokyo Marine – where he also served as a HCC’s Board Director until 1997.

An entrepreneurial culture with the ability to be nimble and to seize opportunities as they arise. The choice of new lines, geographies and timing of cycle management is an undeniable strength of IGIC’s management team.

A high degree of conservatism shines through a consistent history of peer-leading underwriting performance and a clean balance sheet. Imagine zero financial debt and business growth funded by primarily operating cashflows.

Management incentives centered around profitability. Based on management comments internal performance is measured purely on underwriting, while investment results are not factored in.

Rational capital allocation. IGIC has a track record of rational and shareholder-friendly capital allocation, prioritising organic business growth. Dividends and share buybacks are in the management playbook as a means of returning excess capital in the absence of any better opportunities. Since 2020, IGIC has paid a total of $39m in dividends and $31m in share buybacks. Before going public IGIC had an unofficial dividend payout ratio of close to 40%, with the majority of capital generated being reinvested in growth. At the end of 2023, the dividend yield was around 0.3%, with share buybacks and the purchase of warrants taking precedence.

Source: IGIC, own analysis.

In 2023, IGIC wisely bought back dilutive warrants from the SPAC transaction. The only reason why the management could spend $16m on expiring warrants is if they believe the fair value of the company is higher. Also based on recent management comments, we should expect the company to continue to buy back shares as long as they trade at a discount.

What are my few reservations? Related party transactions. Although there are no known major related party transactions of concern, there are a few minor ones that caught my attention. In particular, IGIC has accounted for the rental of a private boat for business promotional purposes (entertaining clients at the Monte Carlo annual meeting?) and aircraft management fees from a private jet company Arab Wings controlled by Wasef Jabsheh with a total of approx. $2.4m to be expensed to the company’s general and admin account between 2015 and 2021. As much as I am happy for the people who use such transport services, as a shareholder I prefer this type of expense to be covered from a personal account.

Valuation

IGIC trades significantly cheaper than its peers with P/E of 8.0x and P/B of 1.7x multiples pricing rather modest growth. This is particularly interesting considering the consistent earnings history, conservative balance sheet, entrepreneurial culture and aligned management team.

Source: Own analysis, companies’ filings, Finchat (dated Dec 11, 2024).

What is already priced in? Mr. Market expects EPS growth of 5% (2023-22026e), which seems a stretch to me given the historical EPS CAGR of +15% and the future growth prospects, including upside from further expansion in the US short-tail lines and reinsurance market where conditions remain favourable.

Source: Own analysis, companies’ filings, Finchat (dated Dec 11, 2024).

With the expected 2024 EPS of $3 and current share price $24.4, you get a return of 12% The upside lies in continued EPS growth supported by disciplined underwriting, improved business scale and potential multiple expansion closer to the peer group (P/E of 10-15x?). If the market fails to recognise this, then I do not mind management continuing to buy back shares, thereby increasing shareholder value per share.

Source: IGIC, own analysis.

Depending on the future growth and interest rate assumptions, the fair value of IGIC’s operating earnings combined with investment returns varies as showned in the matrix below. Based on my simple valuation, IGIC’s fair value is closer to $50 per share, with a mid-term IRR of at least +15% and an upside potential of at least 50%, not including any future share buybacks.

Source: My own model assuming 10 years EPS growth. No terminal value.

Why does the opportunity exist?

- Limited coverage: After four years of listing on NASDAQ, IGIC is covered by only three analysts (Dowling & Partners, Oppenheimer & Co and RBC) and is not yet on the radar of large funds.

- Middle East perception: Given its Middle Eastern origins, the insurer may still be perceived as a local company. This is no longer the case due to its successful international expansion and reduced relative exposure to the region.

- SPAC ‘birthmark’: Indeed, many institutional investors may be put off by this fact due to negative bias. However, a closer look at the transaction provides sufficient reassurance.

- Low float/liquidity: IGIC’s public float amounts to approx.15.4m shares (representing 34% of the company or +$350m), while insiders such as the founding family and other affiliated investors (Oman International Development & Investment Company at ca. 21%), together with the original SPAC sponsors, own the rest.

Key risks

The company is not without risks:

- Exposure to Nat Cat, political violence, cyber, you name it.

- Too rapid expansion and acquisition of new talent.

- Underwriting cycle turn – Softening of rates as more capacity comes in from both new and established players.

- Competition – Let’s not forget that nobody wants to pay higher insurance premiums.

- Accounting fraud – E&Y at Wirecard?

My hypotheses:

(1) The market in which IGIC operates is poised to grow long-term.

(2) IGIC is a first-class operator in its niche.

(3) IGIC’s management is shareholder-friendly.

(4) IGIC is trading at a discount to its fair value (at least +15% IRR).

Whether I am right or wrong, we will certainly learn something from this case.

If you are interested in reading more about the company I recommend articles on IGIC from Chief Inspector and VIC, which also contributed to my thinking here.

Feel free to leave your comments in the below section or reach out to me via a direct message or e-mail.

Disclaimer: The material and analysis in details herein is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. All facts and statistics are from sources believed reliable, but are not guaranteed as to accuracy, completeness or timeliness in the information. The author has or had positions in the company and her positions may change over time without notice.

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Investment thesis

Kinsale Capital Group Inc. (KNSL) is the best-in-class US Specialty insurer operating in the Excess & Surplus (E&S) market. The company stands out as a remarkable business with unique combination of above industry profitability and top line growth. Key competitive advantages include exceptional discipline in the small-to-medium corporate account underwriting, technology enabled low-cost structure and superior quality of customer service. As a founder-led company, Kinsale represents business with entrepreneurial culture and management team with equal merits of talent and integrity.

Background

Founded in 2009 in Virginia, Richmond (US) the company is managed by its founder Michael Kehoe, who serves as a CEO and Chairman. Originally the company was registered in Bermuda and subsequently re-domesticated to Delaware prior to its IPO in 2016. KNSL has primarily focused on organic growth through its underwriting expertise rather than rapid expansion via acquisitions.

KNSL’s track record speak for itself. Since IPO, the insurer delivered outstanding returns compounding at CAGR of ca. +50%, way above its peers and the broader financial market.

Note: Data for 2016 begins with Kinsale's initial public offering date of July 28, 2016 and assumes reinvestment of dividends.

‘Golden age’ of E&S market

Before going into further details, let’s talk about the industry. The US Specialty or E&S market is a part of the large and mature US P&C industry with ca. $1tn premiums written in 2023. Roughly 10% of the total P&C industry handles non-standard or hard-to-place P&C risks, which standard or so-called admitted insurers refuse to write. Unlike standard risks, the involved heterogenous risks are more complex. That’s why the E&S market enjoys more freedom and less regulation in terms of price and form of a policy.

The E&S market has been growing in the past years at CAGR of ca. 20%, which some consider as the ‘golden age’ of the industry both in terms of margins expansion and top line growth. It is yet unclear, whether it is a structural or cyclical change. Probably a bit of both. On the one hand, the nature of insurance business is cyclical. The recent E&S premium rates surge will slow down and eventually reduce as more capacity will flow back to the standard market. On the other hand, we live in the world with increasing complexity. Strong demand for tackling more sophisticated risks is here to stay long-term. In any event, many industry experts agree that the E&S market is expected to grow further, but likely not at the same high pace as experienced in the past six years. The underlying forces include growth due to economic expansion, rising insurance penetartion, technological advancements, emerging risks and new products.

Source: S&P Global Inc.

In this context KNSL is still a relatively small and fast growing insurer in the E&S market. According to S&P, KNSL is 21st largest P&C insurer and 13th largest US E&S insurer. Its market share has been rapidly growing in the past years and now reached close to ca. 2% (behind Berkshire Hathaway, Fairfax Financial, Markel (see my write up here), AIG and others).

Source: S&P Global, Insurance Insider US.

Superior underwriting enabling profitable growth

How does KNSL earn its money? The company sells policies to cover insurance risks of corporate clients, which have hard time finding standard insurance coverage elsewhere. Typically it would involve newly established companies or industries, business with high risk operations, insured in litigious venues or companies with poor loss histories. Examples of KNSL’s clients include construction companies with history of losses, new restaurants, manufacturers of high hazard products like power tools, pharmaceuticals, and nutrition related products. In addition, a minor portion of the company’s revenues comes from personal lines (ca. 2% in 2023).

Source: Kinsale

Since IPO, KNSL managed to grow almost double as fast as the market, at ca. 40% p.a. KNSL’s gross written premiums of ca. $1.6bn is attributable to two thirds of Casualty business and one third of Property.

The company’s underwriting book represents a mix of lines of business geared towards commercial property, general liability, professional liability and product liability. More than 25% of the business relates to the construction industry. There is some exposure to natural catastrophe events, e.g. man-made fires, windstorms and wildfires. However, KNSL pro-actively manages its exposure to low frequency and high severity events and buys reinsurance protection externally (ca. 50% business ceded on commercial property in 2023). In terms of reserves duration, KNSL has a balance between short- and long-tail lines with an average duration of liabilities close to ca. 3 years.

KNSL distributes its insurance products primarily through brokers, while ca. 2% of premiums was generated by an in-house broker Aspera, pre-dominantly focused on personal lines. The top 3 brokers accounted for ca. 50% of gross premium written in 2023 (incl. RSG Specialty, AmWINS Brokerage, CRC Commercial solutions). This concentration is not ideal, but very typical for the commercial US P&C market in large. The average size of KNSL’s brokerage commission at ca. 14.5% of premium in 2023 is at the lower range compared to many peers.

So what is the reason behind the KNSL’s success disrupting the industry? KNSL is a great example of a company, which embodies focus. The company provides insurance risk coverage with the clearly defined strategy:

• 100% focus on E&S market

• Hard-to-place risks

• Small-to-medium size accounts

• Proprietary technology with integrated digital platform without legacy IT systems

• No delegated underwriting authority

Unlike many established large E&S insurers, KNSL does not write standard (or admitted) risks, with 100% of its premiums coming from the E&S market. KNSL focuses on small and mid size accounts, which tend to have less competition and higher operating margins. An average KNSL’s premium per policy amounted to ca. $15,200 in 2023 ($ 16,200 excl. personal lines). The big traditional players usually choose to stick to larger corporates due to the embedded cost efficiencies with higher volume of premium written per deal. KNSL is a contrarian in this sense and deliberately serves the small-to-mid size client base with much higher volume of transactions. For instance in 2023, it handled 735,000 policy submissions, of which 489,000 were quoted (66.5% quote to submission ratio) and 53,000 were bounded (7.2% bound to submission ratio) considering the relatively modest headcount of 574 FTEs. This result is remarkable for the industry.

One of the reasons why KNSL managed to stay cost efficient and scale significantly in the past years is its reliance on the proprietary technology with integrated digital platform. Making a quote to a broker for KNSL is matter of 24 hours, while for many established insurers this may take up to some days, if not weeks? In addition, KNSL growth was primarily organic, hence the company did not have to deal with integrating legacy IT systems. The latter issue is common for M&A driven peers with decades of legacy on their book. The combination of clear focus on the niche customer group combined with superior IT capabilities, allows KNSL to benefit from its low-cost operator strategy and outperform peers by a lofty margin. On average, KNSL expense ratio was at ca. 22% in the past 5 years, the lowest among direct peers. More importantly, the cost advantage will be even more pronounced, if E&S market cycle turns from ‘hard’ to ‘soft’ and premiums rates start declining.

*Based on companies’ filings aggregated by segments by myself, incl. Berkshire Hathaway Primary Group, Fairfax North American Insurance (incl. Crum & Foster, Zenith National and Northbridge), AIG North America, WR Berkley Insurance, Cincinnati Financial E&S.

What else KNSL does differently? Unlike most insurers underwriting small-to-medium accounts, KNSL does not delegate underwriting authority to agents, brokers or any other third parties. It handles critical underwriting processes in-house, incl. risk selection, price-risk matching, claims handling etc. This not only saves KNSL other few %-points on brokerage commissions, but also keeps the company closer to its core competency, i.e. insurance risk. In addition, delegated underwriting often comes with a potential conflict of interests because third party agents and brokers often get paid commissions based on volume of premiums, but not profitability of the underlying business. Also by performing the core underwriting activities in-house KNSL has an advantage of broader risk terms versus tighter policy conditions which are more common among agents and brokers. In the past 5 years, KNSL loss ratio at ca. 58% was among the best for peers.

*Based on companies’ filings aggregated by segments by myself, incl. Berkshire Hathaway Primary Group, Fairfax North American Insurance (incl. Crum & Foster, Zenith National and Northbridge), AIG North America, WR Berkley Insurance, Cincinnati Financial E&S.

To summarise, KNSL’s business model emphasizes underwriting profitability over premium growth. As a business with superior expense base and better loss experience, KNSL’s operating results are best-in-class the industry.

*Based on companies’ filings aggregated by segments by myself, incl. Berkshire Hathaway Primary Group, Fairfax North American Insurance (incl. Crum & Foster, Zenith National and Northbridge), AIG North America, WR Berkley Insurance, Cincinnati Financial E&S.

Also KNSL demonstrated prudent reserving practices with consistent favourable loss reserves development from prior years. Since IPO, the company released total of ca. $160m net loss reserves into profit, on average ca. 5% of premiums earned annually. In other words, the insurer’s estimate of future claims was conservative with more reserves placed on the balance sheet than actually needed to settle claims.

This is especially encouraging given the recent challenges related to the rising loss cost trends faced by the US P&C industry (i.e. social inflation and economic inflation). In the past years many peers took drastic actions to strengthen reserves for in-force US Casualty lines, more pronounced in commercial auto, professional liability, product liability and directors and officers liability lines of business.

‘Boring’ investments

Like many traditional insurance companies, KNSL has a relatively conservative investment profile, with more than 90% of assets invested in liquid asset classes, i.e. cash, T-bills and other fixed income securities.

The company is clearly focused on capital preservation rather than optimising investment returns while maintaining a healthy balance sheet. Since 2016, KNSL’s investment returns averaged out close to ca. 3%, pretty much following the US risk-free rate dynamics.

As a result, the superior underwriting combined with solid investment performance translated into very strong profitability for the entire group, with an average ROE of ca. 20% p.a. since IPO.

‘Fanatical’ leadership

Much of the KNSL’s success is attributable to the leadership team. Management has good reputation within the industry and on average +30 years of experience.

Michael P. Kehoe, the founder and CEO, has been instrumental in shaping Kinsale's strategic direction and corporate culture. Prior to founding Kinsale M. Kehoe was a CEO of James River (2002-2008), the Kinsale’s direct competitor. There he closely worked with Brain Haney, the former Chief Actuary of James River (2002-2009) and the current COO of KNSL. Both individuals are well regarded in the industry as top notch talent. The team has some qualities of the ‘fanatical’ management, incl. passion of what they do and how they engage with people (see a wonderful interview of Guy Spier with Ejnar Knudsen touching this topic).

As a meaningful owners of KNSL, the management team ‘eats its own cooking’ and has closely aligned interests with external stockholders (ca. 5.6% of the company owned by management, of which ca. 4% by Mr. Kehoe as per latest proxy statements).

In terms of compensation, KNSL management team does not have excessive compensation packages. The highest paid employee was the CEO Mr. Kehoe with total compensation of close to $5.2m in 2023, much of it is in a variable form tied to the stock performance. The management incentives are mainly focused on the business profitability and include KPIs like underwriting profit, combined ratio and operating return on equity.

What else to like about KNSL? It’s entrepreneurial culture with strong emphasis on integrity, innovation, and customer service. The company recognises achievement, rewards the doers and removes underperformers. KNSL promotes key leadership roles from inside, which demonstrates its commitment in recognising and rewarding own talents (see the latest promotions in 2024 of S. Winston as Chief Underwriting Officer and P. Dalton as Chief Business Development Officer)

The insurer’s capital allocation strategy focuses predominantly on deploying capital for organic and profitable growth, while maintaining strong balance sheet without much debt. The company has consistently increased its dividends, reflecting a stable and growing payout history since 2016. KNSL’s dividends amounted to ca. $0.15 per share for the fiscal year 2023, or ca. 0.16% dividend yield and ca. 4% dividend payout ratio. Since 2016, there were no related party transactions of concern or any acquisitions with own stock.

Valuation

Too bad, KNSL is not a cheap company. The stock is traded at eye-popping valuations for the industry at 7.5 P/B and MCAP to EBT 12-months trailing close to ca. 25x. The common valuation for commercial insurance peers is around P/B of 1.5x and P/E close to 10x. Clearly, KNSL is priced for growth. The question is whether the current valuation is still justified?

*CR: Berkshire Hathaway Primary Group, Fairfax North American Insurance (incl. Crum & Foster, Zenith National and Northbridge), AIG North America. Horizontal axis: P/BV based on May 10, 2024 (Source: Tikr.com). Vertical axis: 5y average combined ratio. Bubble size: DWP (Source: S&P Global).

Kinsale’s story reminds me of Progressive (PGR) in the US personal auto space. Historically, PGR grew its written premiums from $23m in 1965 to $51bn in 2023. Thanks to its low cost strategy rooted in the technology and relentless focus on the profitable underwriting, the company managed to change status quo in the mature personal auto space. In the past 15 years, PGR doubled its market share from 7.5% to close to 15% biting in to the pie of the big established market players like Stat Farm, Allstate, USAA, etc. Despite of the relatively rich valuation with high P/B and P/E multiples, PGR delivered compelling returns, i.e. stock price more than 10x-times in the same period. Similar to PGR, KNSL seems to apply the same playbook with emphasis on low cost structure, technology, innovation and customer service.

Depending on the future growth and interest rates assumptions, the fair value of KNSL’s operating earnings combined with investment returns varies as outlined in the matrix below. Based on my simple valuation, currently Mr. Market is pricing for KNSL at least +20% EPS target growth vs. historical growth of ca. 35%.

Source: My own model assuming 10 years EPS growth. No terminal value.

Source: TIKR

For those investors with a bullish view on the E&S industry growth related tailwinds and KNSL’s continuous ability to outperform the market the current price may come across as fair. As a quality business with a long runway, KNSL is worthwhile consideration to me. Since I do not aim to time the market, there is no reason to get upset about a potential short-term decline in the stock price. As Warren Buffett used to say: “When it goes down we love it, because we'll buy more”.

Key risks

Kinsale is a great business, but it’s not without some risks:

• Operational risk: Succession risk to Mr. Kehoe, who is clearly instrumental to the company’s success.

• Cyclical risk: Downturn in the E&S market with more capacity going back to admitted market and less risk passed on to non-admitted carriers.

• Competition from new and established players.

• Regulatory and legal risk: KNSL is sensitive to any adverse changes in the regulatory and legal system, incl. legislation changes, jury award practices, etc.

• Risk of unknown…. Who knows which genie is out of the bottle this time?

Disclaimer: The material and analysis in details herein is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. All facts and statistics are from sources believed reliable, but are not guaranteed as to accuracy, completeness or timeliness in the information. The author has or had positions in the company and her positions may change over time without notice.

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Investment thesis

Markel Group Inc. (MKL) is a financial holding, which runs US Property & Casualty (P&C) specialty insurance operations and performs investments in a concentrated portfolio of wholly or partially owned publicly traded and private companies. The more accurate definition of the company according to its current CEO Tom Gayner is a ‘family office, which happened to be a public company’.

MKL’s business model was largely inspired by Berkshire Hathaway, whereby a float from insurance operations serves as a ‘rocket fuel’ to invest elsewhere. There are three economic engines, which are placed to work for MKL: Insurance, Investments (mainly bonds and common stock) and Markel Ventures (a collection of fully and partially owned private and public industrial and service businesses).

Summary:

− Multi-decade compounder with consistent underwriting and investment results.

− Remarkable culture embracing the ‘win-win-win’ values.

− Management of high skill and integrity.

− Fair price.

All in all, MKL emerged as an economic engine with autonomy-trust culture and diversified operations, which provide the dual benefit of generating underwriting profit and superior investment returns. Similar to some other conglomerates, the MKL’s value exceeds the sum of its parts.

Multi-decade compounder

Markel started in 1930, after two generations of family ownership, the company went public in 1986 priced at ca. $8 with market cap of ca. $30m. Over time, the company has transformed itself from a small local insurer of jitney buses to the top three largest US surplus insurance business with some international operations (see Market Segment Report - U.S. Surplus Lines, A.M. Best).

By year-end 2023, market cap reached close to $19bn, that is an impressive compound annual return of ca. 14% since the IPO. As outlined in the below, MKL managed to outperform the market by 3%-pts since inception.

In the past 5 years value creation slowed down facing challenging years of the Covid-19 pandemic, above average Nat Cat activity, financial market volatility and inadequate pricing cycle in some US Casualty lines exacerbated by rising social and economic inflation.

So what are key drivers of the MKL’s outstanding results? In my view, it is a combination of the solid insurance underwriting record and superior investment results reinforced by a unique culture. Let’s explore each source of value in more detail.

Underwriting

MKL operates in the US specialty market, which implies underwriting of an admitted risk and hard-to-place non-standard risk (E&S, or Excess & Surplus). The latter one is not assumed by a traditional or so called admitted market. The regulatory framework affords E&S businesses greater flexibility in setting premium rates and terms for its policies compared to the admitted market. As a result, E&S insurers like MKL compete based on value-added considerations such as expertise, availability and service rather than price only. In the past years E&S market has been growing at a high pace with CAGR of ca. 20% to ca. $86bn, which many consider as the ‘golden age’ for E&S insurers. The overall E&S industry is expected to further grow with a double-digit rate, at much higher pace of the total P&C market. The key drivers are technological advancements, economic growth and rising complexity of the current and new emerging risks.

Source: S&P Global Inc.

In 2022, MKL was the 3rd largest US specialty insurer and the 41st largest US reinsurer (as measured by premium volume by S&P Global and A.M. Best). In 2022, MKL’s combined net premiums earned amounted to $7.6bn, growing at an annualised growth rate of 13% in the past 10 years.

More than half of it is attributable to the Casualty business (mainly Professional Liability and General Liability lines), which tends to exhibit higher uncertainty towards pricing and loss reserve adequacy since claims are paid out over long period of time, i.e. multiple years. Also, this long-tail business is sensitive to macroeconomic factors like interest rates and economic inflation as well as social trends (i.e. social inflation). Despite of higher complexity, long-tail business comes with a benefit of longer periods of investment, which is supportive to the MKL’s business model.

How strong is the company’s underwriting quality? Since 2013, MKL earned underwriting profit of ca. $2.6bn with an average combined ratio of ca. 95%, which is ca. 5%-pts below the US P&C industry.

In other words, MKL made 5 cents per dollar of insurance premiums after paying all operating expenses, which is on top of money it held and could invest with market-beating returns.

Since 2005, there were only three calendar years (2017, 2011 and 2005) with a combined ratio of above 100%, all driven by the above average Nat Cat events. Indeed, this is a remarkable result.

How prudent are reserving practices at MKL? The main methodologies to determine loss reserves estimate (e.g. Chain Ladder, Cape Cod, Bornhuetter-Ferguson, Benktander, etc.) are designed to avoid volatility by ‘bleeding in’ news, good or bad, over time and not at once. As a result of this, loss reserves development tends to have memory. The MKL’s prior year loss reserves development was favourable in each consecutive year over the past 10 years, with total of $4.8bn of reserve releases (ca. 10% of annual earned premiums).

To put it simply, MKL over-reserved in prior years underpinned by high prudency of loss reserving and management discipline. To note, MKL’s favourable loss reserve releases reduced in the past years, in particular applicable for accident years 2016-2019. This is mainly driven by the US Casualty industry-wide challenges from the rising social and economic inflation. The final outcome of which is yet to be seen.

Since 2015, MKL has made numerous acquisitions to establish in-house ILS services and fronting operations with aim to reduce its cost of capital. This is an asset-light business model with limited risk-bearing and marginal fee-based returns. This sub-segment of MKL insurance operations is not performing up to expectations yet given the increased Nat Cat claims load in prior years. For the purpose of the below valuation, I’ve decided to assign no value to the ILS/fronting operations given its current track record, which may be too conservative considering its growth potential in the future.

Investments

Let’s turn to the investment side of MKL business. Similar to traditional insurers, a sizeable portion of MKL’s invested assets is allocated to fixed income securities and cash primarily to match duration of MKL’s future claim obligations with duration of assets. Bonds and cash amounts roughly to two-thirds of the MKL’s total invested assets (ca. $20bn of $27bn at year-end 2022). Assets in excess of that are allocated to a concentrated portfolio of public equities and a collection of fully and partially owned private equities. However unlike for many P&C insurers, MKL has relatively high allocation of invested assets to common stock (ca. $5.7bn, or 30% of total invested assets at year-end 2022). The public equity portfolio is relatively concentrated and the top 20 positions represent close to 50% of equity portfolio as per the latest 13-F filings (incl. Berkshire Hathaway, Alphabet, Deere & Co, Amazon, Visa, Apple, Home Depot, Watsco and others). Embracing value investment philosophy, the CEO Tom Gayner steers equity investments according to the four-part test:

1. Invest in businesses with good returns on capital that don’t use too much debt.

2. Management teams should possess equal measures of talent and integrity.

3. Invest in businesses that can reinvest earnings at good rates of return or redistribute it.

4. Fair price.

Remarkably, since IPO in 1986 MKL’s equity portfolio outperformed the S&P 500 total return index. See the annual investment return breakdown by asset category in the table below.

Markel Ventures

Since 2005, MKL started allocating capital to a collection of a majority owned private (mostly) and public industrial and service companies operating in various industries. Products and services include house plants (Costa Farms), building products (Lansing Building Products), crane rental service (Buckner Heavy Lift Cranes), pre-cast concrete (Metromont), concierge medical services (Partner MD), fire protection (VSC Fire & Security), IT consulting (CapTech), luxury bags (Brahmin), dredges (Ellicott Dredges), flooring (Havco), and more. Similar to Berkshire Hathaway, MKL prefers to invest in owner-founder lead operators with leading positions in niche markets and long-term orientation. It aims to offer a ‘permanent home’ to private businesses, which choose to join MKL.

Markel Ventures’ contribution to the group has drastically increased over time. The segment has become an additional source of resiliency, diversification and cash flow to MKL as a group.

In terms of operating performance, Markel Ventures earned an operating profit of $0.3bn in 2022, which has nicely grown in the past 10 years, on average of ca. 24% per annum. Since 2017, Markel Ventures earned an average 9% on equity capital as presented in the table below.

As a side note on accounting, a portion of Markel Ventures with a non-controlling interest stake (typically 20-50% ownership) and significant control is not consolidated under US GAAP.  It appears as equity method investments in ‘Other assets’ recorded at historical cost, no mark-to-market adjustments are flowing through a balance sheet. As a result, the MKL’s private equity investments seem to be understated. For example, book value of a general managing agent Hagerty acquired in 2019 amounted ca. $0.2bn, while market value of this public equity stake amounted $0.65bn at the year-end 2022. This results in off-balance sheet unrealised investment gains of ca. $0.45bn. Hence, US GAAP shareholders’ equity does not fully reflect the economic value of MKL and manual adjustments to book value may be not without a merit.

Remarkable culture

Much of the MKL’s success is attributable to the ‘win-win-win’ culture defined by the Markel Style written in 1986, whereby its customers, associates and shareholders participate in the company’s success. This culture lived in practice creates strong alignment among stakeholders.

MKL’s shareholders are considered to be business owners and partners. This shines through high-quality genuine annual letters, annual shareholder meetings as events to exchange and socialise with its business partners, and relentless focus on creating value for stakeholders.

As a multi-generational company, MKL is also consistent and long-term focused. T. Gayner jokes, if he had to choose another profession, it would be a make of the 12-year old scotch whiskey embracing his predisposition to the long-term thinking. As to common stocks, Tom Gayner follows a ‘buy and hold’ strategy not only to avoid emotional biases, but also to be more tax efficient. For instance, he started a position in Diageo more than 25 years ago and by dollar-cost-averaging it has grown to a sizable position at present. There are rare cases when major changes in the equity portfolio occur like the net sales of $1.2bn listed equities in 2020 at the beginning of the Covid-19 pandemic to preserve MKL’s balance sheet as a management’s response to uncertainty of the potential pandemic related claims. Also, long-term thinking is embedded in Markel Venture businesses, which serves as a ‘permanent home’ for many private, often family-lead companies.

Also as an incrementalist, Tom Gayner aspires to be directionally right than accurately wrong. In his daily life he follows the ‘crawl, walk, run’ principles, whereby trying something in small measures and doing more of it, if it works well.

Hands-off approach with decentralised operations in Markel Ventures allows local management teams to run operations independently and reduces management efforts at the holding level. MKL embraces the autonomy-trust based culture with accountability being more important than scale. As an example, when MKL acquired a bakery equipment manufacturer AMF in 2005, the original CEO remained in charge for at least the next 12 years.

As to another great aspect of the MKL’s culture, Tom Gayner emphasizes making mistakes and more importantly learning from them. He states “good judgement comes from experience, which comes from bad judgement”. As humble person, he admitted to a painful omission mistake of not buying a Berkshire Hathaway stock soon enough he learned about the company in 1984 (only started buying in 1990). It is a rare and valuable quality of management to publicly admit mistakes and allows transparency around it.

Management of high skill and integrity

The most valuable Markel’s intangible asset, which is not visible on the balance sheet and is not fully reflected in the above valuation, resides with its spectacular management team.

The founder Markel family managed to grow the business and passed on core values through multiple generations, which remain great contributors to the Markel’s success. The 3^rd generation of the founder family members, namely Anthony Markel and Steve Markel, serve as non-executive directors. The family demonstrated strong ability to select skilled managers with equal merit of talent and integrity.

One of the unmatched assets in the company is Tom Gayner, a well-known value investor with a solid track record of market-beating returns. He joined MKL in 1990 and has overseen the investment portfolio since then. In 2016, he stepped in the co-CEO role and the sole CEO as of 2023. More recently, T. Gayner became a non-executive director of Coca-Cola.

Moving on to the talent side, the MKL management team exercises a strong discipline in capital allocation, which over the past three decades allowed to compound shareholders’ returns at an incredible average rate of ca. 15% per annum, well above ca. 10% what S&P 500 delivered in the same timeframe.

MKL follows a proven capital allocation strategy, which is applicable to all investments:

1.         Invest in existing businesses.

2.         Acquire new businesses.

3.         Acquire publicly traded companies.

4.         Repurchase own shares, if a price is below reasonable intrinsic value estimate.

MKL managed to reinvest earnings into profitable insurance operations, private and public companies through Markel Ventures and Investments, while also returning capital back to its shareholders in a form of share buy-backs. The latter action is justified by a sizable discount to the intrinsic value and brings a value-added benefit of increased ownership to shareholders.

Another attribute of the management’s discipline is no use of own stock to acquire new companies, whereas most deal considerations were paid in cash. There were only few exceptions, when MKL issued own stock to finance major acquisitions, e.g. Alterra in 2013 and Terra Nova (renamed to Markel International) in 2000.

Since 1986, MKL’s paid no dividends, whereby embracing its ability to reinvest retained earnings back into business at attractive returns. Thanks to management’s discipline to walk away from unprofitable business and to talent in finding new opportunities, MKL managed to transform its insurance float from a liability to an economic asset. I am aware of only few examples of holding companies, where insurance float was turned to a durable asset, namely Berkshire Hathaway, Alleghany and Fairfax Financial.

As to incentives and compensation, the MKL management remuneration is based on the long-term view, i.e. 5-year growth book value growth per share and growth in total shareholders’ return. The executive management and directors own close to 2% of a company as a group[1]. Although it is a relatively small figure, each director owns some MKL shares, while for few officers and directors MKL stock represents a sizeable amount of their private net worth. In addition, there are no excessive compensation packages. The MKL’s directors and officers compensation is relatively modest in the context of US corporate world. In 2022, the highest paid employee earned below $5m (T. Gayner CEO).

Most recently, we can observe numerous open market stock purchases by senior management, inc. T. Gayner and some non-executive directors (e.g. L. Cunningham, L. Puckett, G. Harris). In light of the intensified MKL share buy-back activity since 2017, this is an encouraging sign that the management truly believes that the business group is currently undervalued.

Fair price

My fair value estimate of MKL business following three methods (i) Sum of its parts,  (ii) GAAP-adjusted financials and (iii) simple Price to Book (P/B) ranges between $1,400 and $2,400 and on average amounts to close $1,850 per share. Personally, I think  the fair value is closer to the upper end of the range given conservatism of my underlying assumptions. Importantly, Markel is a collection of business generating cash flows, which grow over time. Hence, the above figure is a point-in-time value, which should be revisited as the Markel business continues to evolve. If interested to learn more details on my valuation assumptions and approach, please reach out to me in the comment section or email.

Compared to its core peers in the E&S market, MKL is valued ca. 1.4x and MCAP/EBT at ca. 7.0x., which is close to some well known conglomerate-like businesses, incl. Berkshire Hathaway and Fairfax Financial. In the past years, the MKL market price lagged behind the company’s BV growth in part due to some management missteps in pricing of some US Casualty lines of business, underperformance of CatCo and Nephila operations and the recent scandal related to write-downs on fraudulent letters of credit tied to Vestoo.

Horizontal axis: P/BV based on May 10, 2024 (Source: Tikr.com). Vertical axis: 5y average combined ratio. Bubble size: DPW (Source: S&P Global).

In my view MKL is well positioned to withstand the temporary setbacks and steer its direction towards sustainable and profitable long-term growth. What gives me so much confidence? Well, the insurance cycles happens to turn. Sooner or later the US Casualty business will be re-priced by the industry and MKL in particular. Also, it is about MKL’s remarkable culture and structural advantage of being a multi-decade capital allocator with embedded diversity of cashflow streams. Plus, so far MKL managed to earn attractive long-term returns from all sources combined: Underwriting, Investments and Markel Ventures - de-facto getting ‘cost-free’ insurance float and earning premium on other operations. If the market does not get the beat, I am happy to see more share buy backs coming our way as long as the business continues to be undervalued.

Let’s revert

Markel is a strong business that has been set up to sustain distressed periods, but it’s not without its risks. So what is the ‘bear case’ for the company?

• Competition: MKL’s insurance operations may fail to grow profitably due to strong competitive pressures in the insurance specialty industry

• Low frequency and high severity insurance events: For example, severe natural catastrophe events and any new unknown risks, may impair MKL’s operations

• Operating risk: To some extent MKL is dependent on few skilled individuals like Tom Gayner who help to preserve the company’s culture and promote business resilience

• M&A: MKL may become an acquisition target by some other major conglomerates, e.g. Berkshire Hathaway

Summary

Markel is a company with a remarkable culture and solid collection of cash-generating businesses, which earnings power has been consistently growing over the past decades. The company’s long history of well-deserved success and still relatively high potential for growth given its current size makes it a solid business case. If I was applying earlier mentioned capital allocation principles myself, Markel is a business with (i) good returns on capital without too much leverage, (ii) management with equal measures of talent and integrity, (iii) growth prospects and (ix) reasonable valuations. Lately, the company faced some headwinds in underwriting and made few missteps publicly acknowledged by the leadership. However, the resilience of its business model and genuine culture will bring the company forward and create value for long-term investors. Isn’t a “wonderful business at a fair price”?

Disclaimer: The material and analysis in details herein is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. All facts and statistics are from sources believed reliable, but are not guaranteed as to accuracy, completeness or timeliness in the information. The author has or had positions in the company and her positions may change over time without notice.

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