Successful Launch Of Apartment Program And Catastrophe Bonds Will Stabilize Future Earnings Outlook

Key Takeaways

• Strategic underwriting and new reinsurance protections are poised to boost premium growth, stabilize earnings, and improve margins.
  
• The Interboro sale will enhance financial flexibility and positively impact future earnings by providing additional cash.
  
• Dependence on the Florida market poses risks from regulatory changes, while exposure to natural disasters and cost pressures could impact margins and profitability.

Catalysts

Through its subsidiaries, primarily engages in the commercial and personal property, and casualty insurance business in the United States.

• The successful launch of the new apartment program and the significant underwriting efforts are expected to accelerate premium growth, contributing to increased revenues.
  
• The reduction in quota share retention allows the company to retain a higher percentage of premiums, thereby enhancing net margins and overall profitability.
  
• Enhanced reinsurance protections and new catastrophe bond placements are designed to mitigate earnings volatility, providing a more stable and predictable earnings outlook.
  
• The strategic focus on high-quality risk selection and a low binding ratio in underwriting indicates a potential improvement in net margins through better loss ratio management.
  
• The approval and pending sale of Interboro, expected to add approximately $22 million in cash, may support financial flexibility and contribute positively to future earnings.

American Coastal Insurance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American Coastal Insurance's revenue will grow by 9.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.7% today to 20.9% in 3 years time.
• Analysts expect earnings to reach $82.3 million (and earnings per share of $1.68) by about March 2028, up from $76.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, up from 7.7x today. This future PE is lower than the current PE for the US Insurance industry at 13.9x.
• Analysts expect the number of shares outstanding to grow by 0.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.49%, as per the Simply Wall St company report.

American Coastal Insurance Future Earnings Per Share Growth

Risks

• American Coastal's exposure to natural disasters, such as hurricanes and other catastrophic events, remains a significant risk. Despite reinsurance programs, increased frequency or severity of such events could adversely impact net margins and earnings.
  
• The company's reliance on the Florida market, especially for new growth initiatives like the apartment program, could pose risks due to regulatory changes or market-specific challenges, potentially affecting future revenues and profitability.
  
• Decreased pricing in the insurance market due to declining reinsurance costs, while beneficial for competitiveness, might compress profit margins if loss trends don’t follow suit, impacting net margins.
  
• Higher operating expenses, including policy acquisition costs and general administrative expenses, might erode profitability if not offset by increased revenues from premium growth, affecting overall net earnings.
  
• Execution risk associated with the strategic shift towards the apartment insurance market might affect growth initiatives if underlying assumptions prove inaccurate, impacting revenue and future earnings stability.

Valuation

• The analysts have a consensus price target of $16.0 for American Coastal Insurance based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $393.9 million, earnings will come to $82.3 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 6.5%.
• Given the current share price of $12.14, the analyst price target of $16.0 is 24.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.