Acquisition Of First Indemnity Of America Will Open New Market Opportunities

Key Takeaways

• Strategic acquisitions and market entry, like the surety market, are set to drive long-term growth, positively impacting revenue and earnings.
  
• Reduction in reinsurance costs and strategic risk retention aim to enhance earnings and improve underwriting profitability.
  Sure, please provide the financial narrative on Palomar Holdings, and I'll summarize it for you.

Catalysts

A specialty insurance company, provides property and casualty insurance to individuals and businesses in the United States.

• Palomar Holdings' acquisition of First Indemnity of America (FIA) and entry into the surety market is poised to drive long-term growth, with surety expected to become a significant segment over time. This could positively impact revenue and earnings.
  
• The expansion of the casualty segment, leveraging new leadership and market conditions, indicates potential for continued strong growth, which is likely to bolster revenue and contribute to improved net margins due to strong rate increases and prudent risk management.
  
• Reduction in reinsurance costs due to favorable market conditions and strategic risk retention is expected to enhance earnings by lowering operational expenses and improving underwriting profitability.
  
• Palomar's strategic focus on increasing its participation in its crop insurance business from 5% to 30% represents a major growth catalyst, aiming to achieve $500 million in premiums in the intermediate future. This increased participation could significantly boost revenue and earnings.
  
• Continued investment in talent and geographic expansion within its Inland Marine and other property products, along with rate increases in certain lines, is likely to support sustained premium growth and potentially improve net margins through enhanced operational efficiency.

Palomar Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Palomar Holdings's revenue will grow by 18.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.2% today to 23.1% in 3 years time.
• Analysts expect earnings to reach $215.4 million (and earnings per share of $7.84) by about March 2028, up from $117.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.8x on those 2028 earnings, down from 29.5x today. This future PE is greater than the current PE for the US Insurance industry at 13.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Palomar Holdings Future Earnings Per Share Growth

Risks

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Valuation

• The analysts have a consensus price target of $139.333 for Palomar Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $152.0, and the most bearish reporting a price target of just $115.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $931.1 million, earnings will come to $215.4 million, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 6.2%.
• Given the current share price of $130.17, the analyst price target of $139.33 is 6.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.