Florida Legislative Reforms And Reinsurance Trends Will Support Stronger Long-Term Insurance Profitability

Catalysts

About American Integrity Insurance Group

American Integrity Insurance Group is a property insurer focused on homeowners and commercial residential coverage in Florida and select Southeastern states.

What are the underlying business or industry changes driving this perspective?

• Disciplined expansion into underpenetrated Florida segments such as Tri County and middle aged homes, where current share materially trails local housing stock, can support sustained double digit premium growth and higher net income as fixed expenses are leveraged.
• Legislative reforms that have curbed legal system abuse and driven a sharp decline in catastrophe lawsuit inventories are improving loss cost visibility, which should stabilize loss ratios and support structurally higher net margins over time.
• Softening reinsurance pricing and ample capacity, combined with the company’s intention to gradually reduce quota share, may allow American Integrity to retain more profitable premium and potentially lift earnings and book value per share growth.
• Measured entry into commercial residential lines for condominiums and HOAs in a capacity constrained, hard market may enable attractive risk adjusted pricing, adding a new earnings stream with favorable margin potential.
• Geographic diversification into Georgia, South Carolina and North Carolina through builder relationships enhances scale and spreads risk, which can further reduce the expense ratio and support more consistent earnings through the cycle.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming American Integrity Insurance Group's revenue will grow by 22.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.7% today to 8.7% in 3 years time.
• Analysts expect earnings to reach $43.6 million (and earnings per share of $0.05) by about December 2028, down from $84.6 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $49.0 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 18.2x on those 2028 earnings, up from 4.7x today. This future PE is greater than the current PE for the US Insurance industry at 13.6x.
• 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 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current benign catastrophe and non catastrophe loss environment in Florida may reverse as severe weather frequency normalizes or worsens. This would drive higher catastrophe claims costs and elevate the loss and loss adjustment expense ratio, putting pressure on earnings.
• American Integrity is leaning into growth in historically challenging segments such as Tri County Florida and middle aged homes. If legislative reforms are weakened, legal system abuses reemerge or loss costs are misestimated in these cohorts, underwriting results could deteriorate and compress net margins.
• The strategy to gradually reduce quota share and retain more premium is predicated on stable reinsurance capacity and pricing. If capital markets or traditional reinsurers reprice Florida risk higher after a major event, reinsurance costs could spike and materially reduce net income and book value accretion.
• Rapid policy count growth of 49% year over year across multiple states and new commercial residential products increases operational complexity. Any lapse in underwriting discipline, pricing accuracy or claims handling could erode the currently favorable combined ratio and slow earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $27.0 for American Integrity Insurance Group 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 $29.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $503.5 million, earnings will come to $43.6 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $20.38, the analyst price target of $27.0 is 24.5% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.