Capital Light Shift And Data Advantage Will Drive Durable Long Term Earnings Power

Catalysts

About Accelerant Holdings

Accelerant Holdings operates a data driven specialty insurance platform that connects high quality MGAs with diversified risk capital partners through its Risk Exchange.

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

• Rapid expansion of specialized, small ticket commercial insurance products, supported by over 90 new offerings in the last 12 months and a record pipeline of more than $3 billion of annualized premium, is expected to support double digit exchange written premium growth and increase fee based revenue.
• Ongoing shift of business from owned carriers to third party insurers, targeted to reach roughly two thirds of the portfolio over the next three to five years, makes the model more capital light and is expected to increase the proportion of stable Exchange Services fees in total earnings.
• Scaling of a broad specialty P and C data asset, now exceeding 57,000 unique exposure attributes, enhances pricing and risk selection capabilities and is expected to support continued gross loss ratios in the low 50s and structurally higher net margins.
• Diversification and deepening of risk capital relationships, including the Lloyd’s facility, Ozark Specialty and a growing base of 17 third party insurers alongside major reinsurers, reduces concentration in Hadron over time and is expected to improve capital efficiency and earnings durability.
• Compounding value in owned and incubated MGAs, evidenced by sizable recent unrealized and realized gains, indicates a growing embedded equity portfolio that can supplement fee income with periodic investment gains and support long term earnings power.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Accelerant Holdings's revenue will grow by 20.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -182.9% today to 15.5% in 3 years time.
• Analysts expect earnings to reach $206.7 million (and earnings per share of $1.27) by about December 2028, up from $-1.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $322.6 million in earnings, and the most bearish expecting $88.9 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 33.2x on those 2028 earnings, up from -2.5x today. This future PE is greater than the current PE for the US Insurance industry at 13.5x.
• 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 strategy to migrate roughly two thirds of the portfolio to third party insurers within three to five years depends on timely member transitions and regulatory approvals. Continued delays like those already seen could slow the scaling of fee based Exchange Services and MGA Operations revenue while leaving more capital intensive underwriting revenue in place, which may pressure earnings growth and net margins over time.
• Although the portfolio currently benefits from a low gross loss ratio in the low 50s on very small policy limits, a structural shift in loss cost inflation or liability severity in commercial SME lines, especially property fire and casualty exposures, could erode this advantage and push loss ratios toward industry norms. This would reduce the profitability of the platform and weaken future earnings.
• The model relies on attracting and retaining high quality MGAs and risk capital partners to fuel its two sided exchange. If competitive specialty platforms, changing capital markets conditions or reputational issues slow member growth, compress take rates or limit reinsurance capacity, exchange written premium expansion could decelerate, impacting revenue and EBITDA growth.
• Embedded value in owned and incubated MGAs and broader ecosystem investments contributed irregular investment gains that boosted EBITDA in the latest quarter. If future gains are smaller, lumpy or negative as valuations reset across private specialty insurance assets, reported earnings and margins could fall back toward the lower underlying level, making sustained profit growth harder to achieve.
• The shift toward a more capital light, third party focused model assumes continued strong cash flow conversion and stable operating leverage. If building and maintaining extensive data infrastructure, AI capabilities and integration with numerous insurers prove more expensive than anticipated or encounter regulatory and data governance headwinds, operating expenses could rise faster than revenue, compressing net margins and earnings.

Valuation

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

• The analysts have a consensus price target of $20.67 for Accelerant 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 $36.0, and the most bearish reporting a price target of just $15.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $206.7 million, and it would be trading on a PE ratio of 33.2x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $15.67, the analyst price target of $20.67 is 24.2% 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.