Private Flood Shift And AI Underwriting Will Support Durable Long-Term Earnings Power

Catalysts

About Neptune Insurance Holdings

Neptune Insurance Holdings is a technology driven managing general agent that distributes private flood insurance across the United States using proprietary AI powered underwriting and a capital light model.

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

• Ongoing under penetration in U.S. flood coverage, with management estimating only about 2% of properties insured, creates a long runway for policy and premium growth as awareness rises and agents increasingly offer flood on every home sale, directly supporting sustained double digit revenue expansion.
• Structural shifts away from the NFIP, including higher rates under Risk Rating 2.0 and demonstrated private market functionality during the recent shutdown, are pushing more borrowers and lenders toward private alternatives. This may improve Neptune's pricing power and mix and could lift net margins and earnings over time.
• Continued investment in AI and machine learning, such as the rebuilt Triton underwriting engine and new quote conversion and renewal models, is associated with higher conversion, better retention and rising revenue and EBITDA per employee, reinforcing margin durability as the platform scales.
• Expansion of the carrier and reinsurance panel to 39 risk taking partners, highlighted by the Palomar program, enhances capacity depth and diversification. This allows Neptune to write more premium at economics the company views as attractive and to support higher earnings potential without adding balance sheet risk.
• Broader distribution reach through record levels of active agency codes, nationwide coverage including recent entry into Alaska and deepening API integrations positions Neptune to capture growth in both mandatory and voluntary flood demand, underpinning renewal revenue and supporting the company’s targeted adjusted EBITDA margins above 60%.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Neptune Insurance Holdings's revenue will grow by 19.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -17.5% today to 40.7% in 3 years time.
• Analysts expect earnings to reach $101.2 million (and earnings per share of $0.69) by about December 2028, up from $-25.8 million today.
• 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 58.0x on those 2028 earnings, up from -148.1x 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 long-term shift from the NFIP to private flood insurance, combined with only about 2% of U.S. properties currently insured, could sustain strong policy growth for years and support continued double digit increases in revenue.
• Neptune's AI-first, asset light MGA model is already delivering 60% adjusted EBITDA margins and rising revenue and EBITDA per employee. Further technology enhancements such as the rebuilt Triton engine and new machine learning models could expand net margins as the platform scales.
• Deepening and broadening relationships with 39 risk taking capacity providers and new programs like Palomar, alongside favorable feedback from reinsurers, could unlock additional underwriting capacity that enables materially higher premium in force and earnings over the long term.
• The growing distribution footprint, record agency codes binding policies, increasing API integrations and strong non-mandatory demand outside traditional flood zones suggest Neptune can keep expanding its addressable market, which may drive sustained growth in new business sales, renewal retention and total revenue.
• Structural and regulatory tailwinds, including NFIP Risk Rating 2.0, periodic NFIP shutdowns and political support for a more robust private flood market in key states such as Florida, may enhance Neptune's competitive position and pricing power, supporting higher premiums written and long-term 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 $28.38 for Neptune Insurance 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 $35.0, and the most bearish reporting a price target of just $22.5.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $248.6 million, earnings will come to $101.2 million, and it would be trading on a PE ratio of 58.0x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $27.73, the analyst price target of $28.38 is 2.3% 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.