Digitization Trends Will Drive Long Term Expansion Of Insurance Platform Margins

Catalysts

About Exzeo Group

Exzeo Group provides a proprietary Insurance as a Service platform that powers core operations for property and casualty insurance carriers, with an emphasis on homeowners insurance.

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

• Structural digitization across the insurance industry is driving carriers to retire legacy systems and adopt integrated cloud platforms like Exzeo, which is expected to support revenue growth as managed premium scales from the current 1.2 billion base.
• Carrier appetite for data driven risk selection and efficiency gains is increasing, and Exzeo's underwriting and management services already contribute more than 85 percent of incremental revenue, which supports continued expansion in net and EBITDA margins.
• The pipeline has tripled within weeks of the IPO and is broadening beyond Florida and start up carriers, which suggests a multi year runway for new client additions and potentially higher annual recurring revenue as contracts convert.
• The asset light model allows incremental managed premium to be added with minimal expense, and with adjusted EBITDA margins already near 55 percent, additional operating leverage can support earnings growth in line with or faster than topline growth.
• A debt free balance sheet, more than 140 million of cash and over 50 percent free cash flow margin give Exzeo capacity to invest in go to market build out and product innovation, which may reinforce competitive positioning and support long term earnings power.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Exzeo Group's revenue will grow by 17.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.6% today to 42.7% in 3 years time.
• Analysts expect earnings to reach $125.8 million (and earnings per share of $1.14) by about December 2028, up from $54.4 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 21.8x on those 2028 earnings, down from 30.1x today. This future PE is lower than the current PE for the US Software industry at 31.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.48%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The rapid growth in managed premium from $500 million to $1.2 billion in a year is heavily tied to onboarding HCI related carriers, so any slowdown in HCI growth, loss of a major carrier or reduced Citizens policy opportunities in Florida could materially curb premium expansion and slow revenue growth.
• The current client base and many new prospects are still concentrated in the Florida homeowners market, so adverse regulatory changes, hurricane losses or shifts in risk appetite in that state could reduce carrier premium volumes on the platform and pressure both revenue and earnings.
• Exzeo's strategy depends on insurers continuing to outsource core systems and operations to third party cloud platforms, and if larger carriers accelerate in house digitization or competing Insurance as a Service vendors emerge, pricing pressure or slower client wins could limit long term revenue growth and stall net margin expansion.
• The model assumes new managed premium continues to come on at higher incremental margins than the existing base, but meaningful investment in sales talent, product innovation and global go to market could lift operating expenses faster than expected and cap adjusted EBITDA margin expansion.
• Guidance for pretax income to rise from around $81 million year to date to between $115 million and $125 million in 2026 relies on sustained high free cash flow conversion of about 140 percent of net income and a free cash flow margin above 50 percent, and any deterioration in carrier collections, contract terms or reinvestment needs could weaken free cash flow and challenge the long run earnings trajectory.

Valuation

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

• The analysts have a consensus price target of $26.0 for Exzeo Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $294.4 million, earnings will come to $125.8 million, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $18.01, the analyst price target of $26.0 is 30.7% 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.