A while ago I posted here about American Integrity Insurance and how I believed that the market was expecting a return to 'normal' hurricane levels but was pricing it as if there would be both a disastrous level of hurricanes in future and that AII would fail to navigate that.

Whilst I was confident in my thesis that AII was undervalued, a key part missing from my analysis was setting reasonable price targets. In part this was due to my previous analysis being focused only on whether AII was fairly valued or not, but it was also due to my mistrust of (and hence inexperience with) discounted cash flows and all the assumptions required to construct them.

In the post below I lay out the different price targets I have set, and the assumptions behind the model to construct each one. In all cases I believe I have taken the more conservative assumption in order to come up with an estimate that I feel is 'safe'. This doesn't lead to a high-energy post about how this stock could 10x, but I believe gives a cautious view on a company that has executed well in recent years and could stand to beat the price targets by continuing to perform.

The summary of the price targets are in the table below. If you're curious about how these price targets came to be, then read further.

Price Target	Price/share
Asset value (base case)	$16
DCF (0 Growth)	$23.76
DCF (Limited Growth)	$26.81
DCF (Carolina Expansion)	$28.13
"Fair" P/B Valuation	$32

Base Case (Balance Sheet)

The book value reported in the last earnings report of $337m (giving a P/B of about 1.1 at the time) took little adjustment to come up with a base value. I reduced the Premiums Receivable by an amount equal to AII's credit provision for losses and, importantly, reduced their cash balance by the $20m dividend that would now be paid.

A few bonus points to note here. Firstly, AII has no debt, meaning the balance sheet is a nice clean reflection of the business and means the RoE calculations for an insurer are a more reliable indicator. Secondly, the balance sheet doesn't have any Goodwill or Intangible Assets, something else that can muddy a balance sheet.

This adjustment leads to around $313m in equity, and a base case of $16/share.

DCF Model - Intro

The method of calculating a DCF for an insurer is really a DNI (discounted net income), looking at the distributable profits. In creating a DCF model there are always a number of assumptions to be made which I detail below:

Payout Ratio for the DCF is calculated as 45%, based on a $45m payout for 2025. This was calculated as $20m dividend and $25m buyback on $99.6m net profit. The results of pricing depends highly on this payout ratio.

Cost of Equity is set at 11.5%, calculated as a combination of a risk free rate of 4.2%, a risk premium of 5.8% and a small cap premium of 1.5%.

Ceded premiums were previously ~73% of gross premiums earned, but in the recent earnings call AII highlighted the new earnings share agreement for next year, which equated to around 62%.

Expense Ratio is estimated at 30%. Whilst AII managed to achieve an expense ratio of 25% in 2025, and I would not expect the company to become less efficient over time, I wanted to allow for a more conservative value more in line with other insurers.

Loss Ratio is estimated at 45%. This is actually fairly close to AII's 2024 value (of 47.9%) which was achieved even during an abnormally high hurricane activity year, and feels like a safe conservative level to project.

That brings the estimated Combined Ratio to 75%, sitting in between AII's two previous abnormally low (63%) and high (80%) years.

I keep project any other factors, such as policy fee income, tax rates, simply based on the average of previous years.

DCF - 0 Growth

The first case to look at is a scenario where there is no growth in the company at all. In other words, how much is the future cash worth if the company is just maintaining year on year.

This may not be such an unreasonable assumption. AII's rapid growth in the last few years was largely due to policy take-outs from Citizens, a process which is mostly completed and AII do not expect to take on a significant number of future policies. Indeed the total income from 'Voluntary' premiums was relatively stable for the last 3 years.

Setting a growth in gross premiums written to 0 actually leads to a small drop in net income from 2025 (due to my conservative expense and loss ratios), but still values those cash flows at $23.76.

DCF - Limited Growth

For the Limited Growth scenario I add two growth factors. The population growth in Florida is estimated at approx 1.28%. I add this to forecast GDP growth for each year to obtain growth rates for each year varying between 3-3.4%.

Adding this growth each year to the top line Gross Premiums Written, increases the price target to $26.81.

DCF - Carolina Expansion

Where AII is really most likely to gain growth is in its new expansion into the North Carolina market. As a new market entry this is much harder to estimate initially, but I took the following figures.

The average policy sits around $3100, and I estimated AII to take out around 5000 policies in the first year. With rapid growth of 50% in gross premiums written for NC, and 20-30% as growth slows in years after. Those might sound like big growth numbers, but with a low starting policy count this equates to only 4% of AII's total gross premiums written after 5 years. Successful execution in North Carolina could outperform this estimate.

I increase the expense ratio by 3% (trailing back to a standard 30%) to reflect the additional costs incurred in venturing into a new market. I initially increased the loss ratio by to account for AII 'learning' the new market, but then realised such a small % of premiums written is unlikely to have a bearing on their overall ratio.

This leads to a price target of $28.13.

Thesis Update Potential: AII releases first quarter results on 12th May, where we may get more guidance on the Carolina Expansion.

Bonus - Hurricane Forecasts and "Fair" P/B

I revealed in the previous post revealed that the market appeared to be expecting AII to suffer a worse year for hurricane damage in 2026 than in 2025. Whilst that is certainly likely, my previous post revealed that the market seemed to be pricing in too many hurricanes and too much underperformance.

I extended my analysis to include probabilities for hurricanes making landfall, based on the historical hurricane data. Using the losses for each scenario from my previous analysis, I calculated a total 'expected loss' from hurricanes that would normalize AII's earnings for 2025, bringing it closer to 25% RoE.

Insurers such as AII typically trade at a P/B value around 2 (for an RoE only as high as 20%), making a fairer price target $32 and one likely to get closer to re-rating on more good hurricane news.

Thesis Update Potential: More accurate hurricane forecasts release on 21st May.

u/Kaladorm