Our target price of $85 implies multiples of 10X blended 2026/2027 EPS and 1.1X F12M book and represents a modest discount to our estimate of intrinsic value. We value the company by discounting capital-adjusted earnings assuming a cost of equity of 9% and terminal growth rate of ~3% (vs. the 10% and 4% implied by industry multiples over the past 20 years). The company has traded at 8X F12M EPS and 0.7X last reported book value versus industry averages of 11-12X and 1.3-1.4X, respectively, over the past 20 years.
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Upside risks to target price include: Economic strength could benefit revenues through higher exposures and reinvestment rates; insurance rate increases could benefit ST revenue growth and LT margins; reserve redundancies could benefit margins; higher inflation could benefit revenues through increased exposures and reinvestment rates, while lower inflation could lead to better margins (current and prior years); higher interest rates could lead to higher reinvestment rates and positively impact net investment income, while lower rates could benefit book value; a lack of catastrophes losses could aid earnings and capital, while catastrophe losses could benefit pricing; and technological/societal change could positively impact operations, demand, expenses, and competitive position.
Downside risks to target price include: Economic weakness growth could hinder revenues through lower exposures and reinvestment rates; insurance rate decreases could hinder ST revenue growth and LT margins; reserve inadequacies could benefit margins; lower interest rates could pressure reinvestment rates and impact net investment income, while higher interest rates could adversely impact book value; higher inflation could adversely impact margins (current and prior years), while lower inflation could lead to lower reinvestment rates and adversely impact net investment income; catastrophes losses could create downside to earnings and capital, while lack of catastrophe losses could benefit pricing; and technological/societal change could adversely impact operations, demand, expenses, and competitive position.
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