American Coastal Insurance Corporation (ACIC) Earnings Call Transcript & Summary

Good morning, and thank you for joining American Coastal Insurance Corporation's 2024 Investor Day. Before we begin, please be reminded that some of the statements made during today's presentation are forward-looking statements. These statements are based on current expectations and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those discussed. Factors that could impact our business are detailed in our filings with the Securities and Exchange Commission. We encourage you to review those filings for a comprehensive understanding of the risks. We undertake no obligation to update forward-looking statements, except as required by law. Please keep this in mind as we discuss our vision and future plans today. With that, I will turn it over to Mr. Dan Peed. Dan?

Good morning. I'm Dan Peed, the Chairman and CEO of American Coastal Insurance Corporation. We're here this morning. I want to introduce the executive team, the senior executive team that we're working with, provide a corporate overview, a little bit about our strategic transformation, and then we'll hand it over to Brad Martz, he'll be talking a little bit more about our current underwriting strategy and our in-force portfolio as well as our reinsurance tower. And then we'll turn it over to Chris Griffith to talk a little bit about a new product that we're launching right now, and then lastly Lana Castle, as our CFO, to go over the numbers. So first, on the executive management team. I'm here with Brad Martz, he's the President. He was the former CFO and long-time CFO of UTC and American Coastal. And then also sitting here with me is Chris Griffith. He's the Chief Operating Officer and the CIO, and he's going to talk about the new product. And then also with us is Lana Castle. She's our current CFO, and she's going to talk more about the numbers. Not with us, but on our senior executive management team is Brooke Adler, she's General Counsel; as well as Andy Gray, who's Chief Compliance and Risk Officer. So first, I want to talk a little bit about the corporate overview of American Coastal and provide an introduction and some history for -- as an introduction to American Coastal Corporation, which is the holding company. The holding company is publicly listed on the NASDAQ and trades under the ticker symbol ACIC. We have a market cap of about $650 million and a net premium earned of about $270 million to $280 million, which is growing on a quarter-over-quarter basis. We want to talk a little bit about the reset of the profitability metrics and how we expect that going forward to continue. We have a net income that's approximately $75 million to $80 million. We're headquartered in St. Petersburg, Florida, and we have about 65 employees. The American Coastal holding company operates through 2 statutory entities, which are our P&C carriers. The main one is AmCoastal, and it does specialty commercial property, which is condo associations in Florida exclusively. We write about $640 million of premium in AmCoastal. And then second, we have Interboro Insurance, which is a personal lines insurer based and writing in New York. We write about $35 million worth of premium. We're going to talk in a minute about our strategic transformation from commercial -- from personal and commercial lines into only commercial lines. And as the final step in that transformation, we entered definitive agreements to sell Interboro earlier this year, which we expect to close in the first quarter of next year. That is classified as discontinued operations. So I've mentioned the strategic transformation. Historically, we were both a personal lines and a commercial specialty writer. I was -- joined as Chairman and CEO July 1, 2020, and we entered -- and we entered into this journey of a strategic transformation to a commercial specialty carrier. We started off immediately with underwriting initiatives, including trying to derisk the portfolio. At the end of 2020, we sold the Northeast renewal rights to a third party. At the end of 2021 we sold the Southeast, which included Georgia, South Carolina and North Carolina renewal rights, and into mid-2022 we put the remainder of the personal lines into runoff, with the objective of becoming a commercial specialty carrier. In the end of 2022, Hurricane Ian hit and impacted our personal lines business, UPC. And in early 2023, that was put into receivership. That really expedited our exit from the personal lines space and enabled us to focus both our time and capital in the commercial specialty space. In August of 2023, we rebranded and started trading under the ticker of ACIC, American Coastal Insurance Corp. And again, as I mentioned, we divested ourselves -- or we entered into definitive agreements to divest Interboro Insurance Company mid-this year 2024, expected to close early 2025. That leaves us with really the investment thesis of the commercial specialty that we have been working to create, and I'll start with what I consider to be really our core competency, core competitive advantages, really oriented around deep underwriting expertise. We have been in the catastrophe-exposed property world and specifically commercial property, and I have myself as an underwriter, for nearly 40 years. I started with Factory Mutual engineering (sic) [ Factory Mutual Insurance ], which is a large industrial and manufacturing, as a loss prevention consultant and engineer, and moved through the reinsurance world, forming AmRisc in 2020 -- in 2000 as a co-founder with BB&T Insurance at the time, which was then merged and became Truist Insurance Holdings and recently TIH. So that underwriting expertise really is the core culture of our company. I like to say -- we like to say underwriting profit is job #1 and for job #2, see job #1, and for job #3, see job #1. That has given us a portfolio which is quite mature. We've been underwriting it for about 15 years. It has above-average risk characteristics. So it's what we call the best in class. And that's focused on new roof coverings, wind-resistive design, strapped roofs, things of that nature, and give us a portfolio which has really performed well from a low loss ratio perspective, which drives #3, consistent profitability. We have a pretax income on a 10-year average of over $50 million with an attritional loss and LAE ratio of 8.5%. Building on that, we have an exclusive partnership with AmRisc, which I've mentioned is one of the largest windstorm MGA/MGUs in the country. They're a subsidiary of TIH, previously Truist Insurance Holdings. And we have a mutually exclusive agreement with them, which we actually have just extended to 2029. Along with that, if you're going to write a CAT portfolio, you have to have very strong reinsurance partners, and we have been working with these reinsurers for nearly 20 years and we consider very strong reinsurance support, including quota share as well as excess of loss reinsurance support. And then lastly, what we have right now is very favorable market conditions. To steal a phrase, 2023 was a generational hard market. And while that did back off a little bit, we still consider '24 to be an exceptional hard market. That is a hard market driven by catastrophe capacity, focused in Florida and focused in residential. So we tick all the boxes and I think -- I believe that that puts us into a very favorable market for at least 3 to 5 years. I mentioned this strategic transformation and how we believe that that has really reset our profitability metrics in 2023 with the exit from personal lines. And even in commercial specialty, you can see in this graph with 2023 pretax profit being $112 million. And then the 9 months to date 2024 being $87 million, we feel like we have reset that profitability metric. We have previously announced -- the 9 months includes losses from Hurricane Helene. And then Milton hit in the fourth quarter, but we have announced that we do expect to continue to have an underwriting profit even in the fourth quarter despite the damages from Milton. Again, the work here was to reset the metrics and so that we continue with that level of profitability going forward. Lastly, I want to just touch on, again, this exclusive partnership with AmRisc Group They are a subsidiary of TIH. AmRisc provides all of our production and underwriting, policy issuance, [ claim ] services, inspections, portfolio optimization. American Coastal, obviously, is the statutory entity, brings the capital. We placed the reinsurance tower each year and provide underwriting strategy and direction and pricing targets to AmRisc. And as I have said, as I mentioned, we have extended that contract and relationship through 2029. With that, I'm going to turn it over to Brad Martz to talk about our underwriting strategy.

Thank you, Dan. I'm Brad Martz, President of ACIC. I'm going to talk a little bit about our culture, what we write, how we write it and how we manage risk. So when we talk about underwriting strategy, underwriting profitability is job #1, for job #2, see job #1 is well known throughout the company. Dan, thank you for that mantra. It does work and it keeps us focused. We've established a market leadership position in Florida commercial residential following that approach. AmRisc has done a fantastic job working with us. We're directing a lot of the strategy [ in ] how we want to grow, where we want to grow, where we want to shrink, changes in terms, conditions, et cetera, and they just do a masterful job of execution for us. We are very, very selective in what we write and how we write it. 100% of our portfolio is inspected, as Dan mentioned, with above-average risk characteristics, and that data quality is super important in getting the price right. So what do we write? We're typically focused on low rise, meaning 3 to 4-story garden-style condominiums and apartments. These tend to be further inland. We've spent the past 2 years post Ian kind of reunderwriting the book and moving away from hypercoastal risks that are 0.1, 0.2 of a mile from the water due to outsized losses relative to the premium provided by those hypercoastal risks. So that has accounted for a good part of our exposure reduction and PML reduction over the past 2 years, which is now substantially complete, and we're looking to continue growing. We cover the building envelope. So if you think about a condominium building, we're writing the shell, okay? So the walls, the roof, windows, doors and common areas. We do not write or cover contents or liability inside the units. We exclude flood and all liability and just focus on physical damage of the property. How we write it is really a combination of some sophisticated modeling tools that allow us to price each risk to a target return on capital. American Coastal is an admitted carrier with [ filed rate ] tools and forms in Florida which allows us to access the Florida Hurricane Catastrophe Fund. That's an important distinction over an excess and surplus lines carrier because it provides a pretty significant cost advantage. However, for commercial risks in Florida over $5 million of total insured value, which most of ours are -- our average TIV is about $13 million -- those risks are individually rated and priced, which means we have significant flexibility in pricing compared to other traditional admitted products. We established a technical model price and manage to that, and our return on capital expectations are set and managed around changing market conditions. So how do we manage the risk? I think the key for us is that we're utilizing an extensive reinsurance and risk transfer program to manage the volatility. Reinsurance is essential to our strategy and we are targeting catastrophe losses, retaining catastrophe losses to be within an average quarter's pretax earnings. We want CAT to have minimal volatility on our earnings. And we purchase enough protection, both for frequency and severity over time, to ensure that our capital and earnings are protected. Underwriting discipline is at the heart of our character, one of our core values, integrity is at the center of that. And this chart sort of illustrates details of the Florida market over the past 10 years. From 2014 through 2017, prior to Irma, the market was soft, capacity was abundant, terms and conditions were completely different and we were more of a risk-off approach to the market. We retained the best risks and ceded market share to others who were not as disciplined. And post Hurricane Irma in 2017, that completely changed the market. That was an outsized loss, a little bit of a surprise. And it started to create a reversal of those soft market conditions, and hard market conditions offered us an opportunity to increase exposures and grow premiums over time. And that's exactly what we did. So risk on, risk off throughout the cycle, depending on our expectation on being able to deploy and earn an acceptable return on capital. This chart illustrates kind of a year-over-year view of the risk relative to the return, right? The top blue line is the premium we get, the dotted bottom line is the total insured value or exposure we get. So the bigger the gap there, generally the more profitable your portfolio is going to be. Those 2 lines are starting to converge a little bit and move back towards where we were in September of '23, which is fine, still -- market is still ripe for underwriting profitability. Retention is holding strong. We have about an 85% retention rate in the business today, which is exactly where we want it to be. That means we will need to write some more new business, obviously, to keep overall exposure base flat year-over-year, but hopefully write enough new business to actually growth and resume growth year-over-year. But retention rates dipped in the previous most recent periods because of that re-underwriting of the book that I mentioned previously. Increased competition does impact us a little bit. But again, as a market leader, we're generally getting first look and last look at every risk, helping us really -- we have a lot of control and influence over the retention rate. So if we wanted it to be 90%, we could push it there. If we wanted it to be 80%, we could push it there. But for right now, we're maintaining our outlook for 85%. So let's talk a little bit about reinsurance and how we manage the risk. So our primary risk is natural catastrophes, hurricane being the #1 nat cat that we face. Florida is the peak zone in the world for windstorm. So this year, we did expand the exhaustion point and stretch the top of our tower up significantly, up to about the 230-year return period on an ARR basis, blended basis closer to 200-year, consistent with our goal to continue to stretch that exhaustion point, which does go up to $1.3 billion. Put in context around -- the most significant loss the company has ever had in its 17, 18-year history was hurricane Ian at about $700 million, that would have essentially used just a little over half of the reinsurance program. We did experience a first event retention for Hurricane Milton that occurred in October. So we did that -- a pretax number, $20.5 million. We have not had to date, and with hurricane season over at this point, don't expect a second or third event retention, which would have dropped down to $13 million on a pretax basis for any subsequent events. And we made it through Debbie, Helene and Milton with still our full reinsurance stack up to the $1.3 billion of occurrence limit in place for any events subsequent to Milton, which we're very proud of. I should have mentioned on the last slide that we are in the market with Aon Securities. We have launched a new CAT bond offering to put a new top layer on top of our program to, again, continue to stretch the exhaustion point and the overall severity protection for the company. But this new layer on top also has a drop-down feature that will help protect against frequency as well for second and third event, providing second and third event coverage against hurricanes, and we expect that transaction to be completed and effective on January 1. The next reinsurance program that's super important to us is what we call the AOP CAT reinsurance program, which is capturing all the catastrophe events other than hurricanes. So think about tornadoes and hailstorms, those types of events, the severe convective storms have been very challenging for a lot of carriers nationwide. They don't really impact us all that much in Florida in the commercial book, given the high deductibles we have and just the geographic nature of where our risk portfolio is, but we are buying up to $100 million of protection against those such events. Keep in mind, again, average total insured value per policy is about $13 million. So very robust protection. And the retention currently is generally limited to $14.5 million, and this program actually renews on January 1. We're actively in the market. We should have a press release out in early January announcing the completion of this program on favorable terms and working to push that retention down for 2025. And lastly, our excess per risk, very similar. We're working on its placement. It's currently an effective of February 1. We're considering changing that as well, but more details will be provided in the next few weeks, again, working to push that retention down closer to $5 million for the upcoming year. And this is an important piece of the puzzle to protect us on a per policy and per building basis for non-catastrophe perils like fire, water, sinkhole, those sorts of things. So with that, I'm going to turn it over to Chris Griffith to talk about our exciting new apartment program.

Thanks, Brad. Hello, everyone. I'm Chris Griffith, COO and CIO of ACIC. I'm excited to announce our new apartment program. Officially launched in October of 2024, we started this program with a Citizens assumption where we took 14 policies and approximately $10.7 million in expiring premium. We're utilizing our underwriting expertise, as detailed by Mr. Martz earlier, to select similar risks to our condo book of business. We're focused on garden-style and mid-rise buildings with a TIV over $5 million. We've developed a sophisticated modeling engine called Mosaic to ensure that we are focused on those risks that are most profitable in the state of Florida. We launched for new business on Monday of this week. We've already received a significant number of new business opportunities in the market. We have a strong reputation in the commercial residential market. We have key partnerships with wholesale brokerage channels that allow us to access the best-in-class risks, as Brad described earlier, in the state. Very limited competition that we're seeing in this market in Florida. We're excited to be able to bring an admitted product to our broker partners. We see this as a great opportunity to bring those apartments within the state of Florida that have not had an admitted market back to an admitted carrier. We have some soft data that shows this market is in excess of $1 billion of premium potentially. With -- and if we target a similar set of risks as we do in our condo book, that gives us a potential market that's at the top 1/3 of between $200 million and $300 million. We're launching our apartment program through a new ACIC company called Skyway Underwriters. Skyway Underwriters adds diversification to our portfolio of companies by allowing for service fee income. Skyway is currently focused on servicing the apartment program for AmCoastal, but that's just the beginning. By having our own MGA, we can expand to other lines of business and explore opportunities to provide services for other insurance carriers or markets. Additionally, Skyway Underwriters has a strong IT team that has built a flexible system for policy administration called Compass. Compass utilizes state-of-the-art technology and integrates directly with Mosaic, our proprietary modeling engine, to ensure underwriting profitability on a per risk basis. The investment in technology is already complete. We don't anticipate the need for continued significant technology investments in the future. By having our own technology platform, we're able to control operating expenses and operate at a significant competitive advantage over those that have invested in technology vendors that require them to pay a percentage of their premium. Our technology costs are fixed and significantly lower than the competition. So we'll be able to utilize our tech, our MGA capabilities, our strong reputation in the market through AmCoastal and our resilient distribution channel to expand into other markets in the future. Apartments are just the beginning. Next, I'm going to turn it over to our CFO, Lana Castle.

Thank you, Chris, and hello, and Svetlana Castle, Chief Financial Officer of ACIC. I would like to cover with you some of our financial highlights, starting with our consolidated financial results. The story just shared by our team translates into really strong financial numbers. There are a lot of numbers on the slide, but I just wanted to draw attention to some of our key results. As of Q3 of 2024, our core return on equity was 53.8%, our book value per share has grown 93.5%, and our core income has grown over 73%. This was largely as a result of our increase in net earned premium and our total revenue. Our net earned premium grew over 48% and our total revenue grew over 56%. We do expect for this trend to continue through the rest of 2024 as well as into 2025. We are very proud of our combined ratio of 57.7%. It's made up of the 2 components, our loss ratio is slightly under 16% at 15.8% and our expense ratio is right under 42%. Also on this slide, you see the results of Interboro Insurance Company. As Dan mentioned earlier in the presentation, we expect to close on the sale of this subsidiary in the first quarter of 2025. I'd like to now cover some of the balance sheet highlights. Between December of 2023 and September 2024, our assets under management grew by $175 million, and our cash and cash equivalents grew by $44 million. This strong capital position allowed us to open the market for new business, which was on pause for a few years due to the market conditions that we experienced in the state of Florida. So between the growth in assets under management, cash and other assets, currently our equity and liability are at $1.1 million. I'd now like to share some of 2024 guidance as well as 2025. For 2024, we expect for net income from continuing operations to fall between $75 million to $80 million and our net owned premium somewhere between $270 million to $180 million. This is -- this shows an increase in net earned premium, but a slight decrease in net income from continuing operations. However, I'd like to mention that 2023 was the year free of material catastrophe events, while in Q4 of 2024 we experienced Milton. Milton will contribute to $16.2 million net of tax retention as well as $5 million reinstatement [ premiums ]. If you exclude that event, our net income from continuing operations did grow in 2024 compared to 2025 -- compared to 2023. In 2025, we expect net income from continuing operations to be between $70 million to $90 million, and as I mentioned earlier, we expect to see continued growth in our net earned premium, and it will be between $290 million to $320 million. Lastly, I'd like to share our philosophy on capital allocation. On that, long term, we expect to target a ratio of 20% to 25%. So when our current long-term debt matures, we expect for it to be reduced but not fully eliminated. On equity, when the management feels that our stock is undervalued, we might participate in share buyback. Alternatively, when we feel the circumstances dictate so, we might consider issuing additional shares in view of that issuance. In terms of dividends, we believe that, being a catastrophe underwriter, it will provide for a stronger capital position if we issue special dividends versus just regular quarterly dividend, because we think it provides for better risk diversification and ultimately provides a better return to our shareholders. We are happy to share that our Board of Directors declared dividend, cash dividend, of $0.50 per share payable on January 10, 2025, to the shareholders of record as of January 2, 2025. This concludes our presentation. We thank you all for your attention, and we are now open to questions.

Thank you, Svetlana. [Operator Instructions] Our first question comes from [ Adi Orzel ] from Eagle Value. The core business is in a niche market and quite mature. What are the growth opportunities for American Coastal going forward?

Well, thanks for the question. I can start and just suggest that while our core business of condos is mature, and we have tremendous experience, we've seen lots of risks leave the portfolio over the last couple of years for a variety of reasons. There is still a lot of headroom in the condo space for us to grow. And we will seek to restore policy count, probably somewhere around 4,500 policies in force by the end of next year, which is a pretty nice increase from where we sit today, around 4,000. That is the target. Now market conditions, competition will have something to say about that. But we've given AmRisc the green light to grow new business. Our job #1 is to protect the renewal book. So we'll continue to protect it. We feel like we've got a best-in-class portfolio and we're going to make it very difficult for people to compete in that regard. But for new business, we can be a little bit more aggressive. We want to hold the line on terms and conditions the best we can, and market conditions, again, will dictate that. We're seeing not a lot of games being played with valuations and deductibles and the sort, but pricing has come down commensurate with our reduced loss costs, reduced reinsurance costs, et cetera, and we're happy to pass those savings on to policyholders over time as appropriate, while maintaining margins. So we're excited about the ability to grow in condos, both by holding of a strong retention rate and adding new business. AmRisc is excited about that growth as well, because that's good for them. But the real way we're going to augment the portfolio and grow top and bottom line next year is through the new apartment program. I think the premium expectations we're setting here today are fairly modest and easily achievable, but we'll see. We are going to be very selective and take it slow initially, especially out of the gate. But so far, what we've seen, the deal flow is good and looks very, very promising. So we're excited about that. So growth is -- and if we think about growth longer term, of course, Skyway Underwriters is not intended to compete with AmRisc in any way, shape or form. We are going to avoid that at all costs. Sometimes it happens accidentally. But there are other products in the hopper that we are considering. It will take time to develop those products and bring the expertise both from the people and technology capabilities to bear, but we can see underwriting some of those on our own balance sheet as well as bringing in third-party capital and using fronting arrangements to access other forms of -- in other segments of the market to grow our business and introduce some service fee income to our operation, which, again, will be much less meaningful in terms of driving total revenues but much more capital efficient since there is very little capital required associated with fee-for-service operations through Skyway Underwriters.

The next question comes from Greg Peters at Raymond James. Can you discuss recent discussions with regulators relating to any outstanding concerns?

No outstanding concerns. Thank you for your question. Our regulatory relations, I believe, in Florida are in very good shape. We did make a change to the officers and directors of the insurance company. It was a voluntary interim change to just solidify and have regulatory approval for a new group of officers for the insurance company. The officers and directors with the holding company have remained unchanged, and the OIR is fine with that. I report to Dan. Chris and Lana report to me. We're all on the same team. And I think some separation has been good, but no significant updates. We haven't experienced any challenges with getting things processed, approved and working in connection with our regulators. So it's been business as usual. With -- the Florida Office of Insurance Regulation is doing a fine job.

The next question comes from Jong Lim at City Different Investments. How do you model the new Skyway Underwriters business over time? What could it mean for potential top line and net income growth and its impact on the rest of the business, including the new apartment business?

So I think, going back to what Chris mentioned, I'll start and he can add if I miss anything significant. But the market opportunity is pretty large. It's a $1 billion marketplace. It's comparable in size over all the condos, maybe even bigger. But remember, we're going after a special niche within apartments. We're not writing high rises, we're not writing these large multiplexes with high valuations. That stuff belongs to the E&S market. We're targeting $5 million to $60 million of TIV. So smaller risks, much more manageable written on a single policy in the admitted market. And we believe that opportunity is somewhere between $100 million and $300 million of premium. And we believe we can get there over the next 2, 3 years. But as far as technical details on the underwriting side, it's going to follow the same successful model we've used on condos. The risks are substantially identical -- the only difference really being occupancy type, where owner occupied versus tenant occupancy. So we'll have -- we have considered some of the additional coverages and exposures related to tenant occupancy compared to condos. That's all baked into our pricing model.

Thank you, Brad. That was very well said. I would just add that we do have our sophisticated pricing engine called Mosaic that we are able to not only run on a per risk basis but across the portfolio. So we'll be watching very closely. And we're monitoring the book, and we will be very careful to make sure that our portfolio is staying where we expect it to stay. We have a lot of experience in commercial residential and we expect to leverage that experience across the new apartment line.

Yes. It's not our first [ forte ] into apartments. We've had apartments in the portfolio in the past, and we're very comfortable with the risk. Thank you.

Going along with the apartment question, this question comes from [ Matt Dean ] at Titan Capital Management. What originally attracted you to the apartment market? And can you discuss the competitive landscape relative to your existing condo business?

This is Dan. I think that one of the key components of the apartments is that they are substantially the same risk as condos, where we have a core competency and that's our specialty. That's what we do. There's a little different ownership structure. As mentioned, tenant-occupied versus an owner-occupied, and a corporate ownership versus really individual personal ownership. But the hurricane risk is substantially the same, the fire risk pretty close to the same. And we really feel like we're bringing a competitive advantage with an admitted product because most of that product goes into the excess and surplus lines. So we're really excited about the opportunity there with expanding into apartments, which is -- gives us a place to expand without really start-up risk of going into a completely unknown product [ or ] territory.

And the apartments tend not to be in the same areas as condos. So we're seeing a little bit of a better spread of risk associated with filling out certain territories across the state through apartments. And so it will be similar to the footprint of condos, but slightly different. Further inland, maybe some more business in other territories where we don't have a lot of exposure today.

The next question comes from Bob Farnam at Janney Montgomery Scott. What are the pros and cons of forming or acquiring a non-admitted platform to ACIC to provide additional underwriting flexibility?

Well, I'd say the pros are just that: the underwriting flexibility in having access to E&S capacity would be nice. We're obviously going to have a very tight underwriting box on the underwriting side for our admitted carrier, American Coastal. And if we can capture part of the value out of all the submissions that are coming to us, we're not going to -- we're going to be very selective. We're not going to write everything. For example, AmRisc is getting thousands of submissions every month, and they might quote 1/3 of those and bind a fraction of those. So we expect similar metrics in our business, but what happens to all the stuff you have to pass on? And if you have E&S capability, maybe you can capture some value either through service fee income or at-risk underwriting opportunities with access to that. We do have some strategic partners we've talked to about leveraging that capacity, but we're not there yet. And I would just add that, obviously, the con is it's very capital intensive. I don't believe it would make a lot of sense to go form a new E&S balance sheet until we can build some scale and proof that Skyway Underwriters has built a successful E&S program. And once you have a successful book of business, then maybe it would make some sense to go acquire or build a new E&S balance sheet. But to start building a portfolio, I think a fronting arrangement and renting that capital would make a lot more economic sense. But we can do both. It's certainly not out of the realm of possibility that we would want to acquire or build a new E&S company at some point in the future.

The next question comes from Nicholas Pope at Pope Capital. Do the terms of the Interboro sale remain the same? GAAP book value of the Interboro at time of closing? Can any detail be provided for expectation of current book value of potential tax impact and expectation of net cash to American Coastal?

No changes in the deal. The deal is what it is. We've had good discussions with the New York Department of Financial Services. They've assured us that first quarter is still a very reasonable target for completing that transaction. We don't expect too much variation in Interboro's GAAP book value, which is right around $22 million, $23 million. So it will be nice to convert that asset to cash and complete our exit from personal lines. We're looking forward to that. We've got our partner -- or not partner, but the buyer has been a great partner. They are already the program administrator for Interboro today. So they're completely engaged, and one contingency of the transaction is they have filed a new product in the state of New York that they would like to use with Interboro. So if this was a straight change of control application, it might have been completed by year-end, but because it's tied to the approval of a new homeowners insurance program, it's taking a little bit longer than we would have liked, but still on track.

There are several questions around the special dividend. Why are you paying out a special dividend and not buying back shares? And is the dividend announced essentially based on the proceeds of the personal lines sale? Or do you expect to maintain a policy of paying an annual dividend every year going forward?

As Lana mentioned, no, we believe a special dividend that -- on an annual basis is more appropriate. We'll typically assess that in the fourth quarter after hurricane season and evaluate the year's results. We had a very strong year in 2023, but did not declare any dividends based on those results, but having another good year in 2024, sort of proving that our model it is what we believe it to be, including some increased hurricane CAT loss activity from Debbie, Helene and Milton, being able to pay a special dividend made some sense. So we're looking at our insurance company being now in a little bit of an excess capital position with strong risk-based capital ratio well over 1,000% at year-end, projected, inclusive of dividends being paid. So we thought the timing of that made sense. Shareholders hadn't been paid or rewarded in a while for their patience as we went through the strategic transformation. So thank you to our largest shareholder here for his patience, especially. But no, I don't envision a regular quarterly dividend in the short term. Longer term, maybe, I mean our goal is to have minimal volatility in earnings, consistent reliable earnings and stability in cash flows. And when we accomplish that, and I think we're well on our way to accomplishing that, maybe we can bring back a regular modest dividend. I think it would be very modest, but we've got opportunities to put capital to work. We're doing that. We still see strong potential returns for capital, but we felt like this was a necessary step to balance what we need to grow the business with expectations of shareholders.

The next question comes from a private investor, [indiscernible]. Can you please speak to how the reinsurance rate environment looks for 2025 subsequent to Hurricane Milton and Helene?

Sure. Yes, the environment today, we're seeing capacity is strong, interest is strong. Our reinsurance partners are phenomenal. We have a tremendous respect for all of them and what they do, and we're actively, again, working on our 1/1 and 2/1 renewals. So more details to follow on that. But pricing overall is expected to be flat. We are going to bring retentions down. So maybe, on a risk adjusted, down slightly. If you consider the lower retentions, but overall costs should be relatively flat, which is a sign of stability, right? Milton was not a surprise. It was more in line with expectations. In fact, probably is now exceeding expectations, as our Milton loss is trending much lower than we originally expected. The ultimate claim count we provided originally of about 200 claims is holding. So from a frequency perspective, it's spot on, but we're just not seeing the severity that we had expected originally due to the potential for large losses in our commercial portfolio that can be lumpy. So with the absence of any meaningful severity, our loss now is likely to be well below the range we provided previously. So we'll have additional updates on that once we finalize the number for year-end. But right now it's trending favorably, which is a positive and allowing reinsurers to be more aggressive, I believe, in deploying capacity and supporting a quota market.

The next question comes from Matt Scullen at Ancora Advisors. In light of a larger capital position, how do you think about managing reinsurance retention limit and any quota share agreements as they come up for renewal? Is there potential to keep more gross premium?

Definitely. I think that's an important point to make that maybe we didn't make today, is that we are in total control of that -- of how much net premium we retain and -- we have stated and disclosed in previous filings that we have prenegotiated a reduction in the quota share from 20% to 15% effective June 1. So it's going to shrink some, as we promised it would step down over time, but it's going to step down more modestly in exchange for some other concessions and broader support across our programs from Arch Re, who is one of our lead reinsurance partners. They've been great, and we really appreciate their support. But for the next -- for June 1, 2025, to May 31, 2026, it will be 15%. From 2026, we'll see whether or not we step that down further. I expect we will. We'd love to get it to 0 over time. Quota share, when you're running best-in-class combined ratio like we are, closure can be a little expensive, but it's also ground-up protection, it's all perils, very flexible limit, and there's nothing wrong with quota share per se other than just making sure it's cost effective. But strategically, we're generally agnostic in terms of form of reinsurance. We'll explore all avenues from capital markets to traditional rated to collateralized to excess, per risk, quota share, et cetera, we evaluated it all. And I didn't answer the question about retentions, but yes, capital growth is great, but we like the fact that holding the line on retentions and maybe even bringing the retentions down a little bit, we'll seek to minimize volatility and add to consistency of profitability, which is a good thing. We believe that's the right trade and there's a clear correlation in valuation to consistency and volatility and valuation. So we're keen on that, but where it makes sense to use our captive and take more risk, that's what we'll do. We did that this year in 2024, and that proved to be very successful. We raised a little bit of capital we needed to write the 30% internal quota share that replaced Berkshire coming off. Berkshire previously had a 20% quota share with -- alongside Arch, and we increased that to 30% but did it with ourselves, and that required some capital to do. But it's generated a meaningful return to our captive and to our shareholders as a result of us doing that. So proved to be the right move and we'll continue to use it strategically as market conditions and capacity constraints dictate. We either take risk or buy in the open market.

The next question comes from [ Matt Dean ] at Titan Capital Management. Can you discuss further your technology platform? What is unique about it? And why do you believe it gives you a competitive advantage?

Sure. So we decided when we divested from personal lines to take a new look in the market and see what's available. We actually went with a technology platform that's a no-code platform called Encore. It has fixed annual expense. It's not linked to our premium, and we're able to build it out with a team of -- a small team of 7 people, 2 of those doing the configuration work which is -- for any of you that know technology, especially policy administration system implementations, to be able to build and deploy a policy administration system with a team that size was fantastic. They're experts. They helped in the past put in other systems, so they know policy administration well. And they were able to configure and deploy Encore, which we've rebranded to Compass internally, along with technology that we utilize for Mosaic that allows us to quickly build and deploy APIs to do calls out to other service providers, whether it be external service data providers or internal spreadsheets that we deploy into the cloud and API-enabled. It allows us to quickly adjust pricing, to quickly adjust the models as we need to, whether it be for reinsurance purposes or others. And so it's a platform that we -- again, we were able to deploy with a small team and have a fixed cost on an annual basis with a vendor rather than a percent of premium. The real advantage for us there is the control of operating expense and not having -- giving away a point or two of our premium to a technology vendor.

One more answer would be speed. The cost savings is nice, but for the speed and flexibility we have with this platform theoretically, you'd probably be willing to pay a little bit more than traditional cost structure, but the fact that we're paying less and have way more speed to market is going to be a differentiator.

The next question is a follow-up question from Jong Lim at City Different Investments. Can you please comment on the puts and takes that account for the difference between net income for year-end 2024 and 2025? And what are the change in loss assumptions impact of new business, divestiture, et cetera.

I'll start and then ask Lana to comment if I missed anything. But our target combined ratio is still 65%. Yes, we're underperforming that in 2024, but for forward-looking projections, we're still -- we're revising that upward, right? We expect premiums to come in flat to down slightly in terms of price change, but we're going to obviously try and grow overall premiums through new business in condos and apartments, but that -- with your average premiums starting to come down as a result of cost savings, that changes your denominator in the combined ratio. So we expect the combined ratio to migrate back up closer to our target. What -- I'd love to outperform and hold a 57%, a better combined ratio. I just don't know if that's realistic long term. We think 65% is still best-in-class. And there's a reason for it. It's not an accident that we have such stellar loss experience. Underwriting CAT business is very, very difficult and there is some volatility baked into our projections for next year. We are including basically a net average annual loss for all CAT events, both hurricane and non-hurricane, projected in those numbers. So obviously we can do better if those events don't materialize, we can do worse if more events materialize. CAT is inherently unpredictable. So I'm personally a little uncomfortable giving guidance in a CAT-exposed business like ours. But I believe it's the right thing to do. We're excited to do it. And the goal is always to grow earnings year-over-year, but the weather will have a [ say ] in that. But if you strip out all the CAT like Lana did, and compare results excluding CAT, we should see consistent earnings growth year-over-year. But the CAT is going to do what it's going to do. We'll try and bring down retentions to manage that volatility. But that's really the short answer. Do you have anything?

No, Brad, you've covered it all. I think I would only add maybe on losses, we run multiple sophisticated statistical models that give us a picture where the loss can fall so we select within that range. But as Brad mentioned, there is some volatility to it. So this is where the biggest variable will come from, how far off we are from those statistical model losses. But we do think we have a conservative model in terms of our retention and where overall premium [ and ] loss is looking.

Yes, and reinsurance costs. We're trying to be conservative in expecting those costs to be relatively flat. The market may soften further, we might see 5% down or 10% down, who knows? But for the initial guidance, we're assuming sort of flat, consistent with what we're seeing at 1/1.

And the final question was asked by several private investors. How does American Coastal insurance manage and mitigate the risk of liquidity challenges posed by the FHCF reimbursement structure? What specific measures are in place to ensure timely access to capital during periods of heightened hurricane activity?

So I can start. I know post Hurricane Ian, we were billing weekly, I mean to the CAT fund, the CAT fund can turn around and approve payments just as quick. So there really was not a liquidity concern. Our CAT fund attach is pretty high, close to $300 million. So it's going to have to be a substantial event to get into the CAT fund. But once losses are there, we can bill as quickly as weekly, and theoretically maybe even faster if we needed to. But I don't see any liquidity challenges associated with getting reimbursed from the Florida Hurricane Catastrophe Fund. It's well financed, well capitalized, and the state of Florida and its credit rating and budget surplus are phenomenal. So there's really no concerns in my mind around liquidity on reinsurance recovery from the CAT fund.

And in terms of overall liquidity of the company, we always maintain enough cash and short-term securities, like money market funds and CDs, for if we need to prepay for certain reinsurance losses before we get collections, that we are always in a position to have enough cash to not have to liquidate the securities.

Thank you. I'll now turn it back.