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

Greetings, and welcome to the American Coastal Insurance Corporation First Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Karin Daly with the Equity Group. Please go ahead, Karin.

Thank you, Kevin, and good afternoon, everyone. American Coastal Insurance Corporation has also made this broadcast available on its website at www.amcoastal.com. A replay will be available for approximately 30 days following the call. Additionally, you can find copies of the latest earnings release and presentation in the Investors section of the company's website. Speaking today will be President and Chief Executive Officer, Bennett Bradford Martz; and Chief Financial Officer, Svetlana Castle. On behalf of the company, I'd like to note that statements made during this call that are not historical facts are forward-looking statements. The company believes these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those expressed in or implied by the forward-looking statements. Factors that could cause actual results to differ materially may be found in the company's filings with the U.S. Securities and Exchange Commission in the Risk Factors section of their most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Forward-looking statements speak only as of the date on which they are made, and except as required by applicable law, the company undertakes no obligation to update or revise any forward-looking statements. With that, it's my pleasure to turn the call over to Brad Martz. Brad?

Thank you, Karin. Today, I'm pleased to report American Coastal continued to deliver exceptional results during the first quarter by hitting our target combined ratio of 65% and also producing a core return on equity of over 34%. We successfully grew our policies in force approximately 6% since year-end, with premiums in force as of March 31, 2025, totaling approximately $661 million. New business growth, combined with solid renewal account retention of approximately 88%, helped increase gross premiums written by over 7% compared to the same period last year. The Florida Condominium market has continued to generate media attention this year, focused primarily on declining affordability and resale values. We acknowledge and certainly understand such issues can be challenging, but they are not having a significant impact on our business. The market for older, high-rise waterfront condos in Florida where most of the concerns lie, but that is not our target market. Conversely, the underwriting environment for newer, well-maintained low-rise garden-style condos further inland in Florida, where American Coastal is focused, remains relatively healthy and competitive. This is evidenced by the fact that we are currently open to new business and passing on savings in the form of lower rates to our policyholders without sacrificing margins that allow us to underwrite this risk. Next, I'd like to offer a quick progress update on our core catastrophe reinsurance program renewal effective June 1, 2025. Page 12 of our earnings presentation provides an overview of the projected structure. At this point, we are now 100% placed except for a new top layer shown on this page as Layer 5, which was recently firm ordered to the market and is in the process of being finalized. Assuming we end up placing 100% of that top layer, that would bring our estimated first event limit up approximately 16% from the $1.16 billion last year to approximately $1.35 billion this year. Our aggregate protection from multiple events is also expected to increase pretty significantly, about 32% year-over-year, given the new drop-down features of the 2 top layers. ACIC is buying significantly more protection this year due to both exposure growth and a more conservative view of hurricane risk. Last year, we disclosed our program exhausted at roughly the 208-year return time using an equal blend of AIR version 10 and RMS version 22. And if you use that same model view on our expected renewal this year, the exhaustion point increases to close to the 250-year return time. However, our updated view of risk incorporates the new versions of both AIR and RMS in the return time shown on this page, so that obviously distorts the comparability. Our first event retention is expected to increase from approximately $20.5 million last year to $29.75 million this year, but is similar to last year as a percentage of stockholders' equity. For 3 full retention events, we expect to retain $52 million, up from $46.5 million last year, but this is down as a percentage of our equity. We are extremely grateful for the broad support we received this year from our reinsurance partners and the risk-adjusted reinsurance rate decrease estimated at approximately 12% is consistent with the rate decreases we're currently sharing with our policyholders. The risk-adjusted rate decreases did vary by layer between 10% and 22% with the first layer being flat due to Hurricane Milton. Overall, we're very pleased with the 6/1 renewal progress, and we will have more detail regarding it in an 8-K filing within a couple of weeks. I'll now turn it over to our CFO, Lana Castle, for more specifics on our first quarter results.

Thank you, Brad, and hello. I'm Lana Castle, Chief Financial Officer of American Coastal Insurance Corporation, and I'll provide a financial update, but encourage everyone to review the company's press release, earnings and investor presentations and Form 10-Q for more information regarding our performance. As reflected on Page 5 of the earnings presentation, American Coastal demonstrated another strong quarter with net income of $21.3 million. Core income was $20.7 million, a decrease of $3.7 million year-over-year due to increased policy acquisition costs, partially offset by higher gross premiums earned as we execute on our plan of measured growth with a focus on risk selection and decreased ceded premium earned from the step-down of our gross catastrophe quota share from 40% to 20% effective June 1, 2024. Page 6 of the presentation shows that net premium earned grew 9% to $68.3 million. As Brad mentioned, our combined ratio was 65%, in line with our previously stated target. Our non-GAAP underlying combined ratio, which excludes current year catastrophe losses and prior year development, was 68.2%. We continue to feel our reserve position is strong. As shown on Page 6 of our presentation, operating expenses increased $12.1 million. This was primarily driven by a $13.9 million or 144.8% increase in policy acquisition costs due to a decrease in ceding commission income because of the quota share step-down mentioned earlier and increased management fees paid related to our quarter-over-quarter premium growth. General and administrative expenses offset this, decreasing $1.8 million or 15.9%. Page 7 shows balance sheet highlights. Cash and investments grew 5.2% to $540.8 million, reflecting the company's strong liquidity position. Our cash position strengthened further in April following the proceeds from the Interboro sale of $26.5 million, which were higher than expected. Stockholders' equity increased 10.7% to $260.9 million, driven by our first quarter income. Book value per share is $5.40, a 10.4% increase from year-end 2024. The company continues to be in a strong position to execute on its 2025 growth initiatives. I'll now turn it over to Brad Martz for closing remarks.

Thanks, Lana. I'll just note, as always, we appreciate your interest in American Coastal. That really completes our prepared remarks for today's call. We're now happy to take any questions.

[Operator Instructions] Our first question is coming from Greg Peters from Raymond James.

Can we go to Page 9 of your investor deck. And -- which is the rate trend and wind deductible. Can you give some color, explain to us what's going on in this chart because it looks like it's down, but I just want to make sure I'm reading the chart right.

Sure, Greg. Happy to. So the red line is a measure of our average account rate. So average account rate, that's the way we look at it as a function of total insured value. So you would take that rate times the total insured value to get the premium. And as you can see, from essentially a third quarter 2024 through the end of the first quarter '25, it's been relatively stable. The real decrease occurred -- we peaked off of sort of record high rate levels and set that high watermark back in December of 2023. And since then, we've come back down to more normal levels. But even at close to $1, it was $0.97 here shown on this chart as of March 31. That's a pretty healthy rate level relative to our historical premiums. So we still feel good about rate adequacy. We're watching the trend in average wind deductible, which is represented in the bar charts below very carefully because obviously, if you're giving up premium and you're assuming more risk via lower deductibles, that is not necessarily a great combination. But it's, like I said, a competitive market. We're pushing hard, especially in areas like Tri-County, where we're definitely focused on maintaining 5% wind deductibles. But outside of the Tri-County area, we have a little bit more latitude depending on where the risk is.

Great. Thanks for walking us through that. And then I wanted to -- the other question that you sort of covered in your call in your comments were the Slide #12, which is the reinsurance. I don't remember seeing a third event sort of cover in your previous cat program. So has something changed? Or is this just more of the concept of the cascading feature coming down? And I'm just curious with the other aspect about it is this does not include reinstatement costs. So how is that shaping up this year in terms of year-over-year comparisons?

Okay. Starting with reinstatement costs. Last year, we had a reinstatement exposure of about $13 million-ish, something like that. This year, it's only expected to be about $5 million. So we've dramatically reduced the reinstatement premium exposure, assuming all layers had to be reinstated. So that's a big improvement year-over-year. And last year, we did have third event covered. It was definitely more limited. And the retention for a third event last year was $13 million. So it was $20.5 million, then $13 million for second and then $13 million for a third for a total of $46.5 million for 3 events. But yes, it was much more limited. The major enhancement this year is that the cat bond we did back in January on the $200 million excess of $50 million is something -- and that is correct the way it's drawn. It just -- it drops down for subsequent events. That's improving our sideways protection and the overall aggregate coverage, same with Layer 5 is going to be a top or drop feature. We haven't quite -- we're still negotiating final positions on that layer. So we'll ultimately obviously update this very soon with -- and specify the final exhaustion point and return times, et cetera. But overall, very pleased with how this has come together.

Yes. Just a question -- a follow-up question on the $200 million x of $50 million. When that drops down, how far does that -- will that drop all the way down to Layer 1? Or does it drop -- how far down does it drop in the event of earlier layers being exhausted from a storm?

It's exactly as it stated. So it's $200 million xs of $50 million. The rest of this protection is an [indiscernible] to it, but assuming that protection were to be gone, the reality of where it would attach is about the $300 million mark. Assuming you've fully reinstated Layer 1 and Layer 2, the cat bond would drop down to the $300 million mark for a second event. And then for a third event, obviously, if you did not have a reinstatement for layers 1 and 2, which were 1 in 100, then it would drop down to 50.

Perfect. The last question I have -- thanks for filling in some gaps there. What -- the last question I have for you is just -- I know one of the newer initiatives is the apartment building, the apartment initiative. Can you give us an update on how that's progressing?

Yes, it's going well. We've -- through the first 4 months of the year, we've averaged about 15 policies, 15 [ binds ]a month. We're obviously quoting more than that and seeing a lot more submissions than that. But it's been good. Average premiums a little over $100,000. So if you were to annualize the first 4 months, that would put us somewhere between $18 million and $20 million, pretty consistent with our target. I don't know if that's a feasible thing to do to just annualize those 4 months given the seasonality in the book and the upward trend in what we're trying to do in growing that portfolio. But we're seeing very good risks. AAL to premium ratio, for example, is very much -- is spot on in line with the new business and the renewal business we wrote in the condos. So -- and the PML to [TIV] and the expected profit margin as modeled is also very, very attractive relative to the condos. We're getting good spread of risk, helping to diversify our portfolio. A lot of this business is coming in Central and Northeast Florida, where we're underweight in condos, tends to be a lot further inland as well, a lot of new construction. So the risk characteristics are very nice. So we've got a pretty extensive set of underwriting guidelines related to valuation requirements and location and occupancy and height and so on and so forth. But we're pretty happy. The only thing I would suggest is that it's a pretty competitive market, much more so than we expected, and we're trying to be selective. So I want to manage expectations about this being a hyper growth opportunity. It's not. We're going to move very carefully and cautiously and slowly to build the best portfolio we can that's going to produce similar underwriting returns to what we've accomplished on the condo side.

Next question today is coming from Bill Dezellem from Tieton Capital.

Two questions. First of all, how are you thinking about quota sharing going ahead and specifically about lowering that quota sharing amount?

Bill, I can take that. We are very pleased with the result this year with the quota share stepping down from 20% to 15%. We have not made any formal decisions yet relative to 2026. So the quota share will be -- the external quota share will be 15% from June 1, '25 to May 31, 2026. And ultimately, I think it could go lower. It just depends on cost and availability of reinsurance in those lower layers. I think that's something we will take into account as well as the broad support provided by Arch across all our layers and all our programs. They've been a terrific supporter of American Coastal, and we appreciate that very much. So there are some qualitative and quantitative factors to consider before we adjust that lower. One thing we didn't mention is that we are increasing the internal quota share from 30% to 45%. So we are going to be ceding a lot more business to the captive, which is building a pretty healthy balance sheet as a result. So for the statutory insurance company, that's going to continue to keep risk-based capital very high, its net retention lower than the group as a whole and help protect the regulated entity while accumulating additional underwriting profits and capital flexibility in the captive.

Great. And then would you please discuss the AmRisc management fee and the change -- the contractual change that you all have there?

Sure. There were two changes made to that. And when we negotiated the extension, there was a profit sharing component added to the AmRisc agreement that both sides are very happy with. And we also increased the total percentage. There's 2 parts. There's an administration part and a claims part, but those 2 pieces combined went up 1%. So that's 1% of premium written. And most of that 1% increase was passed on to producers in softening market conditions, that's typically what happens as premiums start to go down, commission rates need to go up to maintain level revenues for our key producing partners. And obviously, the opposite is true and the harder markets where rates are going up and commission rates can go down to maintain sort of normalized growth in commission revenue for producers.

Congratulations on another solid quarter.

Thank you. We reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.