American Coastal Insurance Corporation (NASDAQ:ACIC) Q1 2024 Earnings Call Transcript

American Coastal Insurance Corporation (NASDAQ:ACIC) Q1 2024 Earnings Call Transcript May 11, 2024

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Operator: Greetings, and welcome to the American Coastal Insurance Corporation First Quarter 2024 Financial Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Karin Daly, Vice President at the Equity Group and American Coastal's Investor Relations Representative.

Karin Daly: Thank you, John, 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 Investor Section of the company's website. Speaking today will be Chairman of the Board and Chief Executive Officer, R. Daniel Peed; Chief Financial Officer, Svetlana Castle; and President, Bennett Bradford Martz. 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 a company's filings with the U.S. Securities and Exchange Commission in the risk factor section of the 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 Mr. Daniel Peed.

Dan, you may begin.

Daniel Peed: Thanks. Hello, and thank you for joining us on American Coastal's first quarter 2024 earnings call. I plan to provide an update on activities from the first quarter, touch on strategic initiatives that we expect will have a positive impact on the bottom line in the near term, and then I will turn it over to Brad Martz and Lana Castle, who will provide more detail on the first quarter financial results. First, as announced in January, we enhanced the bench strength of our leadership team. Lana Castle joined as the CFO of all entities. Lana has 15 years of experience in the insurance industry with extensive experience in shared service operations, enterprise risk management, and all aspects of finance and accounting.

A woman in a business suit in an insurance office, analyzing a policy.

With the addition of Lana as CFO, Brad Martz's role as President shifted to strategic initiatives that enhance shareholder value. In line with our commitment to risk management and compliance, we promoted Andy Gray to Chief Compliance and Risk Officer. Andy is a CPA with more than 30 years of experience in tax, accounting, internal audit, and risk management within the Florida insurance space. We are excited about these changes, and our results show that Lana and Andy have provided immediate value. Next, I'm happy to report that our earnings continue to be very strong. The first quarter 2024 ended with a core return on equity of 69.7% driven by an underlying combined ratio of 57.8% and favorable prior year development in both commercial and personal line segments.

The book value per share increased by 18.3% from the end of 2023 to March 31, 2024. First quarter net income continued to trend upward to $23.6 million or up 38% from the fourth quarter of 2023. This highlights our expanding net earned premium margin as direct rate increases that took effect in 2023 earned through the book and catch up to the reinsurance premium levels established at 6/1/2023. Furthermore, we expect net written and earned premiums to increase substantially over the next 18 months accelerated by our planned reduction of external quota share at June 1, 2024. At the same time, we have increased our multi-year reinsurance commitments, enhancing stability. Our 2024 catastrophe reinsurance program was marketed with a structure that further protects the balance sheet.

We have been able to increase the expected exhaustion point with the successful placement of AmCoastal's multi-year CAT bond which was oversubscribed at the lower end of the expected coupon range. To reduce earnings volatility, we also continue to target a first event retention of less than 1 quarter's expected underwriting profit before CAT losses. AmCoastal enjoys a mature and defensible portfolio with both a low underlying combined ratio and net catastrophe exposure near an all-time low. We enjoy a solid reputation developed over a dozen years, strong reinsurance relationships with long-term partners, and an exclusive distribution partner for Florida Condominium Associations. These are AmCoastal's unmatched competitive advantages in a specialty niche combined with an ongoing firm market expected to continue well above average for several years.

Finally, I am excited to announce that we signed definitive documents for the sale of Interboro Insurance Company. Closing is subject to customary regulatory approvals, but we anticipate that process will be smooth and we look forward to a seamless transition of Interboro. This represents a milestone in our divestment of our personal lines operations. With that, I'll turn it over to Lana Castle to go over more specific financial results.

Svetlana Castle: Thank you, Dan. 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 4 of the earnings presentation, American Coastal had a strong quarter with a net income of $23.6 million. Core income was $24.3 million, which is a decrease of $6.4 million year-over-year, as a result of high ceded earned premium from the 40% gross catastrophic quarter share which was effective June 1, 2023. Gross premium written however, increased $10.4 million from Q1 2023 to $197.5 million.

And gross premium earned grew $24.3 million to $168.8 million due to improved rate adequacy and valuation in commercial and personal lines. Our combined ratio was 58.3%, which is a 4 point improvement from 62.3% in the same period last year. We are very pleased with this result. This improvement is due to a decrease in net expense ratio of 8.2%, offset by an increase in net loss ratio of 4.2%. Increase in net loss ratio is driven by catastrophe losses in our personal lines. As Dan mentioned, we continue to experience favorable prior year development and feel very good about our result position. As shown on Page 5 of our presentation, operating expenses decreased $13.8 million. This was primarily driven by $15.2 million or 56.3% decrease in policy acquisition costs to $11.8 million from $27 million due to an increase in ceding commission income as a result of the 40% quarter share mentioned earlier.

This was partially offset by increased external management fees and premium taxes related to the company's increased commercial lines gross written premium. Despite the significant change in ceded premium earnings before tax were close to last year, $31.2 million for the 3 months ended Q1 2024 compared to $33.8 million for the 3 months ended Q1 2023. Going to the segment results shown on Page 6, we are happy to report that personal lines were profitable. Personal lines operating expenses benefited from the collection of $2.5 million of return agent commissions that had a full valuation allowance against the receivable. Commercial lines, which is our core product, had pretax earnings of $32.7 million. Page 7 shows balance sheet highlights. Cash and investments grew 36.7% to $504 million, reflecting the company's strong liquidity position within increase in cash of $131.6 million.

Stockholders' equity increased 20.9% to $204 million as a result of the company's profitability in the first quarter. Book value per share is $4.27, an 18.3% increase from year end. High liquidity and stronger capitalization resulted in significant improvement to our leverage ratios. I'll now turn it over to Brad Martz.

Bennett Bradford Martz: Thank you, Lana. Today, I'll provide a brief underwriting update and also discuss our pending catastrophe reinsurance program renewals. On Page 8 of our earnings presentation, it illustrates the enforced premium and exposure trends for our commercial business. Year-over-year, our premiums enforced were up about 16%, and our exposures were down 19%. During the first quarter, policies and total insured value decreased slightly with our account retention near our target, but new business was lower than expected due to our firm underwriting stance on pricing. This resulted in an average effective rate change of 4.3% across our enforced portfolio during Q1, and a nearly 8% improvement in our PML to premium ratio, which supports our assertion that the risk return profile remains very attractive.

On Page 9 of our presentation, this is intended to show that market conditions remain favorable for underwriting profitability. We continue to push hard on insurance valuations with an average increase of 8.5% during the quarter. The adoption of higher deductibles was impacted by our decision to pause the 7.5% and 10% wind deductible offerings until a revised regulatory filing was completed. This has now been fixed, and we will continue to push the appropriate terms and conditions when and where appropriate. Switching over to personal lines. Page 10 of our earnings presentation shows the renewal business rate and account retention trends for the last 6 quarters, which are helping drive improvement in underwriting results. Retention in the first quarter was very strong at nearly 92%, despite the impact of double-digit average rate increases for policies renewed.

Overall, our policy count and total insured value was flat compared to year end, but with average premiums up, we also saw improvements in our risk-adjusted metrics with PML to premium and average annual loss to premium, each improving about 4% during the current quarter. Finally, I'd like to touch on the highlights of our projected catastrophe reinsurance renewals at June 1, 2024. Pages 11 and 12 of our presentation show our projected reinsurance towers and our expectations for American Coastal Insurance Company and Interboro Insurance Company. As of today, we have secured over 90% of the total limit being sought, and the placement is progressing in line with our expectations. Our primary goals for this upcoming hurricane season are threefold.

First, we want to increase the overall protection. Second, we want to improve cost efficiency. And third, we want to maintain retentions that are similar as a percentage of our capital from the expiring program, along with those retentions being less than our underwriting profit before an event in any typical quarter. I believe we will achieve all 3 this year. For American Coastal, we're seeking to purchase roughly $265 million more limit from the private market this year, which will stretch our exhaustion point up closer to $1.2 billion for the 208-year return time compared to the expiring program of 167-year return time as estimated by the AIR hurricane model. $200 of the additional open market limit was secured in a new 3-year catastrophe bond that closed in April.

And as Dan mentioned, the most significant change will be the reduction of our quota share from 40% to 20%. The net result of that will be a material increase in net premiums earned, partially offset by higher net losses, as we retain more of those, and higher policy acquisition costs, as we see a decrease in ceding commissions during the treaty year from June 1, 2024 through May 31 of 2025, as we seek to retain more of our gross underwriting margin. We intend to keep the statutory insurance company's retention at $10 million, but increase our captive's first event retention from $2.3 million to approximately $10 million and reduce our second event retention to only $10 million. For Interboro, the exhaustion point will look very similar to the expiring program, despite our exposure base being down about 17% year-over-year at September 30, 2024.

And our retention will be reduced from $3 million to $2.5 million. We expect to have both towers fully placed well before June 1, and we will provide more information on the final limits retentions, and costs once both programs have been completed. That completes our prepared remarks for today, and we are now happy to take any questions.

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