American Coastal Insurance Corp
NASDAQ:ACIC
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Earnings Call Analysis
Summary
Q2-2024
American Coastal Insurance Corporation reported a solid quarter with net income of $19.1 million and a core income of $19.6 million. They achieved a significant milestone with the divestment of Interboro Insurance Company, streamlining their focus on profitable commercial lines. A strategic reinsurance renewal added $100 million coverage, expecting to boost revenue and earnings. Forward-looking guidance projects net income from continuing operations between $85 million and $95 million and net premiums earned between $285 million and $300 million for 2024. Despite market softening, a combined ratio of 65% remains achievable. The company plans to participate in the October 27, 2024, Citizens commercial residential takeout to drive future growth.
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Greetings, and welcome to the American Coastal Insurance Corporation's Second Quarter 2024 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, Investor Relations 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, Bennett Bradford Martz; and Chief Financial Officer, Svetlana Castle.
On behalf of the company, I'd like to note that statements made during the 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 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. Brad Martz. Brad, you may begin.
Thank you, Karin, and hello. Today I'll provide an underwriting and commercial residential market update and also review some forward-looking guidance for the remainder of 2024. I'll then turn it over to our CFO, Lana Castle, for more detail on our second quarter results.
Page 3 of our earnings presentation highlights some of our key accomplishments this quarter. Two of these stand out due to their impact on current and future periods. First is the core catastrophe reinsurance renewal effective June 1, 2024, and the second is the entry into formal definitive agreements to divest of Interboro Insurance Company.
The pending sale of Interboro caused its results to be presented as discontinued operations for the quarter and the year. Accordingly, our results from continuing operations now only reflect our profitable commercial lines operations, making comparability and analysis easier going forward given the noise and volatility historically associated with the personal lines business, which is not part of our future.
Before discussing the impact of our core catastrophe reinsurance renewal, I want to first thank our reinsurance partners to whom we are very grateful for their support and proud to have on our panel. All but 1 of our incumbent reinsurers renewed their lines with us, and we diversified our panel by adding 8 new reinsurers this year.
Following our announcement regarding successfully completing our June 1 renewal, we seized an opportunity to strengthen our program further by adding an additional $100 million of limit on the top of our tower to protect against a potential high-severity event and also added third event coverage to protect against a series of more moderate events. The current structure, along with a recap of the program highlights, is shown on Page 13 of our earnings presentation.
While the additional coverages added cost, the replacement of the FORA layer in the private market, plus the reduction of the quota share from 40% to 20%, will more than offset that. Thus, we are expecting ACIC's enhanced core catastrophe reinsurance program to have a positive impact on both revenue and earnings growth.
Given the discontinued operations and reinsurance changes noted for this period, I felt it was appropriate to introduce some forward-looking guidance regarding net income from continuing operations and net premiums earned.
Slide 7 of our earnings presentation summarizes our outlook by estimating net income from continuing operations, excluding catastrophes, to be between $85 million and $95 million for the full year. This implies earnings growth in the second half of 2024 of between 43% and 77% year-over-year. Potential catastrophe losses could have a significant impact on this. But without any material hurricane losses in the prior year, it's a fair year-over-year comparison.
If you stress-test our earnings estimates for potential hurricane losses, please note that our retention for a first event is $16.2 million after tax, and drops down to $10.3 million after tax for a second and third event, assuming such events are contained within the reinsurance program.
As for net premiums earned, we estimate they will be between $285 million and $300 million for the full year 2024, implying revenue growth of between 33% and 46% in the second half of this year.
Pages 10 through 12 of our earnings presentation provides some additional color on our risk portfolio and what we're seeing in the Florida commercial residential marketplace. The bottom line is that the market is showing signs of softening, but it's not having a material impact on our expected margin. We still believe a 65% underlying combined ratio is very achievable despite our outlook for lower rates and increased competition.
The last thing I'd like to highlight, before turning it over to Lana, is the last bullet on Page 10 of the earnings presentation indicating our plans to participate in the October 27, 2024 Citizens commercial residential takeout. We have identified a few hundred policies that fit our current underwriting criteria, and we have received approval from the Florida Office of Insurance Regulation to participate on that assumption date. We will likely only get a fraction of the policies we've identified, but we're excited about the opportunity to participate and supplement our growth via this process.
I'll now turn it over to Lana.
Thank you, Brad, and hello. I'm Lana Castle, Chief Financial Officer of American Coastal Insurance Corporation, and I'll provide the financial update, but encourage everyone to review the company's press release, earnings and investor presentation and Form 10-Q for more information regarding our performance.
As reflected on Page 5 of the earnings presentation, American Coastal had a strong quarter with a net income of $19.1 million. Core income was $19.6 million, which is a decrease of $7.5 million year-over-year as a result of higher ceded earned premiums from the 40% gross catastrophe quota share, which was effective June 1, 2023.
Page 6 of the presentation shows that gross premium earned grew $5.6 million to $155.5 million. Our combined ratio was 64.9%, which is on target, but increased 1.8 points from 63.1% in the same period last year. We continue to experience favorable prior year development and feel very good about our reserve position.
As shown on Page 6 of our presentation, operating expenses decreased $7.1 million. This was primarily driven by $9.6 million or 41% decrease in policy acquisition costs due to an increase in ceding commission income as a result of the 40% quota share mentioned earlier. This was partially offset by increased general and administrative expenses. Despite the significant change in ceded premium, earnings before tax were $2.5 million higher year-over-year.
Page 8 shows balance sheet highlights. Cash and investments grew 83.6% to $573 million, reflecting the company's strong liquidity position, with increase in cash of $90.5 million. Stockholders' equity increased 32.2% to $223 million, driven by strong underwriting results. Book value per share is $4.63, a 28.5% increase from year-end. High liquidity and stronger capitalization resulted in significant improvement to our leverage ratios.
Page 9 of the presentation provides additional detail on our investment portfolio. 99.4% of the portfolio are NAIC Level 1 and Level 2 securities. In the second quarter, we invested $150 million of cash in fixed securities in anticipation of the decrease in cash yield. Our investment strategy is to maintain high-quality portfolio responsive to market conditions within our risk tolerance.
I will now turn it over to Brad Martz for closing remarks.
Thank you, Lana. I'll conclude by just saying the company remains very well positioned to thrive as we've done successfully through all parts of the insurance cycle since 2007.
That completes our prepared remarks today, and we are now happy to take any questions.
[Operator Instructions] Our first question is coming from Gregory Peters from Raymond James.
So for the first question, I'm going to focus on the first statement you make on Slide 10, and then Slide 11. I was focused on the TIV down just under 2%, policy count being down just under 6%, with the 100-year PML up. I assume that there's some underlying insurance-to-value initiatives going in there. And maybe you could spend a minute and just talk to us about what we're seeing on Slide 11, because it looks like conditions still remain pretty favorable.
Certainly. Thanks, Greg. This is Brad. I'll take that. Yes. On Slide 11, we just want to continue to demonstrate that year-over-year premium relative to TIV is holding strong. We've noted in the past that we would expect some slight increases to the dotted total insured value line at the bottom, with some small decreases in the blue premium line on top, narrowing that gap in future periods. But the risk versus return profile is what we're focused on with that slide. It remains very good.
As far as the total insured value being down and policy count being down, that's just continued underwriting. We are being disciplined. We've held the line on terms and conditions and pricing, while others attempt to take advantage of softening market conditions. So we've taken the opportunity to work through changes in some of our peak zones to reduce overall exposure, especially since we've -- those are metric changes since year-end, and we've been able to grow premiums in force while curbing exposure.
So we felt like that was a prudent thing to do in the first half of the year going into our catastrophe reinsurance renewal. And now that we've got that new program in place, especially with the additional limit we bought subsequent to 6/1, we feel like we're very well positioned to add some exposure growth.
So part of the reason we want -- we did that is because of the anticipation of assuming some business on October 27, which is obviously still in the wind season. So there is growth on the horizon, but we're still being very selective.
Okay. I guess you mentioned the reinsurance program. So let's pivot for my follow-up question to the Slide 13 where you talk about the '24-'25 cat reinsurance program. So the first event retention is $16 million, then you say this net maximum reinstatement exposure is $14 million.
I assume the $14 million would be if you go through the whole tower. But if you don't go through the whole tower, the net reinstatement will be something less than that. So when I think about if an event happens that curses your retention, it's going to be $16.2 million plus whatever portion of reinstatement is due. Is that the correct interpretation?
That's correct. And the key difference with the reinstatement exposure is that, one, that's a pretax number. So you'd want to probably look at that after tax for apples-to-apples.
And then two, the reinstatement premiums are amortized over the remaining term of the treaty period. So if an event happened on September 1, that reinstatement cost would be amortized from September 1 to May 31, 2025, whereas the loss is recognized in full immediately.
So when you have these reinstatement costs, you have a second and third event retentions, if we had 3 full events in Florida this year, the third event, you would have coverage for the full tower layer going up to the $1.259 billion? Or is there a different amount of coverage that happens in the third event versus the second event?
They're different amounts of coverage in the second event and the third event. And it really depends on what happens with the first event. So I think what we are trying to say -- it gets super complicated, but the real way to answer that question is it depends on the size of the first event. And obviously, after a first event, we would try and get guidance to the market as quickly as possible about our estimate of that loss and the remaining reinsurance available.
Okay. I figured it was complex. Just final, just -- probably way too soon to say anything. But Debby came through, not sure if it's really material to you guys yet or not. But do you have any comment you can offer yet on that, or do you want to wait for a couple more weeks?
Yes. I can comment that it was mostly a rain event, not a wind event. Our commercial residential portfolio has fared resiliently in the past to similar events. We have 1 claim at this time. It's very small, roof leak claim, under deductible.
So I'm not -- obviously, we feel for everyone that was impacted by the event. There was a lot of rain, a lot of water in -- on the West Coast of Florida, and elsewhere, even outside of Florida, right now. So never take that lightly at all.
The flooding, unfortunately, is -- or fortunately for us, is not covered. We don't cover flood. But that's a peril that we don't have to worry about. But the wind damage we would expect to be close to nothing.
Fair enough. All right. Well, thanks for the slide on the guidance, too. I think that's helpful. Congratulations on the quarter.
You're welcome. Thank you.
[Operator Instructions]
We've 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 line at this time, and have a wonderful day. We thank you for your participation today.