AMERICAN COASTAL INSURANCE Corp Q2 FY2025 Earnings Call

Greetings, and welcome to the American Coastal Insurance Corporation Second Quarter Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to 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 in 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, and welcome, everyone. I'm pleased to report American Coastal continued to deliver exceptional results during the second quarter by growing revenues 26% year-over-year, growing pretax earnings 51% year-over-year, and producing a core return on equity of approximately 42%. In our view, the Florida market for admitted commercial residential property insurance remains relatively healthy, but property insurance rates continue to fall in most territories during the second quarter. So we're monitoring all terms and conditions very carefully. In Southeast Florida, in particular, where much of our exposure is located, the market is generally firmer than the rest of the state and is even expected to improve in some instances due to ongoing capacity and underwriting constraints. Our risk portfolio continues to perform in line with most key underwriting metrics. These metrics, along with improvements in our balance sheet strength and our catastrophe reinsurance program are a big reason why we have grown our policies in-force roughly 10% since year-end. Year-to-date, total insured value increased approximately 18% to $69.8 billion as of June 30. However, continuous portfolio optimization and improvements in our overall spread of risk have resulted in modeled expected losses growing at a much slower rate. During the quarter, we completed our core catastrophe reinsurance program renewal effective June 1, 2025. Page 10 of our earnings presentation provides the final structure and highlights of which are very similar to the projected structure we previewed last period with a risk-adjusted cost decrease of approximately 12.4%. Ceded premiums are subject to potential adjustment based on actual modeled average annual loss versus our projected AAL at September 30. So our risk appetite for adding new exposures is likely to be somewhat limited during the third quarter. We expect to resume growth in the fourth quarter towards the end of hurricane season, assuming the underwriting environment is favorable to do so. On July 21, we also announced that the Kroll Bond Rating Agency had upgraded American Coastal Insurance Corporation to BBB minus and moved all of our outlooks from Stable to Positive. Our team has worked hard to regain investment-grade status. And since it reduces the interest rate on our senior notes by 100 basis points and clearly conveys that our company is headed in the right direction, we were very happy to see that.

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 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 $26.4 million. Core income was $26.8 million, an increase of $7.2 million year-over-year due to a $15.1 million increase in net premiums earned as a product of stepping down our gross quota share from 40% to 20% effective June 1, 2024, and further from 20% to 15% effective June 1, 2025. This was partially offset by increased operating costs of $6.2 million, driven by a $10.3 million or 74.8% increase in policy acquisition costs, offset by a $4.1 million or 34.5% decrease in general and administrative expenses. Policy acquisition costs increased due to a decrease in ceding commission income because of the step-down and increased external management fees, while G&A decreased due to the receipt of $2.9 million of employee retention tax credit refunds. These refunds were previously disclosed as a gain contingency and are nonrecurring. Our combined ratio was 60.6%, a decrease of 4.3 points from 2024 and lower than our stated 65% target. Our non-GAAP underlying combined ratio, which excludes current year catastrophe losses and prior year development, was 62.2%, also below our 65% target. We continue to feel our reserve position is strong. Page 6 of the presentation provides additional detail on our financial results. The increased operating costs mentioned earlier were in line with expectations and were more than offset by the increase in net premiums earned, creating strong net earnings. Page 7 shows balance sheet highlights. Cash and investments grew 34.3% since year-end to $726.2 million, reflecting the company's strong liquidity position. Included in this balance is $25.7 million of cash received from the sale of our Interboro subsidiary announced in April 2025. Stockholders' equity increased 24% since year-end to $292.3 million, driven by our strong results. Book value per share is $6, a 22.7% increase from year-end 2024. The company continues to be in a strong position to execute on its 2025 initiatives.

Thanks, Lana. That completes our prepared remarks for today's call, and we are now happy to field any questions.

Our first question is from Greg Peters at Raymond James.

In your investor deck, you talked about Skyway Underwriters. And I thought on Page 9 of the deck, it's kind of interesting because there's this quote-to-bind ratio, and it seemed like it improved pretty noticeably in June. How do I think about the market that you guys are going after with Skyway Underwriters in the context of your comments about the pricing environment for your other core business?

Thanks for the question, Greg. This is Brad. We're cautiously optimistic about our ability to grow our presence in the apartment space in Florida on an admitted basis. Obviously, most of the apartment risks are written in the E&S market today. We're offering a compelling alternative. And you have to see a lot of submissions to finally issue a policy. We haven't been chasing everything that's coming to us, but we're seeing nice deal flow. And I think it's that submission-to-bind ratio that's probably more important as an indicator of us just being cautious and being selective and being patient. We're not chasing rate. Rates in the E&S market in Florida tend to be a little bit more volatile than the admitted market, as you can imagine. So while we price our business like E&S, it's not something that we're forced to grow. That's the good part about having an Executive Chairman who's an underwriter, and there's no requirement or anything internally that suggests we have to hit our $20 million premium goal. We'll take on risk as it presents an opportunity based on the expected return on capital. And that's really how we're approaching it.

Can you clarify that for this apartment business, you are not assuming any liability exposures and it's solely regarding physical damage?

Correct. Yes, great clarification. We are not in the casualty business. This is a property book only. So no liability exposure.

Great. And lots of great information that you're providing on Slide 10 on your reinsurance program. And very rarely do we see companies that talk about third event cover. So maybe you can spend a second and unpack. Obviously, the first event is pretty straightforward, but talk about the second and third event because I imagine if there are other parts of the tower that are used in a first or second event that might limit the availability of what's possible for a third event cover, but perhaps you could provide some clarification on that.

Yes, certainly. The group retentions mentioned in the earnings presentation are simulating three typical events, estimating a gross loss of around $100 million. This aligns with our view of an average annual loss in the $50 million range. If we consider a normal event like Milton, which we have reserved at $90 million, our incurred losses there are under $25 million. This indicates that the retention level would be based on the limit utilization. However, it largely relies on the specifics of the first event. As you've noted, various scenarios based on frequency and severity could alter those retention amounts. That's the design of the program. A critical factor is the Florida hurricane catastrophe fund, which we're showing drawn around the $300 million mark. This figure is expected to increase due to our reported exposure growth to the CAT fund as of June 30. Therefore, we anticipate more coverage ultimately, which will likely elevate the total exhaustion point of our program based on this illustrative structure. However, we have no gaps in coverage, and all limits related to the CAT fund are intact. A unique enhancement this year, not present last year, involves a cascading feature of some upper limit layers. Historically, these upper layers had fixed attachment and exhaustion points. Now, if there’s significant erosion in the Florida Hurricane Catastrophe Fund, for instance, the Armor Re II CAT bond is structured as $200 million in excess of $50 million, despite an attachment point much higher. This is because it first drops to $300 million to cover any erosion in CAT fund limits for a second event, and could potentially drop even further to $50 million for a third event. Therefore, numerous scenarios exist regarding frequency and severity. What we've laid out here is an expected normalized stress test for three standard CAT 1, CAT 2, and CAT 3-type events.

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

I actually would like to follow up on the apartment binding ratio. Because that 45% is higher than what you had been experiencing earlier in the year, would you walk through the implications? I mean, is this literally that you had that much higher quality apartments coming to you? Or is it more a function of gaining experience, understanding, and getting comfortable with the market and being willing to bind more coverage than you were earlier in the year? Walk me through the dynamics, if you would, please.

Sure. Thanks for the question, Bill. I definitely agree that we are gaining experience and knowledge while building deeper relationships with our distribution partners every day. What we knew in January is significantly improved today. That being said, the quote-to-bind ratio can be somewhat random. June is a big month for production in property insurance in Florida, and the second quarter is typically our strongest for premium production. In June, we just happened to find more risk that aligned with our strategy than in the previous months. It's a mix of some seasonality and a bit of randomness, but I want to emphasize that our capabilities are improving daily in the underwriting distribution of the apartment program.

Well, I'll ask you to step out on a limb. First half, your quote-to-bind ratio was 29% on average. Directionally, is that number going up in the second half or down in the second half?

It's difficult to predict. I don't have a perfect insight into the underwriting environment. If it stays relatively strong, there is potential for growth. However, if rates keep dropping and returns are affected by changes in terms and conditions, that could slow progress. We will approach growth opportunistically and thoughtfully. I would like to see us achieve or surpass our goals for the year, but it's a flexible target and not something I'm pushing too hard internally. I prefer to focus on writing high-quality business with better expected margins rather than just increasing the number of premiums.

All right. And then in your opening remarks, you referenced that the geography where you have concentration is a better market, harder market than Florida on average. Would you dive into that comment a bit further, please?

Sure. Southeast Florida, also affectionately known as Tri-County, includes Dade, Broward, and Palm Beach counties, to a lesser extent, Martin County. That Southeast region of the state is always going to be the most challenging. It's the peak exposure zone in the world for hurricane risk, and there's more demand than there's supply of quality carriers willing to write there and have the experience and knowledge and know-how to successfully underwrite in that particular part of the state. So we've got a strong presence. That bodes well for our book, considering that that market is what I would characterize as firmer than the rest of Florida, where that's perceived to be less risky. And our apartment business, I should have mentioned, is a lot of this premium that we're writing in the apartments is not in the peak zones where our condo business is. So it is helping diversify our portfolio from an exposure management perspective. And we're happy to see that.

That is helpful. And I guess I have one additional question relative to the employee tax retention credit. You have now received all of the credits that you'll be receiving? Or are there still some lingering out there that you are hoping to receive?

I believe we received everything at this point. Lana, can you confirm that that's accurate?

Yes, Brad, that confirmed, all have been received.

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.