AMERICAN COASTAL INSURANCE Corp Q3 FY2025 Earnings Call

Greetings, and welcome to the American Coastal Insurance Corporation's Third Quarter 2025 Earnings Conference Call. As a reminder, I'd like to let you know that this conference is being recorded. It is now my pleasure to turn the call over to your host, Karin Daly, Vice President at The Equity Group and American Coastal's Investor Relations representative. Please go ahead, Karin.

Thank you, Diego, 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 earnings 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 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 Brad Martz. Brad?

Thank you, Karin, and welcome, everyone. I'm pleased to report American Coastal continued to deliver exceptional results during the third quarter with over $42 million of earnings before income taxes, representing our best quarter to date. Total revenues grew over 10% and despite general and administrative expenses normalizing in the third quarter without the nonrecurring payroll tax credits realized in the first half of the year, American Coastal was able to grow net income 16% year-over-year due to the muted catastrophe and attritional losses incurred. As previewed last quarter, we intentionally slowed premiums written in the third quarter to limit exposure growth through the peak of hurricane season and to hit our modeled expected average annual loss target, which was ultimately successfully accomplished. As the commercial property market continues to soften, risk selection and underwriting discipline remain paramount as we search for profitable growth opportunities. Looking forward, we believe the opportunity to earn strong returns on capital remains present even if headwinds from the current softening cycle persist. Accordingly, on October 1, American Coastal reverted to normal operations. So we do expect to see a rebound in premiums written during the fourth quarter with that positive momentum likely continuing into 2026. Our wholly owned MGA, Skyway Underwriters, recently introduced a new product and began quoting a new commercial residential property insurance program targeting the assisted and independent living facility market in Florida. American Coastal is only underwriting and retaining property exposure and will not be taking any liability or casualty risk. We believe the assisted living niche represents another attractive avenue for us to leverage our powerful distribution relationships and unique expertise in underwriting commercial residential property insurance by targeting properties that have similar physical risk characteristics to our condo and apartment policies but are also expected to diversify our risk portfolio. Page 10 of our earnings presentation provides more detail on this exciting new initiative. I'd like to now turn it over to our Chief Financial Officer, Svetlana Castle, for more specifics on our results.

Thank you, Brad, and hello. 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 $32.5 million. Core income was $30.5 million, an increase of $3.6 million year-over-year due to a $6.4 million increase in net premiums earned as a product of stepping down our gross catastrophe quota share from 20% to 15% effective June 1, 2025, and the earning of new business premium written in prior quarters. This was partially offset by increased operating costs of $5.6 million, driven by a $4.5 million or 21.5% increase in policy acquisition costs. Policy acquisition costs increased due to an increase in commission to MGA and decrease in ceding commission income year-over-year. Our combined ratio was 56.9%, a decrease of 0.8 points from 2024 and lower than our stated target of 65%. Our non-GAAP underlying combined ratio, which excludes current year catastrophe losses and prior year development, was 57.8%, also below our 65% target. We continue to feel our reserve position is strong. Page 6 of our presentation shows our increased operating expenses of $5.6 million, as previously described. These increased costs were in line with expectations and were more than offset by the increase in net premiums earned mentioned earlier, driving additional net earnings shown. Looking at the full year results on Page 7 of the earnings presentation. Net income from continuing operations was $80.2 million, an increase of $9.7 million or 13.8% year-over-year. Revenues have increased $31.7 million or 14.6% year-over-year, driven by increased net premiums earned. Operating expenses increased $23.8 million year-over-year, driven by policy acquisition costs increasing $28.7 million. This increase was in line with expectations and driven by the quota share step-down and commissions mentioned previously. G&A expenses partially offset this, decreasing $4.9 million; however, this was driven by a one-time tax credit refund of $4.5 million previously unrecorded and disclosed as a gain contingency. Page 8 shows balance sheet highlights. Cash and investments grew 28.5% since year-end to $695 million, reflecting the company's strong liquidity position. Stockholders' equity has increased 38.9% since year-end to $327.2 million, driven by strong results. Book value per share is $6.71, a 37.2% increase from year-end 2024. The company continues to be in a strong position to execute its strategic initiatives. I'll now turn it over to Brad for closing remarks.

Thanks, Svetlana. I don't have anything to add. So that completes our prepared remarks today, and we're now happy to field any questions.

And your first question comes from Greg Peters with Raymond James.

I have three questions. First, can you explain the decline in gross premium written in the third quarter? Also, I noticed your presentation mentioned a 13% decrease in pricing related to reinsurance. Specifically, could you clarify how much of the decrease in gross premium written was due to suspending new business versus how much was due to the reduced pricing that you noted in your press release? Was there any impact from new business or none at all?

Greg, this is Brad. We did not completely stop taking on new business; we continued to write both new and renewal business, but implemented stricter underwriting controls. We manage our portfolio by providing AmRisc with specific targets for total insured value, probable maximum loss, and average annual loss. This year, we set an average annual loss target as of September 30 that was linked to our reinsurance purchase. It is crucial for us to meet the targets for the amount of exposure we have during hurricane season, based on what we communicated to our reinsurance partners. If we exceed that target, we have some flexibility, but there would be no additional reinsurance premium. We could have chosen to grow in the third quarter, but we believed it was wise to maintain our targets for expected average annual loss. That’s the main reason for the decrease. I think we can easily make up for this in the fourth quarter and into the first half of 2026, so I wouldn’t read too much into it.

In your press release, you mentioned that reinsurance costs as a percentage of gross earned premium decreased significantly in the third quarter compared to the same period last year. With the January 1 renewal approaching, which isn't a major contract for you, could you provide an update on how the renewal discussions are progressing? Additionally, do you have any early insights on the wind contract that is up for renewal in June?

We had productive conversations in Orlando in early October with about three-quarters of our reinsurance panel. We engaged in good dialogue about capacity and our desire to grow with our reinsurance partners, indicating strong support for American Coastal. However, the discussions did not primarily focus on price. We rely on other metrics and price discovery tools, such as our broker-reinsurance intermediaries, to assess the market and anticipate pricing expectations. There is ample capacity available, and there isn't a supply issue. The key concern now is the demand. I see reinsurance costs moving in alignment with our front-end rates, which have been decreasing. As you pointed out, our rates continued to decline in the third quarter. We are mindful of the challenges presented by the softening cycle and are trying to gauge their implications for returns on capital and business profitability. Average premiums have only decreased about 9% since year-end, but for the full year, they will reflect the risk-adjusted cost decrease we observed in our core cat renewal pricing as of June 1, 2025. As long as this trend persists, our outlook remains positive. Additionally, the lack of major catastrophe events in the second half of 2025 has clarified the direction of pricing on both the primary and ceded sides.

We have another question coming from Greg Peters with Raymond James.

I'm going to ask a follow-up question about the assisted living business since you included this in your presentation. Could you provide some insight into the addressable market for American Coastal and how that might influence your growth next year?

Absolutely. Thank you for the question. This presents another opportunity for us, provided by some of our distribution partners. Our initial market research indicates that it's around a $100 million market for the types of risks we are examining, which is somewhat limited but growing. It could potentially double in 10 years, based on the growth projections. However, we don't expect it to significantly affect our results for next year. This is similar to our outlook for apartments, where we estimated about a $200 million market opportunity, with plans to capture around 10% of that in the first year. We can approach assisted living facilities in a similar manner, recognizing it as a current $100 million addressable market opportunity. If we can secure 10% of that in the first year, that would be a solid outcome. We are not aiming to achieve extraordinary results right from the start given the learning curve ahead, but we feel confident with this risk. What's intriguing is that the properties we're targeting qualify for the Florida Hurricane Catastrophe Fund, aligning well with our strategy. Just as with apartments and condos, this gives us a cost advantage in the Florida admitted market, where it's eligible for both the catastrophe fund and the guarantee fund. I believe we will find some success in this area, though it's a bit early to make forecasts. We plan to provide more details on our future projections for 2026 at our upcoming Investor Day, which we are aiming to hold in the first half of January, likely the second week of January. I don’t have a specific date yet, but we hope to update our shareholders on our strategic initiatives for the upcoming year and share our full-year guidance for 2026 concerning both net premiums earned and net income. So please stay tuned for that.

And there are no further questions at this time. So with that, we will conclude today's call. All parties may disconnect. Have a good evening. Thank you.