Earnings Call Transcript - ACIC Q4 2025

Operator, Operator

Greetings, and welcome to the American Coastal Insurance Corporation's Fourth Quarter 2025 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Jeremy Hellman, Vice President at The Equity Group and American Coastal's Investor Relations representative. Please go ahead, Jeremy.

Jeremy Hellman, Vice President, Investor Relations

Thank you, operator, and good afternoon, everyone. American Coastal Insurance Corporation has also made this broadcast available on its website at www.amcoastal.com. 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 in 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 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 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 is my pleasure to turn the call over to Brad Martz. Brad?

Bennett Bradford Martz, President and CEO

Thank you, Jeremy, and welcome, everyone. During the fourth quarter of 2025, American Coastal continued to demonstrate that we are a unique, high-performing specialty underwriter producing strong returns on capital that is very well positioned for the future. A lack of hurricane activity in the current period helped drive solid earnings growth compared to the same period last year that was impacted by catastrophe losses yet remain profitable. Our full year net income of $106.8 million exceeded our full year guidance at the beginning of 2025, which was $70 million to $90 million. And even with a major hurricane loss, ACIC would have landed above the midpoint of our guidance. Over the last 3 years, ACIC has produced over $336 million of pretax profits and returned over $60 million to shareholders through special dividends. I think it's fair to say our strategic transformation has been nothing short of spectacular. Yet I believe we're capable of more. As forecasted last quarter, premiums written in the current period rebounded nicely, increasing approximately 59% compared to the third quarter of 2025, but declined 19% year-over-year due primarily to rate decreases. Rates are falling in our business due in large part to Florida's legislative reforms that are clearly working as evidenced by reduced reinsurance costs and lower losses incurred. For the full year, our net premiums earned of $306.8 million were also above the midpoint of our 2025 guidance, which was $290 million to $320 million. Total revenues increased year-over-year despite a much more competitive environment without sacrificing underwriting discipline. With softer market conditions persisting in commercial property insurance, we expect premium production to remain challenging as our risk appetite is highly correlated to modeled expected returns on capital. Last month, we revealed plans to improve the company's business profile by introducing new revenue and earnings growth pathways in the E&S market. While we are not necessarily looking to grow commercial property exposure in the short term, we do believe there are pockets of opportunity to underwrite new profitable commercial residential property insurance business inside and outside of Florida, where we can leverage American Coastal's technical expertise and competitive advantages. Our E&S ambitions and investments are more about putting the company in the best possible position to succeed over time rather than chasing growth in this part of the property cycle. With that, I'd like to now turn it over to our Chief Financial Officer, Lana Castle, for more specifics on our fourth quarter and full year results.

Svetlana Castle, Chief Financial Officer

Thank you, Brad, and hello. I'll provide a financial update, but encourage everyone to review the company's press release, earnings, and investor presentation and Form 10-K 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 $26.6 million. Core income was $25.8 million, an increase of $19.8 million year-over-year due to a $20.5 million decrease in incurred losses as Hurricane Milton made landfall in the fourth quarter of 2024, resulting in a full excess of loss catastrophe retention. For the full year, net income was $106.8 million and core income was $103.7 million, an increase of $26.8 million. Our combined ratio was 58.6% for the quarter and 60.1% for the full year. Our non-GAAP underlying combined ratio, which excludes current year catastrophe losses and prior year development, was 58.9% for the quarter, a decrease of 7 points from the prior year. For the full year, our underlying combined ratio was 61.5%, which is below our 65% target. We continue to maintain a strong reserve position. Page 6 of our presentation shows more detailed quarter-over-quarter comparison with net premiums earned driving higher revenue compared to 2024 as a product of stepping down our gross catastrophe quota share from 20% to 15% effective June 1, 2025. Operating expenses remained relatively flat, decreasing $1.3 million or 3.4%. Page 7 provides a year-over-year comparison of our results. Revenues for the full year increased $38.8 million or 13.1% in 2025, driven by the quota share step down previously mentioned as well as a step down from 40% to 20%, which was effective June 1, 2024, and impacted 2024 results. Total expenses remained flat year-over-year, though operating costs increased $22.6 million, largely as a result of reduced ceding commissions. This was offset by the retention related to Hurricane Milton. Page 8 shows balance sheet highlights. Cash and investments grew 19.8% in 2025 to $647.7 million, reflecting the company's strong liquidity position. Stockholders' equity increased 34.8% since year-end to $317.6 million, driven by strong underwriting results. Book value per share is $6.51, a 33.2% increase from year-end 2024. These increases are inclusive of a special dividend of $0.75 per share declared in the fourth quarter, totaling $36.6 million. As shown on Page 9, through strong results, the company has seen increased liquidity and book value per share since the first quarter of 2023. I'll now turn it over to Brad Martz for closing remarks.

Bennett Bradford Martz, President and CEO

Thank you, Lana. I'm extremely grateful for our team and for our business partners as they are the true reasons for ACIC's outperformance of its peer group and the insurance industry returns overall. That completes our prepared remarks for today, and we are now happy to field any questions.

Operator, Operator

Our first question today is from Michael Phillips from Oppenheimer.

Michael Phillips, Analyst

I guess I wanted to start, I guess, Brad, with the gross premium results this quarter down around 19%. It looks like from December through September, at least your commentary on the rate environment is 13%. It looks like it kind of maybe stabilized. I guess I want to see if you can comment on that. But then talk more about the premium in this quarter. Last quarter, you said you intentionally slowed down for exposure limitations and expected to rebound this quarter to continue into the next quarter. It looks like maybe that didn't happen or maybe it did in your view. I just want to talk about that and kind of how this quarter's 19% drop compares to what you were thinking.

Bennett Bradford Martz, President and CEO

Thanks, Mike. Good questions. And I would just reiterate that quarter-over-quarter, premium rebounded almost 60%. So we're okay with that. The machine, when you slow it down, it does take time to crank it back up sometimes. So we felt it was super important to hit the average annual loss targets that we set for September 30. That's a key measuring stick for our core catastrophe reinsurance program, and we were successful in delivering on hitting that target. So we believe we took the appropriate measures to manage our exposures in the third quarter. That being said, obviously, October got off to a little bit of a slow start because of just the time it takes to continue to receive quotes, bind, and issue policies given the lead times associated with that activity. So it's a challenging market environment. We make no bones about it. We are walking away from risks that previously may have met our return on capital hurdle rates but today might not be. So we're trying to be disciplined. And I think you'll see a little bit of volatility in the written. But from an earnings perspective, I have no worries. I think we've given solid revenue guidance for 2026. No promises on us being able to hit those numbers, of course. But hopefully, we did demonstrate some predictability in our business with the results we posted relative to the guidance in 2025.

Michael Phillips, Analyst

Okay. That was helpful. I guess your last words were what I was going to ask next. Maybe I'll still ask and see what you think. If growth continues to slow, perhaps more than you anticipated, that will obviously impact earnings later in the year. It sounds like you're not concerned about the revenue numbers you mentioned earlier this year, at least for now.

Bennett Bradford Martz, President and CEO

Yes, that's correct. We are committed to making significant changes to our expenses in line with our revenue changes. It's crucial for us to keep working hard on developing the best risk transfer program possible by June 1. We had a successful placement for our January 1 AOP CAT program and our Catastrophe Aggregate program, which have shown a substantial decrease year-over-year on a risk-adjusted basis, well ahead of the rate changes and written premium changes we saw in the fourth quarter. We are optimistic about the June 1 renewal. These programs are smaller and not a perfect comparison to the June 1 program. However, if we face rate changes, we will actively seek to reduce loss costs and reinsurance costs to protect our margins. If we cannot achieve that, it may put pressure on our combined ratio, and we will need to be more selective in writing both new and renewal business.

Michael Phillips, Analyst

Okay. Maybe one smaller one on the margin piece. The G&A ratio has kind of ticked up a bit. And I wonder what's driving that? And any expectations for this year on that one?

Bennett Bradford Martz, President and CEO

Nothing notable to point out. Obviously, we had some distortion in the first half of the year with some payroll tax credits that artificially reduced our recurring normal operating expense levels, but the third quarter and fourth quarter represent a true current run rate. So the first half of '26 won't necessarily be a perfect comparison with the first half of '25. But other than that, I don't have anything to call out on G&A.

Michael Phillips, Analyst

Phenomenal results on the margin side. So congrats on that.

Operator, Operator

Next question is coming from Mitchell Rubin from Raymond James.

Mitchell Rubin, Analyst

You've outlined plans for expansion into South Carolina, Texas, and broader nationwide E&S markets through ACES and the expanded AmRisc partnership. Could you provide some color on how underwriting margins, catastrophe profiles, and reinsurance structures in these markets differ from your Florida book?

Bennett Bradford Martz, President and CEO

Sure. Thanks for your question, Mitch. I believe they are quite similar. The issue of named windstorm exposure in Texas and South Carolina is not very different. However, I anticipate that those states will have a slightly higher combined ratio, making precise forecasting challenging. Our prior experience with underwriting in those states through Journey Insurance Company indicates that it's comparable. We will continue to focus on the same types of commercial and residential properties we currently underwrite, primarily condos, apartments, and assisted living facilities. Other property classes would be outside our comfort zone for now, and we would need to provide more information about any such initiatives. Regarding the expansion with AmRisc, we are very enthusiastic about it. It has been a long time coming. They are an excellent partner with 25 years of successful results, and we are proud to offer them some capacity. We are starting with a modest line of approximately $100 million in full-year premiums. If the market becomes tighter and they require more capacity, we could consider increasing that. Conversely, if the market softens and margins do not meet expectations, we might reduce it. Nonetheless, it's a 2-year deal that is underway. We will begin recognizing premiums from their nationwide commercial E&S property portfolio in March.

Mitchell Rubin, Analyst

I appreciate the color there. So with the debt to total capital ratio at 32% in the quarter, and you've previously stated a long-term target of around 25%, how are you prioritizing deleveraging, funding ACES, and potential capital return in 2026?

Bennett Bradford Martz, President and CEO

The debt is set to mature at the end of 2027, so there's no urgent need to address it right now. Our primary goal is to generate an underwriting profit, enhance book value per share, and increase shareholder equity through our organic earnings. This approach should help reduce our debt-to-capital ratio. However, we have indicated our intention to lower overall financial leverage. When it comes time to refinance that debt, I anticipate the company will avoid a straightforward refinance. The total debt is expected to decrease by around $50 million to $75 million, which we are comfortable with. That will largely depend on our earnings and cash flow generation. Over the last two years, we've been pleased to return $60 million of our profits to shareholders, and we are closely monitoring the stock price. We believe the company is significantly undervalued, making share repurchases a viable option. Typically, we consider buybacks in light of significant market disruptions, but at the current earnings multiples, we see the stock as a good investment.

Mitchell Rubin, Analyst

Congrats on the quarter and the year.

Operator, Operator

Your next question today is coming from Akshay Forma, a private investor.

Unknown Attendee, Private Investor

Congratulations on a good quarter and a great 2025. I have questions on the E&S opportunity, so the new company, ACES. I joined the call a little late, so forgive me, but do you mind giving an update on where you are with creating the new entity from your last call and the update? And then I have one more follow-up question.

Bennett Bradford Martz, President and CEO

Yes. The update is that it is still pending regulatory approval in the state of Arizona. It took us most of the fourth quarter to complete all the necessary background checks and biographical affidavits. Typically, Arizona does not begin reviewing new company applications until that process is finished. We have cleared that hurdle, and I believe they are working on it, so we should have an update for you shortly. However, at this moment, the certificate of authority is still pending.

Unknown Attendee, Private Investor

And how should we think about like the forecasted gross premiums for ACES for 2026? And then also, like thinking longer term, how should one think about ACES market share? So in the January presentation, you had mentioned about the E&S opportunity market, about $1.4 billion in Florida, $1.9 billion in Texas, and $455 million in South Carolina, which comes up to like a total of $3.7 billion of opportunity. So like can we expect if things fall in the right place, ACES also to have the same market share as what AmCoastal has, which is, I think, around 25% market share? Is that kind of like where the team is targeting? Or how should one think about it in the long term?

Bennett Bradford Martz, President and CEO

It's a great question. Clearly, we aim to achieve a market leadership position in our endeavors, and that's our ultimate goal. The timeline for reaching this milestone is uncertain. For 2026, the contribution from ACES is expected to be limited, around 5% or less of our total revenue guidance for that year. The focus really shifts to 2027 and beyond. In the first year of ACES, assuming it receives the necessary approval and funding—which still has uncertain timing—it will function as a collateralized reinsurer. Achieving a rating from A.M. Best and becoming a direct writer of commercial property business will take time. However, any capital we invest in ACES will be utilized effectively, similar to our recent deal with AmRisc, which is projected to generate over $100 million on an annual basis. While it's possible for ACES to eventually reach a level comparable to American Coastal, it's more likely that it will remain slightly smaller for the next 3 to 5 years. Ideally, we envision a well-balanced portfolio that includes both admitted and non-admitted business across Florida and other states, offering a good spread of risk and geographic diversification.

Unknown Attendee, Private Investor

Got it. In terms of combined ratios for ACES, would you say it aligns with your goal of a 65% combined ratio that you have for American Coastal? Is that still the overall target you are aiming for?

Bennett Bradford Martz, President and CEO

I think that's aggressive. The condo book in Florida is somewhat unique due to the Florida market and the length of time we've been underwriting in that area. Our knowledge, experience, and scale, along with the advantages provided by the Florida hurricane cat fund, likely make that goal unachievable. Historically, the combined ratio for commercial residential property insurance in Florida, excluding catastrophes, has ranged between 65% and 75% throughout the company's 18-year history. It ultimately depends on the loss experience. However, having an underlying margin is crucial, as our Chairman frequently emphasizes. An underwriting margin is necessary to absorb catastrophes and navigate soft market cycles. Without this margin, you risk disappointment. We are confident that everything we undertake will be beneficial and yield an acceptable return on capital, but I wouldn't anticipate that business from the E&S platform will reach the same results as our condo book in Florida.

Unknown Attendee, Private Investor

My last question is going to be on share repurchases. So I know the team has mentioned in a couple of conferences as well that the stock is undervalued. I believe it, too, and I am a shareholder as well, and I believe the stock is undervalued. So I guess my question is, what's holding the team back from share repurchases? I know you mentioned you would do or you would look at share repurchases when the stock is undervalued. So I'm just curious what's holding the team back.

Bennett Bradford Martz, President and CEO

It just hasn't been our top priority. I appreciate the sentiment, and we hear you. And I think going forward, it will be given slightly more consideration. I don't know if that consideration will trump how we feel about special dividends. We love the optionality of that and waiting until we're through hurricane season to really be able to accurately measure what excess capital we may or may not have. So ideally, we'll obviously still be able to pay a special dividend every year, but the amount of that will be driven by our loss results, which are inherently unpredictable. That being said, we're monitoring the stock. We're obviously not a complete outlier with some of our peers. But to the extent that we are not rewarded for continuing to produce exceptional returns, yes, I mean we're buyers at these levels.

Operator, Operator

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Bennett Bradford Martz, President and CEO

Nothing further from the American Coastal team.

Operator, Operator

Thank you. That does conclude today's teleconference webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.