American Coastal Insurance Corp
NASDAQ:ACIC
Earnings Call Analysis
Q4-2023 Analysis
American Coastal Insurance Corp
Amidst challenging market conditions, the company delivered a robust core income of $17.7 million for the fourth quarter and an annual core income of $89.5 million, marking an improvement of over $100 million year-over-year. This performance equates to an impressive 100.6% core return on equity, showcasing the company's adeptness at generating profitable growth.
The company's consolidated net loss ratio saw a remarkable decrease, from 54.3% to 21.2% in the fourth quarter, and from 56.2% to 43.7% in expenses year-to-date, contributing to a much healthier net combined ratio, falling from over 104.5% to 66.0% year-to-date.
The Commercial Lines segment continues to excel, contributing $27.9 million in pretax earnings for the fourth quarter, a dramatic rise from $3.7 million in the prior year. Conversely, the Personal Lines segment incurred a loss, though improvements were evident with losses reducing from $10.6 million to $5.2 million in the same quarter year-over-year.
The at-the-market equity program (ATM) has been instrumental in capitalizing on market opportunities, raising $38 million to bolster specialty underwriting. The byproduct of this strategic capitalization is a significant increase in book value per share from $2.78 to $3.61 in just three months.
A combination of diligent underwriting tactics and streamlined expenses culminated in ACIC posting record results for the year, underpinning the company's strategic progress and operational efficiency.
A strategic renegotiation of the core catastrophe reinsurance program led to nonrecurring charges of approximately $8.4 million. This proactive move will realize $14.4 million in cost savings, a commendable trade-off for long-term financial health.
The remarkable reduction in catastrophe losses coupled with a decline in the underlying combined ratio to 67.2% underscores the company's underwriting prowess and fortified risk management strategies.
While the sale of Interboro has been delayed until the end of 2024, once complete, it will crucially release capital and facilitate the exploration of diversification opportunities for the business.
The company has implemented a 12.6% rate increase, projecting an incremental impact of $5.9 million on an annualized basis, indicative of its ability to leverage pricing power for revenue expansion.
A formidable increase in stockholders' equity by 40% to $168.8 million and a solid base of $369 million in cash and invested assets reflect a robust financial position.
The ATM offering, exceeding capital raising expectations, led to a strategic hiatus after amassing significant financial resources to optimize under current market conditions. It raised more capital than anticipated, leading to a total of $26.8 million net of expenses, further bolstered by subsequent sales bringing in an additional $11.4 million.
Despite an uptick in competition within the specialty Commercial Lines business, management anticipates rate increases between 10% to 20% in 2024 compared to 2023, positioning the company to navigate a more challenging competitive environment effectively.
The company is steadfast in its focus on sustaining underwriting profitability, facilitating earnings growth, and bolstering bench strength by adding two new executive officers to the team, demonstrating a methodical approach to scaling the business.
The quota share is expected to decrease from 40% to potentially none over the next 2 to 3 years, reflecting the company's confident outlook on maintaining profitability and its improved positioning for reinsurance negotiations.
With a risk-based capital ratio standing at 981%, the company is well-positioned to assume more net premium risk, expecting this to be offset by the anticipated rise in underwriting profitability.
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Hello, and welcome to the American Coastal Insurance Corporation's 2023 Fourth Quarter and Full Year 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 Karin Daly, Vice President of the Equity Group and American Coastal's Investor Relations representative. 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.yamcoastal.com. A replay will be available for approximately 30 days following the call. Additionally, you can find copies of the latest earnings release and presentations in the Investors section of the company's website.
Speaking today will be Chairman of the Board and Chief Executive Officer, R. Daniel Peed; 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 these 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 their most recent annual report on Form 10-K. 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.
Thanks, Karin. Hello, and thank you for joining us on our fourth quarter earnings call. I'm Dan Peed, Chairman and CEO of American Coastal Insurance Corporation. I will provide an overview of results from the fourth quarter and year-to-date, and then turn it over to Brad Martz who will expand on the financial results. Our core income for the fourth quarter is $17.7 million, which annualized is a 100.6% core return on equity. The core income at December 31 is $89.5 million, which is over a $100 million improvement year-over-year. Net income is primarily attributable to our Commercial Lines segment.
The consolidated net loss ratio is 21.2% for the fourth quarter '23 versus 54.3% in the same period in 2022. Consolidated net loss ratio year-to-date was 22.3%.
The consolidated net expense ratio continues to trend downwards, 45.4% in the fourth quarter and 43.7% year-to-date, down from 50.2% and 56.2%, respectively, last year. The net combined ratio is 66.6% in the fourth quarter and 66.0% year-to-date, down from 104.5% and 106.2% year-over-year, respectively.
Personal Lines underperformed in the fourth quarter and year-to-date, but the impact is smooth by the Commercial Lines segment continuing to outperform year-over-year. Pretax earnings attributable to the Commercial Lines segment totaled $27.9 million for the fourth quarter of 2023 compared to $3.7 million for the fourth quarter of 2022.
The Commercial Lines underlying combined ratio improved 17.5 points to 50.9% in the fourth quarter 2023 from 68.4% in the fourth quarter 2022. The same improvement holds true year-to-date with Commercial Lines underlying combined ratio, improving 13.2 points year-over-year to 53.6% year-to-date for 2023.
Earnings also improved as management implemented and achieved its plan for expense reduction in 2023, policy acquisition, underwriting and general and administrative expenses were all reduced positively impacting the bottom line.
Am Coastal's 2023 results position Commercial Lines in a solid position going into 2024 and creates opportunities unique to Am Coastal the largest commercial residential lines writer in Florida behind Almay Citizens to continue its conservative reinsurance approach, protect its balance sheet and identify opportunities to expand our products to meet the needs of Florida policyholders and create shareholder value.
Moving on to Personal Lines. This segment experienced a pretax loss of $5.2 million in the fourth quarter 2023 but that compares favorably to a pretax loss of $10.6 million in the fourth quarter of 2022. We continue confirmatory due diligence with the potential buyer of Interboro and expect to sign definitive documents shortly. The sale of Interboro will unlock capital and generate liquidity to explore diversification opportunities for our business. In all, net income attributable to the company for the year ended December 31, 2023, was $309.9 million or $7.11 per diluted share.
Our at-the-market offering raised approximately $38 million to date which, as we have stated, creates capacity for expanding specialty underwriting, especially during these hard market conditions. As a result of the strong performance of our Commercial segment and the improvement in our Personal Lines segment. Period-over-period, our book value per common share increased 29.8% from $2.78 at September 30, 2023, to $3.61 at December 31, 2023.
While competition in the commercial lines space is increasing, Am Coastal continues to be a commercial residential leader in Florida because of its well-established reputation extensive distribution network and underwriting expertise. I expect this unmatched competitive advantage will continue to drive results and deliver value to shareholders.
With that, I'll turn it over to Brad Martz.
Thank you, Dan, and hello. I'm happy to review our financial results and encourage everyone to review the company's press release, earnings and investor presentations and Forms 10-Q and 10-K, including amendments for more information regarding performance.
We entered 2024 with positive forward momentum in our core business. Underwriting actions taken over the past year, combined with expense reduction and a more favorable external operating environment, led ACIC to post record results Dan highlighted for 2023.
While we were pleased with our overall performance in the fourth quarter, pretax earnings included nonrecurring charges of roughly $8.4 million, $2 million of which was related to impairment of capitalized software and $6.4 million impacted reinsurance costs.
Page 6 of our earnings presentation provides some additional color on the charge related to reinsurance, which is actually a good thing because it will reduce reinsurance costs over time. The reinsurance charge occurred from a voluntary commutation to the 2023 core catastrophe reinsurance program in exchange for a no-claims bonus. The $6.4 million incurred in Q4 will be offset by $14.4 million of cost savings over the remaining trading period from January 1 to May 31, 2024. The net economic benefit to ACIC is approximately $8 million after accounting for the upfront costs incurred in Q4 and the savings expected in Q1 and Q2 of 2024, which are net of costs we incurred to replace the cat limit commuted.
A big driver of improvement in the pretax earnings and our combined ratio in the current quarter was the lack of any meaningful catastrophe losses. Catastrophe losses were just $277,000 this quarter compared to $18.9 million in the same period last year. We continue to see favorable prior year reserve development with $629,000 in the current quarter and feel good about our overall loss reserves at year-end.
Excluding catastrophe losses and prior year reserve development, our underlying combined ratio improved over 15 points to 67.2% in the current period and was 65% for the full year. We previously stated that our target for the underlying combined ratio in 2023 was 65%, so we're obviously pleased with hitting this goal.
Page 7 of our earnings presentation breaks down our results by segment with $27.9 million of pretax profit from Commercial Lines reduced by a $5.2 million loss from Personal Lines and $3.2 million of expense at the whole company, which is primarily interest expense. This brought our year-to-date pretax profit in Commercial Lines to over [ $118 million ] with a combined ratio of 53.7%.
As Dan mentioned, ACIC continues to work towards finalizing definitive agreements to sale of Interboro and we still expect to get that done this year. But completing the sale is now more slated to occur towards the end of 2024. That means Personal Lines will continue to be a minor drag on overall results this year. However, we did receive regulatory approval in New York for a 12.6% rate increase, effective February 6 business and March 15 for renewal business with an annualized expected impact of $5.9 million. So that is obviously expected to help improve Personal Lines results in the current period.
Page 8 of our earnings presentation provides balance sheet highlights, including stockholders' equity increasing 40% to $168.8 million or $3.61 a share. Unrealized losses on our bond portfolio of $17.1 million or $0.36 a share indicated an underlying book value of approximately $3.97. And cash and invested assets totaled $369 million with total assets of just under $1.1 billion.
As Dan mentioned, our previously announced at-the-market, or ATM program, delivered a nice boost to our unrestricted liquidity and our overall capitalization during the quarter. As of year-end, ACIC issued and sold approximately 3.4 million new shares, raising $26.8 million net of selling expenses. Subsequent to year-end, the company sold another 1 million shares, raising another $11.4 million net of expenses. The ATM has now raised more capital than we originally anticipated, but the dilutive impact was in line with our original expectations. Accordingly, the ATM has now been paused, and American Coastal is not anticipating additional sales of its common stock under the ATM program at this time.
The big question everyone wants to know is what are we going to do with the $38.2 million raised from the ATM inception to date. And as we've stated previously, we see a tremendous opportunity to grow our net earned premiums over time by retaining more of our direct underwriting results. We've deployed some of this capital to our captive already to support our January 1 AOP cat reinsurance program and our excess per risk reinsurance program that was placed at February 1 on layers with a modeled expected return on capital well in excess of 50%. However, most of the proceeds are being reserved for a much bigger core catastrophe renewal at June 1 of this year.
It's premature to comment on our upcoming core catastrophe renewal at June 1, but we are hard at work on it and can point to the very successful reinsurance renewals at 1/1 and is good evidence that we expect to see significant improvements in pricing and overall protection at June 1 this year relative to the program expiring at May 31.
Page 9 of our earnings presentation summarizes our current view of the underwriting environment. Market conditions remain very favorable for achieving underwriting profitability and above-average risk-adjusted returns on capital in the near term. To capitalize on this, we will look to supplement our anticipated organic growth this year by also exploring takeout and assumption opportunities. We believe assuming business from other carriers, such as Citizens, that meet our underwriting criteria make sense in the current environment and could potentially offset any potential competitive pressures as the market cycle evolves.
Pages 10 and 11 of our earnings presentation provides some additional color on pricing and valuation trends in our commercial residential business. We ended 2023 with premiums up 28% and exposures down 18% year-over-year. Rate levels are moderating but remain very healthy relative to current exposures loss and expense trends. Even with direct written premiums flattening out, we are confident in our ability to grow net earned premiums in 2024, which is truly what will drive our bottom line this year.
And finally, we would like to give a huge thank you to our partners at Am Risk for their exceptional contributions to our success in 2023 and also offer our sincere congratulations to both the buyer and the seller of Am Risk parent company. American Coastal continues to enjoy a very strong and exclusive relationship with Am Risk in the Florida admitted commercial residential space and we do not expect any significant changes to our business because of Am Risk ownership change in the foreseeable future.
With that, operator, please open the line for questions.
[Operator Instructions] First question is coming from Greg Peters from Raymond James.
So Dan, in your comments, you hinted about increased competition in your specialty Commercial Lines business. Brad, you also mentioned it. Can you give us a sense of what your expectation is in terms of pricing or rates in your specialty segment for '24 and how that might compare with what happened in '23?
Sure, Dan. We had so little competition last year that just about any competition is an increase. We see probably the main company where if the accounts leave would be going to Citizens and mostly due to a rate, just due to a rate being less expensive for the Citizens policy. We have also seen a few different carriers that are introducing products, but they tend to be a small number compared to the volume that American Coastal typically sees. So as far as REIT, we continue to expect that we will get rate increases, they just will be decelerating from the rate increases that we were getting over the course of the last 12 months. And I would expect that we probably will be up between 10% and 20% through the course of 2024 over the average 2023 rates.
Okay. I guess, the other comment, I think you made was just sort of what the expected underlying combined ratio target was for '23. Wondering if you want to venture a guess and give us sort of a range of what you think the underlying combined ratio target should be for the enterprise for '24 or give us some benchmark of expectation around what you think the margin performance will be, understanding that there's volatility for cat.
Yes, Greg, this is Brad. Well, the underlying combined excludes cat and reserve development, so that's the purpose of that measurement. It does allow us to create an apples-to-apples comparison so years regardless of what's happening with prior year reserve and the volatility associated with cat. But we think it's a good metric, and we're still targeting 65% as of today. I think our reinsurance renewal June 1 could change that outlook favorably or unfavorably depending on how we execute, but I think that's the big reset that we need to wait and see how our fixed costs related to reinsurance as well as the variable costs associated with the quota share end up changing at June 1.
Okay. And then I guess, pivoting to sort of the capital and balance sheet situation. I guess now you're closing the ATM for the time being, pausing, I think, was the word you used. How should we think about capital adequacy across the enterprise? If you look to your debt to total capital leverage ratio, it looks elevated relative to your peers, but maybe I'm missing something. I think your RBC is probably running a little bit high right now. But maybe you can just provide some perspective around your views on capital.
Certainly. You're correct. On the statutory side, which is where we're most sensitive to our capital needs. American Coastal Insurance Company ended the year with a risk-based capital ratio of 981%. So we feel like we've done a great job managing that. Obviously, taking back more net premium risk with decreasing potential reinsurance spend could cause us to see a decrease in that RBC, but it will be offset by increased underwriting profitability. So the way we've modeled it out, I think we're all set on capital for the year.
Obviously, we are working feverishly to unlock some additional liquidity by selling Interboro, which is a big reason we went to the ATM as we were somewhat disappointed in the time line and the length of time it's taking to dispose of that asset and formally exit the personal lines business. But for right now, I think we're in great shape with on policyholder surplus on RBC, and if we want to retain more risk, I think we have the capital to do it.
Got it. I guess just pivoting back to one of your other comments about take-out opportunities from Citizens. I assume that's focused on the specialty commercial side. That's not a pivot back into the personal residential side. Is that correct?
That is correct. Yes, good clarification. I apologize for admitting that. But yes, we've lost a few accounts to Citizens due to rate differential and that's okay. That happens from time to time. But there is some good business that we'd like to get back. And I think that's one way to do it. So we should be evaluating the opportunities there from time to time. And when it makes sense and the risks we're familiar with that meet our underwriting criteria are available, we'll consider it.
Got it. Well, congratulations on the air.
Thank you.
Next question is coming from Arian Gupta from Eagle Eye Asset Private Limited.
Congratulations on the results for the commercial specialty segment. I just had a couple of questions. So I guess, have there been any updates on the fee income side of the business? I guess that's my first question.
I'll take that. This is Dan. We are working on some different opportunities. But I think as we have kind of mentioned all along, I wouldn't feel like that is something that is just imminently in the short term, it would be something that we build over time. We are still working on some fee opportunity fee business opportunities, but there is nothing there to report yet.
Sure. That makes sense. And I was also wondering, are there any opportunities that you guys see in the E&S market on the non-admitted market where potentially there might be, I mean, opportunities for growth?
Well, one thing that Brad mentioned is the opportunity for pretty significant growth in our net premiums written and net premiums earned from the standpoint of just eating more of our own cooking. Obviously, if you look at our numbers, there's a very large feeded percentage in part due to our capital level at the beginning of last year. Obviously, that capital has been [indiscernible], and we like the business that we're writing from a gross written perspective and we may be able to have more of that hit the net written premium perspective. So that's one opportunity for growth. And while it won't be as significant on the top gross written premium number, we don't think this year, but it could be significant on the net premium number. So that's one opportunity. And we are exploring some other opportunities from the E&S side of business or potentially, like, for example, in some reinsurance opportunities or that, but nothing that we're really prepared to discuss right now.
Sure. That makes sense. And just one last quick question on the quota shares. So is that expected to sort of go down this year? And if you could give us sort of any sort of like clarity on what that ends up being for this, for the new this year?
So we can't really provide any specific numbers, but we have stated in the past that we did a 40% quota share at June 1 of '23, and then we would expect that to go down to eventually 25%, 15%, 0% in the course of 2 to 3 years. So I would say that would be our expectation going into 6/1/24 is for that to go down by 1/3 to 1/2 the quota share component.
Next question is coming from Bill Dezellem from Tieton Capital.
First of all, would you please discuss your view of the reinsurance market, specifically as it relates to your June renewal?
Yes, certainly. We did issue a press release to screen some of the details of the January 1, all of the [indiscernible] cat, or AOP cat placement we did, it's about $100 million of limit. So it's significantly smaller than our hurricane focused or catastrophe reinsurance program done midyear. But we did see just under a 10% risk-adjusted rate decrease on that limit, and we did buy more limit. So my comments we're guiding towards, we do expect to see some more capacity available. The feedback we got at both 1/1 and 2/1 was that capacity is available. Reinsurers are hungry. They're remaining disciplined. So we have to be cognizant and mindful of that.
But last year's program was distressed, right? We still have the cloud of uncertainty hanging over the company regarding the disposal of our former affiliate United Property & Casualty. And it definitely impacted the pricing and the capacity available to us as well as other terms and conditions. So we see now that, that is further away in the rearview mirror, and we've proven that we've got a very strong company book of business I think we're in a much better overall negotiating position. But we respect our reinsurance partners immensely. We need their support and we're playing long ball with them for sure. So while this is an annual opportunity to drive terms, and I do think we're a little bit in a cedence market at the moment, we'll have more details for you in the coming months.
And then secondarily, you've highlighted a number of things that you are doing. Would you please walk through, for 2024 specifically, what you see as your most important strategic initiatives?
Sure. Number one is underwriting profitability. That's always job 1, that's never going to change. Number two is developing pathways for earnings growth. That doesn't mean top line growth. It means earnings growth. So that can come in the form of fee income. It can come in the form of deploying capital intelligently, whether it's direct assumed or reinsurance, to earn strong returns on capital. The third, I would say, is to continue to support and complete the runoff of discontinued operations. So we still will have a couple of things on our to-do list there, most notably Interboro, getting that sold and continuing to support the Department of Financial Services in any way we can.
And then lastly, it's building bench strength. I think we showed everyone in January that we're serious about that, naming 2 new named executive officers, [ Beth Castle ] joins us as our new Chief Financial Officer. I've known her a long time, and I'm very, very excited. She has joined our team. She will likely be participating on this call next quarter. She's here with us today, listening in and learning and getting up to speed on how we operate, but she's a terrific hire. And we also promoted from within and created a new position of Chief Compliance and Risk Officer and that title is pretty self-explanatory. Given what we went through in 2023, there's going to be increased emphasis on risk management and compliance at the company going forward. So those are my top 4.
We've reached end of our question-and-answer session. I'd like to turn the floor back over to Dan for any further closing comments.
Okay. Thanks, everybody, for your time and your interest on our company and your time on this call. And that ends our call. Thanks again.
Thank you. 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.