United Insurance Holdings Corp
NASDAQ:UIHC
Earnings Call Analysis
Summary
Q3-2023
American Coastal, primarily a commercial lines insurer, reported a robust third quarter with over 90% of its income from this segment, a pretax income of $25.9 million, and year-to-date $90.2 million. Their combined ratio improved considerably to 52.5% quarterly and 55.3% year-to-date, signaling enhanced profitability. Commercial premiums grew by 22%, driven by rate increases, while risk exposure reduced, aligning with market conditions. The company is divesting its personal lines carrier, Interboro, which should close in six months, enhancing focus on the more profitable commercial lines. An at-the-market stock offering aims to raise $10-20 million for business growth, revealing confidence in their commercial strategy amidst a 'hard' Florida market.
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Hello, and welcome to the American Coastal Insurance Corporation's Third Quarter 2023 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, 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 Chairman of the Board and Chief Executive Officer are R. Daniel Peed and President and Chief Financial Officer, 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 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 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 Mr. Daniel Peed. Dan, you may begin.
Thanks, Karin. Hello, and thanks for joining us on our third quarter earnings call. I plan to provide an overview of activities from the third quarter and year-to-date, including focusing on the operating results of our continuing operations. I will then turn it over to Brad Martz, who will expand on the financial results.
Our commercial lines segment now comprises over 90% of the third quarter gross written premium and 95% of the gross earned premium with pretax income of $25.9 million in the third quarter and $90.2 million year-to-date. The net loss ratio for commercial lines was 19.5% in the third quarter and 19.7% year-to-date, in line with expectations.
Commercial lines net expense ratio continues to trend downwards, 33% in the third quarter and 35.6% year-to-date, down from 43% and 44.2%, respectively, last year. The net combined ratio attributable to the commercial lines segment was 52.5% in the third quarter and 55.3% year-to-date, down from 100.5% and 80.3% year-over-year, respectively.
Still addressing the commercial lines segment, prior year development continued to be favorable at 6.2% in the third quarter and 5.5% year-to-date. The cat loss ratio was 9.7% in the third quarter and 6.5% year-to-date, which is in line with expectations and accounts for seasonal AOP activity as well as Hurricane Idalia. American Coastal was largely unimpacted by Idalia with our current loss estimate well below the reinsurance attachment point of $10 million.
Nevertheless, we are aware that Floridians along the Northern Gulf Coast were impacted by Idalia and our thoughts and support goes out to them.
American Coastal's commercial segment underlying combined ratio was 48.9% in the third quarter and 54.3% year-to-date, down from 57.7% and 66.1%, respectively, year-over-year. This demonstrates the improvement in profitability produced by the commercial lines portfolio and the earnings power of our commercial book of business.
Turning to our underwriting metrics. The commercial portfolio continues to be well positioned given the current marketplace post Hurricane Ian. Commercial total insured value was down 14%, while the probable maximum loss at the 100-year return period was down 23% on a year-over-year basis. The gross written premium is up 22% through the third quarter as well as 31% year-to-date. Valuation is up at an average of 9%.
American Coastal continues to be a commercial residential leader in Florida, and we believe that our commercial lines segment will be an earnings leader for the foreseeable future. Florida continues to be a hard market, and we continue to see the benefits of Florida's insurance reform. Litigation is down, and we have been able to effectively utilize the pre-suit notification of intent to litigate to settle claims and get the insurance firms to make appropriate repairs, which allows us to continue to provide capacity to Floridians.
As we have mentioned several times before, -- we continue with our efforts to divest of Interboro, our New York domiciled personal lines carrier. Once Interboro is sold, American Coastal will have achieved its multiyear strategy to divest the personal lines and focus on commercial lines.
In conclusion, while the hard market creates challenges, it also creates excellent opportunities for American Coastal with the #1 market share for admitted commercial residential exposure in Florida.
My outlook on Florida? Florida's commercial marketplace remains unchanged. The market remains hard, and I expect it to remain that way for both the near and intermediate terms. With that, I'll turn it over to Brad Martz.
Thank you, Dan, and hello. Today, I'm pleased to review our financial results but encourage everyone to also review the company's press release, earnings and investor presentations and forms 10-Q and 10-K, including amendments for more information regarding our performance. Pages 3 and 4 of our earnings presentation provide a summary of the quarter ending September 30, 2023, which includes core income of $14.9 million or $0.34 a share to increase nearly $33 million compared to a core loss of $18.1 million or $0.42 a share last year.
Net income from continuing operations of $14.4 million or $0.33 a share, improved approximately $42 million versus a net loss of $27.5 million or $0.64 a share in the same period last year.
Both core income and net income from continuing operations were driven by strong underwriting performance in our commercial lines segment and lower catastrophe losses year-over-year. Hurricane Idalia represented a gross loss incurred of approximately $4 million and $2.5 million net of reinsurance with the remaining $3.3 million of catastrophe losses stemming from a couple of current year PCS events.
While we also continue to see favorable prior year reserve development with $3.3 million in the current quarter from both cat and non-cat losses, helping to offset those cat losses during the quarter.
Our combined ratio for the third quarter improved over 70 points to 68.7% versus last year. Excluding catastrophe losses and prior year reserve development, our underlying combined ratio also improved 27 points to 64.2%, fueled by a $27.4 million or 20% increase in gross premiums earned year-over-year despite our intentional reduction in Commercial lines policies and risk exposures, as well as a $16.4 million decline in personal lines gross premiums written.
Page 5 of our earnings presentation provides a breakdown of our results for the quarter, which highlights the growth in gross premiums earned and the lower net loss in operating expenses, which were partially offset by higher reinsurance costs.
Page 6 of our earnings presentation breaks down our results by segment with $25.9 million of pretax profit from commercial lines reduced by a $5.5 million pretax loss from personal lines and $3 million of expense at the holding company level, which is mostly interest expense in the other column. This brought our year-to-date pretax profit in commercial lines to over $90 million with a combined ratio of 55.3%.
We've noted that action on the personal lines business is being taken to reduce the drag on earnings. The first significant action involves Interboro filing for rate increases of roughly 13% in New York, expected to be effective in mid-January. Second, on October 6, 2023, the company entered into a nonbinding term sheet for the sale of Interboro where the buyer will acquire 100% of the issued and outstanding securities of Interboro Insurance Company in exchange for cash, purchase price equal to GAAP book value of Interboro at the time of closing, subject to entering definitive documents containing customary terms and conditions and obtaining regulatory approvals. The company expects the transaction to close in approximately 6 months.
Page 7 of our earnings presentation provides balance sheet highlights that include stockholders' equity of $120.6 million or $2.78 a share, which increased 7.3% from the prior quarter. Unrealized losses on our fixed income portfolio of $23.8 million or $0.55 a share indicate an underlying book value of approximately $3.33 a share. Cash and invested assets totaled nearly $287 million, with total assets of approximately $1.15 billion.
At the end of the third quarter, the company launched an at-the-market common stock offering and as of today, November 13, the company has sold roughly 978,000 shares, raising approximately $7.1 million net of expenses. The prospectus allows for up to 8 million shares to be sold, but we are targeting to only raise between $10 million and $20 million and plan to use the proceeds to support exposure growth and optimizing our reinsurance spend via increased utilization of our captive.
Our goal with the ATM is to minimize dilution while also allowing for the development of new earnings streams and the underwriting of more profitable commercial lines business, by leaning further into the hard market conditions in Florida that are ripe for outsized returns on capital.
Page 8 of our earnings presentation shows premium and exposure trends for the last 12 months. But American Coastal has been shrinking its commercial lines total insured value and PML for even longer than that due to capital constraints and uncertainty regarding the cost and availability of reinsurance.
However, I am pleased to announce that improved capitalization and market outlook mean that we have resumed exposure growth and are actively writing new commercial lines business again. This may take time to be reflected in our results, but improving terms and conditions shown on Page 9 of our earnings presentation also support this change in strategy.
That completes our prepared remarks, and we are now happy to take any questions.
[Operator Instructions] Our first question is coming from [ Aryan Gupta ] from [ Eagle Eye Asset Private Limited ].
I just had a quick question regarding the current quota share agreements that ACIC has in place. So how do you see the pathway to reducing this quota share agreement going forward with [indiscernible] and also have like just a sort of quick follow-on question regarding the potential for a sort of captive MGA that ACIC might create and how they would go about doing so.
Thanks for your question. This is Brad Martz. We have -- as you mentioned, we have 2, 20% quota shares, 1 with [ Archery ] and 1 with Berkshire. We view both quota share partners as instrumental in the current catastrophe reinsurance program. If we were to consider reducing those quota shares they contain a tremendous amount of catastrophe limit. These are gross quota shares. So we've got $350 million of aggregate cat limit in those 2 quota shares, $175 million per occurrence.
So task #1 would be to replace that cat limit on an excess of loss basis in the open market, which we're not prepared today to talk about the prospects of doing that. But we have stated it is -- would be our intention over time to reduce the quota share and retain more of our direct underwriting results going forward. And second, as it relates to a captive, we already have the captive forms. It's a Class B reinsurer domiciled in Cayman, it's filed a 953(d) election. So it's a U.S. taxpayer included in our consolidated tax returns, and we have used it in the past and plan to use -- utilize it more extensively going forward. So we want to be very strategic in approaching some of the high expected return on capital layers and opportunities we're seeing in our reinsurance programs today.
Our next question is coming from Bill Dezellem from Tieton Capital Management.
What is the current book value of Interboro?
Current book value is approximately $23 million.
And so if the transaction were to close today, you would be selling it for about $23 million. Is that what we understood in your opening remarks?
That's correct. But the purchase price will be determined at closing. So we do expect Interboro to have some earnings between now and then and hopefully grow its book value. So the purchase price will be reflective of the final closing balance sheet near closing.
Great. And congratulations on getting that agreement put in place or sale put in place. Secondarily, with your commercial lines gross written premiums were up 22.3%. What's the split between price and volume in that 22% increase.
I can respond to that, Bill. Just real quick, is that the volume is actually down, the TIV down about 13%, 14%. So the rate is up around 30%.
Great. That's -- I don't need any level of precision beyond that. Congratulations.
We reach the end of our question-and-answer session. I'd like to turn the floor back over to Dan for any further closing comments.
Okay. Thank you. And I want to thank our callers for your time on this call and your interest in our company. So 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.