American Coastal Insurance - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered strong underwriting with combined ratio at 65.0% and underlying combined ratio at 68.2%; core EPS was $0.42 and GAAP diluted EPS was $0.43, with favorable prior-year reserve development (-3.2 pts) and no catastrophe losses in the quarter.
• Core EPS modestly beat S&P Global consensus by $0.02 ($0.42 vs $0.40), while revenue missed ($72.2M actual vs $80.0M consensus) amid elevated policy acquisition costs from the quota-share step-down to 20% effective 6/1/24; only one estimate was available for each metric (limited visibility).
• Book value per share increased to $5.40 from $4.89 at year-end, and underlying BVPS rose to $5.67; equity reached $260.9M supported by net income and investment portfolio gains.
• Management highlighted reinsurance renewal progress: expected overall risk-adjusted cost down ~12%, external quota share at 15% for 2025/26, and improved drop-down features via cat bond to enhance 2nd/3rd event protection; formal 8-K disclosure on 5/29/25 confirmed structure and pricing.
• Strategic catalysts: continued policy growth (+6% since year-end), 88% account retention, softening rates passed to policyholders without sacrificing margins, and measured expansion into Florida apartments (~$18–$20M annualized premium run rate).

What Went Well and What Went Wrong

What Went Well

• Target combined ratio achieved (65.0%); underlying combined ratio at 68.2% with no current-year CAT losses and $2.2M favorable prior-year reserve development, evidencing disciplined underwriting and strong reserving.
• Equity and book value strengthened: BVPS rose to $5.40; underlying BVPS to $5.67; cash, restricted cash, and investments increased to $568.8M, reflecting robust liquidity and investment income ($4.5M).
• Reinsurance renewal progress and risk transfer enhancements (cat bond drop-down, lower reinstatement exposure ~$5.9M max): risk-adjusted rate down ~12.2%, first-event limit ~$1.33B, FHCF at 90% coverage; foundational for 2025 hurricane season.

What Went Wrong

• Core income declined 15.3% YoY to $20.7M; net expense ratio rose to 48.3% (vs 33.3% YoY) driven by lower ceding commissions post quota-share step down and higher external management fees; combined ratio increased 11.8 pts YoY.
• Revenue missed Wall Street consensus as total revenue reached $72.2M vs $80.0M consensus, reflecting the expense pressure from PAC and the reinsurance mix shift (replacement XoL more cost-effective but lowers ceding ratio).
• Sequentially, net premiums earned and revenues were down vs Q4 (seasonally impacted and with Milton reinstatement effects amortizing Oct–May), though net income improved sharply as Q4 carried significant CAT loss burden from Hurricane Milton.

Transcript

Operator (participant)

As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Karin Daly, with The Equity Group. Please go ahead, Karin.

Karin Daly (VP of Investor Relations)

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 investor 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 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?

Bennett Bradford Martz (President and CEO)

Thank you, Karen. Today, I'm pleased to report American Coastal continued to deliver exceptional results during the first quarter by hitting our target combined ratio of 65% and also producing a core return on equity of over 34%. We successfully grew our policies in force approximately 6% since year-end, with premiums in force as of March 31, 2025, totaling approximately $661 million. New business growth, combined with solid renewal account retention of approximately 88%, helped increase gross premiums written by over 7% compared to the same period last year. The Florida condominium market has continued to generate media attention this year, focused primarily on declining affordability and resale values. We acknowledge and certainly understand such issues can be challenging, but they are not having a significant impact on our business.

The market for older, high-rise, waterfront condos in Florida where most of the concerns lie, but that is not our target market. Conversely, the underwriting environment for newer, well-maintained, low-rise, garden-style condos further inland in Florida where American Coastal is focused remains relatively healthy and competitive. This is evidenced by the fact that we are currently open to new business and passing on savings in the form of lower rates to our policyholders without sacrificing margins that allow us to underwrite this risk. Next, I'd like to offer a quick progress update on our Core Catastrophe Reinsurance Program renewal effective June 1, 2025. Page 12 of our earnings presentation provides an overview of the projected structure.

At this point, we are now 100% placed, except for a new top layer shown on this page as Layer 5, which was recently firm-ordered to the market and is in the process of being finalized. Assuming we end up placing 100% of that top layer, that would bring our estimated first event limit up approximately 16% from the $1.16 billion last year to approximately $1.35 billion this year. Our aggregate protection for multiple events is also expected to increase pretty significantly, about 32% year-over-year, given the new drop-down features of the two top layers. ACIC is buying significantly more protection this year due to both exposure growth and a more conservative view of hurricane risk. Last year, we disclosed our program exhausted at roughly the 208-year return time using an equal blend of AIR version 10 and RMS version 22.

If you use that same model view on our expected renewal this year, the exhaustion point increases to close to the 250-year return time. However, our updated view of risk incorporates the new versions of both AIR and RMS in the return time shown on this page, so that obviously distorts the comparability. Our first event retention is expected to increase from approximately $20.5 million last year to $29.75 million this year, but it is similar to last year as a percentage of stockholders' equity. For three full retention events, we expect to retain $52 million, up from $46.5 million last year, but this is down as a percentage of our equity.

We are extremely grateful for the broad support we received this year from our reinsurance partners, and the risk-adjusted reinsurance rate decrease estimated at approximately 12% is consistent with the rate decreases we're currently sharing with our policyholders. The risk-adjusted rate decreases did vary by layer between 10-22%, with the first layer being flat due to Hurricane Milton. Overall, we're very pleased with the six-one renewal progress, and we will have more detail regarding it in an 8-K filing within a couple of weeks. I'll now turn it over to our CFO, Lana Castle, for more specifics on our first quarter results.

Svetlana Castle (CFO)

Thank you, Brad, and hello. I'm Lana Castle, Chief Financial Officer of American Coastal Insurance Corporation, and I'll provide a 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 $21.3 million. Core income was $20.7 million, a decrease of $3.7 million year-over-year due to increased policy acquisition costs, partially offset by higher gross premiums earned as we execute on our plan of measured growth with a focus on risk selection, and decreased ceded premium earned from the step-down of our gross catastrophe quota share from 40% to 20% effective June 1, 2024. Page 6 of the presentation shows that net premium earned grew 9% to $68.3 million.

As Brad mentioned, our combined ratio was 65%, in line with our previously stated target. Our non-GAAP underlying combined ratio, which excludes current year catastrophe losses and prior year development, was 68.2%. We continue to feel our reserve position is strong. As shown on page 6 of our presentation, operating expenses increased $12.1 million. This was primarily driven by a $13.9 million, or 144.8%, increase in policy acquisition costs due to a decrease in ceding commission income because of the quota share step-down mentioned earlier, and increased management fees paid related to our quarter-over-quarter premium growth. General and administrative expenses offset this, decreasing $1.8 million, or 15.9%. Page 7 shows balance sheet highlights. Cash and investments grew 5.2% to $540.8 million, reflecting the company's strong liquidity position. Our cash position strengthened further in April following the proceeds from the intercompany borrow sale of $26.5 million, which were higher than expected.

Stockholders' equity increased 10.7% to $260.9 million, driven by our first quarter income. Book value per share is $540, a 10.4% increase from year-end 2024. The company continues to be in a strong position to execute on its 2025 growth initiatives. I'll now turn it over to Brad Martz for closing remarks.

Bennett Bradford Martz (President and CEO)

Thanks, Lana. I'll just note, as always, we appreciate your interest in American Coastal. That really completes our prepared remarks for today's call, and we're now happy to take any questions.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you'd like to be placed in the question queue, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing Star one. One moment, please, while we pull up your questions. Our first question is coming from Greg Peters from Raymond James. Your line is now live.

Greg Peters (Managing Director)

Hey, Greg. Good afternoon. Can we go to page nine of your investor deck, which is the rate trend and wind deductible? Can you give some color, explain to us what's going on in this chart? Because it looks like it's down, but I just want to make sure I'm reading the chart right.

Bennett Bradford Martz (President and CEO)

Sure, Greg. Happy to. The red line is a measure of our average account rate. Average account rate, that's the way we look at it as a function of total insured value. You would take that rate times the total insured value to get the premium. As you can see from essentially the third quarter of 2024 through the end of the first quarter of 2025, it's been relatively stable. The real decrease occurred. We peaked off of sort of record high rate levels and set that high watermark back in December of 2023. Since then, we've come back down to more normal levels. Even at close to $1, it was $0.97 here, shown on this chart as of March 31. That's a pretty healthy rate level relative to our historical premiums. We still feel good about rate adequacy.

We're watching the trend in average wind deductible, which is represented in the bar charts below, very carefully. Because obviously, if you're giving up premium and you're assuming more risk via lower deductibles, that is not necessarily a great combination. But it's, like I said, a competitive market. We're pushing hard, especially in areas like Tri-County where we're definitely focused on maintaining 5% wind deductibles. But outside of the Tri-County area, we have a little bit more latitude depending on where the risk is.

Greg Peters (Managing Director)

Great. Thanks for walking us through that. I wanted to add the other question that you started covered in your call and in your comments were the slide 12, which is the reinsurance. I do not remember seeing a third event sort of cover in your previous CAP program. Has something changed, or is this just more of the concept of the cascading feature coming down? I am just curious, the other aspect about it is this does not include reinstatement costs. How is that shaping up this year in terms of year-over-year comparisons?

Bennett Bradford Martz (President and CEO)

Okay. Starting with reinstatement costs, last year we had a reinstatement exposure of about $13 million-ish, something like that. This year, it's only expected to be about $5 million. We've dramatically reduced the reinstatement premium exposure, assuming all layers had to be reinstated. That's a big improvement year-over-year. Last year, we did have third event cover. It was definitely more limited. The retention for a third event last year was $13 million. It was $20.5 million, then $13 million per second, and then $13 million for a third for a total of $46.5 million for three events. It was much more limited. The major enhancement this year is that the cap bond we did back in January, the $200 million excess of $50 million, is something that, and that is correct the way it's drawn, it drops down for subsequent events.

That's improving our sideways protection and the overall aggregate coverage. Same with Layer 5 is going to be a top-order drop feature. We're still negotiating final positions on that layer. We'll ultimately, obviously, update this very soon and specify the final exhaustion point and return times, etc. Overall, very pleased with how this has come together.

Operator (participant)

Yeah. Just a follow-up question on the $200 million excess of $50 million. When that drops down, how far will that drop all the way down to Layer 1, or how far down does it drop in the event of earlier layers being exhausted from a storm?

Bennett Bradford Martz (President and CEO)

It's exactly as it stated. So it's $200 million excess of $50 million. The rest of this protection is inhering to it, but assuming that protection were to be gone, the reality of where it would attach is about the $300 million mark. Assuming you've fully reinstated Layer one and Layer two, the cap bond would drop down to the $300 million mark for a second event. And then for a third event, obviously, if you did not have a reinstatement for layers one and two, which were one and 100, then it would drop down to $50 million.

Greg Peters (Managing Director)

Perfect. The last question I have.Yeah. Thanks for filling in some gaps there. The last question I have for you is just I know one of the newer initiatives is the apartment building, the apartment initiative. Can you give us an update on how that's progressing?

Bennett Bradford Martz (President and CEO)

Yeah, it's going well. Through the first four months of the year, we've averaged about 15 policies, 15 binds a month, obviously quoting more than that and seeing a lot more submissions than that. It's been good. Average premiums a little over $100,000. If you were to annualize the first four months, that would put us somewhere between $18 million and $20 million. Pretty consistent with our target. I don't know if that's a feasible thing to do, to just annualize those four months, given the seasonality in the book and the upward trend and what we're trying to do in growing that portfolio. We're seeing very good risks. AAL to premium ratio, for example, is spot on in line with the new business and the renewal business we wrote in the condos.

The PML to TAV and the expected profit margin as modeled is also very, very attractive relative to the condos. We're getting good spread of risk, helping to diversify our portfolio. A lot of this business is coming in central and northeast Florida where we're underweight in condos. Tends to be a lot further inland as well. A lot of new construction. The risk characteristics are very nice. We've got a pretty extensive set of underwriting guidelines related to valuation requirements and location and occupancy and height and so on and so forth. We're pretty happy. The only thing I would suggest is that it is a pretty competitive market, much more so than we expected. We're trying to be selective. I want to manage expectations about this being a hyper-growth opportunity. It's not.

We're going to move very carefully and cautiously and slowly to build the best portfolio we can that's going to produce similar underwriting returns to what we've accomplished on the condo side.

Greg Peters (Managing Director)

Makes sense. Thanks for your answers.

Bennett Bradford Martz (President and CEO)

You're welcome.

Operator (participant)

Thank you. Next question today is coming from Bill DeZellum from Tituson Capital. Your line is now live.

Bill Dezellem (Founder, President, and Chief Investment Officer)

Thank you. Two questions. First of all, how are you thinking about quota sharing going ahead and specifically about lowering that quota sharing amount?

Bennett Bradford Martz (President and CEO)

Hi, Bill. I can take that. We are very pleased with the result this year with the quota share stepping down from 20% to 15%. We have not made any formal decisions yet relative to 2026. The quota share will be, the external quota share will be 15% from June 1, 2025 to May 31, 2026. Ultimately, I think it could go lower. It just depends on cost and availability of reinsurance in those lower layers. I think that's something we will take into account as well as the broad support provided by Arch across all our layers and all our programs. They've been a terrific supporter of American Coastal, and we appreciate that very much. There are some qualitative and quantitative factors to consider before we adjust that lower.

One thing we didn't mention is that we are increasing the internal quota share from 30% to 45%. We are going to be feeding a lot more business to the captive, which is building a pretty healthy balance sheet as a result. For the statutory insurance company, that's going to continue to keep risk-based capital very high, its net retention lower than the group as a whole, and help protect the regulated entity while accumulating additional underwriting profits and capital flexibility in the captive.

Bill Dezellem (Founder, President, and Chief Investment Officer)

Great. Thank you. Would you please discuss the AmRisc management fee and the contractual change that you all have there?

Bennett Bradford Martz (President and CEO)

Sure. There were two changes made to that. When we negotiated the extension, there was a profit-sharing component added to the AmRisc agreement that both sides are very happy with. We also increased the total percentage of, there are two parts. There is an administration part and a claims part. Those two pieces combined went up 1%. That is 1% of premium written. Most of that 1% increase was passed on to producers. In softening market conditions, that is typically what happens as premiums start to go down. Commission rates need to go up to maintain level revenues for our key producing partners. Obviously, the opposite is true in the harder markets where rates are going up and commission rates can go down to maintain sort of normalized growth in commission revenue for producers.

Bill Dezellem (Founder, President, and Chief Investment Officer)

Great. Thank you. Congratulations on another solid quarter.

Bennett Bradford Martz (President and CEO)

Thank you.

Operator (participant)

Thank you. We've reached the end of our question and answer session. 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.