American Coastal Insurance - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 remained profitable despite a Cat 3 event (Hurricane Milton) driving a 27.8pt hit to the combined ratio; total revenue rose 54.7% year over year to $79.3m as net premiums earned increased with lower quota-share cessions.
• Core EPS was $0.12 and GAAP diluted EPS was $0.10; core income fell to $6.0m, down $12.0m year over year on catastrophe retention and higher policy acquisition costs tied to lower ceding commissions after quota-share step-down.
• Reinsurance protections were enhanced: a $200m three-year catastrophe bond with a drop‑down feature, AOP retention reduced to $9m (from $14.25m), Excess Per Risk retention reduced to $4m (from $6.5m), and a $40m catastrophe aggregate program designed to reduce earnings volatility in 2025.
• 2025 guidance reiterated: net income $70–$90m; management targets ~65% underlying combined ratio and expects ROE >30% on beginning equity, aided by risk transfer enhancements; sale of Interboro expected to add ~$22m of holding company cash at closing (Apr 1).

What Went Well and What Went Wrong

What Went Well

• Profitability preserved in the face of a full retention hurricane: “that Cat 3 hurricane event was absorbed within a single quarter's profit… our target”.
• Strong top-line growth with reduced cessions: “we were able to grow total revenues nearly 55% year-over-year in Q4” as quota share stepped down from 40% to 20% effective June 1, 2024.
• Reinsurance program strength and breadth expanded: $200m cat bond with drop‑down for second and third events; AOP retention cut ~37%; Excess Per Risk retention cut ~38%; new CAT Aggregate to dampen volatility.

What Went Wrong

• Catastrophe impact compressed margins: Q4 combined ratio at 91.9% (up 32.0pts y/y) with 27.8pts from Hurricane Milton; underlying CR still 65.9%.
• Core income fell $12.0m y/y to $6.0m; policy acquisition costs rose $13.4m (+102.3%) due mainly to lower ceding commission income after quota-share step‑down and higher MGA fees.
• Versus sell‑side (Raymond James) markers, Q4 core EPS ($0.12), BVPS ($4.89), and CR (91.9%) were below the firm’s estimates, suggesting modest expectation shortfalls despite management describing results as “in line”.

Transcript

Operator (participant)

Greetings and welcome to the American Coastal Insurance Corporation earnings call. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. You may press star one to be placed into question queue at any time. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Karin Daly, Vice President with The Equity Group and American Coastal's Investor Relations Representative. 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 Relations 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 are not historical facts or 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 Exchange Commission in the risk factor 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?

Bennett Bradford Martz (CEO)

Hello, and welcome to American Coastal's fourth quarter 2024 earnings call. Today, I'll provide an operational and strategic update and then turn it over to our CFO, Lana Castle, for more specifics on our fourth quarter and full-year results, along with our expectations for 2025. American Coastal continued to perform very well in the fourth quarter, and despite a full retention loss from Hurricane Milton, we remained profitable, and I could not be more optimistic about our future. In December, we successfully launched a new apartment program in Florida, and our team worked extremely hard to build out the technological and distribution capabilities to underwrite apartments, and these efforts are already starting to pay off. As of today, American Coastal has written 19 new apartment risks totaling approximately $2.3 million of premium.

Most of that exposure is less than 10 years old, with some being brand new, and most risks are located outside of our peak zones for condos, helping improve our spread of risk. The company has received hundreds of high-quality submissions from our distribution partners, but we are being very selective with what we've added to our risk portfolio. Premium generation is the easy part of our business. Underwriting profit is the goal, and we remain laser-focused on that as our primary objective for all new business. During the fourth quarter, I was very pleased to see new business growth, along with renewal account retention being better than expected. These metrics, combined with our policy assumption from Citizens, resulted in ACIC growing its policy count sequentially quarter over quarter.

Further, by retaining more of our business using less quota share, we were able to grow total revenues nearly 55% year over year in Q4. Rates are continuing to decrease due to favorable trends in loss and reinsurance costs, but deductible levels and valuations are holding firm, which creates opportunity for us to grow and maintain our underwriting margin. Next, I'd like to highlight American Coastal's accomplishments in enhancing our reinsurance protections. Prior to year-end, the company placed a new three-year catastrophe bond at the top of our core catastrophe reinsurance program that was upsized from $100 million to $200 million and priced well below the expected range. We did this in advance of our 6-1 renewal because of the attractive terms and pricing available at that time.

This new top layer also includes a cascading or drop-down feature for potential second and third hurricane events that has previously not been available to us in the market, at least not since 2020. We are very grateful to have obtained this more robust coverage. At January 1, we also successfully renewed our All Other Perils, or AOPCAT program, which protects against non-hurricane catastrophe events such as tornado and hailstorms. That was completed with a modest improvement in terms, including reducing our retention approximately 37% from $14.25 million to $9 million before tax. We had a similar experience at February 1 with our Excess Per Risk reinsurance program, which protects against non-catastrophe perils such as fire, also reducing our retention about 38% from $6.5 million to just $4 million before tax.

However, the real headline for the period was the placement of a new catastrophe aggregate, or CAT-AG program, designed to reduce potential earnings volatility. The purpose of the CAT-AG is to reduce the probability of our annual net losses from catastrophes exceeding $40 million during 2025. History would suggest it's unlikely American Coastal will feed any losses to the CAT-AG, but if the frequency and severity of hurricanes and non-hurricane CAT events increases, this program should respond and protect future expected earnings. For the full year 2024, our pre-tax income was approximately $102 million, up nearly 6% year over year, despite having incurred $23 million more in net catastrophe losses. Even with Hurricane Milton in Q4, American Coastal remained profitable, and that Cat 3 hurricane event was absorbed within a single quarter's profits, which we've stated previously is our target.

ACIC's strong annual earnings produced an exceptional 57.4% return on beginning equity. The company starts 2025 with approximately $236 million of stockholders' equity, and given our previous earnings guidance for this year, which we are now reiterating, that implies an expected return on beginning equity of over 30%, inclusive of all CAT losses for this year. Net losses incurred will ultimately drive our actual results for 2025, but the risk transfer enhancements added should provide more certainty and less volatility around our performance. With that, I would like to now turn it over to Lana. Lana.

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-K for more information regarding our performance. As reflected on page five of the earnings presentation, American Coastal had a profitable quarter despite a full retention from Hurricane Milton, with net income of $4.9 million. Core income was $6 million, a decrease of $12 million year over year as a result of $20.53 million retention from Milton, partially offset by lower ceded earned premiums from the step-down of our gross catastrophe quota share from 40% to 20% effective June 1, 2024. Page six of the presentation shows that gross premium earned grew $3.6 million to $162.7 million. Our combined ratio was 91.9%. Hurricane Milton drove 27.8% of this ratio.

Our non-GAAP underlying combined ratio, which excludes current year catastrophe losses and prior year development, was 65.9%, and our 2024 full-year combined ratio was 67.5%, in line with our 65% target. Our reserve position remains strong. As shown on page six of our presentation, operating expenses increased $15.1 million. This was primarily driven by a $13.4 million increase in policy acquisition costs due to a decrease in ceding commission income as a result of the quota share step-down mentioned earlier, and increased MGA fees paid related to our premium growth quarter over quarter. General and administrative expenses also contributed to this increase, increasing by $1.7 million, or 17.7%. These increased costs were in line with expectations and offset by the decrease in the previously mentioned ceded premiums earned and increased gross premiums earned.

We are very proud to have demonstrated a profitable quarter despite Milton proving success of our initiative to have catastrophe events be an earnings event, not an event that erodes our equity position. Page seven shows balance sheet highlights. Cash and investments grew 73.4% to $540.8 million, reflecting the company's strong liquidity position. Stockholders' equity increased 39.6% to $235.7 million, driven by strong underwriting results and inclusive of a $24 million dividend paid to shareholders in January 2025. Book value per share is $489, a 35.5% increase from year-end 2023. High liquidity and stronger capitalization resulted in significant improvement to our leverage ratios. The company is in a strong position to execute on its 2025 growth initiatives. As Brad mentioned, our previously provided forward-looking guidance remains the same, and we project a range between $70-$90 million of net income in 2025.

I'll now turn it over to Brad Martz for closing remarks.

Bennett Bradford Martz (CEO)

Thank you, Lana. I'll conclude today by mentioning that we have received regulatory approval from the state of New York to complete the sale of Interborough. We have scheduled a closing date for April 1, so one second past our drop-dead date for first quarter. All kidding aside, we're now working with the buyer on all the closing checklist items, and that transaction will add approximately $22 million of cash to our holding company. I'm honored and humbled by the opportunity to lead American Coastal into the future and want to thank each and every one of you for your participation and interest in our great company. That completes our prepared remarks for today's call, and we are 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 at this time. One moment, please, while we pull for questions. Our first question is coming from Gregory Peters from Raymond James. Your line is now live.

Gregory Peters (Managing Director, Equity Research)

Hey, good afternoon, everyone. I wanted to go to the outlook or the guidance slide, and you've provided some expectations around earned premium. Just provide some color on how pricing is. You said the pricing environment's changed because of the profitability. Maybe you can give us an update of how you see that evolving through the course of this year.

Bennett Bradford Martz (CEO)

Sure. I'd be happy to. Thanks for your question, Greg. Pricing is changing because of expectations of future loss and reinsurance costs. With those coming down, it's our expectation that we'll be able to pass some savings on to our policyholders, so we're excited about that. I do think there are a number of reasons for that. Inflation moderating, some of the reforms that have been enacted in Florida are absolutely having a positive effect in the market, especially in terms of litigation. There are a number of reasons why we're optimistic about the Florida marketplace today, but it's not going to impact our expected profitability. We're still targeting a combined ratio of 65% before CAT. Margins are intact despite pricing being down between 5% and 10% year over year on the average account renewal.

Gregory Peters (Managing Director, Equity Research)

Okay. You talked about the apartment growth, the opportunity to grow your apartment book. Do you have sort of an aspirational target of how much business you or how big you want that book to get? Obviously, you're being very selective, but I mean, longer term, do you have a mix in mind that you're thinking about?

Bennett Bradford Martz (CEO)

We do. Absolutely. It's a good question. Back in our investor day in December, we did talk a little bit about the market opportunity being somewhere between $200 million and $300 million of premium based on our analysis of the garden-style apartment complexes. Garden style is the same physical sort of risk characteristics that we're writing today in our condo book. We're not going to stray from the secret sauce that has really worked well for us in terms of risk characteristics. The only thing about an apartment is occupancy, tenant-occupied versus owner-occupied. Obviously, that has some potential differences in loss experience from perils like fire, which we obviously price for. Otherwise, from a wind perspective, which is our primary risk, the physical risk characteristics of the building are unchanged. We don't write liability either. It really is just a property cover.

For 2025, we've stated our goal is modest at about $20 million of premium. We may exceed that. We may not. We're off to a pretty good start. We've got several quotes issued, and I expect we'll have a strong ramp-up leading up to June 1, and then it'll quiet down, just like typical with the seasonality in our condo book. Yeah, it'll have a modest impact to earnings this year, but I think in 2026, 2027, you'll see a much larger makeshift between condos and apartments.

Gregory Peters (Managing Director, Equity Research)

Great. The final question that I'll have for the call will be just you have an important reinsurance renewal coming up. I think in your slide deck, you talked about how the previous year your quota share was reduced from 40% to 20%. Can you give us a preview on what kind of changes you think might happen with your reinsurance structure for the renewal and how the pricing is on that renewal, considering that you did have some losses last year?

Bennett Bradford Martz (CEO)

Sure. I'll do my best. It's obviously pretty early. Our team was actually in Bermuda yesterday, meeting with some of our reinsurance partners on Tuesday and Monday as well. We're actively working on the structure and the placement for mid-year. I can just tell you our goals are very similar in terms of keeping a modest retention that is absorbed within a typical quarter's earnings. We'd like to push the exhaustion point of the program up closer to the 250-year return period if we can. The expiring program was about the 230-year, according to AIR. That'll be a little challenging with model change from both AIR and RMS. We look at both, but we're off to a good start with the limit we placed in the cap bond market at the end of December. That $200 million new layer sits on top.

There's essentially $800 million of open market limit that we're placing this year. $400 million is already done in the cat bond market. The other $400 million will sit some slightly above, alongside, but most of that limit below the cat fund and above our retention. We haven't finalized our retention yet, and the Florida Hurricane Catastrophe Fund will not be done with their rate-making procedures until the end of March. That will finalize the attachment point of the cat fund, which is instrumental in us finalizing the layering and the structure. We're still a few weeks away from having clarity on that, but we're actively working on it, and we expect to have a very, very successful renewal.

Gregory Peters (Managing Director, Equity Research)

Great. Makes sense. Congratulations on your results.

Bennett Bradford Martz (CEO)

Thank you.

Operator (participant)

Thank you. Next question is coming from Bill D'Zellem from Tie-Ton Capital. Your line is now live.

William Joseph Dezellem (President)

Thank you. Congratulations on a good quarter with a big cap. I have a couple of three questions. I'd like to start with the apartment market and make sure we're scaling this correctly, that you're referencing the size of this market being that you would like to address $200 million-$300 million. Would that be versus or compared to the $638 million of gross premiums earned in 2024? Would that be the proper reference point and characterization?

Bennett Bradford Martz (CEO)

Yes, it would be. We ended 2024 with $646 million of in-force premiums, the vast majority of that being condos. Yes, I think that's the appropriate reference point in terms of the mix between apartments and condos.

William Joseph Dezellem (President)

That's outside. I believe in your opening remarks, Brad, you had referenced that there was a lot of work to get ready for the apartment business. For those of us who have never run an insurance company before, would you talk to us about what was required to be ready to do this and kind of that behind-the-scenes view, please?

Bennett Bradford Martz (CEO)

Sure. I can give you a brief executive summary, and that really entailed first developing a product and then filing the rates, rules, and forms with our regulators in Tallahassee, getting approval for those, then building out policy administration systems to be able to price, quote, bind risk, and issue policies, and also establishing our distribution network. We have partnered with AmWinds and CRC and Bridge Specialty, among others, and they are key producers for us on the condo side. They know us very well, and we know them very well. We're not venturing into foreign territory with people who we don't know. We know Florida. We know our producers. We know this product. We've underwritten it before.

We're very comfortable with the risk, again, given that it's substantially identical to a condo, but it did require a lot of steps for us to be able to underwrite this appropriately.

William Joseph Dezellem (President)

How about back-office systems? Was there a heavy lift to accomplish that, or is it essentially the same systems?

Bennett Bradford Martz (CEO)

No, it was a pretty heavy lift. I mean, we were really starting with a team that had substantial experience in building and integrating and implementing very complex architecture. That was not our foray. Historically, 100% of our business has been produced by AmRisc, and we have a fantastic partnership with AmRisc. We are not seeking to compete with AmRisc. I have to reiterate that again. Obviously, we are producing some of this stuff internally, and we had to do our best to replicate a lot of the activities that are on the condo book that are being done by a third party that is unaffiliated with the company.

William Joseph Dezellem (President)

One additional question on that front. If you look at $1 million of gross premiums earned on the condo business underwritten by AmRisc versus $1 million of gross premium written or earned on the apartment business, what is the incremental level of profitability to American Coastal now that you are doing the work that AmRisc does for you on the condo front?

Bennett Bradford Martz (CEO)

I wouldn't say there's a huge incremental level. I think we're still targeting a similar combined ratio. It's just the mix of how we get there is slightly different. We'll trade a slightly higher loss cost for the tenant occupancy of apartments for reduced operating expenses for some of the internal efficiencies we've created with doing this in-house. Obviously, scale has a lot to do with that. It really depends on how much business we write and how good of underwriters we are and how good of a job we do with risk selection. Risk selection is the ultimate determinant of underwriting profitability in this business. Our binding ratio is right around 10% today. I think we're being very, very picky, and that's a good thing. We'll start slow. I'm sure we'll make some mistakes along the way and pivot accordingly.

I think we're off to a good start. Yeah, if we can approach a similar combined ratio, I'd be thrilled. The reality is that it might be hard to compete with the condo book. The condo book is a very mature book. It's been around 17-plus years. It's very well underwritten, very stable. It'll take us time, I think, to get there. The objective is to have it be very comparable.

William Joseph Dezellem (President)

That's helpful. Jumping to reinsurance, if I may. Last month, the California fires made big headlines. What implications, if any, do you see for American Coastal now that a little bit of time has passed and the industry has had time to evaluate the impact?

Bennett Bradford Martz (CEO)

My personal opinion on this is that it may have a small impact on Florida, but I don't think it'll have a significant impact. Obviously, capacity was impacted in the global reinsurance market with a pretty big loss being ceded out of California. It is a big global reinsurance market. I think they can handle it. I think they will address their underwriting and pricing for California separately. It could put pressure on capacity for all forms of CAT globally just because it is such a big loss. That could impact some carriers in Florida, but I don't expect it to have much impact on American Coastal.

William Joseph Dezellem (President)

Okay. Thank you. Relative to your one-one renewal, you in your opening remarks referenced coverage that previously has not been available for several years. That sounds significant. Would you please kind of rewalk through that and the implications and how that's important to you all?

Bennett Bradford Martz (CEO)

Sure. When I say hasn't been available, I really mean available to us. Maybe others were successful in purchasing limit that cascades or drops down. For us, it's been a while, and we just think that's superior coverage at the end of the day. Instead of limit having fixed attachment and exhaustion point, what this new catastrophe bond will do for us is it has the potential for, after a first event, to drop down to $50 million for a second event and for a third event, providing us substantially more protection than we've had in years past, and at least the most two recent years for a high-frequency year.

William Joseph Dezellem (President)

Great. Thank you. Congratulations on your promotion.

Bennett Bradford Martz (CEO)

Thanks, Bill.

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. We disconnect your line at this time and have a wonderful day. We thank you for your participation today.