American Coastal Insurance Corporation

Hello, and welcome to the American Coastal Insurance Corporation's third quarter 2023 earnings conference call and webcast. 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 at any time to be placed into question queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Karen Daly, Investor Relations with the Equity Group. Please go ahead, Karen.

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 Chairman of the Board and Chief Executive Officer, R. Daniel Pede, 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 factor 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 Pede. Dan, you may begin.

Thanks, Karen. 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 line segment now comprises over 90% of the third quarter gross written premium and 95% of the gross earned premium with pre-tax 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 line 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 line 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 Alliance 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 an average of 9%. American Coastal continues to be a commercial residential leader in Florida, and we believe that our commercial line 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've been able to effectively utilize the pre-suit notification of intent to mitigate to settle claims. and get the insured's funds 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 domicile personal lines carrier. Once Interboro is sold, American Coastal will have achieved its multi-year strategy to divest of 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 number one 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 Marks.

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 10Q and 10K, 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, which increased nearly $33 million compared to a core loss of 18.1 million or 42 cents a share last year. Net income from continuing operations of 14.4 million or 33 cents a share improved approximately 42 million versus a net loss of 27.5 million or 64 cents 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 line segment and lower catastrophe losses year over year. Hurricane Adalia 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 pre-tax profit from commercial lines, reduced by a $5.5 million pre-tax 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 pre-tax 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. On October 6, 2023, the company entered into a non-binding 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 gap 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 six months. Page seven 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 13th, 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 and $20 million and plan to use the proceeds to support exposure growth and optimizing our reinsurance spend via increased utilization of our captives. 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, all to support this change in strategy. That completes our prepared remarks, and we are now happy to take any questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Once again, that's star 1 to be placed into question queue. Our first question is coming from Aryan Gupta from Eagle Eye Asset Private Limited. Your line is now live.

Hello. 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 those quota share agreements going forward with Berkeley? And I also had, 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.

Hi, thanks for your question.

This is Brad Martz. We have, as you mentioned, we have two 20% quota shares, one with Archery and one 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. we've got $350 million of aggregate cap limit in those two quota shares, $175 million per occurrence. So, you know, task number one would be to, you know, replace that cap limit on an excess of loss basis in the open market, which, you know, we're not prepared today to talk about the prospects of doing that, but we have stated, you know, it 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 a captive formed. It's a Class B reinsured domiciled in Cayman. It's filed a 953 election. So it's a US taxpayer, included in our consolidated tax returns, and we have used it in the past and plan to 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.

Sure. That makes sense. Thank you so much for answering.

You're welcome. Thank you. As a reminder, that's star one to be placed into question queue. Our next question is coming from Bill DeZellum from Tyson Capital Management. Your line is now live.

Thank you. 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 that. 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.

I don't need any level of precision beyond that. Congratulations. Thank you.

Thank you. 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.