American Coastal Insurance Corporation (ACIC) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are against December 31, 2023. Unless noted otherwise, financial amounts below are in millions of dollars. ACIC writes commercial residential property insurance primarily in Florida and personal residential insurance in New York. Its former subsidiary UPC remains in receivership and is presented as discontinued operations.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Gross premiums written | $197.5 | $187.1 |
| Gross premiums earned | $168.8 | $144.5 |
| Net premiums earned | $68.7 | $87.3 |
| Total revenue | $73.2 | $90.3 |
| Income from continuing operations | $23.6 | $30.4 |
| Net income | $23.6 | $267.3 |
| Diluted EPS from continuing operations | $0.48 | $0.70 |
| Net cash provided by operating activities | $124.5 | $(104.2) |
Gross written premiums grew 5.5%, led by Florida commercial business and higher New York personal-lines rates. Net premiums earned fell 21.3%, mainly because ceded premiums earned increased to $100.1 million from $57.2 million following changes to reinsurance arrangements. Net investment income rose to $4.5 million from $2.6 million.
Continuing-operations income declined 22.3%. Total expenses decreased 25.0% to $42.8 million, mainly from lower policy acquisition costs, partly offset by higher operating and general and administrative expenses. The reported Q1 2023 net income included $236.9 million from discontinued operations, including a $238.4 million gain on UPC’s divestiture; consequently, the year-over-year comparison of total net income and EPS is not representative of ongoing operations.
The consolidated combined ratio improved to 58.3% from 62.3%; the underlying combined ratio was 57.8% versus 63.0%. Net loss and LAE were $15.9 million, including $0.8 million of current-year catastrophe losses and $0.4 million of favorable prior-year reserve development. The personal-lines segment’s net loss ratio rose to 71.4% from 29.0%, while its pretax result improved to $1.1 million from a $1.9 million loss, largely reflecting lower expenses.
Financial position, liquidity and capital
At March 31, 2024, total assets were $1,077.3 million, total liabilities $873.3 million and stockholders’ equity $204.0 million. Cash and cash equivalents were $285.4 million, restricted cash $20.3 million, and investments $198.7 million; together these totaled $504.5 million. Operating cash flow was $124.5 million, while financing cash flow included $11.4 million from common-stock issuance. Management stated current capital resources and operating cash flows are expected to meet currently anticipated working-capital needs.
Unpaid losses and LAE were $279.6 million, down from $370.2 million at year-end, as prior catastrophe claims continued to settle. Reinsurance recoverables were $257.1 million, down from $341.1 million. Notes payable, net, were $148.8 million; the $150 million senior notes mature in December 2027 and bear interest at 7.25%. The filing states the company was compliant with the notes’ covenants at year-end 2023 because it did not incur additional indebtedness, although its leverage ratio exceeded the stated threshold for incurring new debt. The insurance subsidiaries reported combined statutory surplus of $193.0 million and met regulatory requirements at quarter-end.
Material changes, outlook and risks
- Commercial gross written premiums increased 4.5%; personal-lines gross written premiums increased 22.7%. Policies in force declined 3.2% year over year to 22,733.
- Quota-share ceded premiums increased substantially, reducing net earned premiums but contributing to lower policy acquisition costs through ceding commissions. Management reported a $9.4 million reduction in reinsurance expense in Q1 from a reinsurer commutation and replacement; it expects a total $14.3 million decrease in the first half of 2024, for an estimated $8.0 million net economic benefit over the stated coverage period.
- No numeric earnings or revenue guidance is provided. After quarter-end, ACIC secured $200 million of additional excess-of-loss catastrophe reinsurance for the 2024–2025 program, attaching at $275 million through catastrophe bonds. On May 9, 2024, it signed agreements to sell 100% of IIC to Forza, subject to New York regulatory approval. The filing had previously said it expected a sale price equal to IIC’s book value; the subsequent-event disclosure does not state final consideration.
- Catastrophe exposure remains a key risk: modeled protection can be exceeded, and ACIC remains responsible to policyholders if reinsurers fail to pay. The company also identifies reserve-estimation uncertainty, reinsurance availability and pricing, Florida and New York regulatory conditions, and dependence on its commercial managing general underwriter, AmRisc.
- ACIC disclosed an open Florida Department of Financial Services claim seeking up to $40 million under D&O insurance related to UPC’s insolvency; the company previously accrued its $1.5 million retention. It also disclosed a possible, not-yet-quantifiable quota-share commission contingency tied to unavailable UPC loss data. Of a $10.2 million employee-retention-credit refund claim, $5.7 million had been received; the unreceived amount was not recognized as income.
- Management concluded disclosure controls were ineffective because of a material weakness in internal control over financial reporting involving review of significant unusual transactions and related tax accounting. Remediation is underway but requires sustained testing and validation. The filing also describes regulatory discussions concerning whether former UPC officers and directors contributed to UPC’s insolvency.
Important facts for investors to verify
- Whether the IIC sale receives New York approval, its final consideration, and the effects on ACIC’s operations, earnings and capital.
- How catastrophe reinsurance renewals, the new catastrophe-bond coverage, and reinsurer collectability affect net exposure and ceded costs.
- Whether loss reserves and the $257.1 million reinsurance-recoverable balance develop as expected as prior catastrophe claims settle.
- Progress in remediating and validating the disclosed material weakness in internal controls.
- Resolution and potential financial impact of the D&O claim and the quota-share commission contingency.
- Ongoing personal-lines loss trends, liquidity at the holding company, debt covenant capacity and restrictions on insurance-subsidiary dividends.