Business context and reporting period
American Coastal Insurance Corporation (ACIC), formerly United Insurance Holdings Corp., filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. It writes commercial residential property insurance primarily in Florida through AmCoastal and personal residential insurance in New York through IIC. The company changed its name on July 10, 2023; its trading symbol changed to ACIC on August 15.
UPC, its former subsidiary, entered Florida receivership on February 27, 2023, ending ACIC’s ownership. UPC’s results are presented as discontinued operations. ACIC says it is seeking a buyer for IIC and expects a sale price at book value.
Amounts below are in millions of dollars unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Gross premiums written | $243.9 | $207.6 | $431.0 | $350.0 |
| Net premiums earned | $83.2 | $64.5 | $170.5 | $122.3 |
| Total revenue | $79.3 | $63.9 | $169.6 | $122.3 |
| Continuing-operations income (loss), net | $20.4 | ($13.3) | $50.7 | ($13.6) |
| Net income (loss) attributable to ACIC | $17.8 | ($69.0) | $285.1 | ($102.2) |
| Diluted EPS | $0.41 | ($1.60) | $6.52 | ($2.37) |
| Net combined ratio | 67.7% | 76.9% | 64.9% | 88.3% |
Premium growth reflected a larger commercial business: Q2 commercial gross written premiums rose 30.8% to $236.8 million, while personal lines fell 73.4% to $7.1 million. Q2 core income, a non-GAAP measure excluding specified items, was $26.2 million, or $0.60 per diluted share.
Q2 net investment income was $2.7 million; net realized investment losses were $6.7 million. For the first half, operating cash flow was negative $232.8 million, investing cash flow was positive $26.5 million, and financing cash flow was zero. Cash, cash equivalents and restricted cash ended at $77.3 million; cash and investments totaled $241.7 million. Restricted cash was $49.5 million.
At June 30, total assets were $1,444.9 million, liabilities $1,332.5 million, and stockholders’ equity $112.4 million, versus a year-end 2022 deficit of $182.0 million. Unpaid losses and loss adjustment expenses were $534.7 million; reinsurance recoverables were $658.8 million. Notes payable had a $148.5 million carrying value ($150 million principal), with a 7.25% rate and December 2027 maturity.
Material changes versus comparable periods
- Q2 gross written premiums increased 17.5% year over year, driven by Florida commercial business. First-half gross written premiums increased 23.1%.
- Q2 net combined ratio improved to 67.7% from 76.9%; catastrophe losses added 7.9 percentage points, partly offset by favorable prior-year reserve development of 6.2 points. First-half combined ratio improved to 64.9% from 88.3%.
- First-half net income includes a $238.4 million gain on UPC’s disposition, which more than accounts for the reported $285.1 million total income. Continuing-operations income was $50.7 million. The Q2 discontinued-operations loss was $2.6 million.
- The balance-sheet comparison with December 2022 is substantially affected by UPC’s deconsolidation and discontinued-operations presentation; it is not a like-for-like change in the ongoing business.
- Fixed-maturity investments at fair value fell to $160.9 million from $204.7 million; the company also sold its $15.7 million mutual-fund equity portfolio. The company reported $6.8 million of realized investment losses for the first half.
Outlook, risks, contingencies and unusual items
- Management reported no quantified earnings or premium guidance. It described a strategy of expanding specialty commercial lines and exiting personal lines through a proposed IIC sale.
- Management concluded substantial doubt about going concern had been alleviated after the DFS affirmed the reinsurance allocation agreement, the parties reached a tax memorandum, and ACIC finalized its June 2023–May 2024 catastrophe reinsurance placement. The tax arrangement depends in part on the IRS not objecting to use of UPC net operating losses.
- The catastrophe program provides protection up to approximately $1.3 billion in aggregate; the core treaty has $10 million retentions for the first and second events. Reinsurance does not remove ACIC’s primary obligation to policyholders, and recoverability from reinsurers remains a risk.
- Key risks include Florida catastrophe exposure, claims-reserve estimation, reinsurer credit and collection, investment-market risk, regulatory restrictions on subsidiary dividends, and the company’s ability to meet debt covenants and obligations. A rating downgrade increased the Senior Notes’ interest rate from 6.25% to 7.25%.
- The company reversed a $2.2 million deferred-tax-asset valuation allowance in Q2. First-half results also reflect the one-time UPC disposition gain. A $10.2 million employee-retention-credit refund claim remains partly unresolved; $5.7 million had been received and recognized by June 30.
- The filing identifies a material weakness in internal controls over significant unusual transactions and tax accounting, present as of March 31, 2023. A Q1 amendment corrected discontinued-operations and tax reporting, with the filing stating net income had been understated by $6.4 million. Remediation is underway and requires sustained testing. The filing also states disclosure controls were effective at June 30, while describing the earlier weakness and its remediation status.
- A discrimination and age-discrimination lawsuit was settled on July 6, 2023 for an immaterial payment, without admission of wrongdoing. The filing says the Q2 earnings release was followed by changes to reported tax, discontinued-operations, and balance-sheet amounts.
Most important facts for investors to verify
- Reconcile the $238.4 million UPC disposition gain and the reported $285.1 million first-half net income to continuing operating performance.
- Review the final amended Q1 and Q2 financial statements, including the changes made after the earnings release and the $6.4 million Q1 correction.
- Track remediation and testing of the internal-control material weakness, especially controls over complex transactions and tax accounting.
- Monitor collection and allocation of UPC-related reinsurance recoveries, the tax memorandum’s conditions, and any IRS challenge to UPC NOL use.
- Assess catastrophe protection, retentions, Florida concentration, reserve adequacy, and the liquidity impact of claims and reinsurance payments.
- Confirm the status and terms of a potential IIC sale, and the effects of dividend restrictions, debt covenants, and the 7.25% Senior Notes.