American Coastal Insurance Corporation (Nasdaq: ACIC) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Amounts below are in millions of dollars unless stated otherwise. The company changed its name from United Insurance Holdings Corp. to American Coastal Insurance Corporation in July 2023.
Business context
ACIC is an insurance holding company focused on catastrophe-exposed property insurance. Its principal continuing businesses are Florida commercial residential insurance, written through AmCoastal and distributed exclusively by managing general agent AmRisc, and New York personal lines, written through IIC. Commercial lines generated 94.9% of 2023 gross written premiums. Following former subsidiary UPC’s receivership in February 2023, ACIC reported UPC as discontinued operations and is pursuing a sale of IIC; a non-binding term sheet proposed a sale for IIC’s GAAP book value, subject to definitive agreements and regulatory approval.
Key financial results
| Metric | 2023 | 2022 |
|---|---|---|
| Gross written premiums | $670.0 | $572.3 |
| Net premiums earned | $281.9 | $269.3 |
| Total revenue | $286.5 | $269.8 |
| Income (loss) from continuing operations, net of tax | $82.2 | $(40.0) |
| Net income (loss), including discontinued operations | $309.9 | $(470.0) |
| Diluted earnings (loss) per share | $6.98 | $(10.91) |
| Net loss and LAE | $62.9 | $134.8 |
| Net combined ratio | 66.0% | 106.2% |
| Underlying combined ratio (non-GAAP) | 65.0% | 88.8% |
| Net cash used in operating activities | $(136.0) | $(173.1) |
Gross written premiums rose 17.1%, driven by Florida commercial growth: commercial premiums increased to $635.7 million from $508.2 million. Personal premiums fell 46.4% to $34.3 million, primarily after the UPC quota-share agreement ended. Ceded premiums earned rose 33.1% to $354.1 million, reflecting increased quota-share cessions and catastrophe reinsurance costs.
Improved underwriting results reflected substantially lower catastrophe losses than in 2022, when Hurricane Ian drove significant claims. Net current-year catastrophe losses were $15.3 million in 2023 versus $57.9 million in 2022; ACIC also recorded $12.3 million of favorable prior-year reserve development. The 2023 combined ratio was below 100%, indicating an underwriting profit under the company’s definition. Personal lines remained unprofitable, with a 165.1% segment combined ratio; commercial lines reported 53.7%.
Reported net income included a $238.4 million gain on UPC’s disposition, driven by UPC’s negative equity position. Discontinued operations also recorded a $10.7 million loss, resulting in $227.7 million of net income from discontinued operations overall. Accordingly, consolidated net income and EPS are not representative of continuing underwriting earnings alone.
Financial position, liquidity and capital
- Assets and equity: Total assets were $1,060.4 million and stockholders’ equity was $168.8 million at year-end 2023, versus a $182.0 million stockholders’ deficit at year-end 2022.
- Cash and investments: Cash, cash equivalents, restricted cash and investments totaled $369.0 million, compared with $340.9 million at year-end 2022. Cash and cash equivalents were $153.8 million; restricted cash was $18.1 million.
- Claims and reinsurance: Gross unpaid losses and LAE were $370.2 million, down from $843.0 million; reinsurance recoverables were $341.1 million, down from $796.5 million. Net unpaid losses were $98.3 million.
- Debt: $150.0 million of senior notes remain outstanding, due December 2027, with a 7.25% interest rate following a rating-triggered increase from 6.25%. Interest expense was $10.9 million in 2023. The company reported covenant compliance, although its leverage ratio exceeded the threshold for incurring additional debt.
- Cash flow: ACIC used $136.0 million in operating cash and $2.5 million in investing activities, while financing activities provided $26.8 million, principally from common-stock issuance. Year-end cash and restricted cash were $171.8 million.
- Insurance capital: The filing reports RBC ratios of 979% for ACIC and 477% for IIC, both above minimum requirements. Statutory policyholder surplus was $143.5 million at AmCoastal and $22.7 million at IIC.
Material changes, outlook and risks
- Policies in force fell to 22,848 from 41,242 in the prior-year comparable continuing-business presentation; the filing’s headline 91.0% decline compares 2023 with a 2022 figure that included discontinued operations. ACIC continues to concentrate on Florida commercial business and expects to exit personal lines through a proposed IIC sale.
- ACIC commuted a reinsurer’s share of catastrophe coverage and replaced it with coverage from another reinsurer. The change added approximately $6.3 million of 2023 expense; management estimated $14.3 million of expense reduction in the first half of 2024 and an approximately $8.0 million net economic benefit for the covered period.
- For 2024, the company disclosed renewed all-other-perils catastrophe coverage costing approximately $9.9 million and excess-per-risk coverage costing approximately $5.0 million, both with lower risk-adjusted costs than the expiring programs. These are program details, not earnings guidance. The filing provides no clear quantified earnings or revenue guidance.
- Material weakness: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end. The weakness involved review of significant unusual transactions, including discontinued-operations and tax accounting. An interim financial statement error understated first-quarter 2023 net income by $6.4 million and was corrected through a restatement. Remediation and testing were ongoing; the weakness had not been declared remediated.
- Contingencies include a DFS demand under D&O insurance alleging wrongful acts by former UPC officers and directors and seeking the $40.0 million policy limit; ACIC accrued its $1.5 million retention and said litigation is anticipated. ACIC also disclosed a possible quota-share commission loss related to UPC for which it could not estimate the impact. It had claimed a $10.2 million employee retention credit and received $5.7 million; the unreceived amount was not recognized as a gain.
- Principal risks include Florida hurricane and weather concentration, catastrophe losses exceeding models or reinsurance, reinsurance cost and collectability, loss-reserve estimation, dependence on AmRisc for all commercial distribution, investment and interest-rate risk, and restrictions on subsidiary dividends. IIC is restricted from paying ordinary dividends without New York regulatory approval through January 1, 2025.
Important facts for investors to verify
- How much of 2023 earnings and book-value recovery reflects the UPC disposition gain and tax accounting, versus recurring continuing-operations performance.
- Progress and terms of the proposed IIC sale, including regulatory approvals and the actual closing value.
- Remediation and independent testing of the material weakness, and whether controls operate effectively over a sufficient period.
- Adequacy of loss reserves and the quality, collectability and terms of reinsurance recoverables, including the unresolved quota-share commission issue.
- Renewal pricing, limits, retentions and counterparty strength for catastrophe reinsurance, and the company’s ability to maintain capital and liquidity after severe Florida events.
- Cash generation and holding-company liquidity given operating cash outflows, the $150 million notes due in 2027, restricted subsidiary dividends and the absence of formal quantified guidance.