American Coastal Insurance Corporation (ACIC) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unless otherwise noted, financial amounts below are in millions of dollars. The company changed its name from United Insurance Holdings Corp. to American Coastal Insurance Corporation on July 10, 2023. Results reflect continuing operations after former subsidiary United Property & Casualty Insurance Company (UPC) entered receivership in February 2023; prior-period results were reclassified to discontinued operations.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Gross premiums written | $103.9 | $103.2 | $534.9 | $453.2 |
| Net premiums earned | $55.8 | $70.2 | $226.3 | $192.5 |
| Total revenue | $58.7 | $72.8 | $228.3 | $195.1 |
| Continuing-operations net income (loss) | $14.4 | $(27.4) | $65.1 | $(41.0) |
| Net income (loss), including discontinued operations | $10.6 | $(70.9) | $295.6 | $(173.2) |
| Diluted EPS, continuing operations | $0.33 | $(0.64) | $1.48 | $(0.95) |
| Combined ratio | 68.7% | 139.3% | 65.8% | 107.0% |
Q3 gross premiums written were nearly flat year over year: commercial premiums grew while personal-lines premiums declined. Net premiums earned fell 20.5%, mainly as ceded premiums earned rose to $110.0 million from $68.1 million, reflecting the 2023 reinsurance program. Lower catastrophe losses, favorable prior-year reserve development and lower acquisition and administrative expenses supported the improvement in continuing-operations earnings. Q3 catastrophe losses were $5.8 million versus $35.6 million; nine-month losses were $15.0 million versus $39.0 million. Favorable prior-year reserve development was $3.3 million in Q3 and $11.7 million for the nine-month period.
Nine-month total net income includes a $238.4 million gain from UPC’s deconsolidation, recorded in discontinued operations. Excluding that gain, discontinued operations reported a $7.9 million loss for the nine-month period. The filing also reports core income, a non-GAAP measure, of $14.9 million for Q3 and $71.8 million for the nine months; it should not be treated as a substitute for GAAP results.
Financial position, cash flow and capital
- Liquidity: Cash and cash equivalents were $111.1 million and restricted cash was $19.4 million at September 30. Cash, cash equivalents, restricted cash and investments totaled $286.9 million, down from $340.9 million at December 31, 2022.
- Cash flow: Operating activities used $184.9 million in the first nine months, compared with reported use of $97.9 million in the cash-flow statement for 2022. The MD&A separately cites $27.0 million of 2022 operating cash outflow, an apparent inconsistency requiring verification. Investing activities provided $31.7 million; financing activities provided $0.04 million. Ending cash, cash equivalents and restricted cash was $130.5 million.
- Debt: The company had $150.0 million principal amount of senior notes due December 2027, with a 7.25% coupon following a rating downgrade; carrying value net of issuance costs was $148.6 million. Q3 interest expense was $2.7 million.
- Equity and reserves: Stockholders’ equity was $120.6 million, compared with a deficit of $182.0 million at year-end 2022. Unpaid losses and LAE were $443.4 million, down from $843.0 million; reinsurance recoverables were $448.4 million, down from $796.5 million. These large balance-sheet changes reflect UPC’s divestiture and continued claims settlement.
- Regulatory capital: The filing states AmCoastal and IIC met applicable regulatory requirements at September 30. Their combined statutory surplus was $153.1 million.
Material changes, outlook and risks
- The business is focused on Florida commercial residential insurance and New York personal residential insurance. Policies in force fell 92.3% year over year to 23,162, largely following UPC’s receivership. Management is pursuing a transition away from personal lines.
- For the 2023–24 season, AmCoastal’s catastrophe reinsurance program provides aggregate coverage to an exhaustion point of approximately $1.3 billion; the filing describes a $10 million retention for the first and second events. IIC’s program has an approximately $82 million aggregate exhaustion point and $3 million per-occurrence retention. Reinsurance does not remove the company’s primary obligation to policyholders, and collection depends on reinsurers’ ability to pay.
- Management concluded that substantial doubt about the company’s ability to continue as a going concern no longer existed as of June 30, 2023, citing agreements with Florida’s Department of Financial Services (DFS) on reinsurance allocations and tax matters, and completion of reinsurance placement. The company’s ability to use UPC net operating losses remains subject to IRS non-objection; it has sought a private letter ruling.
- The company reversed a $21.4 million valuation allowance on deferred tax assets. Under its tax memorandum with DFS, benefits from UPC net operating losses are payable to the receiver, with amounts and allocations subject to true-up.
- No numerical earnings or premium guidance is provided. Management says current capital resources and operating cash flows are expected to meet anticipated working-capital requirements. In October, ACIC signed a non-binding term sheet to sell IIC for cash equal to its GAAP book value at closing, subject to definitive agreements and regulatory approval.
- ACIC established an at-the-market equity program for up to 8 million shares. Approximately 978,000 shares had been sold by November 13, generating about $7.1 million net proceeds; further issuance could dilute existing shareholders.
- A material weakness in internal controls related to accounting for significant unusual transactions and tax provision review was identified. Management described remediation efforts, but the weakness requires sustained testing before it can be considered remediated. The filing contains conflicting statements about controls: one passage says disclosure controls were effective, while other passages state they were ineffective due to the weakness.
- DFS, as UPC receiver, demanded available limits under ACIC’s D&O policy after quarter-end. ACIC accrued the $1.5 million retention and does not expect exposure to exceed it. The filing reports no material non-claims-related legal actions at September 30.
Important facts for investors to verify
- Reconcile the filing’s conflicting control-effectiveness statements and track whether the material weakness is remediated.
- Monitor cash generation, claims payments, reserve estimates and the collectability and timing of reinsurance recoveries, including amounts associated with UPC and the DFS agreements.
- Check the status and terms of the proposed IIC sale, including regulatory approval and final proceeds.
- Track ATM share sales, resulting dilution and use of proceeds.
- Review the 2023–24 catastrophe exposure and reinsurance protection, including retentions, exhaustion limits and counterparty credit risk.
- Clarify the cash-flow comparison: the cash-flow statement shows 2022 operating cash used of $97.9 million, whereas MD&A cites $27.0 million.
- Assess how much reported nine-month earnings depends on the one-time UPC deconsolidation gain, tax-asset assumptions and favorable reserve development.