Karin Daly; Investor Relations; American Coastal Insurance Corp
Bennett Martz; President; American Coastal Insurance Corp
Svetlana Castle; Chief Financial Officer; American Coastal Insurance Corp
Operator
Greetings, and welcome to the American Coastal Insurance Corporation earnings call (Operator Instructions) As a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to your host, Karin Daly, Vice President with the Equity Group and American Coastal's Investor Relations representative. Please go ahead, Karin.
Karin Daly
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 Relations section of the company's website.
Speaking today will be President and Chief Executive Officer, Bennett Bradford Martz; and Chief Financial Officer, Svetlana Castle. 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 Factors section of the 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 Brad Martz. Brad?
Bennett Martz
Hello, and welcome to American Coastal's Fourth Quarter 2024 Earnings Call. Today, I'll provide an operational and strategic update and then turn it over to our CFO, Svetlana Castle, for more specifics on our fourth quarter and full year results along with our expectations for 2025.
American Coastal continued to perform very well in the fourth quarter. And despite a full retention loss from Hurricane Milton, we remain profitable, and I could not be more optimistic about our future.
In December, we successfully launched a new apartment program in Florida and our team worked extremely hard to build out the technological and distribution capabilities to underwrite apartments, and these efforts are already starting to pay off.
As of today, American Coastal has written 19 new apartment risks totaling approximately $2.3 million of premium. Most of that exposure is less than 10 years old with some being brand new and most risks are located outside of our peak zones for condos, helping improve our spread of risk.
The company has received hundreds of high-quality submissions from our distribution partners, but we are being very selective with what we've added to our risk portfolio. Premium generation is the easy part of our business. Underwriting profit is the goal, and we remain laser focused on that as our primary objective for all new business.
During the fourth quarter, I was very pleased to see new business growth along with renewal account retention being better than expected. These metrics, combined with our policy assumption from Citizens resulted in ACIC growing its policy count sequentially quarter-over-quarter. Further, by retaining more of our business using less quota share, we were able to grow total revenues nearly 55% year-over-year in Q4.
Rates are continuing to decrease due to favorable trends in loss in reinsurance costs, but deductible levels and valuations are holding firm, which creates opportunity for us to grow and maintain our underwriting margins.
Next, I'd like to highlight American Coastal's accomplishments, enhancing our reinsurance protections. Prior to year-end, the company placed a new three year catastrophe bond at the top of our core catastrophe reinsurance program that was upsized from $100 million to $200 million and priced well below the expected range.
We did this in advance of our 61 renewal because of the attractive terms and pricing available at that time. This new top layer also includes a cascading or drop-down feature for potential second and third hurricane events that has previously not been available to us in the market, at least not since 2020.
So we're very grateful to have obtained this more robust coverage.
At January 1, we also successfully renewed our all other perils or AOP cat program, which protects against non-hurricane catastrophe events, such as tornado and hail storms. That was completed with a modest improvement in terms, including reducing our retention approximately 37% from $14.25 million to $9 million before tax.
We had a similar experience at February 1 with our excess per risk reinsurance program, which protects against non-catastrophe perils such as fire, also reducing our retention about 38% from $6.5 million to just $4 million before tax.
However, the real headline for the period was the placement of a new catastrophe aggregate or Cat Ag program, designed to reduce potential earnings volatility. The purpose of the Cat Ag is to reduce the probability of our annual net losses from catastrophes exceeding $40 million during 2025.
History would suggest it's unlikely American Coastal will feed any losses to the Cat Ag, but if the frequency and severity of hurricanes and non-hurricane cat events increases, this program should respond and protect future expected earnings. For the full year 2024, our pretax income was approximately $102 million, up nearly 6% year-over-year despite having incurred $23 million more in net catastrophe losses.
Even with Hurricane Milton in Q4, American Coastal will remain profitable, and that Cat 3 hurricane event was absorbed within a single quarter's profit, which we've stated previously is our target. ACIC's strong annual earnings produced an exceptional 57.4% return on beginning equity.
The company's starts 2025 with approximately $236 million of stockholders' equity. And given our previous earnings guidance for this year, which we are now reiterating -- that implies an expected return on beginning equity of over 30%, inclusive of all cat losses for this year.
Net losses incurred will ultimately drive our actual results for 2025. But the risk transfer enhancements added should provide more certainty and less volatility around our performance.
And with that, I would like to now turn it over to Lana. Lana?
Svetlana Castle
Thank you, Brad, and hello. I'm Lana Castle, Chief Financial Officer of American Coastal Insurance Corporation and I'll provide a financial update, but I encourage everyone to review the company's press release, earnings and investor presentations and Form 10-K for more information regarding our performance.
As reflected on Page 5 of the earnings presentation, American Coastal had a profitable quarter despite the full retention from Hurricane Milton with net income of $4.9 million. Core income was $6 million, a decrease of $12 million year-over-year as a result of 20.5% pretax retention from Milton partially offset by lower ceded earned premiums from the step-down of our gross catastrophe quota share from 40% to 20% effective June 1, 2024.
Page 6 of the presentation shows that gross premium earned grew $3.6 million to $162.7 million. Our combined ratio was 91.9%, Hurricane Milton drove 27.8% of this ratio. Our non-GAAP underlying combined ratio, which excludes current year catastrophe losses and prior year development was 65.9%, and our 2024 full year combined ratio was 67.5% in line with our 65% target. Our reserve position remains strong.
As shown on Page 6 of our presentation, operating expenses increased $15.1 million. This was primarily driven by a $13.4 million increase in policy acquisition costs due to a decrease in ceding commission income as a result of the quarter share step down mentioned earlier and increased MGA fees paid related to our premium growth quarter-over-quarter.
General and administrative expenses also contributed to the decrease, increasing by $1.7 million or 17.7%. These increased costs were in line with expectations and offset by the decrease in the previously mentioned ceded premiums banned and increased gross premiums earned.
We're very proud to have demonstrated a profitable quarter despite Milton, proving successful initiatives to have catastrophe events can be an earnings event, not an event that erodes our equity position.
Page 7 shows balance sheet highlights. Cash and investments grew 73.4% to $540.8 million, reflecting the company's strong liquidity position. Stockholders' equity increased 39.6% to $235.7 million, driven by strong underwriting results and inclusive of $24 million dividend paid to shareholders in January 2025. Book value per share is $4.89, a 35.5% increase from year-end 2023. High liquidity and stronger capitalization resulted in significant improvement to our leverage ratios.
The company is in a strong position to execute on its 2025 growth initiatives. As Brad mentioned, our previously provided forward-looking guidance remains the same, and we project a range between $70 million and $90 million of net income in 2025.
I'll now turn the call over to Brad Martz for closing remarks.
Bennett Martz
Thank you, Lana. I'll conclude today by mentioning that we have received regulatory approval from the state of New York to complete the sale of Interboro. We have scheduled date -- a closing date for April 1. So 1 second past our update date for first quarter. But all kidding aside, we're now working with the buyer on all the closing checklist items and that transaction will add approximately $22 million of cash to our holding company.
I'm honored and humbled by the opportunity to lead American Coastal into the future and want to thank each and every one of you for your participation and interest in our great company.
That completes our prepared remarks for today's call, and we are now happy to take any questions.
Operator
(Operator Instructions) Gregory Peters from Raymond James.
I wanted to go to the outlook or the guidance slide, and you've provided some expectations around earned premium -- just provide some color on how pricing is? You said pricing -- the pricing environment has changed because of the profitability. Maybe you can give us an update on how you see that evolving through the course of this year?
Bennett Martz
Sure. I'd be happy to. Thanks for your question, Greg. Pricing is changing because of expectations of future loss in reinsurance costs. So with those coming down, it's our expectation that we'll be able to pass some savings on to our policyholders.
So we're excited about that. I do think -- there are a number of reasons for that. Inflation moderating, some of the reforms that have been enacted in Florida are absolutely having a positive effect in the market, especially in terms of litigation.
So there are a number of reasons why we're optimistic about the Florida marketplace today. But it's not going to impact our expected profitability. We're still targeting a combined ratio of 65 before Cat. So margins are intact despite pricing being down between 5% and 10% year-over-year on the average account renewal.
Okay. And then you talked about the apartment growth, the opportunity to grow your apartment book. Do you have sort of an aspirational target of how much business you're -- how big you want that book to get? Obviously, you're being very selective. But I mean longer term, do you have a mix in mind that you're thinking about?
Bennett Martz
We do. Absolutely. It's a good question. And back to our Investor Day in December we did talk a little bit about the market opportunity being somewhere between $200 million and $300 million of premium based on our analysis of the garden-style apartment complexes. Garden style is the same physical sort of risk characteristics that we're writing today in our condo book.
So we're not going to stray from the secret sauce that has really worked well for us in terms of risk characteristics. The only (inaudible) apartment is occupancy, tenant occupied versus owner-occupied.
Obviously, that has some potential differences in loss experience from perils like fire, which we obviously price for. But -- otherwise, from a wind perspective, which is our primary risk, that's the -- fiscal risk characteristics of the building are unchanged. We don't write liability either. So it really is just a property cover.
And for 2025, we've stated our goal is modest at about $20 million of premium. We may exceed that. We may not. We're off to a pretty good start. We've got several quotes issued, and I expect we'll have a strong ramp-up leading up to June 1, and then it will quiet down, just like typical with the seasonality in our condo book.
But yes, it will have a modest impact to earnings this year. But I think in 2026, 2027, you'll see a much larger mix shift between condos and apartments.
Great. The final question that I'll have for the call will be just you have an important reinsurance renewal coming up. I think in your slide deck, you talked about how the previous year, your quota share was reduced from 40% to 20%. Can you give us a preview on how -- what kind of changes do you think might happen with your reinsurance structure for the renewal? And how the pricing is on that renewal considering that you did have a some losses last year.
Bennett Martz
Sure. I'll do my best. It's obviously pretty early. Our team was actually in Bermuda yesterday meeting with some of our reinsurance partners on Tuesday and Monday as well. So we're actively working on the structure and the placement for midyear.
I can just tell you our goals are very similar in terms of keeping a modest retention that is absorbed within a typical quarter's earnings.
We'd like to push the exhaustion point of the program up closer to the 250-year return period if we can. The expiring program was about the 230 year according to AIR. So that will be a little challenging with model change from both ARR and RMS. We look at both. But we're off to a good start with the limit we placed in the cat bond market at the end of December.
So that $200 million new layer sits on top. There's essentially $800 million of open market limit that we're placing this year, $400 million is already done in the cat bond market and the other $400 million will sit some slightly above alongside but most of that limit below the cat fund and above our retention.
So we haven't finalized our retention yet, and the Florida hurricane catastrophe fund will not be done with their rate-making procedures until the end of March. And that will finalize the attachment point of the cat fund, which is instrumental in us finalizing the layering and the structure. So we're still a few weeks away from having clarity on that, but we're actively working on it, and we expect to have a very, very successful renewal.
Great. Makes sense. Congratulations on your results.
Operator
Bill Dezellem from Tieton Capital.
Congratulations on a good quarter with a big gap. So I have a couple of 3 questions. I'd like to start with the apartment market and make sure we're scaling this correctly that you're referencing the size of this market being that you would like to address $200 million to $300 million? And would that be versus or compared to the $638 million of gross premiums earned in 2024. Would that be the proper reference point and characterization?
Bennett Martz
Yes. It would be. We ended 2024 with $646 million of in-force premiums the vast majority of that being condos. So yes, I think that's the appropriate reference point in terms of the mix between apartments and condos.
That's helpful. And I believe in your opening remarks, Brad, you had referenced that there was a lot of work to get ready for the apartment business. For those of us who have never run an insurance company before, could you talk to us about what was required to be ready to do this and kind of that behind the scenes view, please?
Bennett Martz
Sure. I can give you a brief executive summary, and that really entailed first developing a profit and then the filing, the rates, rules and forms with our regulators in Tallahassee, getting approval for those then building out policy administration systems to be able to price quote, bind risk and issue policies and also establishing our distribution network.
So we are -- we have partnered with Amwins and CRC and Bridge Specialty among others, and they are key producers for us on the condo side. So they know us very well and we know them very well. We're not venturing into a foreign territory with people who we don't know. So we know Florida. We know our producers.
We know this product. We've underwritten it before. We're very comfortable with risk, again, given that it's substantially identical to a condo, but it did require a lot of steps for us to be able to underwrite this appropriately.
And how about back office systems? Was there a heavy lift to accomplish that? Or is it essentially the same systems?
Bennett Martz
No, it was pretty heavy lift. I mean, we were really starting with a team that had substantial experience and building and integrating and implementing very complex architecture, but that was not our forte. Historically, 100% of our business has been produced by AmRisc. And we have a fantastic partnership with AmRisc. We are not seeking to compete with AmRisc.
I have to reiterate that again.
But obviously, we are producing some of the stuff internally. And so we had to do our best to replicate a lot of the activities that are on the condo book that are being done by a third party that is unaffiliated with the company.
And then one additional question on that front. If you look at $1 million of gross premiums earned on the condo business underwritten by AmRisc versus $1 million of gross premium written or earned on the apartment business, what is the incremental level of profitability to American Coastal now that you are doing that the work that AmRisc does for you on the condo front.
Bennett Martz
I wouldn't say there's a huge incremental level. I think we're still targeting a similar combined ratio. It's just the mix of how we get there is slightly different. So will trade at slightly higher loss costs for the tenant occupancy of apartments for reduced operating expenses for some of the internal efficiencies we've created with doing this in-house.
But obviously, scale has a lot to do with that, and it really depends on how much business we write and how good of underwriters we are and how good of a job we do with risk selection. Risk selection is the ultimate determinant of underwriting profitability in this business. And we are -- our binding ratios are right around 10% today. So I think we're being very, very picky, and that's a good thing. We'll start slow.
I'm sure we'll make some mistakes along the way and pivot accordingly. But I think we're off to a good start. And yes, if we can approach a similar combined ratio, I'd be thrilled. But in all -- the reality is that it might be -- it will be hard to compete with the condo book. The condo book is a very mature book.
It's been around 17-plus years. It's very well underwritten, very stable. So it will take us time, I think, to get there. But the objective is to have it be very comparable.
That's helpful. And then jumping to reinsurance. So if I may. Last month, the California fires made big headlines. What implications, if any, do you see for American Coastal now that a little bit of time has passed and the industry has had time to evaluate the impact.
Bennett Martz
My personal opinion on this is that it may have a small impact on Florida, but I don't think it will have a significant impact. Obviously, capacity was impacted in the global reinsurance market with a pretty big loss being ceded out of California. But it's a big global reinsurance market. I think they can handle it.
I think they will address their underwriting and pricing for California separately. But it could put pressure on capacity for all forms of cat globally just because it is such a big loss. So that could impact some carriers in Florida, but I don't expect it to impact -- have much impact on American Coastal.
Okay. And then relative to your 1/1 renewal, you in your opening remarks referenced, coverage that previously has not been available for several years, that sounds significant. Would you please kind of rewalk through that and the implications and how that's important to you all.
Bennett Martz
Sure. And when I say it hasn't been available, I really mean available to us, maybe others were successful in purchasing limit that cascades or drops down. But for us, it's been a while, and we just think that's superior coverage at the end of the day instead of limit having fixed attachment and exhaustion point. What this new catastrophe bond will do for us is it has the potential for -- after a first event to drop down to $50 million for a second event and for a third event, providing us substantially more protection than we've had in years past and at least the most to recent years for a high-frequency year.
Great. And congratulations on the promotion.
Bennett Martz
Thanks, Bill.
Operator
We've reached the end of our question-and-answer session. And ladies and gentlemen, 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.
