Overview of Financial Performance

American Coastal Insurance Corporation (ACIC) reported mixed financial results for the first half of 2024. Consolidated net income for the six months ended June 30, 2024 decreased 85.0% to $42.7 million, compared to $285.1 million in the same period of 2023. This was primarily driven by a significant decline in income from discontinued operations, which decreased $232.4 million year-over-year.

Income from continuing operations, net of tax, was $42.8 million for the first half of 2024, down 18.9% from $52.8 million in the prior year period. The decrease was due to lower revenues and higher expenses, partially offset by a reduction in losses and loss adjustment expenses (LAE).

Revenue and Profit Trends

ACIC’s gross premiums written remained relatively flat, increasing 0.1% to $414.1 million for the six months ended June 30, 2024 compared to the same period in 2023. This was driven by a 0.2% increase in Florida premiums, offset by the cessation of writing business in Texas.

However, net premiums earned decreased 22.5% to $126.0 million, down from $162.7 million in the prior year period. This was due to a significant increase in ceded premiums earned, which rose 51.6% to $189.7 million. The higher ceded premiums were a result of increased reinsurance costs, including the impact of a commutation transaction in late 2023.

The company’s combined ratio improved to 59.1% in the first half of 2024, compared to 60.6% in the same period of 2023. This was driven by a 3.1 percentage point decrease in the expense ratio, partially offset by a 3.6 percentage point increase in the loss ratio. Excluding the impact of catastrophe losses and prior year reserve development, the underlying combined ratio was 59.7% in 2024, compared to 60.6% in 2023.

Strengths and Weaknesses

A key strength for ACIC is its strong reinsurance program, which provides substantial coverage for catastrophe losses. The company’s core catastrophe reinsurance program is estimated to provide sufficient coverage for approximately a 1-in-184-year return period event. This helps to mitigate the impact of large catastrophe losses on ACIC’s financial results.

Another strength is the company’s investment portfolio, which is primarily composed of high-quality fixed-maturity securities. As of June 30, 2024, approximately 87.9% of ACIC’s fixed maturities were rated “A” or better. This conservative investment approach helps preserve capital and generate stable investment income.

However, a weakness for ACIC is its high reinsurance costs, which have increased significantly in recent years. The company’s total ceding ratio rose to 60.1% in the first half of 2024, up from 43.6% in the prior year period. This puts pressure on ACIC’s underwriting profitability and reduces the amount of premium it can retain.

Additionally, ACIC faces ongoing challenges related to the material weakness in its internal controls over financial reporting that was identified in 2023. While the company has begun implementing a remediation plan, the material weakness has not yet been fully resolved, which could expose the company to increased risk of errors or misstatements in its financial reporting.

Outlook and Future Prospects

Looking ahead, ACIC’s future prospects will depend on its ability to effectively manage its reinsurance costs, maintain underwriting discipline, and continue strengthening its internal control environment.

The company’s recent decision to sell its subsidiary, Integrity Insurance Company (IIC), for the GAAP book value of the business represents a strategic move to streamline operations and focus on its core Florida commercial property business. This divestiture could provide ACIC with additional capital resources to invest in growth initiatives or further enhance its reinsurance program.

Additionally, the company’s at-the-market equity offering program, which has raised $38.2 million in net proceeds as of June 30, 2024, gives ACIC additional financial flexibility to support its operations and pursue potential acquisition opportunities.

However, the company will need to closely monitor the impact of inflation on its claims costs, as well as any changes in the reinsurance market that could further increase its reinsurance expenses. Successful execution of the company’s remediation plan for the material weakness in internal controls will also be crucial to maintaining investor confidence and ensuring the reliability of ACIC’s financial reporting.

Overall, ACIC appears to be navigating a challenging operating environment, but its strong reinsurance program, conservative investment approach, and strategic initiatives provide a solid foundation for the company to potentially return to more consistent profitability in the future.