American Coastal Insurance Q2 Earnings
Robust Results in Core Business + MGU Momentum
Earnings Summary
Revenue: $86,500,000
Core Income: $26,756,000 (+36.4% YoY)
Combined Ratio: 60.6%
Core Return on Equity: 41.6%
Total Retention to Equity: 5.6x
See our full thesis on American Coastal Insurance Here
Commentary
Overall, I could not be happier with the results American Coastal reported for the second quarter. The core insurance business continues to churn out meaningful returns on equity despite an overall weakening price environment while the balance sheet continues to retain meaningful cash and insulate the business from the worst effects of the Florida Hurricane market. In addition, the Managing General Underwriter, Skyway is showing great results and is on track to meet internal performance targets while avoiding rate chase and sticking to sound underwriting principles.
Balance Sheet
Only a few years ago American Coastal almost went under due to a loss sharing agreement with its parent UPC that ate up nearly $80M of the company’s equity capital on top of a devastating year in the wake of Hurricane Ian. As of today, Kroll has now BBB rated American Coastal’s senior notes with a positive outlook and thus reducing the businesses cost of debt by roughly $1.5M annually.
The balance sheet also boasts $726M of cash today with meaningful reserve set asides and a debt to capitalization ratio of just 33.8% down from nearly 40% in December of 2024. American Coastal is laser focused on reducing debt/cap to 25% or lower and we think will do so in fairly short order not by reducing financial leverage but from retaining earnings and fortifying its capital base.
Earnings Power
The core insurance firm continues to generate high quality earnings on its existing portfolio of risk with underwriting margins that meaningfully exceeded the company’s expectations and my own. While other read throughs from adjacent businesses have been weak, American Coastal performed exceptionally and cited some moderation in prices, however, their largest market is somewhat insulated from major price decreases as it is capacity constrained and firm relative to the rest of the state (Miami/Dade/Broward).
Even if rates do step down meaningfully, we see American Coastal as a great option in that kind of an environment. While others will play games with rate and grow exposure to chase rate, American Coastal has a nearly two-decade history of disciplined underwriting and as a result, strong and consistent profitability.
“Overall, rate changes for admitted markets moderated as compared to the first quarter. Casualty and auto remain the lines with the highest increases…Expecting admitted rate changes for most lines in the second half to be consistent with the rate changes in the second quarter” -Brown&Brown
Skyway Underwriters
On the topic of earnings power, we see the addition of Skyway MGU as a great way to complement the core insurance business in two main ways. The first being that the markets American Coastal is providing their admitted product for apartments in is geographically diversified from the core insurance product. The second piece is the fee generative nature of the Skyway business and the “property-only” risk that excludes casualty exposure.
Skyway is showing material growth by all measures with quote to bind stepping up in the first half of 2025. The company noted that the step up from 28% to 45% from January to June was a combination of some seasonality activity peaking in the summer months ahead of the June renewal period. In addition, the business felt the higher quote to bind was also partially attributed to the knowledge and associated confidence in what risk is worth taking on. On the call, management noted a goal of $20M of premiums for their Skyway product and while they are in no way forced to hit that goal being that underwriting quality is so important, we still think they will achieve this figure.
Core CAT Program
While we had a good idea of what the Core Cat renewal would be from managements previous notes, it was good to see it finalized. We are very happy with the step down in quota share from 40% just a few years ago to 15% today, enabling the company to “eat more of its own cooking”. In addition, the business extended total return thresholds and saved 12.4% in risk adjusted cost.
Another piece of the reinsurance tower is the new cascading feature. For example, the Armor Re II 200M xs 50M has the ability to make up for any exhaustion in the Florida Cat Program. There is also hidden value in the step up in Shoreline Quota share from 30-45% which is an internal quota share that helps to insulate the regulated entity.
To round out the piece on the Core Cat Program, we once believed that AmCo would eventually step quota share to 0%. After talking with the business, we think that Arch, a business AmCo has high regard for, will be sticking around as they add a lot of strategic advantages for the business.
State of the Market
While we are not in a hard market for insurance at this time in the state of Florida, the tri-county market where AmCo has the bulk of its business is in a perpetually “firm” market. Property valuations remain elevated, and capacity is scarce, leading to a stronger rate environment. Most insurance businesses simply do not have the operating capabilities to be consistently profitable in the state of Florida and the tri-county area broadly, furthering AmCo’s advantage through the cycle.
There are a lot of reasons to like AmCo, but we think the opportunity to grow Skyway in markets not currently served to diversify geographic risk is increasingly attractive. All in all, we are of the belief that AmCo has never been in a stronger position than it is today and look forward to owning this business for a long time to come.