Item 1A. Risk Factors
Many factors affect our business, financial condition and results of operations, some of which are beyond our control. If any of the following risks or uncertainties occur, our business, financial condition or results of operations may be materially and adversely affected. In that event, the trading price of our securities could decline, and investors could lose all or part of their investment in our securities. Before making an investment in our securities, investors should carefully consider the risk factors discussed below, together with the other information in this report, including the section entitled “Forward-looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the other reports and materials filed by us with the SEC.
RISKS RELATED TO OUR BUSINESS
As a property and casualty insurer, we may experience significant losses, and our financial results may vary from period to period, due to our exposure to catastrophic events and severe weather conditions, the frequency and severity of which could be affected by the unpredictability of future catastrophic events and severe weather conditions.
Our property and casualty insurance operations expose us to risks arising from catastrophes. Catastrophes can be caused by various natural events, including but not limited to hurricanes, tropical storms, tornadoes, windstorms, earthquakes, hail, sinkholes, severe winter weather and fires, or man-made events, such as terrorist attacks (including those involving nuclear, biological, chemical or radiological events), cybercrimes or consequences of war or political instability. We may incur catastrophe losses that exceed the amount of:
•catastrophe losses experienced in prior years;
•catastrophe losses projected to be incurred, using third-party catastrophe modeling software;
•catastrophe loss estimates used to develop prices for our products; or
•our current reinsurance coverage (which would cause us to have to pay such excess losses).
The frequency and severity of weather conditions are inherently unpredictable, but the frequency and severity of property claims generally increase when severe weather conditions occur. We write a significant number of our policies in Florida, a state that has experienced significant hurricanes in recent years, which some weather analysts believe is consistent with a period of sustained greater hurricane activity. There is a growing consensus today that climate change is increasing the frequency and severity of catastrophic events or severe weather conditions which, in addition to the attendant increase in claims-related costs, may also cause an increase in our reinsurance costs and/or negatively impact our ability to provide insurance to our policyholders in the future. In addition, increased catastrophic events could result in increased credit exposure to the reinsurers we transact business with. Our actual losses from catastrophic events may be larger than anticipated should our reinsurers fail to meet their obligations.
We cannot predict how legal, regulatory and social responses to concerns around climate change may impact our business. Governmental entities may also respond to climate change by enacting laws and regulations that may increase our cost of providing insurance in the future, which could adversely affect demand.
Catastrophes could be more frequent or severe than contemplated in our pricing and risk management models, and may have a material adverse effect on our results of operations during any reporting period due to increases in our loss and loss adjustment expense. Catastrophes may also reduce liquidity and could impair our ability to maintain existing capital, or raise capital on acceptable terms or at all. In addition to catastrophes, the accumulation of losses from several smaller weather-related events in any reporting period may have a similar impact to our results of operations and financial condition.
Because we conduct a significant portion of our business in Florida, our financial results substantially depend on, and could be adversely affected by, the regulatory, legal, economic, political, demographic, competitive and weather conditions present in that state.
As of December 31, 2023, a significant number of our policies in-force were concentrated in Florida and a majority of our total insured value was concentrated in Florida. Therefore, the prevailing regulatory, legal, economic, political, demographic, competitive, weather and other conditions in Florida will likely have a more significant impact on our revenues and profitability compared to such conditions in other jurisdictions in which we operate. Furthermore, changes in such conditions in Florida could make doing business in Florida less attractive for us, which could have a more pronounced effect on us than it would on other insurance companies that are more geographically diversified.
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In addition, due to Florida’s climate, we are subject to increased exposure to certain catastrophic events such as hurricanes, tropical storms and tornadoes, as well as an increased risk of losses from such events. The occurrence of one or more catastrophic events or other conditions affecting losses in Florida may cause a disproportionately adverse effect on our results of operations and financial condition.
We face an increase in cost of claims as the result of one-way attorney fees in the State of Florida. Florida Statutes sections 627.428 and 57.105 provide that a prevailing party in litigation is entitled to attorney’s fees. In 2021, the Florida legislature enacted omnibus insurance reform that, among other measures, replaced the one-way attorney fee statute with a schedule whereby recovery of attorney fees is contingent upon obtaining a judgment that exceeds the pre-suit offer. In 2022, the Florida legislature enacted additional insurance reform designed to improve the affordability of property insurance and reduce frivolous lawsuits. We cannot guarantee that this new legislation will further reduce the impact of litigation and expenses related to litigation, or whether additional legislation will be passed that affect the cost of litigation on claims expenses.
Because we rely on insurance agents, the loss of these agent relationships, particularly our relationship with AmRisc, LLC (AmRisc), or our inability to attract and incentivize new agents could have an adverse impact on our business.
We market our homeowners’ insurance product to a broad range of prospective policyholders through approximately 400 independent agencies as of December 31, 2023. Many of these agents are independent insurance agents that own their customer relationships, and our agency contracts with them limit our ability to directly solicit business from our existing policyholders. Independent agents commonly represent other insurance companies, including our competitors, and we do not control their activities. As a result, we must compete with other insurers for independent agents’ business. Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage or higher commissions to their agents. As a result, our business is dependent on the marketing efforts of these independent agents and on our ability to offer products and services that meet their and their customers’ requirements. The loss of these marketing relationships could adversely impact our ability to attract new agents or retain our agency network and policies in-force. Failure to grow or maintain our agency relationships, a failure to attract and incentivize new agents or the failure of agents to act as anticipated could adversely affect sales of our insurance products.
Additionally, AmCoastal has a managing agency contract (the MGA contract) with AmRisc, pursuant to which AmRisc serves as AmCoastal’s managing general agent for binding and writing commercial residential property lines for condominium, townhome and homeowners association insurance written in Florida. The contract between AmCoastal and AmRisc is exclusive. Under the MGA contract with AmCoastal, AmRisc must produce a certain volume of business for AmCoastal. Therefore, failure of AmRisc to produce the required volume of business could cause us to lose substantial premiums and could require us to seek one or more alternative managing general agents. If we were unable to find a replacement managing general agent, our revenues could decrease, which could have a material adverse effect on our business, financial condition and results of operations. Given the concentration of AmCoastal’s commercial business and operations with AmRisc, AmRisc may have substantial leverage in negotiations with AmCoastal regarding the MGA contract, and amendments to the terms and conditions of the MGA contract or other changes to the commercial relationship between AmRisc and AmCoastal could have a material adverse effect on our business, financial condition and results of operations. Following the termination or expiration of the MGA contract, AmCoastal’s ability to compete for and solicit renewals of business previously underwritten by AmRisc on their respective behalves may be limited by legal, commercial and other impediments, including AmRisc’s relationship with other insurance producers that control the business. Such impediments could have a material adverse effect on our financial condition and results of operations due to the concentration of AmCoastal’s business with AmRisc.
Actual claims incurred may exceed our loss reserves for claims, which could adversely affect our results of operations and financial condition.
Loss reserves represent our estimate of ultimate unpaid losses for claims that have been reported and claims that have been incurred but not yet reported. Loss reserves do not represent an exact calculation of liability, but instead represent our best estimate, generally utilizing actuarial expertise, historical information and projection techniques at a given reporting date.
The process of estimating our loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends, legislative changes, emerging economic and social trends and varying judgments and viewpoints of the individuals involved in the estimation process, among others. In addition, application of statistical and actuarial methods in estimating our loss reserves may require the adjustment of overall reserves upward or downward from time to time. Future loss experience substantially in excess of our loss reserves could substantially harm our results of operations and financial condition.
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Because of the inherent uncertainty in estimating loss reserves, including reserves for catastrophes and litigated claims, additional liabilities resulting from one insured event, or an accumulation of insured events, may exceed our existing loss reserves. If our reserves are inadequate, it may cause us to overstate our earnings for the periods during which our reserves for expected losses was insufficient and result in higher losses in future periods.
We may experience government-levied assessments. Although we may have the ability to collect this assessment from our policyholders, the timing of collection may have a material adverse effect on our results of operations.
Our insurance subsidiaries are subject to assessments levied by various governmental and quasi-governmental entities in the states in which we operate. For example, in May 2023, Florida enacted a consumer protection law that increased the maximum administrative fines that may be levied on insurance companies by the Florida Office of Insurance Regulation by 250% generally, and 500% for violations stemming from a state of emergency such as a hurricane. While we may have the ability to recover these assessments from policyholders through policy surcharges in some states in which we operate, our payment of the assessments and our recoveries may not offset each other in the same reporting period in our financial statements and may cause a material adverse effect on our results of operations in a particular reporting period.
We have identified a material weakness in our internal control over financial reporting, and our management has concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of the end of the period covered by this report. While we are working to remediate the identified material weakness, we cannot assure you that additional material weaknesses or significant deficiencies will not occur in the future. If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our common stock.
The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires, among other things, that we maintain effective
disclosure controls and procedures and internal control over financial reporting. As disclosed in this Annual Report, in the course of preparing our interim financial statements for the fiscal quarter ended June 30, 2023, we identified a material weakness in our internal control over financial reporting, which existed as of March 31, 2023. The material weakness was caused by inadequate controls over the review of significant unusual transactions, including the effects of the transactions on the preparation of the Company’s tax provision, described in more detail under the heading Part II — Item 9A. Controls and Procedures in this Annual Report. We have commenced efforts to remediate the material weakness as described in more detail under the heading Part II — Item 9A. Controls and Procedures in this Annual Report. The material weakness in our internal control over financial reporting will not be considered remediated until the controls operate for a sufficient period of time and management has concluded, through testing, that these controls operate effectively. If we do not successfully remediate the material weakness, or if other material weaknesses or other deficiencies arise in the future, we may be unable to accurately report our financial results, which could cause our financial results to be materially misstated and require restatement. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a result. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the control deficiencies that led to a material weakness in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses.
If we experience difficulties with our information technology or data security systems and/or outsourcing relationships, our ability to conduct our business could be negatively impacted, which could adversely affect our financial condition or results of operations.
We use computer systems to store, retrieve, evaluate and utilize customer, employee, company and third-party data and information. Our business is highly dependent upon our information technology systems and the ability of key vendors and third-party administrators’ to perform necessary business functions efficiently and without interruption. Our ability to process policies and adjust claims in a timely manner could be impaired by an unplanned shutdown or failure of one or more systems or facilities due to man-made or natural disruption. These include an event leading to power outages, loss of facility access, a major internet failure, pandemic or a failure of one or more of our information technology, telecommunications or other systems. Because our information technology and telecommunications systems interface with and often depend on third-party systems, we could experience service denials if demand for such service exceeds capacity or a third-party system fails or experiences an interruption. If sustained or repeated, such a business interruption, system failure or service denial could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary business functions.
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Despite our continual evaluation of potential attackers’ techniques and tactics and our efforts in monitoring, training, planning and prevention, our information technology systems are vulnerable to computer viruses, natural disasters, unauthorized access, cyber-attacks, system failures, human error and negligence, and similar disruptions. There is no assurance that our security measures will provide fully effective protection from such disruptions. Because techniques used to obtain unauthorized access or to sabotage systems evolve rapidly, we may be unable to anticipate these techniques or to implement comprehensive counter measures. A material breach in the security of our information technology systems and data could include the theft of our confidential or proprietary information, including trade secrets, and the personally identifiable information of our customers, claimants, agents and employees. From time to time, we have experienced threats to our data and information technology systems, including malware and computer virus attacks, attempts of unauthorized access, system failures and disruptions. Disruptions or security breaches resulting in a loss or damage to our data or inappropriate disclosure of proprietary or confidential information, or the personally identifiable information of our customers, claimants, agents and employees, could cause significant damage to our reputation, adversely affect our relationships with our customers, result in litigation or regulatory investigations, increase remediation costs and/or regulatory penalties, and ultimately harm our business. Third parties to whom we outsource certain functions are also subject to the risks outlined above, any one of which may result in our incurring substantial costs and other negative consequences, including a material adverse effect on our business, financial condition and results of operations.
In addition, we may transmit, receive and store personally identifiable, confidential and proprietary information by any number of standard data transmission methods or other electronic means. We may be unable to keep such information confidential, in all events, especially with clients, vendors, service providers, counterparties and other third parties who may not have or use appropriate controls to protect confidential information. Furthermore, we are subject to compliance with laws and regulations enacted by U.S. federal and state governments, or enacted by various regulatory organizations or exchanges relating to the privacy and security of the information of clients, employees or others. The compromise of personally identifiable, confidential or proprietary information could result in remediation costs, legal liability, regulatory action and reputational harm.
Additionally, in the absence of overarching federal law, individual states are adopting their own privacy and cybersecurity laws and regulations. For example, in an effort to protect information systems, the New York State Department of Financial Services (NYDFS) adopted regulation providing minimum standards for an organization’s cybersecurity program and requiring additional certification confirming compliance. In October 2017, the National Association of Insurance Commissioners (NAIC) adopted a new Insurance Data Security Model Law, which is intended to establish the standards for data security and standards for the investigation and notification of data breaches applicable to insurance licensees in states adopting such law, with provisions that are generally consistent with the NYDFS cybersecurity regulation. In November 2023, NYDFS finalized amendments effective in April 2024 to expand their cybersecurity regulation by requiring companies to, among other things, (i) establish and maintain a cybersecurity program designed to ensure the confidentiality, integrity and availability of their information systems; (ii) implement and maintain a written cybersecurity policy setting forth policies and procedures for the protection of their information systems and nonpublic information; and (iii) review and update any risk assessments at least annually, as well as whenever a change in the business or technology causes a material change to cyber risk. Though the NYDFS cybersecurity regulation helps to reduce the third-party risk and imposes specific technical safeguards, the evolving compliance and operational requirements of privacy and cybersecurity laws and regulations impose significant costs that are likely to increase over time and may restrict the way services involving data are offered, all of which may adversely affect our business and results of operations.
Furthermore, the SEC has made clear their focus on cybersecurity. In August 2023, the SEC adopted new cybersecurity disclosure rules, aimed at enhancing and standardizing disclosures made by public companies regarding cybersecurity risk management, strategy, governance and incident reporting. Some jurisdictions have also enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data. AmCoastal, in particular, processes sensitive personal information of its policyholders, which exposes AmCoastal to heightened risk. Many regulators have indicated an intention to take more aggressive enforcement actions regarding cybersecurity matters, and private litigation resulting from such matters is increasing and resulting in progressively larger judgments and settlements.
Loss of key vendor relationships, disputes with key vendors, or failure of a vendor to protect personally identifiable information of our customers, claimants or employees, or failure of a vendor to perform its duties in accordance with the contract or the applicable law, could have an adverse effect on our business, results of operations or financial condition.
We rely on services and products provided by many third-party vendors. These include, for example, vendors of computer hardware and software and vendors of services such as claim adjustment services and payroll and benefits vendors who process sensitive personally identifiable information. In the event that one or more of our vendors suffers a bankruptcy, renews its contractual arrangement on terms less favorable to us, fails to comply with legal or regulatory requirements or otherwise
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becomes unable to continue to provide products or services, or fails to protect personally identifiable information of our customers, claimants or employees, we may suffer operational impairments and financial losses. An interruption in or the cessation of service by any service provider as a result of system failures, capacity constraints, financial difficulties or for any other reason could disrupt our operations, impact our ability to offer certain products and services and result in contractual or regulatory penalties, liability claims from clients or employees, damage to our reputation and harm to our business. Moreover, in the event of a data breach involving any of our third-party vendors, our customers’, claimants’ or employees’ personally identifiable information could also be put at risk. The failure of the third-party vendor to adhere to service level standards, or not perform their duties in accordance with applicable law, could impact our financial position. Any such data breach involving our third-party vendors, or failure to perform their duties, could result in significant mitigation or legal expenses for us, which could materially and adversely affect our reputation, relationships with our customers, business, results of operations and financial condition.
Our success has been and will continue to be greatly influenced by our ability to attract and retain the services of senior management, the loss of any of whom could have an adverse effect on our business, financial condition or results of operations.
Our senior executive officers play an integral role in the development and management of our business given their skills, knowledge of our business, years of industry experience and the potential difficulty of promptly finding qualified replacement employees. Due to the intense competition in our industry for senior executive officers with demonstrated ability, we cannot guarantee that any such officers will continue their employment with us. Additionally, we do not maintain any key person life insurance policies on any of our officers or employees. Losing any of our senior executive officers and/or not succeeding in attracting and retaining senior executive officers could have an adverse effect on our results of operations and financial condition.
Our mergers, dispositions and other strategic transactions may not be as successful as we anticipate, and could be difficult to integrate, divert management resources, result in unanticipated costs or dilute our existing stockholders.
Part of our continuing business strategy is to evaluate opportunities to merge with companies that complement our business model or enter into other strategic transactions that facilitate or expedite the accomplishment of our business goals. We may be unable to identify suitable counterparties to such a transaction. Even if we enter into an agreement in respect of a merger with another business, disposition of a business or other strategic transaction, we may not be able to finalize a transaction after significant investments of time and resources due to, among other things, a lack of regulatory approval or imposition of a burdensome condition by the regulator.
In connection with a merger, disposition or other strategic transaction, we could incur debt, amortization expenses related to intangible assets, large and immediate write-offs, assume liabilities or issue stock that would dilute our current stockholders’ percentage of ownership. As a result, there is a risk of transaction-related litigation. Such strategic transactions could pose numerous risks to our operations, including risks relating to:
•incurring substantial unanticipated integration costs;
•diverting significant management attention and financial resources from our other operations and disrupting our ongoing business during the integration process;
•losing key employees, particularly those of the merged operations;
•keeping existing customers and retaining the merged business’ customers;
•failing to realize the strategic benefits or the potential cost savings or other financial benefits of the mergers;
•incurring unanticipated liabilities or claims from the acquired businesses and contractually-based time and monetary limitations on the seller’s obligation to indemnify us for such liabilities or claims; and
•limitations on our ability to access additional capital when needed.
We are also subject to a certain level of risk regarding the actual condition of the businesses that we acquire. Until we actually assume operating control of such businesses and their assets and operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations. As a result, we may not be able to complete acquisitions, mergers or other strategic transactions or integrate the operations, products or personnel gained through any such acquisition, merger or other strategic transaction without a material adverse effect on our business, financial condition and results of operations.
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We may engage in future dispositions or wind-downs of certain business. These dispositions pose risks to our operations in addition to those previously mentioned, including risks related to:
•the ability to price a sale transaction appropriately and otherwise negotiate acceptable terms;
•the ability to replace legacy earnings from the business position with new revenues;
•the ability to collect proceeds from the disposition in a timely manner, which may be earmarked for other strategic transactions and may hinder our ability to carry out those strategic transactions; and
•the ability to run-off segments of our business while staying compliant with all applicable regulatory requirements.
In addition, the disposition of any portion of our business may adversely affect the price of our stock and result in losses to investors of shares.
We face risks associated with investments in which we share ownership or management with third parties.
From time to time, we have and may continue to invest in entities in which we share ownership or management with third parties. In certain circumstances, we may not have complete control over governance, financial reporting, operations, legal and regulatory compliance or other matters relating to such entities. As a result, we may face certain operating, financial, legal, regulatory, compliance and other risks relating to these entities, including, but not limited to, risks related to the financial strength of other investors; the willingness of other investors to provide adequate funding for the entity; differing goals, strategies, priorities or objectives between us and other investors; our inability to unilaterally implement actions, policies or procedures with respect to the entity that we believe are favorable; legal and regulatory compliance risks relating to actions of the entity or other investors; and the risk that we will be unable to resolve disputes with other investors. As a result, investments in which we share ownership or management subject us to risk and may contribute significantly less than anticipated to our earnings and cash flows.
Our Senior Notes place certain restrictions on our operations and our failure to comply with such restrictions, including as a result of events beyond our control, could result in an event of default, which could materially and adversely affect our liquidity, financial condition and results of operations.
Our Senior Notes due 2027 (Senior Notes) place certain restrictions on the Company’s financial operations. Because we are a holding company, our assets consist primarily of the securities of our subsidiaries. The negative pledge provisions in the Senior Notes limit our ability to pledge securities of our subsidiaries and restrict dispositions of the capital stock of our subsidiaries. Our Senior Notes require us to maintain certain financial ratios and to comply with various operational and other covenants, including limitations on our ability to incur any indebtedness unless certain conditions are met. Details of these covenants can be found in Note 12 in our Notes to Consolidated Financial Statements. Our failure to comply with such restrictions, including as a result of events beyond our control, could result in an event of default and an acceleration of the maturity of the Senior Notes. We cannot assure you that our assets or cash flow would be sufficient to fully repay the Senior Notes if accelerated, or that we would be able to restructure the payments on the Senior Notes. This could have a material adverse impact on our liquidity, financial condition and results of operations.
RISKS RELATED TO THE INSURANCE INDUSTRY
Because we are operating in a highly competitive market, we may lack the resources to control our market share, which could adversely impact our business and results of operations.
The property and casualty insurance industry is highly competitive, and we believe it will remain highly competitive for the foreseeable future. The principal competitive factors in our industry are price, service, coverage options, underwriting guidelines, commission structure and financial condition. We compete with other property and casualty insurers that underwrite property and casualty insurance in the same geographic areas in which we operate and some of those insurers have greater financial resources and have a longer operating history than we do. In addition, our competitors may offer products for alternative forms of risk protection that we presently do not offer or are not similarly regulated in the admitted market, which could adversely affect the sales of our products. Customers may turn to our competitors as a result of price, our failure to deliver on customer expectations, service flaws, technology issues, gaps in operational support or other issues affecting customer experience. We also compete with new companies that continue to enter the insurance market. We may have difficulty controlling our market share due to an increase in reinsurance costs, inflation which increases actual losses and loss adjustment expenses, and losses from the high frequency of catastrophe events in recent years. Competition could limit our ability to retain existing business or to write new business at adequate rates, and such limitation may cause a material adverse effect on our results of operations and financial position.
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In addition, industry developments could further increase competition in our industry. These developments could include:
•an influx of new capital in the marketplace as existing companies attempt to expand their businesses and new companies attempt to enter the insurance business as a result of better market conditions, more competitive premium pricing and/or more favorable policy terms;
•an increase in programs in which state-sponsored entities provide property insurance in catastrophe-prone areas;
•changes in state regulatory climates; and
•the passage of federal proposals for an optional federal charter that would allow some competing insurers to operate under regulations different or less stringent than those applicable to us.
These developments and others could make the property and casualty insurance marketplace more competitive by increasing the supply of insurance available. If competition limits our ability to write new business at adequate rates, or reduces our policy retention rates, our future results of operations would be adversely affected.
Changes in state regulation may adversely affect our results of operation and financial condition.
As a holding company with operating insurance company subsidiaries, we are subject to the laws and regulations of the various states in which our insurance subsidiaries operate. From time to time, states pass legislation, and regulators take action, that has the effect of limiting the ability of insurers to manage risk, such as legislation prohibiting insurers from reducing exposures or withdrawing from catastrophe-prone areas, or mandating that insurers participate in residual markets. In addition, legislative initiatives and court decisions can seek to expand insurance coverage for insured losses beyond the original intent of the policies, which could cause our actual loss and loss adjustment expense to exceed our estimates. Further, our ability to adjust pricing to the extent necessary to offset losses or operating costs requires approval of insurance regulatory authorities.
Our ability to appropriately manage our catastrophe exposure by adjusting prices, modifying underwriting terms or reducing exposure to certain geographies may be limited due to considerations of public policy and the evolving political environment, which may have a material adverse effect on our results of operations, financial condition and cash flows. We cannot predict whether and to what extent the adoption of new legislation and regulations would affect our ability to manage our exposure to catastrophic events.
The insurance industry is heavily regulated and further restrictive regulation may reduce our profitability and limit our growth.
The insurance industry is extensively regulated and supervised. Insurance regulatory authorities generally design insurance rules and regulations to protect the interests of policyholders, and not necessarily the interests of insurers, their stockholders, and other investors. This regulation relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial components of an insurance company's business. We are subject to comprehensive regulation and supervision by state insurance departments in New York and Florida, the states in which our insurance subsidiaries are domiciled, as well as all states in which they are licensed, sell insurance products, issue policies, or handle claims. The regulations of each state are unique and complex and subject to change, and certain states may have regulations that conflict with the regulations of other states in which we operate. As a result, we are subject to the risk that compliance with the regulations in one state may not result in compliance with the regulations in another state.
We strive to maintain all required licenses and approvals. However, we may not fully comply with the wide variety of applicable laws and regulations. The relevant authority's interpretation of the laws and regulations also may change from time to time. Regulatory authorities have relatively broad discretion to impose fines, and grant, renew or revoke licenses and approvals. If we do not have the required licenses and approvals or do not comply with applicable regulatory requirements, these authorities could preclude or temporarily suspend us from carrying on some or all of our activities or impose substantial fines. In addition, we may face individual and class action lawsuits by insured and other parties for alleged violations of certain of these laws or regulations.
State statutes and administrative rules generally require each insurance company to register with the department of insurance in its state of domicile and to furnish information concerning the operations of the companies within the holding company system. Failure to comply with such requirements may materially affect the operations, management or financial condition of the insurers. As part of its registration, each insurance company must identify material agreements, relationships and transactions with affiliates, including loans, investments, asset transfers, transactions outside of the ordinary course of business, certain management, service, and cost sharing agreements, reinsurance transactions, dividends, and other financial and
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non-financial components of an insurer’s business. Some states impose restrictions or require prior regulatory approval of specific corporate actions, which may adversely affect our ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow our business profitably. Our ability to comply with these laws and regulations, and to obtain necessary regulatory action in a timely manner is, and will continue to be, critical to our success.
Currently, the federal government’s role in regulating or dictating the policies of insurance companies is limited. However, from time to time Congress has considered and may in the future consider proposals that would increase the role of the federal government in insurance regulation, either in addition to or in lieu of state regulation. For example, the Dodd-Frank Act established a Federal Insurance Office (FIO) within the U.S. Department of Treasury Department to collect data on the insurance industry, recommend changes to the state system of insurance regulation and preempt certain state insurance laws. The potential impact on our business as a result of the Dodd-Frank Act and the FIO’s current and future recommendations remains unclear; however, the implementation of any federal insurance regulations that constrain our business opportunities or reduce investment flexibility could negatively impact our business.
In recent years, the state insurance regulatory framework has come under increased federal scrutiny. Changes in federal legislation, regulation and/or administrative policies in several areas, including changes in financial services regulation and federal taxation, could negatively affect the insurance industry and us. In addition, Congress and some federal agencies from time to time investigate the current condition of insurance regulation in the United States to determine whether to impose federal or national regulation or to allow an optional federal charter, similar to the option available to most banks. Further, the NAIC and state insurance regulators continually reexamine existing laws and regulations, specifically focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws and regulations. We cannot predict what effect, if any, proposed or future legislation or NAIC initiatives may have on the manner in which we conduct our business.
As part of potential, or future, industry-wide investigations, we may from time to time receive requests for information from government agencies and authorities at the state or federal level. If we are subpoenaed for information by government agencies and authorities, potential outcomes could include law enforcement proceedings or settlements resulting in fines, penalties and/or changes in business practices that could cause a material adverse effect on our results of operations. In addition, these investigations may result in changes to laws and regulations affecting the industry.
Changes to insurance laws or regulations, or new insurance laws and regulations, may be more restrictive than current laws or regulations and could significantly increase our compliance costs, which could have a material adverse effect on our results of operations and our prospects for future growth. Additionally, our failure to comply with certain provisions of applicable insurance laws and regulations could result in significant fines or penalties being levied against us and may cause a material adverse effect on our results of operations or financial condition.
Our inability to obtain reinsurance on acceptable terms could increase our loss exposure or limit our ability to underwrite policies, which could adversely affect our results of operations and financial condition.
We use, and we expect to continue to use, reinsurance to help manage our exposure to property risks. Reinsurance is insurance for insurers and is fundamentally a promise by the reinsurer to pay possible future claims in exchange for the payment of a premium by the insurance company seeking reinsurance. Both the availability of reinsurance and the cost of reinsurance are subject to prevailing market conditions beyond our control, which can affect business volume and profitability. We may be unable to maintain our current reinsurance coverage, to obtain additional reinsurance coverage in the event our current reinsurance coverage is exhausted by a catastrophic event, or to obtain other reinsurance coverage in adequate amounts or at acceptable rates. Similar risks exist whether we are seeking to replace coverage terminated during the applicable coverage period or to renew or replace coverage upon its expiration. Market conditions beyond our control determine the availability and cost of reinsurance. For example, reinsurance may be more difficult or costly to obtain after several years with higher frequencies of major catastrophes. We may be unable to reduce per event or aggregate retentions when renewing or replacing our coverage due, in part, to the frequency of storms in prior years and the litigation trends in the state of Florida, which would increase our risk exposure and could ultimately lead to us paying higher claims. We provide no assurance that we can obtain sufficient reinsurance to cover losses resulting from one or more storms or other events in the future, or that we can obtain such reinsurance in a timely or cost-effective manner. If we are unable to renew our expiring coverage or to obtain new reinsurance coverage, either our net exposure to risk would increase or, if we are unwilling to accept an increase in net risk exposures, we may have to reduce the amount of risk we underwrite or accept higher reinsurance costs. Any of these alternatives may cause a material adverse effect on our results of operations and our financial condition.
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Our inability to collect from our reinsurers on our reinsurance claims could have a material adverse effect on our business, results of operation, financial condition and cash flow.
We use reinsurance as a tool to manage risks associated with our business. However, we remain primarily liable as the direct insurer on all risks for which we obtain reinsurance. Our reinsurance agreements do not eliminate our obligation to pay claims to insureds. As a result, we are subject to counterparty risk with respect to our ability to recover amounts due from reinsurers. The risk could arise in two situations: (i) our reinsurers may dispute some of our reinsurance claims based on contract terms, and we may ultimately receive partial or no payment, or (ii) the amount of losses that reinsurers incur related to worldwide catastrophes may materially harm the financial condition of our reinsurers and cause them to default on their obligations. Collectability of reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. A reinsurer’s insolvency, inability to make payments, or dispute of its obligations under the terms of a reinsurance contract could have a material adverse effect on our business, results of operations, financial condition and cash flow.
Our efforts to manage these risks through underwriting guidelines, collateral requirements, financial strength ratings and other oversight mechanisms may not be successful. As a result, our exposure to counterparty risk under our reinsurance agreements may have a material adverse effect on our results of operations, financial condition and cash flow.
Our investments are subject to market risks that may result in reduced returns or losses.
Our investment assets are invested by professional investment management firms under the direction of our management team in accordance with investment guidelines approved by the Investment Committee of the Board of Directors. Our investments are subject to market risks and risks inherent in individual securities. In particular, interest rates are highly sensitive to many factors, including monetary and fiscal policy, domestic and international economic and political issues, geopolitical events, economic sanctions, blockades, and other factors beyond our control.
Our portfolio is primarily invested in fixed income securities and changes in the general interest rate environment will affect our returns on, and the fair value of, our fixed maturity and short-term investments. A decline in interest rates reduces the interest rate payable on new fixed income investments, thereby negatively impacting our net investment income. Conversely, rising interest rates reduce the fair value of existing fixed maturities. The volatility of any losses may force us to liquidate securities, which may cause us to incur capital losses. Realized fixed income and equity and unrealized equity losses in our investment portfolio would generally reduce our book value and, if significant, could affect our ability to conduct business. In addition, defaults under, or impairments of, any of these investments as a result of financial problems with the issuer and, where applicable, its guarantor could reduce our net investment income and net realized investment gains or result in investment losses.
We are subject to risks associated with potential declines in credit quality related to specific issuers and a general weakening in the economy. We may experience credit or default losses in our portfolio, including as a result of the failure of the procedures we have implemented to monitor the credit risk of our invested assets, which could adversely affect our results of operations and financial condition.
We may decide to invest an additional portion of our assets in equity securities, private equity limited partnership interests or other investments, which are generally subject to greater volatility than fixed maturity investments. Moreover, our private equity limited partnership interests are subject to transfer restrictions and may be illiquid. General economic conditions, stock market conditions, geopolitical events and many other factors beyond our control can adversely affect the fair value of our equity securities or other investments and could adversely affect our realization of net investment income. As a result of these factors, we may not realize an adequate return on our investments or we may incur losses on sales of our investments, which could reduce our net investment income and net realized investment gains or result in investment losses.
The fair value of our investment portfolio is also subject to valuation uncertainties. The valuation of investments is more subjective when the markets for these investments are illiquid and may increase the risk that the estimated fair value of our investment portfolio is not reflective of prices at which actual transactions would occur. Additionally, in the case of our private equity limited partnership interests, such valuations are determined by outside managers. Since the majority of our investments are held by our insurance subsidiaries, significant decreases in the fair value of these investments will produce significant declines in the statutory surplus of our insurance business. A long-term material decline in statutory surplus could have an adverse effect on our financial strength ratings and our ability to write new and renewal insurance business, thus potentially reducing our future underwriting profits.
Our determination of the amount of credit allowances to record varies by investment type and is based upon our periodic evaluation and assessment of known and inherent credit risks associated with the respective investment type. We revise our
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evaluations and assessments as conditions change and new information becomes available, and we reflect changes in the credit allowance in our Consolidated Statements of Comprehensive Loss. We base our assessment of whether a credit allowance is required based on our case-by-case evaluation of the underlying reasons for the decline in fair value. However, we may not accurately assess whether a credit allowance is required and the recorded amounts for a credit allowance in our financial statements may be inadequate.
Federal and/or state tax legislation could be enacted that would lessen or eliminate some or all of the tax advantages we currently benefit from, including those governing received deductions and tax credits, which could adversely affect the value of our investment portfolio.
The property and casualty insurance and reinsurance industry is historically cyclical and the pricing and terms for our products may decline, which would adversely affect our profitability.
Historically, the financial performance of the property and casualty insurance and reinsurance industry has been cyclical, characterized by periods of severe price competition and excess underwriting capacity, or “soft” markets, followed by periods of high premium rates and shortages of underwriting capacity, or “hard” markets. We cannot predict with certainty when such a period may occur or how long any given hard or soft market will last. Downturns in the property and casualty market may cause a material adverse effect on our results of operations and our financial condition.
Losses from legal actions may materially affect our operating results, cash flows and financial condition.
Trends in the insurance industry regarding claims and coverage issues, such as increased litigation and the willingness of courts to expand covered causes of loss, may contribute to increased litigation costs and increase our loss exposure under the policies that we underwrite.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. Examples of emerging claims and coverage issues include, but are not limited to:
•judicial expansion of policy coverage and the impact of new theories of liability; and
•plaintiffs targeting property and casualty insurers in purported class-action litigation relating to claims-handling and other practices.
Multiparty or class action claims may present additional exposure to substantial economic, non-economic or punitive damage awards. The loss of even one of these claims, if it resulted in a significant award or a judicial ruling that was otherwise detrimental, could create a precedent in our industry that could have a material adverse effect on our results of operations and financial condition. This risk of potential liability may make reasonable settlements of claims more difficult to obtain.
We may be named a defendant in a number of legal actions relating to those emerging claim and coverage issues. The propensity of policyholders and third-party claimants to litigate and the willingness of courts to expand causes of loss and the size of awards may result in increased costs associated with litigation, render our loss reserves inadequate and may be material to our operating results and cash flows for a particular quarter or annual period and to our financial condition. In addition, claims and coverage issues may not become apparent to us for some time after our issuance of the affected insurance policies. As a result, we may not know the full extent of liability under insurance policies we issue for many years after the policies are issued.
A downgrade in or withdrawal of our financial strength or stability ratings could adversely impact our business volume and our ability to access additional debt or equity financing.
Financial strength or stability ratings are important to an insurer’s competitive position. Ratings measure an insurance company’s ability to meet its obligation to contract holders and policyholders. High ratings help maintain public confidence in a company’s products, facilitate the marketing of its products and enhance the company’s competitive position. Rating agencies review their ratings periodically, and our current ratings may not be maintained in the future. If significant losses, such as those resulting from one or more major catastrophes, or significant reserve additions were to cause our capital position to deteriorate significantly, or if one or more rating agencies substantially increase their capital requirements, we may need to raise equity capital in the future to maintain our ratings or limit the extent of a downgrade. For example, a trend of more frequent and severe weather-related catastrophes may lead rating agencies to substantially increase their capital requirements.
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We cannot guarantee that our insurance subsidiaries, IIC and ACIC will maintain their current A (Exceptional) or higher ratings by Demotech and A- ratings by Kroll. Any downgrade or withdrawal of these ratings could impact the acceptability of our products to mortgage lenders that require homeowners to buy insurance, reduce our ability to retain and attract policyholders and agents and damage our ability to compete, which may cause a material adverse effect on our results of operations and financial condition. These material adverse effects could include, but are not limited to:
•reducing demand for new sales of insurance products;
•requiring us to modify our existing products or services, introduce new products or services or reduce prices for our products and services, in order to remain competitive;
•adversely affecting our relationships with our independent agents;
•materially increasing the number or amount of policy cancellations and non-renewals by policyholders;
•requiring us to post additional collateral under certain of our financing transactions;
•limiting financial flexibility and access to capital markets;
•adversely affecting our ability to obtain reinsurance at reasonable prices or at all; and
•increasing the interest rates on our outstanding Senior Notes.
RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK
Future sales of substantial amounts of our common stock by us or our existing stockholders could cause our stock price to decrease.
As of December 31, 2023, we had registered up to 100 million shares of our securities (including both our preferred and common stock) authorized to issue from time to time in one or more offerings. Additional equity financings or other share issuances by us could adversely affect the market price of our common stock. Future share issuances in connection with merger transactions or other acquisitions could result in substantial additional dilution to our stockholders. If these additional shares are sold, or if it is perceived that they will be sold, into the public market, the price of our common stock could decline substantially. For example, in the fourth quarter of 2023, we sold 3,367,889 shares of common stock pursuant to an at-the-market program.
If we issue additional shares of our common stock or if any of our existing stockholders sells a substantial amount of our common stock, or if the market perceives that such issuance or sales may occur, then the trading price of our common stock may significantly decline.
Dividend payments on our common stock in the future are uncertain, and our ability to pay dividends may be constrained by our holding company structure.
We have paid dividends on our common stock in the past but have paid no dividends since March 16, 2022. However, the declaration and payment of dividends will be at the discretion of our Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal and regulatory restrictions on the payment of dividends from our subsidiaries (as we are a holding company and do not have any significant operations or assets other than our ownership of the shares of our operating subsidiaries), capital adequacy, liquidity, general business conditions and such other factors as our Board of Directors deems relevant. Therefore, investors who purchase our common stock may only realize a return on their investment if the value of our common stock appreciates.
The ability of our subsidiaries to pay dividends may affect our liquidity and ability to meet our obligations.
The Company is a holding company with no significant operations. The principal assets are the stock of its subsidiaries and the holding company’s directly held investment portfolio. State insurance regulatory authorities limit the payment of dividends by insurance subsidiaries, as described in Note 16 in our Notes to Consolidated Financial Statements. The limitations are based on statutory income and surplus. In addition, competitive pressures generally require the subsidiaries to maintain insurance financial strength ratings. These restrictions and other regulatory requirements affect the ability of the subsidiaries to make dividend payments. Limits on the ability of the subsidiaries to pay dividends could adversely affect holding company liquidity, including our ability to pay dividends to stockholders and service our debt in the timeframe expected.
Management views enterprise economic capital as a combination of statutory surplus and invested assets at the parent holding company level. Deterioration in statutory surplus or earnings, from developments such as catastrophe losses, or changes in market conditions or interest rates, could adversely affect holding company liquidity by impacting the amount of dividends from our subsidiaries or the utilization of invested assets at the holding company to increase statutory surplus or for other corporate purposes.
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In connection with the filed plan of withdrawal in New York for our former insurance subsidiary, UPC, our insurance subsidiary, IIC, has agreed not to pay ordinary dividends until January 1, 2025, without the prior approval of the New York Department of Financial Services.
The substantial ownership of our common stock by R. Daniel Peed and his affiliates allows him to exert significant control over us, and the Company and R. Daniel Peed are subject to certain restrictive covenants that may restrict our ability to pursue certain opportunities.
R. Daniel Peed, our Chief Executive Officer and Chairman of the Board, beneficially owned approximately 30% of our issued and outstanding common stock at December 31, 2023. Mr. Peed also has a proxy from another member of RDX Holding, LLC, the former parent company of AmCo, who beneficially owns approximately 8% of our issued and outstanding common stock. As a result, Mr. Peed is able to exert substantial control over us. Moreover, Mr. Peed’s interests may conflict with the interests of other holders of our common stock and he may take actions affecting us with which other stockholders may disagree. Mr. Peed has the ability to exert significant influence over the following:
•the nomination, election and removal of our Board of Directors;
•the adoption of amendments to our charter documents;
•management and policies;
•our day-to-day operations; and
•the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets.
AmCo and AmCoastal are also subject to restrictive covenant agreements that contain non-competition, non-solicitation, confidentiality and other restrictive covenants that prohibit AmCo and AmCoastal from engaging in certain activities, including activities customarily performed by managing general agents and activities relating to segments of the commercial property insurance market for coastally exposed risks in the United States. Additionally, in connection with our merger with AmCo, we agreed to be subject to a restrictive covenant expiring on January 1, 2027 that will prohibit the formation, investment in or development, acquisition or ownership of any managing general agent or entity that performs activities customarily performed by managing general agents, or the engagement in customary managing general agent functions with respect to the commercial property insurance business. These restrictive covenants may restrict us from pursuing opportunities for expansion, including opportunities to act as or perform functions similar to a managing general agent, and therefore may limit our overall growth potential.
Further, we entered into a stockholder’s agreement with Mr. Peed and certain affiliates of Mr. Peed, which provides those stockholders with rights that our other stockholders do not have. Although the stockholder’s agreement requires shares beneficially owned by Mr. Peed and his affiliates to be voted in proportion to the votes cast by other stockholders on any proposal on which our stockholders are entitled to vote, this restriction terminated on April 3, 2022.
Transactions by Mr. Peed and his affiliates involving our common stock may have an adverse effect on the price of our common stock.
As noted above, Mr. Peed beneficially owned approximately 30% of our issued and outstanding common stock as of December 31, 2023. The Company has granted Mr. Peed and his affiliates customary demand and piggyback registration rights pursuant to which, subject to certain limitations, all of such shares eligible to be registered under the Securities Act of 1933, as amended (the Securities Act), and may be offered and sold to the public from time to time after the effectiveness of the related registration statement. Such shares may also be resold into the public markets in accordance with an exemption from registration under the Securities Act, including Rule 144, subject to the volume limitations, manner of sale requirements and notice requirements thereof. Sales of our common stock by Mr. Peed and his affiliates could have the effect of lowering our stock price. The perceived risk associated with the possible sale of a large number of shares by these stockholders could cause some of our other stockholders to sell their stock, thus causing the price of our stock to decline. In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of stock by Mr. Peed and his affiliates could cause other institutions or individuals to engage in short sales of our common stock, which may further cause the price of our stock to decline.
Provisions in our charter documents may make it harder for others to obtain control of us even though some stockholders might consider such a development to be favorable.
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Our Second Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions that may discourage unsolicited takeover proposals our stockholders may consider to be in their best interests. Our Board of Directors is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. At a given annual meeting, only a portion of our Board of Directors may be considered for election. Additionally, the Board of Directors and executive officers control greater than 50% of the Common Stock of the Company. Consequently, our “staggered board” and concentrated holdings may prevent our stockholders from replacing a majority of our Board of Directors at certain annual meetings, and may entrench our management and discourage unsolicited stockholder proposals that may be in the best interests of our stockholders.
Further, our Board of Directors has the ability to designate the terms of and issue one or more series of preferred stock, which may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Risk Management and Strategy
Our cybersecurity program is led by our Chief Information Security Officer (CISO) and overseen by the Audit Committee and the Board. Our cybersecurity program prioritizes threat mitigation, while focusing on maintaining the integrity and resilience of our systems. Our cybersecurity program includes identifying threats, considering potential damages through the lens of residual risk, identifying potential actions to manage cyber risk, implementation, and ongoing monitoring and testing for design and performance effectiveness.
The Company’s risk management strategy identifies cybersecurity risks, such as vulnerabilities on assets, fraud, abuse of systems and services, unauthorized data access, data exfiltration, data destruction, and service disruption, as among the Company’s top enterprise risks. As such, the cybersecurity risk management process and related governance process are integrated into the broader information technology control environment, which is integrated into the Company’s overall risk management systems and processes. Additionally, we regularly review and test our cybersecurity controls.
Our cybersecurity team, in partnership with external vendors and a third-party security operations center, designs and implements data security and cybersecurity programs, risk assessments, monitoring, external and internal penetration tests, controls testing and training for our employees. In 2023, a third-party consultant was engaged to facilitate a table top exercise to test the company’s cyber incident response plan. We continue to make investments to enhance our ability to identify and detect cybersecurity risks within our environment and protect the Company from those identified risks.
Risk Assessment, Risk Management and Incident Management
We employ processes and technologies to proactively address cybersecurity risks. This includes the periodic review and update of IT security policies, employee security awareness training programs complemented by simulated phish testing, and the implementation of firewalls, intrusion prevention and detection systems, anti-malware functionality, and access and identity management controls.
As one of our processes, we have implemented cybersecurity incident response plans, including the Security Incident Response Plan and IT Disaster Recovery Plan, that set forth specific frameworks for responding to and managing potential and actual cybersecurity incidents, provide guidance on the roles of, and interactions with, various departments within ACIC and define certain processes and procedures for cybersecurity incident response and management. Our cybersecurity incident response plans and procedures also establish escalation protocols in connection with a potential cybersecurity incident. These protocols vary depending upon the specific factors involved, including the materiality of an incident, the related harms and risks associated therewith, any undertakings required to mitigate and remediate any such incident and any corresponding legal or regulatory actions. Under the cybersecurity incident response plans and their protocols, incidents are responded to by multidisciplinary teams and are further escalated to the attention of senior management and our Board when applicable. The Company reviews and updates these cybersecurity incident response plans annually.
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The Company’s risk assessment considers cybersecurity threats associated with the use of third-party service providers. Failure to assess potential risks associated with a third party could expose us to a variety of risks, including, but not limited to supply chain attacks, data breaches, and reputational damage which can have devastating and long-lasting impacts. As such, we have employed contracting policies and procedures which include data protection and other cybersecurity considerations during the vendor onboarding process, and periodic review of service organization controls reports for material third-party service providers.
In the last three fiscal years, we have not experienced a material cybersecurity incident, and we are not aware of any cybersecurity risks that are reasonably likely to materially affect our business other than what is already disclosed in Item 1.A Risk Factors in this annual report on Form 10-K. For more information about the risks posed by cybersecurity threats, see “If we experience difficulties with our information technology or data security systems and/or outsourcing relationships, our ability to conduct our business could be negatively impacted, which could adversely affect our financial condition or results of operations” in Item 1A. Risk Factors in this annual report on Form 10-K.
Governance
Management Oversight
Our CISO has the overall responsibility of implementing its strategy and objectives to build a strong cyber management function. Our CISO has over 25 years of IT experience with specialization in IT compliance, information security and risk management.
Our Chief Information Officer (CIO) has the overall responsibility of establishing and overseeing the Company’s technology infrastructure and security posture.Our CIO has over 25 years of experience of IT experience, nearly all in the insurance space.
Finally, our Chief Compliance and Risk Officer (CCRO) has more than 30 years of experience in finance and accounting and has managed tax planning, insurance accounting, internal audit and risk management functions.Our CCRO maintains an active Certified Public Accountant license.
Board Oversight
The Board and Audit Committee are responsible foroverseeing our annual enterprise risk assessment, reviewing the guidelines and policies for assessing and managing the Company’s exposure to risks, including cybersecurity risks, and the steps management has taken to monitor and control such exposures. The Board and Audit Committee periodically meet to facilitate oversight of cybersecurity risk.
The Board regularly devotes time during its meetings to review and discuss the most significant risks facing the Company over the short-, medium- and long-term, and management’s responses to those risks, including cybersecurity. Within these discussions, the Board receives updates from the CISO on the risks posed bycybersecurity threats and the Company’s cybersecurity program. In addition to evaluating the Company’s cybersecurity risks, the Board has oversight of management’s cybersecurity function and is responsible for reviewing and approving of the Company’s cybersecurity program, as well as reviewing the quality and effectiveness of the Company’s technology security.
Item 2. Properties
We use all of our leased properties for office space. We lease in total approximately 21,700 square feet of office space located in Florida, New York, and Minnesota. These leases are generally short-term to medium-term leases of commercial office space.
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Item 3. Legal Proceedings
We are involved in routine claims-related legal actions arising in the ordinary course of business. We accrue amounts resulting from claims-related legal actions in unpaid losses and loss adjustment expenses during the period that we determine an unfavorable outcome becomes probable and we can estimate the amounts. Management makes revisions to our estimates based on its analysis of subsequent information that we receive regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) judicial decisions and legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation.
On October 20, 2023, we received notice that the DFS filed a notice of claim and demand for tender of insurance policy limits under our director and officer insurance to carriers participating in the our director and officer’s insurance program (the “Claim”). The Claim alleges that former officers and directors of UPC were involved in wrongful acts that resulting in UPCs insolvency and demands immediate tender of our director and officer’s policy limit of $40 million where we have a retention of $1.5 million. The former directors and officers of UPC deny the allegations. Although no litigation has arisen from the Claim, litigation is anticipated. We anticipate that directors and officers will be successful in their defense; however, due to our indemnification obligation, we have accrued the policy retention amount of $1.5 million.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATION
Our common stock trades on the Nasdaq Capital Market (Nasdaq) under the symbol “ACIC”.
HOLDERS OFCOMMON EQUITY
As of March 4, 2024, we had 5,049 holders of record of our common stock. The number of record holders does not include stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees.
DIVIDENDS
During 2023, we did not pay dividends of our common stock. While we did not pay a dividend during 2023, any future dividend payments will be at the discretion of our Board of Directors and will depend upon our profits, financial requirements and other factors, including legal and regulatory restrictions on the payment of dividends, general business conditions and such other factors as our Board of Directors deems relevant.
During November 2022, we received a $26,000,000 dividend from our insurance subsidiary, AmCoastal. During February 2021, we received a $3,500,000 dividend from our insurance subsidiary, IIC.
Under Florida law, Florida-domiciled insurers such as AmCoastal may not pay any dividend or distribute cash or other property to its shareholders except out of its available and accumulated surplus funds which are derived from realized net operating profits on its business and net realized capital gains. Additionally, Florida-domiciled insurers may not make dividend payments or distributions to shareholders without the prior approval of the insurance regulatory authority if the dividend or distribution would exceed the larger of:
1.the lesser of:
a.10% of the insurer’s capital surplus, or
b.100% of the insurer’s net income, not including realized capital gains, plus a two-year carryforward
2.10% of the insurer’s capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains, or
3.the lesser of:
a.10% of the insurer’s capital surplus, or
b.100% of the insurer’s net investment income plus a three-year carryforward with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains.
Alternatively, AmCoastal may pay a dividend or distribution without the prior written approval of the insurance regulatory authority when:
1.the dividend is equal to or less than the greater of:
a.10% of the insurer’s surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains, or
b.The insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, and:
i.The insurer will have surplus as to policyholders equal to or exceeding 115% of the minimum required statutory surplus as to policyholders after the dividend or distribution is made, and
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ii.The insurer files a notice of the dividend or distribution with the insurance regulatory authority at least ten business days prior to the dividend payment or distribution, and
iii.The notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution the insurer will have at least 115% of required statutory surplus as to policyholders.
Except as provided above, Florida-domiciled insurers may only pay a dividend or make a distribution (i) subject to prior approval by the insurance regulatory authority, or (ii) 30 days after the insurance regulatory authority has received notice of intent to pay such dividend or distribution and has not disapproved it within such time. As of December 31, 2023, we were in compliance with these requirements.
Under the insurance regulations of New York, a New York-domiciled insurer such as IIC may not declare or distribute any dividend to shareholders which, together with all dividends declared or distributed by it during the next preceding twelve months, exceeds:
1.the lesser of:
a.10% of the insurer’s surplus to policyholders as shown on its latest statement on file with the Superintendent, or
b.100% of “adjusted net investment income” during that period.
New York law defines “adjusted net investment income” to mean net investment income for the twelve months immediately preceding the declaration or distribution of the current dividend increased by the excess, if any, of net investment income over dividends declared or distributed during the period commencing 36 months prior to the declaration or distribution of the current dividend and ending 12 months prior thereto.
In addition, in connection with the filed plan of withdrawal in New York for our former insurance subsidiary, UPC, our subsidiary, IIC, has agreed not to pay ordinary dividends until January 1, 2025, without the prior approval of the New York Department of Financial Services.
See Note 16 to our Notes to Consolidated Financial Statements for further discussion of restrictions on future payments of dividends by our insurance affiliates.
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RECENT SALES OF UNREGISTERED SECURITIES
During 2023, we did not have any unregistered sales of our equity securities.
REPURCHASES OF EQUITY SECURITIES
During 2023, we did not repurchase any of our equity securities.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing in Part II, Item 8 of this Form 10-K. The following discussion provides an analysis of our results of operations and financial condition for 2023 as compared to 2022. Discussion regarding our results of operations and financial condition for 2022 as compared to 2021 is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 and the Revised Items of our Form 10-K for the year ended December 31, 2022, filed as Exhibit 99.1 to Form 8-K on September 19, 2023. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed or implied in these forward-looking statements as a result of certain known and unknown risks and uncertainties. See “Forward-Looking Statements.”
OVERVIEW
American Coastal Insurance Corporation is a holding company primarily engaged in commercial and personal property and casualty insurance business with investments in the United States. On July 10, 2023, we changed our corporate name from United Insurance Holdings Corp. to American Coastal Insurance Corporation. During the periods presented, we conducted our business principally through two wholly-owned insurance subsidiaries: American Coastal Insurance Company (AmCoastal) and Interboro Insurance Company (IIC). Collectively, we refer to the holding company and all our subsidiaries, including non-insurance subsidiaries, as “ACIC,” which is the preferred brand identification for our Company.
Our Company’s primary source of revenue is generated from writing insurance in Florida and New York. Our target market in such areas consists of states where the perceived threat of natural catastrophe has caused large national insurance carriers to reduce their concentration of policies. We believe an opportunity exists for ACIC to write profitable business in such areas. During 2022, we also wrote commercial residential insurance in South Carolina and Texas, however, effective May 1, 2022, we no longer write in these states. In addition, during 2022 we wrote personal residential business in six other states, however on February 27, 2023, our former insurance subsidiary, United Property & Casualty Insurance Company (UPC) was placed into receivership with the Florida Department of Financial Services (the "DFS"), which divested our ownership of UPC. The events leading to receivership and results of this subsidiary, now included within discontinued operations, can be seen in Note 3 of the Notes to Consolidated Financial Statements below.
We have historically grown our business organically, complemented by strategic acquisitions and partnerships, including our acquisitions of AmCo Holding Company, LLC (AmCo) and its subsidiaries, including AmCoastal, in April 2017, IIC in April 2016, and Family Security Holdings, LLC (FSH), including its subsidiary Family Security Insurance Company, Inc. (FSIC), in February 2015, and our strategic partnership with a subsidiary of Tokio Marine Kiln Group Limited (Tokio Marine), which formed Journey Insurance Company (JIC) in August 2018. Effective June 1, 2022, we merged JIC into AmCoastal, with AmCoastal being the surviving entity. Effective May 31, 2022, we merged FSIC into UPC, with UPC being the surviving entity.
As a result of underwriting actions implemented during 2023, as well as the receivership of our former subsidiary UPC by the DFS effective February 27, 2023, our policies in-force decreased by 91.0% from 254,275 policies in-force at December 31, 2022 to 22,848 policies in-force at December 31, 2023. Our 2022 value includes policies attributable to our discontinued operations.
Our business is subject to the impact of weather-related catastrophes on our loss and loss adjustment expenses (LAE). Over the last three years, the frequency of these catastrophes has increased. As a result, we have experienced increased catastrophe losses incurred during the prior three years. During the years ended December 31, 2023, 2022 and 2021, two, two, and four named storms, respectively, made landfall in our geographic footprint, resulting in retained pre-tax catastrophe losses of $729,000, $57,906,000, and $15,696,000, respectively, excluding discontinued operations. In addition, during 2022 and 2021, we increased our loss and LAE reserves as a result of development trends from 2017’s Hurricane Irma, that indicated our ultimate gross loss estimate should be increased.
The following discussion highlights significant factors influencing the consolidated financial position and results of operations of ACIC. In evaluating our results of operations, we use premiums written and earned, policies in-force and new and renewal policies by geographic concentration. We also consider the impact of catastrophe losses and prior year development on our loss ratios, expense ratios and combined ratios. In monitoring our investments, we use credit quality, investment income, cash flows, realized gains and losses, unrealized gains and losses, asset diversification and portfolio duration. To evaluate our financial condition, we consider our liquidity, financial strength, ratings, book value per share and return on equity.
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Consolidated Net Income (Loss)
Year Ended December 31,
REVENUE:
Net unrealized gains (losses) on equity securities 814 (1,968) 1,471
EXPENSES:
Less: Net loss attributable to noncontrolling interests — (111) (1,949)
Net income (loss) per diluted share $ 6.98 $ (10.91) $ (1.35)
Return on equity based on GAAP net income (loss) 439.5 % (307.4) % (16.9) %
Effect of current year catastrophe losses on combined ratio 5.4 % 21.5 % 7.1 %
Effect of prior year development on combined ratio (4.4) % (4.1) % (2.7) %
(1) Loss ratio, net is calculated as losses and LAE net of losses ceded to reinsurers, relative to net premiums earned. Management uses this operating metric to analyze our loss trends and believes it is useful for investors to evaluate this component separately from our other operating expenses.
(2) Expense ratio is calculated as the sum of all operating expenses less interest expense relative to net premiums earned. Management uses this operating metric to analyze our expense trends and believes it is useful for investors to evaluate these components separately from our loss expenses.
(3) Combined ratio is the sum of the loss ratio, net and expense ratio. Management uses this operating metric to analyze our total expense trends and believes it is a key indicator for investors when evaluating the overall profitability of our business.
(4) Underlying combined ratio, a measure that is not based on GAAP, is reconciled above to the combined ratio, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in “Definitions of Non-GAAP Measures”, below.
(5) Included in both the expense ratio and the combined ratio is amortization expense predominately associated with the AmCo and IIC acquisitions, which cause comparative differences among periods.
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AMERICAN COASTAL INSURANCE CORPORATION
DEFINITIONS OF NON-GAAP MEASURES
We believe that investors’ understanding of ACIC’s performance is enhanced by our disclosure of the following non-GAAP measures. Our methods for calculating these measures may differ from those used by other companies and therefore comparability may be limited.
Combined ratio excluding the effects of current year catastrophe losses and prior year reserve development (underlying combined ratio) is a non-GAAP measure, that is computed by subtracting the effect of current year catastrophe losses and prior year development from the combined ratio. We believe that this ratio is useful to investors, and it is used by management to highlight the trends in our business that may be obscured by current year catastrophe losses and prior year development. Current year catastrophe losses cause our loss trends to vary significantly between periods as a result of their frequency of occurrence and magnitude, and can have a significant impact on the combined ratio. Prior year development is caused by unexpected loss development on historical reserves. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. The most directly comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered as a substitute for the combined ratio and does not reflect the overall profitability of our business.
Net loss and LAE excluding the effects of current year catastrophe losses and prior year reserve development (underlying loss and LAE) is a non-GAAP measure that is computed by subtracting the effect of current year catastrophe losses and prior year reserve development from net loss and LAE. We use underlying loss and LAE figures to analyze our loss trends that may be impacted by current year catastrophe losses and prior year development on our reserves. As discussed previously, these two items can have a significant impact on our loss trends in a given period. We believe it is useful for investors to evaluate these components both separately and in the aggregate when reviewing our performance. The most directly comparable GAAP measure is net loss and LAE. The underlying loss and LAE measure should not be considered a substitute for net loss and LAE and does not reflect the overall profitability of our business.
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AMERICAN COASTAL INSURANCE CORPORATION
RESULTS OF OPERATIONS
Consolidated Results
Net income attributable to ACIC for the year ended December 31, 2023 increased by $779,766,000 to $309,911,000, compared to a net loss of $469,855,000 for the year ended December 31, 2022. The increase in net income was primarily driven by a decrease in loss & LAE for the year, as a result of Hurricane Ian making landfall in Florida in 2022, which caused large losses in 2022. In addition, we had an increase in our gross written premiums, an increase in ceded premiums earned, favorable prior year loss development during the year, decreased policy acquisition costs and general and administrative expenses, as described below.
Revenues
Our gross written premiums increased by $97,700,000, or 17.1%, to $670,043,000 for the year ended December 31, 2023, from $572,343,000 for the year ended December 31, 2022, driven by increased written premiums in Florida as we continue to grow our commercial book of business. This was offset by a decrease in written premiums across the personal lines business, driven by the cancellation of the quota share with our former subsidiary, UPC. The breakdown of the year-over-year changes in both direct and assumed written premiums by state and gross written premium by line of business are shown in the table below.
Direct Written and Assumed Premium By State (1) 2023 2022 Change
South Carolina — 15 (15)
Gross Written Premium by Line of Business
(1) We are no longer writing in Texas or South Carolina as of May 31, 2022.
(2) Assumed premium written for 2023 primarily included commercial property business assumed from unaffiliated insurers. Assumed premium written for 2022 primarily included personal property business assumed by our former subsidiary, UPC.
New and Renewal Policies(1) By State(2) 2023 2022 Change
South Carolina — 2 (2)
(1) Only includes new and renewal homeowner, commercial and dwelling fire policies written during the year.
(2) We are no longer writing in Texas or South Carolina as of May 31, 2022.
Ceded premiums earned increased by $88,057,000, or 33.1%, to $354,080,000 for the year ended December 31, 2023 from $266,023,000 for 2022. The increase is primarily driven by a $60,804,000 increase in ceded premiums earned from our quota share agreements. This increase can be attributed to the increase in AmCoastal’s quota share reinsurance coverage to 40% in the second quarter of 2023 from 10% during the first half of 2023. In addition, we saw increased costs associated with our Core catastrophe reinsurance program during 2023.
Net investment income increased by $2,901,000, or 37.8%, to $10,574,000 for the year ended December 31, 2023 from $7,673,000 for 2022, driven by increased interest income due to increased holdings and higher interest rates year-over-year.
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AMERICAN COASTAL INSURANCE CORPORATION
Net realized investment losses and net unrealized gains (losses) on equity securities increased by $2,457,000, or 29.1%, to a net loss of $5,994,000 for the year ended December 31, 2023 from a net loss of $8,451,000 for the year ended December 31, 2022, driven by the liquidation of our fixed maturity securities in an unrealized loss position during 2022 to satisfy liquidity needs. The remainder of this change can be attributed to more favorable market conditions in 2023 resulting in decreased unrealized losses on our investment portfolio.
Expenses
Expenses for the year ended December 31, 2023 decreased $98,805,000, or 33.4%, to $196,811,000, from $295,616,000 for 2022. The decrease in expenses was primarily due to a decrease in loss and LAE as a result of Hurricane Ian making landfall in 2022, which caused a large increase in 2022. The calculations of our combined loss ratios and underlying loss ratios are shown below.
($ in thousands) Year ended
December 31,
% of Gross earned premiums 9.9 % 25.2 % (15.3) pts
% of Net earned premiums 22.3 % 50.0 % (27.7) pts
Less:
% of Gross earned premiums 9.4 % 16.4 % (7.0) pts
% of Net earned premiums 21.2 % 32.6 % (11.4) pts
(1) Underlying loss and LAE is a non-GAAP financial measure and is reconciled above to net loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in the “Definitions of Non-GAAP Measures” section, above.
The calculations of the Company’s expense ratios are shown below.
($ in thousands) Year ended
December 31,
% of Gross earned premiums 19.4 % 28.3 % (8.9) pts
% of Net earned premiums 43.7 % 56.2 % (12.5) pts
Loss and LAE decreased by $71,944,000, or 53.4%, to $62,861,000 for the year ended December 31, 2023, from $134,805,000 for the year ended December 31, 2022. Loss and LAE expense as a percentage of net earned premiums decreased 27.7 points to 22.3% for the year ended December 31, 2023, compared to 50.0% for the year ended December 31, 2022. In addition, during the year ended December 31, 2023, prior year reserve favorable development was higher on both catastrophe and non-catastrophe losses. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the year ended December 31, 2023 would have been 9.4%, a decrease of 7.0 points from 16.4% during the year ended December 31, 2022.
Policy acquisition costs decreased by $11,972,000, or 12.6%, to $83,346,000 for the year ended December 31, 2023, from $95,318,000 for the year ended December 31, 2022. The primary driver of the decrease in expense was an increase in ceding commission of $36,457,000, driven by the changes in the terms of our quota share reinsurance agreements. This was partially offset by increased external management fees and premium taxes of $21,199,000 and $1,949,000, respectively, both of which fluctuated in conjunction with the year-over-year increase in commercial lines gross written premium.
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AMERICAN COASTAL INSURANCE CORPORATION
Operating and underwriting expenses decreased by $3,489,000, or 25.4%, to $10,240,000 for the year ended December 31, 2023, from $13,729,000 for the year ended December 31, 2022, driven by decreased costs such as printing, postage, rent and utilities totaling $1,384,000 as we look to reduce our overhead spending. In addition, investments in technology decreased $1,834,000 year-over-year.
General and administrative expenses decreased by $12,792,000, or 30.3%, to $29,489,000 for the year ended December 31, 2023, from $42,281,000 for the year ended December 31, 2022, driven by the impairment of goodwill attributable to the Company’s personal lines operating segment during 2022 totaling $10,157,000. There were no similar transactions in 2023.
We experienced favorable reserve development in the current year and its historical impact on our net loss and net underlying loss ratios is outlined in the following table.
Historical Reserve Development
Consolidated net loss and LAE ratio (LR) 49.8 % 40.3 % 50.0 % 22.3 %
Prior year reserve favorable development on LR (1.0) % (2.7) % (4.1) % (4.4) %
Current year catastrophe losses on LR 16.8 % 7.1 % 21.5 % 5.4 %
(1) Underlying net loss and LAE Ratio is a non-GAAP measure and is reconciled above to the Consolidated net loss and LAE Ratio, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in the “Definitions of Non-GAAP Measures” section, above.
Commercial Lines Operating Segment Results
Pretax earnings attributable to our commercial lines operating segment for the year ended December 31, 2023 increased by $82,287,000 to pretax income of $118,128,000, compared to pretax income of $35,841,000 for the year ended December 31, 2022. The increase in pretax earnings was primarily due to an increase in revenue driven by increased gross written premium described below. This was partially offset by increased ceded premiums, driven by the changes in our quota share contracts. In addition, all of our expenses related to commercial lines decreased year-over-year, as described below.
Revenues
Our gross written premiums attributable to our commercial lines operating segment increased by $127,466,000, or 25.1%, to $635,709,000 for the year ended December 31, 2023, from $508,243,000 for the year ended December 31, 2022, driven entirely by increased written premiums in Florida as we continue to focus on increasing commercial written premiums and transitioning to a specialty commercial lines underwriter. These increases were partially offset by a decrease in assumed premiums as we wind-down these contracts, as well as a decrease in premiums written in Texas and South Carolina, as we are no longer writing business in these states. The breakdown of the year-over-year changes in both direct and assumed written premiums by state are shown in the table below.
Direct Written and Assumed Premium by State (1) 2023 2022 Change
South Carolina — 15 (15)
(1) We are no longer writing in Texas or South Carolina as of May 31, 2022.
(2) Assumed premium written for 2023 and 2022 is primarily commercial property business assumed from unaffiliated insurers.
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AMERICAN COASTAL INSURANCE CORPORATION
New and Renewal Policies(1) by State (2) 2023 2022 Change
South Carolina — 2 (2)
(1) Only includes new and renewal commercial policies written during the year.
(2) We are no longer writing in Texas or South Carolina as of May 31, 2022.
Ceded premiums earned attributable to our commercial lines operating segment increased by $97,371,000 or 39.7%, to $342,664,000 for the year ended December 31, 2023 from $245,293,000 for the year ended December 31, 2022. The increase is primarily driven by a $60,804,000 increase in ceded premiums earned from our quota share agreements, driven by changes to our quota share reinsurance contracts resulting in increased cessions to these contracts during 2023. In addition, costs of our core catastrophe reinsurance program increased year-over-year.
Net investment income attributable to our commercial lines operating segment increased by $1,495,000, or 25.5%, to $7,356,000 for the year ended December 31, 2023 from $5,861,000 for 2022. This increase is driven by a $3,513,000 increase in income from our cash and cash equivalent holdings, as a result of increased holdings and higher interest rates experienced year-over-year.
Net realized investment losses and net unrealized gains (losses) on equity securities attributable to our commercial lines operating segment increased by $2,500,000, or 29.5%, to a net loss of $5,977,000 for the year ended December 31, 2023 from a net loss of $8,477,000 for 2022, primarily driven by decreased unrealized losses as a result of favorable market conditions experienced in 2023.
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AMERICAN COASTAL INSURANCE CORPORATION
Expenses
Expenses attributable to our commercial lines operating segment for the year ended December 31, 2023 decreased $46,281,000, or 25.5%, to $135,363,000 for the year ended December 31, 2023, from $181,644,000 for the year ended December 31, 2022. The decrease in expenses was primarily due to a decrease in loss and LAE as a result of decreased catastrophe losses in 2023. In addition, policy acquisition costs decreased $5,560,000 in 2023, as described below.
($ in thousands) Year ended
December 31,
% of Gross earned premiums 7.8 % 18.8 % (11.0) pts
% of Net earned premiums 18.4 % 39.8 % (21.4) pts
Less:
% of Gross earned premiums 7.8 % 11.1 % (3.3) pts
% of Net earned premiums 18.3 % 23.6 % (5.3) pts
(1) Underlying loss and LAE is a non-GAAP financial measure and is reconciled above to net loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in the “Definitions of Non-GAAP Measures” section, above.
The calculations of the Company’s commercial lines operating segment expense ratios are shown below.
($ in thousands) Year ended
December 31,
% of Gross earned premiums 15.0 % 20.4 % (5.4) pts
% of Net earned premiums 35.3 % 43.2 % (7.9) pts
Loss and LAE attributable to our commercial lines operating segment decreased by $40,844,000, or 46.9%, to $46,299,000 for the year ended December 31, 2023, from $87,143,000 for the year ended December 31, 2022. Loss and LAE expense as a percentage of net earned premiums decreased 21.4 points to 18.4% for the year ended December 31, 2023, compared to 39.8% for the year ended December 31, 2022. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the year ended December 31, 2023 would have been 7.8%, a decrease of 3.3 points from 11.1% during the year ended December 31, 2022.
Policy acquisition costs decreased by $5,560,000, or 6.9%, to $75,436,000 for the year ended December 31, 2023, from $80,996,000 for the year ended December 31, 2022, driven primarily by an increase in ceding commission of $26,662,000 driven by the changes in the terms of our quota share reinsurance agreements. This was partially offset by increases to management fees and premium taxes of $19,405,000 and $1,706,000, respectively, both of which fluctuated in conjunction with the year-over-year increase in commercial lines gross written premium.
Operating and underwriting expenses attributable to our commercial lines operating segment decreased by $918,000, or 23.4%, to $3,008,000 for the year ended December 31, 2023, from $3,926,000 for the year ended December 31, 2022, driven by decreased operating expenses as we look to reduce our overhead spending.
General and administrative expenses attributable to our commercial lines operating segment increased by $1,041,000, or 10.9%, to $10,620,000 for the year ended December 31, 2023, from $9,579,000 for the year ended December 31, 2022. This increase was driven by a $1,144,000 increase of allocated external fees related to legal, audit, actuarial and tax services provided during the year.
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AMERICAN COASTAL INSURANCE CORPORATION
Personal Lines Operating Segment Results
Pretax losses attributable to our personal lines operating segment for the year ended December 31, 2023 decreased by $38,300,000 to a pretax loss of $13,854,000, compared to a pretax loss of $52,154,000 for the year ended December 31, 2022. The decrease in pretax net loss was primarily due to a $29,766,000 decrease in gross written premiums, as described below, and a $31,100,000 decrease in losses and LAE during 2023, driven by decreased catastrophe losses. We also experienced a $13,303,000 decrease in general and administrative costs year-over-year, as described below.
Revenues
Our gross written premiums attributable to our personal lines operating segment decreased by $29,766,000, or 46.4%, to $34,334,000 for the year ended December 31, 2023, from $64,100,000 for the year ended December 31, 2022. This decrease was driven primarily by a decrease in assumed premiums, driven by the termination of our quota share agreement between our former subsidiary, UPC and IIC effective December 31, 2022. The change in personal lines direct written and assumed premiums and new and renewal policies of the personal lines operating segment year-over-year can be seen below.
(1) Only includes new and renewal homeowner and dwelling fire policies written during the year.
Ceded premiums earned attributable to our personal lines operating segment decreased by $9,314,000 or 44.9%, to $11,416,000 for the year ended December 31, 2023 from $20,730,000 for the year ended December 31, 2022. The decrease is primarily driven by a $9,455,000 decrease in ceded premiums earned from our core catastrophe reinsurance program year-over-year.
Net investment income attributable to our personal lines operating segment increased by $1,360,000, or 77.3%, to $3,119,000 for the year ended December 31, 2023 from $1,759,000 for 2022. This increase is driven by higher interest rates experienced during 2023.
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AMERICAN COASTAL INSURANCE CORPORATION
Expenses
Expenses attributable to our personal lines operating segment for the year ended December 31, 2023 decreased $53,374,000, or 52.0%, to $49,260,000 for the year ended December 31, 2023, from $102,634,000 for the year ended December 31, 2022. The decrease in expenses was primarily due to a decrease in loss and LAE as a result of decreased catastrophe losses during the year. Additionally, we saw a decrease in general and administrative costs and policy acquisition costs, described below. The calculations of our combined loss ratios and underlying loss ratios are shown below.
($ in thousands) Year ended
December 31,
% of Gross earned premiums 40.2 % 67.0 % (26.8) pts
% of Net earned premiums 55.5 % 94.5 % (39.0) pts
Less:
Prior year reserve unfavorable (favorable) development 400 (2,970) 3,370
% of Gross earned premiums 33.1 % 50.7 % (17.6) pts
% of Net earned premiums 45.8 % 71.6 % (25.8) pts
(1) Underlying loss and LAE is a non-GAAP financial measure and is reconciled above to net loss and LAE, the most directly comparable GAAP measure. Additional information regarding non-GAAP financial measures presented in this Form 10-K can be found in the “Definitions of Non-GAAP Measures” section, above.
The calculations of the Company’s personal lines operating segment expense ratios are shown below.
($ in thousands) Year ended
December 31,
% of Gross earned premiums 79.3 % 77.3 % 2.0 pts
Loss and LAE attributable to our personal lines operating segment decreased by $31,100,000, or 65.3%, to $16,562,000 for the year ended December 31, 2023, from $47,662,000 for the year ended December 31, 2022. Loss and LAE expense as a percentage of net earned premiums decreased 39.0 points to 55.5% for the year ended December 31, 2023, compared to 94.5% for the year ended December 31, 2022. Excluding catastrophe losses and reserve development, our gross underlying loss and LAE ratio for the year ended December 31, 2023 would have been 33.1%, a decrease of 17.6 points from 50.7% during the year ended December 31, 2022.
Policy acquisition costs attributable to our personal lines operating segment decreased by $6,412,000, or 44.8%, to $7,910,000 for the year ended December 31, 2023, from $14,322,000 for the year ended December 31, 2022. The primary driver of the decrease in costs was decreased ceding commission of $9,795,000 related primarily to quota share reinsurance agreements no longer in place in 2023. This was partially offset by increased agent commissions, policy administration fees and printing and postage expenses of $1,795,000, $584,000 and $547,000, respectively.
Operating and underwriting expenses attributable to our personal lines operating segment decreased by $2,558,000, or 27.3%, to $6,809,000 for the year ended December 31, 2023, from $9,367,000 for the year ended December 31, 2022, primarily due to decreased expenses related to our investment in technology of $1,187,000. In addition, office utilities and rent expenses decreased $433,000 and $396,000, respectively, driven by decreased office space as we look to reduce our overhead spend.
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AMERICAN COASTAL INSURANCE CORPORATION
General and administrative expenses attributable to our personal lines operating segment decreased by $13,303,000, or 42.5%, to $17,979,000 for the year ended December 31, 2023, from $31,282,000 for the year ended December 31, 2022, driven by the one-time impairment of goodwill totaling $10,156,000 in 2022. There was no similar impairment during 2023.
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AMERICAN COASTAL INSURANCE CORPORATION
ANALYSIS OF FINANCIAL CONDITION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying consolidated financial statements and related notes in Part II, Item 8 in this Form 10-K.
Investments
The primary goals of our investment strategy are to preserve capital, maximize after-tax investment income, maintain liquidity and minimize risk. To accomplish our goals, we purchase debt securities in sectors that represent the most attractive relative value, and we maintain a moderate equity exposure. Limiting equity exposure manages risks and helps to preserve capital for two reasons: first, bond market returns are less volatile than stock market returns, and second, should the bond issuer enter bankruptcy liquidation, bondholders generally have a higher priority than equity holders in a bankruptcy proceeding. Our investment strategy is the same for both our commercial lines and personal lines operating segments.
We must comply with applicable state insurance regulations that prescribe the type, quality and concentrations of investments our insurance subsidiaries can make; therefore, our current investment policy limits investment in non-investment-grade fixed maturities and limits total investment amounts in preferred stock, common stock and mortgage notes receivable. We do not invest in derivative securities. Large catastrophe losses such as Hurricane Ian in 2022 can present significant liquidity demands to the Company stemming from higher than normal frequency and severity of insurance claims. This can lead to the selling of securities that we intended to hold until maturity and realizing untimely gains or losses.
Two outside asset management companies, which have authority and discretion to buy and sell securities for us, manage our investments subject to (i) the guidelines established by our Board of Directors and (ii) the direction of management. The Investment Committee of our Board of Directors reviews and approves our investment policy on a regular basis.
Our cash and investment portfolios totaled $369,022,000 at December 31, 2023 compared to $340,905,000 at December 31, 2022.
The following table summarizes our investments, by type:
Estimated Fair Value Percent of Total Estimated Fair Value Percent of Total
U.S. government and agency securities $ 27,432 7.4 % $ 2,385 0.7 %
Foreign governments — — % 991 0.3 %
States, municipalities and political subdivisions 23,865 6.5 % 26,895 7.9 %
Total equity securities — — % 15,657 4.6 %
We classify all of our investments as available-for-sale. Our investments at December 31, 2023 and 2022 consisted mainly of U.S. government and agency securities, states, municipalities and political subdivisions, mortgage-backed securities and securities of investment-grade corporate issuers. Our equity holdings in 2022 consisted mainly of securities issued by companies in the financial, utilities and industrial sectors or mutual funds. We held no equities as of December 31, 2023. Most of the corporate bonds we hold reflected a similar diversification. At December 31, 2023, approximately 83.2% of our fixed maturities were U.S. Treasuries, or corporate bonds rated “A” or better, and 16.8% were corporate bonds rated “BBB” or “BB”.
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AMERICAN COASTAL INSURANCE CORPORATION
During the year ended December 31, 2022, as a result of UPC’s plan of run-off, management determined that it was more likely than not that we would be required to sell a portion or all of our fixed-income securities attributable to the entity before recovery of their amortized cost basis. These securities were evaluated and none of the unrealized loss position was the result of a credit loss. As a result, we realized impairment losses of $22,718,000 on these securities. Total shareholders’ equity (deficit) was not impacted by such charge; however, our net loss for the year ended December 31, 2022 worsened and other comprehensive income improved by $22,718,000, before tax impacts, in offsetting amounts. The impact on our net loss is captured within our discontinued operations.
Reinsurance
We follow industry practice of reinsuring a portion of our risks. Reinsurance involves transferring, or “ceding”, all or a portion of the risk exposure on policies we write to another insurer, known as a reinsurer. To the extent that our reinsurers are unable to meet the obligations they assume under our reinsurance agreements, we remain primarily liable for the entire insured loss under the policies we write.
Our catastrophe reinsurance programs are designed primarily by utilizing third-party catastrophe modeling software and consulting with third-party reinsurance experts to project our exposure to catastrophe events. We evaluate modeled expected losses developed by the catastrophe modeling software using our risk portfolio data to estimate probable maximum losses (PML) across multiple return periods and the average annual loss. The Company monitors and manages its catastrophe risk using this model output along with other internal and external data sources, such as our historical loss experience and industry loss experience, to develop our view of catastrophe risk.
Our catastrophe reinsurance coverages consists of three separate placements:
1.AmCoastal’s core catastrophe reinsurance program in effect June 1 through May 31, annually, which includes excess of loss and quota share treaties providing coverage for catastrophe losses from named or numbered windstorms and earthquakes;
2.AmCoastal’s all other perils catastrophe excess of loss agreement in effect January 1, through December 31, annually, which provides protection from catastrophe loss events other than named windstorms and earthquakes; and
3.IIC’s core catastrophe reinsurance program in effect June 1, through May 31, annually, which provides protection from all catastrophe losses.
This reinsurance protection is an essential part of our catastrophe risk management strategy.It is intended to provide our stockholders an acceptable return on the risks assumed by our insurance entities, and to reduce variability of earnings, while providing surplus protection. Although reinsurance agreements contractually obligate our reinsurers to reimburse us for the agreed-upon portion of our gross paid losses, they do not discharge our primary liability. In the event one or more of our reinsurers fail to fulfill their obligation, the surplus of our statutory entities may decline, and we may not be able to fulfill our obligation to policyholders, or we may not be able to maintain compliance with various regulatory financial requirements. Additionally, we face the risk that actual losses incurred from one or more catastrophic events may be above the modeled expected loss resulting in losses exceeding our reinsurance coverage, which may result in a decline in surplus, and as a result we may not be able to fulfill our obligations to policyholders, or we may not be able to maintain compliance with various regulatory financial requirements. The details of our programs and likelihood of a catastrophic event exceeding these three coverages are outlined below.
AmCoastal’s core catastrophe reinsurance program provides occurrence-based coverage up to an exhaustion point of approximately $1,100,000,000 for a first occurrence and $1,300,000,000 in the aggregate. Under this program, our retention on a first and second event is $10,000,000 each, plus $2,250,000 retained separately by our captive. AmCoastal’s program provides sufficient coverage for a 1-in-150-year return period, indicating that the probability of a single occurrence exceeding protection purchased is roughly 0.7% estimated by equally blending the AIR and RMS catastrophe models using long-term catalogs including demand surge. AmCoastal’s program also provides sufficient coverage for a 1-in-100-year event followed by a 1-in-50-year event in the same treaty year, the probability of which is less than 0.1%.While we believe these catastrophe models are very good tools and their output provides reasonable proxies for the probability of exhausting our reinsurance protections, they are imperfect so actual results could vary dramatically from those expected.
AmCoastal’s all other perils catastrophe excess of loss agreement provides protection from catastrophe loss events other than named windstorms and earthquakes up to $101,000,000. This agreement provides sufficient coverage for a 1-in-250-year return period, indicating that the probability of a single occurrence exceeding protection purchased is no more than 0.4%.
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AMERICAN COASTAL INSURANCE CORPORATION
IIC’s core catastrophe reinsurance program provides coverage up to an exhaustion point of approximately $82,000,000 in the aggregate, with a retention of $3,000,000 per occurrence. Based on IIC’s PML, the program provides sufficient coverage for a 1-in-130 year return period, indicating the probability of a single occurrence exceeding protection purchased is no more than 0.8%. IIC’s program also provides sufficient coverage for a 1-in-100-year event followed by a 1-in-50-year event in the same treaty year, the probability of which is less than 0.1%.
Effective December 15, 2023, we agreed to commute a private reinsurer’s share of core catastrophe reinsurance coverage and replace this gap in coverage with new coverage provided by one of our other private reinsurers. This transaction resulted in additional expense of approximately $6,300,000 for the year ended December 31, 2023, but will result in decreased expense totaling $14,300,000 during the first half of 2024, resulting in a net economic benefit of approximately $8,000,000 net of replacement coverage for the period December 15, 2023 through May 31, 2024.
During the third quarter of 2022, the Company's core catastrophe reinsurance program was impacted by Hurricane Ian. As a result, the Company has approximately $508 million of occurrence limit remaining for Hurricane Ian, all of which is attributable to AmCoastal only. After reinstatement premiums of approximately $15.4 million, the Company, with its former subsidiary UPC, has approximately $980 million of aggregate limit remaining for events subsequent to Hurricane Ian, based on our estimated ultimate net loss subject to the core catastrophe reinsurance program.
During the third quarter of 2022, one of our private reinsurers who held a 100% share of the $15,000,000 in excess of $15,000,000 layer on our all other perils catastrophe excess of loss agreement notified us of their intent to terminate the agreement due to the contractual provision regarding the change in UPC's statutory surplus being greater than 25%. We agreed to a termination and commutation date of September 30, 2022 for this contract. This change resulted in approximately $1,300,000 of ceded premium savings that would have otherwise been due in the fourth quarter of 2022 and the Company retaining all the risk for any non-hurricane catastrophe losses up to $30,000,000, excluding any quota share recoveries.
The table below outlines our quota share agreements in effect for the years ended December 31, 2023 and 2022. The impacts of these quota share agreements on our former subsidiary, UPC's financial statements are included in discontinued operations.
Reinsurer Companies in Scope (1) Effective Dates Cession Rate States in Scope
(1) Effective May 31, 2022, FSIC was merged into UPC, with UPC being the surviving entity.
(2) This treaty provides coverage for all catastrophe perils and attritional losses incurred. For all catastrophe perils, the quota share agreement provides ground- up protection effectively reducing our retention for catastrophe losses.
(3) This treaty provides coverage on our in-force, new and renewal policies until these states are transitioned to HCPCI or TypTap upon renewal.
(4) This treaty provides coverage on non-catastrophe losses on policies in-force on the effective date of the agreement.
(5) Cessions are split 50% to HCPCI and 50% to TypTap.
(6) This treaty was amended effective December 31, 2020 to include AmCoastal.
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AMERICAN COASTAL INSURANCE CORPORATION
Reinsurance costs as a percent of gross earned premium during the years ended December 31, 2023 and 2022 were as follows:
Non-at-Risk (0.4) % (0.6) %
Total Ceding Ratio (55.8) % (49.7) %
Reinsurance costs as a percent of gross earned premium for our commercial lines and personal lines operating segments during the years ended December 31, 2023 and 2022 were as follows:
Personal Commercial
Non-at-Risk (2.2) % (1.1) % (0.3) % (0.5) %
Please note that the sum of the percentages above will not reconcile to the consolidated percentages as they are calculated using each operating segments’ gross earned premium rather than our consolidated gross earned premium.
We amortize our ceded unearned premiums over the annual agreement period, and we record that amortization in ceded premiums earned on our Consolidated Statements of Comprehensive Loss. The table below summarizes the amounts of our ceded premiums written under the various types of agreements, as well as the amortization of ceded unearned premiums:
Year Ended December 31,
Equipment, identity theft, and cyber security (2,103) (3,067) (1,499)
The breakdown of our ceded premiums written under the various types of agreements, as well as the amortization of ceded unearned premiums for our commercial lines and personal lines operating segments can be seen in the tables below. These values can be reconciled to the table above.
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AMERICAN COASTAL INSURANCE CORPORATION
Personal Lines Operating Segment
Year Ended December 31,
Equipment, identity theft, and cyber security (931) (798) (748)
Commercial Lines Operating Segment Impact
Year Ended December 31,
Equipment, identity theft, and cyber security (1,172) (2,269) (751)
Current year catastrophe losses disaggregated between named and numbered storms and all other catastrophe loss events are shown in the following table.
Current period catastrophe losses incurred
Named and numbered storms 2 $ 729 0.3 %
All other catastrophe loss events 20 14,550 5.1 %
Current period catastrophe losses incurred
All other catastrophe loss events 11 5,830 2.2 %
Current period catastrophe losses incurred
Named and numbered storms 4 $ 4,142 1.9 %
All other catastrophe loss events 10 11,554 5.2 %
(1) Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserves. Shown net of losses ceded to reinsurers. Incurred loss and LAE and number of events includes the development on storms during the year in which it occurred.
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AMERICAN COASTAL INSURANCE CORPORATION
The impact of the current year catastrophes to our commercial lines and personal lines operating segments can be seen in the tables below. Please note that the catastrophe events may have impacted both operating segments. As a result, the sum of the number of events in the tables below will not reconcile to the consolidated number of events above. In addition, the combined ratio impact is calculated and sum of the ratios in the tables below will not reconcile to the ratios above.
Personal Lines Operating Segment Impact
Current period catastrophe losses incurred
Named and numbered storms 1 $ 129 0.4 %
All other catastrophe loss events 13 2,367 8.0 %
Current period catastrophe losses incurred
Named and numbered storms 1 $ 8,903 17.7 %
All other catastrophe loss events 11 5,618 11.1 %
Current period catastrophe losses incurred
Named and numbered storms 3 $ 3,984 8.3 %
All other catastrophe loss events 7 2,182 4.6 %
(1) Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserves. Shown net of losses ceded to reinsurers. Incurred loss and LAE and number of events includes the development on storms during the year in which it occurred.
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AMERICAN COASTAL INSURANCE CORPORATION
Commercial Lines Operating Segment Impact
Current period catastrophe losses incurred
Named and numbered storms 1 $ 600 0.2 %
All other catastrophe loss events 10 12,183 4.9 %
Current period catastrophe losses incurred
All other catastrophe loss events 7 212 0.1 %
Current period catastrophe losses incurred
Named and numbered storms 4 $ 158 0.1 %
All other catastrophe loss events 10 9,372 5.4 %
(1) Incurred loss and LAE is equal to losses and LAE paid plus the change in case and incurred but not reported reserves. Shown net of losses ceded to reinsurers. Incurred loss and LAE and number of events includes the development on storms during the year in which it occurred.
See Note 10 in our Notes to Consolidated Financial Statements for additional information regarding our reinsurance program.
Unpaid Losses and Loss Adjustments
We generally use the term “loss(es)” to collectively refer to both loss and LAE. We establish reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we estimate we will be required to pay in the future, including provisions for claims that have been reported but are unpaid at the balance sheet date and for obligations on claims that have been incurred but not reported at the balance sheet date. Our policy is to establish these loss reserves after considering all information known to us at each reporting period. At any given point in time, our loss reserve represents our best estimate of the ultimate settlement and administration costs of our insured claims incurred and unpaid.
Unpaid losses and LAE totaled $370,221,000 and $842,958,000 as of December 31, 2023 and 2022, respectively. Of this total, $347,738,000 and $816,489,000 is related to our commercial lines operating segment, respectively. The remaining $22,483,000 and $26,469,000 is related to our personal lines operating segment, respectively. On a consolidated basis, this balance has decreased from year end as we continue to settle claims related to Hurricane Ian which made landfall in the third quarter of 2022.
Since the process of estimating loss reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, our ultimate liability will likely differ from these estimates. We revise our reserve for unpaid losses as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we determine the adjustments as necessary.
See Note 11 in our Notes to Consolidated Financial Statements for additional information regarding our losses and LAE.
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AMERICAN COASTAL INSURANCE CORPORATION
Discontinued Operations
On February 10, 2023, we announced that a solvent run-off for UPC was unlikely and on February 27, 2023, UPC was placed into receivership with the Florida Department of Financial Services (DFS) which divested our ownership of UPC. As a result, UPC, as well as the activities related directly to supporting the business conducted by UPC, qualifies as a discontinued operation. We have recast our Consolidated Financial Statements to exclude the results of our discontinued operations, in conformity with the U.S. generally accepted accounting principles (GAAP). For more information regarding the results of our discontinued operations, see Note 3 in our Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
We generate cash through premium collections, reinsurance recoveries, investment income, the sale or maturity of invested assets, the issuance of debt and the issuance of additional shares of our stock. We use our cash to pay reinsurance premiums, claims and related costs, policy acquisition costs, salaries and employee benefits, other expenses and stockholder dividends, acquire subsidiaries and pay associated costs, as well as to repay debts and purchase investments.
As a holding company, we do not conduct any business operations of our own and, as a result, we rely on cash dividends or intercompany loans from our management subsidiaries to pay our general and administrative expenses. Insurance regulatory authorities heavily regulate our insurance subsidiaries, including restricting any dividends paid by our insurance subsidiaries and requiring approval of any management fees our insurance subsidiaries pay to our management subsidiaries for services rendered; however, nothing restricts our non-insurance company subsidiaries from paying us dividends other than state corporate laws regarding solvency. Our management subsidiaries pay us dividends primarily using cash from the collection of management fees from our insurance subsidiaries, pursuant to the management agreements in effect between those entities. In accordance with state laws, our insurance subsidiaries may pay dividends or make distributions out of that part of their statutory surplus derived from their net operating profit and their net realized capital gains. The RBC guidelines published by the NAIC may further restrict our insurance subsidiaries’ ability to pay dividends or make distributions if the amount of the intended dividend or distribution would cause their respective surplus as it regards policyholders to fall below minimum RBC guidelines. See Note 16 in our Notes to Consolidated Financial Statements and Part II, Item 5 for additional information.
During the year ended December 31, 2023, we made no capital contributions to our subsidiaries. During the year ended December 31, 2022, we contributed $81,000,000 and $11,200,000 to our former insurance subsidiaries, UPC and FSIC, respectively. The contribution made to FSIC was made prior to the merging of FSIC into UPC. In addition, we contributed $9,574,000 to our reinsurance subsidiary, UPC Re. During the year ended December 31, 2021, we contributed $17,000,000, $8,000,000 and $17,500,000 to our former insurance subsidiaries, UPC, FSIC, and ACIC, respectively.
During 2022, we received a dividend of $26,000,000 from ACIC. During February 2021, we received a dividend of $3,500,000 from IIC.
In September 2023, the Company entered into an equity distribution agreement (the “Agreement”) with Raymond James & Associates, Inc., as agent (the “Agent”), relating to the issuance and sale from time to time by the Company, through the Agent, of up to 8,000,000 shares of the Company’s common stock, par value $0.0001 per share (the “Shares”). Sales of the Shares under the Agreement will be made in sales deemed to be “at the market offerings”. The Agent is not required to sell any specific amount of Shares but agreed to act as the Company’s sales agent for a commission equal to 3.0% of the gross proceeds from the sales of the Shares. As of December 31, 2023, 3,373,000 shares had been sold under the Agreement resulting in commissions paid of approximately $829,000 and net proceeds of approximately $26,792,000 and as of the date of this filing, approximately 4,373,000 shares have been sold under the agreement resulting in commissions paid of approximately $1,181,000 and net proceeds of approximately $38,190,000. The Agreement will terminate upon the issuance and sale of all Shares subject to the Agreement, or the Agreement may be suspended or discontinued at any time. The Company does not plan to sell additional shares under the at-the-market program during the first half of 2024.
On December 13, 2017, we issued $150,000,000 of senior notes (Senior Notes) that will mature on December 15, 2027 and bear interest at a rate equal to 6.25% per annum payable semi-annually on each June 15 and December 15, commencing June 15, 2018. The Senior Notes are senior unsecured obligations of the Company. We may redeem the Senior Notes at our option, at any time and from time to time in whole or in part, at a redemption price equal to the greater of (i) 100% of the principal amount of the Senior Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the date of redemption to the date that is three months prior to maturity. On and after that date, we may redeem the Senior Notes at par. On December 8, 2022, the Kroll Bond Rating Agency, LLC announced a downgrade of our issuer and debt ratings BBB- to BB+. As a result, pursuant to our agreement, the interest rate of our Senior notes increased from 6.25% to 7.25% effective on June 15, 2023.
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AMERICAN COASTAL INSURANCE CORPORATION
As a result of claim activity from the current and prior years, we have an obligation related to the unpaid policyholder losses and unpaid loss adjustment expenses associated with the settling of these claims. As of December 31, 2023, our total obligation related to these claim payments was $370,221,000, of which we estimate $132,176,000 to be short-term in nature (due in less than twelve months), based upon our cumulative claims paid over the last 22 years. While we believe that historical performance of loss payment patterns is a reasonable source for projecting future claim payments, there is inherent uncertainty in this estimated projected settlement, and as a result these estimates will differ, perhaps significantly, from actual future payments.
In addition to our unpaid loss and loss adjustment expenses, as of December 31, 2023 we have outstanding debt obligations related to our notes payable totaling $150,000,000. This is exclusive of interest costs, which we estimate will total $43,500,000 over the life of the debt, based on the current fixed interest rates of these notes. Our short-term obligation related to these notes payable total $10,875,000 in estimated interest payments and no principal payments. For more information regarding these outstanding notes, please see Note 12.
In connection with entering into contracts with our outside vendors, we have minimum obligations due to our vendors over the life of the contracts. Our main vendor obligations are related to underwriting tools, claims and policy administration systems. Our total obligation related to these two categories of obligations are $1,394,000, and $591,000, respectively. Of these obligations, $697,000, and $285,000, respectively are short-term in nature.
Cash Flows for the Year Ended December 31, (in millions)
Operating Activities
The principal cash inflows from our operating activities come from premium collections, reinsurance recoveries and investment income. The principal cash outflows from our operating activities are the result of claims and related costs, reinsurance premiums, policy acquisition costs and salaries and employee benefits. A primary liquidity concern with respect to these cash flows is the risk of large magnitude catastrophe events.
During the year ended December 31, 2023, we experienced cash outflows of $136,003,000 compared to outflows of $173,113,000 during the year ended December 31, 2022. This change in outflows was driven by an increase in net income of $485,333,000, net of adjustments to reconcile net income to cash. This was partially offset by a decrease in changes to our balance sheet operating assets and liabilities of $448,223,000. The change in net income can be attributed to a large net loss experienced by our former subsidiary, UPC, during 2022, as a result of Hurricane Ian exhausting our reinsurance coverage. The change in our operating assets and liabilities can be attributed to the placement of UPC into receivership in 2023 as a result of the loss above, divesting our ownership of UPC during 2023.
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AMERICAN COASTAL INSURANCE CORPORATION
Investing Activities
The principal cash inflows from our investing activities come from repayments of principal, proceeds from maturities and sales of investments. We closely monitor and manage these risks through our comprehensive investment risk management process. The principal cash outflows relate to purchases of investments. Additional cash outflows relate to the purchase of fixed assets. The primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption. During the year ended December 31, 2023, cash provided by investing activities decreased $239,379,000, driven by the divestiture of UPC which resulted in $232,582,000 in cash being removed.
Financing Activities
The principal cash inflows from our financing activities come from issuances of debt and other securities. The principal cash outflows come from repayments of debt and payments of dividends. The primary liquidity concern with respect to these cash flows is market disruption in the cost and availability of credit. We believe our current capital resources, together with cash provided from our operations, are sufficient to meet currently anticipated working capital requirements. During the year ended December 31, 2023, cash provided by financing activities increased by $52,159,000 due primarily to proceeds from the issuance of our common stock in 2023. This increase was partially offset by the return of capital related to our former noncontrolling interest of $18,335,000 during 2022 and a decrease in dividend payments of $2,589,000 since no dividends were declared in 2023.
RECENT ACCOUNTING STANDARDS
Please refer to Note 2(u) in our Notes to Consolidated Financial Statements for a discussion of recent accounting standards that may affect us.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates include those used in determining:
•reserves for unpaid losses,
•fair value of investments,
•investment portfolio credit allowances, and
•goodwill.
In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance industry. It is reasonably likely that changes in these estimates could occur from time to time and result in a material impact on our consolidated financial statements.
In addition, the preparation of our financial statements in accordance with GAAP prescribes when we may reserve for particular risks, including litigation exposures. Accordingly, our results for a given reporting period could be significantly affected if and when we establish a reserve for a major contingency. Therefore, the results we report in certain accounting periods may appear to be volatile and past results may not be indicative of results in future periods.
Reserves for Unpaid Losses and LAE
Reserves for unpaid losses and LAE represent the most significant accounting estimate inherent in the preparation of our financial statements. These reserves represent management’s best estimate of the amount we will ultimately pay for losses and we base the amount upon the application of various actuarial reserve estimation techniques as well as considering other material facts and circumstances known at the balance sheet date.
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AMERICAN COASTAL INSURANCE CORPORATION
As discussed in Note 11 in our Notes to Consolidated Financial Statements, we determine our ultimate losses by using multiple actuarial methods to determine an actuarial estimate within a relevant range of indications that we calculate using generally accepted actuarial techniques. Our selection of the actuarial estimate is influenced by the analysis of our historical loss and claims experience since inception. For each accident year, we estimate the ultimate incurred losses for both reported and unreported claims. In establishing this estimate, we reviewed the results of various actuarial methods discussed in Note 11 in our Notes to Consolidated Financial Statements.
Fair Value of Investments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are responsible for the determination of fair value of financial assets and the supporting assumptions and methodologies. We use quoted prices from active markets and we use an independent third-party valuation service to assist us in determining fair value. We obtain only one single quote or price for each financial instrument.
As discussed in Note 5 in our Notes to Consolidated Financial Statements, we value our investments at fair value using quoted prices from active markets, to the extent available. For securities for which quoted prices in active markets are unavailable, we use observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes and other relevant inputs. We also have investments in limited partnerships that require us to use the net asset value per share method of valuation to determine fair value.
See “Item 7a. Quantitative and Qualitative Disclosures about Market Risk” for more information regarding the sensitivity of our fixed maturity portfolio to changes in interest rates.
Investment Portfolio Credit Allowances
For investments classified as available for sale, the difference between fair value and cost or amortized cost for fixed income securities is reported as a component of accumulated other comprehensive loss on our Consolidated Balance Sheet and is not reflected in our net loss of any period until reclassified to net loss upon the consummation of a transaction with an unrelated third party. We have a portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be impaired as the result of a credit loss.
For each fixed-income security in an unrealized loss position, if we determine that we intend to sell the security or that it is more likely than not that we will be required to sell the security before recovery of the cost or amortized cost basis for reasons such as liquidity needs, contractual or regulatory requirements, the security's entire decline in fair value is recorded in earnings.
If our management decides not to sell the fixed-income security and it is more likely than not that we will not be required
to sell the fixed-income security before recovery of its amortized cost basis, we evaluate whether the decline in fair value has
resulted from credit losses or other factors. This is typically indicated by a change in the rating of the security assigned by a
rating agency, and any adverse conditions specifically related to the security or industry, among other factors. If the assessment
indicates that a credit loss may exist, the present value of cash flows expected to be collected from the security are compared to
the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized
cost basis, a credit loss exists and an allowance for credit losses will be recorded in earnings. Credit loss is limited to the
difference between a security's amortized cost basis and its fair value. Any additional impairment not recorded through an
allowance for credit losses is recognized in other comprehensive loss.
If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an allowance for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive loss. If we determine that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
Due to the adoption of Accounting Standards Update (ASU) 2016-01 (ASU 2016-01) as of January 1, 2018, equity securities are reported at fair value with changes in fair value, including impairment write-downs, being recognized in the revenue section of our Consolidated Statements of Comprehensive Loss.
See Note 2(b) in our Notes to Consolidated Financial Statements for further information regarding our credit loss testing.
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AMERICAN COASTAL INSURANCE CORPORATION
Measurement of Goodwill and Related Impairment
Goodwill is the excess of cost over the estimated fair value of net assets acquired. Goodwill is not amortized but is tested
for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate,
indicate that there may be justification for conducting an interim test. We test goodwill for impairment by performing a
quantitative assessment. Goodwill is impaired when it is determined that the carrying value of a reporting segment is in excess of the fair value of that reporting segment. The valuation methodologies utilized are subject to key judgments and assumptions that are sensitive to change. Estimates of fair value are inherently uncertain and represent only management’s reasonable expectation regarding future developments.
Please refer to Note 2(k) and Note 9 in our Notes to Consolidated Financial Statements for further information regarding our measurement of Goodwill and Related Impairment.
RELATED PARTY TRANSACTIONS
There were no related party transactions for the years ended December 31, 2023, 2022 and 2021.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our investment objective is to preserve capital, maximize after-tax investment income, maintain liquidity and minimize risk. Our current investment policy limits investment in non-investment grade debt securities, and limits total investments in preferred stock, common stock and mortgage notes receivables. We also comply with applicable laws and regulations that further restrict the type, quality and concentration of our investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, and preferred and common equity securities.
Our investment policy was established by the Investment Committee of our Board of Directors and is reviewed regularly. Pursuant to this investment policy, our fixed-maturity portfolio is classified as available for sale and we report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive loss within our stockholders’ equity (deficit). We do not hold any securities that are classified as held to maturity and we do not hold any securities for trading or speculation. We do not utilize any swaps, options, futures or forward contracts to hedge or enhance our investment portfolio. The unrealized gains or losses related to our equity securities are recorded on the income statement per the guidance in ASU 2016-01.
INTEREST RATE RISK
Fixed-income securities are sensitive to potential losses resulting from unfavorable changes in interest rates. We manage the risk by analyzing anticipated movements in interest rates and considering our future capital and liquidity requirements.
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AMERICAN COASTAL INSURANCE CORPORATION
The following table illustrates the impact of hypothetical changes in interest rates on the fair value of our fixed-income securities at December 31, 2023 and 2022:
Percentage
Increase
Change in (Decrease) in
Estimated Estimated Estimated
Hypothetical Change in Interest Rates Fair Value Fair Value Fair Value