American Coastal Insurance: A Remarkable Comeback

Investment Thesis - American Coastal Insurance reported strong first quarter earnings with an underlying combined ratio of 57.8% and core ROE of 69.7%, indicating exceptional profitability metrics compared to peers [1] - The company's shares are considered a buy due to attractive premiums in coastal homeowners insurance and cheap valuation metrics relative to the sector median [1] Company Overview - American Coastal Insurance is engaged in commercial and personal property and casualty insurance, focusing on high-risk areas like Florida and New York [2] - The company employs a contrarian underwriting strategy, targeting perceived high-risk areas where larger carriers have reduced their policy concentration [2] - The company has a robust reinsurance program providing significant coverage, which enhances its reputation and profitability [2] Operational Efficiency - The company demonstrated improved efficiency with an expense ratio reduction from 43.4% to 35.2% year-over-year in Q1 2024 [3] - American Coastal's investment strategy focuses on stable debt securities, contributing to its low-cost operational history [3] Earnings Performance - For Q1 2024, net income was $23.6 million, or$0.48 per diluted share, with total gross written premiums increasing by 5.5% to $197.5 million [4] - The company successfully reduced loss and LAE by 3.1$15.9 million, attributing strong performance to better rates in high-risk areas [4] - Management expects continued premium growth and has renewed its MGA agreement with AmRisc, indicating confidence in future earnings [4] Personal Lines Segment - The personal lines insurance segment experienced a spike in loss ratios from 29% to 71.4% year-over-year, prompting management to cut costs significantly [5] - Rate increases in the personal lines market are expected to stabilize, leading to improved loss ratios and potential earnings growth [5] - The company has low retention in its reinsurance agreements, which protects against extreme losses [5] Valuation - Projected revenues are expected to reach $300 million by 2025, with a conservative net margin of 25$75 million [6] - The fair value of the stock is estimated at $15 per share based on a 10x P/E ratio, which is slightly below the sector median [6] - The P/B ratio of 2.0x may not accurately reflect future valuation due to past losses, suggesting a potential undervaluation of the company [6]