American Coastal Insurance Corporation (ACIC | UIHC)

Executive Summary

• American Coastal Insurance Corporation (“American Coastal” or “AmCo”) is a commercial property & casualty insurance carrier in the state of Florida that exclusively insures garden-style condominium and homeowner association properties against hurricanes and other catastrophe risks.
• American Coastal is a gem of a business hiding in plain sight. Since its founding in 2007, American Coastal has dominated its niche and captured 40% of its TAM. It has also delivered an average ROE of 23.1%, has demonstrated exceptional loss and profitability ratios, and has never had an unprofitable year despite withstanding several major hurricanes.
• This opportunity exists chiefly because until several months ago, American Coastal was a subsidiary within publicly traded United Insurance Holdings Company (“UIHC”), whose primary business was selling personal homeowner’s insurance policies under its main subsidiary United Property & Casualty Insurance Company (“UPC”). In April 2023, The Florida Department of Financial Services memorialized the “GoodCo-BadCo” deconsolidation of UIHC and took “BadCo” UPC into receivership, leaving shareholders today with “GoodCo” American Coastal.
• American Coastal’s #1 market share position is firmly protected by a set of competitive advantages and barriers to entry that are borne from its exclusive relationship with AmRisc, the largest catastrophe-focused MGA in the U.S. and with whom for all intents and purposes American Coastal is vertically integrated. These competitive advantages translate to pricing power over competitors, strong customer retention rates, higher margins, and high customer switching costs.
• Shares appear exceptionally undervalued based on our EPS estimates of $1.89-$2.86/share over FY24-29 vs. today’s share price of $5.63. Our estimates imply a FY24E P/E of 2.9x, FY25E P/E of 1.9x, and a P/BV and P/TBV of <1x by mid-FY25 while delivering 53% ROE. From FY25 onward, with a healthy capital surplus, American Coastal should return 100% of its incremental net profits to shareholders, which at today’s price would imply a ~50% dividend yield and/or significant share repurchases. We see an asymmetric path for American Coastal’s share price to appreciate from $5.63 today to $16.00 – $22.00 over the next 24-36 months.
• Founder and CEO Dan Peed owns 48% of shares outstanding and has an impressive track record of not only building American Coastal, but also co-founding AmRisc in 2000 which is the nation’s largest catastrophe-focused MGA. Based on our channel checks, Dan has an excellent, revered reputation in the industry. Notably, now that the UPC deconsolidation is finally complete, Dan is eager to launch a new MGA under the American Coastal public company, which we view as a free call option that could be valued at $400MM in and of itself by FY27.

American Coastal: Overview

American Coastal is a U.S.-listed small-cap commercial property & casualty (P&C) insurer headquartered in St. Petersburg, Florida. Since its founding in 2007, the company has exclusively been in the business of selling windstorm insurance policies to the specific niche of garden style condominium and homeowner association properties within the state of Florida.

As most readers will know, all properties in the state of Florida, whether personal or commercial, must insure against one particular type of property risk that is not as relevant in other states, which is hurricane windstorm risk. While the thought of evaluating a hurricane insurance company can seem daunting, I firmly believe that learning more about the opportunity at American Coastal will prove to be worthwhile, and I will try my best to illustrate a clear picture of the company and its industry.

Perhaps unsurprisingly, many Florida property insurers have a poor reputation, not only among their customers but among Wall Street as well. In the early-mid 2010s, a “trio” of Florida homeowner’s insurance carriers Universal Insurance Holdings (UVE), HCI Group (HCI), and Heritage Insurance Holdings (HRTG) became subjects of short reports on VIC, primarily because all three were engaging in a now-defunct practice of cherry-picking insurance policies from Florida’s state-owned insurance provider Citizen’s. UVE in particular caught the attention of investor Anthony Bazzo, who at the 2015 Robin Hood Investors Conference presented a short pitch on UVE so compelling that Lee Ainslie of Maverick Capital deemed it “the best short pitch he’s ever seen in 25+ years in the industry.”

I mention this because, in stark contrast to the “trio,” American Coastal in terms of both its business model and business quality is worlds apart and incomparable in just about every respect. While the personal lines “trio” generated its profits by exploiting an unsustainable, commoditized policy acquisition mechanism, had no proprietary underwriting advantages, and eventually suffered net losses, American Coastal operates in a different sector altogether, has established a deeply entrenched set of competitive advantages, has maintained 30% or greater market share within its niche since 2014, has developed a loyal customer base that loves doing business with them, and has never sustained an operating loss in its entire 16-year operating history despite weathering several major hurricanes over the years. Simply put, AmCo is a much better, more durable business than any of the aforementioned personal lines, or homeowner’s insurance, carriers.

For those glancing at ACIC/UIHC’s financial statements for the first time, one should understand that much has transpired in recent years, and that the historical GAAP financial statements prior to 2023 do not reflect American Coastal’s financial history, but rather that of “BadCo” UPC, a business which is no longer owned by or associated with ACIC/UIHC. To summarize the history of events among these entities, UIHC, the public holding company, was primarily a personal lines insurer through its owned entity UPC. UIHC acquired private company AmCo in 2016. But, in the years that followed, executive decisions at UPC caused it to perform so poorly that in June 2020, AmCo founder Dan Peed ousted then-CEO of UIHC John Forney and assumed the role of CEO in an attempt to save the company. His first order of business was to begin trying to save UPC, which at the time represented 69% of the company’s policies, by exiting certain states and salvaging others. Fast forwarding several years and many developments later, UPC was placed into runoff in August 2022, and in April 2023 UPC finally became legally deconsolidated from UIHC, as memorialized by the Florida Department of Financial Services (DFS). This has left shareholders today with simply AmCo and an immaterial subsidiary Interboro that is likely to be sold in the coming months.

As a result, for the first time in its history, American Coastal is now a standalone public company, and as of Q1 2023 its GAAP financials have begun reflecting American Coastal without the burden of UPC. In fact, to signify this milestone, in recent weeks the company announced the change of its corporate name from United Insurance Holdings Corporation to American Coastal Insurance Corporation, and a change of its ticker from UIHC to ACIC, both of which will take effect on August 15, 2023.

We believe this opportunity exists because of how recently the series of deconsolidation events has occurred, the lack of research coverage on the sell-side and buy-side, the lack of relevant historical GAAP financial statements on AmCo (statutory annual filings from 2008-2022 can be found at www.naic.org), the negative bias against Florida insurers, misperceptions around how to think about hurricane risk, and the tendency for investors to place insurance companies into the “too hard” pile. Now that UIHC/ACIC has shifted from a complex situation to clean one, we think it is only a matter of time before the market recognizes the opportunity at hand. We see a clear path to American Coastal’s share price appreciating from $5.63 today to a range of $16.00 – $22.00 or a +180-290% gain over the next 24-36 months.

Introduction to American Coastal

History of American Coastal

In the year 2000, before founding American Coastal, Dan Peed along with two of his classmates from Texas A&M University co-founded a company in the insurance industry called AmRisc. Dan was the leading figure and served as CEO. The three co-founders, all with degrees in engineering, first began working in the construction industry where they learned the ins and outs of commercial property structures. Eventually, they came up with the idea of using their combined knowledge to form a managing general agent (MGA) that specializes in underwriting catastrophe-focused insurance policies for commercial properties.

In the insurance industry, an MGA is an entity in the insurance value chain that sits between the insurance broker and the insurance carrier. An MGA’s main function is to specialize in the underwriting and pricing of insurance policies, or in other words, to leverage their internal experience and data in order to accurately price individual insurance policies based on customer risk profiles. An MGA can provide a carrier with instant infrastructure, including well-managed risk and governance structures, intellectual property in underwriting pricing, and access to underwriting talent, all of which can be an instant saving for the carrier since this would require significant investment to build from scratch. The insurance carrier might consider asking the MGA to underwrite its policies in exchange for paying the MGA commission fees. MGAs also perform other value-add functions such as distribution and claims management.

(Source: The Insurance Stack: A Battle for Margin)

Since its founding in 2000, AmRisc has gone on to be wildly successful, and today stands as the largest catastrophe-focused MGA in the United States. AmRisc has underwriting reach across six states, business relationships with a dozen or so of the world’s largest insurance carriers including Zurich, Lloyd’s, and AIG, and underwrites over $2 billion in annual gross written premiums.

In 2004 and 2005, Florida experienced an unlucky string of major hurricanes, which caused a great deal of damage in a short period of time. Many of the major insurance carriers, and smaller carriers as well, writing windstorm policies were either no longer comfortable underwriting hurricane risk or realized they hadn’t developed the proper underwriting skills to underwrite hurricane risk under state-admitted guidelines, and as a result stopped offering admitted policies to certain segments of the market. This created a large void in P&C insurance supply, particularly for personal lines and low-rise commercial-residential lines, because policies in these segments carried premiums that were deemed too small by the major carriers for them to be interested in dealing with the associated hurricane risk. This quickly became problematic for many property owners across the state, because purchasing property insurance is either required or prudent, and suddenly they were left with no attractive options. Most property owners were forced to resort to purchasing P&C insurance from state-owned insurer Citizen’s, whose policies offer less than desirable coverage and whose government-led customer service is subpar.

From his perch at AmRisc, Dan saw this void developing in real time. Specifically, he noticed that within the commercial-residential property insurance sector, there was a large gap forming in the property insurance market for 1-to-6 story, garden style condominium and homeowner association properties. While demand for high-rise commercial policies with large premiums was being better met by major carriers, garden style premiums of ~$50,000/year were not large enough to attract new entrants.