Hello, everyone. Thank you for joining us, and welcome to the American Coastal Insurance Corporation Q3 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Bennett Bradford Martz, President and CEO. Brad, please go ahead.
Thank you. Before beginning our commentary, I must first ask everyone to please see page two of our earnings presentation for more information regarding forward-looking statements. During the third quarter of 2026, American Coastal continued to maintain its market leadership position in Florida commercial residential property insurance, evidenced by, one, strong account retention near 90%; two, policy in force growth of roughly 7% year- to- date; three, a 3.2% increase in gross premiums written during the current quarter compared to the same period a year ago, despite downward pressure on average account rates; and finally, but most importantly, delivering a combined ratio of 64.7%, which fueled a core return on equity of over 24%. While our core business continues to produce great results, I am very excited about how American Coastal's business profile is evolving.
During the quarter, we announced our new E&S carrier, ACES Specialty, was formally licensed, and it will be the cornerstone of controlling our E&S growth strategy over the long term. In the near term, we remain on track to formally produce and underwrite our first new E&S property insurance policies on or about the end of the 2026 hurricane season, utilizing one or more third-party carriers who already have the financial rating and licenses needed to commence this important strategic initiative. Our MGA, Skyway Underwriters, already has several submissions in the pipeline. We have cleared and quoted many of these, so it is reasonable to expect we will bind some new business in December. Given the challenges with soft market conditions in commercial property insurance, our strategy is to remain very selective and disciplined in both the admitted and the non-admitted commercial property markets.
Thus, I am compelled to reiterate that while top-line growth is nice when new business makes sense, our focus remains locked in on underwriting profitability and risk-adjusted returns on capital. It is currently premature to provide any revenue or earnings guidance for 2027. Our historical process for sharing that annual forward-looking information has been to publish an investor presentation and host a call in January once we have finalized those estimates. The commercial property market remains very dynamic and competitive, with some players doing very reckless and irresponsible things to win new business. This is likely to persist into 2027, but I do expect things to moderate compared to the changes in pricing, terms, and conditions American Coastal experienced this year. ACIC will not require any additional capital to achieve our primary goal of earnings growth over time.
We have made the investments required to expand our business and still have excess capital that could be returned to shareholders through a special dividend, assuming no significant catastrophe losses occur in the fourth quarter. Hurricane Isaias will have a minor impact on our fourth quarter, but it is unlikely to influence our board's consideration of declaring a special dividend later this year. I will now turn it over to our Chief Financial Officer, Lana Castle, for more specifics on our financial results. Lana?
Thank you, Brad, and hello. I will provide the financial update but encourage everyone to review the company's press release, earnings and investor presentations, and Form 10-Q for more information regarding our performance. As reflected on page seven of the earnings presentation, American Coastal demonstrated another strong quarter with net income of $19.4 million. Core income was $20.4 million, a decrease of $10.1 million driven by softening market conditions. But the company still produced a strong core return on equity over 24%. Our non-GAAP underlying combined ratio, which excludes current year catastrophe losses and prior year development, was 68.4% compared to 57.8% in the prior year. We continue to demonstrate underwriting discipline through the market cycle. As shown on page 15 of our presentation, revenues decreased to $19.7 million. Expenses decreased $4 million in the current year, driven by favorable prior year development and low operating expenses quarter-over-quarter.
Page 16 shows balance sheet highlights. Cash and investments have increased 9.3% from year-end. The company's liquidity position remains strong. Stockholders' equity increased by $38.1 million or 12% to $355.7 million, driven by our underwriting results. Book value per share is $7.52, a 15.5% increase from year-end 2025. The company is well positioned to navigate the shifting market and capitalize on growth opportunities. This concludes our prepared remarks. We will now open the floor for questions. Thank you.
We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Michael Phillips with Oppenheimer. Your line is open. Please go ahead.
T hank you. Good evening, everybody. Brad, it might be too early to talk about this immature. As we think about the ACES and Skyway and the platform there for E&S, is it possible to think about maybe the difference between fee income in 2027 versus how much you will retain on an underwriting risk basis?
Thanks for the question, Mike. Yeah, it is probably a little early to talk about that. We are working on sourcing various forms of capacity for Skyway, one of which would be a fee income earning opportunity for our MGAs. Some of the premium we expect to generate and business we expect to underwrite next year will lead to growth in fee income beginning in 2027. But I would like to defer getting into the specifics of that until we preview our revenue and profitability metrics early next year. My guess is we will be able to demonstrate some nice top-line growth year-over-year when comparing 2027 to 2026, both in terms of gross premiums written, gross premiums earned, net premiums earned, and total revenues. I do think we have some very positive momentum in our business right now regarding our growth initiatives.
That just has to be tempered, obviously, by good cycle management. While we are optimistic and still feel very comfortable underwriting in the current pricing environment, how much business we actually produce next year, our plans are still being developed and finalized. How much of that will result in fee income growth to the company is also still being determined.
Okay. No, that is fair. Look forward to that then in January. No, it will be good conversation. This might be the same answer then. Obviously, lots of moving parts as we try to figure out, I guess, a net acquisition ratio, given all the different things. Gross commission rates, the ceding rates are changing. The AmRisc participation, obviously, if I can net. All those moving parts. Is there anything we can take away tonight to think about how to remodel that for 2027? Given, obviously, there is the drop in net earned premium, but a lot of moving parts there.
Well, I think the ratios should be relatively consistent going forward. Obviously, there is some amortization of deferred policy acquisition costs that is understating the current run rate on a fully earned basis. But there will be a slight increase there, but certainly the net impact on our ability to grow earnings will not be a significant headwind for us. Policy acquisition costs on the E&S side are obviously slightly higher because of fronting fees that we expect to incur as we produce business through other third-party carriers and transfer that risk to ourselves and to others. But overall, I think the PAC ratio is not going to move all that dramatically next year.
Okay. Thanks, Brad. On the gross written premium, is it fair to just back out that 8.6 from E&S to get a sense of what the underlying book did this quarter?
Yes, I think that is fair.
Okay, good. As you said, it is a continuation of a pretty soft environment. If you do that, you are down 9% or so, which is not bad at all, given the rate environment. Anything you can talk about in terms of retentions and renewal pricing, exposure change, anything else that might be an offset to those pretty sharp declines in pricing?
The renewal business account retention is one key factor we are paying close attention to. Renewal business tends to be a lot more profitable than writing new business. Keeping that account retention as high as possible is priority one, so we are doing a great job on that front. Both AmRisc and Skyway are working hard to retain our best business. That is going great, but the market is the market. We do not control the rate environment. We will be able to overcome some of that loss of premium through rate change via writing some new business as well as growth in the E&S side of the house. That is obviously, step one of that with the co-participation in the nationwide portfolio underwritten by AmRisc is great.
That is really helping offset some of the premium weakness this year, but that will really be more than fully offset next year, and why I expect it is possible, it is feasible to see revenue growth year-over-year. Even if rates continue to be in decline. That is the thing. How much rates continue to decline next year is anyone's guess. We have targeted an estimate, at least preliminary for financial modeling purposes. But even inclusive of a double-digit rate decrease next year, we still feel like revenue growth is possible because of this evolving and expanding business profile.
Okay. Yeah, thank you. Just last one real quick, I guess, because you mentioned whatever may happen in the fourth quarter and what that might do, possibility of a special dividend. Just to confirm, I did not see any share repurchases quarter. Just confirm that was the case.
I can confirm there were no share repurchases during the third quarter.
Okay, cool. Thank you very much, and congrats. Appreciate your time.
Thank you. You're welcome.
Your next question comes from the line of Bill Dezellem with Tieton Capital Management. Your line is open. Please go ahead.
Great. Thank you. Brad, you mentioned in your opening remarks that you believe that the price decline next year will moderate. Would you talk through the background of what's prompting you to think that?
Several factors. Obviously, there's an expectation of only writing business that can produce a solid return on capital. There's only so much rate decrease I think we're expecting and our reinsurers are expecting based on changes that have already occurred. As we look forward, we just feel that that will be the case. The current velocity of rate change is slowing down a little bit. That was not necessarily true for the first half of the year, and some of that bled into the third quarter for sure. But 20% year-over-year decline is not sustainable. Prices aren't going to continue to free fall like that. An adjustment was warranted. The operating environment is very competitive and there's lots of excess capital out there. Obviously, no storms will continue to exacerbate that a little bit as capital remains hungry.
From our perspective, regardless of what happens in the industry, we're going to be looking to moderate what we underwrite going forward. We'll see if that prediction holds true, but I do think that it's reasonable that whatever rate change we experience, we're going to see a very similar, if not greater offset on the change of our cost of reinsurance. Those are the two things we like to keep in focus. Our pricing has always followed our cost of capital on the reinsurance side. We've kept those two things very much aligned since our inception, and that's how we continue to maintain margin in the business.
That's very helpful. Thank you, Brad. You made reference to the E&S market and the way that you're approaching that now using others' balance sheets, and that will ultimately shift to ACES once that is up and running. Would you walk us through how you envision that transition taking place? And whether it's just truly as simple as you're doing the exact same thing, just given to ACES as opposed to an external party, or if there's something more, for lack of a better word, something more complicated to it.
No, it really is that simple. I think part of it is having good, strong partners and that can provide additional capacity will just allow us to underwrite more business. That the bottom line. The more capacity the MGA has, the better. Most of that will be retained by the company, but we do envision a partnership with one capacity provider who has a Lloyd's syndicate that we are hopeful to write on behalf of that will generate fee income, where we will not be the primary risk taker. We could take a small co-participation in the business we underwrite on their behalf. But, for the most part, that relationship, which is obviously still in negotiations and in development and nowhere near complete. But we're being thoughtful and we're excited about the prospect of being able to start underwriting on behalf of other third parties next year.
Initially, the business will be transformed to our balance sheets, because we want to utilize our capital and continue to earn strong returns on our capital. The build-out of ACES is really a function of getting the rating process where they invest will take time, the white-listing process in the various states will take time. For example, there are states that have three-year seasoning requirements out there that will prohibit ACES from being a direct writer of new business. We are not going to let that stop us. We will partner with carriers that already meet those requirements and write the business. The quicker we can transform business to ACES, theoretically the better, given the potential profitability enhancement. But we see strategic value long term in continuing to partner with other carriers that can allow Skyway to build a meaningful E&S risk portfolio.
Size, scale, diversification will be important to our long-term success. If I look out five years, I can definitely see a dramatically different mix of business at our company as a result of having various partners and not just being solely dependent on ACES's balance sheet for growth.
Brad, to carry that one step further, just to be sure that we are clear here. Long term, not in the short term, but long term, the amount of business that you see potentially out there is greater than what ACES's capital would allow, and maybe even in some areas that ACES may not be interested in taking risk on. But that is not going to stop you all from having Skyway be able to do that essentially, or write that business for a fee on behalf of others. Is that the right way to think about that?
Yes, I do believe so. We are first and foremost a balance sheet underwriter. We are an underwriting shop. To the extent it makes sense to deploy our capital, we will. But certainly, having partners who can help us build this risk portfolio and earn fees is part of our short and long-term strategy.
It is probably premature for me to ask this question, but that won't stop me from seeing what you might want to add here. At what point do you think that the amount of business that Skyway will be in a position to write will exceed the amount of capital that ACES has and is able to take on, even if they wanted to?
I don't think that's a real risk in the near term. Longer term, it's certainly possible, but I think that's something that's beyond 5 years. Remember, we can always control the amount of net risk we retain via reinsurance. So if ACES is capitalized with $100 million and is properly rated, we believe utilizing reinsurance is going to be the easiest way to manage the net premium risk to the company to avoid having to raise additional capital. To the extent that let's just assume for a second, maybe the market shifts or it hardens and terms and conditions improve dramatically, then maybe it could make sense to add capital and move faster to capitalize on that opportunity. We'll just have to see.
Great. Thank you. Thanks for taking all the questions, Brad.
Yes, sir. You're welcome.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.