American Integrity Insurance Group, Inc. (AII) Earnings Call Transcript

Good morning, and welcome to American Integrity Insurance Group's Third Quarter 2026 Earnings Conference Call. My name is Joel, and I will be your operator today. [Operator Instructions] This call is being recorded. But before we begin, please note that today's remarks may contain forward-looking statements, including comments about the company's outlook, strategy, plans, and expected performance. These statements are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially. A full discussion of these risks and uncertainties can be found in the company's SEC filings, including its most recently filed annual report on Form 10-K and quarterly reports on Form 10-Q. Management undertakes no obligation to update any forward-looking statements, except to the extent required by law. Furthermore, today's remarks may contain non-GAAP financial measures. A reconciliation of non-GAAP financial measures to their most comparable GAAP measures is included in the company's quarterly press release and can also be found on its website at www.aii.com. References to American Integrity or the company prior to the consummation of the IPO refer to American Integrity Insurance Group, LLC, and after the consummation of the IPO, refer to American Integrity Insurance Group, Inc. With that, I'll turn the call over to American Integrity's Founder and Chief Executive Officer, Bob Ritchie. Please go ahead.

Thank you, and good morning, everyone. Before I discuss our performance, I want to acknowledge the families and the communities affected by Hurricane Isaias. Insurance is a promise made long before it's tested, and following the storm, our team quickly mobilized to the panhandle within 48 hours, meeting our policyholders face-to-face and helping them to begin the claims process and the recovery. I want to thank all of our employees, our agents, our claims partners for doing that important work. Their response reflects what American Integrity was built to do. Now turning to our results. This quarter tells an important story about the company we have built over the past 20 years. We are continuing to grow our voluntary business. We're retaining more of the economics that we create, and importantly, we're maintaining the underwriting discipline in a more competitive market. Our net income has more than doubled year-over-year to $28.4 million in the third quarter. Net premiums earned increased approximately 95% to $101.2 million. Revenue grew 83% year-over-year. Our combined ratio was 70.6%, and our annualized return on equity was 29.8%. More importantly, our results demonstrate how our operating strategy is translating to very strong financial performance. Within our results, the continued growth of our voluntary business is very encouraging. We wrote approximately 41,000 new voluntary policies in this quarter. That's 57% more than the quarter a year ago, and it follows record production in the second quarter. Our total policies in-force have increased 18.6% to more than 481,000, and our in-force premium increased 17.4% to nearly $1.1 billion compared to the prior year period. So as we continue to grow and build scale, we have maintained our focus on sound risk selection. We are not pursuing policy count for its own sake. We're pursuing business that we know we can underwrite responsibly and serve well. Let's talk about the couple of segments where we're growing. Tri-County is one example of where we see room to grow continuously. We have historically been underrepresented there, yet we now have considerable underwriting experience in the region and longstanding relationships with agents serving it. Improved market conditions have allowed us to expand our appetite and put that experience to work. We believe we can build our presence in Tri-County by being the dependable partner to agents while selecting business that meets our underwriting requirements. The next segment is middle-aged homes. This provides another opportunity, as we talked about, to apply the experience we already have. This was a core part of our business before Florida's litigation crisis changed the economics of this business, and it prompted us to reduce our participation during the crisis, but not now. With the reform being as strong as it is and an improved operating environment, we are expanding there again. And that history matters because we understand the segment, and we have demonstrated a willingness to change our participation as these conditions have changed and improved. So our decisions today must be based on the properties we are underwriting and the returns we expect them to generate. Together, these opportunities give us greater flexibility in where we can write business. We're using that flexibility to build a portfolio that performs over time. Jon Ritchie will discuss the production, the underwriting considerations, and the choices behind that approach. Our ability to capitalize on these opportunities is directly supported by our independent agency relationships, which are a competitive strength that took us years to earn, and frankly, cannot be replicated simply by deploying capital. In Florida, agents, of course, have choices, and those choices are naturally expanding. We must earn those recommendations every day through a combination of underwriting appetite, consistency, responsiveness, and claim service. These relationships help us identify opportunities, while disciplined execution determines whether we convert them into profitable business. We recently brought together about 50 of our leading agents at what we call our Power of Partnership event. We spent time discussing their businesses, discussing their needs that they see in their communities, and how our evolving appetite can help them serve customers. These discussions are valuable because they connect the opportunities agents see with the business we want to write. We have spent 20 years building these relationships. Our agents know our people, our agents understand how we underwrite, and our agents know the service they can expect from us. In turn, we understand their businesses. We want that familiarity to translate into confidence when an agent recommends American Integrity to a homeowner. And so, the work behind a relationship continues well after a policy is written, particularly when a customer has a claim. We believe consistent execution across that relationship is how we earn an even greater share of our agent partners' business over time. These relationships are particularly valuable as Florida's property insurance market is becoming healthier and yes, more competitive. Availability has increased, pricing has moderated, and additional capital has entered, and that's good for homeowners. It also raises the standards for all of us as insurers. And in this environment, results will increasingly depend upon underwriting judgment, distribution relationships, operating efficiency, and the ability to adapt, not merely on the market cycle. We welcome that test. Importantly, our average premium per policy across our portfolio has remained broadly stable year-over-year. That average includes changes in business mix as well as pricing. Growth in Tri-County and middle-aged homes is helping to offset appropriate modest rate reductions elsewhere in our book. Our inflation guard adjustment also provides support as rates moderate. And so, we'll continue to evaluate pricing against the cost of the risk we are accepting. A portfolio average is very useful context, yet it does not replace that evaluation at the product and market level. We continue to see the benefits of Florida's legislative reforms in lower litigation activity, favorable loss cost trends, and greater insurance availability. Now these improvements have helped make additional businesses attracted to write and allowed more carriers to serve homeowners. That's not a bad thing. That's a very responsible, healthy thing in this environment. Preserving a stable operating environment matters to the customers who need coverage and to the capital required to provide it. And so, we'll continue to advocate for policies that support a healthy, competitive insurance market. I also want to congratulate Florida's newly elected officials just last week, and we look forward to working with the incoming administration and state leaders. We believe this election outcome supports continuity of these reforms, and we will continue to advocate for a stable, competitive market that serves Florida homeowners. Our opportunity is not limited to one quarter and one part of Florida. We continue to see room to serve more homeowners in South Florida, in segments of middle-aged homes we know well, and selectively across the Southeast. Yet the defining principle is the same in every market. We will grow where risk-adjusted returns justify the capital we commit. Retaining more of our underwriting economics increases the opportunity for our shareholders and increases our responsibility to manage risk carefully. Jon will now take you through how we're executing on these choices. And with that, I'll turn the call over to Jon.

Thanks, Bob, and good morning, everyone. I'll discuss production across our growth initiatives, underwriting performance, and reinsurance. I'll also update you on Hurricane Isaias, which occurred after the third quarter ended. Gross premiums written increased 22.7% to $293.3 million, primarily driven by voluntary business growth. Retention improved to 84.9% from 84.4% in the second quarter and 82.8% a year ago. We are adding new business while retaining a greater share of our existing customers. Both contribute to building our portfolio, and we will continue to evaluate retention alongside pricing and loss performance as competition increases. Florida offers substantial opportunities in market segments where our current participation remains relatively small. Market size helps us identify where to look. Our underwriting requirements determine which opportunities we pursue. In Tri-County, we wrote approximately 8,000 voluntary new business policies, compared with just over 200 a year ago, and approximately 7,600 in the second quarter. Our sequential growth is encouraging given that the second quarter tends to be our strongest seasonal period for new business. Importantly, Tri-County represents approximately 28% of Florida households and 10% of our Florida policies in-force as of September 30. That comparison helps illustrate our relatively small presence and the opportunity for future growth. It does not prescribe our eventual mix. Outside Tri-County, we wrote approximately 8,600 voluntary new business policies on middle-aged homes, compared with fewer than 600 a year ago. This market segment represented about 3/4 of our HO3 policies in force in 2016, before we reduced our participation during the litigation crisis. That experience gives us a foundation as we expand. We are applying it to today's property characteristics, pricing, and loss conditions rather than seeking to recreate a historical portfolio mix. As we expand, we look at both the property and what it adds to our overall exposure. Eligibility requirements, roof condition, and inspections help inform selection at the policy level. Geographic concentration and catastrophe exposure also matter when we consider the portfolio. We evaluate those factors together so that an attractive production opportunity remains consistent with our risk appetite. In Georgia, South Carolina, and North Carolina, voluntary new business policies increased 20% year-over-year. These states accounted for 6.9% of our voluntary in-force premium at quarter end. We see an opportunity to grow this business over time through builder and agency relationships we have already developed. Those partners know American Integrity and our operating approach, giving us a foundation for introducing additional products. We plan to expand our offerings in these states in 2027, including dwelling fire coverage, where agents have expressed strong demand, and we are working on the applicable product filings and approvals as we speak. The contribution is still relatively small, but we believe expanding these relationships can continue to broaden our business beyond Florida as the portfolio develops. Turning to Florida's commercial residential market, the market segment remains highly competitive, and while we see selective opportunities, we do not expect this business to be a leading growth driver. As of September 30, we had 283 commercial residential policies in-force and $16.7 million of in-force premium. As we have discussed, we write business only where it meets our underwriting and return requirements. Lastly, we did not participate in a Citizens take-out this quarter because the policies available to us did not meet our underwriting and targeted profitability standards. However, we will continue to evaluate future opportunities. As you can see, having multiple sources of voluntary growth gives us choices about where to deploy capacity. Our decision on Citizens and our selective approach to commercial residential business are examples of how we use that flexibility. We will continue to evaluate those opportunities while directing our efforts toward business that meets our underwriting and return objectives. Our gross underlying loss ratio was 18.9%, compared with 19.3% a year ago. We are encouraged by that consistency as production grows and the portfolio mix evolves, and we will continue to evaluate the emerging loss experience of newer business as it matures. The aggregate ratio is an important measure, and the performance developing within the portfolio will inform how we adjust our participation. Turning to Hurricane Isaias, this is a fourth quarter event and is separate from the catastrophe losses in our third quarter results. Based on the information available today, we view it as a manageable loss event. Our preliminary estimate is up to a $35 million loss. As a reminder, our catastrophe excess of loss program attaches at $35 million. The claims process remains at an early stage, and our estimate may change as claims develop. We view a loss up to $35 million as a conservative estimate at this time and will provide an update when we report fourth quarter results. Based on what we know today, we do not expect Isaias to materially change our outlook for the June 1, 2027 reinsurance renewal. We continue to anticipate a favorable pricing environment while recognizing that terms will depend on industry loss experience, available capacity, and conditions at renewal. The third quarter was the first full quarter under the catastrophe reinsurance treaty that renewed on June 1, 2026. Our ceded catastrophe excess of loss premium ratio declined to 42.7% from 48% a year ago, primarily reflecting improved risk-adjusted pricing. We continue to expect program costs of $430 million to $440 million for the treaty period. With that, I'll turn the call over to Brian for a more detailed review of our financial results.

Thanks, Jon. We generated net income of $28.4 million, or $1.44 per diluted share, compared with $13.2 million, or $0.67 per diluted share a year ago. Adjusted net income was $28.3 million, or $1.44 per diluted share. Income before taxes increased 111% to $39.6 million from $18.8 million in the prior year period. I'll walk through the underlying premium growth, the effects of our reinsurance decisions, and the expense comparisons because they help explain the strong year-over-year growth. Gross premiums written increased 22.7% to $293.3 million from $239.1 million, primarily reflecting voluntary business growth. Gross premiums earned increased 14.9% to $255 million from $221.9 million. Ceded premiums earned declined to $153.9 million from $170 million, primarily reflecting the reduction in our non-catastrophe quota share cession from 40% to 25% effective January 1, 2026. Net premiums earned increased 94.5% to $101.2 million from $52 million in the prior year period. Our net earned premium growth reflects expansion of our underlying business and our decision to retain a greater share of it. Effective January 1, we reduced our non-catastrophe quota share cession from 40% to 25%. That means more premiums remain with American Integrity. It also means we retain more losses and receive less ceding commission income to offset expenses. In addition, improved catastrophe reinsurance pricing is benefiting our economics. These are important items to understand the improvement to our earnings. Net investment income increased 21.9% to $8.4 million from $6.9 million, reflecting the redeployment of approximately $200 million of cash into fixed income securities at the beginning of the quarter, and to a lesser extent, higher interest rates. Loss and loss adjustment expenses increased to $38.3 million from $29.7 million, primarily reflecting business growth and the greater share of losses we retain following the quota share reduction. Our net loss ratio improved to 36.6% from 54.1%, and our net underlying loss ratio improved to 31.7% from 49.9%. The elevated prior year net loss ratio reflected timing of reinsurance costs in anticipation of earned premium growth. Third quarter catastrophe losses were $5.1 million, arising from severe convective storms, compared with none in the prior year period. As Jon noted, gross underlying loss ratio was 18.9% compared with 19.3% a year ago. This ratio provides a view of the underlying loss experience before reinsurance. The larger movement in our net underlying loss ratio primarily reflects our reinsurance structure, whereby additional costs of our cat tower began impacting our financial statements in the third quarter of 2025, ahead of anticipated growth materializing in earned premiums. That distinction is important when assessing how much of the improvement reflects underlying loss experience and how much reflects the economics of the reinsurance program. Policy acquisition expenses increased to $18 million from $6.3 million, reflecting higher new business production and lower ceding commission income following the quota share reduction. Ceding commission offset allocated to policy acquisition expenses was approximately $15 million in the current quarter compared to $20 million in the prior year quarter. The prior year comparison also benefited from Citizens take-out business, which carries minimal upfront acquisition costs. General and administrative expenses increased to $17.6 million from $7.3 million. Of the $10.3 million increase, approximately $8 million reflects lower ceding commission offsets from the step-down in the quota share. The remaining approximately $2 million reflected growth in our gross G&A expenses. This explanation is necessary to distinguish the cost of operating the business versus changes in the quota share. Our expense ratio increased to 34% from 24.8%. Higher production, business mix, and lower ceding commission offsets affected this comparison, as well as the lack of Citizens take-out windfalls. Our combined ratio improved to 70.6% from 78.9%, an improvement of 8.3 percentage points. It reflects strong reported underwriting profitability for the quarter, while the underlying measures and reinsurance explanation provides context for the year-over-year comparison. Annualized return on equity was 29.8% compared with 17% a year ago. Annualized adjusted return on equity was also 29.8% compared with 18.1% a year ago. Shareholders' equity increased to $391.2 million at September 30, up from $337 million at year-end. Book value per share was $19.96, up 23.7% year-over-year and 5.8% since June 30, 2026. Book value growth gives shareholders another measure of the value being accumulated in the company as we execute. We also fully repaid our outstanding surplus note debt during the quarter and ended the period debt-free. With that, I'll turn the call back to the operator to open the line for questions.

[Operator Instructions] Your first question is from Tommy McJoynt with KBW.

A great quarter you guys reported here. First question is on the Citizens take-out opportunity, actually. So while the policy count at Citizens in Florida is at a multi-decade low, it's interesting that there actually have been about 170,000 policy take-outs year-to-date. And I think American Integrity did maybe 1,000 of those earlier in the year. But when you guys are in the process of looking at the data room of what's available at Citizens, what do you think it is that drives your decision to say that none of these policies meet your underwriting or profitability standards? But evidently, for other carriers out there that are doing take-outs, they do see an opportunity. So what could drive such a divergence in evaluating that opportunity?

Tommy, this is Bob Ritchie. Thank you for your kind words. Here's how I feel about this. The current policy count for Citizens Property Insurance Corporation is at 216,000 risks. That's too low. The last time that this happened, it ended around 400,000. The reason I say that is Florida has no assigned risk program. There are many nonstandard risks for a state with 23 million people and 8 million rooftops. We do not believe it's responsible, nor do the underwriting characteristics adhere to what we're looking for. Now, I'm not here to place any sort of criticism among those that maybe have done that, but for us, it doesn't make sense. Furthermore, Jon's going to talk about why we don't need them. Go ahead, Jon.

Yes, Tommy, just to add onto that is the way that we've built our distribution organically, we can attract the type of risk that we deem profitable and attractive to us organically through the voluntary marketplace. So for us, the Citizens take-out has always been additive, but not central to our overall production strategy.

Got it. That makes sense. And then switching over, I know we're a long way away from the next 6/1 reinsurance renewals, but I wanted to ask for a refresher on how you go about thinking about and ultimately negotiating your retention levels. This cycle, it was a $35 million first event loss retention, but as you are growing nicely, potentially reducing your quota share, generating really strong earnings. So as you think about where that $35 million figure could move next cycle, do you guys aim for a certain percentage of income or a percentage of equity or some other factors?

Yes, Tommy, as we look out to next year's renewal, certainly with the growth of the portfolio and exposure, that $35 million exhaustion point of the insurance company and captive will increase proportional to the growth in the portfolio. And that's something that we'll begin to negotiate very soon as we start our conversations, particularly for our cat bond issuance, which happens sooner than the traditional program on June 1. But you should expect that that $35 million exhaustion point of our retention to increase at renewal next year.

Your next question is from Mitchell Rubin with Raymond James.

This is Mitch on for Greg. Congrats on the quarter. So coming out of your recent events with leading agents, what did you hear about the competitive environment that's shaping your voluntary growth expectations for 2027?