HCI Group, Inc. Price & Performance (HCI)

Forward looking statements are not guarantees of future results conditions, but rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the company's filings with the Securities Exchange Commission. Genenity risks or uncertainties develop into actual [indiscernible] have material adverse effects on the company's business financial conditions and results, of operations. HCI Group disclaims all of the obligations to update any forward looking Now with that, I'd like to turn the call over to Karen Coleman, Chief Operating Officer. Karen?

Thank you, Matt, and welcome, everyone. At the beginning of the fourth quarter, Hurricane Milton made landfall in Florida as a three hurricane. Losses from this event were significant our hearts go out to everyone impacted. We continue to work with our policyholders to pay claims and help them rebuild their lives. With that said, our results continue to demonstrate the resiliency of our business model. Mark will walk you through the numbers, but I think it's important to highlight some highlight several notable things that HCI accomplished in 2024. We handled over 22,600 claims during the year, with over half of them coming from Hurricanes Debbie, Helene and Milton. Ultimately, we expect these three events will result in age paying over $500,000,000 to help Florida rebuild. Despite this, we held our rate steady in Florida and we plan to continue to do so in [indiscernible] Our customers appreciate that we are a steady partner the retention rate of our existing customers remains strong at approximately 90%. During the year, we offered over 68,000 citizens policyholders a private market auction and nearly 53,000 policyholders moved to 77%. We started a new insurance company, condo owners' reciprocal exchange, grew to approximately $70,000,000 of in force premium.

Across our different growth initiatives, we increased our policies in force from two seven thousand to more than 272,000.

And our in force premium grew 22% to over $1,200,000,000 This was accomplished all while reducing our underlying net combined ratio by 10 percentage points.

In the fourth quarter, HCI continued to deliver on its commitment to return value to our shareholders by paying a dividend of $0.4 per share, our fifty seventh consecutive were able to achieve all of this because we have a solid management team, with proven successes backed by best in class technology. HEI has been able to consistently grow its top line and bottom line and we look forward to continuing on this path. I'll turn it over to Mark to provide more details on our financial results. Thanks, Karen.

On our last earnings call, we detailed the expected impact of Hurricane Milton on the fourth quarter and said we expected underlying earnings to mitigate much of it.

As expected, the net impact of Hurricane Milton was $128,000,000 including $78,000,000 of net loss expense and $50,000,000 for the reversal of benefits under a multiyear reinsurance agreement, and including that impact, pre tax income in the fourth quarter was $5,900,000 and diluted earnings per share were $0.23 For the full year, even with the impact of three hurricanes, pre tax income was $173,000,000 and diluted earnings per share were $8.89 illustrating the strength of underlying earnings. There are a few reasons we've been able to grow underlying earnings over the past couple of years. First, we've been adding policies and growing revenue without really adding a lot of operating expense. Driven by our technology, and overall operational efficiency. Over the past two years, we've grown in force premiums by 50% and only added a handful of people. Second, our loss ratio has been steadily declining. When legislative changes were introduced in Florida, we expected that the loss ratio would drop from 40% to 30% and that happened In 2024, it dropped even further. For the full year 2024, our non cat gross loss ratio was less than 25%. Combined impact of these two things strong operating leverage and a lower loss ratio, have resulted in a noteworthy improvement in our combined ratio Our normalized combined ratio is now about 75%.

While the underlying combined ratio was better than that in the fourth quarter, and should be again for the first half of twenty twenty five, we expect the combined ratio to be about 75% once reinsurance and commissions kick in for the recent Citizens' assumptions. There is one more positive trend enhancing underlying earnings beyond what's happening with the combined ratio. Investment income has doubled over the last couple of years through a combination of higher investment balances and higher rates. Because we kept our investments short term when rates were low, we have been able to capitalize as rates have increased. The impact of all of these factors has improved underlying earnings to the point where we can be profitable and generate capital in an active storm year like 2024. Now just a couple of things on the balance sheet. Even with three hurricanes and paying $1.6 per share in dividends, book value increased by almost $9 per share from $33.36 at the start of the year to $42.1 at the end of the year. Debt to cap has also improved materially during the year We started the year with a debt to cap ratio of 50% and ended the year at 34%.

During 2024, we reduced consolidated [indiscernible] by $80,000,000 grow underwriter surplus by 50% and holding company liquidity is still over $200,000,000 at the end of the year. In summary, 2024 was a strong year for the company despite an active storm season we are well positioned for the future. Revenue is growing, underlying earnings are increasing, and the balance sheet continues to strengthen. And with that, I'll hand it over to Perish.

Now As Mark and Karen highlighted in their comments, HCI Group ended the year on a very positive note. Overall, we grew gross premiums earned by over 40% for the full year while also increasing profitability. The combination of our best in class technology and the ongoing impact of reforms in Florida has contributed to this strong outcome. Looking to the future, continuing on our current trajectory, and hopefully without the hurricanes would be very impressive. And in the short term, we intend to do just that. Our new reciprocal [indiscernible] just became operational a few days ago and we expect it to be an additional driver of growth. Well, we see an even bigger opportunity. What Karen Mar's comments highlighted was that our technology has a proven track record and it's a game changer. The technology currently supports over 1,200,000,000 of dollars of premium across the companies controlled by HCI Group. With HCI Group represents less than 1% the total homeowners premium in The U. S. And given the increasing frequency and severity of catastrophe losses, we believe there's an opportunity to use our technology to drive a better underwriting result for the other 99% of the market. So to that go, we have set up a new structure that will consist of two distinct operating units.

The first unit includes our four top performing cat insurance companies and our captive reinsurer. Additionally, this unit will include our operations in claims management and real estate. [indiscernible] This group has its own dedicated team will continue to focus on delivering strong underwriting results creating a positive claims experience for policyholders, while diligently managing risk, and generating opportunistic income from our real estate portfolio.

Our second operating unit includes our market leading technology platform and our insurance management operations. This unit helps empower insurers to develop to deliver better underwriting outcomes and optimize operational efficiencies. However, and therefore we felt it appropriate at this time to rename the unit from being TypTap Insurance Group to Exio Group Inc. Exo Group is an independently viable entity solid profitability, strong cash flows, no immediate capital needs and more importantly no hurricane volatility. In 2024, Exxio Group earned approximately $35,000,000 of pretax income and we expect that number to grow significantly in 2025. Exo Group's technology has demonstrated its ability to navigate in a catastrophe prone world while significantly enhancing the profitability of its customers. Which are currently the four insurance carriers under the HCI umbrella. With the need for this technology is only growing, So to fully embrace this opportunity, we want to make Exo Group a standalone entity so that it can do the same thing for other insurance companies in other geographies. Same vision, same management team, but fewer restrictions at a much bigger market TAM. And therefore, we are evaluating a range of strategic alternatives With the assistance of outside advisors, to take advantage of this upmarket opportunity.

During this review, We intend to consider potential actions solutions or structures that will unlock additional value for our shareholders. But we will not be entertaining a sale of the platform at this point. It's just too valuable. With that, I'll turn it over for questions. Thank you. At this time, we'll be conducting our question and answer session. Thank you. Our first question is coming from Matt Carletti with Citizens JMP. Your line is live. Hey, thanks. Good afternoon.

Perish, maybe following up on kind of your commentary there about separating the groups. You've been talking for some time about how you view Florida as being kind of well ahead of the rest of the country in terms of dealing with catastrophic weather and changing climate and things like that. We got kind of a reminder of that in January with the fires in California. As we think about kind of opportunities outside Florida and your knowledge already in these kind of challenging areas, Can you help us with how you might go about that? So if you use California as an example, Should we expect to see HCI or any of the carriers at any point take on some risk there even if on a E and S basis or otherwise?

Would you look to use Exxio Group as more of the means to access an opportunity like that.

Great question, Matt. And look, speaking of the unfortunate events in California, and our hearts go out to all those people as well. What clearly California is in desperate need of is a solution that actually is financially viable and that can withstand what probably will be additional wildfire that will occur in the coming years.

And do it comfortably. We have just done that [indiscernible] But in terms of the question as to how we would go approaching the market, it's a multifaceted idea. First things first, is to make sure you have the technology that can do this, which we've second part that we are which will now come across is at the right moment It's a little bit of debate as to whether we do it just with an HCI Group company or we partner with somebody who's already in California or we do both. Part of the whole thing of this was to remove [indiscernible] having to exclusive deal with one or the other or whatever. The technology is going to be there ready to go. And is this going to be a question of what is the best way of going to market with it? And that's the flexibility I'm talking about in this separation that we're looking at.

Does that help?

It does, for sure.

Next question just around takeout activity. We've seen kind of the Citizens numbers get below [indiscernible] As there's been obviously an elevated amount of takeouts Can you talk a little bit about one, Kind of how you view that pool of 1,000,000 policies so that are left And two, we saw the announcement of the kind of tail row going live. Does having a reciprocal structure that can do takeouts kind of expand, you always talk about the green light policies that are in Citizens. Does it increase that number that there might be policies that don't fit ACI's balance sheet, but might fit a reciprocal structure?

Yes.

So lot of questions there.

Starting with Citizens being just under 1,000,000 policies at this point. Yes, we continue to notice that there are still policies in there [indiscernible] we would consider green and would be worth depopulating. There is some flux in the portfolio at the moment because of the change that has just been approved by for the citizens going forward. That'll have some impact. But not as great as you would think. So overall, the Citi's opportunity is still there. And just put this into perspective. We've grown the business by $200,000,000 or so by taking on about 50,000 policies in the fourth quarter. So fifty, sixty, seventy, eighty, 100,000 policies, can we find them? Absolutely. That is there. The other thing with with Teuro and Reciprocals and everything else. Taro in its takeout just for as an item of note did most of its assumption in Florida. It's almost like complementary to TypTap. So as we're doing these things, we are we are getting more and more adapt at it. And one of the other items of note in the comments Karen made about how many offers we made and how many people chose to come with us, It really highlights how well our technology is now working because [indiscernible] We've got very efficient.

We only ask people to join. We we think would be interested and are likely to say yes We don't waste picks on folks who will not likely join or will go somewhere else. That said, All of these efficiencies all build into what Mark is talking about about operating leverage and being able to do this correctly. So we've seen this go over and over and over again in 2024. So if there's any doubt about our technology, The last twelve months really brings it home. [indiscernible] For sure. That's very helpful. And then just one quick numbers question if I could.

The 37% gross loss ratio in the quarter Obviously, there's Milton impact in there. Was there any favorable development impact in the loss numbers in the quarter? And if so, what would be kind of the accident year gross loss ratio without it or how much was it?

Yes. So, Hamad, it's Mark. So yes, there is about $24,500,000 worth of favorable that's included in the Q4 number. About $5,000,000 of that relates to prior years. And the other $19,000,000 $20,000,000 relates to actually to to prior quarters of 2024. In terms of the normalized loss ratio, if you will, And for the full year, it was the consolidated loss ratio full year normalized was 23.7 and in Q4 it was 19.5 I think.

All right, great. Very helpful. Thank you very much for all the answers.

Thank you. Our next question is coming from Michael Phillips with Oppenheimer. Your line is live.

Thanks. Good evening, everybody. I'll turn off, which is a follow-up [indiscernible] Mark. On the PYD, so $19,000,000 from the first three quarters of twenty twenty four. I guess, would that be I think it could be possibly two things. It's you've talked about the litigation and how it's been favorable and yet you've kept a reserve somewhat cushioned from that.

Is that part of that recognizing some of that or is it just maybe some of the earlier cats that happened Helene or anything else?

No, it's I mean, it's a few things, right? I mean, it's largely driven by the fact that we make our initial selections and then watch the development and it was very clearly clearly developing significantly better than we thought it would. Getting less lawsuits than we initially thought that was part of it. There's a lot of little things. Severity is a little bit lower than we initially thought it was going to be. And also a little bit less of a claims tail than we thought So everything moving in the same direction and very clear that it was considerably better than we expected it to be and that quite frankly we were going to be well above the actuaries range if we didn't bring our expense if we didn't bring our selections down for the first nine months of the year.

Okay. Thank you. So that makes it sound like it's more of the former of what I said than the latter. It's not so much any any prior cats from 3Q, but it's more of better state, less litigation, better severity. Right? Yes. That's what you said.

Yes. Okay.

Okay.

Thank you. Perish, on the two structures, I guess, when you mentioned the much bigger TAM obviously for the tier tech platform. You talk a little bit about that? Like what do you see as the TAM? Maybe not specific numbers, but happy to take that if you which is maybe qualify how do you think of the TAM for that segment of the business?

Okay. So back to that $1,200,000,000 that's out there.

Okay.

HCI controls. Nationally, I think we spend about $140,000,000,000 or so, it might be off by a year or two, but about $140,000,000,000 in homeowners insurance premium is what's spent on an annualized basis.

So like I said, around 1%. But more and more carriers are struggling. Think of what's going on in California and all the stories coming out from the insurance carriers perspective of trying to stay solvent profitable in the light of those events. And little things come to mind, what should the premium be how should we do risk selection, how should we deploy our capital so that when these events, which will continue to occur, occur, we are not Yes, we're not [indiscernible] hurt that badly. [indiscernible] And given that environment, We've been facing that for seventeen years and we've built technology that can do this really well. So the technology that we had, nobody wanted or was thinking about it outside Florida because everybody had didn't have these kinds of catastrophe and disasters occurring before. And if the premium under management under on our platform You've already seen the leverage we're getting just by it growing. Imagine it went from $1,200,000,000 to $2.5 or $10,000,000,000 is by the time we get there, it will be about 4% market share throughout The U. S. Very, very small. But a huge opportunity. So that kind of gives you an idea As to the The time we're looking at here, Does that help?

It does. Yes. And in the first part of your answer, I think sounds like you're referring to kind of the overall homeowners market. And that's how your tech can help the market. So when you're TAM, you're referring to the size of the homeowners industry. Clearly, your HCI is a small part of that.

Okay, good. Thank you. I guess maybe one more for Mark. When you talked about that kind of a I don't know you call it, the adjusted for the core combined ratio, a little bit better in the first half 75% and a little and maybe closer to 75% in the second half. In the second half of the year. Make sure I heard that correctly first off. And then if I'm looking at the right numbers, if we can, the first half of 2024 was around 67. Is that am I comparing the same numbers that you're talking about, Mark?

Yes. Yes. And [indiscernible] To your question about 2025, the 75% that I referred to as a normalized combined ratio Think of that as Q3 and beyond next year after on those citizens assumptions you've got full reinsurance in there. Commissions on renewals, that type of thing. So like the sort of fully loaded Q3 number, that's where the 75% number comes from. The reason it will be more likely in the mid-60s in the first half of the year. Is because again of that of that temporary impact of the Citizens' assumptions where you've got premium coming in have lost expense obviously, but no reinsurance no pack, And so combined ratio is just going lower. So that's how you get 60%, 65% in the first half of the year. 75% once that normalizes out. And by the way, the normalized combined ratio for the full year 2024 was about 72.5%, 73%. [indiscernible] Does that help? That's perfect. Yes. Thank you. That's all I got.

Appreciate it. Thanks. Thank you. Our next question is coming from Mark Hughes with Truist Securities. Your line is live. Yes.

Thank you. Good afternoon. [indiscernible] I assume a good a good result for Exxio at least to a start would be to have some sort of flagship or early customer if the idea here is you're going to use this technology to help other insurance companies than Step in that direction, it seems like it would really highlight the opportunity. Are the odds? What's the chance? What's the visibility for for that to happen in the near to medium term. And is that a right way to look at Yes. Mark, I think you're right, it would help. The interesting thing of where we've take where we've developed these companies to Is Agios to my comments it's solidly profitable, no immediate needs of capital no hurricane volatility, and earnings are growing at rapid clip. All of these things are true with only having the four HCI Group controlled carriers as customers. So even if Exio doesn't get any new customers, just by the leverage and the things they're doing for their four [indiscernible] is going to give them a very is going to create a very positive future for them. Right? If you now set it up correctly, so you can expand to other catastrophe active states California being obviously the one that comes to mind at the moment.

Louisiana being another one. But if you start adding these states, Exeo's future could be even brighter, right? [indiscernible] the beauty of what we're doing in separating this thing out Agios technology is needed in those places. HCI Group on the other hand may make different decisions as to whether it wants to operate in Texas or Louisiana or California. [indiscernible] Now you're separating those two decisions. So while HCI Group, for example, may not want to operate in Texas, there are plenty of carriers in Texas who could use the help or right now in California who could use the help to underwrite the business better. So that's why we are making this separation so that You're not limited to only helping capital that is beneficial to HCI Group.

But Could this involve fronting as well?

I don't necessarily know that again, we'll see how this evolves. But so far, things that we've never done, we've never done fronting before. In the sense of [indiscernible] our technology has always had a much higher bar to clear than lots of other people who have technology. Is that Because so far every time we've done something, we've put our capital at risk and actually entirely our capital at risk and not anybody else is.

We have produced these results because we have been very, very mindful that the technology is going to produce a positive outcome for the capital. Right? When you get into things like fronting, etcetera, you are more focused on How shall I put this? Distribution and financial engineering than actually underlying profitability.

Right?

As I'm talking to it through, a different way of looking at it is HCI Group has been fronting Exgeo Group % of the time. And Mark just gave you the numbers that this has resulted in, right?

I'm sure there are lots of funding companies would like their clients to have these kinds of [indiscernible] Yes. Yes. Jeff, I hear you. [indiscernible] fourth quarter, the very good gross loss ratio Any perspective, I think storms tend to knock down some attritional losses you get some variability in the weather, all of that How much do you think those other factors helped that loss ratio?

I mean, it might have helped it's Mark, it might have helped a bit, but I think if you look at claims frequency, which is a big driver obviously of the loss ratio, Claim frequency is just coming down. It was 25% lower in 2023 than 2024. It was 12.5% lower in '24 than 2023 And if you factor out whether it's a little bit different but not a lot. I mean, even if you take weather out Claims frequency is coming down. Litigation propensity is coming down Security is going up, but just a bit. And it's all moving in the right direction and it's not it is not a weather phenomenon.

And Martin, if you could add add to that commentary about how things are going, We talked about the efficiency that technology is showing in terms of depopulating citizens. Making sure we only pick policyholders who want to come with us and then stay with us. There's other aspect to the technology also doing. When we did the depopulations in late 'twenty three, We clearly had clearly understood the loss ratios of our existing business. Yes, we were a little bit concerned about how the takeout book would perform. And so I'm sure we I think Mark talked about it in quarters past. We We were a little bit more conservative in our reserving for those takeout books. Think what the fourth quarter results and everything else have sort of started showing is those takeouts that we're doing are almost as good as the existing book that we already have in place.

Right?

This is new phenomenon that we didn't originally a few years ago would have said could never happen. [indiscernible] Yes. The loss ratio on that assumed business the difference between that and the the legacy business, if you will, is indistinguishable, which we didn't We did not assume that at the start. And that's that's part of what you're seeing.

Yes. And the fact that it's doing that is is attributable to nothing other than technology. That is why as you start to look at how all this stuff is working, not in theory it will work someday in the future, It's showing right there in the combined ratio. Which effectively Garen's point is dropping by about 10% in the course of the year.

All the insurance guys would tell you that if you can improve by two or three points in a year, you should be thrilled. Right? We seem to be effortlessly doing it by 10% and the tone is just a matter of fact as opposed to doing laps around the the boardroom table.

Does that open up the possibility for additional takeouts if you're doing as well on knees and presumably you can kind of mine a little lower strata or higher strata, however you want to look at it for future tank outs, is that fair?

Yes, it does, right. And look, one of the things that we are doing because we also happen to be in a state where the legislature made the reforms and then has kept a very steady regulatory environment, a stable environment is that we can step up And offer alternatives to people to go to the private market [indiscernible] I will tell you, it's an incredible achievement and this is for the whole state of Florida. That even after three hurricanes, [indiscernible] The insurance and the private insurance and this is stepped up and Citizens actually shrank the fourth quarter. Which is after the hurricanes, right? And there is talk of it [indiscernible] to your question, we're going to shrink citizens even further. [indiscernible] That is what a stable healthy market looks like. And it only suddenly contracts itself when you compare it to what may be about to happen in California.

Right? Good regulations matter and And when you have them, The private industry usually responds in a very, very positive manner as it has done here.

If I might put in one more Parish, what do you think about the reinsurance market outlook in the wake of the California wildfires?

I'll give you a tongue in cheek answer because we were in Bermuda in mid January. I think everybody Everybody wants to worry and discuss about what's going to happen in California. We are the boring insurance guys from Florida. [indiscernible] [indiscernible] what we said we were going to do, we did. The losses are contained. The numbers we said we would [indiscernible] had estimated other numbers that are coming through. So like I said, everybody looked at, as I said, we know exactly how you behave. We know exactly what the rates are going to do, everything else. Like you as customers.

We have to solve our California problem.

I think those that sentiment says it all, right? California is now the talking point of the industry. We seem to be the boring Florida guys and I love that by the way, right? First time it's happened in eighteen years, and it's always a good thing when it does.

Thanks.

Thank you. We have reached the end of our question and answer session. So I'll now turn the call back over to Mr. Patel for any closing comments.

Okay. On behalf of our entire management team, I would like to thank our shareholders, employees, agents, and most importantly, our policyholders for their continued support. We look forward to updating you with our progress in the coming months. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference and you may disconnect your lines at this time. We thank you for your participation.