HCI Group, Inc. Q4 FY2024 Earnings Call

Good afternoon, and welcome to HCI Group's Fourth Quarter 2024 Earnings Call. My name is Ali, and I will be your conference operator. At this time, all participants will be in a listen-only mode. Before we begin today's call, I would like to remind everyone that this conference call is being recorded and will be available for replay through March 27, 2025, starting later today. The call is also being broadcast live via webcast and available via webcast replay until February 27, 2026, on the Investor Information section of HCI Group's website at www.hcigroup.com. I would now like to turn the call over to Matt Glover, Gateway Investor Relations. Matt, please proceed.

Thank you, and good afternoon. Welcome to HCI Group's Fourth Quarter 2024 Earnings Call. On today's call is Karin Coleman, HCI's Chief Operating Officer; Mark Harmsworth, HCI's Chief Financial Officer; and Paresh Patel, HCI's Chairman and Chief Executive Officer. Following Karin's operational update, Mark will review our financial performance for the fourth quarter of 2024, and then Paresh will provide a strategic update. To access today's webcast, please visit the Information section or of our corporate website at www.hcigroup.com. Before we begin, I'd like to take the opportunity to remind listeners that today's presentation and responses to questions may contain forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. Words such as anticipate, estimate, expect, intend, plan and project and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and 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 and Exchange Commission. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on the company's business, financial conditions and results of operations. HCI Group disclaims all the obligations to update any forward-looking statements. Now with that, I'd like to turn the call over to Karin Coleman, Chief Operating Officer. Karin?

Thank you, Matt, and welcome, everyone. At the beginning of the fourth quarter, Hurricane Milton made landfall in Florida as a category 3 hurricane. Losses from this event were significant, and 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 several notable achievements that HCI accomplished in 2024. We handled over 22,600 claims during the year, with over half of them coming from Hurricanes Debby, Helen, and Milton. Ultimately, we expect these three events will result in HCI paying over $0.5 billion to help Florida rebuild. Despite this, we held our rates steady in Florida, and we plan to continue to do so in 2025. Our customers appreciate that we are a steady partner and 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 option, and nearly 53,000 policyholders moved to HCI. This implies a blended success rate across our different insurance companies up 77%. We started a new insurance company, Condo Owners Reciprocal Exchange, which we grew to approximately $70 million of in-force premium. Across our different growth initiatives, we increased our policies in force from 247,000 to more than 272,000, and our in-force premium grew 22% to over $1.2 billion. 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 $0.40 per share, our 57th consecutive quarterly dividend. We were able to achieve all of this because we have a solid management team with proven successes backed by best-in-class technology. HCI has been able to consistently grow its top line and bottom line, and we look forward to continuing on this path. Now I'll turn it over to Mark to provide more details on our financial results.

Thanks, Karin. 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 million, including $78 million of net loss expense and $50 million for the reversal of benefits under a multiyear reinsurance agreement. Including that impact, pretax income in the fourth quarter was $5.9 million and diluted earnings per share were $0.23. For the full year, even with the impact of three hurricanes, pretax income was $173 million, 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 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%. The 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 2025, 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 $1.60 per share in dividends, book value increased by almost $9 per share from $33.36 at the start of the year to $42.10 at the end of the year. Debt to capital 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 debt by $80 million, grew underwriter surplus by 50%, and holding company liquidity is still over $200 million at the end of the year. In summary, 2024 was a strong year for the company despite an active storm season, and 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 Paresh.

Thank you, Mark. As Mark and Karin 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. In the short term, we intend to do just that. Our new Reciprocal Insurance Company, Tailrow, just became operational a few days ago, and we expect it to be an additional driver of growth. But we see an even bigger opportunity. What Karin and Mark's comments highlighted was that our technology has a proven track record, and it's a game changer. The technology currently supports over $1.2 billion of premium across the companies controlled by HCI Group. But HCI Group represents less than 1% of the total homeowners premium in the U.S. 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 goal, 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. This group has its own dedicated team who will continue to focus on delivering strong underwriting results, creating a positive claims experience for our policyholders, and diligently managing risk while 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 better underwriting outcomes and optimize operational efficiencies. However, this unit does not include any insurance companies, and therefore, we felt it appropriate at this time to rename the unit from TypTap Insurance Group to Exzeo Group Inc. Exzeo Group is an independently viable entity with solid profitability, strong cash flows, no immediate capital needs, and more importantly, no hurricane volatility. In 2024, Exzeo Group earned approximately $35 million of pretax income, and we expect that number to grow significantly in 2025. Exzeo Group 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. But the need for this technology is only growing. To fully embrace this opportunity, we want to make Exzeo Group a stand-alone entity so that it can do the same thing for other insurance companies in other geographies. Same vision, same management team, but fewer restrictions and a much bigger market TAM. Therefore, we are evaluating a range of strategic alternatives with the assistance of outside advisers to take advantage of this market 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 will turn it over for questions.

Our first question is from Matt Carletti with Citizens JMP. Your line is now open.

Hey thanks, good afternoon. Paresh, maybe following up on your commentary there about separating the groups. You've been talking for some time about how you view Florida as being ahead of the rest of the country in terms of dealing with catastrophic weather and changing climate. We received a reminder of that in January with the fires in California. As we think about opportunities outside Florida and your knowledge already in these challenging areas, can you help us understand how you might go about that? Using California as an example, should we expect to see HCI or any of the carriers at some point take on some risk there even on an E&S basis or otherwise? Or would you look to use Exzeo Group as more of the means to access an opportunity like that?

Great question, Matt. And regarding the unfortunate events in California, our hearts go out to all those affected. California is in desperate need of a solution that is financially viable and can withstand what will likely be additional wildfires in the coming years. We have just done that for the surviving three hurricanes in Florida. In terms of how we would approach the market, it's a multifaceted idea. First and foremost, we need to ensure we have the technology that can support this, which we have clearly proven. The second part which will emerge is timing. There may be some debate as to whether we do it solely with an HCI Group company or partner with someone already established in California, or pursue both paths. The separation provides us the flexibility to decide the best way to go to market.

It does, for sure. Next question just around takeout activity. We've seen the Citizens numbers dip below 1 million as there has been an elevated amount of takeouts. Can you talk about how you view the remaining pool of policies? Additionally, we saw the announcement of Tailrow going live. Does having a reciprocal structure that can take out expand? You always talk about the green light policies in Citizens. Does it increase that number of policies that don’t fit HCI's balance sheet but might fit a reciprocal structure?

Yes, a lot of questions there. Starting with Citizens being just under 1 million policies at this point, we continue to notice that there are still policies that we would consider green and worth pursuing. There is some flux in the portfolio at the moment because of the recently approved rate change for Citizens going forward. That will have some impact but not as significant as you would think. Overall, the Citizens opportunity remains. Just to put this in perspective, we've grown the business by approximately $200 million by taking on about 50,000 policies in the fourth quarter. So yes, we are capable of finding those 50,000, 60,000, 70,000, 80,000, or even 100,000 additional policies. Regarding the Tailrow Reciprocal, it performed most of its assumptions in other products. So as we do these things, we are becoming more adept at it. One of the highlights of what Karin mentioned is how many offers we made and how many people chose to come with us. This underscores the efficiency our technology brings us; we are only approaching those we believe will be interested and likely to accept.

Yes, for sure. That's very helpful. And then just one quick numbers question if I may. 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 for the quarter? And if so, what would the accident year gross loss ratio be without it? How much was it?

Yes, Matt, it's Mark. So yes, there is about $24.5 million worth of favorable development included in the Q4 number. About $5 million of that relates to prior years and the other $19 to $20 million pertains to prior quarters of 2024. In terms of the normalized loss ratio for the full year, it was approximately 23.7%. In Q4, it was 19.5%, I believe.

Great. Very helpful. Thank you very much for the answers.

Thank you.

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

Thanks, good evening, everybody. I'll start off with a follow-up to that last question, Mark, regarding the favorable development. So $19 million from the first three quarters of 2024; could this be related to litigation, given you've discussed how favorable that has been while keeping reserves cushioned? Is that part of that, or is it stemming from the earlier catastrophes that occurred in the year, such as Helen?

No, I mean, it's a few factors at play, right? Primarily, it's driven by our initial selections followed by monitoring the development. It was clear that development was significantly better than expected. We experienced fewer lawsuits than anticipated, and there were also various minor factors. Severity was somewhat lower than we initially projected, and there was a shorter claims tail than originally thought. Everything moved in the same direction, confirming that the situation was considerably better than we expected it to be, thus necessitating adjustments to our selections.

Okay, so it appears the situation is more favorable than the previous catastrophes, leading to improved outcomes. For the next point regarding the two structures. When you mentioned a much larger total addressable market (TAM), could you elaborate on what you're observing in that segment, specifically for your technology platform?

Sure. Regarding the $1.2 billion that HCI Group controls, we are looking at an annualized national expenditure of approximately $140 billion in homeowners insurance premiums. So, as noted, we currently represent around 1% of that market. More carriers are facing challenges. California’s recent events underscore the urgency as insurers strive to remain solvent and profitable amidst climate impacts. We are equipped with proven technology in these circumstances. As premium under management grows, we're seeing substantial leverage. Should our premium rise from $1.2 billion to $2.5 billion or even $5 billion, we could capture up to 4% of market share nationwide, highlighting the substantial growth potential. That gives you insight into the TAM we're considering here.

It does. Yes, your initial comment regarding the overall homeowners market signifies how your technology can enhance that segment. So when calculating TAM, I gather you're referencing the overall homeowners industry, recognizing HCI's smaller portion of it.

Yes. To answer your inquiry regarding the combined ratio, the normalized combined ratio I referred to is about 75%, which reflects the expectations for Q3 and beyond next year once all Citizens assumptions are in place, including full reinsurance and commissions on renewals. The first-half ratios will likely see some temporary variance due to the timing of the Citizens assumptions and resulting premium influx, leading to better numbers than what we anticipate for the second half.

Thank you. That's perfect. I appreciate the clarity.

Thanks.

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

Yes, thank you. Good afternoon. Paresh, regarding Exzeo, it would be beneficial to secure a significant customer early on if the intention is to showcase the technology to other insurance companies. What is the probability of establishing such a flagship or early customer in the near to medium term?

Yes, Mark, you're correct; it would be advantageous. The companies we've nurtured to create the Exzeo, demonstrate solid profitability and are not presently in need of capital, are also unaffected by hurricane-related volatility. Their earnings are growing rapidly, even with just the four existing carriers as our customers. If Exzeo were to acquire no new clients, the leverage from our current customers alone would lead to a promising outlook. If we secure additional states seeing technological growth, such as California or Louisiana, Exzeo's future could be even brighter. The separation allows us the freedom to support additional markets without limiting our potential to HCI Group alone.

Could this involve fronting as well?

I cannot say definitively yet, as this situation is still evolving. So far, we have not engaged in fronting deals where the capital risk has only been ours. We aim to achieve those favorable results because we prioritize technology that yields positive outcomes for the capital involved. Venturing into fronting would focus on distribution and financial structuring rather than underlying profitability. Historically, Exzeo has been fully funded by HCI Group, and we have recently reported impressive figures. Several fronting companies would likely be keen to achieve comparative results.

I see your point. Regarding the fourth quarter, you reported a strong gross loss ratio. Typically, storms may reduce some of the attritional losses. How much do you think other factors influenced that loss ratio?

It may have helped a bit. Claim frequency, a significant driver of loss ratios, has shown that claims frequency in 2023 was 25% lower than in 2022. It was 12.5% lower in 2024 than in 2023. When isolating weather impacts, the frequency is still down, though not extensively. Even excluding weather effects, claim frequency is decreasing along with litigation rates. While severity is slightly rising, it's all trending positively, and this doesn't appear to be a weather-related phenomenon.

Additionally, I would like to elaborate on the efficiency our technology has shown in depopulating Citizens, allowing us to efficiently select policyholders likely to join us, ensuring they remain with us. Our analysis from late 2023 indicated concerns over how the takeout business performed. Fourth quarter results are demonstrating that the performance of these takeouts is nearly indistinguishable from our established business. A few years back, we may have thought this wasn't possible.

The loss ratio on that assumed business and legacy business are now nearly interchangeable, which is noteworthy given our previous assumptions.

The ongoing positive results are, without a doubt, attributable to our technology. Everything appears to be aligning perfectly, as evidenced by the combined ratio showing a drop of around 10% within a year. Comparing this to standard industry improvements must encourage optimism around our prospects.

Does that suggest more takeouts are now feasible if these trends hold? You could potentially explore new policy stratifications for future takeouts, is that accurate?

Yes, it does suggest a broader range of opportunities. Furthermore, we are positioned in a state where regulatory reforms have been made and a steady regulatory environment exists, enabling us to present alternatives for policyholders seeking private market options. It's noteworthy that we saw the private insurance indices expand while Citizens actually reduced in the fourth quarter after the hurricanes, which reflects a healthy, stable market environment. This supports the prospect of further reductions for Citizens in the future.

What are your views on the reinsurance market outlook following the California wildfires?

I find it amusing as we were in Bermuda in mid-January. Many are preoccupied with the challenges in California, while we are the conservative insurance players from Florida, demonstrating that we have executed our strategies effectively as promised. The losses are contained, and our projections align with reality. Everyone is turning their focus to California while we navigate successfully here in Florida. I find that to be a positive shift after 18 years of dealing with catastrophe issues.

Thank you very much.

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 on 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.