Executive Summary / Key Takeaways

• HCI Group has demonstrated remarkable financial resilience and profitability growth, driven by a significantly improved combined ratio stemming from operational efficiencies and lower loss frequency enabled by its proprietary technology platform, Exzeo.
• The company's strategic focus on the Florida homeowners market, coupled with successful Citizens policy take-outs, continues to fuel robust premium growth and policy expansion, reinforcing its market position despite an active catastrophe environment in 2024.
• A planned tax-free spin-off of the Exzeo technology segment into a separate public company is expected by the end of 2025, aiming to unlock substantial value for shareholders by allowing Exzeo to pursue growth opportunities in the broader U.S. insurance technology market beyond HCI's current operations.
• HCI maintains a strong balance sheet with growing shareholder equity, increasing book value per share (projected near $60 by Q2 2025), and declining debt levels (debt-to-cap expected well below 10% by Q2 2025), providing a solid foundation for future initiatives and risk management.
• Management's outlook points to continued underlying profitability, with normalized combined ratios expected around 70-75%, supported by stable reinsurance costs and a commitment to holding Florida rates steady in 2025, signaling confidence in the sustainability of operational improvements.

The Tech-Powered Transformation of a Florida Insurer

HCI Group, Inc., a Florida-based holding company, has evolved significantly since its incorporation in 2006. While its roots remain firmly planted in the property and casualty insurance business, primarily serving the challenging Florida homeowners market through subsidiaries like Homeowners Choice Property Casualty Insurance Company (HCPCI) and TypTap Insurance Company (TTIC), HCI has strategically diversified into related areas including reinsurance, real estate, and, most notably, insurance technology. This diversification, particularly the development of its proprietary technology platform, Exzeo (formerly TypTap Insurance Group), is not merely an ancillary business but the central nervous system driving HCI's operational efficiency, risk selection, and ultimately, its profitability in a market often defined by volatility.

Operating within the competitive landscape of U.S. property insurance, HCI faces established giants like Progressive (PGR), Allstate (ALL), Travelers (TRV), and Chubb (CB), as well as smaller regional players and emerging insurtech firms. While these larger competitors boast national scale, broader product lines, and significant brand recognition, HCI has carved out a distinct position, particularly in the high-risk Florida market. Its strategy has increasingly leveraged technology and targeted growth initiatives, such as participating in the Citizens Property Insurance Corporation take-out program, to expand its policy base and premium volume. This approach allows HCI to compete effectively by focusing on operational excellence and sophisticated risk management, areas where its technological capabilities provide a tangible edge.

At the core of HCI's differentiation is the Exzeo platform. This isn't just off-the-shelf software; it's a suite of purpose-built applications and data analytics tools designed specifically for the P&C insurance ecosystem. Management describes Exzeo as a "game changer" focused on reducing both loss and expense ratios for its clients – currently, primarily HCI's own insurance carriers. The platform includes tools like AtlasViewer for data visualization, SAMS™ and Harmony™ for policy administration, and ClaimColony™ for intelligent claims automation. While specific, comprehensive quantitative comparisons to competitors' systems are not detailed for all aspects, management commentary highlights that Exzeo enables significant operational leverage, allowing HCI to grow its policy count and premium volume substantially without a proportional increase in personnel or operating expenses. This efficiency translates directly into a lower expense ratio. Furthermore, the technology is credited with improving risk selection and underwriting outcomes, contributing to a steadily declining underlying loss ratio. The stated goal of Exzeo is to "turn premiums into profits," and its proven track record within HCI's own operations is the primary evidence cited for its effectiveness.

Performance Reflecting Strategic Execution and Technological Edge

HCI's recent financial performance underscores the impact of its strategy and technological foundation. The first quarter of 2025 saw net income reach $74.2 million, or $5.35 per diluted share, a significant increase from $57.0 million, or $3.81 per diluted share, in the prior-year quarter. This improvement was primarily driven by a substantial decrease in losses and loss adjustment expenses (L&LAE) and a notable increase in net premiums earned.

Gross premiums earned grew to $300.4 million in Q1 2025 from $256.6 million in Q1 2024, an increase of 17%. This growth was fueled by policy assumptions from Citizens, with approximately 13,900 policies assumed in Q1 2025 alone, representing $35.8 million in annualized gross written premiums. Net premiums earned, after accounting for ceded premiums (which increased due to higher reinsurance rates and increased coverage needs for a larger policy base), rose to $200.7 million from $188.5 million.

The most striking improvement was in the loss ratio. The consolidated gross loss ratio fell to 19.74% in Q1 2025 from 31.14% in Q1 2024. The net loss ratio similarly improved to 29.54% from 42.39%. Management attributed this decline to lower claims and litigation frequency, influenced by legislative reforms in Florida and favorable weather conditions early in the year, although partially offset by losses on policies assumed by the reciprocal exchanges. The underlying non-cat gross loss ratio for the full year 2024 was less than 25%, a level management believes is sustainable, projecting a normalized loss ratio around 24-25% going forward.

The operational leverage provided by Exzeo is evident in the expense ratio. While policy acquisition and G&A expenses increased in absolute terms due to growth and personnel costs, the efficiency gains contributed to a lower overall expense burden relative to earned premiums. The combined ratio (excluding interest expense), a key measure of underwriting profitability, dramatically improved to 56.15% in Q1 2025 from 66.85% in Q1 2024. Management estimates a normalized combined ratio around 70-75% once the temporary benefits from the timing of Citizens assumptions subside in the latter half of 2025. This represents a significant improvement from prior periods and underscores the effectiveness of the operational model.

Investment income also contributed positively, although slightly lower in Q1 2025 compared to Q1 2024 ($13.8 million vs $14.1 million). However, over the past couple of years, investment income has doubled, benefiting from higher interest rates and increased investment balances. The company's strategy of keeping investments short-term when rates were low allowed it to capitalize as rates rose.

This strong underlying performance enabled HCI to navigate an active hurricane season in 2024, which included Hurricanes Debby, Helene, and Milton. Despite incurring significant net losses from these events (e.g., $128 million net expense for Milton), the company remained profitable for the full year 2024, reporting $173.4 million in pretax income and $8.89 diluted EPS. This resilience is a testament to the strength of the underlying business, the effectiveness of the reinsurance program, and the operational efficiencies achieved.

The balance sheet reflects this strengthening. Shareholder equity grew by nearly $70 million in Q1 2025 and over $125 million in the trailing twelve months, reaching $522.7 million at March 31, 2025. Book value per share increased by over $6 in Q1 2025 and $10 in the past year, standing at $45.35 at March 31, 2025. Management projects shareholder equity near $750 million and book value per share near $60 by the end of Q2 2025, partly driven by the expected conversion of convertible notes. Debt levels are decreasing, with the debt-to-cap ratio expected to be well below 10% by the end of Q2 2025, down from 34% at the end of 2024 and 62% a year prior. Holding company liquidity remains robust, exceeding $250 million at the end of Q1 2025. This financial strength provides a solid foundation for managing risks and pursuing strategic growth.

Strategic Outlook: Unlocking Value and Expanding the Tech Horizon

Looking ahead, HCI Group is focused on two primary strategic pathways: continuing to optimize and grow its core insurance operations and unlocking the full potential of its technology segment through a planned separation.

The core insurance business in Florida remains a key focus. Management is committed to operating in the state and sees it as an attractive market, despite its catastrophe exposure. The success of Citizens take-outs is expected to continue driving growth, with Tailrow Reciprocal Exchange, which commenced operations in February 2025 by assuming 14,000 Citizens policies, serving as an additional growth vehicle alongside HCPCI, TypTap, and CORE. Management's decision not to increase Florida rates in 2025, despite the recent hurricane activity, signals confidence in the underlying profitability and a commitment to policyholder stability, a factor that likely contributes to the strong policy retention rates observed (around 85% for assumed policies upon renewal). The recent completion of the 2025-2026 catastrophe reinsurance programs, securing over $3.5 billion in coverage with statutory retentions of $18 million for the main towers and $3 million for CORE, provides a clear picture of expected ceded premiums ($422 million) and management's view on adequately protecting the balance sheet against future events.

The most significant strategic initiative is the planned separation of Exzeo Group. Management views Exzeo as an "independently viable entity" with solid profitability ($35 million pretax in 2024, expected to grow significantly in 2025), strong cash flows, and no hurricane volatility. The technology platform currently manages $1.2 billion in premiums for HCI's entities, but the U.S. homeowners market is vast, exceeding $150 billion annually. HCI believes Exzeo's proven ability to improve underwriting outcomes and operational efficiency in a catastrophe-prone environment positions it uniquely to serve other insurance carriers struggling with increasing frequency and severity of losses. A standalone Exzeo would remove potential conflicts of interest that exist while it's under the HCI umbrella, allowing it to pursue a much larger market opportunity. The preferred path for this separation is a tax-free spin-off of Exzeo shares to existing HCI shareholders, expected by the end of 2025, which management believes will maximize value creation.

In the real estate segment, the recent multiyear lease agreement with GEICO for a large office campus in Tampa highlights opportunistic income generation and value creation, with an estimated $85 million off-balance sheet gain in the portfolio.

Overall, the outlook is positive, underpinned by expected continued underlying profitability, balance sheet strengthening, and the potential for significant value creation through the Exzeo spin-off. Management guidance points to a normalized combined ratio around 70-75%, reflecting sustainable operational improvements, and strong capital metrics by the end of Q2 2025.

Risks and Challenges

Despite the positive trends, HCI Group faces inherent risks. The primary risk remains exposure to natural catastrophes, particularly hurricanes in Florida. While the company maintains a robust reinsurance program, severe or multiple events could still result in significant net losses and impact financial results. The estimation of losses and loss adjustment expenses, especially for incurred but not yet reported (IBNR) claims, is inherently uncertain and subject to future development, potentially leading to adverse reserve development.

The insurance industry is subject to significant regulatory oversight, and changes in regulations could impact premium rates, claims handling, or capital requirements. Competition in the Florida market, particularly for Citizens take-outs and commercial residential business, remains a factor that could affect growth and profitability.

Investment market risks, including interest rate fluctuations, credit risk, and equity price volatility, can impact the value of the investment portfolio and net investment income. While managed through diversification and monitoring, significant market downturns could still affect financial position and results.

Finally, the planned spin-off of Exzeo is subject to various conditions, including SEC registration effectiveness, and there is no guarantee it will be completed as planned or within the expected timeframe. The success of Exzeo as a standalone entity in attracting third-party clients is also not guaranteed, although its proven track record within HCI provides a strong foundation.

Conclusion

HCI Group presents a compelling investment narrative centered on a successful transformation driven by proprietary technology. The company has demonstrated its ability to generate strong underlying profitability and build a robust balance sheet, even while operating in the challenging Florida property insurance market and enduring an active hurricane season. The significant improvement in the combined ratio, fueled by operational efficiency and improved risk selection enabled by the Exzeo platform, is a clear indicator of the strength of its business model.

The planned spin-off of Exzeo represents a strategic move to unlock the value of this core technological asset and position it for substantial growth in the broader insurance technology market. Coupled with continued growth in the core insurance business through targeted Citizens take-outs and the launch of new entities like Tailrow, HCI appears well-positioned for future success. While catastrophe risk remains a constant factor, the company's strong financial position, prudent reinsurance strategy, and demonstrated resilience provide confidence in its ability to manage these challenges. Investors should monitor the progress of the Exzeo spin-off, execution on growth initiatives, and ongoing claims development, but the underlying trends point towards a company effectively leveraging technology to drive profitable growth and create shareholder value.