Executive Summary / Key Takeaways

• A Technology Company Trapped Inside an Insurer: HCI Group built Exzeo, a proprietary insurance technology platform that has driven loss ratios below 25% and enabled 50% premium growth over two years while adding only a handful of employees, creating a hidden asset carried at cost on HCI's books but now valued at over $1.5 billion following its IPO.

• The Spin-Off That Changes Everything: The planned tax-free spin-off of Exzeo by end-2025 will create two pure-play entities, unlocking value that is currently invisible in HCI's financial statements and allowing the technology platform to pursue a $150+ billion U.S. homeowners insurance market without conflict of interest.

• Best-in-Class Insurance Economics: HCI's insurance operations demonstrate operational leverage at scale, with a normalized combined ratio of ~75% that drops to the mid-60s during Citizens takeout periods, generating over $210 million in pretax income through technology-driven underwriting discipline and 90% customer retention.

• Undervalued on Every Metric That Matters: Trading at 5.4x operating cash flow and 10.8x earnings, HCI's valuation ignores the Exzeo stake worth more than HCI's entire book value, while the core insurance business trades at a discount to peers despite superior margins and growth.

• The Two Variables That Decide Everything: The investment thesis hinges on successful execution of the Exzeo spin-off without value leakage and continued benign Florida hurricane activity; failure on either front could erase the discount, while success could drive a multi-year re-rating.

Setting the Scene: When a Florida Insurer Became a Technology Company

HCI Group, incorporated in Florida in 2006, began as a traditional property and casualty insurer focused on the hurricane-prone Florida market. The company spent its first decade building insurance operations through its subsidiaries Homeowners Choice Property Casualty Insurance Company (HCPCI) and TypTap Insurance Company (TTIC), participating in Florida's Citizens depopulation program to assume policies from the state-run insurer of last resort. This conventional start masks the critical inflection point that defines today's investment case: in 2012, HCI founded what would become Exzeo (originally TypTap Insurance Group) not as a side project, but as the technological backbone to solve the fundamental problem of Florida homeowners insurance—how to underwrite profitably in a market defined by catastrophic risk and litigation.

The Florida market structure underscores the importance of technological innovation. Following legislative reforms in 2022-2023 that curtailed assignment of benefits abuse and attorney fees, the state transitioned from a dysfunctional market where insurers couldn't price risk to a stable environment attracting private capital. HCI's response was counterintuitive: instead of simply expanding policy count, it built an integrated technology platform that could identify profitable risks, process claims efficiently, and retain customers at scale. This decision created two distinct businesses that today operate under one roof but serve fundamentally different markets. The insurance operations generate 77% of revenue through underwriting homeowners policies, while Exzeo provides the technology infrastructure that makes this possible—and increasingly serves external carriers.

HCI's competitive position reflects this dual structure. Against Florida-centric peers like Universal Insurance Holdings (UVE) and Heritage Insurance Holdings (HRTG), HCI's technology platform enables materially lower expense ratios and superior loss ratio performance. While UVE writes over $1.5 billion in premiums with a 9.9% net margin, HCI's insurance operations achieve margins exceeding 30% on $847 million in gross premiums earned. Against specialty players like Palomar Holdings (PLMR) that focus on catastrophe-exposed markets, HCI's integrated real estate holdings and reinsurance subsidiary provide additional diversification. The key differentiator isn't scale—HCI remains smaller than UVE—but operational leverage: the company grew in-force premium by $460 million to $1.2 billion since 2022 while adding only a handful of people, a feat that traditional insurers cannot replicate.

Technology, Products, and Strategic Differentiation: The Exzeo Platform

Exzeo's technology stack—AtlasViewer for risk visualization, SAMS for policy administration, Harmony for underwriting, and ClaimColony for claims management—represents more than workflow automation. These purpose-built applications create a data ontology that maps every aspect of the insurance lifecycle, from property characteristics and weather patterns to litigation trends and reinsurance costs. This transforms insurance from a commodity priced on historical averages to a precision business where each policy's profitability can be predicted and managed in real time.

The economic impact manifests in the numbers. HCI's gross loss ratio fell below 25% in 2024, down from 30-40% levels before legislative reforms, and the normalized combined ratio sits at approximately 75%. During Citizens takeout periods, when premium flows in before reinsurance and policy acquisition costs fully load, the combined ratio drops to the mid-60s. This isn't temporary arbitrage—it's structural efficiency. The technology enables HCI to process claims faster, identify subrogation opportunities automatically, and prevent leakage that plagues traditional insurers. The result is a 90% retention ratio in a market where 80% is considered strong, and loss ratios on assumed Citizens business that are "indistinguishable" from legacy business that was never assumed.

Exzeo's expansion beyond HCI's own carriers marks the next phase. In September 2025, the platform added its first non-HCI-controlled carrier, bringing the total to five. This validates that Exzeo's value proposition extends beyond HCI's captive operations. The U.S. homeowners insurance market exceeds $150 billion annually; Exzeo currently manages $1.2 billion in premium, representing less than 1% market share. The platform's variable-cost model—charging fees per policy bound and administered—scales without proportional infrastructure investment, creating a path to 4% market share ($5 billion in premium under management) that would generate hundreds of millions in high-margin revenue.

The spin-off amplifies this opportunity. As a standalone entity, Exzeo can pursue insurance companies that view HCI as a competitor, unlocking a much larger TAM than the current $1.2 billion under HCI control. The IPO in November 2025, which raised $155 million at $21 per share, valued Exzeo at approximately $1.75 billion (83.3 million shares outstanding). HCI retained 75 million shares, representing a 90% stake worth $1.575 billion at IPO price—yet carried on HCI's books at cost, likely under $3 per share or less than $225 million total. This $1.35 billion gap between market value and carrying value exceeds HCI's entire consolidated book value of $800+ million, creating a hidden asset that will only be recognized upon spin-off.

Financial Performance & Segment Dynamics: Evidence of a Structural Moat

HCI's segment reporting reveals a story of divergent economics converging on a common technology foundation. The Insurance Operations segment generated $616 million in revenue through nine months of 2025, representing 77.3% of the total, with $210 million in pretax income—a 34% margin that reflects both underwriting profit and investment income. Gross premiums earned grew 12.3% year-over-year, driven by Citizens takeouts that added 13,900 policies representing $35.8 million in annualized premium. The segment's $1.94 billion in assets includes the insurance subsidiaries, captive reinsurer Claddaugh, and real estate operations, demonstrating capital intensity that Exzeo entirely avoids.

Exzeo Group's financial profile could not be more different. With $166 million in revenue (16.6% of total) and $81 million in pretax income (49% margin), Exzeo achieves software-like economics while consolidated within an insurance holding company. Its asset base of $182 million represents just 7% of HCI's total, yet it generates nearly 40% of consolidated pretax profit. This disparity explains why management describes Exzeo as having "no hurricane volatility" and "no immediate capital needs"—it's a capital-light, high-margin business trapped inside a capital-intensive insurer.

The Reciprocal Exchange Operations segment, comprising CORE and Tailrow, demonstrates how HCI leverages its technology across multiple legal structures. CORE, launched in 2024, reached $70 million in-force premium by year-end. Tailrow, which commenced operations in February 2025 by assuming 14,000 policies and $35 million in premium from Citizens, adds another growth vector. These reciprocal exchanges are policyholder-owned but managed by HCI's attorney-in-fact subsidiaries, allowing HCI to earn management fees without bearing underwriting risk—a structure that competitors cannot easily replicate.

Real Estate operations, through Greenleaf Capital, provide non-correlated revenue and hidden value. The division owns commercial properties in Tampa, including a 190,000 square-foot office campus leased to GEICO that generated an off-balance sheet gain of approximately $85 million. A three-building campus is now fully leased, providing flexibility to explore financing options that could unlock additional capital for the insurance operations. This diversification generates rental income that isn't exposed to hurricane risk, smoothing earnings volatility that plagues pure-play Florida insurers.

The consolidated balance sheet tells a story of capital efficiency and financial strength. Cash and investments increased $334 million year-to-date to $987.9 million, while long-term debt fell to just $32 million after converting $172.5 million of convertible notes. The debt-to-capital ratio dropped to 8%, and shareholder equity exceeded $800 million—nearly doubling since the start of 2025. Holding company liquidity stands at $285 million, providing ample capacity for opportunistic growth or returning capital to shareholders. This financial position compares favorably to peers: UVE carries higher leverage with a debt-to-equity ratio of 0.22 and lower liquidity, while HRTG operates with minimal debt but generates lower returns on equity.

Outlook, Management Guidance, and Execution Risk

Management's guidance for 2025 and beyond centers on two critical milestones: completing the Exzeo spin-off and normalizing the insurance combined ratio. Mark Harmsworth, HCI's CFO, has stated that the full-year combined ratio will settle around 70% once the temporary benefit of Citizens assumptions flows through the reinsurance and commission structure. In the first half of 2025, the ratio will likely remain in the mid-60s, reflecting premium recognition before associated expenses fully load. This timing creates a predictable earnings pattern: stronger margins in Q1-Q2, normalization in Q3-Q4, providing a clear framework for evaluating performance.

The Exzeo spin-off timeline targets completion by end-2025. The IPO, which priced at $21 per share, provides a market-based valuation anchor that will guide the tax-free distribution of HCI's remaining 75 million shares to shareholders. Harmsworth estimates the spin-off will increase HCI's book value by $125 million and book value per share by $10, pushing total book value over $1 billion and per-share value close to $80 by year-end. This excludes any unrealized gains on the Exzeo shares, which are recorded at less than $3 per share but trade at market price. Consequently, HCI shareholders will own two securities, each valued on its own merits, likely resulting in a sum-of-the-parts valuation that exceeds the current consolidated price.

Insurance operations face a shifting competitive landscape. Florida's market is "healthy" and attracting capital, with Citizens shrinking from the largest to a mid-tier carrier. HCI assumed 47,000 policies in October 2025 representing $175 million in premium, but declined to participate in the December takeout, citing Citizens' diminished size and the distraction of "going back to a well that has dried up." This discipline signals that HCI can be selective, choosing only the most profitable risks rather than chasing growth for its own sake. Karin Coleman, HCI's COO, notes that "a couple of new entrants" is normal in a healthy market, but HCI's technology and capital position create defensible moats.

Reinsurance placement for the 2025-2026 treaty year was described as "boring" and "orderly," with ample capacity and stable pricing. This stability, attributed to Florida's improved regulatory environment, reduces a key variable expense for HCI. Paresh Patel, HCI's CEO, contrasts this with California's wildfire-driven market chaos, positioning Florida insurers as the "boring insurance guys" who deliver predictable results. This predictability enables HCI to maintain steady rates in Florida despite three hurricanes in 2024, a strategy that preserves margins while competitors may be forced to raise prices and lose customers.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is Florida hurricane exposure. HCI's concentration in a catastrophe-prone state creates inherent volatility that no technology can eliminate. In 2024, three hurricanes generated over 22,600 claims and $500 million in expected payments, demonstrating the potential for a single storm to erase a year's underwriting profit. While HCI's reinsurance program provides protection, the company retains significant risk through its captive reinsurer Claddaugh. Consequently, even best-in-class technology cannot overcome a major landfalling hurricane, and a repeat of 2004-2005 storm seasons could drive the combined ratio well above 100%, destroying capital and the investment thesis.

Execution risk for the Exzeo spin-off represents a second critical vulnerability. While the IPO succeeded, the tax-free spin-off requires careful structuring to avoid value leakage. If the IRS challenges the transaction or if operational separation proves more complex than anticipated, the expected book value uplift may not materialize. Additionally, Exzeo's growth as a standalone entity depends on attracting competitors of HCI as customers—a potential conflict that could limit adoption. Kevin Mitchell, Exzeo's President, acknowledges that being "free from competitive and valuation restrictions" will "lift a huge barrier," but success is not guaranteed.

Competition in Florida is intensifying. New entrants are attracted to the stable regulatory environment, and existing players like UVE and HRTG are expanding their own technology capabilities. The condo insurance market, where HCI launched CORE, has become "a lot more competitive" as others follow HCI's lead. This could compress margins and limit growth opportunities. HCI's technology advantage is real but not permanent; competitors can and will narrow the gap over time.

Regulatory risk remains despite recent reforms. Florida's legislature could reverse course, reintroducing litigation-friendly policies that drove loss ratios to 40% in prior years. While current leadership appears committed to stability, political winds shift. A return to the old regime would disproportionately harm HCI because its technology advantage is most valuable in a rational market where underwriting discipline matters. In a litigation-driven market, even perfect data cannot overcome legal costs.

Reinsurance market volatility presents a final risk. While 2025 placement was orderly, global catastrophes like California wildfires or Japanese typhoons can tighten capacity and increase rates. HCI's captive reinsurer provides some insulation, but a 20% increase in reinsurance costs would flow directly to the combined ratio, potentially pushing it above management's 70% target. This risk is amplified by HCI's growth; larger premium volumes require more reinsurance, increasing exposure to market pricing.

Valuation Context: A Two-Part Story Trading at a Single-Part Price

At $170.17 per share, HCI Group trades at a market capitalization of $2.21 billion. The valuation metrics appear attractive on a consolidated basis: 5.4x operating cash flow, 5.5x free cash flow, and 10.8x earnings. The price-to-book ratio of 3.95x sits above Florida peers UVE (1.76x) and HRTG (1.79x) but below specialty player PLMR (3.51x). However, these ratios miss the fundamental reality that HCI's book value excludes the market value of its Exzeo stake.

HCI owns 75 million Exzeo shares, representing a 90% ownership stake. At the IPO price of $21 per share, this stake is worth $1.575 billion. Exzeo's current carrying value on HCI's books is less than $3 per share, or under $225 million total. The $1.35 billion difference exceeds HCI's entire consolidated book value of $800+ million. This hidden asset means that at current prices, investors are effectively getting the insurance operations for free—or even at a negative valuation when subtracting the Exzeo stake from HCI's market cap.

The insurance operations alone generated $210 million in pretax income through nine months of 2025, putting them on track for approximately $280 million annually. Applying a 25% tax rate yields $210 million in after-tax earnings. At the current market cap minus the Exzeo stake ($2.21B - $1.575B = $635M), the insurance business trades at just 3x earnings. This compares to UVE at 7.3x earnings and HRTG at 5.5x earnings, despite HCI's superior margins and growth.

Exzeo's standalone valuation appears reasonable for a high-growth technology platform. With $81 million in pretax income through nine months and a 49% margin, Exzeo is on track for $100+ million in annual pretax profit. The IPO valuation of $1.75 billion represents approximately 17x forward pretax earnings, in line with insurance technology peers. The key question is whether Exzeo can achieve its $5 billion premium under management target, which would drive earnings multiples higher.

The balance sheet provides additional support. HCI's debt-to-capital ratio of 8% is lower than all peers, and holding company liquidity of $285 million exceeds the entire market capitalization of some smaller Florida insurers. The real estate portfolio contains an estimated $85 million in off-balance sheet gains not reflected in book value, providing further hidden capital. This financial strength means HCI can weather storms—both literal and figurative—that would bankrupt less-capitalized competitors.

Conclusion: A Rare Sum-of-the-Parts Opportunity in a Stabilizing Market

HCI Group has choreographed a complicated sequence of steps to unlock the true value of Exzeo, and with the IPO completed, the final spin-off represents a catalyst that will force the market to recognize what the consolidated financials obscure. The insurance operations demonstrate that technology can transform even the most catastrophe-exposed markets into profitable, growing businesses, while Exzeo proves that the platform enabling this transformation has value far beyond HCI's own subsidiaries.

The central thesis hinges on two variables: successful execution of the tax-free spin-off by end-2025 and continued benign hurricane activity in Florida. If both hold, shareholders will own two securities: a best-in-class Florida insurer trading at 3x earnings and a high-growth insurance technology platform with a $150 billion TAM. The combined value should exceed the current $170 share price by a significant margin, potentially unlocking 50-100% upside as the market reappraises each component.

The risks are real but manageable. Florida concentration creates volatility that no spin-off can eliminate, but HCI's reinsurance program and capital position provide resilience. Competition will intensify, but the technology moat and first-mover advantage in profitable Citizens takeouts create defensible market share. The spin-off could face execution challenges, but management's track record of delivering on complex initiatives suggests these risks are low probability.

For investors, the opportunity is straightforward: buy a consolidated entity at a price that doesn't reflect the sum of its parts, and wait for the spin-off to reveal the hidden value. In a market where technology companies trade at premium multiples and insurers struggle for relevance, HCI offers both—temporarily stuck together but soon to be separated, with each part worth more than the whole.