Participants

Karin Coleman; Chief Operating Officer, Director, President of Homeowners Choice; Hci Group Inc

James Harmsworth; Chief Financial Officer; Hci Group Inc

Paresh Patel; Chairman of the Board, Chief Executive Officer; Hci Group Inc

Matthew Carletti; Analyst; Citizens JMP

Michael Phillips; Analyst; Oppenheimer

Mark Hughes; Analyst; Truist Securities

Presentation

Operator

Good afternoon, and welcome to HCI Group's fourth-quarter 2024 earnings call. My name is Ali, and I will be your conference operator. (Operator Instructions) 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.
Matt Glover
AttendeeThank 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, HEI's Chief Financial Officer; 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 Investor information section of our corporate website at www.hcigroup.com.
Before we begin, I'd like to take the opportunity to remind our 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, project and other similar words and expressions are intended to signify forward-looking statements.
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 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?

Karin Coleman

Thank you, Matt, and welcome, everyone. At the beginning of the fourth quarter, Hurricane Milton made landfall in Florida as a category three 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 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, 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.

James Harmsworth

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 million, including $78 million of net loss expense and $50 million for the reversal of benefits under a multiyear reinsurance agreement. And 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 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 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.

Paresh Patel

Thank you, Mark. As Mark and Karin highlighted in the 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 (inaudible) insurance company, [ Taro ] 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 company is controlled by HCI Group. But HCI Group represents less than 1% of 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 goal, we have set up a new structure that will consist of two distinct operating units. The first unit includes our four top-performing 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 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 deliver 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 being tipped up Insurance Group to (inaudible) Group Inc. [Axio Group] is an independently viable entity with solid profitability strong cash flows, no immediate capital needs and more importantly, no hurricane volatility. In 2024, Axio Group earned approximately $35 million of pretax income, and we expect that number to grow significantly in 2025.
We Axio 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.
So to fully embrace this opportunity, we want to make Axio Group a stand-alone entity so that it can do the same thing for other insurance companies in other geographies. We same vision, same management team, but fewer restrictions and a much bigger market TAM. And 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.

Question and Answer Session

Operator

(Operator Instructions) Matt Carletti, Citizens JMP.

Matthew Carletti

Paresh, 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 an E&S basis or otherwise? Or would you look to use Axio Group as more of the means to access an opportunity like that?

Paresh Patel

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 or probably would be additional wildfires that will occur in the coming years and do it comfortably. We have just done that for the largest three hurricanes in Florida. But in terms of the question as to how we would go approaching the market, it's a multifaceted idea.
First thing for us is to make sure you have the technology that can do this, which we have clearly proven. Second part is 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, right? Part of the whole thing of this was to remove Axio Group from 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?

Matthew Carletti

It does, for sure. Next question just around takeout activity. We've seen kind of the citizens numbers that get below $1 million as there's been obviously an elevated amount of takeouts. Can you talk a little bit about, I think, one, kind of how you view that pool of one million policies, so that are left? And two, we saw the announcement of kind of tail road going live does having a reciprocal structure that can do take out kind of expand?
And 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 HCI's balance sheet but might fit a reciprocal structure.

Paresh Patel

Yes. So a lot of questions there. starting with Citizens being just under one million policies at this point. Yes, we continue to notice that there are still policies in there. we would consider green and will be worth the populating.
There is some flux in the portfolio at the moment because of the rate change that has just been approved by -- for the Citizens going forward. That will have some impact but not as great as you would think.
So overall, the Citizens opportunity is still there. And let's just put this into perspective. We've grown the business by $200 million or so by taking on about 50,000 policies in the fourth quarter. So the 50,000, 60,000, 70,000, 80,000, 100,000 policies, can we find them Absolutely. So that is there.
The other thing with Taro and reciprocals and everything else, payroll in its takeout just for as an item of note, did most of its assumption in other product. 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 Karin 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 we've got very efficient.
We only ask people to join who 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, et cetera, right?
All of these efficiencies all built 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 12 months who really brings it home.

Matthew Carletti

Yes, 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?

James Harmsworth

Yes. So Matt, it's Mark. So yes, there's about $24.5 million worth of favorable development that's included in the Q4 number. About $5 million of that relates to prior years. and the other $19 million, $20 million relates to actually to prior quarters of 2024.
In terms of the normalized loss ratio, if you will, 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.

Operator

Michael Phillips, Oppenheimer.

Michael Phillips

I'll start off with just a follow-up to that last question, Mark, on the PYD. So $19 million from the first three quarters of 2024. 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 kept you preserve somewhat cushioned from that. Is that part of that, recognizing some of that?
Or is that just maybe some of the earlier cats that happened in the year, maybe, Helen, or anything else?

James Harmsworth

No, 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 developing significantly better than we thought it would. Getting less lawsuits than we initially thought that was part of it. There was 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.

Michael Phillips

Okay. So that makes it sound like it's more of the former of what I said in the latter, it's not so much any prior cats from 3Q, but it's more of better state, less litigation, better severity, right? That's what you said. On the two structures. I guess when you mentioned the much bigger TAM, obviously, for the second start to your tech platform.
Can 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 want, but just maybe qualify how do you think of the TAM for that segment of the business?

Paresh Patel

Okay. So back to that $1.2 billion that's out there that HCI controls. Nationally, I think we spent about $140 billion or so, I might be off by a year or 2, about $140 billion in homeowners insurance premium is what's spent on an annualized basis. So like I said, we're around 1%. But more and more carriers are struggling.
I think of what's going on in California and all those stories coming out from the insurance carriers perspective of trying to stay solvent, profitable in the light of those events and will things come to mind, like 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, we are we're not financially hurt that badly. And given that environment, we've been facing that for 17 years, and we've built technology that can do this really well. So knowledge that we had. Nobody wanted to was thinking about it outside Florida because everybody had -- didn't have these kinds of catastrophe and disasters occurring before.
Now they do, right? And if the premium under management on our platform, you've already seen the leverage we're getting just by growing. Imagine it went from $1.2 billion to $2.5 million or $5 billion. $5 billion is -- by the time we get there, we'll be about 4% market share throughout the U.S., very, very small, with a huge opportunity. So that kind of gives you an idea as to the the TAM we're looking at here.
Does that help?

Michael Phillips

It does. Yes. In the first part of your answer, I think it sounds like you're referring to kind of the overall homeowners market. and that's how your tech can help the market. So when your TAM, you're referring to the size of the homeowners industry, your ACI is a small part of that.
Okay. Good. I guess maybe one more for Mark. When you talk about that kind of -- I don't know what you call the adjusted of the combined ratio, a little bit better in the first half than 75%, 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?

James Harmsworth

Yes. Yes. And the -- 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 as 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 temporary impact of the Citizens assumptions where you've got premium coming in, you have loss expense, obviously, but no reinsurance, no pack. And so your 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%, so -- does that help?

Michael Phillips

Yes, that's perfect. Yes, thank you I appreciate it.

Operator

Mark Hughes, Truist Securities.

Mark Hughes

Paris on I I assume a good result for GEO, 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 and stepping that or in that direction. It seems like it would really highlight the opportunity. What 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 it?

Paresh Patel

Yes. Mark, I think you're right, it would help. The interesting thing of where we -- where we've developed these companies through is go to my comments, is solidly profitable, no immediate needs of capital, no hurricane volatility and earnings are growing at a rapid clip. All of these things are true with only having the four HCI Group controlled carriers as customers. So even if Axio doesn't get any new customers just by the leverage and the things they're doing for their four existing carriers is going to give them a very -- that 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, geos future could be even brighter, right? And the beauty of what we're doing in separating this thing out, Axio's technology is leader on 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, right?
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 the separation so that you're not limited to only helping capital that is beneficial to HCI Group.

Mark Hughes

But could this involve fronting as well?

Paresh Patel

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 where 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 actually entirely our capital risk and not anybody else is, we have produced these results because we have been very, very mindful the technology is going to produce a positive outcome for the capital, right? When you get into things like fronting, et cetera, you are more focused on how shall I put this distribution and financial engineering than actually underlying profitability, right? So yes, as I'm talking this through a different way of looking at it is HCI Group has been funding Axio group, 100% of the time.
And Mark just gave you the numbers that this has resulted in, right? I'm sure there are lots of friendly companies would like their clients to have these kinds of results.

Mark Hughes

Yes. Yes, I hear you. The fourth quarter, a 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?

James Harmsworth

I mean it might help -- Mark, 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 -- it's coming down. It was 25% lower in 2023 than 2024. It was 12.5% lower in '24 than '23.
And if you factor out weather, 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, severities going up, but just a bit -- and it's all moving in the right direction, and it is not a weather phenomenon.

Paresh Patel

And Mark, if I could 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 big policyholders who want to come with us and they stay with us. There's other aspects to the technology also doing when we did the depopulations in late '23, we clearly had -- we can understood the loss ratios of our existing business. 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 were a little bit more conservative in our reserving for those takeout books.
I think what the fourth quarter results and everything else has 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 a new phenomenon that we didn't -- a few years ago, we would have said could never happen, right?

James Harmsworth

Yes. Yes. The loss ratio on that assumed business -- the difference between that and the legacy business, if you will, is indistinguishable, which we did not assume that at the start, and that's -- that's part of what you're seeing.

Paresh Patel

Yes. And the fact that it's doing that is is attributable to nothing other than technology. So this is why, as you start and 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 to Karin's point is dropping by about 10% in the course of the year. I think 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 are in the boardroom table.

Mark Hughes

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

Paresh Patel

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 of people to go to the private market. And I will tell you, it's an incredible achievement, and this is for the whole state of Florida that even after three hurricanes, right, the insurance -- the private insurance indices stepped up and Citizens actually shrank in the fourth quarter, which is after the hurricanes, right? And there is talk of -- and to your question, we're going to shrink Citizens even further, right? 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 when you have them, the private industry usually responds in a very, very positive manner as it has done here.

Mark Hughes

If I might slip in one more. Paresh, what do you think about the reinsurance market outlook and the wake of the California wildfires?

Paresh Patel

I'll give you a tongue-in-cheek answer because we were in Bermuda in mid-January. I think everybody wants to worry and discuss about what's going to happen in California. We are the boring insurance guys from Florida, right, where what we said we were going to do, we did. The losses are contained, the numbers we said we would -- Mark had estimated other numbers that are coming through. So like I said, everybody looked at it, as I said, we know exactly how you behave.
We know exactly what the rates are going to do everything else. We like U.S. 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 18 years, and it's always a good thing when it does.

Operator

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.

Paresh Patel

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.

Operator

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