HCI Group is a Growth Stock Trading at Reasonable Levels in the P&C Insurance Industry

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Written By Joel Gbolade

HCI Group (NYSE), a Property and Casualty (P&C) insurer focused on residential insurance products, has demonstrated strong growth in written premiums and earnings.

Despite a nearly 80% surge in stock price over the past 12 months, valuations remain reasonable compared to industry peers, making HCI an attractive option for investors looking to capitalize on the positive outlook for the insurance industry.

Strong In-Force Premium and Earnings Growth

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HCI Group’s growth trajectory is evident in its financial performance. The company reached a milestone of $1 billion in in-force premiums in Q1 2024, continuing its trend of robust growth. This achievement follows a long-term expansion strategy, starting in 2007 with the assumption of take-out programs from Citizens, a state-supported insurer in Florida.

Over the past decade, HCI has driven organic growth through its subsidiary TypTap, which leverages technology to enhance underwriting selection and operational efficiency.

Premium Growth and Operational Efficiency

In the past 12 months, HCI added over $300 million in premiums, including $67 million from policies assumed from Citizens in Q1 2024. The company also improved its gross loss ratio to 31% from 34% a year ago, aligning with legislative changes and a reduced frequency of claims and litigation. The combined ratio dropped to below 67% from 70% in Q4 2023, largely due to limited reinsurance and policy acquisition expenses from new Citizens’ policies.

Operational efficiency has allowed HCI to expand its business with minimal increases in staff. Operating income rose to $80.6 million in Q1 2024, up from $25.9 million a year ago. Net income increased by over 200% to $47.6 million, while diluted EPS reached $3.81, significantly surpassing expectations.

Positive Outlook

HCI sees substantial potential in the U.S. homeowner insurance market, estimated at $149 billion in 2023. The company plans to expand selectively, taking advantage of favorable market conditions. For 2024, consensus estimates project quarterly revenue between $180 million and $200 million, indicating strong growth compared to the $120 million to $140 million recorded last year. These estimates align with HCI’s recent premium growth and the broader P&C insurance industry trends.

Industry Performance and Growth Prospects

The insurance industry remains strong, driven by increasing demand for insurance due to climate changes and higher interest rates boosting investment income. HCI and its peer group have received more upward revisions than downward in the past 90 days, reflecting a positive market outlook.

Valuations Still At Reasonable Levels

Despite HCI’s solid performance, its valuations remain attractive. HCI trades at lower multiples compared to both Tier 1 and Tier 2 peers based on P/E, Price/Sales, and EV/Sales ratios. The price-to-book ratio, a common valuation metric for financial companies, places HCI at 2.5x, between the Tier 1 average of 3.1x and Tier 2’s 2.0x. This ratio is consistent with HCI’s five-year average of 2.6x.

Valuation Comparison

The valuation gap between Tier 1 and Tier 2 companies is justified, as larger-cap stocks typically trade at a premium. HCI’s price-to-book ratio reflects its growth profile relative to peers. HCI has delivered higher top-line, earnings, and book value growth than its peer group and exhibits higher profitability.

Given its historical performance, HCI could potentially trade closer to Tier 1 multiples, suggesting upside potential if its price-to-book ratio moves towards 3.1x.

Potential Risks and Considerations

HCI’s combined ratio of 67% in Q1 2024 was influenced by favorable conditions in new Citizens’ assumptions, with limited reinsurance and policy acquisition expenses. As conditions normalize, the combined ratio may rise to the low to mid-80s, potentially impacting net income and operational leverage benefits. This could affect share prices in the short term.

Positioned to Succeed

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HCI Group appears well-positioned to continue benefiting from the positive insurance industry outlook. While there are potential short-term headwinds, the company’s strong growth in premiums and earnings, combined with reasonable valuations, makes it an attractive investment.

As long as HCI continues to expand its written premiums and book value, share prices are expected to remain on an upward trajectory, offering investors a compelling opportunity in the P&C insurance sector.



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