Why HCI Outshines American Coastal in a Soft Insurance Market

The insurance sector faces headwinds from Florida's softening premium environment, rising catastrophe losses, and margin pressures. Amid these challenges, HCI Group (HCI) stands out as a compelling value play, offering superior risk-adjusted returns compared to American Coastal Insurance (ACIC). This analysis dives into fundamental valuation and growth sustainability to explain why HCI's robust ROE, diversified operations, and disciplined reinsurance strategy position it as a safer, higher-growth bet.

HCI Group: A Diversified Engine of Value Creation

HCI's financials reflect a company executing flawlessly on its long-term strategy, even amid hurricane-driven volatility. Key highlights:

1. Superior ROE and Earnings Growth
2. ROE: HCI's 2024 ROE of 26.6% (vs. ACIC's 8.7% GAAP ROE in Q4 2024) underscores its capital efficiency. This compares favorably to the industry average of ~12-15%, signaling HCI's ability to generate outsized returns.
3. Earnings: Diluted EPS rose 16.7% to $8.89 in 2024, outpacing ACIC's 78% EPS decline. HCI's adjusted EPS (excluding catastrophes) grew 18.1%, reflecting consistent operational excellence.

1. Diversification and Innovation
2. Exzeo Group: HCI's technology platform, generating $35M in 2024 pretax income, is being spun off to unlock value. This division could expand into markets like California's wildfire zones, offering a secular growth tailwind.

3. Florida Dominance: HCI retains 90% policyholder retention in Florida, a testament to its customer-centric underwriting. Its Citizens Insurance takeouts added $1.2B in in-force premiums, fueling top-line growth.

4. Balance Sheet Strength

5. Debt Reduction: HCI slashed net debt by $80M in 2024, lowering its debt-to-capital ratio to 34%.
6. Liquidity: Over $200M in cash ensures resilience against future catastrophes.

American Coastal Insurance: Stumbling Under Florida's Challenges

ACIC's results reveal vulnerabilities exacerbated by Florida's soft market and hurricane exposure:

1. ROE Collapse and Earnings Volatility
2. ROE: GAAP ROE plummeted to 8.7% in Q4 2024 (vs. 81% in 2023), dragged down by the deconsolidation of its former subsidiary, UPC. Even its “core” ROE (excluding discontinued ops) fell to 10.6%, far below HCI's 26.6%.

3. Net Income: Full-year 2024 net income dropped 75.9% to $75.7M, with per-share earnings collapsing 78%.

4. Catastrophe Exposure

5. Hurricane Milton: ACIC's Q4 2024 loss expenses surged 345% to $29.8M, pushing its combined ratio to 91.9%. Its full-year 2024 catastrophe-related losses exceed $500M, a stark contrast to HCI's more contained $128M hit.

6. Florida Market Risks

7. Premium Growth Stagnation: Gross premiums rose only 1.9% in 2024, reflecting Florida's softening market. ACIC's reliance on this region leaves it exposed to margin compression and regulatory risks.
8. Leverage: ACIC's investment portfolio remains heavily weighted in fixed maturities (82%), offering limited upside in a rising rate environment.

Direct Comparison: Why HCI Wins the Value Test

Metric	HCI Group (2024)	American Coastal (2024)
ROE (%)	26.6%	8.7% (Q4 GAAP)
EPS Growth (YoY)	+16.7%	-78%
Combined Ratio (ex-Cat)	~75%	59.6% (non-GAAP)
Debt-to-Capital Ratio	34%	N/A (but higher leverage implied)
Book Value Growth	+26% (to $42.10/share)	+35.5% (to $4.89/share)

HCI's stronger fundamentals translate to superior risk-adjusted returns:
- Valuation: HCI trades at ~9.5x 2024 EPS (vs. ACIC's 7.2x), but its earnings growth (25%+ forecast) justifies a premium.
- Safety: HCI's disciplined reinsurance and lower leverage reduce bankruptcy risk, unlike ACIC's exposure to Florida's volatile market.
- Growth Catalysts: Exzeo's spinoff and California expansion offer secular tailwinds absent in ACIC's narrow geographic focus.

Investment Thesis: Buy HCI, Avoid ACIC

HCI's stock has risen ~20% YTD, but it remains undervalued relative to its growth trajectory. Analysts project 11% annual EPS growth through 2026, supported by:
1. Florida's Inelastic Demand: HCI's dominant position in a regulated market with sticky policies.
2. Tech-Driven Efficiency: Exzeo's AI tools reduce underwriting costs and improve loss ratios.
3. Debt Reduction: Lower leverage creates flexibility for buybacks or acquisitions.

ACIC, meanwhile, faces structural headwinds:
- Florida's soft market could erode margins further.
- Its lack of diversification and high catastrophe exposure make it a speculative bet.

Actionable Advice:
- Buy HCI on dips below $80/share (current ~$85). Its 2025 EPS could hit $10, justifying a 12x multiple ($120 target).
- Avoid ACIC until it demonstrates profitability outside Florida and reduces catastrophe risk.

Conclusion

HCI Group's superior ROE, diversified growth drivers, and fortress balance sheet make it a standout in an industry fraught with risks. American Coastal, hamstrung by Florida's soft market and catastrophic volatility, lacks the resilience and vision needed to thrive long-term. For investors seeking value with growth, HCI is the clear choice.

Invest with discipline, not emotion.