HCI Group, Inc. Q2 FY2025 Earnings Call

Good afternoon, and welcome to HCI Group's Second Quarter 2025 Earnings Call. My name is Paul, and I will be your conference operator. 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 September 6, 2025, starting later today. The call is also being broadcast live via webcast and available via webcast replay until August 8, 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 Bill Broomall, VP of Investor Relations. Bill, please proceed.

Thank you, and good afternoon. Welcome to HCI Group's Second Quarter 2025 Earnings Call. To access today's webcast, please visit the Investor Information section of our corporate website at www.hcigroup.com. Before we begin, I would 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 and project and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and 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 the 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?

Thank you, Bill, and welcome, everyone. HCI reported another great quarter. Highlights for the second quarter include reported earnings of $5.18 per share. We improved the net combined ratio to 62% and total shareholders' equity grew to $759 million, up 65% year-to-date. In addition to these financial achievements, we had several other important developments in the quarter. We reduced our debt-to-cap ratio to less than 10%. Homeowners Choice, TypTap Insurance Company, and Tailrow Reciprocal Exchange were each approved for depopulation from Citizens in October of this year. Also, HCI successfully placed its reinsurance program for the 2025, 2026 treaty year. Our conservative reinsurance strategy ensures we are well protected for the year ahead. The technology developed at Exzeo continues to play an important role in HCI's success and is a real differentiator. For example, it has enabled HCI to identify favorable market shifts early. We detected improvements in Florida's underwriting environment ahead of many peers, and we executed on that opportunity. We've been able to scale rapidly without compromising underwriting discipline. HCI has grown in-force premium by more than $460 million to approximately $1.2 billion since the end of 2022. The technology has allowed HCI to select and retain the right customers, supporting a retention ratio of about 90% and our gross loss ratio improved during that time to below 25%. Collectively, Exzeo's technology has delivered meaningful value to shareholders as reflected in HCI's strong financial performance in recent quarters. Looking ahead, irrespective of market conditions, we're confident that our experienced team combined with our technology will continue to help identify and underwrite attractive policies that align with our risk and profitability standards. With this advantage, we believe HCI is well positioned to generate compelling returns on shareholder capital. Now I'll turn it over to Mark to provide more details on our financial results.

Thanks, Karin. Pretax income for the quarter was just over $94 million and diluted earnings per share were $5.18 compared to $4.24 in the second quarter last year. Year-to-date, pretax income is $195 million and diluted earnings per share are $10.57. This significant continuing improvement is driven by higher premiums, a lower loss ratio and lower operating expenses as a percentage of premiums. The gross loss ratio this quarter was 21.3%, up slightly from the first quarter this year, but more than 6 points lower than the second quarter last year, reflecting the continuing decline in claims frequency. We also continue to generate significant operational leverage as evidenced by the lower operating expenses as a percentage of revenue. When combined with lower loss ratios, the result is a combined ratio, which was just under 62% for the second quarter. As we announced back in June, we completed our reinsurance program for the year. Because the effective date of the new program is June 1, part of the impact shows up in the second quarter, but the full impact will be reflected in the third quarter. At that time, premium ceded to reinsurance will be $106 million per quarter, just slightly higher than they were in the first and second quarters. Once the full effect of the new program is reflected, we expect the net combined ratio to be about 70%. Now let's look at the balance sheet, which continues to strengthen. In June, we redeemed the remaining balance of our 4.75% convertible notes, fully settling the $172 million obligation. As Karin mentioned, this brings the debt-to-cap ratio well under 10% and interest expense going forward will now be a little less than $1 million per quarter, which is less than 1/3 of what it had been. Due in part to this redemption, but also because of continued profitability, shareholder equity has grown by more than $300 million so far this year and is now well over $0.75 billion. Book value per share has grown by more than $16 so far this year to $58.55 at the end of June. In terms of holding company liquidity, it's just over $250 million at the end of the second quarter, and there is now very little debt at the holding company level. To summarize, this was another fantastic quarter for the company. The company is growing, but even more importantly, all of our financial metrics continue to improve. The loss ratio continues to come down. The combined ratio continues to come down and the balance sheet continues to get stronger. And with that, I'll hand it over to our President of Exzeo, Kevin Mitchell, to give us an update on Exzeo.

Thanks, Mark. We remain excited about our momentum at Exzeo. As we have mentioned on our prior earnings call, we are moving forward with our plans to have Exzeo be a separate publicly traded entity. After careful consideration of all of our options, we believe the best path is to pursue an initial public offering of Exzeo shares. Earlier this week, Exzeo confidentially submitted a draft registration statement on Form S-1 with the U.S. Securities and Exchange Commission relating to a proposed initial public offering of Exzeo's common stock. As a result, our CFO, Suela Bulku, and I won't be making statements on Exzeo's results in the near term. Additionally, with the suggestion of counsel, we are advised to provide the following disclosure. The size and price range of the proposed offering by Exzeo have not yet been determined. The initial public offering is expected to take place after the completion of the SEC review process, subject to market and other conditions. There is no assurance that the initial public offering will be completed. We note that this announcement regarding Exzeo is being made under SEC Rule 135 and does not constitute an offer to sell or the solicitation of an offer to buy securities. Furthermore, it does not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction. Now I want to turn the call over to Paresh.

Thank you, Kevin. As Karin and Mark highlighted in their comments, HCI reported another quarter of strong financial results. Kevin's exciting comments on Exzeo reminded me of a time 18 years ago. Last week marked the 17th anniversary of HCI's IPO. The company has come a long way since going public in 2008 in the middle of the great financial crisis. But over the past 18 years, our management team has always been guided by a central principle, building long-term shareholder value. And along the way, there have always been ups and downs, but what matters most is what you achieve, not where you begin. As an example, 18 years ago, you wouldn't have predicted that we would grow earnings 25 times or increase the share price by 20 times and increase the shareholders' equity over 30 times. I note that because our management team has a proven track record of delivering strong long-term returns for our shareholders, and we are all very committed to building on that success. Please join us as we embark on the next leg of our journey. Our best days are in front of us. And with that, I will turn it over for questions.

The first question today is coming from Matt Carletti from Citizens Capital Markets.

Paresh, maybe I'll start. I was hoping that you might be able to kind of update us on what you're seeing market condition-wise in Florida, competitive landscape and so forth.

I'm going to give that question to Karin.

Sure. Thanks, Paresh. The environment in Florida now is a healthy one, as you can see from our financial results. It's natural that it will attract capital and competition, but that's not new to us. We've been around for a long time and have succeeded in all kinds of markets. The more competitive market is already here. Look at the 2023 takeout process. That was somewhat competitive in 2024, even more so. But even with that, we got more policies than we thought we would get. The attrition of those policies has been less than what we thought and the loss ratio has been lower than we thought. So we believe we're well positioned in a competitive market. We have multiple underwriters that can pursue different strategies. We have a strong capital position. And as I mentioned earlier, we have the people and the technology to make the right decisions.

Maybe Karin, sticking with that, you mentioned in your prepared remarks about HCI and Tailrow being approved for an October depop. Can you just give us kind of your outlook for maybe what we should expect as we progress through kind of the balance of the year in terms of any of the HCI entities, what appetite for depop might be or prospects for it?

Sure. The 3 carriers I mentioned earlier, Homeowners Choice, TypTap and Tailrow, each have been approved for 25,000 policies in October. And we'll leverage our technology as we've done in the past to identify those greenhouses that you know that we focus on. So there'll be some that we want, and we'll be able to select those given our underwriting criteria.

Okay. Great. And then one last one, if I could. And I appreciate based on kind of Kevin's remarks that you may not be able to answer this, and that's fine. But I was just curious, obviously, a focus has been getting Exzeo out on its own stand-alone so it can really thrive. Just the decision for IPO versus spin, if there's anything you can comment on? And again, if you can't, totally understand.

Matt, it's Mark. In line with Kevin's comment, we cannot delve too deeply into that. Exzeo is a fantastic company and has done excellent work for us. Karin mentioned its impact on our operations, and it is indeed a significant asset for us. Currently, its structure under HCI is not optimal for valuation or competitive reasons, but we are very focused on it. We are genuinely excited about the future. Unfortunately, we cannot discuss the details or weigh the pros and cons of one strategy versus another at this point.

The next question will be from Michael Phillips from Oppenheimer.

Regarding Exzeo, which is tied to the IPO process, I have a question. You've mentioned the advantages for Exzeo in being separate from Homeowners Choice. Could you share what you believe are the advantages for Homeowners Choice in being independent from Exzeo?

Great question. I would simply tell you that what we now have is people can focus on what they do. So HCI Group ex Exzeo has some interesting opportunities in front of them, and we are not quite ready to talk about them on an open mic. But I think people are looking forward to what a pure insurance play might do in the coming years given the volatility in the property and casualty market on a national basis, yes. So we have some great opportunities there as well.

Could you provide your insights on the pricing environment in your condo business?

I think we can confirm what many others have noted about the commercial residential market. That market remains quite soft and has been for months, as Karin mentioned. However, we are comfortable with this situation and expect it, as it represents a very small part of our business and is not a major concern for us. Overall, the entire market is experiencing softness, which is not new information at this point.

Okay. And then just lastly, quick numbers, just to confirm. Since 4Q is pretty sizable favorable reserve adjustment, you haven't done anything since then, just confirming that?

No, no changes.

The next question will be from Mark Hughes from Truist.

Mark, you commented in the past on weather being an influencer on the loss ratio. Was this an unusual quarter from a weather standpoint? Or was this more normal?

No. Actually, just to give you a little bit more color, Mark. If you go back to the second quarter of last year, compare that to the second quarter of this year, we have about 12%, 12.5% more policies now, and we actually had, I think, 40 or 50 fewer claims. But that's despite the fact that we actually had a little bit more weather in the second quarter of this year versus the second quarter last year. So we had, I think, about 100 more weather claims this quarter, but 150 fewer non-weather claims. So frequency is down significantly. I don't think it's an aberration. We had more weather in Q2 than we had in Q1. We had more weather in Q2 than we had in the last second quarter, but the loss ratio just continues to come down because the frequency is coming down.

Very good. I think in the last call and in the Q, you gave some summary Exzeo Financials revenue and pretax income. Is that going to be in the Q this time around? Are you able to share that on the call?

Yes. So we won't go through it on the call, but it will be the same as it always is in the Q, Mark. It's disclosed in the segmented information, and it's been there for quite a while. It will be there. You'll see it tomorrow.

Okay. And then investment income was a little bit higher sequentially. Was there anything unusual there? Or is that a good number on a go forward?

I think that is a good number to consider moving forward. There’s nothing unusual about it. If you compare cash and invested balances at the end of Q2 to the beginning of the year, it’s about $300 million higher because we generated $300 million in positive cash flow so far this year. So cash is around $950 million at the end of Q2. That’s really the main point. Up to this moment, rates have remained fairly flat, but the invested balances have increased significantly. I believe that’s a solid figure to project into the future.

Yes. And then what was your comment on interest expense post these developments?

We had a quarterly interest expense on the convertible notes, which was significant, but that's no longer a concern going forward. The only interest expense we will have from now on is from the credit line and real estate loans. We project that to be about $950,000 per quarter, which is roughly one-third of what it has been in the past.

How would you describe the current opportunity for the remaining policies available for takeout compared to two years ago? The number of 25,000 seems lower, which might indicate that. However, across all three subsidiaries, you are still at 25,000. I'm interested in your perspective on the potential this time around.

Yes. Mark, so about the 25,000 PECs per carrier, it just seems they're all financially healthy enough that they can aspire to those numbers, right? What they will do in practice is what Karin said is how many greenhouses can they find that makes sense for us to take, right? To your bigger question, the ratio of red houses to greenhouses has obviously dramatically shifted, right? Because if you recall things from the past, we had said there's about 500,000 policies that should remain in Citizens. So as you approach that number, the book gets a lot more red than green, if you like, yes. And that's occurring. But that's okay. We know what we're doing, and that's what Karin was alluding to as to how the software runs.

Understood. Regarding the gross premiums written, TypTap saw a nice increase this quarter with a 40% rise, while Homeowners Choice grew by 18%. Could you describe how much of that increase was related to continuing takeout or renewal on takeout revenue? Is it mainly a timing issue, or was there a significant amount of voluntary business involved in those figures?

Not a lot of voluntary activity. It's primarily the renewal of the existing portfolio and the renewals related to the takeouts we executed. It's important to note that when comparing quarter-over-quarter, in the second quarter of last year, we completed the core takeout, which resulted in a slightly higher gross written premium in Q2 last year. Aside from that, the numbers are fairly comparable, showing an 18% increase quarter-over-quarter.

And just one more, Mark, you had used the kind of the 70% net combined ratio. Is that normalized for the expense savings associated with the takeouts? Is that giving kind of a full load at this point?

Yes, it was 62% this quarter. We are projecting 70% because that figure normalizes for three factors. It includes the full reinsurance load, covers all policy acquisition expenses since there is a period where premiums are amortized without any commissions, and we've also factored in a slight flexibility in the loss ratio if it slightly increases. All of this is reflected in the 70% combined ratio, which should be fully normalized and loaded. It's a non-GAAP number, but it represents a snapshot once everything normalizes.

The next question is coming from Casey Alexander from Compass Point.

Paresh, it's funny when you were making your comments about 18 years ago, before the call started, I was looking at the 6-month diluted earnings per share of $10.57 and thinking to myself, geez, that's more than what the price of the stock was when we first met 18 years ago. So it is actually quite an achievement. I just want to clarify on the depop, that is 25,000 policies each for each of the 3 entities or 25,000 spread across the 3 entities?

25,000 for each underwriter.

So a total of 75,000.

Yes.

Okay. Great. And I'm curious about your comments. Where do you see some opportunities emerging outside of the state of Florida? And to a certain extent, how helpful will Exzeo be to HCI TypTap at all in identifying those opportunities?

This is what excites us. Speaking from my experience at HCI, formerly Exzeo, we are beginning to notice opportunities in certain states, as well as potential in some larger states. However, we are proceeding cautiously because we have a strong position at HCI, formerly Exzeo. It's important to ensure that we make thoughtful progress. When we do move forward, we are considering a multiyear perspective. We want to maintain a balanced outlook, but we're enthusiastic because the Exzeo technology continuously improves our performance. The improvements cannot simply be linked to the factors from a few years ago due to legislative changes. That was three years ago, and the numbers continue to rise. Furthermore, reflecting on your earlier points, it is indeed accurate that 18 years ago, we wouldn't have predicted EPS for two quarters to surpass the share price we discussed back then.

That's for sure. Congrats on a good quarter.

Thank you. At this time, this does conclude our question-and-answer session. I would now like to turn the call back over to Paresh Patel, who has a few closing remarks.

Thank you. On behalf of the entire management team, I would like to thank our shareholders, employees, agents and most importantly, our policyholders for their continued support as we embark on the next phase of our growth. Stay tuned. Thank you.

Thank you. At this time, this concludes our question-and-answer session, and this concludes today's call. You may now disconnect.