Earnings Call Transcript - HCI Q3 2025

Operator, Operator

Good afternoon, and welcome to HCI Group's Third Quarter 2025 Earnings Call. My name is Ali, 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 December 6, 2025, starting later today. The call is also being broadcast live via webcast and available via webcast replay until November 6, 2026, on the Investor Information section of HCI Group's website. I would now like to turn the call over to Nat Otis, HCI Group. Nat, please proceed.

Nat Otis, HCI Group

Thank you, and good afternoon. Welcome to HCI Group's Third Quarter 2025 Earnings Call. To access today's webcast, please visit the Investor Information section of our corporate website. 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, 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 risk 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 Coleman, Chief Operating Officer

Thank you, Nat. Good afternoon, everyone, and thank you for joining us today. We're pleased to report another quarter of strong financial results, reflecting our continued focus on disciplined execution, profitable growth, and delivering value for our shareholders. Highlights for the third quarter include reported earnings of $4.90 per share, a net combined ratio of 64%, total shareholders' equity of $821 million with book value per share increasing more than 50% year-to-date to $63 per share and a 22% loss ratio as the weather in Florida remained favorable as we move through the remainder of the 2025 hurricane season. In addition to these financial achievements, we had several other important developments in the quarter. A three-building campus in Tampa owned by Greenleaf Capital, our real estate division, had its tenant move in, and the entire campus is now fully leased. This allows flexibility to explore financing options for the property to optimize returns for shareholders. During the quarter, Greenleaf also added to its portfolio by acquiring a new complex in Pinellas County, Florida. We continue to identify opportunities that can deliver sustainable long-term value for the shareholders. Lastly, in September, Exzeo added a fifth carrier to its platform, its first non-HCI-controlled carrier. In addition to these notable accomplishments, we've continued to make strong progress on several other initiatives in the first few months of the fourth quarter. In October, we successfully assumed over 47,000 policies from Citizens, representing about $175 million of in-force premium. With the strong outcome in October, we do not plan to participate in the December assumption from Citizens. We recently entered into a new credit facility with Fifth Third Bank, which will significantly increase the amount of credit available to HCI. Mark will go into more details on that. And finally, earlier this week, Exzeo successfully completed its initial public offering. We are excited about Exzeo's future prospects, and we look forward to HCI remaining a significant shareholder of Exzeo for the foreseeable future. Mark and Paresh will provide additional details in their remarks. Looking ahead, we remain committed to delivering strong earnings, compounding book value per share, and generating attractive returns for our shareholders. Now I'll turn it over to Mark to provide more details on our financials.

Mark Harmsworth, HCI Group

Thanks, Karin. Pretax income for the third quarter was just over $90 million. And as Karin mentioned, diluted earnings per share were $4.90. Year-to-date, pretax income is $285 million compared to $167 million for the first nine months of last year, an increase of more than 70%. Let's talk about the loss ratio for a minute. When comparing to the third quarter of last year, you have to remember that Hurricane Helene happened last quarter for that quarter. If we adjusted for that, the loss ratio in the third quarter last year would have been about 25%. In the third quarter this year, the loss ratio was down to 22%, reflecting lower quarter-over-quarter claim frequency. The combined ratio this quarter was 64%, reflecting the lower loss ratio and lower operating expenses as a percentage of premiums. The combined ratio this quarter is a little lower than the 70% we've discussed a few times as the loss ratio this quarter was a little lower than expected. Now let's look at the balance sheet for a minute, which continues to improve. Cash and investments are up by around $334 million so far this year. Long-term debt is now only $32 million; shareholder equity of well over $800 million has almost doubled since the start of the year. Debt to capital has dropped to 8%, and book value per share is up more than 50% so far this year to more than $63. Our strong balance sheet should continue to provide comfort to our policyholders, and our shareholders should take comfort in our efficient use of capital as our after-tax return on equity continues to be over 30%. Our strong balance sheet has also allowed us to negotiate better terms with our credit partner, Fifth Third Bank. As Karin mentioned, we recently renegotiated our credit facility, and in doing so, doubled the size of the facility from $75 million to $150 million and released all of the real estate collateral that had secured it. In summary, this was another strong quarter and a very strong year for the company. Our operating ratios are all improving. The balance sheet continues to get stronger. We're generating superior returns, and we're poised for additional profitable growth with the recent Citizens assumptions. And with that, I'll hand it over to Paresh.

Paresh Patel, HCI Group

Thanks, Mark. Karin and Mark talked about the last quarter. But as we all know, the big event was the one that occurred earlier this week. For the last two years, we have been choreographing a complicated sequence of steps to begin to unlock the true value of Exzeo, our organically grown internally developed insurance platform. HCI investors have exhibited both patience and support while we went about this. And with Exzeo's IPO earlier this week, we have completed the last step in this sequence. And while we are already focused on what we're doing next, it's important to step back for a moment to reflect and more importantly, to quantify the meaningful financial benefit of the Exzeo IPO to HCI shareholders. Mark, can you please provide the details.

Mark Harmsworth, HCI Group

Sure. So in that IPO that Paresh just mentioned, Exzeo issued 8 million new shares at a price of $21 per share, and the net proceeds were about $155 million. In addition to those 8 million shares, there's a potential overallotment of another 1.2 million shares, which I'm not including in any of the numbers that I mentioned here. In the offering, HCI did not sell any of its shares in Exzeo. We owned 75 million shares before the IPO, and we own 75 million after it. Because of our ownership position, we will continue to consolidate Exzeo into the financial statements of HCI as we've always done; however, there will be a couple of impacts. First, when calculating earnings per share, net income attributable to non-controlling interest will increase slightly, and therefore, diluted earnings per share will decline slightly. If the IPO had happened at the start of Q3, for example, the impact to diluted earnings per share would have been less than $0.15. Second, when we booked the IPO in Q4, there will be a significant increase in the consolidated book value and book value per share of HCI, resulting from the net proceeds of the IPO. Book value will go up by about $125 million, and book value per share will go up by about $10. By the end of this year, we expect HCI's book value to be over $1 billion, and book value per share to be close to $80. This is a tremendous achievement driven by careful capital management and profitable growth. However, that book value will not include any of the unrealized gains on our ownership of Exzeo shares. We own 75 million shares of Exzeo, and you can see at any time what they're trading for. But we will have them on the books for less than $3 a share because they're recorded effectively at cost. If you get out a calculator and do the math, you'll see that difference is more than the entire book value of HCI. This is an exciting transaction for the shareholders of both companies, and we look forward to the continued innovation, growth, and success of Exzeo. And with that, I'll hand it back to Karin.

Karin Coleman, Chief Operating Officer

Thanks, Mark. To wrap things up, we're very pleased with how our businesses continue to perform. HCI's insurance and reinsurance operations continue to grow and deliver solid results. Our real estate assets have significant embedded value while also delivering meaningful returns, and our investment portfolio continues to be an important source of strong and stable income. Lastly, we were excited to see Exzeo's successful IPO earlier this week as the transaction partially unlocked the intrinsic value of that company. As Mark pointed out, though, we did not sell a single share in the IPO because we believe that this is just the beginning of a successful journey for that company. In short, we're very pleased with both HCI's results as well as Exzeo's successful IPO. With that, I'll turn the call over for questions.

Operator, Operator

Our first question is coming from Michael Phillips with Oppenheimer.

Unknown Analyst, Analyst

This is Amir in for Mike. I just had a question around Citizens. Can you guys please give us an update on the 75,000 policies you guys applied to take out for Citizens for each three of the subsidiaries? Or in other words, how many of the 25,000 are you guys expecting to write? And just subsequently for Homeowners Choice, what is an expected average policy size of those takeouts?

Karin Coleman, Chief Operating Officer

I think we had a total of 47,000 policies that are in that October takeout.

Paresh Patel, HCI Group

We applied for 75,000. We got...

Karin Coleman, Chief Operating Officer

Right. We applied for 75,000, but we ended up with the 47,000 mentioned in the script.

Paresh Patel, HCI Group

Homeowners Choice received approximately 19,500 policies, Tailrow received just over 19,000, and TypTap received a little over 8,000.

Unknown Analyst, Analyst

That's great. And just one last question on my side. Would you guys be able to share any expected use of cash on the balance sheet over the coming years for Homeowners Choice or any more possible aggressive state expansion or potential M&A?

Mark Harmsworth, HCI Group

It's Mark. I mean I don't think we can get too specific. But I talked in my prepared remarks about the strong capital position. There's also a really strong surplus position in the underwriters. And without getting too specific, we grew by 15% or so this year. We've got lots of opportunities both ahead of us for the year coming up, and we will grow, and we've got the capital to do that. So 2026 is going to be a good year.

Operator, Operator

Our next question is coming from Mark Hughes of Truist.

Mark Hughes, Analyst

Mark, how much cash at the holding company?

Mark Harmsworth, HCI Group

So total holding company liquidity at the end of September, I think, was about $285 million total.

Mark Hughes, Analyst

Okay. Why not consider doing the December takeout? You had a successful October. Is there a reason not to aim for more next month?

Paresh Patel, HCI Group

Mark, that's a great question. The truth is, I believe Citizen is currently shrinking. In fact, I don't think Citizen is the largest insurance carrier in the state anymore; it has fallen significantly in the rankings. By December, while there may still be some policies available, we are already considering other options beyond Citizens. It feels like a distraction to keep returning to a source that has diminished so much. If you were really interested in Citizens policies, you would have pursued them two years ago, which we did.

Mark Hughes, Analyst

Yes. The expense ratio was quite good in the quarter, both G&A and other operating expenses were down. Anything unusual this quarter? Or is that just leverage?

Mark Harmsworth, HCI Group

Yes. So thanks for the question, Mark, it's Mark. I mean, no, there's nothing unusual in Q3. It's just a continuation of what we've been talking about before about operational leverage and the importance of technology we've been able to grow without really adding any people and that results in flattish operating expenses while revenue keeps going up. So revenue was up 13%. Operating expenses don't go up that much. And it's just that operational leverage we've been talking about for a while. There's nothing unusual at all in Q3.

Mark Hughes, Analyst

Yes. When we think about modeling the Exzeo impact and the minority interest. Essentially, we're accounting for 8 million shares out of Exzeo's earnings; those will be pulled out as minority interest. And so on a go-forward basis, we've got to think about the ratio of Exzeo versus HCI earnings when we think about what we should use as the basis to calculate the minority earnings. Any rules of thumb or anything you might suggest as we contemplate that?

Mark Harmsworth, HCI Group

Yes, it's quite simple. If you look at the $0.15, which is slightly less than that, that would have been the impact if the IPO had occurred on July 1. Even if it had fully affected Q3, the impact is not significant. In the press release, we provided an earnings per share calculation that excludes the minority interest of several companies, including Exzeo; that number would not be twice as large as it currently is, but slightly less. You would calculate it as you normally would. The negative $2 million mentioned in the press release, as a general guideline, you might consider doubling that for your EPS calculation, which is quite straightforward.

Mark Hughes, Analyst

Yes. I assume the net income for Exzeo versus Homeowners Choice is detailed in the Q?

Mark Harmsworth, HCI Group

It will be in the segmented report in the Q that is published tomorrow.

Mark Hughes, Analyst

Okay. Very good. And then anything to say on the Exzeo pipeline, just kind of an update on the business there. I understand if there's nothing you can or in position to say at this time, but anything about the pipeline of business, growth prospects for Exzeo that you're able to share?

Paresh Patel, HCI Group

Yes, Mark, it's Paresh. Going forward, we want to focus this call on HCI and our perspective on Exzeo's ownership, rather than discussing specifics about Exzeo, since they will soon conduct their own quarterly earnings calls where those details will be provided. However, I want to highlight that there is significant interest in joining the Exzeo platform. I believe they have already announced a second customer, although this happened after the end of Q3. We need to start building the pipeline, and it appears to be developing quite well.

Mark Hughes, Analyst

Very good. I appreciate that and understand your preference going forward. Mark, I'll try to take one more in. Mark, the loss ratio was 25% in this quarter last year, excluding Helene, down to 22%. How much of that might have been due to weather factors? Could you provide more insight into the improvement there?

Mark Harmsworth, HCI Group

The weather was fairly consistent, with good conditions in both the third quarter last year and this year. The main change was in claims frequency, which decreased from 3.7% annualized in the third quarter last year to 3.4% this year. This reduction in claims frequency is what lowered the loss ratio. There weren't any other significant factors at play; it was simply a matter of fewer claims. Weather was present but did not have an impact on the comparison between the two quarters.

Operator, Operator

At this time, this does conclude our question-and-answer session. I would now like to turn the call back over to Karin Coleman for a few closing remarks.

Karin Coleman, Chief Operating Officer

On behalf of the entire management team, I'd 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. Thank you.

Operator, Operator

Thank you. At this time, this will conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.