Exzeo Group, Inc. Q4 FY2025 Earnings Call

Good afternoon, and welcome to Exzeo Group's Fourth Quarter 2025 Earnings Call. My name is Mark, 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 broadcast live via webcast and is available for webcast replay approximately four hours after the call through February 25, 2027, on the Investor Relations section of Exzeo Group's website at www.exzeo.com. I would now like to turn the call over to Bill Broomall, Vice President of Investor Relations. Bill, please proceed.

Thank you, and good afternoon. Welcome to Exzeo Group's Fourth Quarter 2025 Earnings Call. To access today's webcast, please visit the investor information section of our corporate website at www.exzeo.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 within the meaning of 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 condition, and results of operation. Exzeo Group disclaims all the obligations to update any forward-looking statements. Now with that, I would like to turn the call over to Suela Bulku, Exzeo's Chief Financial Officer.

Thank you, Bill. Good evening, everyone, and thank you for joining us for Exzeo's fourth quarter earnings call. Exzeo delivered another strong financial performance for the fourth quarter. Pretax income in the quarter was approximately $29 million, and diluted earnings per share were $0.25. For the full year, pretax income was over $110 million, and diluted earnings per share were $0.99. For the fourth quarter, revenue increased to $53 million; and for the full year, increased to $217 million. We booked the first non-HCI revenue during the quarter. While the contribution from our two new clients was modest, they are growing and are expected to have managed premium on our platform of approximately $100 million by the end of the first quarter. Our adjusted EBITDA margin increased to over 54% in the fourth quarter and for the full year. There continues to be significant leverage in our operating model because we can add managed premium with very little incremental expense. I want to highlight a few other KPI metrics. Managed premium at the end of the fourth quarter was approximately $1.39 billion, ahead of our expectations and up significantly from about $580 million last year. The other KPI metric that I wanted to highlight was our annual recurring revenue, which was $215 million in the fourth quarter, an increase from about $139 million in the prior year quarter. For the full year 2025, we generated strong free cash flow of about $97 million. With net income of about $83 million, that represents a free cash flow conversion rate of 117%. Moving to the balance sheet, we ended the year with $305 million in cash and cash equivalents, and we continue to have no debt. Stockholders' equity increased 16-fold to $254 million. Before turning the call over to Kevin, we would like to provide a quick update on guidance and what we're currently expecting for the first quarter and the full year 2026, starting with pretax income. We expect pretax income to be between $23 million and $26 million for the first quarter. For the full year 2026, we continue to expect pretax income to be between $115 million and $125 million. Next, managed premium. We expect managed premium to be over $1.4 billion by the end of the first quarter. Based on current momentum, we are raising our outlook for 2026 and we now expect managed premium to reach $1.55 billion by year-end. In closing, Exzeo delivered another strong quarter highlighted by continued growth in managed premium, expanding margins, and a solid, debt-free balance sheet supported by a strong cash position. And with that, I will hand it over to Kevin, President of Exzeo.

Thank you, Suela. As we previously communicated, we laid out goals for 2026. Let me give you a progress update. First, we wanted to add non-HCI clients to our platform and grow them to a meaningful size. As Suela highlighted, the two startups added to the platform in the fourth quarter should be approximately $100 million of premium by the end of the first quarter. Second, we issued a press release this evening announcing that Exzeo has added a new client and a new product to its platform. The new product is flood, and the new client is Tokio Marine Highland, a wholly owned subsidiary of Tokio Marine Kiln and a member of Tokio Marine Group. They've selected the Exzeo platform to offer their flood insurance product, and we've already added our first policy. Third, we are taking an important step to widen our sales funnel with prospective clients. This includes the recent hiring of a seasoned industry executive with a tremendous amount of experience in software sales. Overall, Exzeo is heading in a positive direction. Next, I want to take a few minutes to give our view on the approaching inflection point of AI in the insurance industry and why we think it will be positive for Exzeo. Much of the insurance industry still relies on human underwriters to manually review and touch nearly every policy. In an AI-driven world, that is going to change. Friction will come out of the system. We saw years ago that the industry would eventually be moving towards a fully automated insurance platform, where policies are bound in minutes and administered with little to no human intervention, which is what Exzeo currently does today. What is clear is that the technology bar is being raised. We believe the rise of AI will drive a new upgrade super-cycle that will be difficult to avoid. The end result will be a modernized platform that reduces human touch per policy, lowers operating costs, and delivers better underwriting performance. The debates of how to navigate these upgrades will be a major topic. It will cause a rethink of how insurance is done and what tools or platforms to use. The Exzeo platform was built to deliver the solution. It is a modern, fully automated insurance platform that scales efficiently with our clients' growth. We offer our clients shorter implementation cycles, as demonstrated by the speed at which new clients are already operational on the platform; a consumption-based fee model, eliminating large upfront costs, and directly aligning Exzeo's economics with our clients' growth; and reduced execution risk, providing a streamlined on-ramp to the future. In short, this industry inflection point has the potential to serve as a meaningful catalyst, accelerating our ability to achieve and potentially exceed the strategic objectives we outlined during our IPO process. Now I'll turn the call over to Paresh, Exzeo's Chief Executive Officer.

Thanks, Kevin. Now that we are a few months removed from our IPO, several things are evident. As Suela highlighted, Exzeo is delivering strong operating margins, growing earnings, and generating meaningful positive cash flow. On the operational side, as Kevin discussed, we are growing managed premium, broadening our product offerings, signing new third-party clients, and investing in the team needed to capture additional market share in the years ahead. With all that said, what excites me the most is that with AI, the future operating model of the insurance industry will be different, and Exzeo was designed specifically for that future. Our focus now is on execution, including adding more clients, products, and premium to the platform. And with that, I'll turn the call over for questions.

Thank you. And our first question will come from Terry Tillman with Truist Securities.

Paresh, Kevin, Suela, and Bill, congratulations on the results in the quarter. I had a couple of questions. First, hopefully you can hear me okay. I wanted to ask about entering the flood market with Tokio Marine. That's a very large company. Can you share anything about how quickly that business could grow and how significant it is for their future? I'm trying to understand how this might develop. Is this an indication that you plan to expand in the flood market soon, or are you aiming to start here? I also have a couple of follow-up questions.

Terry, the most significant aspect here is our existing relationship with them. The speed at which this deal came together and the fact that we were able to write our first policy indicates how quickly we acted. We haven't had much time to consider what the future may bring and the possibilities for expansion. What we do know is that Tokio Marine is licensed to sell the product in 42 states, which significantly broadens the scope and reach of what we can achieve with the Exzeo platform.

Terry, this is Kevin. What excites us with Tokio Marine is they have a long history in flood, are very established, and they know the business quite well. Partnering with someone that has that type of credibility we think is a true positive. As Paresh mentioned, the speed at which our technology can partner with them is pretty impressive. They were excited about how quickly we could get to market.

That's great to hear. I have two more quick questions. It sounds like those two newer carriers are set to generate $100 million in premium in the first quarter, which is quite substantial in such a short time. I want to dig a little deeper into the customer acquisition aspect because there’s always a desire for growth. Paresh, you mentioned on the last call that the pipeline tripled in five weeks after the IPO. It seems you have brought on an experienced sales leader. Can you provide more details about your go-to-market efforts? You've been a public company for a while now, so any insights on how you view the funnel evolving would be helpful. Lastly, I have one more question for Suela.

Yes. Absolutely. Look, Terry, the funnel is developing very well, and some relationships take a little bit longer to onboard while others happen very quickly. Tokio Marine, obviously, was a very quick one, but others may take a little longer because various other challenges come into play. What we see is that opportunity is sort of growing. Why I say that is based on some of the prepared comments that we made about instead of having to win customers and convince them that Exzeo was the way to go, with generative AI, more people are looking to see what's the future and how quickly can we get there. Think about what we just did in the last four months. We onboarded three new customers. They already have premium on the platform. Imagine how fast this world is moving compared to an industry where typical software implementations take 12 to 14 months, and that's just for part of the solution. What we've set out to do is now happening in real-time. Ironically, more people are looking for this. We're also trying to be respectful in how we handle this so that we don't over-credit discussions and ensure they translate into premium on the platform.

Yes, it makes sense. I understand. The last question for Suela is about the free cash flow; the conversion is impressive at well over 100%. Could you provide any insights on the pretax income guidance for 2026 that you maintained? Also, could you comment on the outperformance in the fourth quarter and the strength observed, as well as your thoughts on free cash flow conversion for all of 2026?

Yes. We expect the free cash flow conversion to continue to be over 100%. That's primarily driven by the growth that we expect. I mentioned this before, but we have a positive working capital cycle where we actually get paid cash upfront from a customer, then it takes us over 12 months to recognize revenue. Since we're growing in 2026, we expect the free cash flow conversion to continue to exceed 100%.

And our next question will come from Dylan Becker with William Blair.

Really nice job here. Maybe, it's kind of been hinted at, but for Kevin or Paresh, would love your guys' perspectives on kind of what the evolution of the insurance model looks like kind of facilitated by AI. If you could dive into the proprietary data set and how that positions you guys to be that differentiated provider here, and maybe the impetus having accelerated from an adoption perspective from an end consumer due to the fact that the market is normalizing, rates are becoming a little more competitive and they need to get a little more granular in what they're underwriting? Thoughts there would be really appreciated.

Sure. Dylan, this is Kevin. Regarding the evolution of insurance models facilitated by AI, we have been on a journey here at Exzeo that started back in 2012. In our early days, when we started building the platform, there were data sets to purchase, so we built our own. This has given us a distinct competitive advantage in the market. We learned how to source, curate, and ensure that our data is accurate to make key underwriting decisions for our clients. This has been key to our clients' performance over the last few years. When you consider the expectations of consumers today for instant services, the importance of automating all steps of the insurance process, including quoting, binding, underwriting, customer service, and claims, cannot be overstated. If you can seamlessly automate these critical identifiers, it will drive incredible efficiency for your insurance carrier, enhancing the customer experience for the agents and allowing our clients to remain competitive regardless of the market they find themselves in.

Very helpful, Kevin. Maybe for Suela, could you kind of remind us as well too, and great to see kind of the uplift to the expected premium outlook for 2026 here, but how that flows through the seasonality of premiums coming online, how that converts to kind of revenue and annual recurring revenue, and maybe how that also gives conviction in the sustainability of the profitability profile relative to kind of that margin expansion trajectory you've called out in the past as well?

Yes. Very good question. The timing of the ramp that we expect for 2026 will vary, but I would think of the ramp being a little bit more back-end loaded. The timing will obviously matter. As managed premium is added to the platform, it will increase the annual recurring revenue based on the contractual fees or the take rate. From a revenue recognition standpoint, just a reminder that a portion of our revenue gets recognized upfront; about one-quarter of our revenue is recognized upfront, with the remainder earned over the 12-month premium period. I would say it all depends on the timing of the ramp and when managed premium joins our platform.

Yes. I think part of the prediction is that you can appreciate Suela is trying to assimilate the inputs from, at this point, seven different carriers and their growth and expansion plans to predict where Exzeo will be. This is why the answer is a bit less defined than you might normally expect because it's more complicated. With this unique situation, if you have just one entity, predictions can be easier. But the more entities involved, the more difficult it is to project. We're in a transitional period where ramping can be difficult to determine due to the lumpy nature of integration.

And then our next question will come from Matt Carletti with Citizens.

A couple of my questions were answered; I just have a couple of numerical ones for Suela. Can you help me with the $1.39 billion in managed premiums for the year? I know it's a small number, but what is the starting point for third party? I heard your guidance on Q1, where you expect Q1 to end. I also know there was some put on the platform in Q4. Can you help us with where that stood at year-end?

I can just say that it was pretty modest. As both Kevin and I mentioned, we expect that to become material by the end of the first quarter. So percentage-wise, it will be increasing. Would you like to add anything?

Yes, Matt, I think the biggest thing we want everyone to note is that third-party revenue on the platform was zero at the end of Q3, nominal at the end of Q4, and it's projected to be approximately $100 million by Q1. This illustrates any concerns about adding third-party business.

Yes, perfect. That's helpful. And then just want to, Suela, I hate to ask you to repeat yourself, but I was in transit, getting through security, I think, when you said it. The pretax net income guide, just for Q1, I got the year; was it $23 million to $25 million, or did I mishear you?

$23 million to $26 million.

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

I want to thank everyone who joined the call today. I want to thank the Exzeo team for all their hard work. Before we wrap up, I want to quickly mention that the Rule 10b5-1 prearranged purchase plan that I highlighted last quarter for myself will be effective next month. Thank you, everyone, for your time today.

This concludes today's call. You may now disconnect.