HCI Group - Earnings Call - Q2 2025

Executive Summary

• Strong Q2: EPS $5.18 and total revenue $221.9M, with gross loss ratio at 21.3% and book value per share up to $58.55. EPS rose 22% YoY from $4.24 and revenue increased 7.6% YoY from $206.2M.
• Beat vs consensus: EPS $5.18 vs $4.50*; revenue $221.9M vs $219.0M*; management highlighted combined ratio “just under 62%” and expects normalized net combined ≈70% once reinsurance fully loaded.
• Capital and liquidity improved: redeemed 4.75% converts; debt-to-cap ratio well under 10%; interest expense guided to ~<$1.0M per quarter; holding company liquidity just over $250M.
• Strategic catalysts: Exzeo confidentially submitted S-1 for an IPO; three carriers approved for October depopulation (25k each); 2025–26 reinsurance program completed with >$3.5B in aggregate cover and expected net ceded premiums ≈$422M for the treaty year.

Values marked with * are retrieved from S&P Global.

What Went Well and What Went Wrong

• What Went Well

  • Profitability and underwriting: Gross loss ratio improved YoY to 21.3% (from 29.7%); CEO: “industry‑leading net combined ratios”.
  • Operating leverage and balance sheet strength: Combined ratio “just under 62%”; BVPS rose >$16 YTD to $58.55; liquidity >$250M; debt-to-cap <10% after redeeming converts.
  • Strategic progress: Exzeo filed confidential S-1 for IPO; management sees technology as key edge in underwriting and retention (≈90% retention cited).

• What Went Wrong

  • Sequential loss ratio uptick vs Q1 as weather increased: gross loss ratio 21.3% vs 19.7% in Q1; CFO noted more weather in Q2 vs Q1, though frequency still down.
  • Expense drift: Policy acquisition costs rose to $30.6M (from $23.5M YoY); G&A personnel expenses increased to $20.0M (from $17.5M YoY) on SBC/benefits/merit.
  • Ceded premiums edging higher: Reinsurance premiums ceded $102.5M vs $99.6M in Q1; full load expected to be ~$106M per quarter going forward, compressing net combined toward ~70% normalized.

Transcript

Speaker 7

Good afternoon and welcome to HCI Group's second quarter 2025 earnings call. My name is Paul, and I will be your conference operator. At this time, all participants will be in listen-only mode. 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, Vice President of Investor Relations. Bill, please proceed.

Speaker 8

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?

Speaker 3

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 inforce 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.

Speaker 8

Thanks, Karin. Pre-tax 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, pre-tax 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 six 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, premiums 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 a third of what it had been. Due in part to this redemption, but also because of continued profitability, shareholders' equity has grown by more than $300 million so far this year and is now well over three quarters of a billion dollars. 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. With that, I'll hand it over to our President of Exzeo, Kevin Mitchell, to give us an update on Exzeo.

Speaker 0

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.

Speaker 2

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 a great financial crisis. Over the past 18 years, our management team has always been guided by a central principle: building long-term shareholder value. Along the way, there's 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.

Speaker 7

Thank you, sir. At this time, we'll be conducting a question and answer session. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset as listening on speakerphone to provide optimum sound quality. Please hold while we pull for questions. The first question today is coming from Matt Carletti from Citizens Capital Markets. Matt, your line is live.

Hey, thanks. Good afternoon.

Hey, Matt.

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, you know, competitive landscape and so forth.

Speaker 2

I'm going to give that question to Karin.

Speaker 3

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, and 2024 even more so. Even with that, we got more policies than we thought we would get. The attrition on those policies has been less than what we thought, and the loss ratio has been lower than we thought. 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 three carriers I mentioned earlier, Homeowners Choice, TypTap, and Tailrow, each have been approved for 25,000 policies in October. We'll leverage our technology, as we've done in the past, to identify those green houses that you know that we focus on. There'll be some that we want, and we'll be able to select those given our underwriting criteria.

Great. 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, standalone, 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.

Speaker 6

Hey, Matt. It's Mark. In line with Kevin's comment, we can't really get too far into that. I mean, obviously, Exzeo is a great company. It's done great work for us. Karin talked about the effect on our operations. It's a tremendous asset for us. The way it's structured right now, being tucked under HCI, it's not ideal for either evaluation purposes or competitive reasons. We are very focused on that. We're really excited about it. We're excited about the future. Unfortunately, we just can't get into the details and pros and cons of one strategy over the other at this point.

Completely understand and appreciate all the answers. Thank you.

Speaker 7

Thank you. The next question will be from Michael Phillips from Oppenheimer. Michael, your line is live.

Yeah, hey, thanks. Good afternoon. On the Exzeo thing, this isn't really related to the IPO process, but just a random question. You've talked in the past couple of quarters, since you've started talking about this, of the benefits to Exzeo for being independent from Homeowners Choice. I guess I wanted to ask on the flip side to that, what do you think are the benefits to Homeowners Choice from being independent from Exzeo?

Speaker 2

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. We have some great opportunities there as well.

Okay. Thanks. Could you maybe just on the environment, could you comment on what you're seeing in your condo business for the pricing environment?

I think we would confirm the same item that lots of other people would. I think you're talking about commercial residential.

Yes.

That market is very soft. It continues to be soft. As Karin Coleman mentioned, this is nothing new I'm telling you. It's been this way for months. We're fine with it, we anticipate it, and it's a very small part of our business, it's not a significant issue to us. I think the whole market is soft. That's old news at this point.

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

Speaker 6

No, I mean, no changes.

Okay. Great. Thanks, guys. Congrats.

Speaker 7

Thank you. The next question will be from Mark Hughes from Truist. Mark, your line is live.

Thank you. Good afternoon. 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?

Speaker 6

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 12.5% more policies now. We actually had, I think, 40 or 50 fewer claims. 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. We had, I think, about 100 more weather claims this quarter, but 150 fewer non-weather claims. Frequency is down significantly. I don't think it's, you know, 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?

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

Okay. Investment income was a little bit higher sequentially. Was there anything unusual there, or is that a good number on a go-forward?

That is, I think, a good number going forward. There's nothing unusual there. It just, I mean, it reflects if you look at cash and invested balances at the end of Q2 compared to the start of the year, it's like $300 million higher because we generated $300 million of positive cash flow so far this year. You know cash is, I think, $950 million or something like that at the end of Q2. It's really just that. To this point, rates have been fairly flat, but just the invested balances are up significantly. I think that's a pretty good number to project forward.

What was your comment on interest expense post these developments?

We had a quarterly interest expense on the convertible notes, which was significant. Going forward, that's gone. The only interest expense we'll have going forward is on the credit line and on real estate loans. I think our projection there is about $950,000 per quarter, which is about a third of what it's been in the past.

How is the kind of the remaining policies that are available for takeout? How would you characterize the opportunity now versus a year or two years ago? The 25,000, I think, is a lower number, and maybe that reflects that, but you've got across all three subsidiaries, you're doing 25,000. I'm just curious how you'd characterize the potential this time around.

Speaker 2

Yeah. Mark, so about the 25,000 pick spoke, Karin. It just seems that they're all financially healthy enough that they can, you know, 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. As you approach that number, the book gets a lot more redder than green, if you like, yeah? 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. On the gross premiums written, the TypTap was a nice jump this quarter, 40%. Homeowners Choice at 18%. Was there any, could you characterize how much of that was, was that kind of continuing takeout or renewal on takeout revenue? Was that just kind of a timing issue? Was there much or any voluntary in those numbers?

Speaker 6

Not a lot of voluntary in there, no. It's largely, you know, it's the renewal of the existing book, renewal of the takeouts that we did, obviously. The only thing you have to just be a little bit careful of when you're comparing quarter over quarter is in the second quarter of last year, we did the core takeout. Gross written premium was a little bit higher in Q2 last year. Other than that, it's pretty, you know, it's pretty comparative. Yeah, it's up 18% quarter over quarter, something like that.

Just one more, Mark, you would use the kind of a 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. Yeah. Yeah. It was, and that's the reason that, you know, it was 62% this quarter. The reason we're saying 70% is that that's normalizing for three things. It's got the full reinsurance load in it. It also has full policy acquisition expenses because you remember you've got a period of time where you're amortizing in premium that doesn't have any commissions on it. We've also allowed, you know, a little bit of wiggle room on the loss ratio if it drifts up a, you know, a couple of points. That's all meant, that's all captured in that 70% combined ratio, which should be normalized, fully loaded, you know, to non-cap number, obviously, but that's once everything sort of normalizes out.

Very good. Thank you.

Speaker 7

Thank you. Once again, it will be star one if you wish to ask a question on today's call. The next question is coming from Casey Alexander from Compass Point. Casey, your line is live.

Speaker 2

Good afternoon. Paresh, it's funny, when you were making your comments about 18 years ago, before the call started, I was looking at the six-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. It is actually quite an achievement. I just wanted to clarify on the depop, that is 25,000 policies each for each of the three entities or 25,000 spread across the three entities?

Speaker 6

$25,000 for each underwriter.

Speaker 2

A total of 75.

Speaker 6

Yes.

Speaker 2

Okay. Great. I'm curious about your comments. Where do you see some opportunities emerging outside of the state of Florida? To a certain extent, how helpful will Exzeo be to HCI or TypTap at all in identifying those opportunities? This is what gets us very excited. I'm speaking as HCI ex-Exzeo, right? Because of this technology and everything else, we are starting to see shoots of opportunity in certain states. We also see potential opportunities in some other really big states. We are being very careful as to how we go at this thing because, to be blunt, we have a very good thing going as HCI ex-Exzeo. You want to make sure you take your next steps carefully. When we do them, we are trying to do this with a multi-year horizon, multi-year timeframe in mind.

That's why we're trying to be level in our tone, but we are excited. Just look at the numbers. This Exzeo technology just keeps making us better and better, right? You can no longer attribute it to what was being attributed to a couple of years ago because of the legislative reforms, right? That was three years ago now. These numbers just keep improving, right? Back to your opening comments also, 18 years ago, you're right, right? You wouldn't have said EPS for two quarters would exceed the share price that we were talking about back then, yeah? That's for sure. All right. Thanks for taking my questions, and congrats on a good quarter.

Thank you.

Speaker 7

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.

Speaker 2

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.

Speaker 7

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