HCI Group - Earnings Call - Q3 2025

Executive Summary

• HCI delivered Q3 2025 diluted EPS of $4.90, a material beat vs S&P Global consensus of $2.81*, driven by a 22.0% gross loss ratio and a 64% net combined ratio; total revenue of $216.4M slightly missed $220.0M consensus* as investment gains normalized.*
• Book value per share rose to $63.41 and shareholders’ equity to $822M; management expects Exzeo’s IPO to lift YE 2025 book value above $1B and BVPS to “close to $80,” framing a near-term re-rating catalyst.
• Operating leverage remained evident: net premiums earned rose to $195.0M while opex grew modestly; cash & equivalents climbed to $988M with long-term debt at $32M after convertible note conversion.
• Citizens depopulation added ~47k policies (~$175M in-force premium) in October; management will skip December takeouts, indicating focus beyond Citizens and disciplined growth into 2026.

What Went Well and What Went Wrong

• What Went Well
  • “Industry-leading net combined ratios” and strong profitability: combined ratio 64% (below the ~70% level discussed prior) with gross loss ratio 22.0% amid lower non-cat frequency; YoY net income up to $67.9M from $9.4M.
  • Balance sheet strengthening: cash & equivalents $987.9M, debt/cap ~8%, long-term debt $32.1M; renegotiated and doubled credit facility to $150M while releasing real estate collateral.
  • Exzeo IPO completed; HCI retained all 75M shares; management expects YE 2025 BVPS uplift of ~$10 from IPO proceeds and highlights substantial unrealized value not reflected in book.
• What Went Wrong
  • Revenue slight miss vs consensus (actual $216.35M vs $220.03M*) despite EPS beat, reflecting lower realized/unrealized gains vs prior-year compare.*
  • Underwriting expense lines rose with scale: policy acquisition & other underwriting expenses increased to $31.7M (from $26.1M), and G&A personnel to $20.8M (from $19.2M) YoY.
  • Segment mix: Condo Owners Reciprocal Exchange gross premiums earned contracted YoY ($10.5M vs $17.4M), partly offset by Tailrow ramp; highlights portfolio shift dynamics.

Transcript

Operator (participant)

Good afternoon, and welcome to HCI Group's third quarter 2025 earnings call. My name is Ali, and I will be your conference operator. At this time, all participants will be in a 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 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 at www.hcigroup.com. I would now like to turn the call over to Matt Aldrich, HCI Group. Matt, please proceed.

Matt Aldrich (Head of Investor Relations)

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 at www.HCIgroup.com. 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 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 (COO)

Thank you, Matt. 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, 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 remains 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, Exio 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 a 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. Finally, earlier this week, Exio successfully completed its initial public offering. We are excited about Exio's future prospects, and we look forward to HCI remaining a significant shareholder of Exio 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 (CFO)

Thanks, Karin. Pre-tax income for the third quarter was just over $90 million, and as Karin mentioned, diluted earnings per share were $4.90. Year to date, pre-tax 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 cap 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 in 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. With that, I'll hand it over to Paresh.

Matt Aldrich (Head of Investor Relations)

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 year, 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 Exio, our organically grown, internally developed insurance platform. HCI investors have exhibited both patience and support while we went about this. With Exio's IPO earlier this week, we have completed the last step in this sequence. We are already focused on what we're doing next, but it's important to step back for a moment to reflect and, more importantly, to quantify the meaningful financial benefit of the Exio IPO. HCI shareholders. Hey, Mark, can you please provide the details?

Mark Harmsworth (CFO)

Sure. In that IPO that Paresh just mentioned, Exio 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 is a potential overallotment of another 1.2 million shares, which I am not including in any of the numbers that I mentioned here. In the offering, HCI did not sell any of its shares in Exio. 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 Exio into the financial statements of HCI, as we have always done, but 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, as an example, the impact to diluted earnings per share would have been less than $0.15. Second, when we book 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 Exio shares.

We own 75 million shares of Exio, 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 Exio. With that, I'll hand it back to Karin.

Karin Coleman (COO)

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 Exio'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 Exio's successful IPO. With that, I'll turn the call over for questions. Operator.

Operator (participant)

Thank you. At this time, we'll be conducting our question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from Michael Phillips with Oppenheimer. Your line is live.

Amir Trebelsi (Analyst)

Hi. Thanks for taking the question. 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? In other words, how many of the 25,000 are you guys expecting to write? Just subsequently, for Homeowners Choice, what is an expected average policy size of those takeouts? Thank you.

Karin Coleman (COO)

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

Paresh Patel (CEO)

We applied for 75. We got 4.

Karin Coleman (COO)

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

Paresh Patel (CEO)

That's how many. I think Homeowners Choice got about.

Karin Coleman (COO)

It's 19.

Paresh Patel (CEO)

19,000.

Karin Coleman (COO)

19,000.

Paresh Patel (CEO)

19,200. Sorry. Homeowners Choice got about 19,500. Terra got about just over 19,000. TypTap got a little bit over 8,000.

Amir Trebelsi (Analyst)

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

Mark Harmsworth (CFO)

It's Mark. I mean, I don't think we can get too specific, but I mean, 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 for growth ahead of us for the year coming up, and we will grow. And we've got the capital to do that. 2026 is going to be a good year.

Amir Trebelsi (Analyst)

Thank you.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, if you do have questions today, please press Star 1 on your telephone keypad. Our next question is coming from Mark Hughes of Truist. Your line is live.

Mark Hughes (Analyst)

Yeah. Thank you. Good afternoon. Mark, how much cash at the holding company?

Mark Harmsworth (CFO)

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

Mark Hughes (Analyst)

Okay. And then why not do the December takeouts? You had good success for October. Why not go for more next month?

Paresh Patel (CEO)

Great question. The reality of it is, I think Citizens is now shrinking. For the record, I think Citizens is no longer the largest insurance carrier in the state anymore. It has dropped down the rankings quite a bit. By the time you get around to December, I'm not saying there won't be enough policies there, but I think we have a lot more. We're already thinking about other things beyond Citizens, and it just seemed like a little bit of a distraction to still be saying you keep going back to a well that is dried up that much. If you wanted Citizens policies, really, you would have done it two years ago, which we did.

Mark Hughes (Analyst)

Yeah. Yeah. The expense ratio was quite good in the quarter. Both G&A, other operating expenses, were down. Anything unusual in this quarter, or is that just leverage?

Mark Harmsworth (CFO)

No. I mean.

Mark Hughes (Analyst)

New government?

Mark Harmsworth (CFO)

Yeah. Thanks for the question, Marcus. 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. Revenue goes up 13%. Operating expenses don't go up that much. 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)

Yeah. When we think about modeling the Exio impact and the minority interest, essentially, we're accounting for the 8 million shares out of Exio's earnings. Those will be pulled out as minority interest. On a go-forward basis, we've got to think about the ratio of Exio 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 (CFO)

Yeah. I mean, it's pretty straight, Mark, again. It's pretty straightforward. If you just pull out, for example, and I gave an idea on the call about the 15 cents, a little bit less than that. That's what the impact would have been if the IPO would have happened on July 1. If it would have had full effect in Q3, it's not a very big effect. If you think about even in the press release, we've got an earnings per share calculation there, and there's that little part there where we back out the minority interests of a number of companies, including Exio. That number would be a little—that number would be—it wouldn't be twice as big as it is. It would be a little bit less than that. You just do the calculation as you would normally do it.

That negative $2 million that you see there in the press release. Just if you want a rule of thumb, say double that. And that's how you do EPS. It's pretty straightforward.

Mark Hughes (Analyst)

Yeah. Do you have—I assume it's broken out in the Q—the net income for Exio versus the Homeowners Choice?

Mark Harmsworth (CFO)

It'll be in the segmented report in the queue that's published tomorrow.

Mark Hughes (Analyst)

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

Paresh Patel (CEO)

Yeah. Mark, it is Paresh. I think going forward, we're going to be trying to give this call about HCI and just basically how HCI feels about its ownership of Exio as opposed to the pipelines and discussing Exio things because now that Exio is public, Exio will shortly hold its own quarterly earnings calls, etc., and that's where all those things will come in. Having said all of those things, very simple thing. There continues to be outsized interest in people joining the Exio platform. I believe they've announced that they already got a second customer already, but it was subsequent to the end of Q3. The pipeline will go—we have to start somewhere, and the pipeline grows from there, and it seems to be doing it very healthily.

Mark Hughes (Analyst)

Very good. Appreciate that and understand your preference going forward.

Paresh Patel (CEO)

Thank you.

Mark Hughes (Analyst)

Mark, the—I'll just take one more in. Mark, the loss ratio, 25% in this quarter, last year ex-Helene, to 22%. How much of that might have been weather, mix? Could you maybe give a little bit more on the improvement there?

Mark Harmsworth (CFO)

No. I mean, the weather was pretty consistent. The weather was fairly good. Third quarter last year, third quarter of this year. It was really just frequency. Claims frequency was down. From—it was, I think, 3.7% annualized, 3.7% in the third quarter last year, 3.4% in the third quarter this year. And that's what drove the loss ratio lower. Really nothing else going on, just. Lower claim frequency. And weather was not—I mean, there's always weather, but weather was not a factor one way or the other from one quarter to the next.

Mark Hughes (Analyst)

Yeah. Understood. Excellent. Thank you very much.

Mark Harmsworth (CFO)

Thank you.

Operator (participant)

Thank you. Once again, as a reminder, ladies and gentlemen, for any questions, please press Star 1 on your telephone keypad. Our next question is coming from Karel Chmiel with Citizens. Your line is live.

Yeah. Hi. Thank you. I'm calling in for Matt Carletti, and a lot of the questions have already been answered. Just one question to clarify the October takeout. You mentioned it's $175 million in-force premium. Is that roughly the same as the annualized premium regarding those takeouts? How much of that is unearned premium that is then recognized in Q4?

Mark Harmsworth (CFO)

It's Mark. So yeah. The number that Karin gave, that's basically the annualized premium or the premium in force or whatever you want to call that. In terms of how much of that is unearned, that will be the amount of cash that we get and the amount that will be written in Q4. It's about $150 million.

Mark Hughes (Analyst)

60%.

Mark Harmsworth (CFO)

Yeah. Yeah. It's about 60% of that number now. And then, of course, in terms of how that'll get earned, that'll just get earned evenly over the next. The $175 million is what—when you're modeling earned premium, it's the $175 million that matters, not how much of it is earned and unearned in Q4. It's the $175 million that you need to model.

Okay. You said 60%?

Yeah. It's about that. That's pretty normal.

Got it.

Yeah. 60% of the $175 million. That's your unearned.

Perfect. Thank you very much.

Operator (participant)

Thank you. 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 (COO)

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 (participant)

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.