Hci Group Inc (HCI) 2025 Q3 法說會逐字稿

Good afternoon and welcome to HCI Group Inc Earnings Call's 3rd Quarter 2025.

[Operator instruction]

I would now like to turn the call over to Matt Otis, HCI Group. Matt, please proceed.

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 risks or uncertainties develop into actual events, these developments could have material adverse effects on the company's business, financial condition, and results of operations. HCI Group disclaims any obligation to update any forward-looking statements.

Now, with that, I'd like to turn the call over to Karin Coleman, Chief Operating Officer.

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 diluted share. Net combined ratio of 64.0%. Total shareholders' equity of $821 million. Book value per share increased more than 50% year-to-date to $63.00. Loss ratio of 22%, as weather in Florida remained favorable through the remainder of the 2025 hurricane season. In addition to these financial achievements, we had several other important developments in the quarter.

A 33-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 our 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 this strong outcome, 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 detail 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 in 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.

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 occurred during that period. 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 their 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. And with that, I'll hand it over to Paresh.

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 unlocking 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 final step in that sequence. While we're already focused on what comes 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. Hey Mark, can you please provide the details?

Sure. So, in the IPO that Paresh just mentioned, Exzeo issued 8 million new shares at a price of $21 per share, and the net proceeds were approximately $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 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 shares after it.

Because of our ownership position, we will continue to consolidate Exzeo into the financial statements of HCI as we've 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, for 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 increase 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 per 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.

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 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?

Thank you. At this time, we will be conducting our question-and-answer session.

[Operator instruction]

Our first question is coming from Michael Phillips with Oppenheimer & Co. Inc.

Hi, thanks for taking the question. This is Amir in for Mike.

I just had a question around Citizens. Can you give us an update on the 75,000 policies you applied to take out from Citizens across each of the three subsidiaries?

Or in other words, how many of the 25,000 per subsidiary are you expecting to write? And specifically for Homeowners Choice, what is the expected average policy size of those takeouts?

Thank you.

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

We applied for 75. We got right.

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

I cannot say how many. And I think Homeowners Choice got...

About ... it's 1,919,000.

19,200 sorry, Homeowners Choice got about 19.5,000. Teo got about just over 19,000 and ... got a little bit over 8,000.

That's great. And 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 homeowner's choice or any more possible aggressive state of state expansion or potential M&A?

Thank you.

It's Mark. I mean, I don't think we can get too specific, but I mean, I talked to, on my, 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, so, 2026 is going to be a good year.

Thank you.

[Operator instruction]

Our next question is coming from Mark Hughes of Truist Securities.

Yeah, thank you. Good afternoon.

Mark, how much cash at the at the holding company?

So total holding company liquidity. At the end of September, I think was about, 200, about 285 million total.

Okay, and then the, why not do the December takeouts you had a good success for October, is that, why not go for more, next month?

Mark, Great question. The reality of it is, I think Citizens is now shrinking. For the record, I think Citizen is no longer the largest insurance carrier in the state anymore. It's dropped down the rankings quite a bit, and 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 are keep going back to a well that is... That is dried up that much. If you wanted citizens' policies, really, you would have done it two years ago, which we did.

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

No, I mean—right. Yeah, thanks for the question, Mark. It's Mark.

No, there's nothing unusual in Q3. It's just a continuation of what we've been talking about before—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 goes 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. Nothing unusual at all in Q3.

Yeah. When we think about modeling the Exzeo impact and the minority interest, essentially we're accounting for the 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 considering 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?

Yeah, I mean, it's pretty straightforward. It's Mark again.

If you just pull out, for example—and I gave an idea on the call—about the $0.15, a little bit less than that, that's what the impact would have been if the IPO had happened on July 1st. So if it had taken full effect in Q3, it's not a very big impact.

Even in the press release, we included an earnings per share calculation, and there's a section where we back out the minority interests of a number of companies, including Exzeo. That number would be a little higher—it wouldn’t be twice as big, but a little less than that.

Then you just do the calculation as you normally would. So that negative $2 million you see in the press release—just as a rule of thumb, double that, and that’s how you estimate the EPS impact. It’s pretty straightforward.

Yeah, do you have, I assume it's broken out in the queue, the net income for Exzeo versus, the Homeowner's Choice.

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

Yeah, okay, very good.

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

Yeah, Mark.

Parish, I think going forward we're going to try to keep this call about HCI and just basically how HCI feels about Exzeo—about its ownership of Exzeo—as opposed to the pipelines and discussing Exzeo things. Because now that Exzeo is public, Exzeo will shortly hold its own quarterly earnings calls, etc., and that's where all those things will come in.

But having said all of those things, very simple thing: there continues to be outside interest in people joining the Exzeo platform. And I believe they've announced that they already got a second customer, but it was subsequent to the end of Q3.

And the pipeline will grow—you have to start somewhere—and the pipeline grows from there. And it seems to be doing it very healthily.

Very good. Appreciate that and I understand your, preference going forward. Thank you.

Mark the, I'll try to take one more and mark the loss ratio 25% in this quarter last year exhale to 2022.

How much of that might have been weather mix, could you maybe, give a little bit more on the improvement there?

No, I mean, the weather was pretty consistent. The weather was fairly good in the third quarter last year and the third quarter this year. It was really just frequency—claims frequency was down.

It was, I think, 3.7% annualized—3.7% in the third quarter last year, and 3.4% in the third quarter this year—and that's what drove the loss ratio lower.

Not really anything 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.

Yeah, understood excellent, thank you very much.

Thank you.

Our next question is coming from Carol Hamill with Citizens.

Yeah, hi, thank you. I'm calling in for Matt Carletti and a lot of the questions have already been answered, but just one, question to clarify the October takeout, you mentioned, it's 175 million in for premium. Is that roughly the same as the annualized premium regarding those takeouts? And then, how much of that is unearned premium that is then recognized in Q4?

Yeah, so the number that Karen gave—that's basically the annualized premium, or the premium in force, or whatever you want to call that.

And 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%...60%. Yeah, it's about—yeah, it's about 60% of that number.

Now, of course, in terms of how that'll get earned, that'll just get earned evenly over the next $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. And you said 60%?

Yeah, it's about that. That's pretty normal. Got it. Yeah, 60% of the $175 million, that's your unearned.

Thank you very much.

Thank you. At this time, this does conclude our question-and-answer session.

I would now like to turn the call back over to Karen Coleman for a few closing remarks.

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.

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