Exzeo Group, Inc. ($XZO)

Good afternoon, and welcome to Exzeo Group's First Quarter 2026 Earnings Call. My name is Angela, and I will be your conference operator. [Operator Instructions] Before we begin today, I would like to remind everyone that this conference is also being broadcast live via webcast and is available for webcast replay approximately 4 hours after the call through May 6, 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 go ahead.

Thank you, and good afternoon. Welcome to Exzeo Group's First Quarter 2026 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 operations. Exzeo Group disclaims all the obligations to update any forward-looking statements. Now with that, I'd 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 first quarter earnings call. Exzeo continues to deliver on its core objectives. Managed premium on the platform experienced another quarter of growth to $1.43 billion and exceeded our expectations. We delivered continued bottom line growth, including strong cash flows and a 49% adjusted EBITDA margin in the quarter. Pretax income in the quarter was over $27 million, an increase from $24 million in the prior year quarter and above our previous guidance range. Diluted earnings were $0.22 per share. For the first quarter, revenue increased to $56 million from $52 million in the prior year quarter, driven by the increase of managed premium on the platform. The growth in managed premium reflects continued diversification across the business with managed premium from non-ACI clients reaching approximately $105 million, a positive step forward. Our adjusted EBITDA margin was over 49% in the quarter, and we believe our margins are repeatable in the future. This quarter reflected continued investment in growth initiatives and personnel and as our model continues to expand, we expect to make additional investments going forward. Kevin will go into more detail in his remarks. A few additional highlights for the quarter. Our annual recurring revenue was $216 million in the first quarter, an increase from about $199 million in the prior year quarter. Free cash flow generation remained strong. For the first quarter, we generated free cash flow of about $25 million with net income of about $20 million, that represents a free cash flow conversion rate of 123%. Turning to the balance sheet. We ended the year with $330 million of invested assets, which includes cash, cash equivalents and fixed income securities, and we remain debt-free. Shareholders' equity increased to $275 million, an increase from $254 million at the end of the year. Our shareholder equity is now 8x higher than it was a year ago. Excluding the IPO impact, it has more than tripled over the same period, reflecting strong underlying growth in the business. Before turning the call over to Kevin, I want to quickly touch on our guidance expectations. For the second quarter, we expect pretax income to be between $27 million and $30 million. For the full year 2026, we are leaving our guidance unchanged at between $115 million and $125 million. With respect to managed premium, we expect managed premium to remain stable in the second quarter at approximately $1.4 billion, consistent with the anticipated timing of growth across our existing client base. We continue to expect managed premium of $1.55 billion at year-end 2026. In closing, we are very pleased with our strong start to 2026 as Exzeo delivered another quarter marked by continued execution across premium expansion, revenue growth, solid profitability and solid balance sheet. And with that, I will hand it over to Kevin, President of Exzeo.

Thank you, Suela. Exzeo has made meaningful progress towards its strategy in early 2026. To remind those new to the Exzeo story, the composition of managed premium continues to evolve as Exzeo expands beyond its historical client base. At the end of the third quarter of 2025, all $1.2 billion of managed premium on the Exzeo platform was generated from HCI-sponsored carriers. That has grown to approximately $1.3 billion as of the first quarter 2026. Additionally, over the past 6 months, we've added 3 new carriers to the platform, and these carriers added $105 million of managed premium as of the first quarter. These new carriers account for over 7% of managed premium, marking an important milestone in diversifying revenue sources and validating the platform's ability to attract and support external partners. And because of the validation we are seeing in the market, we are investing in our business and infrastructure to ensure we have everything in place to pursue our future growth ambitions. This includes investing in talent and platform capabilities. Through April of this year, the company added about 20 new full-time employees. These new team members will focus on supporting scaling of operations, onboarding new clients and expanding product capabilities. This build-out reflects both the increasing demand for the Exzeo platform and management's confidence in the company's growth trajectory. In closing, we continue to build momentum. The existing carriers on our platform are growing. The new carriers added to the platform are having success scaling and now contribute to the total managed premium on our platform. And we are investing in infrastructure to put us in a position to take advantage of the next phase of growth. Now I'll turn the call over to Paresh, Exzeo's Chief Executive Officer.

Thanks, Kevin. As Suela highlighted in her remarks, we are successfully scaling our platform with tremendous efficiency. Out of every dollar we are adding to the platform, $0.50 is dropping to pretax income. And because of these attractive economics, Kevin is working to add more managed premium to the platform. And I think we have a fabulous team to execute that strategy. But in addition to that, we have an additional strategy that is now developing. It requires a deep understanding of the broader industry and market trends. Let me elaborate. First, we know that the insurance industry, our potential clients, generally are behind in adapting the latest technology. Most of them have IT teams who can implement and maintain software tools and systems. But what they cannot do is develop new tools. Second, the Exzeo platform was developed entirely in-house from the ground up. We have developers and insurance experts under the same roof. And it shows that we know how to develop, deploy, maintain systems at scale. This is a key differentiator. Third item is insurers are facing shortage of skilled talent, and that talent gap continues to widen across the industry. And finally, there is AI. The industry recognizes that AI has the potential to significantly improve operational efficiency. And while there's been considerable discussion about how carriers can leverage AI, most companies are just adding AI to their tool set as an additional expense. Exzeo is doing something different. Exzeo is using AI to build solutions. Let me give you a concrete example. Starting April 1, insurance regulators in Florida implemented new wind mitigation requirements. These updated regulations, which include additional documentation requirements, creates a meaningful operational burden for all carriers. Insurers must also find the talent and expertise needed to manage these new requirements. These challenges not only place additional strains on operations, but also introduces incremental costs. While many in the industry viewed these changes as a challenge, Exzeo saw them as an opportunity. The Axio team was able to combine its deep expertise in building solutions with internally developed AI tools to design and deploy a solution in less than a month. It is called WindForm Pro. By eliminating manual workflows, WindForm Pro streamlines the process and significantly reduces the operational and friction of burden on carriers. In fact, multiple carriers outside the Exzeo platform are already testing WindForm Pro and one carrier has already signed up to use it. What this demonstrates is that by combining AI capabilities with our in-house talent, we can quickly identify challenges and design and deploy solutions in a highly cost-effective manner. And we believe we are only beginning to tap into the broader opportunities that this approach can create. In summary, we already have a profitable platform that is a strong generative cash flow and continues to scale. At the same time, we are identifying and solving new industry challenges that can lead to additional revenue streams in the future. With that, I'll turn it over for questions.

Your first question comes from the line of Matt Carletti with Citizens Capital Markets.

Maybe I'd start with kind of a 2-part question, but kind of first part being, can you update us on kind of the newer clients you've announced in the past few quarters, kind of how the onboarding and integration and getting up to speed is going? And then kind of alongside that, kind of how the pipeline is looking, conversations and so forth for customers 8, 9 and beyond.

Sure, Matt. This is Kevin. From a new client standpoint or ones that we've recently onboarded, it's going as planned. As I think Suela and I both mentioned, from a standing start in December to over around $105 million of premium on the platform. I think that's a strong uptake when you consider that those 2 clients, one was signed in September of last year and the other one was October. So all is on solid footing there. As far as new clients and pipeline continues to build. As we mentioned last quarter, we have team members that are focused at and each day, each week, building on that pipeline, we feel confident that we'll continue to execute and bring on new clients in standard fashion.

Great. And then if I could just maybe follow up with Paris, you talked a bit about this WindForm Pro. Can you just help us maybe give us a better understanding of, one, just kind of order of magnitude, what that can mean to. If it does get some traction kind of revenue or how it's priced based on premiums, things like that? And then secondly, if you're really viewing this as kind of just a one-off product or more from an angle of kind of maybe a hook or an opportunity to bring potential new customers into the broader ecosystem that is Exzeo?

Yes, Matt. So answering the questions in different ways. The product, because of the need that the industry had, it was built in a very quick fashion. And obviously, it solves a problem -- a current problem that everybody is facing. So as such and the way we've deployed it, it's very, very, very cheap. It's about 10% of what it would cost you to do manually. What it's doing is it's opening doors for new carriers to appreciate what Exzeo is capable of. So from that sense, it's a very good deal to further spread the Exzeo brand. In terms of revenue, I don't think this in of itself, especially because of the prices we're charging, right, that it's going to be meaningful in terms of revenue. I don't think Suela is adjusting our financial models because of it. So that's that part. But really, the big thing is how this was developed, the speed at which it was developed, how it's being deployed, right? This is basically monetizing AI capabilities in a manner that is both reduces our expenses to develop by orders of magnitude and enhances value to potential clients, right? And it's a real thing that we weren't even thinking of when we had the last earnings call 2 months ago, right? I mean, to be fair, our developers have been managing -- have been monitoring developments in the AI space for almost 3 years at this point, pretty much since the week ChatGPT came out. But it's waiting for it to be when the moment is right, when it's ready for prime time. And in WindForm Pro, we are demonstrating how AI can be used and utilized and turned into a product and turned into revenue, all in 2 months.

Your next question comes from the line of Terry Tillman with Truist Securities.

Kevin, Paresh, Suela. My first question, I kind of wanted to build on the last set of good questions. Really about AI. I mean it seems like it's almost like daily, something dramatic is happening in some of these industries, and we're hearing CEOs saying spending billions of dollars on this stuff. Beyond just kind of like this potential new factory where you can light up new solutions really quick like WindForm, I'm curious if AI is just this call to arms for even traditional insurers or upstart is actually starting to drive some incremental sales funnel activity just because we really have to transform the whole business across everything, underwriting, policy management, et cetera. So are you seeing any kind of incremental tailwinds from just, hey, this AI thing is a real deal, and we need to get going yesterday? And then I have a couple of follow-ups.

Yes. Terry, what I would tell you about that is, yes, all those possibilities in underwriting, quoting, claims management, et cetera, there's always been that conversation of AI could do things, right? But the issue has always been how do you do it? And a lot of insurance carriers probably want a package solution as opposed to here's cloud code, develop your own solution. That was my point about this, right, is that one of my earlier -- in my prepared remarks. Just because it's available, it doesn't mean everybody can actually assemble it and turn it into a solution that they can use over and over and over again. But it turns out that the Axio technology team can, right? And they do it in a controlled manner. And back to that whole thing, being able to design, deploy and maintain things at scale is quite a need that still is there. So we are starting to sort of see a unique niche that we can sell. In theory, anybody can fill that niche is what people will tell you. But in theory, anybody could have built a copy of Google Search. Microsoft even tried with all of their resources, but Bing doesn't quite cut it, right? You get the idea. We are seeing that having the idea and being able to actually put it into production are two separate different things, yes.

Yes. Got it. And maybe just maybe 1.5 more questions. I know, Kevin, you were talking about investing and I think, 20 FTEs. I know you all hired a key kind of long-term veteran in the industry. Is that team built out now? Or has it got enough substance in size and how they're doing? And I know it's early days, but just any progress there? And then a model question for Suela.

Yes. Terry, this is Kevin. Yes, we continue to build the team, hence, the 20 folks since January 1. So we continue to build the team around them to drive growth and drive ever-increasing pipeline activity.

Terry, and if I could put a different context into all of this stuff, I'm sure you've been on lots of earnings calls. And the recurring theme has always been we are adding AI as in licensing stuff and running up -- making it a new tool and running up an expense. And two, we are cutting headcount, right? That seems to be the recurring theme. We are doing the opposite. We're using AI as a revenue generator and a lead generator in lots of ways. So we're actually already monetizing it. And secondly, Kevin is adding people. And to be fair, it's not a fair comparison because we start from such a lean, efficient operation that the people Kevin is adding should have a material impact on our rate of accelerating our growth going forward, right? So that's why I'm kind of excited that he's adding people, yes.

For sure. And I will turn it over to somebody else after just this question, but I really wanted to get it in. Managed premium and ARR were strong in the quarter. They were well ahead of at least our expectations. I know it takes time for that to move to revenue from operations and revenue. Can you share anything about how that played out in 1Q versus what you thought? Or just any commentary around timing from the large add of premium in 1Q as we move into 2Q and beyond?

Yes. Thank you for the question, Terry. So yes, as I mentioned before, the timing when the managed premium gets added to our platform obviously matters. And what we saw in Q1 is that the new additional premium, especially from the new clients joined the platform mid- to late quarter. But also keep in mind that we recognize upfront about 25% to 30% of the revenue and the remainder is recognized over time. That said, new premium is still not large enough, large enough share of our total managed premium we currently have in our platform to materially distort quarterly revenue on its own. So on a normalized basis, you can think of the ARR conversion into revenue to being generally flat, fairly flat, consistent over the quarters. Just a reminder, though, that we do have some seasonality on the margin based on the renewal cycle of the policy and the product mix and then how we recognize revenue along with expenses. So historically, you'll see higher margin renewals tend to be in the middle of the year, which drives the Q2 peak that we have seen historically.

Your next question comes from the line of Dylan Becker with William Blair.

Maybe, Paresh, double-clicking on kind of the prior points and maybe for Kevin as well, too. But on the opportunity to kind of dedicate more resources given kind of the opportunity at hand and the ability for AI to kind of superpower that in some context. I know the cadence of getting wind form into market is notable. But maybe how you think about that balance, right, of compounding the existing kind of platform value proposition, how that can compel more customers to come online, but also kind of scaling that outside of Florida and into new territories and regions, kind of maybe a breadth and depth kind of type of question, if that makes sense from a platform functionality perspective?

Yes. Great question, right? And I think that's why we sort of in our prepared remarks, try to talk about plans and growth for the existing platform and adding managed premium in that fashion, while at the same time, exploring these new capabilities and basically door opening projects that we are doing that also have -- they won't have impact immediately, but they will create long-term opportunity and create a differentiation for Exzeo over other solutions in the marketplace. So we kind of have short-term things we're trying to do, medium-term things we're trying to do and long-term things we're trying to do. And personally, from my perspective, it's the long-term things that we're doing that I think are the most exciting as to what it could mean down the road, right? Because WindForm Pro, if you think of it as just a universal way of filling out this OIR requirement, right? It's a very specific thing. But the same architecture method that we developed that, we could use it to create a digital agent for reviewing claims or a digital agent for compliance, which is a big thing with insurance carriers or a digital agent for generating a rate filing, those kinds of things. And we can see that at this point. And we know how to use AI to develop those tools and capabilities. And that's the beauty of AI. It doesn't mean that we will only do it on the Exzeo platform. One of the agents could also work on any other software platform that a carrier might have implemented. Think about what that opens up as a door, right? Again, very early days, but we didn't want to talk -- if you notice and all through all of this stuff, we never really mentioned AI in any material way. We didn't because it wasn't that we weren't aware of it the EUR 1 billion thing. Weren't doing anything. We want to do it when we actually had something. And WindForm Pro actually shows you when we have something. But it was only -- it was a sample of what is more to come, yes.

Very helpful. And excited to kind of keep an ear out for what's to come in the future there. Maybe for Suela too, on the premium growth dynamic, obviously, still very impressive. I know you kind of said, hey, we expect it to be flat next quarter, reiterate the full year outlook. Could you just kind of remind us some of those seasonal components and maybe again, a broader update given the Florida exposure to how underwriting cycles are maybe impacted or how carriers kind of think through those as we enter into hurricane season, if there's anything to kind of be aware of there from a seasonal perspective?

Yes, that's a very good question. Yes, as I mentioned, yes, we expect managed to remain stable, which is consistent with the growth pattern of our client base. We are primarily -- our clients are primarily based in Florida, which usually the growth is more back-ended. So you see the growth in the managed premium more in the fourth quarter.

Yes. I mean, yes, you get it right in the sense of -- it's not set by us, it's set by clients. What we're just trying to explain what clients typically do and what their cadence normally is.

[Operator Instructions] 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.

Thank you. I want to thank everyone who joined the call today, and I also want to thank the Exzeo for their continued hard work. Before we wrap up, I should just provide a quick update on the Rule 10b5-1 purchase plan that is underway for me to buy shares. As of today, I think I've bought about 72,000 shares since the plan went into effect a couple of months ago, and it still continues on, and I look forward to it being filled out, hopefully sometime in the current quarter. And with that, we'll end the call. Thank you.

At this time, this concludes today's call. Thank you all for joining. You may now disconnect.