HCI Group, Inc. (HCI) Earnings Call Transcript & Summary

Good afternoon, and welcome to HCI Group's First Quarter 2025 Earnings Call. My name is Ali, and I will be your conference operator. [Operator Instructions] 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 June 7, 2025, starting later today. The call is also being broadcast live via webcast and available via webcast replay until May 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, Investor Relations. Bill, please proceed.

Thank you, and good afternoon. Welcome to HCI Group's First 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 a material adverse effect on the company's business, financial conditions and results of operation. HCI Group disclaims all the obligations to update any forward-looking statements. Now with that, I would like to turn the call over to Karin Coleman, Chief Operating Officer. Karin?

Thank you, Bill, and welcome, everyone. HCI continues to demonstrate its ability to grow top line revenue while enhancing bottom line profitability. In the first quarter, we grew gross earned premiums by 17% over the same quarter last year. We improved the net combined ratio to 56% from 67% in the first quarter of 2024. And we reported pretax net income of just over $100 million and earnings of $5.35 per share. In addition to these financial achievements, we had several other accomplishments in the quarter. Tailrow Reciprocal Exchange, the second reciprocal established by HCI, commenced operations in February by assuming approximately 14,000 policies and $35 million of premium from Citizens. We view Tailrow as an additional component of HCI's growth initiatives moving forward. During the quarter, HCI announced its plans to redeem its 4.75% convertible senior notes. We expect the notes will be fully converted in June of this year. This will reduce the debt on our balance sheet by approximately $172 million. In the first quarter, Greenleaf, our Real Estate division, successfully entered into a new multiyear lease agreement with GEICO for an office campus consisting of 190,000 square feet. As a result, we believe the total off-balance sheet gain in our real estate portfolio is now approximately $85 million, which is not reflected in our reported book value. Lastly, we've made substantial progress on the separation of Exzeo from HCI Group. We will be speaking more about it later on this call. We're off to a really good start in 2025. Now I'll turn it over to Mark to provide more details on the financial results.

Thanks, Karin. As Karin mentioned, pretax income for the quarter was just over $100 million and diluted earnings per share were $5.35 compared to $3.81 in the first quarter last year. These outstanding results reflect the continuing trends we've been discussing for a while now, a lower loss ratio, revenue that's growing faster than expenses and a strengthening balance sheet. One of the more impactful trends is the significant decline in loss ratio. The gross loss ratio this quarter was less than 20%, down from 31% in the same quarter last year, reflecting continued low claim volume. Claim frequency was about the same as the fourth quarter last year, but was down more than 40% from the first quarter of last year. The low claim frequency is driven by legislative changes, favorable weather conditions and the lull we sometimes see after a hurricane. The declining loss ratio is only part of the story, though. Because of the technology provided by Exzeo, we've been able to generate significant operational leverage. As evidence of that, the combined ratio this quarter was only 56%. Revenue is growing, but expenses are not. We are, of course, getting a temporary benefit from the timing of the Citizens assumptions, and the loss ratio this quarter is a little lower than expected. But even if we normalize for both of these, the adjusted combined ratio is still around 70%. Now let's take a look at the balance sheet, where we are also seeing significant continued strengthening. Shareholder equity grew by almost $70 million during the quarter and book value per share grew by more than $6. In the past 12 months, shareholder equity has grown by more than $125 million and book value has grown by $10 per share, both of these in a period where we had 3 hurricanes. The strengthening of the balance sheet should accelerate in the second quarter as we expect to complete the process of converting our convertible notes, as Karin mentioned. By the end of the second quarter, we expect shareholder equity to be close to $0.75 billion, book value per share to be close to $60 and the debt-to-cap ratio to be well below 10%. In terms of holding company liquidity, that also continues to grow and is just over $250 million at the end of the first quarter. In summary, this was another fantastic quarter. Revenues up, the combined ratio was down, earnings are growing, and the balance sheet continues to strengthen. And with that, I'll hand it back to Karin.

Thanks, Mark. As I mentioned earlier, we've made substantial progress on the separation of Exzeo from HCI Group. And as we move Exzeo toward being a stand-alone company, I want to introduce 2 key executives to the call. Kevin Mitchell, who will discuss the opportunity in front of Exzeo, and Suela Bulku, who will discuss Exzeo's financials. With that, I'll turn it over to Kevin.

Thanks, Karin. As background, I'm currently President of Exzeo, and I joined HCI Group in 2013. Exzeo is, at its core, a technology company focused on developing solutions that help insurance clients reduce both their loss ratio and expense ratio. Our benchmark for success is turning premiums into profits for our clients. In insurance terms, we want to give our clients access to a technology platform that delivers better combined ratios. The power of our technology is best illustrated by the proven track record at HCI's insurance companies, which have delivered industry-leading results. Exzeo currently manages approximately $1.2 billion in premiums on its platform. Up to this point, premiums on Exzeo's platform have been tied to HCI. But this is only a small fraction of the U.S. homeowners insurance market. We see a massive opportunity to unleash our technology on the rest of the market that our technology does not currently touch. We want to replicate the success we've had working with HCI's insurance companies and bring those underwriting results to the rest of the industry. By being a stand-alone company, it will create new opportunities to pursue our growth objectives by adding new customers who can benefit from our technology platform. Next, I want to turn the call over to Suela Bulku to introduce Exzeo's financials.

Thanks, Kevin, and hello, everyone. As background, I'm currently Chief Financial Officer of Exzeo and have been with HCI Group for nearly 14 years. I've been fortunate to be part of the team since the founding of Exzeo in 2012. To build on Kevin's comments, as we pursue the next phase of growth at Exzeo, we do so from a position of strength. Exzeo already has attractive margins, is solidly profitable and generates strong operating cash flows. For the first quarter, Exzeo reported $52 million in revenue and $24 million in pretax income, assuming Exzeo operated as a stand-alone entity. For those looking for further financial details, the segment information disclosure in HCI's 10-Q filing, which is scheduled for publication tomorrow, offers a more detailed summary of Exzeo's financial performance. This would also help establish a consistent baseline for understanding Exzeo's financial profile going forward. Overall, the quarter reflects strong margins and solid performance for the business. I'll now hand it over to Paresh.

Thank you, Suela. The key takeaways from the earlier comments are that HCI is in a strong and healthy financial position. And that Exzeo meets all the criteria necessary to succeed as a stand-alone company. And the benefit of an Exzeo separation has the potential to be very significant. As Kevin highlighted in his comments, Exzeo can bring its proven technology to a broader part of the market, which would be otherwise difficult to do under the HCI umbrella. The only question left to answer is, how do we make Exzeo a stand-alone company in a manner that enures to the benefit of the current HCI shareholders. We believe a spin-off of Exzeo into a separate public company is the best path forward, and that is what we are focused on at this time. A spin-off transaction would be subject to a variety of conditions, including the filing and effectiveness of a Form 10 registration statement with the SEC. The transaction will be done by distributing shares of Exzeo held by HCI Group on a tax-free basis to HCI shareholders. If we were to proceed with the spin-off, we expect to complete the transaction by the end of this year. HCI shareholders will benefit from both the continued performance of HCI and the unlocked future potential of Exzeo. With that, I'll turn it over for questions. Operator, please provide instructions.

[Operator Instructions] Our first question is coming from Matt Carletti with Citizens Capital Markets.

Paresh, maybe I'll just follow on from your last comments there. I don't know if this is a question for you or for Kevin. But could you just maybe give us a little more color on the homeowners market is a big market and so if there's kind of particular areas of the market that you think Exzeo is at least initially best suited to go after? And then secondly, whatever you can say on kind of reception from third parties or discussions with third parties that might be kind of potential clients, how that's gone and how that's going?

Matt, it's Paresh. Yes, in terms of the places we could do it, obviously, Exzeo technology has proven its mettle in Florida. It's also proven its mettle in lots of other states that some of our subsidiaries operate in. So we know we can do homeowners insurance in lots of states and markets very well. We actually are also looking at potentially using the technology for the lines of business. We've been doing this with commercial residential already. And there are other affiliated lines that we could -- we're looking at currently as well. So there is a broad applicability of this technology across multiple geographies and multiple lines of business. So that's the size of the opportunity we're looking at. In terms of attracting new clients that are non-HCI, we're in early discussions and early conversations, but part of the whole thing with this was we have been doing this in a very measured manner. First of all, prove the technology works beyond the shadow of a doubt, which hopefully has been done at this point. Secondly, you had to make sure that Exzeo is capable of operating as a stand-alone company, which clearly with Suela's numbers, you can see that is the case. And thirdly, to do the separation, which we are now undertaking. And then the fourth item is to expand to new clients, et cetera. So we're doing this in a measured way, but the progress we're making, and I'm answering the question, but I would tell you, I'm so impressed by the Exzeo team. Every time they've been handed a task, it has got done on time and ahead of -- under budget and ahead of schedule. It's just phenomenal to watch. Kevin, do you want to add anything?

Yes. Just to echo some of Paresh's comments, Matt, when we look at the market, the homeowners market itself is big. It's over $150 billion. So massive opportunity. Right now, Exzeo operates in just a small segment of the market. So based on these results, we see large opportunities coming our way over time.

That makes a lot of sense. Maybe just a couple of follow-ups, separate topics. So I guess, maybe for Mark, on the gross loss ratio, can you -- you mentioned kind of the favorable weather helped the quarter. Can you kind of -- any way to quantify that kind of versus what was normal. And if we adjust for that, is that kind of the loss ratio you see for the foreseeable future, obviously, absent any wind activity or anything like that?

Yes. So yes, the loss ratio this quarter was a little under 20%, which actually was pretty similar to what it was in the fourth quarter of last year when you adjust for Milton. We sometimes get lower claims for 4, 5, 6 months after a hurricane, less weather claims. If you look at a more normalized kind of weather, we'd expect loss ratio might be 4 or maybe 5 points higher. So when I had mentioned sort of the normalizing to get to that 70% combined ratio, I was thinking of a loss ratio of about 24%, 25%, which I think is a little bit more reflective of where we're at. Obviously, that's down significantly than it was before, but I think that's about where we are now.

Okay. That's very helpful. And then one last one. Again, I don't know if it's for Karin or Paresh. Just June 1 renewals coming up. I know you haven't announced anything yet, but I'm sure you've had lots of meetings with your reinsurers in various markets. Any kind of takeaways or color you can provide on kind of expectations or...

Yes. Matt, we're obviously in the middle of negotiations and everything else as we would expect to be at this time in the calendar. There's plenty of capacity out there. So it's the usual negotiation that goes on at this point, which is capacity and price and terms. So it's a very orderly, one could almost say boring, year in terms of placing reinsurance, yes.

Yes, boring is good in this case.

[Operator Instructions] Our next question is coming from Mike Phillips with Oppenheimer.

Maybe two other questions on the Exzeo news. I guess, first, can you talk about, I guess, other options that you were considering besides the way you're going with the spin-off and kind of the pros and cons of those and maybe why you're going with this one? I'm assuming it's because of the benefit -- the tax-free benefit, but maybe you can talk about that, just different options. And then also on Exzeo, are there advantages that the platform offers to potential partners? Are those advantages more or less dependent on where the partners are admitted or not admitted partners?

Sure. So in terms of other ways of doing this, I think everybody had always thought about maybe we could do an IPO and then sell off or distribute the shares or do something on those lines. But those kinds of things are things you would do if you were needed to raise capital in order for Exzeo to be healthy as a stand-alone company. It's already so healthy that it doesn't -- we don't need additional capital for it. So in that sense, it became, as you would expect us to do being a public company is what can we do to maximize the benefit to our existing shareholders, and that's what this is, that us to the spinoff is if we can do it that way, it maximizes the value creation for existing shareholders. And we have always taken that into consideration in all of our actions, and this is no different, yes. What was the second part of your question again?

Yes, the second part was just I'm curious if the advantages -- Exzeo, you've talked about how it's not just homeowners, but it does stuff for condo and other lines of business already internally. But I was curious if the advantage that it offers to potential partners, are they different more or less for a partner that is a pure-play admitted carrier in homeowners versus a non-admitted carrier in homeowners. Does that matter?

No, it doesn't actually because the way the technology works and in the plumbing of the thing, it's trying to assemble a book of business to whichever kind of partner it is. So that is most optimized to the profit margins and distribution that they want, yes. We just take all the heavy lifting out of doing that distribution. So admitted or -- E&S doesn't make any difference, yes.

Okay. And asking, it seems like the growth potential in homeowners over sort of the near term seems to be -- if I had to get, it seems to be more on the E&S side. Maybe I disagree with that. But if so, it'd be nice to see that those benefits are equal to both sides, which is why I was asking. Can you talk just generally about how Florida property homeowner rates have moved in the past 3 months compared to what you were talking about last quarter in Florida?

Yes. So I think the Florida rates, I don't think there's been much movement in the last 3 months or so. The other thing that's occurred, I think there's been a couple of new entrants into the marketplace. But that is normal activity that you would expect in a healthy marketplace. The other thing, going back to your earlier comment, yes, we can do this with E&S just as effectively as we can do with admitted book carriers at this point, yes.

Okay. Good. And then, I guess, lastly, just maybe thoughts on, I guess, the commercial market, how that relates to your core business and the condo business? I noticed the premium was down there. Any kind of -- any thoughts on what drove those premiums down this quarter? And then just more generally, what's the competitive market look like in the condo business?

The condo business, commercial residential business is a lot more competitive. When we started core, nobody wanted to be near that business, but suddenly, everybody seems to want to compete with core now that we've done it, which is fabulous. But we maintain our pricing discipline, and everything will work itself out in due course, yes.

Okay. Anything -- I mean, is that competitive nature? Is that why the core business was down this quarter?

Mike, it's Mark. Are you looking at the written premium number in the press release? Is that what you're referencing?

Yes, I don't have it in front of me, Mark. But yes, I think so. Yes.

Yes. The one thing you just have to be careful of is it's actually not down. The thing you have to be careful of is just the way that the assumptions work. So we did the assumption one of the -- we did a significant assumption in the first quarter last year for core. And so just the way that you account for the written premium that all got written in that one quarter. So when you look at Q1 to Q1, it actually, forget -- it's not down all.

Okay. Yes. Sorry, I was looking at the [ 7 ] versus the [ 19. ]

Our next question is coming from Mark Hughes with Truist.

Paresh, is your thought to spin off some of the shares, but still be able to consolidate Exzeo? How are you thinking about that?

Very simply, we're talking about a total spin, total separation.

Yes. So Mark, it's Mark. Yes, I mean, they'd be 2 separate public companies and would not be consolidating operations effective anymore.

Okay. Very good. Mark, were there any reserve gains in the quarter?

So I'm not -- do you mean net reserves? Did they change? Is that what you mean?

Yes, just any favorable development.

Yes, there's no favorable development. There's no adverse development. That 19 point, whatever it was, it's just a straight up number. And actually, net reserves are actually up a little bit. And we talked about that. Most quarters, net reserves go up a bit. So it did again. So we expensed $59 million, but again, we -- our actual incurred losses were less than that. But no PPD, good or bad.

Yes. I think you had commented last quarter, I think that your loss experience on the Citizens assumptions had been better than you expected. Do you have an update on that?

Yes. I mean it's pretty similar to the rest of the book. If you look at TypTap and Homeowners Choice combined, there's like maybe 15% difference in the loss ratio. It's very small. And we had expected it to be -- I don't mean the difference in '25 and you know what I mean, very small difference between the two. And that was a little bit better than we initially anticipated when we got into it. I think that's an encouraging sign.

Yes. And Paresh, on rates, I think you said last quarter that you anticipated that rates would be steady for the balance of 2025. With this good profitability and I guess, what you observed across the wider industry, what's your current sense of what the pricing might be like, what your rate filing might be like balance of this year and into next year?

Yes, Mark, I think as we -- one of the nuances of the business is that every -- all the carriers, on an annual basis, file the rate indications, et cetera, with the department. So just like the reinsurance thing, we're going through that process at this moment in time. And at the end of it, there will be some -- there could be some minor rate adjustments. And one of the variable that's about to come up, obviously, is reinsurance, which I don't think is going to be particularly significant. But because of all of those movements and the department -- to make a rate adjustment, we have to do all the work, filing with the department. The department has to go through its processes, approve it. And at that point, we then start implementing it. So given where we are currently, there isn't anything that's imminent, right? There will always be rate changes eventually that will come through, but there is nothing imminent at this moment in time.

Yes. And when you're doing that rate evaluation filing process, how far back do you go, which is to say, how much -- you've had some good quarters here lately, but how much weight goes into the filing process from those very recent quarters?

I think if you were to do a rate filing today, and I'm not an actuary, so I may get this off by a little bit, but it would be at best reflecting results up to the end of 2024. Because I think the way they do it is you've got to do the end of 2024 results measured at the end of Q1 2025 would be the most current way you could do it. So it would reflect some of the stuff in there. But that also includes, at that point, Helene and Milton. So you should keep that in mind as well. But this is just -- it's a mechanical thing that happens. So it will work itself through, and rates fluctuate slowly over periods of time, whereas our results tend to be much more volatile based on cat activity, yes, but it's normal stuff.

When you think about Exzeo, is there peers in the public market that you think it looks like? Or you think it's meaningfully different? Is there any -- anybody you have in mind as kind of fits in the same niche? Performs the same services?

Not in the insurance space, right? Because I think the way -- and we get asked this question a lot. So bear with me a second while I walk everybody through this. What we're talking about the difference between what Exzeo does and the other people who provide policy admin systems, et cetera, is the difference between, let's say, Ford and Uber, right? Ford sells you a car, you put gas in it, you drive it from A to B. If you want -- it's a wonderful device to get you from A to B. On the other hand, Uber gets you from A to B as well. And it doesn't involve any of the purchasing an automobile and any of that stuff. It's -- Uber is more of a solution. Ford is a transportation system, if you like, yes? So in the same sense, Exzeo isn't a software system or anything else. It's more of a platform that solves a problem. It provides a solution. So very different. And it has important distinctions from just buying a piece of software. You're buying a solution, not a piece of software. Does that help?

It does. It does.

[Operator Instructions] Our next question is coming from Casey Alexander with Compass Point.

I'm curious in relation to Exzeo, the spin-off and making it fully independent from HCI, is that in part to resolve any conflict of interest when Exzeo goes out to a customer, they're not owned or a division of a potentially competing insurance company. Is that a part of the calculus for doing a spin-off -- 100% spin off?

Casey, this is Kevin. Yes, 100%. From our standpoint, that is going to be -- lift a huge barrier and allow us to grow without any type of conflict.

Yes. That makes sense. Kevin, would it be your anticipation that the customers would be buying sort of a prepackaged software solution? Or is everything kind of customized to each individual client? How much are you going to have to customize versus how much can you kind of prepack?

Casey, it's Paresh. So let me kind of give a techy answer for you. When you buy a Ford, you pick which -- whether you want to buy a Ford or a GM or a Mercedes or BMW, right? When you go with an Uber, you just pay for the ride. In the same sense, how Exzeo works is Exzeo collects a fee every time a policy is bound and administered. If you don't bind a policy, there is no cost. So it's very much a variable cost model, and it's a solution in that fashion. But when you do that at great volume, right, it suddenly becomes incredibly powerful and incredibly valuable. You see other marketplaces of this nature, whether you think of Uber or Lyft or if you were to think of Amazon or Spotify or any of those kinds of distribution platforms, you're paying for by the transaction, but the transactions add up.

Yes. Okay. I apologize. It's a technology [indiscernible] it kind of rolls right over my head sometimes. The -- you mentioned you're redeeming the 4.75% convert. Would it be your expectation that you'd be redeeming that with cash or settling it with shares?

Settling in shares.

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.

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 our next phase of our growth. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's call. You may now disconnect, and we thank you for your participation.