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

Good afternoon, and welcome to HCI Group's Second Quarter 2026 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 August 20, 2026, starting later today. The call is also being broadcast live via webcast and available via webcast replay until August 6, 2027 on the Investor Information section of HCI Group's website at www.hcigroup.com. I would now like to turn the call over to Nat Otis, HCI Investor Relations. Please proceed.

Thank you, and good afternoon. Welcome to HCI Group's Second Quarter 2026 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 in actual events, these developments could have materially adverse effects on the company's business, financial condition and results of operations. HCI Group disclaims all obligations to update any forward-looking statements. Now with that, I'll turn the call over to Mark Harmsworth, Chief Financial Officer.

Thanks, Matt. Good afternoon, and thank you for joining us on our second quarter earnings call. This was another very strong quarter for the company. Pretax income of more than $110 million was 18% higher than the same quarter last year and year-to-date, pretax income of $226 million was 16% higher than the first 6 months of last year. When comparing with last year, remember that was a record year. And so far, this is an even better one. . Diluted earnings per share were $5.60, up from $5.18 in the second quarter last year, and year-to-date diluted earnings per share were $11.05. Gross premiums earned for the quarter grew by 6% from the second quarter last year driven by policy growth, while average premium per policy remained flat. Total revenue grew by 11%, driven by the premium growth as well as an increase in services revenue generated from new clients in Axio. The loss ratio this quarter was 22%, just a touch higher than the first quarter, reflecting the normal seasonal trend and as well within the 20% to 25% range we've been discussing for some time now. In terms of the combined ratio, we've indicated this should be in the 60% to 65% range, absent any cat activity and the combined ratio this quarter of 61% was right in the range. Let's turn to the balance sheet for a minute, which continues to strengthen. We have more than $2 billion in cash and investments. Stockholder equity is over $1 billion. The debt-to-cap ratio was less than 6% and book value per share is now $86.60. As we discussed on our last call, while the growth in book value per share has been impressive, remember, this does not include any unrealized gains on our ownership of Exzeo or our real estate portfolio. The fair value of Exzeo and our real estate portfolio were added, pro forma book value per share would be over $150. Over the last 36 months, our after-tax return on equity has been 35% in a period that includes 2 major hurricanes, Milton and Helen. This is a very compelling return for an insurance company, and yet we trade at less than 1.2x adjusted book. This is the reason we've been buying back the stock. As you know, we announced a buyback plan in March, under which we were authorized to purchase up to $80 million of stock, and we are pleased to say that we have completed that program. We have fully utilized that authorization, buying back a total of 504,000 shares, representing about 4% of the outstanding shares of the company. In terms of holding company liquidity, we have just over $160 million of liquidity at the HCI level. This does not include the 75 million shares we own of Exzeo, which now trade publicly. Wrapping up in the quarter, this has been another fantastic 1 for the company. 2025 was a record year for HCI and the first 2 quarters of this year have been even better. Revenue is growing, margins are expanding. We are generating record cash flows at minimum minimal debt. We continue to generate superior returns on capital, and we bought back 4% of the company. And with that, I'll hand it over to Karin.

Thank you, Mark. If you heard those results without any context, you might think current conditions are ideal. In reality, market conditions are far more challenging, so the results Mark just discussed are even more impressive. We have always been good at operating in all types of environments. So it may be helpful to discuss some of the ways we are prepared to navigate through this market. The first role of managing through the soft part of the cycle is to preserve your own business, meaning keep attrition low by prioritizing your current in-force book. How are we doing? Our retention rates are consistently above 90%. This success is due to focusing on the policyholder from day 1 regardless of market conditions and not simply when the competitive environment gets more challenging. Two ways to do this are by rate and policy coverage. As for rates, HCI underwrites with a focus on what is an appropriate rate, both now and in the future. We don't dramatically increase rates when the market is hard, which then reduces the need to chase rates down as the market softens. Policyholders want fairness and consistency, and we provide that. As far as policy coverage is concerned, we are consistent in how we -- how comprehensive we are. Some carriers limit coverages for policyholders when profitability is under pressure. We don't do that. As an example, we continue offering the broadest possible coverage in water damage even when some in our industry choose to cap each event at $10,000. While this artificially improves the carrier's profitability in the near term, it can also negatively impact their ability to retain customers over the long term. Bottom line, ACI knows that the first rule of growth is making sure your current customers want to stay with you. The second role is to be opportunistic. In the second quarter, we pivoted core, our condo owners Reciprocal Exchange from writing commercial business to focusing on the residential market. As a result, since April, we have seen significant month-over-month growth to the point we now believe it will be a good source of new business in the second half of 2026. I would add that just last week, we had 1 of our best weeks for new voluntary business, and this was done in a softening market. Again, we believe that policy coverage is the differentiating factor for the rapid scaling we have seen so far. We are also focused on the market we know best. Florida, understanding that expanding into other states that have different market characteristics can be challenging, especially at this point in the cycle. That said, we remain interested in California, given the obvious similarities it has with Florida, but timing and the longer-term rate environment will be crucial in our decision-making. Also in the quarter, we completed our catastrophe insurance programs for the 2026, 2027 treaty year. We're very pleased with these new reinsurance programs, having purchased more coverage and better coverage while reducing our actual ceded premiums by over 10%. This translates into more than $10 million of savings per quarter. In short, we utilized 1 of the most important expense levers we have to improve both the top and bottom line going forward. Continuing on the reinsurance front. You may remember in the second -- in the first quarter, we announced the creation of our second reinsurer Fortex Re. We quickly used Fortex and the new programs we announced on June 1 as well as for a new project of ours digital tokenized reinsurance security. In mid-June, we announced that 3 separate token offerings would be available that are structured to mirror parts of Fortex excess of loss programs. And by June, those offerings were completed. For HCI, one of the primary goals of this pilot project was to identify new ways to make catastrophe reinsurance as an asset class available to a wider market of investors, which could result in a more efficient reinsurance marketplace for placing and pricing specific types of risk. I will close by simply saying that HCI is in its strongest financial position in our 19-year history, and we got here by having the vision to look to the future, while we consistently are operating in the present. Over the last 6 quarters, we have averaged $5.62 per quarter in EPS and almost $110 million in pretax income, while rates have softened and competition has increased. With that, let me turn it over to Paresh for some final thoughts.

Thanks, Karin. To recap what we just heard, HCI is delivering consistently outstanding operating results in a softer market. and it's doing so while rolling out new products to offset attrition and return to organic policy growth. This is being done even as we reduce our largest operating expense line item, reinsurance. And we're doing it while improving all the quality components of the reinsurance programs for this coming year. That's a pretty good start to 2026. . And let me add 2 quick things. In July, we signed up GEICO to distribute our new product, and they have already started selling policies. This is a new business and a new relationship that is not reflected in the second quarter numbers. We will start to benefit from this in the third quarter. Additionally, our ability to rapidly ramp up this new business, both internally and with the help of our agents is a direct result of the speed and agility that Ageas technology platform affords us on a daily basis. So thanks to an opportunity mindset, hard work and ages pioneering technology, we may see organic policy growth by the end of the year. And this is without any cities assumptions, acquisitions or entering new markets, which in all of itself is no small achievement. And with that, I will turn the call over for questions.

[Operator Instructions] Our first question is coming from Mark Hughes with Truist.

Mark, the ceded premiums in the third quarter, what should they be absolute terms or a ratio?

$96 million.

$96 million, okay. And what does it mean in terms of rates, presumably, you have to update your filed rates in Florida for the new reinsurance agreement. What do you think that will mean in terms of blended impact on pricing?

Mark, that's got to take some time because now that this thing is in here, you go through the process of going through the actuaries, the market all up and then eventually it will go into the next rate filing that we do, which probably is going to be late this year. So it's going to be -- it will get incorporated into our rate filing, but it's going to take a little while. .

Any early estimates?

No. I actually work in mysterious ways. .

Yes. Very good. And I'm sorry if you already mentioned that the tail row gross premiums written a pretty big number this quarter. What was going on there?

So some of that significant part of that, some of that is new business, Mark, but there's also -- remember, we did the takeout in Q4 last year and about $80 million of that takeout was Tailrow. So they had some significant -- a lot of those policies came up for renewal, and they wrote those in Q2. A little bit of new business there, too, but that was the biggest piece of that.

Okay. And then how meaningful is that GEICO relationship, I think you said by the end of the year, you see organic policy growth, GEICO presumably is a part of that. But sounds exciting. Any way to size that up?

No, it's early days. We'll see how it goes. But I mean I think by Karin's comments, core and a new product we already doing fantastically well. The GEICO relationship accelerates that possibility. And the other thing about all of this stuff is there's been some industry press in the last couple of weeks about bundling and putting home and auto together. You're kind of looking at core home and GEICO Auto. So that bundling may have some -- may find some traction, but we'll keep you posted as things develop, yes?

Sounds good. And then if you could spend a minute or 2 on the pilot project, the token initiative that you're talking about, the financial implications, operationally, how does that work? I'd be interested to hear a little bit more on that.

Yes. So Mark, we've -- I would tell you 2 different things. One is that we announced that we've told everybody what we're doing, and we're doing it on a very small scale just to make sure that we've got every step of the process and regulatory approvals and everything else done. So we're doing this in the short term in a nonmaterial way. And we've made great progress, obviously, because as Karin said in her prepared remarks, tokens have already been issued, et cetera, right? So all that has occurred. The -- but in the short term, it is not material to our numbers. Having said that, in the long term, if this works, it could create a whole new asset class from a tokenization perspective, but from an HCI perspective, it opens up a whole new market through which to secure reinsurance, right? So you can imagine a future world where you've got the regular reinsurance you can buy through Premier and London. There's obviously a different market in the cat bonds, which we don't participate anybodies out there. And then this could be a whole third class of places where you can buy reinsurance. And the 3 markets complement each other as opposed to directly compete. So this could be a huge improvement for the industry. if we can get it to work all the way through, yes?

So would that be more of an asset management model on your part?

No. I think from an HCI's perspective, it's like every year, when we place reinsurance, we generally do it through the general market in Bermuda and London and [indiscernible] reinsurers, the classics. You could also place reinsurance through cat bonds and things which I'm sure you've seen lots of people do. Now you can have a third option of placing reinsurance, which would be through tokens. We're trying to open up that third avenue. And that could be as revolutionary as cat bonds when they first came along, were, right? It was a very small piece of the market, it has gone -- grown to be quite a large thing. And it's not just 1 company specific. It could be industry-wide, it could be a whole new class, yes. . So we are pioneering all this stuff from an HCI's perspective is just were to procure reinsurance from. But it could be an asset class that could -- that will require asset managers and everything else, yes?