Q2 2025 HCI Group Inc Earnings Call
Speaker #4: Good afternoon and welcome to HCI Group's second quarter 2025 earnings call. My name is Paul, and I will be your conference operator. At this time, all participants will be in a listen-only mode.
Speaker #4: Before we begin today's call, I would like to remind everyone that this conference call is being recorded and will be ailable for replay through September 6th, 2025, starting later today.
Speaker #4: The call is also being broadcast live via webcast and available via webcast replay until August 8th, 2026, on the Investor Information section of HCI Group's website, at www.hcigroup.com.
Speaker #4: I would now like to turn the call over to Bill Brumall, VP of Investor Relations. Bill, please proceed.
Speaker #5: Thank you and good noon. Welcome to HCI Group's second quarter 2025 earnings call. To access today's webcast, please visit the Investor Information section of our corporate website at www.hcigroup.com.
Speaker #5: 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.
Speaker #5: 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.
Speaker #5: Some of these risks and uncertainties are identified in company's filings with a 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 conditions, and the results operations.
Speaker #5: HCI Group disclaims all the obligations to update any forward-looking statements. Now, with that, I'd like to turn the call over to Karin Coleman, Chief Operating Officer.
Speaker #5: Karin?
Speaker #6: Thank you, Bill. And welcome, yone. HCI reported another great quarter. Highlights for the second quarter include reported earnings of $5.18 per share, we improved the net combined ratio to 62%, and total shareholders' equity grew to $759 million up 65% year to date.
Speaker #6: In addition to these financial achievements, we had several other important developments in the quarter. We reduced our debt-to-cap ratio to less than 10%, homeowners' choice tip-tap insurance company and tail row ciprocal exchange were each approved for a depopulation from citizens in October of this year.
Speaker #6: Also, HCI successfully placed its reinsurance program for the 2025-2026 treaty year. Our conservative reinsurance strategy ensures we are well protected for the year ahead.
Speaker #6: The technology developed at Exio continues to play an important role in HCI's success and is a real differentiator. For example, it has enabled HCI to identify favorable market shifts early, we detected improvements in Florida's underwriting environment ahead of many peers, and we executed on that opportunity.
Speaker #6: We've been able to scale rapidly without compromising underwriting discipline. HCI has grown in force premium by more than $460 million to approximately $1.2 billion since the end of 2022.
Speaker #6: The technology has allowed HCI to select and retain the right customers supporting a retention ratio of about 90%. And our gross loss ratio improved during that time to below 25%.
Speaker #6: Collectively, Exio's technology has delivered meaningful value to shareholders as reflected in the HCI's strong financial performance in recent quarters. Looking ahead, irrespective of market conditions, we're confident that our experienced team, combined with our technology, will continue help identify and underwrite attractive policies that align with our risk and profitability standards.
Speaker #6: With this advantage, we believe HCI is well positioned to generate compelling returns on shareholder capital. Now, I'll it over to Mark to provide more details on our financial results.
Speaker #7: Thanks, Karin. Pretax income for the quarter was just over $94 million, and diluted earnings per share were $5.18, compared to $4.24 in the second quarter last year.
Speaker #7: Year to date, pretax income is $195 million, and diluted earnings per share are $10.57 cents. This significant continuing improvement is driven by higher premiums, a lower loss ratio, and lower operating expenses, as a percentage of premiums.
Speaker #7: The gross loss ratio this quarter was 21.3%, up slightly the first quarter this year, but more than six points lower than the second quarter last year, reflecting the continuing decline in claims frequency.
Speaker #7: We also continue to generate significant operational leverage, as evidenced by the lower operating expenses as a percentage of revenue. When combined with lower loss ratios, the result is a combined ratio which was just under 62% for the second quarter.
Speaker #7: As we announced back in June, we completed our reinsurance program for year, because the effective date of the new program as June 1st, part of the impact shows up in the second quarter, but the full impact will be lected in the third quarter.
Speaker #7: At that time, premiums ceded to reinsurance will be $106 million per quarter, just slightly higher than they were in the first and second quarters.
Speaker #7: Once the full effect of the new program is reflected, we expect the net combined ratio to be about 70%. Now, let's look at the balance sheet, which continues to strengthen.
Speaker #7: In June, we redeemed the remaining balance of our 4.75% convertible notes, fully settling the $172 million obligation. As Karin mentioned, this brings the debt-to-cap ratio well under 10%, and interest expense going forward will now be a little less than $1 million per quarter, which is less than a third of what it had been.
Speaker #7: Due in part to this redemption, but also because of continued profitability, shareholder equity has grown by more than $300 million so far this year, and is now well over three-quarters of a billion dollars.
Speaker #7: Book value per share has grown by more than $16 so far this year, to $58 and 55 cents at the end of June. In terms of holding company liquidity, it's just over $250 million at the end of the second quarter, and there is now very little debt at the holding company level.
Speaker #7: To summarize, this was another fantastic quarter for the company. The company's growing, but even more importantly, all of our financial metrics continue to improve.
Speaker #7: The loss ratio continues to come down, the combined ratio continues to come down, and the balance sheet continues to get stronger. And with that, I'll hand it to our president of Exio, Kevin Mitchell, to give us an update on Exio.
Speaker #8: Thanks, Mark. We remain excited about our momentum at Exio. As we have mentioned on our prior earnings call, we are moving forward with our plans to have Exio be a separate publicly traded entity.
Speaker #8: After careful consideration of all of our options, we believe the best path is to pursue an initial public offering of Exio shares. Earlier this week, Exio confidentially submitted a draft registration statement on Form S1 with the US Securities and Exchange Commission, relating to a proposed initial public offering of Exio's common stock.
Speaker #8: As a result, our CFO, Suella Boku, and I won't be making statements on Exio's results in the near term. Additionally, with the suggestion counsel, we are advised to provide the following disclosure.
Speaker #8: The size and price range of the proposed offering by Exio have not yet been determined. The initial public offering is expected to take place after the completion of the SEC review process, subject to market and other conditions.
Speaker #8: There is no assurance that the initial public offering will be completed. We note this announcement regarding Exio is being made under SEC Rule 135 and does not constitute an offer to sell or the solicitation of an offer to buy securities.
Speaker #8: Furthermore, it does not constitute an offer, solicitation, or sale in any jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the Securities Laws of that jurisdiction.
Speaker #8: Now, I want to turn the call over to Paresh.
Speaker #9: Thank you, Kevin. As Karin and Mark highlighted in their comments, HCI reported another quarter of strong financial results. Kevin's exciting comments on Exio reminded me of a time 18 years ago—last week marked the 17th anniversary of HCI's IPO.
Speaker #9: The company has come a long way since going public in 2008, in the middle of a great financial crisis. But over the past 18 years, our management team has always been guided by a central principle: building long-term shareholder value.
Speaker #9: And along the way, there have always been ups and downs, but what matters most is what you achieve, not where you begin. As an example, 18 years ago, you wouldn't have predicted that we would grow earnings 25 times, increase the share price by 20 times, and increase the shareholders' equity over 30 times.
Speaker #9: I note that because our management team has a proven track record of delivering strong long-term returns for our areholders, and we are all very committed to building on that success.
Speaker #9: Please join us as we embark on the next leg of our journey: our best days are in front of us, and with that, I will turn it over for questions.
Speaker #3: Thank you, sir. At this time, we'll be conducting a question-and-answer session. If you have any questions or comments, please press *1 on your phone at this time.
Speaker #3: We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. And please hold while we poll for estions.
Speaker #3: The first question today is coming from Matt Carletti from Citizens Capital Markets. Matt, your line is live.
Speaker #10: Hey, thanks. Good afternoon.
Speaker #3: Hey, Matt. Paresh, maybe I'll start. I was hoping that you might able , kind of update us on what you're seeing market condition-wise in Florida, you ow, competitive landscape and so forth.
Speaker #11: I want to give that question to Karin.
Speaker #6: Sure. Thanks, Paresh. the environment in Florida now is, healthy one, as you can see from our financial results. It's natural that it will attract capital and competition, but that's not new to us.
Speaker #6: We've been around for a long time and have succeeded in all kinds of markets. The more competitive market is already here; look at the 2023 takeout process, which was somewhat competitive, and 2024 is even more so.
Speaker #6: but, but even with that, we got more policies than we thought we would get. The attrition, the attrition on those policies has been less than what we thought, and the loss ratio has lower than we thought.
Speaker #6: So we believe 're well positioned in a competitive market. We have multiple underwriters that can pursue different strategies, we have strong capital position, and as I mentioned earlier, we have the people and the technology to make the right decisions.
Speaker #10: Maybe Karin, sticking that, you know, you mentioned in your, your prepared marks about, HCI and tail row being approved for an October deep hop.
Speaker #10: Can you just give us kind of your outlook for maybe what we should expect, you know, as we progress through the balance of the year in terms of any of the HCI entities? What, you know, you know, appetite for Deep Hop might be or prospects for it?
Speaker #6: Sure. the three, the three, three carriers I mentioned earlier, Homer's Choice, TipTap, and Tail Row, each have been roved for $25,000 policies in October.
Speaker #6: and we'll, you know, we'll leverage our technology as we've done the past to identify those greenhouses that, you know, that we focus on. so we'll, well, there'll be, there'll be some that we want and, and we'll be able to select those given our underwriting criteria.
Speaker #10: Okay. Great. And then one, one last one, if I could, and I, I appreciate, you know, based on kind of Kevin's remarks that, that you, you may not be le to answer this, and that's fine, but I was just curious, you know, obviously a focus has been getting Exio out on its own standalone.
Speaker #10: so it can really thrive. you ow, just the decision for IPO versus versus spin or if there's anything you can comment on, and again, if you can't, totally understand.
Speaker #11: Hey, hey, Matt. It's Mark. And, you know, we can't, you ow, sort of in line with, with Kevin's comment, we can't really get too far into that.
Speaker #11: I an, obviously, you know, Exio is a great company. It's done great work for us. Karin talked about the effect on our operations. you ow, it's, it's a tremendous asset for us.
Speaker #11: The way it's structured right now, sort of being tucked under HCI, it's not, it's not ideal for either evaluation purposes or competitive reasons, but, you know, we're very focused on that.
Speaker #11: 're really excited about it. 're excited about the future, but, you know, unfortunately, we just can't, you know, get into the details and pros and cons of one strategy over the other at this, at this point.
Speaker #10: Completely understand. And, appreciate all the answers. Thank ou.
Speaker #3: Thank you. The next question will be from Michael Phillips from Oppenheimer. Michael, your line is live.
Speaker #12: Yeah. Hey, thanks. afternoon. on the Exio thing, this is, isn't ally related to the IPO process, but just, a random question. You've talked in the past, past couple of arters since you've started talking about this, of the benefits to Exio for being independent from Homer's Choice.
Speaker #12: I guess I wanted to k on the flip side to that, what do ou think are the benefits to Homer's Choice from being independent from Exio?
Speaker #11: great estion. I, I would simply tell ou that what we now have is people can focus on what they do. So HCI Group, ex-Exio, has some interesting opportunities in front of them, and we are not quite ready to talk about them on an open mic.
Speaker #11: But I think people are looking forward to what a pure insurance play might do in the coming years given the volatility in the property casualty market on a national basis, yeah?
Speaker #11: So we have some great opportunities there as well.
Speaker #12: Okay. thanks. could you, maybe just com on, on the vironment? Could you comment on what you're seeing in your condo business for the pricing vironment?
Speaker #11: I think we would confirm the same item that lots of other people would. think you're talking about commercial residential.
Speaker #12: Yes.
Speaker #11: that market, that market is very soft. It continues to be soft. but it is, that it, you know, as Karin mentioned, this is nothing new I'm telling.
Speaker #11: It's been this way for months. But we're fine with it, and we anticipate it, and it's a very small part of our business. And it's not, you know, a significant issue to us.
Speaker #11: But I think it is the whole market is soft. That's, that's old news at this point.
Speaker #12: Yeah. Okay. and, and then just lastly, quick numbers just to irm. Since 4Q's pretty sizable, favorable reserve adjustments, you haven't done thing since then, just confirming that?
Speaker #11: No. I mean, no, no, no changes.
Speaker #12: Okay. Okay. Great. Thanks, guys. Congrats.
Speaker #3: Thank you. The next question will be from Mark Hughes from Truest. Mark, your line is live.
Speaker #13: Yeah. Thank you. Good afternoon. Mark, you commented in the past on, weather being a influencer on, the loss ratio. Was this an unusual quarter from a weather standpoint, or was this more normal?
Speaker #7: No, actually, actually, just give you a little bit more color mark. If, if you go if you go back to the second quarter of last year, compare that to the second quarter of this year, we have about 12, 12 and a half percent more policies now.
Speaker #7: And we actually had, I ink, 40 or 50 fewer claims but that's despite the fact that we actually had a little bit more weather in the second quarter of this year, versus the second quarter of last year.
Speaker #7: So we had to think about 100 more weather claims this quarter. but 150 fewer non-weather claims. So frequency's down significant. I don't think it's, you know, I don't think it's an aberration.
Speaker #7: we had more weather in Q2 than we had in Q1. We had more weather in Q2 than we had in last second quarter, but the loss ratio just continues to come down because the frequency's ing down.
Speaker #13: Very good. I think in the, last call and in the Q you gave some summary Exio financials revenue and pretax income. Is that going to be in the Q this time around, or are you able to share that on the call?
Speaker #7: Yeah. So we won't go through it on the call, but, the it'll be the same as, as it always is in the Q markets.
Speaker #7: It's, it's disclosed in the segmented information, and, ou know, it's been there for quite a while. It'll, it'll be there. You'll e it. You'll see it tomorrow.
Speaker #13: Okay. And then, investment income was, a little bit higher sequentially. Was there anything unusual there, or is that, a good number on a go-forward?
Speaker #7: that is, that is a, I think, a good number going forward. There's nothing unusual there. It just, I mean, it reflects, if you look at, you look cash and invested balances at the end of Q2 compared to the start of the year, it's like $300 million higher.
Speaker #7: Because we generated, $300 million of positive cash flow so far this year. So you know, cash is, I ink, $950 million or something like that at the end of Q2.
Speaker #7: So it's really just that. to this point, rates have been fairly flat, but just the invested balances are up significantly. So, and, and, and yeah, I think that's a, 's a, that's a pretty good number to project forward.
Speaker #13: Yeah. And then what was your comment on interest expense post these, developments?
Speaker #7: Oh, just, so we had a quarterly interest expense of, on the convertible notes, which was, you ow, significant. and going forward, that's gone. So the only interest expense we'll have going forward is, on the credit line and on, on real estate loans.
Speaker #7: And I think, I think our projection there is about $950 thousand dollars per quarter, which is, you know, about, about a what a, about a third of what it's been in the in the past.
Speaker #13: Yeah. how is the, kind the remaining policies that are available for takeout? How would ou characterize the opportunity now versus a year or two years ago?
Speaker #13: the $25,000 I think is, a lower number, and maybe that reflects that, but you've got, across all three subsidiaries, you're doing $25,000. So I'm just curious how you would characterize the potential this time around.
Speaker #11: Yeah. Mark, so about the $25,000 tax per carry. It just seems, you know, they're all financially healthy ough that they can, ou know, aspire to those numbers, right?
Speaker #11: What they will do in practice is what Karin said is how many greenhouses can they find that makes sense for us to take? Right?
Speaker #11: Do your bigger question the ratio of red houses to greenhouses has obviously dramatically shifted, right? Because if you recall things from the past, we had said there's about 500,000 policies that should remain in citizens.
Speaker #11: So you're, you as you approach that number, the book gets a lot more redder than green, if you like, yeah? And that's occurring. But that's okay.
Speaker #11: We know how what we're doing, and that's what Karin was alluding as to how the software runs.
Speaker #13: Understood. On the gross premiums written, the TipTap, was a nice jump this quarter, 40%. Homer's Choice up 18%. was there any could you characterize how much of that was, was that kind of continuing takeout or renewal on takeout?
Speaker #13: Revenue? Is that just kind of a timing issue? Was there much or any voluntary in that those numbers?
Speaker #7: Not a lot of voluntary in there, no. It's largely, you know, it's the renewal of the existing book, the renewal of the takeouts that we did, obviously.
Speaker #7: and the only thing you have to just be a little bit careful of when ou're comparing quarter over quarter is in the second quarter of last year, we had we, we did the ta the, the core takeout, so gross written premium was a little higher in Q2, last year.
Speaker #7: But other than that, it's pretty, you know, 's pretty comparative. It's up
Speaker #13: Yeah.
Speaker #7: 18% quarter over quarter, ething like that.
Speaker #13: And you and just one more, Mark, you had used a kind a 70% net combined ratio. D is that normalized for the expense savings associated with the takeouts?
Speaker #13: Is load at this point?
Speaker #7: Yes. Yeah. Yeah. So it was yeah, it, it was and that's the reason that, ou know, it was, it was 62% this quarter. The reason we're saying 70% is that that's that's normalizing for, for, for three things.
Speaker #7: It's got the full reinsurance load in it. it also has full policy acquisition expenses because you remember you've got a period of time where you're ortizing in premium that doesn't have any commissions on it.
Speaker #7: And then, you know, we've also allowed you ow, a little bit of wiggle room on the loss ratio if it drifts a, you know, a couple of points.
Speaker #7: But that's, that's all meant that's all captured in that 70% combined ratio, which should be normalized, fully loaded, you know, to non-cap number, obviously, but that's, that's once everything sort of normalizes out.
Speaker #13: Very good. Thank you.
Speaker #3: Thank
Speaker #3: you. And once again, it will be star 1 if you wish to that giving kind of a full ask a question on today's call.
Speaker #3: The next question is coming from Casey Alexander from Compass Point. Casey, your line is live.
Speaker #14: Yeah. Good afternoon. And, and Parish is funny. When you were making your comments about 18 years ago, I before the call started, I was looking at the six-month diluted earnings per share of $10.57.
Speaker #14: And, and, and, and thinking to myself, geez, that's more than what the price of the stock was when we first met 18 years ago.
Speaker #14: So it is actually quite an achievement. I, I, I just wanted to clarify on, on the deep hop. That is $25,000 policies each for each of the three entities, or $25,000 spread across the three entities?
Speaker #7: Twenty-five thousand for each underwriter.
Speaker #14: So a total of 75.
Speaker #7: Yes.
Speaker #14: Okay. Great. And I-I'm curious about your comments you know, where do you see some opportunities emerging outside of the state of Florida and to a certain extent, how helpful will Exio be to HCI, TipTap et al.
Speaker #14: in, in identifying those opportunities? So this is what gets us very excited. as I'm aking as HCI ex-Exio, right? Because of the so because of this technology and everything else, we are starting to see shoots of opportunity in certain states and we also see potential opportunities in some other really big states but we are, you ow, being very careful as to how we go at this thing because to be blunt, we have a very good thing going as HCI ex-Exio so you want to make sure you take our next steps carefully but you want to, again, we when we do them, we are trying to do this with a multi-year horizon multi-year timeframe in, mind.
Speaker #14: So that's why we're, we're trying to be level in our tone but we are excited that just look at the numbers. This Exio technology just keeps making us better and better.
Speaker #14: Right? And you can no longer attribute it to what was it was being attributed to a couple of years ago because of the legislative reforms, right?
Speaker #14: That was three years ago now. And these numbers just keep improving. Right? you ow, back to your opening comments also. 18 years ago, you're right, right?
Speaker #14: You wouldn't have said EPS for two quarters would exceed the share price that we were talking about back then, yeah?
Speaker #13: That's for sure.
Speaker #14: Mm-hmm.
Speaker #13: All right. Thanks for taking my questions and, and congrats on a good quarter.
Speaker #14: Thanks.
Speaker #3: Thank you. At this time, this does conclude our question and answer session. I would now like to turn the call back over to Paresh Patel, who has a few closing remarks.
Speaker #15: Thank you. On behalf of the ire management team, I would like to thank our shareholders, employees, agents, and most importantly, our policyholders for their continued support.
Speaker #15: As we embark on the next phase our growth, stay tuned. Thank you.