HCI Group, Inc. (NYSE:HCI) Q1 2025 Earnings Call Transcript

HCI Group, Inc. (NYSE:HCI) Q1 2025 Earnings Call Transcript May 8, 2025

HCI Group, Inc. beats earnings expectations. Reported EPS is $5.35, expectations were $4.49.

Operator: Good afternoon. And welcome to HCI Group’s First Quarter 2025 Earnings Call. My name is Ali, and I will be your conference operator. At this time, all participants will be in a listen-only mode. 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 available via webcast replay until May 8, 2026, on the investor information section of HCI Group’s website, www.hcigroup.com. I would now like to turn the call over to Bill Brumall, Investor Relations. Bill, please proceed.

Bill Brumall: 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?

Karin Coleman: 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 initiative 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 by 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 Exio from HCI Group. We will be speaking more about it later on this call. Off to a really good start in 2025.

Now I’ll turn it over to Mark to provide more details on the financial results.

Mark Harmsworth: 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 the 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 Exio, 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 strength.

Shareholder equity grew by almost $70 million during the quarter, and book value per share grew by more than $6. In the past twelve 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 three 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 $750 million, 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 was just over $250 million at the end of the first quarter.

In summary, this was another fantastic quarter. Revenues are up, the combined ratio is down, earnings are growing, and the balance sheet continues to strengthen. And with that, I’ll hand it back to Karin.

Karin Coleman: Thanks, Mark. As I mentioned earlier, we’ve made substantial progress on the separation of Exio from HCI Group. And as we move Exio toward being a standalone company, I want to introduce two key executives to the call. Kevin Mitchell, who will discuss the opportunity in front of Exio, and Suela Boukou, who will discuss Exio’s financials. With that, I’ll turn it over to Kevin. Thanks, Karin.

Kevin Mitchell: As background, I’m currently president of Exio, and I joined HCI Group in 2013. Exio 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. Exio currently manages approximately $1.2 billion in premiums on its platform. Up to this point, premiums on Exio’s platform have been tied to HCI.

But this is only a small fraction of the US 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 standalone 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 Boukou to introduce Exio’s financials.

Suela Boukou: Thanks, Kevin, and hello, everyone. As background, I’m currently chief financial officer of Exio and have been with HCI Group for nearly fourteen years. I’ve been fortunate to be part of the team since the founding of Exio in 2012. To build on Kevin’s comments, as we pursue the next phase of growth at Exio, we do so from a position of strength. Exio already has attractive margins, is solidly profitable, and generates strong operating cash flows. For the first quarter, Exio reported $52 million in revenue and $24 million in pretax income, assuming Exio operated as a standalone 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 Exio’s financial performance.

This would also help establish a consistent baseline for understanding Exio’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.

Paresh Patel: The key takeaways from the earlier comments are that HCI is in a strong and healthy financial position and that Exio meets all the criteria necessary to succeed as a standalone company. And the benefit of an Exio separation has the potential to be very significant. As Kevin highlighted in his comments, Exio 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 Exio a standalone company in a manner that inures to the benefit of the current HCI shareholders?

Mark Harmsworth: We believe a spin-off of Exio into a separate public company is the best path forward.

Paresh Patel: 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 Exio held by HCI Group on a tax-free basis to HCI shareholders. If we were to proceed with a 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 Exio. With that, I’ll turn it over for questions. Operator, please provide instructions.

Operator: Thank you. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. It may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Q&A Session

Operator: Thank you. Our first question is coming from Matt Carletti with Citizens Capital Markets. Your line is live.

Matt Carletti: Hey, thanks. Good afternoon.

Paresh Patel: Afternoon, Matt.

Matt Carletti: Afternoon. Paresh, maybe I’ll just follow on from your comments there, and 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, you know, the homeowners market is a big market, and so if there’s kind of particular areas of the market that you think Exio is, at least initially, you know, 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, you know, how that’s gone, how that’s going?

Paresh Patel: Matt, it’s Paresh. In terms of the places we could do it, obviously, Exio 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 other lines of business. We’ve been doing this with commercial residential already. And there are other affiliated lines that we are 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 are, you know, 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, you know, 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 have to make sure that Exio is capable of operating as a standalone 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, etcetera. 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 Exio team. Every time they’ve been handed a task, it has got done on time and ahead of, you know, under budget ahead of schedule. It’s just phenomenal to watch. Kevin, you want to add anything?

Kevin Mitchell: Yeah. 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, Exio operates in just a small segment of the market. So based on these results, we see, you know, large opportunities coming our way over time.

Matt Carletti: That makes a lot of sense. Thank you. Maybe just a couple 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 we adjust for that, is that kind of the loss ratio you see for the foreseeable future? Obviously, absent any, you know, wind activity or anything like that.

Mark Harmsworth: Yeah. It’s, yeah, 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, you know, four, five, six months after a hurricane. Less weather claims. If you look at a more normalized, you know, kind of weather, we’d expect the loss ratio might be four or maybe five 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 to get from us before, but I think that’s about where we are now.

Matt Carletti: Okay. That’s very helpful. And then one last one. Again, 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, you know,

Paresh Patel: Yeah. 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, you know, capacity and price and terms. So it’s a very orderly, almost could almost say boring year in terms of placing reinsurance.

Matt Carletti: Yeah. Boring is good in this case. So, thank you very much for the color. I appreciate it.

Karin Coleman: Thank you.

Operator: As a reminder, ladies and gentlemen, if you have any questions or comments, please press 1 on your telephone keypad. Our next question is coming from Michael Phillips with Oppenheimer. Your line is live.

Michael Phillips: Thanks. Good afternoon. Maybe two other questions on the Exio 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, you know, 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 Exio, are there advantages that the platform offers to potential partners? Are those advantages more or less depending on where the partner are admitted or not admitted partners?

Paresh Patel: 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 needed to raise capital in order for Exio to be healthy as a standalone company. It’s already so healthy that 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 led us to the spin-off. If we can do it that way, it maximizes the value creation for existing shareholders. And we have always, you know, always taken that into consideration in all of our actions, and this is no different. Yeah? What was the second part of your question again?

Michael Phillips: Yeah. The second part was just I’m curious if the advantages, I mean, you know, Exio, 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 advantages that it offers to potential partners, are they different, more or less, for a partner that is a pure play admitted carrier and homeowners, a non-admitted carrier homeowners. Does that matter?

Paresh Patel: No. It doesn’t, actually, because the way the technology works, and, you know, it’s in the plumbing of the thing, it’s trying to assemble a book of business to whichever kind of partner it is so that it is most optimized to the profit margins and distribution that they want. Yeah? We just take all the heavy lifting out of doing that distribution. So admitted or ENS doesn’t make any difference. Yeah?

Michael Phillips: Okay. Yeah. Thank you. And it seems like, you know, the growth potential in homeowners over, sort of the near term seems to be, if I had to guess, seems to be more on the, you know, side. Maybe you disagree with that, but if so, it’d be nice to see that this benefit is equal to both sides. That’s why I was asking. Can you talk to just generally about how Florida property homeowner rates have moved in the past three months compared to what you were talking about last in Florida?

Karin Coleman: Yes. So I think the Florida rate, I don’t think there’s been much movement in the last three 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, yeah, we can do this with ENS just as effectively as we can do it with admitted book carriers at this point. Yeah?

Michael Phillips: Okay. No. Good. Thanks. And then I guess lastly, just maybe thoughts on, I guess, the commercial market, how it 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?

Paresh Patel: The condo business, commercial residential business is a lot more competitive. You know, 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, you know, we maintain our pricing discipline. And everything will work itself out in due course. Yeah?

Michael Phillips: The core business was down this quarter? Okay. Anything, I mean, is that competitive nature? Is that why that

Mark Harmsworth: Hey, Mike. It’s Mark. Are you looking at the written premium number in the press release? Is that what you’re referencing?

Michael Phillips: Yeah. I don’t have it in front of me, Mark. But, yeah, it’s a good, I think so. So yeah.

Mark Harmsworth: Yeah. 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 first quarter last year for Core. And so just the way that you account for the written premium, that all written in that one quarter. So when you look at Q1 to Q1, it actually forget it’s not down at all.

Michael Phillips: Yeah. Sorry. I was looking at the ‘7 versus the ’19. Okay. Thanks, Mark.

Mark Harmsworth: Okay. That’s it for now. Thank you very much, Jeff.

Paresh Patel: Thank you.

Operator: Our next question is coming from Mark Hughes with Truist. Your line is live.

Mark Hughes: Yeah. Thank you. Good afternoon.

Paresh Patel: Good afternoon, Mark.

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

Paresh Patel: Very simply, we’re talking about a total spin. Total separation.

Mark Harmsworth: Yeah. So, Mark, it’s Mark. Yeah. I mean, they’d be two separate public companies, would not be consolidating the operations in fact, they do anymore.

Mark Hughes: Okay. Very good. Mark, are there any reserve gains in the quarter?

Mark Harmsworth: So I’m not, do you mean net reserves? Did they change? Is that what you mean? Or

Mark Hughes: Yeah. Favorable development.

Mark Harmsworth: We haven’t closed any favorable, yeah. There’s no favorable development. There’s no adverse development. That 19 whatever it was is just a straight-up number. And actually, net reserves are actually up a little bit. We talked about that most quarters, net reserves go up a bit, so they did again. So we expensed $59 million, but, again, our actual incurred loss was less than that. But no PPD, good or bad. Yeah.

Mark Hughes: And you had commented last quarter, I think, that your loss experience on the citizens’ assumptions has been better than you expected. Do you have an update on that?

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

Mark Hughes: Yeah. 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 observe across the wider industry, what’s your current sense of what pricing might be like, what your rate filing might be like, balance of this year and into next year?

Paresh Patel: Yeah, Mark. I think as we, you know, one of the nuances of the business is that every, all the carriers on an annual basis file the red rate indications and etcetera 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, you know, one of the variables 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 had, you know, to make a rate adjustment, we have to do all the work filing with the department, the department has to go through it, 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.

Mark Hughes: Yeah. And when we’re doing that rate evaluation filing process, how far back do you go, which is to say how much, you know, you’ve had some good quarters here lately, but how much weight goes into the filing process from those very recent quarters?

Paresh Patel: 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. Yeah? Because I think the way they do it is you go 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 this 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, yeah, it’s a mechanical thing that happens. So it’ll work itself through and, yeah, rates fluctuate slowly over periods of time. Whereas our results have tended to be much more volatile based on cat activity. Yeah?

Mark Hughes: Yeah. But it’s normal stuff. When you think about the Exio, is there peers in the public market that you think it looks like, or you think it’s meaningfully different? Is there anybody you have in mind as kind of fits in the same niche, performs the same services?

Paresh Patel: Not in the insurance space. Right? Because I think the way, and I 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 Exio does and the other people who provide, you know, policy admin systems, etcetera, 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, yeah. 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 or any of that stuff. Uber is more of a solution. Ford is a transportation system, if you like. Yeah? So in the same sense, Exio isn’t a software system or anything else.

It’s more of a platform that solves a problem and 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?

Mark Hughes: It does. It does. Thank you very much. Appreciate it.

Operator: Once again, if you have any questions or comments, please press 1 on your telephone keypad. Our next question is coming from Casey Alexander with Compass Point. Your line is live.

Casey Alexander: Yeah. Hi. Afternoon. Thanks for taking my questions. I’m curious in relation to Exio, you know, it’s the spin-off in making it fully independent from HCI. Is that in part to resolve any conflict of interest when Exio 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, a 100% spin-off?

Kevin Mitchell: Yeah. Hey, Casey. This is Kevin. Yeah. A 100%. From our standpoint, that is going to be a, you know, lift a huge barrier and allow us to grow without, you know, any type of conflict.

Casey Alexander: Yeah. That makes sense. So, Kevin, would it be your anticipation that, you know, that customers would be buying sort of a prepackaged software solution, or is everything kind of customized to each individual client? How much do you, are you going to have to customize versus how much can you kind of prepack?

Paresh Patel: Hey, Casey. It’s Paresh. Let me kind of give a techy answer for you. When you buy a Ford, you pick whether you want to buy a Ford or a GM or a Mercedes or a BMW. Right? When you go with an Uber, you just pay for the ride. In the same sense, how Exio works is Exio 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, you know, Amazon or Spotify or any of those kinds of distribution platforms. You’re paying for by the transaction. But the transactions add up. Yeah.

Casey Alexander: Okay. Yeah. I apologize. There’s a technology neophyte. It kind of rolls right over my head sometimes. You mentioned you’re redeeming the 4.75% convert. That would be your expectation that you’d be redeeming that with cash or settling it with shares?

Mark Harmsworth: Settling it with shares.

Casey Alexander: Settling in shares. Okay. Great. Yeah. Alright. That’s all I have right now. Thank you.

Paresh Patel: Thank you.

Operator: 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.

Paresh Patel: On behalf of the entire management team, I would like to thank our shareholders, employees, agents, and most importantly, policyholders for their continued support as we embark on our next phase of growth. Thank you.

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