HCI Group achieves $4.90 EPS and 64% combined ratio, while successfully launching Exio's IPO, enhancing shareholder value.

Ali - Operator - (00:00:29)

SAM Good afternoon and welcome to HCI Group's third 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 December 6, 2025 starting later today. The call is also being broadcast live via webcast and available via webcast replay until November 6, 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 Nat Ottoff, HCI Group. Nat, please proceed.

Nat Ottoff - (00:02:01)

Thank you and good afternoon. Welcome to HCI Group's third 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'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 risk or uncertainties develop into actual events, these developments could have material adverse effects on the Company's business, financial conditions and results of operations. HCI Group disclaims all the obligations to update any forward looking statements. Now with that, I'd like to turn the call over to Karen Coleman, Chief Operating Officer.

Karen Coleman - Chief Operating Officer - (00:03:14)

Thank you. Nat Good afternoon everyone and thank you for joining us today. We're pleased to report another quarter of strong financial results reflecting our continued focus on disciplined execution, profitable growth and delivering value for our shareholders. Highlights for the third quarter include reported earnings of $4.90 per share, net combined ratio of 64%, total shareholders equity of $821 million, with book value per share increasing more than 50% year to date to $63 per share and a 22% loss ratio as the weather in Florida remains favorable as we move through the remainder of the 2025 hurricane season. In addition to these financial achievements, we had several other important developments in the quarter. A three building campus in Tampa owned by Greenleaf Capital, our real estate division had its tenant move in and the entire campus is now fully leased. This allows flexibility to explore financing options for the property to optimize returns for shareholders during the quarter. Greenleaf also added to its portfolio by acquiring a new complex in Pinellas County, Florida. We continue to identify opportunities that can deliver sustainable long term value for the shareholders. Lastly, in September, Axio added a fifth carrier to its platform, its first non HCI controlled carrier. In addition to these notable accomplishments, we've continued to make strong progress on several other initiatives. In the first few months of the fourth quarter in October, we successfully assumed over 47,000 policies from citizens representing about $175 million of in force premium with a strong outcome in October. We do not plan to participate in the December assumption from Citizens. We recently entered into a new credit facility with Fifth Third bank which will significantly increase the amount of credit available to hci. Mark will go into more details on that. And finally, earlier this week, Axio successfully completed its initial public offering. We are excited about Exio's future prospects and we look forward to HCI remaining a significant shareholder for Exio for the foreseeable future. Mark and Parrish will provide additional details in their remarks. Looking ahead, we remain committed to delivering strong earnings, compounding book value per share and generating attractive returns for our shareholders. Now I'll turn it over to Mark to provide more details on our financials.

Mark - (00:05:40)

Thanks Karen. Pretax income for the third quarter was just over $90 million and as Karen mentioned, diluted earnings per share were $4.90 year to date. Pretax income is $285 million compared to 167 million for the first nine months of last year, an increase of more than 70%. Let's talk about the loss ratio for a minute. When comparing to the third quarter of last year, you have to remember that Hurricane Helene happened last quarter. If we adjusted for that, the loss ratio in the third quarter last year would have been about 25%. In the third quarter this year the loss ratio was down to 22% reflecting lower quarter over quarter claim frequency. The combined ratio this quarter was 64% reflecting the lower loss ratio and lower operating expenses. As a percentage of premiums. The combined ratio this quarter is a little lower than the 70% we've discussed a few times as the loss ratio this quarter was a little lower than expected. Now let's look at the balance sheet for a minute which continues to improve. Cash and investments are up by around $334 million so far this year. Long term debt is now only $32 million. Shareholder equity of well over $800 million has almost doubled since the start of the year. Debt to Cap has dropped to 8% and book value per share is up more than 50% so far this year to more than $63. Our strong balance sheet should continue to provide comfort to our policyholders and our shareholders should take comfort in our efficient use of capital as our after tax return on equity continues to be over 30%. Our strong balance sheet has also allowed us to negotiate better terms with our credit partner, Fifth Third Bank. As Karen mentioned, we recently renegotiated our credit facility and in doing so, doubled the size of the facility from 75 million to $150 million and released all of the real estate collateral that had secured it. In summary, this was another strong quarter and a very strong year for the company. Our operating ratios are all improving, the balance sheet continues to get stronger, we're generating superior returns, and we're poised for additional profitable growth with the recent citizens assumptions. And with that, I'll hand it over to Paresh.

Paresh - (00:08:10)

Thanks, Mark. Karen and Mark talked about the last quarter, but as we all know, the big event was the one that occurred earlier this year. Earlier this week. For the last two years, we have been choreographing a complicated sequence of steps to begin to unlock the true value of Axio, our organically grown, internally developed insurance platform. And HCI investors have exhibited both patience and support while we went about this. And with Xiao's IPO earlier this week, we have completed the last step in this sequence. And while we are already focused on what we're doing next, it's important to step back for a moment to reflect and more importantly, to quantify the meaningful financial benefit of the Axio IPO HCI shareholders. Hey, Mark, can you please provide the details? Sure.

Mark - (00:09:09)

So in that IPO that Parrish just mentioned, Axio issued 8 million new shares at a price of $21 per share, and the net proceeds were about $155 million. In addition to those 8 million shares, there's a potential over allotment of another 1.2 million shares, which I'm not including in any of the numbers that I mention here in the offering. HCI did not sell any of its shares in Axio. We owned 75 million shares before the IPO and we own 75 million after it. Because of our ownership position, we will continue to consolidate Axio into the financial statements of HCI as we've always done. But there will be a couple of impacts. First, when calculating earnings per share, net income attributable to non controlling interest will increase slightly and therefore diluted earnings per share will decline slightly. If the IPO had happened at the start of Q3 as an example, the impact to diluted earnings per share will impact would have been less than 15 cents. Second, when we book the IPO in Q4, there will be a significant increase in the consolidated book value and book value per share of HCI resulting from the net proceeds of the IPO. Book value will go up by about $125 million and book value per share will go up by about $10. By the end of this year, we expect HCI's book value to be over a billion dollars and book value per share to be close to $80. This is a tremendous achievement driven by careful capital management and profitable growth. However, that book value will not include any of the unrealized gains on our ownership of Axio Shares. We own 75 million shares of Axio and you can see at any time what they're trading for, but we will have them on the books for less than $3 a share because they're recorded effectively at cost. If you get out a calculator and do the math, you'll see that difference is more than the entire book value of hci. This is an exciting transaction for the shareholders of both companies and we look forward to the continued innovation, growth and success of Axio. And with that, I'll hand it back to Karen.

Karen - (00:11:33)

Thanks, Mark. To wrap things up, we're very pleased with how our businesses continue to perform. HCI's insurance and reinsurance operations continue to grow and deliver solid results. Our real estate assets have significant embedded value while also delivering meaningful returns, and our investment portfolio continues to be an important source of strong and stable income. Lastly, we were excited to see Exio's successful IPO earlier this week as the transaction partially unlocked the intrinsic value of that company. As Mark pointed out, though, we did not sell a single share in the IPO because we believe that this is just the beginning of a successful journey for that company. In short, we're very pleased with both HCI's results as well as Exio's successful IPO. With that, I'll turn the call over for questions. Operator.

Operator - (00:12:24)

Thank you. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. And for participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from Michael Phillips with Oppenheimer. Your line is live. Hi. Thanks for taking the question. This is Amir in for Mike. I just had a question around Citizens. Can you guys please give us an Update on the 75,000 policies you guys applied to take out for Citizens for each three of the subsidiaries? Or in other words, like, how many of the 25,000 are you guys expecting to write? And just subsequently, for Homeowners Choice, what is an expected average policy size of those takeouts? Thank you.

Amir - (00:13:36)

I think we had a total of 47,000 policies that are in that October takeout.

UNKNOWN - (00:13:43)

We applied for 75. We got 45. Right. We applied for 75, but we ended up with the 47,000 mentioned in the script. I cannot find how many. And I think Homeowners Choice got about. It's 19,000, 19,200. Sorry. Homeowner choice got about 19,500, got about just over 19,000. And tiptop got a little bit over 8,000.

Amir - (00:14:15)

That's great. And just one last question on my side. Would you guys be able to share any expected use of cash on balance sheet over the coming years for Homeowners Choice or any more possible aggressive state of state expansion or potential ma. Thank you.

Mark - (00:14:34)

It's Mark. I mean, I don't think we can get too specific, but, I mean, I talked in my prepared remarks about the strong capital position. There's also a really strong surplus position in the underwriters. And without getting too specific, we grew by 15% or so this year. We've got lots of opportunities for growth ahead of us for the year coming up, and we will grow. And we've got the capital to do that. So, you know, 2026 is going to be a good year.

Operator - (00:15:09)

Thank you. Thank you. As a reminder, ladies and gentlemen, if you do have questions today, please press star one on your telephone keypad. Our next question is coming from Mark Hughes of Truist. Your line is.

Mark Hughes - (00:15:26)

Yeah, thank you. Good afternoon, Mark. How much cash at the holding company?

Mark - (00:15:35)

So total holding company liquidity at the end of September, I think was about 285 million total.

Mark Hughes - (00:15:48)

Okay. And then the why not do the December takeouts? You had good success for October. That. Why not go for more next month?

Mark - (00:16:04)

Mark, great question. The reality of it is, I think Citizens is now shrinking. For the record, I think Citizens is no longer the largest insurance carrier in the state anymore. It's dropped down the rankings quite a bit. And by the time you get around to December, I'm not saying there won't be enough policies there, but I think we have a lot more. We're already thinking about other things beyond Citizens and it just seemed like a little bit of a distraction to still be saying you keep going back to a well that is. That is dried up that much. If you wanted citizens policies really, you would have done it two years ago, which we did.

UNKNOWN - (00:16:44)

Yeah.

Mark Hughes - (00:16:44)

Yeah. The expense ratio was quite good in the quarter. Both G&A. Other operating expenses were down. Anything unusual in this quarter or is that just leverage?

Mark - (00:17:02)

No, I mean, yeah, so thanks for the question, Mark. It's Mark. I mean, no, there's nothing unusual in Q3. You know, it's just a continuation of what we've been talking about before about operational leverage and the importance of technology. We've been able to grow without really adding any people and that results in flattish operating expenses while revenue keeps going up. So revenue was up 13%. Operating expenses don't go up that much. And it's just that operational leverage we've been talking about for a while there. Nothing, nothing unusual at all in Q3.

Mark Hughes - (00:17:42)

Yeah. When we think about modeling the Axio impact and the minority interest, essentially we're accounting for the 8 million shares out of Axio's earnings. Those will be pulled out as minority interest. And so on a go forward basis, the. We've got to think about the ratio of Exio versus HCI earnings. When we think about what we should use as the basis to calculate the minority earnings, any rules of thumb or anything you might suggest as we contemplate that.

Mark - (00:18:25)

Yeah, I mean it's pretty straight. It's Mark, again, it's pretty straightforward. If you just pull out, for example, and I gave an idea on the call about, you know, the 15 cents, a little bit less than that. That's what the impact would have been if the IPO would have happened on July 1st. So if it would have had full effect in Q3, it's not a very big effect. So if you think about even in the press release, we've got an earnings per share calculation there and there's that little part there where we back out the minority interests of a number of companies, including Exio, that number would be a little. That number would be. It wouldn't be twice as big as it is. It would be a little bit less than that. And then you just do the calculation as you would normally do it. So that negative 2 million that you see there in the press release. Just if you want a rule of thumb, say double that. And that's how you do eps. It's pretty straightforward.

UNKNOWN - (00:19:26)

Yeah. Do you have.

Mark Hughes - (00:19:28)

I assume it's broken out in the Q, the net income for Exio versus the homeowner's choice.

Mark - (00:19:37)

It'll be in the segmented report in the queue that's published tomorrow.

UNKNOWN - (00:19:42)

Yep.

Mark Hughes - (00:19:43)

Okay, very good. And then anything to say on the Exio pipeline? Just kind of an update on business. There's understand if there's nothing you can or are in position to say at this time, but anything about the pipeline of business growth prospects for Axio that you're able to share?

Paresh - (00:20:09)

Yeah, Mark is parish. I think going forward, we're going to be trying to give this call about HCI and just basically how HCI feels about its ownership of Axiom as opposed to the pipelines and discussing Axio things. Because now that Axio is public, Axio will shortly hold its own quarterly earnings call, et cetera, and that's where all those things will come in. But having said all of those things, very simple thing. There continues to be outside interest in people joining the axial platform. And I believe they've announced that they already got a second customer already, but it was subsequent to the end of Q3 and the pipeline will go. We have to start somewhere and the pipeline grows from there and it seems to be doing it very healthily.

Mark Hughes - (00:21:01)

Very good. Appreciate that and understand your preference going forward.

Paresh - (00:21:06)

Thanks, Mark.

Mark Hughes - (00:21:08)

The. I'll just take one more. Mark. The loss ratio, 25% in this quarter last year, exhalene to 22. How much of that might have been weather mix? Could you maybe give a little bit more on the improvement there?

Mark - (00:21:27)

No, I mean the weather was pretty, pretty consistent. The weather was fairly good Third quarter last year, third quarter this year, it was really just frequency claims. Frequency was down. It was, I think, 3.7% annualized. 3.7% in the third quarter last year, 3.4% in the third quarter this year. And that's what drove the loss ratio lower. Really. Nothing else going on, just lower claim frequency. And weather was not. I mean, there's always weather, but weather was not a factor one way or the other from one quarter to the next.

Mark Hughes - (00:22:08)

Yeah, understood. Excellent. Thank you very much.

UNKNOWN - (00:22:12)

Thank you.

Operator - (00:22:15)

Thank you once again. As a reminder, ladies and gentlemen, for any questions, please press star1 on your telephone keypad. Our next question is coming from Carol Chemiel with citizens. Your line is live. Hi. Thank you. I'm calling in for Matt Carletti and A lot of the questions have already been answered. But just one question to clarify.

Carol Chemiel - (00:22:37)

The October takeout mentioned, it's 175. Million in force premium. Is that roughly the same as the annualized premium regarding those takeouts? And then how much of that is. Unearned premium that is then recognized in Q4?

Mark - (00:22:58)

So it's Mark. So, yeah. So the number that Karen gave, that's basically the annualized premium or the premium in force or whatever you want to call that. And in terms of how much of that is unearned? So that will be the amount of cash that we get and the amount that will be written in Q4, it's about 150%. Yeah, it's about 60% of that number now. And then, of course, in terms of how that will get earned, that'll just get earned evenly over the next. The 175 million is what, when you're modeling earned premium, it's the 175 million that matters, not how much of it is earned and unearned in Q4. It's the 175 that you need to model.

UNKNOWN - (00:23:49)

Okay.

Carol Chemiel - (00:23:50)

And you said 60%?

Mark - (00:23:53)

Yeah, it's about that. That's pretty normal.

Carol Chemiel - (00:23:56)

Got it. Yeah.

Mark - (00:23:58)

60% of the 175. That's your unearned.

UNKNOWN - (00:24:01)

Perfect. Thank you very much. Thank you. At this time. This does conclude our question and answer session. I would now like to turn the call back over to Karen Coleman for a few closing remarks.

Karen Coleman - Chief Operating Officer - (00:24:19)

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

Operator - (00:24:34)

Thank you. At this time. This will conclude today's call. You may disconnect your lines at this time. And we thank you for your participation.