HCI Group, Inc. (HCI) Q4 2025 Earnings Report, Transcript and Summary

Good afternoon, and welcome to HCI Group's Fourth Quarter 2025 Earnings Call. My name is Tom, 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 March 25, 2026, starting later today. The call is also being broadcast live via webcast and available via webcast replay until February 25, 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 Group. Nat, please proceed.

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

Thanks, Nat. Good afternoon, everyone, and thank you for taking the time to join our call. As we disclosed in the earnings release, pretax income was $144 million in the fourth quarter and $429 million for the full year. Diluted earnings per share were $7.25 for the quarter and $22.72 for the year. Gross premiums earned in the fourth quarter were up 12% from the same quarter last year and were up 14% for the full year. The gross loss ratio in the fourth quarter was 15.6%. While this includes a modest amount of favorable development from prior periods, with that added back, the normalized loss ratio was 17.5% for the fourth quarter and only 20% for the full year. For the past 3 years now, claims and litigation frequency have continued to decline, resulting in a loss ratio that has been lower each successive year, illustrating the positive impacts of the legislative reform as well as our disciplined underwriting. The combined ratio was less than 45% in the fourth quarter. There is some noise created by the Citizens assumptions that we did in the fourth quarter. We booked some favorable loss development, as I mentioned, and a few other things. But if we adjust for all of this, the normalized combined ratio was less than 60% for the fourth quarter. Let's turn to the balance sheet for a minute. Growth in earnings combined with prudent capital management have resulted in a fantastic balance sheet. Shareholder equity at the end of the year was over $1 billion and has more than tripled in just 2 years. Book value per share is now over $80. This does not include any unrealized gains on real estate or on our investment in Exzeo. If these were to be included, pro forma book value would be about $140 per share. Cash flow continues to be strong. Over the past 2 years, we've generated more than $0.75 billion in cash from operations, and consolidated cash at the end of the year was over $1.2 billion. In terms of holding company liquidity, we have $175 million of liquidity at the HCI level. This does not include the 75 million shares we own of Exzeo, which now trade publicly. In addition to the strong liquidity position at the holding company level, the consolidated surplus in the underwriters has never been stronger. We now have well over $0.5 billion of surplus in the underwriters. The gross leverage ratio is only 2.5, leaving plenty of room for additional growth without the need for new capital. Our strong balance sheet should continue to provide comfort to our policyholders, and our shareholders should take comfort in our efficient use of capital. Our after-tax return on equity over the past 3 years, a period of time that included 3 hurricanes, is over 35%. In summary, this has been another fantastic quarter and year for the company. Revenue is growing, the loss ratio and expense ratios are declining, we are generating record cash flows, have minimal debt, and we are generating superior returns on capital. With that, I'll hand it over to Karin.

Thank you, Mark. In addition to the impressive financial results that we delivered in the fourth quarter, it is important to remember that in the quarter, HCI also completed the IPO of Exzeo. We currently own 82% of Exzeo's outstanding shares, representing an almost $1.2 billion stake in that company. The Exzeo platform is a tremendous asset for us, placing HCI well in front of the curve as automation and AI integration redefine the insurance industry. Also, in the fourth quarter, we successfully assumed 47,000 policies from Citizens, representing more than $175 million of in-force premiums. For the full year, we assumed 60,000 policies from Citizens. The October assumption gave us the strategic opportunity to prefund growth for 2026 as we now start the year already ahead of 2025 on our in-force premiums. On the reinsurance front, we prudently chose not to lock in multiyear rates in recent treaty years or through cat bonds in anticipation of reinsurance market softening. Early indications are this was the right approach. For our June 1 renewal, we continue to work with our reinsurance partners to lock in more favorable terms. Layering in new business before the year begins and using expense levers to drop more to the bottom line gives us greater flexibility and readies us for future growth. First, as a reminder, HCI has historically been successful in taking advantage of market instability and dislocation. Following record results in 2025, increased competition and a much smaller number of policies in Citizens may put pressure on other industry participants who are more constrained in growing their businesses. In this environment, we see many opportunities for strategic acquisitions but must remain patient as pricing rationalizes. Second, as we also continue to look at new markets to enter where our experience, expertise and cutting-edge technology differentiate us from the competition. For example, we continue to monitor California's efforts to reform the insurance industry since we see similarities in that market to the one we have successfully operated in for many years. As a reminder, HCI Group has navigated through years of market uncertainty, the highest state litigation propensity in the nation, regulatory challenges related to Citizens' depopulations and competition from below-market rates, not to mention the high-risk weather environment in Florida. Lastly, as we wait for things to materialize, we are taking the opportunity to invest in ourselves. We are finalizing and expect to announce a new $80 million share repurchase program in the coming days. We view this as an internal M&A because where else can we buy a company that trades at our discount with a return on equity consistently above 30%. With that, let me turn it over to Paresh for some final thoughts.

Thanks, Karin. You've heard the numbers, and as you can see, 2025 was another phenomenal year for HCI. These numbers are not there by accident. They are the result of careful planning and execution. And more importantly, they are sustainable over time, and we believe we can build off of them. As Karin mentioned, the assumptions we did late in the year last year set us up to continue to grow in 2026. And there are also a number of other opportunities for us to accelerate that growth. But the future looks bright. We can grow organically, we can grow by acquiring books, we can grow into new markets. We have done this consistently over a long period of time. But in the meantime, we are investing in ourselves through the share buyback program that Karin discussed. And why are we doing this? Because we feel this is a great opportunity to invest in the company with a superior ROE at a significant discount. And on a personal note, I am also doing that personally by exercising -- as recorded yesterday, I exercised a number of stock options because I want to increase my ownership in this great company. In closing, this was another impressive year for HCI. And I have said before that the best is yet to come. And I'm saying it again, the best is yet to come for HCI. And with that, we will open for questions.

[Operator Instructions] Our first question will come from Mark Hughes from Truist Securities.

What -- how do you see pricing shaking out over the next year? Obviously, these are some pretty strong results. What is that going to mean for your rate filings?

Yes, Mark, it's Paresh. Yes, look, it's a very competitive environment. The results speak for themselves. I think we'd already indicated in previous quarters that rate increases are a thing of the past, right? Now it's just about maintaining rates and/or some easing of rates. But what we would tell you is that all of that has been utterly predictable for almost a year at this point. So all that will play itself out as already anticipated by us. What we're looking at is how to go up in much bigger increments than this, right? So all of that stuff is actually noise. And I say that in the context of, I think, if you look back over the last 3 years, it's been years since we actually changed rates upwards, right? We've been doing everything we've been doing at a very steady rate, and we hope to do that in 2026 and beyond. Putting it simply, I think we sell a great product at a fair price.

Very good. And when you say some easing, how do you think that shakes out across the book? I don't know if you could throw any numbers or ranges at that.

I think we had previously disclosed that Homeowners Choice starting in January had already like reduced rates by 3.5%, right? So -- go ahead, Mark.

But Mark, that's only on the Homeowners Choice book and I mean I don't think that's...

In Florida.

In Florida. And that's not -- I don't think that's really going to have a big impact on average revenue per policy or any metrics like that...

And then any risk that you have to refund any of this to policyholders, any excess profits, anything like that?

No, because I think -- look, this is an interesting world we find ourselves in. 3 years ago, the concern was, will anybody even survive in Florida? And we were basically saying, "Don't worry, we got this." 3 years later, everybody seems to think that the sun will shine forevermore and there will never be any more hurricanes, right? Both extremes, I think, are a little bit overstated. And all this conversation about growth rates, all these things, can change on a dime with one hurricane. This has happened before and it probably will happen again. We know this. This is why we are kind of -- have always been measured in our approach, and we'll continue to do so that way.

Mark, when we think about the net premiums earned, the $226 million this quarter, is that a good starting point when we think about 2026? Or is there anything unusual or onetime in that number?

Yes. I mean a couple of ways to think about that, Mark. First of all, Karin mentioned the assumptions that we did in Q4, those were done in the middle of the quarter, I think, October 21. So you don't have a full quarter's worth of premium in Q4. I think of the $45 million roughly per quarter, I think about $35 million made its way into Q4. So that's one way to think of it. So gross premiums earned in Q1 should be higher than Q4 because you've got the full 90 days on that -- on those assumptions. The other way to think about it is really your starting point is gross premiums in force, which they're up about 11%, 12% over the end of last year. So if you're going back and comparing to the year before, Q1 is going to be higher than Q1 last year and so on. So those are sort of the 2 ways to think about that, if that helps.

It does. How about -- any observations about weather in the quarter? I think talking high teens gross loss ratio. Is that also if the top line is stable from a pricing perspective? Yes, the wind could blow, but is there something about that loss ratio that might go higher or lower in subsequent quarters?

I don't think there's -- I mean it was a -- loss ratio -- the normalized loss ratio in Q4, I think I said was 17.5%. It was a fairly quiet quarter in terms of weather. But I wouldn't think of this as a weather story. I think I mentioned in my comments that the loss ratio has continued to come down over the last 3 years. Some quarters you have weather, some quarters you don't have weather. If you look at the 10 accident quarters since legislative reform sort of fully kicked in, and you look at those in total, our average loss ratio during that period ex-cat is about 20%. We think of ourselves as sort of range-bound around between 20% and 25%, but we've been at the lower end of that for a while. And actually, 5 of the last 10 accident quarters have been lower than 20%. And if you look at why is the loss ratio lower in Q4 this year than Q4 last year, it's not really weather. Whether you look at ex-weather or with weather, you're going to come up with the same thing. But you always have quarters where you have a little bit more weather, a little bit less weather, but it's -- Q4 was not an abnormal sort of quarter in that respect. A little bit less weather, but this is not a weather story.

Okay. If I could sneak one more in. Paresh, you mentioned the potential to acquire books, have a little more of a step function with your growth, perhaps might have to wait for pricing to come in line. I mean with the -- do you -- is it just prohibitive to pay at this point given the profitability in the state? Or are there deals potentially to be done even now?

Mark, before I get to that, I was just going to add something to the things that Mark just said about the loss ratio and everything else. I think what Mark is now alluding to is that the comment about -- that I made earlier about our numbers that we're now posting up seem very sustainable, right, for an extended period of time. Things have been dialed in so well in the book that we have that it sort of starts becoming very predictable, very consistent, et cetera, because we've kept a very stable portfolio. So that's -- it's not about just the numbers we put up. It's giving us confidence about the coming quarters, right, which is also very important because we've lived in lots of times where things every quarter was uncertain. So we have that going for us. In terms of growth and acquisitions or whatever, I think there are opportunities out there. Obviously, there's a negotiated transaction between the buyer and the seller. And fundamentally, I think the biggest thing that's there in the bid-ask spread right now is that the sellers think that 2025 was an average year and the buyers probably want to average 2025 over the last 4 years and get to a different number. So that'll get sorted out in the next few months as -- is 2025 repeatable? And that'll set what the prices would be in terms of any purchases, et cetera, that might occur. Does that help?

It does.

[Operator Instructions] And your next question today is coming from Matt Carletti from Citizens.

Paresh, I actually want to follow-up on actually both of Mark's questions. If I could start with the kind of the pricing question and kind of understanding the answer you gave and some of the comments in the opening about reinsurance pricing and kind of what we're hearing in the market in terms of potential magnitude of savings. Would it be safe to kind of view it as margins are unlikely to have downward pressure on them when you put those together and that's not out of the question that they could actually improve?

Yes. I think I would -- we would conclude that, yes. Clearly, the reinsurance rates are softening as well. And as you go through this, how much margin pressure there will be is, I don't think is as great as people fear.

Yes, that makes sense. And then if I can just follow-up with the M&A question. When we think about potential M&A that you might look at, should we be thinking kind of Florida homeowners? Or should we be thinking more broadly than that, that it could be maybe, a, outside of Florida; or b, something more than homeowners?

Yes. Actually, Matt, I'm going to throw you a curveball on that question, right? In Mark's prepared comments, he talked about when you factor in our Exzeo holdings and real estate holdings, stuff that sort of gets occasionally overlooked, book value is $140. The insurance operations is at $80, right? We've created $60 of book value by doing noninsurance things, so to speak, yes? So when you're looking at M&A, and just to provide clarity to everybody as to how we think about it, and I really need to tell everybody, forward-looking statements, this is my aspirations. What we've done over the years is we always look at wherever we are and say, how do we get 3 times bigger or 3 times the size, right? And ultimately, what we're talking about is how do we triple the share price from here because, clearly, earnings call, we're trying to do right by our shareholders, the people who trust us with their investments. So we are sitting here looking at it saying, how do we triple our share price from here? Because that is what management is getting paid to do. And that doesn't translate into we raise rates 3% or we wrote one new policy or whatever. You've got to be now thinking about bigger moves up. And that's what we're doing, and that's where we see the opportunity because we have a solid base from which to start off. Mark said $1 billion in shareholder equity, no debt, right? Karin is talking about how well the operations are running. So trying to improve that incrementally almost seems like a -- kind of like hitting a single when you should be thinking of home runs. And that's what we're trying to do in terms of what we're trying to do in terms of M&A or anything else, any kind of growth.

Your next question is coming from Michael Phillips from Oppenheimer.

First question would be -- I apologize if I missed this. I don't think I did, but could you give the gross written premium numbers this quarter and last year 4Q without Citizens?

Without Citizens. Yes, this is Mark, just give me a second. You're looking for gross premiums earned without Citizens?

I would prefer written if you have that number.

I don't think I've got it in front of me. We've got...

Okay. We can follow up...

Actually, hang on a second. We've got -- gross written premiums in Q4 were $333 million. And from -- yes, I don't have the Citizens number here. I apologize.

We'll get back to you on it, yes?

Yes. No worries, I'll follow-up. And then, Paresh, you think -- I just want to make sure I heard you correctly. An earlier question, you were talking about buyers and sellers and the kind of disconnect. And I think you said sellers think 2025 was an average year. If you said that that's confusing to me, given that there was no cats. Is that what you think you're hearing from sellers? Or did I get that wrong?

No. Look, I think you've listened to enough earnings calls over the last -- just this week from enough insurance companies that everybody had a very good 2025. For whatever reason, everybody's had a great 2025. And I say whatever reason, we know the reasons, but you get the idea. The question is, is 2025 repeatable for the next 5 years? Or is it a peak earnings year and then things will go down a little bit? Now unless you have a plan that how you grow from here to a bigger number, you get into some of these conversations. Now having said all of that, I'm not -- it's just life. This is how things work. This is how it worked in 2014 as well. Everybody thought 2014, which in that decade turned out to be a peak year, was a repeatable year every year thereafter, right? And the idea about that is -- and you just hit on the key item, right? Is 2025, is it repeatable, assuming that there will be no more hurricanes? We find that hard to model in into our numbers, right? So consequently, that's the disconnect between buyers and sellers.

Okay. And maybe just a quick numbers question for Mark on the expense ratio numbers. And I'm looking at net expense ratios were down pretty hard in the quarter. I guess I want to get some clarification on that. And I know there's some choppiness by quarter, certainly the G&A expense, but any commentary on how to think about just the overall net expense ratio from here?

Yes. You're comparing Q3 to Q4, right?

Well, not just Q3, but 1Q, 2Q, 3Q.

Yes. I mean the expense ratio was lower in Q4 than it was in some of the previous quarters. And that's just sort of related to the way -- to the accounting related to bonuses in Q4. So we paid a considerable portion of the bonuses in restricted shares, which gets expensed over a 3- or 4-year period rather than in the current year. So the expense ratio was lower in Q4. And if you look at what the expense ratio was, whether you're doing it gross or net in the second and third quarter, that's probably a better estimate of what you would see going forward.

Yes, I was looking at net, Mark, but that helps.

[Operator Instructions] And our next question is a follow-up from Mark Hughes from Truist Securities.

What do you think the timing will be on the $80 million buyback?

I think it's probably -- obviously subject to various little regulatory requirements or whatever, but it could be as early as next week or the week after.

Okay. For approval? Or would you assume you could execute on that pretty quickly?

Yes. Mark, okay, so let's go to the details of some of this stuff. Because of all of these things and us also trying to be shareholder-friendly, we wanted to make sure everybody knew about it before -- as opposed to just a press release dropping in the middle of the week or whatever. So we want to make sure we're discussing it on the earnings call. And in reality, we have to instigate it during an open window, which will probably -- and the open window will probably start for us probably mid-next week. So it's roughly in that kind of time frame that we actually have to instigate it. So that's what holds all these things up because we have to make sure we do it at the right time with making sure all of our shareholders are amply informed, yes, before it starts. So that's why it's next week.

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 the next phase of our growth. Thank you, and we look forward to keeping you informed in the future.

At this time, this concludes our call. You may now disconnect. Thank you once again for your participation.