HCI Group, Inc.

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

Thank you and good afternoon. Welcome to HCI Group's second quarter 2026 earnings call. To access today's webcast, please visit the investor information section of our corporate website at www.hcigroup.com. Before we begin, I'd like to take the opportunity to remind our listeners that today's presentation and responses to questions may contain forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. Words such as anticipate, estimate, Expect, Intend, Plan, and Project, and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the company's filings with the Securities and Exchange Commission. Should any risks or uncertainties develop in actual events, these developments could have materially adverse effects on the company's business, financial condition, and results of operations. HCI Group disclaims all obligations to update any forward-looking statements. Now, with that, I'll turn the call over to Mark Harmsworth, Chief Financial Officer.

Thanks, Nat. Good afternoon, and thank you for joining us on our second quarter earnings call. This was another very strong quarter for the company. Pre-tax income of more than $110 million was 18% higher than the same quarter last year, and year-to-date, pre-tax income of $226 million was 16% higher than the first six months of last year. When comparing with last year, remember that was a record year, and so far, this is an even better one. Diluted earnings per share were $5.60, up from $5.18 in the second quarter last year, and year-to-date, diluted earnings per share were $11.05. Gross premiums earned for the quarter grew by 6% from the second quarter last year, driven by policy growth, while average premium per policy remained flat. Total revenue grew by 11%, driven by the premium growth, as well as an increase in services revenue generated from new clients in Exio. The loss ratio this quarter was 22%, just a touch higher than the first quarter, reflecting the normal seasonal trend. and is well within the 20% to 25% range we've been discussing for some time now. In terms of the combined ratio, we've indicated this should be in the 60% to 65% range, absent any CAT activity, and the combined ratio this quarter of 61% was right in the range. Let's turn to the balance sheet for a minute, which continues to strengthen. We have more than $2 billion in cash and investments. Stockholder equity is over $1 billion. The debt-to-cap ratio was less than 6%, and book value per share is now $86.60. As we discussed in our last call, while the growth in book value per share has been impressive, remember this does not include any unrealized gains on our ownership of Exio or our real estate portfolio. If the fair value of Exio and our real estate portfolio were added, pro forma book value per share would be over $150.00. Over the last 36 months, our after-tax return on equity has been 35% in a period that includes two major hurricanes, Milton and Helene. This is a very compelling return for an insurance company, and yet we trade at less than 1.2 times adjusted book. This is the reason we've been buying back the stock. As you know, we announced a buyback plan in March under which we were authorized to purchase up to $80 million of stock and we are pleased to say that we have completed that program. We have fully utilized that authorization, buying back a total of 504,000 shares, representing about 4% of the outstanding shares of the company. In terms of holding company liquidity, we have just over $160 million of liquidity at the HCI level. This does not include the 75 million shares we own of Exio, which now trade publicly. Wrapping up in the quarter, this has been another fantastic one for the company. 2025 was a record year for HCI, and the first two quarters of this year have been even better. Revenue is growing, margins are expanding, we are generating record cash flows, have minimal debt, we continue to generate superior returns on capital, and we've bought back 4% of the company. And with that, I'll hand it over to Karin.

Thank you, Mark. If you heard those results without any context, you might think current conditions are ideal. In reality, market conditions are far more challenging, so the results Mark just discussed are even more impressive. We have always been good at operating in all types of environments, so it may be helpful to discuss some of the ways we have prepared to navigate through this market. The first rule of managing through the soft part of the cycle is to preserve your own business, meaning keep attrition low by prioritizing your current enforced books. How are we doing? Our retention rates are consistently above 90%. This success is due to focusing on the policyholder from day one, regardless of market conditions, and not simply when the competitive environment gets more challenging. Two ways to do this are by rate and policy coverage. As for rates, HCI underwrites with a focus on what is an appropriate rate, both now and in the future. We don't dramatically increase rates when the market is hard, which then reduces the need to chase rates down as the market softens. Policyholders want fairness and consistency, and we provide that. As far as policy coverage is concerned, we are consistent in how comprehensive we are. Some carriers limit coverages for policyholders when profitability is under pressure. We don't do that. As an example, we continue offering the broadest possible coverage on water damage, even when some in our industry choose to cap each event at $10,000. While this artificially improves a carrier's profitability in the near term, it can also negatively impact their ability to retain customers over the long term. Bottom line, HCI knows that the first rule of growth is making sure your current customers want to stay with you. The second rule is to be opportunistic. In the second quarter, we pivoted core, our condo owner's reciprocal exchange, from writing commercial business to focusing on the residential market. As a result, since April, we have seen significant month-over-month growth to the point we now believe it will be a good source of new business in the second half of 2026. I would add that just last week we had one of our best weeks for new voluntary business, and this was done in a softening market. Again, we believe that policy coverage is the differentiating factor for the rapid scaling we have seen so far. We are also focused on the market we know best, Florida, understanding that expanding into other states that have different market characteristics can be challenging, especially at this point in the cycle. That said, we remain interested in California, given the obvious similarities it has with Florida, but timing and the longer-term rate environment will be crucial in our decision-making. Also in the quarter, we completed our catastrophe insurance programs for the 2026-2027 treaty year. We're very pleased with these new reinsurance programs, having purchased more coverage and better coverage while reducing our actual seeded premiums by over 10%. This translates into more than $10 million of savings per quarter. In short, we utilized one of the most important expense levers we have to improve both the top and bottom line going forward. Continuing on the reinsurance front, you may remember in the first quarter we announced the creation of our second reinsurer, Fortex Re. We quickly used Fortex in the new programs we announced on June 1st, as well as for a new project of ours, digital tokenized reinsurance security. In mid-June, we announced that three separate token offerings would be available that are structured to mirror parts of Fortex's excess of loss programs, and by June 30th, those offerings were completed. For HCI, one of the primary goals of this pilot project was to identify new ways to make catastrophe reinsurance as an asset class available to a wider market of investors, which could result in a more efficient reinsurance marketplace for placing and pricing specific types of risk. I will close by simply saying that HCI is in its strongest financial position in our 19-year history, and we got here by having the vision to look to the future while we consistently are operating in the present. Over the last six quarters, we have averaged $5.62 per quarter in EPS and almost $110 million in pre-tax income, while rates have softened and competition has increased. With that, let me turn it over to Parish for some final thoughts.

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

A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. 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 Mark Hughes with Truist. Your line is live.

Yeah, thank you. Good afternoon.

Hey, Mark.

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

About 96 million. 96 million? Okay.

And what does it mean in terms of rates? Presumably, you have to update your filed rates in Florida for the new reinsurance agreement. What do you think that'll mean in terms of a blended impact on pricing?

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

Any early estimates?

No, I actually work in mysterious ways.

Yep, very good. And I'm sorry if you already mentioned this, the tail row, gross premiums written, A pretty big number this quarter. What was going on there?

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

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

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

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

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

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

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

Yep, very good. Appreciate it.

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

Thanks. Good afternoon. Thanks for letting me in. You said that the Florida primary market is pretty rational recently and average pricing is kind of remaining pretty firm. And maybe that's one of your focused areas of growth in the near term. I guess I kind of want to hear if that's still the case.

Michael, I don't want to put words in Karin's mouth, but I don't think she said the industry rates are flat. She was just talking about HCI.

Yeah, pretty stable rates.

For the HCI group of carriers, right? But there are lots of rate filings that are

Yeah, you'll be reading headlines that some people are reducing rates, but as I mentioned, we haven't been one of those that have chased rates up over the last three or four years, so we don't see the need to significantly adjust it down. So the stability in our rates is what I think is what has been very successful. As I mentioned, it's rate and policy language. We try to be very consistent with those two areas.

Okay, thank you. Karin, you mentioned you made some comments about CORE. I guess I wanted to hear your views on the condo market on commercial. I think you mentioned CORE is going to be doing some residential condo. What does that mean for the commercial space and the condo market? Maybe you can update us there, please.

Right. So in CORE, when we entered, the market was focused on the commercial residential space. and we saw that that was softening very quickly and that's when we pivoted to now bring in an HO3 product into core and so we've been writing voluntary business there averaging about per month the last couple of months about six million dollars a month of new business in that HO3 product. So we've pivoted very successfully in that regard.

Okay, great. Thank you very much. Thank you. As a reminder, ladies and gentlemen, if you do have any questions, please indicate so by pressing star one on your telephone keypad. Our next question is coming from Ryan Tunis with Cantor. Your line is live.

Hey, thanks. I guess first question just for Parish, taking a step back, I know you take a longer term view. How do you evaluate Just like this quarter in general, good loss ratio, growth kind of chugging along, but it's kind of hard to interpret where the momentum's at. How do you think about how this quarter shows us what's going to happen over the next, say, year? Thank you.

Ryan, welcome. The way I would characterize it, is, and I think some of the comments Mark made, etc., this is like the sixth quarter in a row that we're over 100 million. The ROE is very strong. We are in a position where just keeping this sequence going quarter after quarter after quarter is having a huge impact in a positive way. So we are not pressured into we have to grow 20% a year or pick a number, but you get the idea. Just The status quo is pretty accumulative for us. So we are, as Karin said in her comments, job one, keep what you already got. And job two is maneuver to what you need to based on what's going on. And what we're doing in that is, and I can tell you it's pretty impressive because the commercial business in core were shrinking because that business has really got soft in terms of rates and whatever. And instead of chasing rates down, which would have been one way to go, to try and keep market share, Karin and her team pivoted to residential and started, in March, Core had never written an HO3 policy, and now it's producing six million a month, right? That is a very impressive pivot from a very soft market to picking up market share in something else. And the fact that that's done kind of gives us confidence in terms of extending the runway of what we're doing currently. Obviously, we also said sort of kind of nature of our nature, we don't like just maintaining the status quo. So we are exploring the two new things. One is the tokenized reinsurance, which we gave Karin gave a very good update on. And secondly, we still keep looking at California. But there's little things, nuances, when you get into the details. I think the rates in California change in October or something. I believe there's some changes coming through. So we're trying to make sure we time our entry correctly. So simply summarizing all of that, the status quo is good. We are taking active steps to extend the status quo for as long as possible. And then we have a couple of initiatives which are geared more towards a better long-term future. So, yeah, that's the idea.

Chuck it along and looking for opportunity. Thank you for that. and then just to follow up, it looks like you guys burned through your authorization on the share repo. Yes, we did. But yeah, I didn't see a new authorization. I'm just curious like what's going on with the repo and that's all for me. And thanks for welcoming me.

Hey Ryan, it's Mark. So yeah, so we had an $80 million authorization. I think about $75 million of that was used by the end of the quarter. and then the rest of it in the first week of July. So my comments on my prepared remarks were that we completed that program. It was completed, I think, on the 6th or 7th of July. In terms of where it goes from here, you know, we'll see. You know, Parish mentioned on our last call that, you know, we thought one of the best investments out there was our stock. I made some comments now about where we're at and where we're trading in terms of price to book and, you know, given the 35% return on equity and where we are. So, I mean, we still think our stock is a great investment. So do we like 5X? Yes. We don't have anything active right now, but we'll see the way the rest of the year plays out.

I do, too. I'd get an authorization active, though. Thank you.

We'll convey your advice to the board at the next meeting, yeah? Thank you.

If there will be no final questions, this will 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.

Thank you. On behalf of the entire management team, I would like to thank our shareholders, employees, and most importantly our policyholders for their continued support. Thank you.

Thank you. This will conclude today's call and you may disconnect at this time. We thank you for your participation.