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HCI Group, Inc. Message Board

  • jcc113222 jcc113222 May 15, 2012 10:09 AM Flag

    Not as good as it looks?

    I went back through their last couple of reports to check out the impact of the Homewise acquisition. They got a great deal because they took over the policies after hurricane season, so they got all of the unearned premium, but none of the reinsurance expense. But remember, that's a one time benefit that goes away on June 1.

    The savings from not having to buy reinsurance on those policies from November 1, 2011 to June 1, 2012 adds roughly $8.5M to net income in 2011 Q4, $11M in 2012 Q1, and $8.5M in 2012 Q2, for a total of about $28M. After June 1 it goes away and HCII looks a lot like it did before the acquisition, only bigger.

    Income available to stockholders in Q1 was $6.8M. Just to set a baseline, if nothing changes but the reinsurance, Q2 should come in at $5.4M, and Q3 at approximately $0.

    So the Homewise acquisition was a great deal, but they haven't made a lot progress in actually making money from renewing homeowners insurance policies. They are going to have to either do that or keep finding bigger acquisitions if they want to show consistent returns.

    There are very few, if, any attractive acquisition targets right now, but anything can happen during hurricane season. If UVE goes down then there will be plenty of business for everybody. There also still might be some profitable business in Citizens.

    The challenge in making additional acquisitions is that they really can't do it on a large scale without additional capital. The OIR required them to put in $10M for the Homewise acquisition, so presumably they would have to put in additional money for additional assumptions. And you can't count on funding it from earnings, as the OIR already counted the pre-hurricane season reinsurance savings toward their projected capitalization for the Homewise acquisition.

    So the likely prospects for HCII are basically slow growth, low profitability, with opportunistic surges that will likely become progressively smaller relative to the size of the company.

    Anybody disagree?

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    • Hi JCC, your analysis is spot on. I would just ignore the posters who refuse to listen and instead resort to cheap name-calling.

      Anyhow, I'd be curious what you think of the true, recurring earnings power of HCII's business post their Q2 results. In particular, if you back out the $2mm of tropical storm losses, then the Q2 loss expense is quite a lot lower than in Q1. They said on the call that they over-reserved in Q1 (to build up IBNR), so now given Q2 pro forma loss expense, the whole expense structure seems more efficient. Even adding back reinsurance expense, I can get to $1.40-$1.50 in recurring annual earnings. Which implies a high teens ROE, as well.

      On the other hand, there should be some storm-related losses every now and then, even if at a level below which reinsurance kicks in (as occurred for the tropical storm in Q2). I'm not that familiar w/FL homeowners insurance, but if every year HCII can expect to incur $2-4mm in such storm-related losses, then recurring annual earnings may be more like $1.00-$1.20.

      Also, as to the current stock price, it's now over 2x book, and as much as 13x my best EPS estimate (and 20x my worst EPS estimate). Even with a high teens ROE, there is periodic downside risk from hurricanes and I'd think that that should merit a lower P/E ratio.

      Since you seem to know the FL market pretty well, would be curious what you think of all this, and whether I'm missing anything else in the analysis. Happy to chat directly, as well.

    • I went through that calculation this morning..
      gross premiums (will be sort of the same as H1 2012): $105000
      Premiums ceded: 47,250
      Net premiums earned: 57,750
      Other misc income (similar): 4,000
      Total revenue: 61,750

      Losses and costs I assume similar to Q2, in the conference call they mentioned that there were larger costs in Q1 as a result of the acquisition of Homewise. Also losses in case of one tropical storm the size of Debby, 2 Mio, gives:

      Losses and loss adjustment expenses: 30,000
      Policy acquisition and other underwriting expenses: 12,000
      Other operating expenses: 9,000
      Total expenses: 51,000
      Income before taxes: 10,750
      Income taxes, 30%: 3,225
      Net income: 7,525
      Pref stock div: 244
      Income available to all stockholders: 7,281
      Per stock: 0,86

      And in case of a major event that would cost up to 9 Mio:

      Losses and loss adjustment expenses: 37,000
      Policy acquisition and other underwriting expenses: 12,000
      Other operating expenses: 9,000
      Total expenses: 58,000
      Income before taxes: 3,750
      Income taxes, 30%: 1,125
      Net income: 2,625
      Pref stock div: 244
      Income available to all stockholders: 2,381
      Per stock: 0,28

      The numbers will be something between this. I am not sure what happens when more than one major event hits Florida. Then it could be that the company even makes a loss since the 9 Mio risk counts per event.

    • Allright, I have listened to the conference call and have to agree with jcr now. The reinsurance costs will be around 45% against 33% in Q2 2012. That does not mean that the company doesn't earn money anymore. They will still be profitable at around 0,30 per share. That is in case no major hurricane will hit florida. If that is the case the profit will be more in the range of 0,10 - 0,20 per share. Q4 should not be affected by hurricanes. End of year expectation of 2,20 per share should be definitely possible. Considering the amount of cash, P/B and target growth of 5% market share, this company is still cheap.

      Large up gap unders strong accumulation this morning. Guess that this was the second short squeeze after the numbers were presented. And perhaps another institution will join.

    • Also...I am tired of explaining this stuff to you. No more ok? Learn things on your own.

    • Now you are talking about something totally different. Just admit you are wrong or go away. Nobody cares anymore. I know you have to prove to people you are intelligent for some strange reason, but just admit you were wrong so the world can start turning again. Jeez you are an attention whore.

    • How do you know that the premiums for the reinsurance were not prorated in the purchase price?

    • I can't believe I'm still having this conversation.
      From Q2 earnings release
      "The percentage decrease in 2012 is primarily due to lower costs during the first five months of 2012 related to policies assumed from HomeWise, which were subject to minimal reinsurance premiums."
      The same topic was prominent in the Q1 and Q2 conference calls. So I guess the CEO is "thick-headed" too.

    • are wrong. Are you that thick-headed? Why is it that everybody says you are wrong. If everybody says you are wrong then guess what? You are wrong. Now...go look over things again and educate yourself before you look even more like a fool. I have yet to see any poster that agrees with you. An MBA, a lawyer, and various investors all say you are dead wrong. Go back to school.

    • "The paid reinsurance premium is included in the price of the acquisition or paid out at closing"

      That absolutely did not happen in this case. Homewise had paid the premium, then handed the book and unearned premium gross of reinsurance costs over to HCII.

      Are you really saying that the CEO has lied about that in both of the conference calls? What is up with you guys?

    • Hi jcc, yours seem to be among the more intelligent posts on this forum. Just wondering if you're still following HCII and if so what you thought of the most recent Q2 earnings? Looks like their losses were quite a bit lower vs. Q1, esp. if you back out the $2mm of tropical storm claims booked in June. They said on the call that they over-reserved in Q1 to build up their IBNR, maybe that skewed the comparison. Anyhow, I wonder what sort of annual loss #s we should count on, barring a major hurricane. Have they really managed to acquire great policies from this perspective? Also, should we count on a certain amount of claims stemming from tropical storms and the like...? Appreciate any insights you might have.

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