HCI

Business Context and Reporting Period

Company: Homeowners Choice, Inc. (HCI Group, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: HCI is a Florida-based property and casualty insurance holding company. It primarily provides homeowners, condominium-owners, and tenants' insurance. The company operates largely through a "take-out program," assuming policies from Citizens Property Insurance Corporation. As of June 30, 2010, the company held approximately 63,000 policies in force.

Key Financial Metrics

Note: The Combined Ratio is calculated as (Loss Ratio + Expense Ratio) relative to Net Premiums Earned. A ratio under 100% indicates underwriting profitability.

Material Changes vs. Prior Period

• Revenue Decline: Net premiums earned decreased by $9.1 million (22%) to $31.9 million for the six months ended June 30, 2010, compared to $40.9 million in the prior year. This was primarily driven by a $10.4 million increase in premiums ceded to reinsurers due to higher coverage limits and increased policy exposure.
• Profitability Drop: Net income fell significantly to $2.0 million from $9.3 million in the same period of 2009. Diluted EPS dropped from $1.28 to $0.29.
• Expense Increases: Policy acquisition and other underwriting expenses rose by $4.8 million to $7.0 million, largely due to increased premium taxes and commissions associated with policy renewals. Other operating expenses increased by $0.8 million due to higher administrative compensation.
• Investment Activity: The company recognized $0.5 million in realized investment gains in 2010 from the sale of securities, compared to zero in 2009. The company also reclassified all held-to-maturity securities to available-for-sale.
• Property Acquisition: On June 1, 2010, the company purchased a new headquarters facility in Tampa, Florida, for $7.1 million.

Guidance, Outlook, and Risks

• Reinsurance Strategy: Effective June 1, 2010, the company entered into new excess catastrophe reinsurance treaties providing approximately $395 million of coverage per event for the 2010-2011 hurricane season. The cost is expected to be approximately $59 million annually, representing about 45% of gross earned premiums (down from 54% in the prior year).
• Seasonality: Management expects increased losses and loss adjustment expenses between June 1 and November 30 due to hurricane season, which may negatively impact operating profits during this period.
• Capital and Liquidity: The company maintains a comprehensive reinsurance program and believes it has sufficient liquidity to meet obligations. It expects to spend between $1.0 million and $2.0 million on building enhancements in late 2010.
• Stock Repurchases: The company continues an authorized repurchase plan. During the quarter ended June 30, 2010, it repurchased 120,258 shares. Approximately $1.96 million remains available under the plan.
• Risk Factors: Key risks include the frequency and severity of catastrophic events (hurricanes), uncertainties in loss reserve estimates, and regulatory constraints on premium rates and dividend payments by the Florida Office of Insurance Regulation.

Investor Verification Checklist

• Reinsurance Costs: Verify the impact of the new 2010-2011 reinsurance treaties on future net premiums earned and profitability.
• Loss Reserves: Review the adequacy of the $23.1 million loss and loss adjustment expense reserves, particularly the $6.5 million allocated to incurred but not reported (IBNR) claims.
• Property Investment: Confirm the timeline and total cost for the relocation and renovation of the new Tampa headquarters.
• Policy Retention: Assess the renewal rates of policies assumed from Citizens Property Insurance Corporation, as this drives future revenue stability.
• Dividend Restrictions: Note the regulatory limitations on the insurance subsidiary's ability to pay dividends to the parent company, which may affect shareholder returns.