Business Context and Reporting Period
This Form 10-K covers Homeowners Choice, Inc. and subsidiaries for the fiscal year ended December 31, 2011; it is not a standalone fourth-quarter filing. The company is a Florida property and casualty insurance holding company offering homeowners, condominium-owners, and tenants insurance through HCPC, with substantially all insurance business concentrated in Florida. In 2011, the company also acquired a Florida marina operation and an Indian software-development company. The filing was signed March 30, 2012.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Gross premiums earned | $143.6 million | $119.8 million | +19.9% |
| Net premiums earned | $87.2 million | $62.4 million | +39.7% |
| Total revenue | $94.8 million | $68.6 million | +38.2% |
| Income before taxes | $16.4 million | $8.6 million | +91.0% |
| Net income | $10.0 million | $5.4 million | +83.8% |
| Income available to common stockholders | $9.1 million | $5.4 million | +68.8% |
| Diluted EPS | $1.34 | $0.81 | +65.4% |
| Combined ratio on net premiums earned | 89.9% | 96.2% | Improved 6.2 points |
| Operating cash flow | $56.0 million | $16.1 million | +247.4% |
| Total assets | $214.8 million | $140.9 million | +52.4% |
| Stockholders’ equity | $63.8 million | $46.6 million | +36.9% |
Premiums ceded to reinsurers were $56.4 million, or 39.2% of gross premiums earned, compared with $57.3 million, or 47.9%, in 2010. Losses and loss adjustment expenses were $48.2 million, while policy acquisition and other underwriting expenses were $18.1 million and other operating expenses were $12.1 million.
Cash and cash equivalents were $100.4 million at year-end, with total investments of $58.8 million, including $39.8 million of available-for-sale securities. The filing does not identify material traditional debt; total liabilities were $151.0 million and primarily consisted of unearned premiums, loss reserves, and operating liabilities. HCPC reported statutory capital and surplus of $46.5 million versus a required minimum of $12.0 million.
Material Changes Versus the Prior Comparable Period
- The November 2011 HomeWise assumption added approximately 70,000 Florida homeowners policies representing approximately $106 million of annual gross premiums; the transaction contributed $18.3 million of 2011 gross premiums earned.
- Policies in force reached approximately 119,000, representing approximately $225 million of annualized premiums.
- Net premiums written increased to $130.9 million from $59.0 million, primarily because of the HomeWise transaction.
- The loss ratio improved to 55.3% from 60.3%, and the expense ratio improved to 34.6% from 35.8%. However, the combined ratio measured against gross premiums earned increased to 54.6% from 50.1%.
- Prior-year reserves developed favorably by approximately $12.2 million, including $8.8 million related to 2010 and $3.4 million related to 2009 and earlier years. Year-end loss and LAE reserves nevertheless increased to $27.4 million from $22.1 million.
- The company completed a $12.5 million Series A preferred stock offering, receiving approximately $11.3 million of net proceeds. The preferred stock carries a 7% cumulative dividend and is initially convertible into common stock at $10.00 per share.
- The company acquired the Tierra Verde Marina property for approximately $5.1 million and recognized a $936,000 bargain purchase gain, or $575,000 after tax. It also acquired Unthink Technologies for $199,000 and recorded $161,000 of goodwill.
- Other income increased to $2.8 million from $0.8 million, primarily because of marina operations and rental income. Realized investment gains declined to $267,000 from $2.0 million.
Cash Flow, Liquidity, Outlook, and Unusual Items
Operating cash flow of $56.0 million substantially exceeded net income, driven in part by a $43.6 million increase in unearned premiums. Investing cash flow was an outflow of $17.0 million, including $5.3 million for acquisitions, $3.1 million for property and equipment, and net purchases of investment securities. Financing cash flow was $6.4 million, reflecting preferred stock proceeds, stock-option proceeds, dividends, and common-stock repurchases.
Management stated that operating cash flow, premiums, investment income, and existing capital are expected to support liquidity needs. The company maintains catastrophe excess-of-loss reinsurance, but remains liable for policyholder claims if reinsurers fail to perform. Management anticipated that reinsurance costs would represent approximately 43% to 45% of gross premiums earned beginning in June 2012 following the HomeWise assumption.
The company will adopt ASU 2010-26 in January 2012 and expects an additional first-quarter 2012 amortization expense of approximately $1.0 million to $1.4 million before tax, with a corresponding reduction in deferred acquisition costs.
Material risks include concentration in Florida, hurricanes and other catastrophes, reserve inadequacy, reinsurance availability and collectability, regulatory restrictions on rates and dividends, competition, dependence on policy-assumption transactions, information-technology failures, and environmental remediation at the marina. The marina property had a $150,000 remediation liability at acquisition; $28,000 had been spent by year-end, leaving $122,000 accrued, although additional costs could exceed the current estimate.
The filing reports no material pending litigation, no off-balance-sheet arrangements, and effective disclosure and internal control over financial reporting. The company declared a $0.15 per-share common dividend in January 2012, paid March 16, 2012.
Most Important Facts to Verify
- Whether the favorable prior-year reserve development persists and whether current reserves adequately reflect catastrophe, litigation, and claims-severity risk.
- The expected impact of the HomeWise policies on retention, loss ratios, reinsurance costs, capital requirements, and future earnings.
- The scope and ultimate cost of the marina’s environmental remediation and the operating profitability of the marina and real-estate businesses.
- HCPC’s statutory capital and surplus, dividend capacity, regulatory compliance, and restrictions on upstreaming cash to the holding company.
- The dilution and cash-dividend implications of the 1.25 million Series A preferred shares and approximately 1.4 million common shares issuable under outstanding warrants.
- The anticipated $1.0 million to $1.4 million pre-tax expense from adoption of the insurance acquisition-cost standard in the first quarter of 2012.
- Related-party arrangements, including the office lease, legal services, software and consulting transactions, and 2011 stock repurchases from directors and a former executive.