HCI - HCI Group Inc

[cmattporter]

Nice little Insurance company that popped up on my screen the other day. Haven't analyzed the numbers in depth yet.

 

Cash can cover Total Liabilities in full. Income, Assets, and Equity are growing like a weed. Trading 3x BV, but the EPS can make it up.

 

Relating to the cash flow they've been conservative. Only take note they've been issuing stock, but not too much.

 

Let me know what you guys think

 

cmp

[bmathews03]

Be very wary of this one.  A major hurricane will wipe them out eventually, assuming regulators don't step in first.

 

http://www.fool.com/investing/small-cap/2013/08/21/four-red-flags-for-this-insurer.aspx

 

[wawallace]

I owned this company as low as $5 a share and exited with gratitude in the upper $20's. Management is slightly cavalier, and has focused in the past on the gains available by owning the company's warrants (which I would consider a slightly speculative attitude); has purchased odd investments like a marina and a local nightclub, and has had the good fortune of charging P&C premiums in Florida during a golden age of not a single major catastrophe. They have saved very little seed for future long winters, and have already maximized their profit from the book they bought from the government program and cherry-picked the most profitable policies.

 

See attached for the 'dun,dun,dun'.

wiki.bmp

[oplia]

This is my first investment idea post on this forum, albeit I have been a reader of CoBF for quite a while and already picked up couple of great ideas in the meantime.

 

I have recently entered a short position in HCI Group and as it is my highest conviction short, I decided to share it in here.

 

The name has already been covered in VIC and SA, so I am not going repeat the whole story in here. The key aspects of the short thesis are:

 

- HCI Group is P&C insurer with the whole portfolio concentrated on Florida wind policies. Florida wind insurers seem to be at a peak of the bull cycle on the back no major loss events for the last ten years. After Katrina, most national and international insurers left Florida and considered the market to be uninsurable due to high tail end risks. State insurer (Citizens) took on majority of the risky policies and over the last few years local insurance companies also started gaining traction.

 

- These domestic insurers (the listed ones are HCI, HRTG, UVE, UIHC and FNHC) are now sporting ROEs of 20%-40% and trade at book multiples of c.3x. All of them have similar market shares of c. 3%-4% (only UVE being slightly bigger at 7%) and similar markets caps. High ROEs are mostly result of low competition and lack of major loss events which allowed companies to under reserve losses and reduce reinsurance by retaining bigger part of the business. Additionally, HCI and HRTG benefitted from large scale depopulation of Citizens, whereby both companies took-out Citizens policies at subsidized terms (huge excess profits were realized on these policies).

 

- Competition has increased drastically over the last couple of years and high ROEs are likely to be the thing of the past. With margins under pressure, all of these domestic insurers are unlikely to trade at BV multiples in the range of 3x for much longer, high ROEs are likely to be the thing of the past. Any major loss event would just accelerate the process and possibly bring quite of few of these companies to the bankruptcy. HCI is best short among the overvalued bunch.

 

- HCI stands out among its peers as the only company which does not do any business organically and is fully reliant on Citizens policy take-outs. Its customers are running away from HCI with churn rates in the range of 15%-20% annually, whereas competitors are growing organically. Policy count growth so far has been supported only by the Citizens take-outs every single year. Thus the company does not seem to have neither marketing channels nor established relations with agents and without Citizens take-outs it will be simply eaten away by competitors. Its current high ROE is not a result of superior management execution or better business model, HCI is simply using the loophole (which is due to close) and taking on excessive risks to deliver these results.

 

- Number of companies willing to participate in Citizens take-outs has tripled over the last 3 years and as a result, the pool of Citizens policies that are available for take-out has been fully exhausted. Recent HCI take-out award, whereby 60% of awarded policies are within the most risky coastal accounts (compared to 10% in previous takeouts for all private insurers), just confirms that there are no more profitable policies left on Citizens books.

- With no further Citizens take-outs and very high competition in a commoditized market, HCI will have no way out, the business will start declining sharply. Its current gross combined ratio of 70% will revert at least to peer average of 90%, resulting in ROEs of 10%. Thus if anything BV should be closer to 1x rather than 3.2x currently.

 

- I might be too early, HCI could continue taking on ever riskier policies from Citizens that no other private insurer is willing to take and just opportunistically ride the wave hoping that no major loss event will occur. But the recent 50% spike in the share price (on the back of take-out award announcement, which I actually find quite negative) gave me a good entry point.

 

- Although short term fluctuations could cause the share price to go more upwards, in longer term I do not think there is much I could lose – valuation over the book value is simply too high for the company to ever grow into it.

 

Looking forward to hearing your thought on this.

 

Sources for further info

Great and very informative industry description: https://www.scribd.com/doc/235288093/The-Unsustainable-State-of-The-Florida-Property-Insurance-Industry

VIC article from 2013 and comment section (price is significantly higher currently): http://www.valueinvestorsclub.com/idea/HCI_GROUP_INC/105440

Recent VIC article on UVE (UVE mostly grows organically rather than through Citizens, but there is relevant info): http://www.valueinvestorsclub.com/idea/UNIVERSAL_INSURANCE_HLDGS/128367

CoBF discussion on UVE: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/uve-universal-insurance-holdings-10506/msg195966/#msg195966

Very detailed HCI series on SA: http://seekingalpha.com/article/2497285-hci-group-the-wizards-of-tampa

My full investment thesis on SA: http://seekingalpha.com/article/2641105-hci-group-insurer-selling-at-3_2xbv-with-15-percent-organic-decline-is-about-to-hit-a-brick-wall

[Hielko]

Compelling idea

[thepupil]

This is so superbly researched and clearly expressed that I fear you will increase the borrow cost on my HCI.

[oplia]

Q3 results are out:

http://irdirect.net/pr/release/id/983531

 

Overall quite bad quarter with significant deterioration in underwriting. For other listed Florida insurers underwriting (in terms of loss ratios) improved YoY, so HCI again stands out from the crowd. Bottom line was pushed up only by transfer of $3m from unrealised gains into realised ones. Excluding this net income would have decreased by 18%. As always management was trying to put a positive spin on events during the conference call, but I think their aggressive risk profile and lack of options going forward is becoming more and more apparent.

 

We will see if market has the same take on results.

 

Also another great article from RH Analytics about the recent take-out award:

http://seekingalpha.com/article/2649535-hci-group-q314-results-and-flying-naked

[rayfinkle]

Q3 results are out:

http://irdirect.net/pr/release/id/983531

 

Overall quite bad quarter with significant deterioration in underwriting. For other listed Florida insurers underwriting (in terms of loss ratios) improved YoY, so HCI again stands out from the crowd. Bottom line was pushed up only by transfer of $3m from unrealised gains into realised ones. Excluding this net income would have decreased by 18%. As always management was trying to put a positive spin on events during the conference call, but I think their aggressive risk profile and lack of options going forward is becoming more and more apparent.

 

We will see if market has the same take on results.

 

Also another great article from RH Analytics about the recent take-out award:

http://seekingalpha.com/article/2649535-hci-group-q314-results-and-flying-naked

 

100% agree. management are a bunch of promoting scam artists. I'm short too. Fortunately for the world (but not for the shorts) hurricane season is ending--biggest risk of a share price collapse is associated with a large storm. More time to accumulate!

[oplia]

Deeper analysis of HCI's Q3 results http://seekingalpha.com/article/2659585-hci-group-dismal-q3-results-are-just-a-glimpse-on-what-will-come-in-the-future

[oplia]

Another insightful post from RH Analytics. http://seekingalpha.com/article/2682965-hci-group-caveat-emptor

 

Apparently the conference call was staged and investors less friendly to the management were not allowed to ask any questions. This kind of explains why there have been no grilling questions about deteriorating underwriting performance.

 

From your experience, is it common to restrict Q&A session only to selected analysts and then pretend like there are no further questions in the queue? For me this sounds a bit outrageous...

[pantheman]

Another insightful post from RH Analytics. http://seekingalpha.com/article/2682965-hci-group-caveat-emptor

 

Apparently the conference call was staged and investors less friendly to the management were not allowed to ask any questions. This kind of explains why there have been no grilling questions about deteriorating underwriting performance.

 

From your experience, is it common to restrict Q&A session only to selected analysts and then pretend like there are no further questions in the queue? For me this sounds a bit outrageous...

 

I wouldn't read too far into this. Many companies who have investor relations firms on retainer or have good IR people in house will manage their calls. Herbalife is like the poster child for hiring a good IR firm (why would you ever want Einhorn or any other activist asking questions on your call?).

 

I will say I find it a bit odd that you had to call in and register before the call to ask questions. Usually the queue sorting is done during the call. Many times though, in general, Joe Schmo investor is not going to be allowed a question and despite the operator claiming no more questions there will often times be many waiting.

[A_Hamilton]

Another insightful post from RH Analytics. http://seekingalpha.com/article/2682965-hci-group-caveat-emptor

 

Apparently the conference call was staged and investors less friendly to the management were not allowed to ask any questions. This kind of explains why there have been no grilling questions about deteriorating underwriting performance.

 

From your experience, is it common to restrict Q&A session only to selected analysts and then pretend like there are no further questions in the queue? For me this sounds a bit outrageous...

 

I wouldn't read too far into this. Many companies who have investor relations firms on retainer or have good IR people in house will manage their calls. Herbalife is like the poster child for hiring a good IR firm (why would you ever want Einhorn or any other activist asking questions on your call?).

 

I will say I find it a bit odd that you had to call in and register before the call to ask questions. Usually the queue sorting is done during the call. Many times though, in general, Joe Schmo investor is not going to be allowed a question and despite the operator claiming no more questions there will often times be many waiting.

 

It is exceptionally common to manage the call list. Look at most major companies, they only take questions from sell side clowns.