3 Reasons To Own Homeowners Choice

By Will Ashworth | April 17, 2012 AAA
Two things caught my eye recently while searching for a micro cap to write about: MSN Money's Stock Scouter gives this tiny Florida insurance company a perfect 10 in its list of 50 highly rated micro caps. Secondly, Investopedia's Sham Gad called it a "gem," in a January article about it and three other micro-cap studs. Only in business since June 2007, Homeowners Choice (Nasdaq:HCII) is growing very quickly. Growth investors ought to take a look.

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Low Overhead

Homeowners Choice is a property and casualty insurance money-maker, and has been from the very start. Those familiar with the term "expense ratio" know that this is the insurance company's cost of acquiring new policies. I use this metric first, instead of the combined ratio (expense ratio combined with loss ratio), because it hasn't been in business long enough to provide an accurate reading of its underwriting ability. Nonetheless, it has four fiscal years under its belt and in those years, its expense ratio averaged 27.31%, hitting 34.61% in 2011. This means it's spending slightly less than 35 cents per dollar of net premiums earned, which is more than satisfactory.

In order to make an underwriting profit, an insurance company's combined ratio must be below 100%. In 2011, it was 89.9%. The company has kept marketing costs low by assuming insurance policies held by Citizens Property Insurance Corporation, a Florida state-supported insurer. Since 2007, it's completed nine assumption transactions acquiring 125,000 policies that provide it with $235 million in recurring revenue. Despite all these transactions, it possesses just 2.8% market share in Florida for homeowners, condo and renters policies. There's plenty of opportunity for growth.

Homeowners Choice and Peers - Combined Ratio - 2011


Combined Ratio

Homeowners Choice


Universal Insurance (NYSE:UVE)


21st Century Holding (Nasdaq:TCHC)


United Insurance


Dividend Yield

Homeowners Choice announced March 28 that it was raising its quarterly dividend by 33% to 20 cents a share, its third consecutive quarter doing so. Its yield is currently around 5.1%, making it very attractive to growth & income investors. The analyst estimate for its 2012 earnings is $2.07 a share, which puts its payout ratio at 39%. Given Homeowners Choice has 16 consecutive quarters of profitability, this level of payout seems rather conservative. I'm guessing management is factoring in a serious increase in the loss ratio from some sort of weather-related incident. However, in the last 25 years, Florida has had just seven storms of Category 3 or higher, and five of them came in 2004 and 2005. Exclude those five and there were just two in 23 years.

There are those, however, who feel Homeowners Choice doubled its business (70,000 policies) last November by acquiring a toxic book of business from HomeWise Insurance. These naysayers probably have felt the same way about the stock market since the crash in late 2008. For the skeptics I say this: let the dividend provide some comfort until your proverbial sky falls in.

SEE: The Importance Of Property Insurance

Stock Price

Homeowners Choice went public in 2008. Since inception it's up over 100% and YTD in 2012, up nearly 58%. That's phenomenal growth, which rightly scares anyone who believes in reversion to the mean. However, when compared with the competitors mentioned in the table above, it's reasonably priced, in my opinion. Both its price-to-sales and price-to-book ratios are similar to all three competitors. On April 9, it announced it was doing a follow-on public offering of 1.6 million shares, pursuant to a previously filed shelf registration. I expect the over allotment of 240,000 shares will be exercised by the underwriters, an indication that the demand for its stock is considerable.

The Bottom Line

Figuring out insurance companies, especially smaller ones, is always a difficult task. The contrarian in me likes the fact it's choosing to do business in Florida, a state that's been considered terribly unprofitable for some time. When the crowd goes one way, you should head in the other direction. That's where the real money's made.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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