HCI Group (HCI) Valuation by David Merkel, CFA of Aleph Blog
It is not often that I get asked to opine on a domestic insurer that I have never heard of. Thus tonight’s article on HCI Group. Here’s the request:
I am a longtime and frequent reader. I appreciate your value-oriented approach and your genuine desire to help your readers. (A vast difference from much market commentary!)
I would be interested in your thoughts on the P&C insurer HCI Group (HCI). The fundamentals look pretty good to me, and the company is growing well, but the stock has gotten beaten down in recent weeks, the PE is 8, and there is huge short interest.
The only news of interest seems to be that they have started writing flood insurance in Florida. I suppose that is a big hurricane risk.
What are your thoughts?
Florida has had many good years recently of no significant hurricane damage. This company has a lot of coastal hurricane exposure.
Moving into flood insurance, and undercutting the National Flood Insurance Program is highly unusual, and I would be skeptical. There is a reason why most of the P&C Insurance industry does not offer Flood cover. Severity of claims is very high when it happens.
I don’t like owning insurance companies at over 2x book, and this one is over 3x book. Reserving seems a little weak, with a large reserve strengthening done in 2012.
Also, the share count is growing, which is a bad sign ordinarily, and particularly when capital is flush in the insurance industry, as it is today. Asset growth is also a bad sign, from a quantitative standpoint.
If conditions are normalizing in Florida, the big guys will start to move back in, and HCI Group will lose a lot of its past advantages.
Taking concentrated risks is great for an insurance company, so long as no claim events occur. But if there are severe claims from hurricanes, this company could be in a lot of trouble. That’s why it has a high short interest.
And so my judgment is no interest. Gun to the head, I would short it, but I don’t short, by and large. This is another company with a limited strategy that could be washed up by a few major hurricanes in Florida. We’re due.