A Quick Valuation Snapshot Of P&C Insurer HCI Group

A Quick Valuation Snapshot Of P&C Insurer HCI Group
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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:

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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. 

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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.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.
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