Assuming risk

Since its founding eight years ago, HCI Group has been on a fast-growth path, achieved mostly from its willingness to take on policies from state-operated Citizens Property Insurance. But managing that growth — and risk — continues to be at the heart of its strategic decisions.

This month, the company's home insurance division, Homeowners Choice, completed its most recent assumption of Citizens policies. Leaders at the company understand they are in the business of risk, but according to Kevin Mitchell, the company's vice president of investor relations, growth is always “conservative and thoughtful.” Although the company was approved to assume 69,000 policies in October by the Florida Office of Insurance Regulation, it selected to assume 36,000 of these policies in December. With the assumption, Homeowners Choice achieved the largest gross premium volumes in the company's history, he says.

Over the last eight years, investors who believed in CEO Paresh Patel's dream to build a better alternative to Citizens Property Insurance have seen a 20-fold return on their money, as the insurance company has grown to more than 160,000 policy holders with 167 employees.

In August, Homeowners Choice's parent company, HCI Group, was ranked No. 2 in Fortune's “100 Fastest-Growing Companies” for 2014. HCI Group achieved the ranking due to its three-year growth rate of 58% on revenues, 100% on earnings per share and 91% annualized total return, according to a company release. In 2013, the company ranked No. 13 on the list.

Homeowners Choice makes up about 98% of revenues for HCI Group, a publicly traded company with $241 million in revenue in 2013 (symbol: HCI; recent price: $38.69).

In the quarter ended Sept.30, HCI reported $14.1 million in net income, or $1.23 diluted earnings per common share compared with $13.4 million, or $1.13 diluted earnings per common share in the year prior. Gross premiums in the quarter increased 9.5% from the year prior to $88.9 million, which was mostly attributed to the Citizens Property Insurance policies assumed in November 2013.

The company was approved to assume another 50,000 in February 2015, but it is still evaluating how many it'll select to assume. “We select the right types of policies that meet our underwriting guidelines,” Mitchell says. “We have to make sure we have a decent spread of risk around the state. Believe it or not, they have not outlawed hurricanes in Florida.” The underwriting evaluates a home's construction, distance to the coast and zip code “so we can make sure we're there in the case of a fire, hurricane or water leak,” Mitchell adds.

One of the company's major initiatives for 2015 is to continue to prepare for a major hurricane. “Since 1953, we haven't gone more than nine years without having a Category 3 hurricane,” Mitchell says. Florida's last major hurricane was Hurricane Wilma in 2005.

Homeowners Choice is preparing for a potential disaster by boosting its technology, according to Mitchell. Using technology built by its sister company in India, the company is able to “quickly and effectively manage a large influx of claims in the event of a hurricane or crisis,” Mitchell says. The Exzeo software product allows the company to view the location of every policyholder in Florida with a latitude and longitude code, and track when a claim comes in, its status and when a policy adjuster visits a property. The company is currently talking with loss adjustment firms, claims firms and reinsurance companies to expand the software's reach.

HCI's reinsurance division “remains somewhat quiet,” Mitchell says. Though it assists the company when pricing becomes too aggressive, Homeowners Choice still believes “the best path is to transfer that risk to our partners in London and Bermuda.”