Flood of Risks

So what drives an engineer, a real estate mogul, a securities lawyer and an insurance agent to start an insurance company?

It all started with breakfast at Bob Evans in Largo in late 2006. In fact a lot has started at the Bob Evans, a place the men refer to as “corporate headquarters.”

The four men were fed up with property insurance hikes following the storms in Florida in 2004 and 2005 and wanted to create an alternative to Citizens Property Insurance, the state-run insurer of supposed last resort. Despite being told a number of times that doing so was a stupid decision, they pulled together $2 million of their own money and fundraised an additional $13 million from 76 investors to start Homeowners Choice.

Eight years later, those 76 investors have seen a 20-fold return on their money, and the insurance company has grown to 160,000 policy holders with 167 employees. Last year Homeowners Choice's parent company, HCI Group, was ranked by Fortune as the 13th fastest-growing public company. Today, Homeowners Choice makes up around 98% of the 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 March 31, Homeowner's Choice reported $17.6 million in net income, or $1.44 diluted earnings per common share.

It's been a bit “serendipitous” according to the former engineer, Paresh Patel, who is now HCI Group's chairman and chief executive officer. But taking a risk and ignoring the naysayers is what he does best.

Kevin Mitchell, HCI's vice president of investor relations, says Patel's biggest strength is his creativity and ability to give things a fresh perspective. “He's not bogged down by what hasn't been done before. We strike that from our vocabulary.”

Taking Risks
In July 2007, people told Patel that buying out Citizen's policies was a terrible idea. They said “plan holders in Citizen's are paying 50% below what they should be paying and are the worst risk,” Patel recalls. But he and his management team ignored them, and bought 6,000 Citizen's policies, giving policyholders an additional 5% discount. In November 2007, they did another small takeout, followed by four takeouts in 2008.

The trend has continued. The company took out 60,000 policies seven months ago, and another 30,000 five months ago. The large acquisitions start to become expected, “after an acquisition of $100 million, people assume, 'That's nice. What's next week?'” Patel says.

Many times the next step can be impossible to predict. And taking more policies out of Citizen's isn't always the answer. Last year, one of HCI's competitors, HomeWise Insurance Company, faced financial difficulty. When regulators asked HCI to consider taking on the 70,000 policyholders, the deal closed just a month after the first meeting.

Patel was also told it was a bad idea to take the company public in 2008 when the financial industry was crashing. But once again, he moved forward with his gut. The offering was two times oversubscribed and sold at top of range.

Patel says this strategic move helped the firm put necessary controls like processes and audits in place when the company was small. “As we've grown, it let us scale up,” he says.
Those who bought in at the initial public offering in 2008 have seen a tenfold return. “Any time you get your money back with a zero behind it, it's a life changing event,” Patel boasts.

Diversification
Rather than branching out to other forms of insurance, Patel and his management team decided to invest in a real estate business and a software company to diversify HCI Group's portfolio.

HCI Group's purchase of a failing Indian software company with 70 employees has created a human capital management tool that Homeowners Choice relies on for handling claims. In a hurricane event with 10,000-plus claims to handle, the software tool allows users to view all stages of a claims process, drilling down to specifics for adjusters, homeowners and repair contractors. “We are our own first customer,” Patel says. Now the tech company is receiving inquiries from other companies interested in purchasing the tool.

The company changed its growth strategy again last year with yet another contrarian investment; it started offering flood insurance coverage at pre-Biggert-Waters reform rates. “To say someone should pay $50,000 a year for flood insurance for $350,000 of coverage, especially since last year they were paying $7,000, just isn't fair,” Patel says.

The risk isn't as big as it seems, Patel insists. Reinsurance policies required by state regulations require that insurance carriers “basically have to survive the 100-year storm,” Patel says. “We buy enough reinsurance to survive a hurricane 1.5 times Hurricane Andrew, followed by a Hurricane Andrew, all in the same year.”

Others aren't as optimistic. Weiss Ratings, a company that provides ratings based on the financial condition of 2,600 property and casualty insurance providers, rates Homeowner's Choice a D, or weak, because of its fast growth and lack of experience with a hurricane.

Out of the 122 providers it rates in Florida, 23 are rated D or E, 57 are rated C and 42 are rated B or above, which is considered the good range, according to Gavin Magor, chief insurance analyst for Weiss Ratings. Citizens is ranked as B+ or higher.

“It's important to remember that we haven't had serious claim events in many years,” Magor says. “That's when we'll find out if these take-out companies can really handle the claims.”

Patel's biggest challenge has been building the company's reputation to make sure people trust the brand. The only way to overcome that hurdle is by “doing the right thing,” Patel says. “It's not the size of the company or how many years in business, it's how you handled claims in the last year.”

Patel brings up the house collapse from a sinkhole in Dunedin as an example of when his company did this. By the time Patel heard the news of the sinkhole several hours after it happened, his claims personnel had already offered to open claims for four homeowners in the neighborhood who were policyholders. “I think one of the homeowners found out about the sinkhole from our claims guy,” Patel says.

With 7,000 claims last year, Patel believes the fact that Homeowners Choice encourages policyholders to call the company's Florida call center, rather than directing them to ask their agent, is key to its customer service model. “They're our customers, we should take the call. While you can look at that on a spreadsheet as an expense, it actually provides much better customer relations, much better customers, and much better knowledge of what's happening.”

Patel believes growth is not solely determined by the number of policyholders. If the company doubled in size from buying up bad policies, it would cause losses and drive up rates, he says. “Where the growth is going to come from, I don't know. But will the growth come? I'm confident it will.”

Work Hard, Play Hard
Everyone thinks work hard play hard is work five days a week, play two days. But that's not how it works for Patel. “I think it's work hard when there's work opportunity, and when there isn't, enjoy your relaxation.”

That's why the CEO of HCI Group is now a self-proclaimed workaholic after leaving six years of retirement. Patel works seven days a week, balancing time among HCI and three other companies where he serves as chairman. These are the other companies he's involved with:

Oxbridge: Patel helped the Cayman-based company go public in March, with a $30 million initial public offering that oversubscribed in eight days.

First Home Bank: Three years ago Patel rescued a community bank in Seminole. He helped turnaround the bank, which is now profitable. Patel is currently helping the bank raise additional capital.
Indo-US Chamber of Commerce: Patel is the chairman of the organization that promotes Indian American led businesses in the Tampa area.

At a Glance
HCI Group revenues
Year Revenue %growth
2011 $93 million
2012 $163 million 75.3%
2013 $241 million 47.9%

Source: HCI Group

Executive Summary
Issue. Diversification Industry. Insurance Key. Taking Risks