Foresight on Reinsurance Rates Keeps Homeowners Choice Profitable, President Says

Chad Hemenway
CLEARWATER, Fla., Nov 11, 2009 (A. M. Best via COMTEX) --

Homeowners Choice Inc. put its ear to the ground late last year and listened. What it heard, said company President Paresh Patel, was talk of a rise in reinsurance rates.

"We were being told reinsurance costs were going through the roof," Patel told BestWire. "We decided to use this information. We looked at our policy counts, and we stopped taking new policies December of last year."

This is not to say Homeowners Choice (NASDAQ: HCII) did not feel the impact of reinsurance increases. In the third quarter, the company said it ceded more than half of its gross premiums earned to reinsurers. The company reported a net income of $815,000 in the third quarter, an increase of 2% from the same period a year ago. It was the insurer's ninth straight quarter of profitability, Homeowners Choice said.

Patel said the company uses the Florida Hurricane Catastrophe Fund "to the fullest extent possible" to purchase reinsurance and structured renewals in a way that would free up liquid assets to cover potential catastrophic losses. "We'd have been cash poor, but solvent," Patel said.

The Florida domestic homeowners insurer, which began business in May 2007, has not assumed any policies yet this year from the state-run Citizens Property Insurance Corp. as part of Florida's "take-out" program to lessen Citizens' growing exposure. Homeowners Choice took two batches of policies from Citizens in 2007 and went back four more times in 2008. The company has about 53,000 policies as of Sept. 30.

"You have to get out there and listen, and when the facts on the ground have changed, you have to adjust," said Patel. Vice President Jay Madhu said results were also boosted by the company's conservative investment strategy as it posted $516,000 in investment gains during the third quarter.

Patel said the insurer is poised to grow once more. Homeowners Choice was chosen as replacement insurer for American Keystone Insurance Co., which recently went into receivership. The insurer had about 5,300 policies. Homeowners Choice has also been approved once again to assume as many as 60,000 policies from Citizens and will likely have assumed about 25,000 of those by mid-fourth quarter, Patel said. Homeowners Choice would like to have about 5% market share, or about 220,000 policies with $400 million to $500 million in premiums.

"We freed up surplus by having fewer policies and now we can use it to go get policies," Patel said. "After another quiet hurricane season, we can expect reinsurance rates to drop a little and companies are receiving rate hikes in Florida."

Patel said Homeowners Choice is about to apply for a rate increase.

Homeowners Choice recently backed off an offer to merge with 21st Century Holding Co. after the fellow Florida domestic rejected the advance. Patel said 21st Century Holding was one of "a number of other companies" Homeowners Choice has spoken to about similar opportunities.

"We didn't need to merge with them," he said. "We thought it would be a good deal for everyone. The yardstick will be a year from now. 21st Century and its shareholders will be able to see if they made the right decision."

In afternoon trading on Nov. 11, shares of Homeowners Choice stock were selling at $8.48, down about 2.1% from the previous close.

The top five writers of homeowners multiperil in Florida in 2008, according to BestLink, based on direct premiums written, were: State Farm Group, with a 17.7% market share; Citizens Property Insurance Corp., with 16.2%; Universal P&C Insurance Co., with 7.2%; USAA Group, with 5.1%; and Tower Hill Group, with 4.5%.