Homeowners Choice Inc. Reports Operating Results (10-Q)
Homeowners Choice Inc. has a market cap of $42.7 million; its shares were traded at around $6.6 with a P/E ratio of 4.4 and P/S ratio of 0.6.
Highlight of Business Operations: Homeowners Choice, Inc. is a property and casualty insurance holding company incorporated in Florida in 2006. Through our subsidiaries, we provide property and casualty homeowners insurance, condominium-owners insurance, and tenants insurance to individuals owning property in Florida. We offer these insurance products at competitive rates, while pursuing profitability using selective underwriting criteria. Our principal revenues are earned premiums, which are reported net of reinsurance costs, and investment income. We cede a substantial portion of our earned premiums to reinsurers to mitigate risks primarily associated with hurricanes and other catastrophic events. Our principal expenses are claims from policyholders, policy acquisition costs, and other underwriting expenses. As of March 31, 2010, we had total assets of $128.2 million and stockholders equity of $44.7 million. Our net income was $698,000 for the three months ended March 31, 2010. Our book value per share increased to $7.21 as of March 31, 2010 compared to $7.03 as of December 31, 2009.
Our losses and loss adjustment expense reserves (Reserves), which are more fully described below under Critical Accounting Policies and Estimates, are specific to homeowners insurance, which is our only line of business. These Reserves include both case reserves on reported claims and our reserves for incurred but not reported (IBNR) losses. At each period-end date, the balance of our Reserves is based on our best estimate of the ultimate cost of each claim for those known cases and the IBNR loss reserves are estimated based primarily on our historical experience. Our Reserves increased from $19.2 million at March 31, 2009 to $20.8 million at March 31, 2010. The $1.6 million increase in our Reserves during 2010 is comprised of a $6.5 million increase specific to the three months ended March 31, 2010 offset by a reduction of $4.4 million and $0.5 million in our Reserves for 2009 and 2008, respectively. The $6.5 million in Reserves established for 2010 claims is due to the increase in our policy exposure, which resulted in an increase in the amount of reported losses in 2010. The decrease of $4.9 million specific to our 2009 and 2008 accident-year reserves is due to favorable development arising from lower than expected loss development during 2010 relative to expectations used to establish our Reserve estimates at the end of 2009. Factors that are attributable to this favorable development may include a lower severity of claims than the severity of claims considered in establishing our Reserves and actual case development may be more favorable than originally anticipated.
Policy Acquisition and Other Underwriting Expenses for the three months ended March 31, 2010 and 2009 of $4.3 million and $0.9 million, respectively, primarily reflect the amortization of deferred acquisition costs, commissions payable to agents for production and renewal of policies, and premium taxes and policy fees. The $3.4 million increase in 2010 is primarily due to increases in our commissions specific to our renewal business, which accounted for $23.3 million of our gross earned premiums in 2010 compared to $9.6 million in 2009. In addition, we experienced increases in our premium taxes, payroll and other underwriting expenses in 2010 reflective of the increase in renewal policy volume.
Other Operating Expenses for the three months ended March 31, 2010 and 2009 were $1.7 million and $1.2 million, respectively. Such expenses include administrative compensation and related benefits, corporate insurance, professional fees, office lease and related expenses, information system expense, and other general and administrative costs. The $452,000 increase is primarily attributable to an increase of $489,000 in 2010 for administrative compensation and related benefits offset by a decrease of $37,000 in net other operating expenses. The increase attributable to compensation and related benefits relates to our 2010 retention bonus program for directors and executive officers and, also, to new employees hired since March 31, 2009. As of March 31, 2010, we had 57 employees compared to 36 employees as of March 31, 2009.
Net cash provided by operating activities for the three months ended March 31, 2010 was approximately $12.3 million, which resulted primarily from the collection of $19.5 million from Citizens and $5.9 million in advance premiums offset by cash disbursed for operating expenses and losses and loss adjustment expenses. Net cash provided by investing activities of $0.5 million was primarily due to the net amount of $4.2 million received from the redemption of various certificates of deposit offset by the net amount of $3.5 million used to purchase various fixed maturity securities. Net cash used in financing activities totaled $1.8 million, which was due to the repurchases during the period of our shares and warrants.
The IBNR reserves represent our estimate of the ultimate cost of all claims that have occurred but have not been reported to us and, in some cases, may not yet be known to the insured. Estimating the IBNR component of our Reserves involves considerable judgment on the part of management. At March 31, 2010, $6.5 million of the total $20.8 million we have reserved for losses and loss adjustment expenses is specific to our estimate of claims incurred but not reported. The remaining $14.3 million relates to known cases which have been reported but not yet fully settled in which case we have booked a reserve based on our best estimate of the ultimate cost of each claim. At March 31, 2010, $9.4 million of the $14.3 million in reserves for known cases relates to claims incurred during prior years.
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