HCI Group: Zacks’ Bull of the Day Play

Thanks in part to a quiet hurricane season in Florida, analysts have been raising their estimates for insurer HCI Group (HCISnapshot Report). It is currently a Zacks Rank #1 (Strong Buy).

HCI Group is a property and casualty insurance holding company. The company’s largest subsidiary, Homeowners Choice Property & Casualty Insurance Company, Inc., provides property and casualty insurance in the state of Florida.

Shares of HCI Group trade at less than 9x forward earnings and yield a solid 2.4%.

Second Quarter Results

HCI Group delivered better-than-expected second quarter results on August 5. Adjusted earnings per share came in at $1.39, crushing the Zacks Consensus Estimate of $1.19.

Net premiums earned (defined as gross premiums earned less premiums ceded to reinsurance companies) increased 9% year-over-year. Net investment income was $1.5 million for the quarter compared with $295,000 in the same period last year. This increase was due to growth in the investment portfolio, which grew from $66.5 million at June 30, 2013 to $179.2 million at June 30, 2014.

The company’s loss ratio (losses + loss adjustment expenses / net premiums earned) improved from 30.4% to an excellent 29.3%. However, the expense ratio (underwriting expenses + interest and other operating expenses / net premiums earned) increased from 27.0% to 34.4%.

The combined ratio (loss ratio + expense ratio / net premiums earned) increased from 57.4% to 63.7%.

Estimates Rising

Analysts have been raising their earnings estimates for HCI Group since its Q2 beat in August. This has sent the stock to a Zacks Rank #1 (Strong Buy).

The 2014 Zacks Consensus Estimate has risen from $4.86 to $5.00 over the last 90 days. And the 2015 consensus has increased from $4.89 to $5.46 over the same period.

Part of the reason for the positive estimate revisions is because, as one HCI analyst put it, “[t]he 2014 hurricane season has been remarkably docile thus far.” That should help keep HCI’s loss ratios low in Q3 and Q4.

Reasonable Valuation

The valuation picture for HCI Group looks attractive. Shares trade at just 8.5x 12-month forward earnings, well below the industry median of 15x. And its enterprise value/cash flow ratio is just 5x, which is well below the industry multiple of 12x.

Keep in mind, however, that a catastrophic event in Florida, such as a hurricane, would likely depress earnings for HCI Group. But so far this season, the hurricanes have avoided Florida.

HCI Group also pays a dividend that yields 2.4%.

The Bottom Line

With strong underwriting profits, positive earnings momentum, a solid yield and attractive valuation, HCI Group offers investors attractive total return potential.

Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.


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