HomeOwners was formed in 2007 by participating in a “take-out program” through which we assumed insurance policies held by Citizens Property Insurance Corporation (“Citizens”), a Florida state-supported insurer. The take-out program is a legislatively mandated program designed to reduce the state’s risk exposure by encouraging private companies to assume policies from Citizens. Policies assumed mostly are home insurance (86%) and the others are condominium insurances (14%). Policies purchased from citizens could be switched back by policy owners to Citizens after three years on specific request by policies owners. Most of the policies 3 years delay is passed. 2 remaining group of policies 3 years is expected to end in october and december 2011. Previous expiration did not result in policies cancellations.
HomeOwners is providing insurance in Florida where hurricanes happens. To protect themselves against hurricane damages, HCII use reinsurers.
Investment in securities, equities and term deposit total up to 42M. Securities are mostly in commercial-backed mortgage loan and corporate bonds. Cash and cash equivalents are at 80M$. Adding up the differed revenue and receivables you get current asset totaling around 150M$ mostly in hard cash!
Total liabilities is considerable at 115M. We can count on net current assets of 35M$. The current market cap is 38M$!
To get a liquidation value you may want to include hard assets (Tampa building, a marina!?! and some other assets) counted at 16M after amortization. Yes they purchased a Marina (Tierra Verde Marina Holdings) last quarter for 6M$ in a foreclosure deal! They also purchased the Tampa building at 7.1M in 2010 in the middle of the housing crisis. revenue recognition from this marina will be interesting to see.
Profitability and cost reduction
Current contract signed for reinsurance reduces reinsurance cost to 42% from previous 45% reinsurance cost. This will directly improve profit by this new saving. For a quarter, this could improve net income by 1M$, less income taxes of 40%. Last quarter income was 1.9M$. Out of this 1.9M$, 0.9M$ came from adjustment of assets from a foreclosure purchase of a commercial properties. Income from operations could then be written down to 1M$. So this cost reduction could improve the profitability by 50%!!!
TTM net income is 1.07 and will probably stabilize around this thanks to cost reduction. P/E is 6.2 on current TTM profit.
Current dividend voted on regular shares gives a dividend yield of 6%.
You get a good profitable business at a reasonable price. The downside protection is high buying the company at net current asset price. The P/E is at a low 6.2. Industry average P/E is 12.7! HCII being a small cap, read mostly ignored company, I do not think it will raise to industry average soon enough. I would expect a P/E around 9 or 10. Giving this business a valuation between 9.6 and 10.7.
We then get a possible profit of 54% and until Mr.Market realize the valuation adjustment, we get a 6% dividend yield!
Disclosure: Author has a position in HCII.