HCII Hudson Executive Investment Corporation II

Rising earnings estimates on the back of strong second-quarter results, including a 23.3% earnings surprise, helped Homeowners Choice, Inc. (HCII) achieve a Zacks #1 Rank (Strong Buy) on September 11. Moreover, this property and casualty insurer has delivered positive earnings surprises in the last five consecutive quarters with an average beat of 55.6%.   

With a solid year-to-date return of 190.4% and a history of beating quarterly earnings estimates, this stock offers an attractive investment opportunity.

The Rank Driver

Better-than-expected second-quarter earnings, growth in revenues and strong credit quality are the primary rank drivers for this stock.

Homeowners Choice reported its second-quarter results on August 1 with earnings per share of 74 cents, beating the Zacks Consensus Estimate of 60 cents by 23.3% and year-ago earnings of 30 cents by 146.7%. Strong results for the quarter were primarily aided by substantially higher net premiums earned. However, slightly lower net investment income and higher expenses were the downsides.

Net premiums earned increased 112.8% to $36.3 million from $17.0 million in the year-ago quarter.

Net investment income in the second quarter of 2012 was $0.3 million compared with $0.5 million in the year-ago quarter. Total expenses increased 71.4% from the year-ago period to $26.8 million.

Homeowners Choice’s loss ratio (defined as loss and loss adjustment expenses related to net premiums earned) was 44.7% in the reported quarter compared with 61.7% in the prior-year quarter. The year-over-year decrease in the loss ratio was primarily a result of significant hike in gross premiums earned in the quarter.

The expense ratio (defined as policy acquisition and other underwriting expenses related to net premiums earned plus compensation, employee benefits and other operating expenses) was 29.4% in the second quarter of 2012 compared with 30.1% in the year-ago quarter.

The combined loss and expense ratio to gross premiums earned was 49.9% in the quarter compared with 50.2% in the same period in 2011.

Earnings Estimate Revisions

The Zacks Consensus Estimate for 2012 increased 8.8% to $2.46 per share based on two out of three upward estimate revisions over the last 30 days. The current estimate implies year-over-year growth of 101.4%.

For 2013, two out of three estimates was revised higher over the same time frame, lifting the Zacks Consensus Estimate by 23.1% to $2.45 per share.

Valuation

Homeowners Choice currently trades at a forward P/E of 9.1x, a 52.6% discount to the peer group average of 19.2x. Also, on a price-to-book basis, the shares are trading at 2.0x, a significant premium to the peer group average of 0.9x.

Homeowners Choice has a trailing 12-month ROE of 29.2% compared with the peer group average of 7.2%.

About the Company

Headquartered in Tampa, Florida, Homeowners Choice is an insurance holding company. Through its subsidiaries, it provides property and casualty homeowners' insurance, condominium owners' insurance and tenants' insurance. It serves roughly 110,000 policyholders throughout Florida representing approximately $220 million in annualized premiums. Founded in 2006, the company has a market capitalization of roughly $211.6 million.

Other Zacks #1 Rank financial stocks include First American Financial Corporation (FAF) and Fidelity National Financial, Inc. (FNF).

 
FIRST AMER FINL (FAF): Free Stock Analysis Report
 
FIDELITY NAT FI (FNF): Free Stock Analysis Report
 
HOMEOWNERS CHCE (HCII): Free Stock Analysis Report
 
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