I-Team: Homeowners Choice is a hot stock, but the Tampa insurer worries an industry watcher

Dividends, marina deals drain startup's reserves

LARGO, Fla. - Neil Elder was never impressed with Citizens Property Insurance Corp., Florida's state-run property insurer of last resort. "Citizens is just dreadful," Elder said.

Elder was glad for an alternative when he was invited to switch to Homeowners Choice Property & Casualty Insurance Co. Inc.

But how stable is Homeowners Choice and a dozen other obscure companies taking out residential policies from Citizens' bulging book of business? The ABC Action News I-Team found the answer to be: not very.

Since long-established home insurers abandoned Florida, Citizens has been left with about 24 percent of all the property insurance policies in the state. The next closest carrier has 9 percent.

State records show most of Florida's 25 biggest property insurers, a list that includes Homeowners Choice, each have less than 2 percent of the market.

Although Homeowners Choice's parent company saw its New York Stock Exchange-listed common shares more than double in price during the past year, its insurance unit gets a "D" from Weiss Ratings, which evaluates the strength of financial services companies. A "D" means Weiss thinks the insurer has significant weaknesses that could negatively impact policyholders.

Weiss views Homeowners Choice as among the weakest of the so-called take-out insurers that have been encouraged to remove policies from the Citizens portfolio. None of the other 12 take-out insurers scored better than a "C," or "fair," on the Weiss scale.

Homeowners Choice executives wouldn't talk to the I-Team. They claimed last month that the Tampa insurer was in a "quiet period" under federal securities rules that precluded them from discussing their business in public. Jay Madhu, the company's Vice President for Investor Relations, couldn't say when Homeowners Choice would emerge from the quiet period.

So the I-Team asked Senior Financial Analyst Gavin Magor at Weiss to elaborate on why Homeowners Choice doesn't get a passing grade from the ratings service.

Magor says take-out insurers have been fortunate. The companies have been able to collect premium dollars from policyholders for years without having to pay out a lot because Florida hasn't been struck by a significant hurricane since 2005.

Yet Magor added: "Seven years on, they're still not, in our opinion, able to deal with a severe catastrophe."

Moreover, Magor is troubled that Homeowners Choice pays regular dividends to common shareholders so soon in its history.  "It's preferable for them not to do that," he said. "And I would say that for any of these young startup companies."

During 2011, only about a third of Florida home insurers paid a dividend, according to Magor.

Homeowners Choice had just 28 common shareholders, as of last year. So many of those cash dividends go right into the pockets of Homeowners Choice executives and directors, who happen to be the company's biggest shareholders.

Although Florida law limits what regulated insurers can pay in dividends, Homeowners Choice's corporate parent was free to pay its executives and directors $1.4 million in dividends last year, according to an I-Team analysis of securities filings.

Paresh Patel, one of the company's founders, received $467,605 in 2012 cash dividends. That amounted to more than half of the $700,001 that he was paid in salary, bonuses and fees to be chairman and chief executive officer of the company in 2011, the latest year for which job-related compensation figures are available.

"I would prefer all of the monies that are made to be left in the business and put into reserves," said Magor, who conceded that dividends do make the company's common stock more attractive to investors.

Homeowners Choice is also plowing profits into --- of all places ---- waterfront real estate.

The company spent $13.7 million to buy two marinas and adjacent property in Pinellas County, which is vulnerable to storms barreling in off the Gulf of Mexico. While Homeowners Choice claims it got good deals, the company set aside $150,000 to clean up an oil spill at one of the marinas.

Company executives wouldn't let us ask them who insures the marinas against property damage.

Magor says it is "extremely unusual" for small home insurers such as Homeowners Choice to invest in real estate. Fewer than 3 percent of Florida insurers do, he added.

Homeowners Choice executives may be hoping to sell the Johns Pass and Tierra Verde marinas for a hefty profit later on. But Magor says most insurers keep their excess cash in relatively liquid assets such as bonds, low-yielding though some of them have been lately.

"The average property and casualty insurer has 95 percent of their investments in bonds," said Magor. "In Homeowners Choice's situation, they've got around 22 percent."

Meanwhile, Neil Elder is looking for a new insurer, just three years after signing up with Homeowners Choice.

Elder says he filed a $2,000 claim for a leaky roof, which was denied. Then the Largo man says Homeowners Choice notified him that it would not renew his policy.

"I've already told our insurance agent that Homeowners Choice is not our choice," said Elder.

Do you have information about government waste, fraud or abuse? A tip about business misconduct that needs to be investigated? Email us at iteam@abcactionnews.com.

State-approved companies in Citizens Property Insurance Corp.'s personal residential take-out program:

American Integrity Insurance Co. of Florida
Headquarters: Tampa
Founded: July 20, 2006
President and chief executive officer: Robert Craig Ritchie
Net income: $1,541,733 (year ending Dec. 31, 2011)

Avatar Property & Casualty Insurance Co.
Headquarters: Tampa
Founded: Jan 30, 2008
President: Hitesh Prabhudas Adhia
Net income: $85,006 (year ending Dec. 31, 2011)

Capitol Preferred Insurance Co. Inc.
Headquarters: Tallahassee
Founded: April 9, 1998
President and chief executive officer: James Anthony Graganella
Net income: $567, 221 (year ending Dec. 31, 2011)

First Community Insurance Co.
Headquarters: St. Petersburg
Founded: Nov. 18, 1993
President: William Lincoln Martin IV
Net income: -$2,890,222 (year ending Dec. 31, 2011)

Florida Peninsula Insurance Co.
Headquarters: Boca Raton 
Founded: March 30, 2005
Chief executive officer: Roger Louis Desjadon  
Net income: $8,498,864 (year ending Dec. 31, 2011)

Heritage Property and Casualty Insurance Co.
Headquarters: St. Petersburg  
Founded: Aug. 2, 2012
President and chief executive officer: Richard A. Widdicombe
Net income: No financial statements filed yet

Homeowners Choice Property and Casualty Insurance Co. Inc.
Headquarters: Tampa  
Founded: May 10, 2007
Chief executive officer: Pareshbai Surykant Patel   
Net income: -$4,309,816 (year ending Dec. 31, 2011)

Prepared Insurance Co.
Headquarters: Tampa   
Founded: April 16, 2009
President and chief executive officer: Eric Lee Gobble   
Net income: $1,118,720 (year ending Dec. 31, 2011)

Safe Harbor Insurance Co.
Headquarters: Tallahassee    
Founded: Feb. 21, 2006 
President: William Emerson Roche    
Net income: $184,016 (year ending Dec. 31, 2011)

Southern Fidelity Insurance Co. Inc.
Headquarters: Tallahassee    
Founded: March 15, 2005
President and chief executive officer: James Anthony Graganella      
Net income: $692,015 (year ending Dec. 31, 2011)

Southern Fidelity Property and Casualty Inc.
Headquarters: Tallahassee     
Founded: Jan. 6, 2012 
President and chief executive officer: James Anthony Graganella     
Net income: -$1,462,331 (quarter ending March 31, 2012)

Southern Oak Insurance Co.
Headquarters: Jacksonville    
Founded: Nov. 30, 2004
President: Tony Alexander Loughman      
Net income: -$1,146,350 (year ending Dec. 31, 2011)

United Property and Casualty Insurance Co.
Headquarters: St. Petersburg    
Founded: Feb. 25, 1999
President and chief executive officer: Donald Jeffrey Cronin       
Net income: -$4,632,263 (year ending Dec. 31, 2011)





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