Paresh Patel was a semiretired tech guy in late 2006 when he decided to jump into something he admittedly knew nothing about: homeowners insurance.
The lure was the same one motivating many a contrarian investor: Everybody else was steering clear of selling property insurance in Florida after the hurricanes of 2004-2005.
"All the headlines said there would be no Florida insurance market left in five years," Patel said. "We thought there was an opportunity. … And that's how we got started."
His instincts proved solid.
Today, as the head of Tampa-based HCI Group, the parent of Homeowners Choice Insurance, Patel, 47, oversees one of the fastest-growing property insurers in Florida. HCI was Tampa Bay's top-performing stock a year ago and is on track for another stellar return this year.
Keeping with his contrarian ways, he recently asked Florida insurance regulators for permission to start selling flood insurance with his policies to counter the new, sharply higher rates under the National Flood Insurance Program.
In a wide-ranging sitdown with the Tampa Bay Times, Patel talked about his aversion to outsourcing, mistakes made by other home-grown insurers, a special relationship with Warren Buffett, and fending off detractors who maintain his company could blow away with the next hurricane.
What was the genesis for creating Homeowners Choice?
I've lived in the area since 1985 and been involved with various high-tech companies. Paradyne used to be a big company here; that's where my first job was. Over the years, I've worked all over the world, but this was always home.
Most of the last decade, I was sort of semiretired. I had made a lot of friends locally and we decided to start a bank for ourselves, NorthStar Bank. I was nothing other than a shareholder.
Then, the insurance crisis started in Florida. It was late '06, early '07. … We thought there was an opportunity for a Florida domestic property insurance company. … At the time, I had no insurance experience. None. The first thing we did is go out and find a management team with experience. Somebody had to be the chairman, and I had the dubious task or honor, depending on the day of the week you ask me.
But then you became CEO as well.
Two and a half years ago, our original CEO, Frank McCahill, stepped away. The board said, "You've been here. Why don't you be CEO?" And I had picked up a lot of insurance by then. In reality this is like being the conductor of the orchestra. You're not the guy making the music; you just coordinate it.
As a public company, is there short-term pressure to perform to appease the shareholders?
I was watching Warren Buffett the other day and … he articulated something I've actually been doing. He said, "Look. When you run a company, you run it for the shareholder who is going to be there today and going to be a shareholder five years from now."
You do not run it for the guy who wants to see the stock go up 20 percent in the next three months so they have a good 20 percent profit and are ready to move on to the next thing. Our goal is to have a company that is bigger, stronger, better five years from now. Not five days from now.
How much did this hurricane-free environment the last several years help your company ramp up?
It hasn't hurt, but I don't know that people appreciate how little it has helped. We still have to go buy reinsurance (an added layer of insurance for catastrophes). You should see the amount of money we spend on reinsurance. This year it was $130 million and the wind didn't blow. Are we $130 million better off or is it the (reinsurance) guys in Bermuda and elsewhere?
You have more than 140,000 policies now. How big do you want to grow?
We're doing a takeout (of state-run Citizens Property Insurance policies), so by the end of the year we'll be at 170,000 policies or so.
We said way back when that we were going to grow to about 5 percent market share. I think by the end of the year we'll be around 4 percent market share.
HCI has diversified into real estate. Some critics maintain you should have stuck to one industry.
What everybody will tell you is that insurance companies should — quote, unquote — diversify. People have different ideas of diversifying. Some people think that means you should write homeowners insurance up and down the eastern seaboard. Other people think you should offer home and auto and all different lines.
Most years there isn't a storm, but some years there are. So you wouldn't mind having other businesses support you in a time of crisis. Getting in the real estate business is as diversified a way as autos or going up and down the seaboard.
Will you expand out of state?
We were thinking of looking outside Florida to other states and then this flood thing came along.
In a funny way, we're taking the position with flood the same way we did with Citizens (Property). People said, "This is terrible with these rates. No one will ever insure you."
We disagreed and put our checkbook there. … There really is an opportunity. I know the homeowners who are subsidized (with low rates now being phased out) don't feel subsidized. Some of them have been paying these rates for how many years with no claims?
You grew largely by taking policies out of Citizens Property. How much resistance do you face from property owners who think you're an untested or unsafe alternative?
We run into a certain amount of it. … It's a legitimate concern, but I think (it's) more being scared of the unknown than analyzing it.
Are you talking about an untested company in terms of finances or untested in terms of operational ability? We have more reinsurance than Citizens does. This is not just us; it's every carrier. Citizens has enough cash to pay for a once-in-60-year storm. That's great. But two things you should know: When they say paying for one-in-60, they're talking about using 100 percent of their surplus. All the (private insurers) have to buy to (insure) a one-in-100-year storm and only use up to 15 percent of the surplus at risk. If you say (Citizens) is safe, this is more safe. If you say that they're risky, this is less risky.
Homeowners Choice has a solid rating with Demotech, but another Florida ratings agency, Weiss Ratings, has given you a "D" in part because you don't keep much of your money in bonds. Is that a valid concern?
There is a different way of looking at it. It's not me versus Weiss. Really, it's Warren Buffett versus that guy. At the same time he was (criticizing) us for being 22 percent in bonds … Warren Buffet was busily saying that with anybody who's in bonds, it should come with a government health warning. Look at what happened with everybody's bond portfolio in the second quarter. Everybody could decide the facts themselves and say Warren Buffett was more right than the guy from Weiss was. But, you know, everybody is entitled to their opinion.
Plus, Warren Buffett has signed a five-year deal with us (to provide reinsurance). I've never met him, but I think he might have done his homework before he says these guys are good for paying me premiums for five years. And by the way, they don't do this with anybody else in Florida. I know the guy is getting old, but I don't think he's that old. They did this because it makes sense.
That was a key part of your reinsurance package this year?
Yes, it was done in March. We had done a three-year deal with him last year in May. So that three years is still going on and we put a five-year (deal) on top of it this year.
From that perspective, the guys who actually have money on the line seem to be taking a very different viewpoint than the guys who want to give ratings by analysis.
With companies like State Farm and especially Allstate scaling back dramatically in Florida, insurers based in the state have really emerged.
If you want to say Citizens is No. 1 and State Farm is No. 2, look at who the rest of the top 10 are. It's Universal Property, a Florida company; Homeowners Choice, a Florida company; Florida Pen (Peninsula), a Florida company; United P&C, a Florida company.
The quirky thing is the folks who encouraged this are actually on the finish line of having a Florida success and the irony is nobody sees it. Are they all going to succeed? There's no guarantee of that. But you have built more successes and, yes, we've had some failures along the way.
In '08 and '09, you had nine companies go under. It's like making sausage. It's not a pretty process. What the insolvencies tell you is there is risk. You can go out of business without a hurricane. We bought Homewise (Insurance). I can tell you the shareholders of Homewise wish they'd never heard of Florida. It didn't work out well for them.
What are some mistakes made by insurers that went insolvent?
I'll give you Magnolia (Insurance Co.), which in a way had a similar business plan to Homeowners Choice in starting with takeouts. Before they went under, we met with the folks to see if we could take over their (policies). We had a very detailed conversation and it's far enough in the past now that I can go into detail. The difference between what we did and what Magnolia did is we were always afraid of failure. Magnolia had no fear. So we would do 5,000 or 10,000 policies as a takeout. They did two massive takeouts three months apart.
They got beat up being in Miami-Dade; over here they got beat up (in Pasco and Hernando) by sinkholes. In 18 months, the thing just blew up very quickly.
So how are you equipped to handle a hurricane?
The reality is none of us have enough business to have a field force (of claims adjusters) in place. You have lots of adjusters contracted all around the country who come down (after a major storm).
One way to make (claim handling) more efficient is if all the claims an adjuster has are on the same street as opposed to going all over the place. What we did develop is the software that automatically does that geographic zoning. We (tell adjusters) we're going to pay the same as everyone else. But because of the way we give you claims, you'll be able to do six claims a day instead of four … because they'll all be near each other and you won't have the added drive time.
We have about 70 people in India from a software company we bought (that) built that software to make us more efficient. We didn't take 70 jobs from here and ship them out there.
Does your India operation handle customer service calls as well?
For a guy who is of Indian heritage, I don't like outsourcing.
When you call Homeowners Choice, it's a Homeowners Choice employee here who answers the phone whether it's for a claim or whether it's just, "Hey, did my payment get there?"
Will the Allstates of the world regret letting go of the Florida market and letting smaller insurers here gain a foothold? Will some Florida insurers get a national footprint at some point?
The survivors will, as this goes along in a natural progression. That's one of the reasons we took the risk. If we said, "Let's start an insurance company in Ohio," you would have had a very different outcome (because of heavier competition).
And unlike high-tech, where AOL was a darling a decade ago and is now obsolete, I can guarantee you 20 years from now some guy will still be living in a house in Florida and somebody will have to provide him insurance. It may be done electronically with a chip in his brain, but …
Jeff Harrington can be reached at (727) 893-8242 or [email protected]