Although it doesn’t always hold true, the reputation of small companies for explosive growth is very often well-deserved.

I mean, if your advisor mentioned a small firm with more than 18-fold earnings growth in the past seven years and stock gains of nearly 600% in the past six, wouldn’t you want to hear more? And the thing is, I’m not just making up these numbers for the sake of argument. They’re real.

After being founded in 2006, the company I’m referring to hit the ground running, growing revenues more than 30-fold from $8 million in 2007 to $241 million in 2013 and $254 million during the past 12 months. Since 2007, earnings per share (EPS) have spiked to $5.28 from $0.29 — that 18-fold increase I mentioned.

Since it began trading on the New York Stock Exchange in September 2008, the firm’s stock has rocketed 590% from $6.09 to $41.70. The price has been even higher, peaking around $54 in December 2013.

#-ad_banner-#You may be wondering exactly what this company does to be so wildly successful. It must be something phenomenal like developing a crucial vaccine, creating the most advanced artificial intelligence yet seen or maybe even finally coming up with a cure for the common cold, right?

Actually, I’m talking about an insurance company — one that sells everyday property and casualty (P&C) policies, mainly for homeowners, condominium owners, and renters. HCI Group (NYSE: HCI), previously known as Homeowner Choice, also offers fire insurance and has recently gotten into flood insurance.

With the sort of numbers it’s been putting up, HCI may look like the insurance industry growth story of the century. But I’m here to tell you it’s actually quite risky and should be approached with a healthy dose of skepticism for a couple important reasons. Now, I’m certainly not the first to describe these risks. Several other writers have pointed them out in the past year or so. But given the way investors have continued piling into the stock, I felt investors needed to hear about them again — before it’s too late.

A big issue, in my view, is that luck has played much too large a role in the firm’s success.

If you read HCI’s latest annual report, you’ll see the firm had about 160,000 policies and annualized gross premiums of $390 million at the end of 2013. Of course, those numbers may be somewhat different by now, but the key consideration is how HCI got all this business.

A huge source was a “take-out” program where policies were obtained in 10 different transfers from July 2007 to November 2013 from Citizens Property Insurance. That’s Florida’s state-run insurance company, which the state decided had become too big and should be pared down.

Thus, many thousands of its policies were given to HCI and other private-sector insurance firms in Florida — and that more than anything else has driven HCI’s growth since it began operating. 

“Substantially all of our premium revenue since inception has come from the policies acquired in these assumption transactions and subsequent renewals,” the firm said in its annual report.

Basically, HCI had all its business handed to it. That sort of thing doesn’t happen often, so I suspect generating revenues and profits will be substantially tougher going forward, considering the company will have to work hard to acquire new business if it wants to keep growing.

HCI has really dodged a bullet when it comes to the weather.

In fact, the company began operations right after a series of devastating hurricanes that spanned years and wreaked major havoc. One of the worst was Wilma, which hit Florida in October 2005 and did $11.9 billion worth of damage. Only two months before was the infamous Katrina, which caused $47.4 billion in damage across Florida and five other states.

As you may know, many larger insurers with deeper pockets than HCI exited Florida, most notably State Farm, because doing business there became too costly. HCI has yet to face this, never having been exposed to any major weather-related disasters in its short history. In a region known for active hurricane seasons, that’s a major stroke of luck.

Surely, a major storm will hit sooner or later. At best, this would erode growth of HCI’s profits and stock price. At worst, it could devastate the firm, particularly since several analysts have cautioned that it doesn’t adequately protect itself from catastrophic risk through reinsurance.

HCI has had a fabulous run, but I’m concerned its luck is about to run out. The firm does appear to have some positives, like strong-looking financials, reasonable valuations and a decent 2.6% dividend yield. But with a couple potentially major — possibly even catastrophic — headwinds, future profits and stock performance aren’t likely to be anywhere near what they’ve been.

Risks to Consider: HCI’s mettle could be tested very soon. According to the National Oceanic and Atmospheric Administration, there’s a 70% chance of 7 – 12 named storms on the Atlantic coast this hurricane season, which is already underway and officially ends November 30. Of these storms, 3-to-6 could be hurricanes with top winds of 74 mph, and 0-to-2 could be major hurricanes with winds of at least 111 mph.

Action to Take –> If you’re an HCI shareholder, consider reducing or even closing your position in the stock because of the risks I’ve described. If you’re thinking of becoming a shareholder, at the very least wait until the company reports full-year results for 2014 so you can fully assess any effects of the hurricane season.

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