Good afternoon. Welcome to HCI Group's fourth quarter 2014 earnings call. My name is Robert, and I will be your conference operator this afternoon. At this time, all participants will be in a listen-only mode. Before we begin today's call, I'd like to remind everyone that this conference call is being recorded and will be available for replay through April sixth, starting later this evening. I would now like to turn the call over to Kevin Mitchell, the Vice President of Investor Relations for HCI Group. You may begin.
Thank you. Good afternoon. Welcome to HCI Group's fourth quarter and full year 2014 earnings call. With me today are Paresh Patel, our Chairman and Chief Executive Officer, Richard Allen, our Chief Financial Officer, and Scott Wallace, President of the Property and Casualty Insurance division. Following Paresh's opening remarks, Richard will review our financial performance for the fourth quarter and full year of 2014, then turn the call back to Paresh for an operational update and business outlook. Finally, we will answer questions. To access today's webcast, please visit the investor relations section of our corporate website at hcigroup.com. Before we begin, I would like to take the opportunity to remind our listeners that today's presentation and responses to questions may contain forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995.
Words such as anticipate, estimate, expect, intend, plan, and project, and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions, rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the company's filings with the Securities and Exchange Commission. Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on the company's business, financial conditions, and results of operations. HCI Group Inc. disclaims all the obligations to update any forward-looking statements. I would like to turn the call over to Paresh Patel, our Chairman and CEO. Paresh.
Thank you, Kevin. Good afternoon, everyone. As Richard will expand on shortly, 2014 was our seventh very good year in a row. The fourth quarter of 2014 was our 29th consecutive quarter of profitability. Here are some highlights from the quarter. In December, we paid a $0.275 dividend per common share, our 17th consecutive quarter of paying common dividends. We repurchased and retired 256,324 common shares at a total cost of $10.6 million, or an average price of approximately $41.20 per share. We also assumed additional policies from Citizens in December, totaling approximately 36,000 policies with about $106 million in estimated annual premium. Of these policies, approximately 30,000 policies are wind-only policies.
On another side, we had a slight uptick in losses and loss adjustment expenses in the fourth quarter compared to the year-ago quarter. This is consistent with a slight uptick we've seen throughout 2014. We do not see this as a start of an upward trend, but rather a reversion to normal levels from an exceptionally good 2013. This uptick, along with the timing and size of Citizens assumption, are the principal differences between 2013 and 2014. To illustrate, in 2013, we assumed $81 million of premium in early November. In 2014, we assumed $106 million, but in mid-December. This fixed change in the quarter results in lower pre-premium recognition for the fourth quarter of 2014. As I will discuss later, we also did an assumption in February of 2015.
I would like to invite our CFO, Richard Allen, to take us through the financial performance for the fourth quarter. Richard.
Thank you, Paresh, good afternoon, everyone. For the quarter ended December thirty-first, 2014, income available to common shareholders decreased by $1 million from the same quarter in 2013 to $14.6 million or $1.30 per common share. Gross premiums earned for the quarter were $91.4 million in line with the prior year. In comparison of the two quarters, the assumption completed in November of 2013 and December of 2014 contributed $11.5 million and $5.3 million, respectively, to the fourth quarter of 2013 and the fourth quarter of 2014. Loss and loss adjustment expenses increased $3.2 million over the same period in 2013.
For the year ended December thirty-first, income available to common shareholders was $62.7 million or $5.36 diluted earnings per common share, compared to $65.5 million and $5.63 earnings per common share for the year December thirty-first, 2013. Gross premiums earned increased 8.4% or $28.4 million to $365.5 million compared to the prior twelve-month period. For the same periods, net premiums earned increased 7.6% to $252.1 million, an increase of $17.8 million. These increases are primarily the result of the assumption of policies from Citizens in November of 2013 and the ability to maintain a consistent cost of reinsurance to gross premium earned over the periods.
Net investment income, reflecting the increases in our investment portfolio from the latter part of 2013, increased to $4.8 million as compared to $1.5 million in 2013. Benefited by market conditions in 2014, realized gains on the sales of investments were $4.8 million for the year ended December 31st, 2014. Loss and loss adjustment expenses increased to $79.5 million from $65.1 million, with a loss and loss adjustment expense ratio to gross premiums earned of 21.7%. This increase is primarily the result of claim development and reserve strengthening throughout the year. Policy acquisition costs increased to $38 million, reflecting the renewal and subsequent commissions in premium taxes on the policies assumed in November of 2013. Interest expense increased by $6.8 million due to the $103 million of senior notes issued in December of 2013.
Our combined ratio for the fourth quarter of 2014 was 66.8%, compared to the prior period of 63.1%. For the year ended December 31st, 2014, our combined ratio was 65.5%, compared to 57.5% for the prior year. On the balance sheet, invested assets have increased to $168.8 million from $146 million at December 31st of 2013. Cash and short-term investments increased to $314.7 million from $293.4 million a year ago. Total stockholders' equity increased 13.7% over the year to $182.6 million. Included in the balance sheet and income statement, as discussed in prior calls, is a benefit of our multi-year reinsurance treaties. As of December 31st, 2014, we have accrued a benefit of $28.1 million and deferred recognition of $6.5 million of ceded premiums. In closing, must we remember that 2014 was an extremely good year following an exceptional year of 2013. Paresh.
Thank you, Richard. Now we're going to talk about 2015 a little bit. In January, we announced an increase of our regular quarterly cash dividend to $0.30 from $0.275 per common share. In February, we assumed approximately 4,700 additional policies from Citizens. This is additional to the December takeout. This assumption is insignificant on its own, but when combined with the December assumption, will result in approximately 41,000 policies joining the company with an estimated annualized premium of $118 million. Of those, about 32,000 policies on a combined basis are wind-only policies. With these two new assumptions, we expect 2015 to be a very good year, provided the hurricane season remains calm. Also, we believe our strong cash position of $315 million allows us to patiently seek and capitalize on accretive growth opportunities if and when they arise.
This is something we've done throughout our history, and we feel confident will occur again. Finally, on a personal note, before we open our call to questions, I would like to take a moment to thank Scott Wallace for his service as the President of our property and casualty insurance division. As we announced last month, Scott will be retiring at the end of May after a 37-year career in the insurance industry. We thank him for his service to the HCI Group and to the industry and wish him a happy and healthy retirement. He has built and leaves behind a very talented management team at Homeowners Choice. With that, we're ready to open the call for questions. Operator, please provide the appropriate instructions.
Thank you, sir. At this time, we will conduct a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question comes from the line of Casey Alexander with Gilford Securities. Please proceed with your question.
Yeah, good afternoon. Could you review sort of the economics and the risk-reward of the wind-only policies as opposed to more traditional multi-line policies?
Sure, Casey. Relatively straightforward. The wind-only policies obviously don't cover any exposure for other perils. It's really pretty much a hurricane coverage policy only. What that means is that between the assumption time till at least June 1, when we have to add hurricane reinsurance to them, they basically have a very low loss ratio, even lower than we used to have before. The only expenses they would have with them is as they renew, we would get the policy acquisition cost and whatever management overhead we allocate to them. So they are very.
Limited loss.
Yeah, they're very profitable in the short term. In this particular scenario where we are in 2015, what would have to happen on June 1 is we would have to buy reinsurance on them. When we do that, given the way reinsurance rates seem to be softening, and I'm greatly hopeful they stay as soft as they are, that that should also provide them to be a very good assumption that we did in December. One other item I would tell you is that there seems to be some perception to some people that these policies do not have any reinsurance on them whatsoever until June. That isn't really true because these policies do get covered by our existing reinsurance tower should there be a massive spring storm or something. It's just they don't get recalibrated to a 1 in 100 year PML till June 1.
Does that help?
Yes, it does. The share repurchase that you mentioned, that $260,000, was that just in the fourth quarter?
Yes, Casey, it was.
Okay. What is book value at currently?
Book value currently as of 12/31 is $1,792 compared to $1,468 at the prior year end.
Okay. Can you discuss, has there been any change in the attrition rate of the previously taken out policies as we look at the book from Q3 to Q4?
Casey, we don't see it that way. Actually, on the year as a whole, we actually seem to be retaining a greater percentage of policies. I don't want to, again, explain this as a big trend. We are tweaking perfection here because I think we're going up from 86% retention to 88% retention or something. This is not going to keep increasing forevermore. We do seem to be at the top end of the range. So far, we seem to see retention improving despite the more competitive environment that is out there.
Another company in your marketplace reported today and discussed that they were evaluating several M&A opportunities. Have you seen any M&A opportunities come across your desk? I know you can't be specific about it, but what's the marketplace look like?
Casey, I guess in simple terms, yes. We see M&A opportunities frequently, and actually, I would say even maybe one a week. The issue that's there is the difference between what the seller would want to sell them at versus what we would buy at. That's always a problem in M&A activity, right? There are always things available for sale, and there's always things available to buy. It's just a question of, is it an appropriate price? You've actually seen us do this a couple of times in terms of go through. We look at acquisition very closely, but if it doesn't meet our price, we are equally disciplined enough to walk away from that. Yes, I agree with whoever the other company was in terms of M&A opportunities being there. It's just a question of at what price. Are you willing to pay that premium?
All right. Okay. A couple of years ago, you started up an effort in Alabama, as I recall. Is there any status update to that? What is your, if I can take your temperature about potentially branching out to some other states?
Okay. Alabama specifically was something that between the time we sort of walked down that mission and when we got down to the far end of it, the risk-reward benefit wasn't sufficient for us to keep pursuing it. While it's there, it's very much on a back burner basis.
Okay.
Okay. In terms of pursuing expansion outside the state, we continue to look and we sort of investigate, check, all those kinds of things. We don't see it as anything significant or it's absolutely planned for 2015 in any particular state at the moment. Are we exploring other states? Yes, we are. We're just waiting for the right opportunity.
Okay. My last question is, we know that you've done multi-year contracts with reinsurance. How would you characterize the reinsurance opportunity for 2015, given that there's been some discussion that lower rates are on the horizon again, which may come as a surprise to some people?
Yeah. Casey, as we sort of stated even last year that we were doing some of the multi-year stuff to hedge volatility in insurance pricing, in reinsurance pricing, right? The point about hedging is sometimes you get wins because prices go up, and sometimes it goes the other way, and you go, "If I had hedged, I would get a better deal." This is obviously, at least for the multi-year contracts we did, more in that side of the equation. Having said that, we do have one of our multi-year contracts actually terminating at the end of May 2015. We are getting that recycling of those contracts. If there's lower rates, we will take advantage of them.
The other way we look to benefit from this is the additional reinsurance we will have to buy for the wind-only book because we price the profitability and looking at that business based on what we thought were slightly stress test numbers, which were reinsurance rates from a couple of years ago. Clearly, if they're lower than that, we should get some benefit from that.
Right.
The final point about there being lower rates this year versus last year. You're not getting the same sense that it's going to be as big and as guaranteed that there will be lower rates this year as we were hearing at this time last year. Obviously, from our perspective, we would like there to be lower rates, and we hope there will be lower rates, but I'm not so certain that it's as big and as sure a thing as it was last year. Yeah?
Yeah. Frankly, we would prefer that your hedges not work because if they're working, that's probably bad news for the citizens of Florida. All right.
Totally agree.
Thank you for taking my questions. I appreciate it.
Thank you.
Our next question comes from the line of Matt Carletti with JMP Securities. Please proceed with your question.
Hey, thanks. Good afternoon, guys. I have a few questions. A couple higher level ones. We touched on a few pieces of kind of growth outlook already. Thanks for the color and clarity on some of the takeouts. I was hoping we could maybe fill in some of the other pieces, being some of the initiatives you've had with flood, some of the initiatives with potential cross-sells on the wind-only and other avenues. How should we think about not just the next few quarters but kind of as we look through 2015 and even into 2016, what sort of growth opportunities you see out there for yourselves?
Matt, great question. From our perspective, with a lot of these things, we sort of say things when they're highly unpopular for people to hear, it sort of plays out that way. If you recall, when people were looking at the beauty and the opportunity in the Citizens, what was that?
Clearinghouse.
Clearinghouse. We were slightly skeptical. I think the numbers speak for themselves at this point. Along a similar line, in the flood business, et cetera, what's beginning to happen is as FEMA went from that massive rate increase, which they reversed, they're now increasing rates starting in April, and I think it'll happen every year. As those increases flow through, we are more likely to increase our premiums from that side of the business. We are not necessarily looking to increase exposure and/or policy counts. We are more focused on premiums and things are heading in that direction.
Okay. I know you guys have been working on some things very long-term. Proplete comes to mind. Where do you see HCI in kind of 3-5 years? We get past kind of the current environment. How do you see the company being similar or different longer down the road?
Well, to be blunt about it, when we look out 3-5 years, you're going to see the business and the industry that Homeowners Choice operates in in one of two things. It's either the same industry that's been here for the last, shall we say, 200 years in terms of how things work. If that's the case, we will do fine as an insurance company. On the other hand, we are very aware of that seems to be a technological play that the industry might be going through a seismic shift. The longer-term stuff that we're doing in Exzeo, et cetera, is designed to make sure that we're positioned to at least participate in that transformation should it occur. Things like Proplete are obviously products that get us to that point.
Great. All I have left are just a few numbers questions. Specifically, for the quarter, do you have handy gross written premiums, net written premiums, and policy count, both the current quarter and year ago?
I've got the gross written for the annual basis right here, Matt.
Okay.
If that's all right.
Okay.
I can get the for you shortly, and we'll give it to you after the call. Gross written for the year was $407,653,000.
Okay.
Net written, $294,230,000.
Great.
Weighted average to ordered shares as of 12/31 for the year was $11,694,000. For the quarter, it was $11,420,000.
Perfect. Then PIF count, do you have that handy?
Yeah. Matt, let me handle that one for a second.
Sure.
It's an interesting question everybody always focuses on that.
Right.
It's been causing some confusion. I just wanted to clarify. We don't focus on that number as much as other people do. They seem to think that's a big number, right? What I'd like to say about that is that people, we are different companies. They look at things differently. It's like if you're a trader, you look at the stock price every day of the week. If you're an investor, you're more worried about where the stock price is going to be a year or two years down the road. We are more about premium and those kinds of things. Just to illustrate the point about why this matters and why we look at it the way we do, we assumed about $61 million of unearned premium when we took over HomeWise in November of 2011. Okay? That was four years ago.
Sorry, three and a half years ago. Since then, we've not only earned that $61 million, we've earned a further $187 million on those same policies. Currently, as of the end of December, we still earn $5 million a month on those policies. Right? What the PIF count was day to day on those policies isn't really the focus. It's how much earned premium are we getting on a monthly basis, how much of a future cash flow are we going to get out of this? To illustrate how we focus on this and we know these numbers, back in July 2007, when we did our very first assumption, about 5,800 policies, it was $7.6 million in unearned premium. Since then, on those policies, we've earned a further $31.7 million in premiums. We continue to do that at about $480,000 a month. Right?
In that context, policy count within a few hundred this way or that way, while it's interesting, it's not really that big. Having said all of that stuff, the PIF count at the end of the year, as we filed with the department, was 177,360. Okay?
Yep.
Yep.
Great. Thank you very much, and congrats on a really nice year and best of luck in 2015.
Thank you.
Thank you.
Our next question comes from the line of Arash Soleimani with KBW. Please proceed with your question.
Hi, everyone. Just a few questions here. First, can you give us a numbers question? What was the prior period reserve development in the quarter?
We don't actually have it handy, but we can probably go pull the Qs and Ks. We'll get you that back after the call, yeah?
Okay. Also, I think you mentioned in the release something about prior development. Was there something specific driving that?
No. Arash, I think overall, and as I said in my earlier comments, right, when you compare 2013 to 2014, there's an increase, right?
Right.
What we're trying to make sure everybody sort of sees is don't just read the numbers side by side, is that 2013 was an exceptional year. You're now reverting a little bit back to the mean, and we didn't want to have everybody extrapolate that to reverting to some other number. Yeah?
Right.
We are making sure we point out that when you look at the Qs and Ks filing, you see that increase, but it's not a, "Oh my God, it's a trend. It's going up there." I think quarter-over-quarter in the fourth quarter 2014 versus 2013, we were up about $3 million or something, and if you look year-over-year, it's about $14 million. It's about $1 million a month. You're also looking at a bigger book of business and those kinds of things. In 2013, it was exceptionally low because if you compare 2013 to 2012, it was flat year-over-year for a company that added about $100 million in premium.
Right.
Right. You get the gist of it, that we're trying to let everybody know that you come back from a very high number to a less high number. It is not the same as a trend. I say that the same thing about our retention when Casey asked the question earlier. We're retaining policies at such a high number that if we drop from 88 to 85, it isn't the end of the world. It's just 88 is an exceptionally high number. Again, we're trying to make sure everybody sort of appreciates that there's a certain amount of noise in the business where a few points move around is not a harbinger of long-term anything, yeah?
Right. That makes sense. Can you talk about the, you may have mentioned this, the expense ratio. What helped that improve? I know some of it was, I think, salaries. Was that the bulk of it or was there anything else in there?
Basically, salaries and stock compensation expenses were reduced.
Okay. I've noticed policy fee income seems to have picked up this quarter and last quarter. What's driving the uptick there?
The uptick there, you're comparing quarter to quarter?
I was looking more so year-over-year.
Back in 2013, we had to switch to a new accounting standard that said you had to earn it over the term of the policy.
Okay. It looks like.
Now we're.
It's gone from 4Q13 to 4Q14, it's gone from, I guess, 85,000 to about almost 1 million.
Correct.
It's gradually gone up. Is that all just from change in accounting?
Yes.
Okay. Can you talk about, I guess in terms of Proplete, how is organic growth? Is that benefiting at all from Proplete? Is Proplete driving anything there?
Simple answer, no.
Okay.
The item that's going on is that there's obviously tremendous competition going on in the voluntary market to pick up policies organically as, and it seems to be the fashion of the moment, right?
Right.
You have people talking about how many millions of dollars, they're writing $2 million of new business a week or whatever.
Right.
That's wonderful, but if you do $2 million a week for 52 weeks, you get $104 million. We assumed $118 million in two assumptions. Right?
Right.
To us, the dollars look just as green. It's just that one's got a lot less effort than the other. We are biding our time for the right set of things, yeah?
Right. You touched on this a little bit earlier in the call in response to a prior question, in terms of the wind-only, I guess what kind of combined ratio is fair to expect on a wind-only policy? I guess I'm asking that more so on a normalized basis once reinsurance is factored in. Let's say a full year where you did buy reinsurance on it. What does the wind-only policy combined ratio look like compared to your typical personal residential policy?
Okay. What's going to happen is in the absence of hurricanes. Just to clarify that because that sort of things around again a little bit as well. What you will find is that the loss ratio on those policies will be a lot less than there is on a normal multi-peril policy.
Right.
Ironically enough, the average premium per policy is higher because of rates and those kinds of things.
Right.
Further the other side, the administration cost, et cetera, will be about the same.
Right.
The place where it'll go up a little bit, the expense will go up is the reinsurance cost as a percentage of premium. Obviously the reinsurance is covering almost the 100% exposure of the policy, yeah.
Right.
Right. You get all those moving parts. If reinsurance costs stay soft, after you add and subtract from here, there, and everywhere, you should end up with the same kinds of profit margins, maybe slightly better on the wind-only policies because. I say slightly better because reinsurance costs are slightly on the soft side, yeah?
Okay. I know you always mention looking at the third quarter of the normalized combined ratio. Looks like in the third quarter of 2014, you guys had a 72.1% combined. Is that sort of what's maybe a little bit less than that for wind-only on a normalized basis? Is that sort of fair?
The part about it why we are trying not to put a number, especially one to the tenth of a decimal point on that, is it's going to depend on the reinsurance contracts as we get into this on June 1, yeah?
Okay.
Post June 1, we would know. Pre-June 1, because the volatility associated with reinsurance contracts will be so great on those policies, we really don't want to get down to the nearest percentage point, let alone decimal points of that, yeah?
I'm just asking ballpark. I guess if the AOP loss ratio is basically zero on wind only, would the reinsurance cost be higher by about that amount?
No, not quite.
If you would have a 30% AOP loss ratio on a typical personal residential policy, is the reinsurance cost more expensive by that amount on a wind only?
No.
Does it basically just equal itself?
Yeah.
Okay.
It shouldn't be by that full amount. Part of the other parts that makes it slightly complicated is how those wind policies fit in with the rest of the book. Right?
Right.
On a general basis. Knock on wood, and this is definitely a forward projection, et cetera. We are hoping that Q3 2015 is more profitable than Q3 2014.
Right.
Definitely on an absolute dollar basis, we're not 100% sure that would also be on a combined ratio basis. If things go the right way, it could be an improvement in both cases, yeah?
Okay.
It requires a lot of right things to play out the right way.
Okay. In terms of the loss ratio was the, I guess, year-over-year increase in the loss ratio, was that just a function again of 2013 being really good and I guess is that basically the extent of it? Is there anything else?
Yeah.
Primarily.
Primarily, it's basically that, right? Now, the other thing that's also going to happen, and just so that everybody sort of sees it, with the addition of these wind-only policies, the loss ratio may also start coming down in the next few months.
Okay.
That's going to occur because you've got those wind policies with zero loss ratios on them, yeah.
Right. Okay. I think that's it for me for now. Thank you so much.
Thank you.
As a reminder, if you'd like to ask a question, please hit star one on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from the line of Edward Hemmelgarn with Shaker Investments. Please proceed with your question.
Yeah. I had a couple of questions. One regarding the interest rates environment and your investments. You've been pretty conservative, obviously expecting that rates were going to be moving higher. Given that we're seeing negative long-term rates in Europe, what's your outlook, and what are your intentions moving forward with the investment portfolio?
One of the luxuries we have as a company is that the primary source of income is not the investment portfolio. We tend to take slightly long-term views. Given that we are a risk management business on the underwriting side, we generally have tended to shy away from investments that yield, shall we say, below 2% a year. Given those kinds of constraints, if interest rates continue in this low environment, et cetera, we will keep building up our cash position. I think worldwide there seems to be interest rates coming down, but you now also have the Federal Reserve talking about raising rates later in the year.
We are hopeful that they actually do that, not just for our investment portfolio sake, but I think just from the general economy perspective because we seem to be living in this interesting world where the U.S. economy seems to be doing very well and improving. I know the rest of the world seems to be in a slightly different spot, but I continue to hope that the American economy goes from strength to strength for the sake of all of our policyholders and all the shareholders out there, yeah.
Well, you would clearly benefit from a rise in short-term rates for your cash.
That doesn't mean the long rates will go up at all.
Yeah. Absolutely. We would be in a wonderful spot for that because we do have lots of cash. Even if short-term rates go up, even if long-term rates don't, it should be.
It just helps.
It should be helpful.
Yeah, I agree.
Yeah.
I know you've increased the equity percentage a little bit. Would you ever think about doing more with that?
Yes. Again, we don't have dogma that we have to stay in cash, or we are aversion to any kind of investment. Really, it's more of a case of opportunity. I can tell you that if you had 10-year treasuries at 5%, you would see us deploying a lot of money in that direction, right? Unfortunately, that isn't the case, and we don't know when that will be the case.
Right. Okay. The other question relates to diversification of risk. What are your thoughts? Clearly, if you're having all of your risk concentrated in Florida, you'll likely, over time, have greater volatility. At least if hurricanes hit in Florida, it will impact you much more because you're concentrated in Florida than if you were all along the coast or something. What are your thoughts and your intentions over time? Do you want to find a way to diversify risk so that you may have less volatility?
Let me give you that answer in two different parts, right? The question about diversity and volatility on the earnings. Well, that's why we buy reinsurance. We have been paying for a hurricane and a half for eight wind seasons at this point. The fact that there hasn't been any major hurricanes in Florida means the reinsurers do very well out of it as opposed to us. I think we sort of pay for that hedge because that's not the business we're in. I'm very happy to pay that every year and not get a claim against it because getting a claim against it means we've got a major hurricane, and we wouldn't want that if we can avoid it.
The volatility question really, while it appears on face that would be the thing, we're talking about a company with 29 straight quarters of profitability, which is, I think, more than most of the companies in all the other industries that are not supposed to be volatile have put up over, especially given the last seven years. We are always mindful of volatility, but I think we have hopefully proven that the volatility is not there absent storms and the storms we do hedge because of hurricanes. You have that. The other kind of conversation of diversity. It's a simple observation. There are a lot of other people who are diversified into multiple states. We don't see the benefit to the bottom line that this diversity should have provided them.
Diversity sounds great, if it's that great, there should be a outcome that follows from that, we don't see that. When we do see that, we will gladly follow that path. The other part about diversifying that I would give you is we don't see diversity as to just having to be in more insurance lines or in more states. It's that whole thing of, is that what you want to be able to grow? We are also diversifying by being in other businesses, whether it be software or real estate, et cetera. We are looking to diversify in means other than insurance. Ultimately, it's about having a stable and growing balance sheet and hopefully consistent earnings quarter over quarter, even though the earnings may be slightly volatile, they're there quarter after quarter after quarter. Long-winded answer. I hope that helps. Yeah.
No, I agree. I guess I was just, you also, though, to the extent, I think there's a certain volatility risk premium that's, or discount that Homeowners Choice is earning. Of the entirety of its exposure to Florida, really. To the extent that one could begin to diversify one's risk and maybe not have the same highs of income as the HCIs had. Also then reduce the risk of, let's say, even though you have reinsurance, if you had one or two hurricanes that would hit, it would have an impact on earnings at least in the quarter for HCI. Maybe to the extent that if the policies were in more locations with carrying reinsurance in each one of those, the risk, you would probably have more frequent events, but not as significant, therefore the earnings would be spread out or more even.
As you point out, you could do the same thing with the other businesses. I'm just curious how quickly you might wish to move on that. I do think that would probably reduce some of the discount that's currently assigned to HCI.
Yeah. Edward, it's an interesting conversation because this whole conversation about the discount, I totally share the viewpoint. We've always managed the business, we manage the business in terms of what's the appropriate thing to do and not the popular thing to do. Unfortunately, we've always had a discount associated with us based on that. To give you an idea, everybody spent 2014 about why takeout is such a great idea and how much growth it leads to and what will you do when it ends, et cetera. What everybody has forgotten is Homeowners Choice was a company that pioneered the idea of the fourth quarter takeout in 2007 and 2008 and 2009 and 2010. We only passed in 2011 because we were buying HomeWise, we did in 2012.
All of those years when we were doing that stuff, there was universal agreement that takeouts were a bad idea, and the companies that did that would have worse outcomes than the people who wrote their policies one policy at a time voluntarily. Ironically enough, at this point, those two dogmas have been reversed. We could have, over those five years, done things that were more popular, but I can assure you they would not have been more profitable. The results speak for themselves on those numbers at this point. As we look forward, we have the same issue. We're trying to do what's right as opposed to what's popular in the short term.
I agree. I certainly have appreciated the benefits of the takeout. Seeing the wisdom behind that, I was just curious longer term what your thoughts may be regarding it. I'm assuming that at some point in time, there may not be takeouts available.
That's not at some point in time. I think we're pretty much there now.
Yeah. Thinking about future growth and how you might approach it is.
To that point, I think the future growth that we will have, I suspect, is going to be in the same way that we've always had it, is that we'll be sitting here one day and an opportunity will show up. It has happened consistently. It's just that it's unpredictable. Our future growth, I think, is going to come along those lines. Let me give you an example. Everybody's talking about lack of growth opportunities. You put one hurricane in Florida, growth opportunities will show up very plentiful, very quickly. Given those kinds of things, we're very patient to wait for the world to catch up to us as opposed to chase the other thing. As far as other opportunities, the real estate division continues to do well, and it's a long-term investment. Same thing with the software division.
I am confident that someday people will look back and say, "Weren't those good investments?" Can I say that that's absolutely beyond the shadow of a doubt today? No. Am I confident that they will occur? Yes. Okay. Thanks.
Perfect.
At this time, this concludes our question and answer session. I would now like to turn the call back over to Kevin Mitchell, who has a few closing remarks.
On behalf of the entire management team, I'd like to express our appreciation for the continued support we receive from our shareholders, employees, agents, and most importantly, our policyholders. We look forward to continued success in 2015.
Thank you for joining us today for our presentation. This concludes today's call. You may now disconnect.