UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20192021
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33251
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UNIVERSAL INSURANCE HOLDINGS, INC. |
(Exact name of registrant as specified in its charter) |
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Delaware | 65-0231984 | | | | |
Delaware | 65-0231984 |
(State or other jurisdiction of incorporation or organization)
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1110 WestW. Commercial Blvd., Fort Lauderdale,, Florida33309
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (954) (954) 958-1200
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 Par Value | UVE | New York Stock Exchange |
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Securities registered pursuant to Section 12(g) of the Act: None.
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒Yes☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☒ |
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Large acceleratedNon-accelerated filer | ☒☐ | Accelerated filerSmaller reporting company | ☐ |
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Non-accelerated filer | ☐ | Smaller Reporting CompanyEmerging growth company | ☐ |
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| | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 28, 2019,30, 2021, the last trading day of the quarter: $871,634,586.registrant’s most recently completed second fiscal quarter: $390,159,388
Indicate the number of shares outstanding of Common Stock of Universal Insurance Holdings, Inc. as of February 24, 2020: 32,685,096.22, 2022: 31,242,264.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated herein by reference to the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2022, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.
UNIVERSAL INSURANCE HOLDINGS, INC.
TABLE OF CONTENTS
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Item 9. | | | | |
Item 9A. | | | | |
Item 9B. | | | | |
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Item 15. | | | | |
Item 16. | | | | |
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Exhibit 4.1 | |
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Exhibit 10.9 | | | | |
Exhibit 21 | | List of Subsidiaries | | |
Exhibit 23.1 | | CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | | |
Exhibit 31.1 | | CERTIFICATION | | |
Exhibit 31.2 | | CERTIFICATION | | |
Exhibit 32 | | CERTIFICATION | | |
DOCUMENTS INCORPORATED BY REFERENCE
Information called for in PART III of this Form 10-K is incorporated by reference to the registrant’s definitive Proxy Statement to be filed within 120 days of the close of the registrant’s fiscal year in connection with the registrant’s annual meeting of shareholders.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These forward-looking statements may be identified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” and other words with similar meanings. These statements may address, among other things, our strategy for growth, catastrophe exposure and other risk management, product development, investment results, regulatory approvals, market position, expenses, financial results, litigation and reserves. We believe that these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (Part I, Item 1A of this report). We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
PART I
Overview
Universal Insurance Holdings, Inc. (“UVE,” and together with its wholly-owned subsidiaries, “we,” “our,” “us,” or the “Company”) is a holding company offering property and casualty insurance and value-added insurance services. We develop, market and underwrite insurance products for consumers predominantly in the personal residential homeowners lines of business and perform substantially all other insurance-related services for our primary insurance entities, including risk management, claims management, and distribution. Our primary insurance entities, Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC” and together with UPCIC, the “Insurance Entities”), offer insurance products through both our appointed independent agent network and our online distribution channels across 1819 states (primarily in Florida), with licenses to write insurance in two additional states. In the second quarter of 2019, we surrendered UPCIC’s license in West Virginia, a state in which we did not write any premium. Also during the second quarter, we received a Certificate of Authority in Wisconsin, approving UPCIC as a licensed insurance company in that state. The Insurance Entities seek to produce an underwriting profit (defined as earned premium minus losses, loss adjustment expense (“LAE”), policy acquisition costs and other operating costs) over the long term; maintain a strongconservative balance sheet to prepare for years in which the Insurance Entities are not able to achieve an underwriting profit; and generate investment income exceeding short-term operating needs.on assets.
Trends - Impact of COVID-19
Subsequent to March 2020, we have not seen a direct material impact from COVID-19 on our business, our financial position, our liquidity, or our ability to service our policyholders and maintain critical operations. Indirectly, inflationary pressures, in part due to supply chain and labor constraints during the pandemic, have affected and continue to affect claims costs and, to a lesser degree, other expenses. As a provider of services that have been deemed essential under most directives and guidelines, we are confident in our ability to maintain consistent operations and believe we can continue to manage with our remote workforce as a result of our disaster preparedness planning, with little impact on our business and service levels and our standards of care for both underwriting and claims. We continue to monitor local, state and federal guidance and will adjust workforce activities as appropriate. Although we have not experienced a direct material impact from COVID-19 in 2020 or 2021, the ultimate impact of the COVID-19 pandemic, or future pandemics, on our business and on the economy in general cannot be predicted.
Business Strategy
UVE’s strategic focus is on creating a best-in-class experience for our customers. We have more than 20 years of experience providing protection solutions. In 2019, we rebranded certainWe continue to focus on disciplined underwriting in opportune markets and maintaining a resilient balance sheet enhanced by our strengthening reserve position, our reinsurance programs, and the completion of a private placement of $100 million aggregate principal amount of 5.625% senior unsecured notes due 2026 (the “Notes”) for general corporate purposes and growth capital to optimize our subsidiaries to better serve our Insurance Entities, distinctly identify our capabilities, and position us for continued growth in the future.capital position. We have made substantial efforts in recent years to improve and enhance our claims operation, including reductions in our claim resolution times and an intensified effort to collect subrogation for the benefit of the Insurance Entities and their policyholders. Our differentiated capabilities support the Insurance Entitiesinnovate across all aspects of our services businesses, including continued development of our digital agency Clovered.com where we have more than 20 carrier partners, utilization of digital applications where applicable to adjust claims, and the insurance value chain to provideplacement of UPCIC’s inaugural catastrophe bond transaction, Cosaint Re Pte. Ltd, by our customers with a streamlined experience, and wein-house reinsurance broker intermediary Blue Atlantic Reinsurance Corporation (“BARC”). We continue to evaluate ways in which we can improve the customer experience.
Our business strategy also aims to provide disciplined underwriting, maintain a strong balance sheet backed by our reinsurance programs and geographic diversification, and maximize earnings stability through inversely correlated or complementary high-quality earnings streams.experience across all touchpoints of the insurance value chain.
Products and Services
Insurance Products
UPCIC (which accounts for the majority of our Insurance Entities’ business) currently offers the following types of personal residential insurance: homeowners, renters/tenants, condo unit owners, and dwelling/fire. UPCIC also offers allied lines, coverage for other structures, and personal property, liability and personal articles coverages. APPCIC currently writes similar lines of insurance as UPCIC, but historically for properties valued in excess of $1 million. More recently, APPCIC has commenced a standard market homeowners insurance program in Florida in conjunction with our digital platforms.
Our Insurance Entities, UPCIC and APPCIC, are both currently rated “A” (“Exceptional”) by Demotech, Inc. (“Demotech”), which is a rating agency specializing in evaluating the financial stability of insurers. In addition, APPCIC writes commercial residential multi-peril insurance.our combined statutory capital surplus was approximately $394.9 million at December 31, 2021.
Risk Management
Our subsidiary, Evolution Risk Advisors, Inc. (“ERA”, formerly Universal Risk Advisors, Inc.), is the managing general agent for the Insurance Entities. In this capacity, ERA advises on actuarial issues, oversees distribution, administers claims payments, performs policy administration and underwriting, and assists with reinsurance negotiations. ERA’s underwriting service evaluates insurance risk and exposures on an individual and portfolio basis and assists the Insurance Entities with pricing risks. All underwriting is performed utilizing our state-approved rate and rule manuals as the basis of our rate-making and risk assessment. ERA collects fees from the Insurance Entities for the services it provides, as well as certain policy fees from
insureds. Our subsidiary, Universal Inspection Corporation d/b/a Wicklow Inspection Corporation, complements ERA and our Insurance Entities by conducting inspections as part of our underwriting process.
The Insurance Entities rely heavily on reinsurance to limit potential exposure to catastrophic events. In most years, our single largest cost is the expense for our reinsurance coverage. In conjunction with ERA, our fully-licensed reinsurance intermediary, Blue Atlantic Reinsurance Corporation (“BARC”),BARC, partners with a third-party reinsurance brokersbroker to place and manage our reinsurance programs for the Insurance Entities. BARC receives commission revenue, net of third-party co-broker fees, from reinsurers in connection with these services.
Claims Management
Our subsidiary, Universal Adjusting Corporation d/b/a Alder Adjusting (“Alder”), manages our claims processing and adjustmentadjusting functions from claim inception to conclusion, which we believe allows us to increase efficiency and provide a high level of customer service. Alder’s Fast Track initiative (“Fast Track”) has expedited the claims settlement process to close certain types of claims in as little as 24 hours through prompt analysis and on-site field adjusting. Alder has increased its use of technology to inspect properties and adjust claims and has adopted certain new precautionary protocols for those inspections still performed in the field. In addition to our in-house claims operation, we assign a small percentage ofsome field inspections to third-party adjusters. Our relationships with these adjusters enable us to continue to provide high quality and timely service following a catastrophe, such as a hurricane in coastal states, and during any other period of unusually high claim volume. Through our continuous improvement and operational excellence initiatives, we continue to evaluate ways in which we can improve the customer’s claims experience on a rolling basis. Alder’s data intelligence allows the Insurance Entities, ERA and our reinsurance partners to identify trends and refine the underwriting process and guidelines to adequately price risk.risk and identify needed adjustments. Our claims management operations provide cost-effective solutions in servicing claims for the Insurance Entities and generates additional fee income from adjusting claims ceded to reinsurers.
We have substantially grown ourOur in-house claims litigation team continues to focus on more effectively and efficiently protectprotecting our rights in litigation, including through subrogation. Subrogation is the act of seeking reimbursement from a third party that caused an insurance loss to thean insured for the amount we paid on the insured’s behalf. Reflecting our efforts to improve and enhance our claims operations and to address emerging claim trends, approximately 63% of our employees work in our claims management operations. Of these employees, 47% comprise our in-house claims litigation team.
Distribution
We market and sell our products primarily through our network of over 9,80010,200 licensed independent agents (4,300 in Florida). In addition to our independent agent force, we offer policies through our direct-to-consumer online distribution platforms. Our strong relationships with our independent agents and their relationships with their customers are critical to our ability to identify, attract and retain profitable business. We actively participate in the recruitment and training of our independent agents and provide each agency with training sessions on topics such as underwriting guidelines and submitting claims. We also engage a third-party market representative to assist in ongoing training and recruitment initiatives in all of the states in which we write business.
We utilize an attractive commission-based compensation plan as an incentive for independent agents to place business with us. We also strive to provide excellent service to our independent agents and brokers, which has yielded long-standing partnerships with our independent agents (a number of which have relationships that span more than a decade) that benefit the Company in our target markets through hard and soft market cycles. Our internal staff and specialists support our independent agents by providing access to our in-house technology systems to assist with the delivery of service to our policyholders. This arrangement creates a collaborative environment between the Company and our independent agents on continuous improvement initiatives and allows our independent agents to provide quotes within minutes. Our technology systems have evolved into a highly valued tool that enables agents to quickly understand the status of a policy and assist their clients with policy-related questions.
In addition to distributing our products through our independent agent network, we also utilize our differentiated direct-to-consumer online distribution platforms. Universal DirectSM was launched in 2016 to enableenables homeowners to directly purchase, pay for and bind homeowners policies online without the need to directly interface with any intermediaries. Universal DirectSM was offered in all 1819 states in which we do business as of December 31, 2019.2021.
In 2019, we introduced a multi-rater quote-to-bind platform, CloveredSM,Clovered.com, where consumers can receive side-by-side quotes from multiple carriers across multiple states, in addition to educational materials about homeowners insurance policies.
Real Estate
The Grand Palm Development Group (“Grand Palm”) is UVE’s real estate development entity, which we have created to help diversify UVE’s investment portfolio. Grand Palm develops and either operates or sells residential properties. Grand Palm also evaluates undeveloped parcels of land for investment opportunities on an ongoing basis.
Investments
Funds in excess of operating needs from the Insurance Entities and UVE are invested withthrough third-party investment advisers.The Investment Committee of our Board of Directors (the “Board of Directors” or the “Board”) oversees these advisers and reports overall investment results to our Board, at least on a quarterly basis. The investment activities of the Insurance Entities are subject to regulation and supervision by the Florida Office of Insurance Regulation (“FLOIR”). See below under “—Government Regulation.Regulation.” The Insurance Entities may only make investments that are consistent with regulatory guidelines, and our investment policies for the Insurance Entities accordingly limit the amount of investments in, among other things, non-investment grade fixed maturity securities (including high-yield bonds), preferred stock and common stock, and prohibit purchasing securities on margin. The primary objectives of our investment portfolio are the preservation of capital and providing adequate liquidity for claims payments and other cash needs. The portfolio’s secondary investment objective is to generate a stable risk-commensurate return with an emphasis on investment income while at the same time maintaining the high-quality standards of the portfolio. Our investment guidelines for fixed-income investments require an average duration of 5 years or less and a portfolio average credit rating of A-. In addition, our investment guidelines, including single-issue and aggregate limitations, promote diversification to limit exposure to single-sector risks. While the Insurance Entities seek to promote diversification of investments in their portfolio, UVE is not similarly restricted by statutory investment guidelines governing insurance companies. Therefore, the investments made by UVE may differ from those made by the Insurance Entities.
See “Part II, II—Item 8—Note 3 (Investments)” and “Part I, I—Item 1A—Risk Factors—Risks Relating to Investments” for more information about our investments.
Markets and Competition
Markets
We sell insurance products in the following 1819 states: Alabama, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Carolina and Virginia. We have additional licenses to write on an admitted basis in IowaTennessee and Wisconsin. During 2019,2021, our total direct premiums written was 82.5%83.1% in Florida and 17.5%16.9% in other states. The Florida market as a whole tends to consistently be a top-three personal residential homeowners insurance market in the United States based on direct premium written, due in large part to higher average pricing levels that seekare necessary to address the hurricane risk exposure in the state (from June 1 through November 30). and other market conditions.
Hurricanes or other catastrophic events can significantly impact earnings for insurance carriers in Florida and other coastal states, depending on the strength of their reinsurance programs and partners and the level of net retention to which the carriers subscribe. For example, volatility and market dislocation were evident in Florida following Hurricane Andrew in 1992, the 2004 and 2005 hurricane seasons (during which eight hurricanes made landfall in coastal states), as well as following the 2017, 2018 and 20182019 hurricane seasons. Earnings of insurance carriers can also be affected by years similar to 2020 where there was a heightened frequency of events, but lower severity. Given the potential for significant personal property damage, the availability of homeowners insurance and claims servicing are vitally important to coastal states’ residents. The benefits of UVE’s reinsurance strategy in 20192021 and the specific programs are further discussed below and in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Competition
The market for homeowners insurance is highly competitive. In many of the states in which we write business, we compete with small or regional insurers that might have greater familiarity with the local markets than we do. We also compete with large national insurers, many of which have substantial brand awareness, experience and capital resources. See “Part I—Item 1A—Risk Factors—Risks Relating to Our Business—Business and Operations—Our future results are dependent in part on our ability to successfully operate in a highly competitive insurance industry.” Within the Florida marketplace, due to the dislocating weather events of recent years and other market conditions, such as a proliferation of first-party litigation, competition from other admitted market insurers has waned as a result of some insurers having shown reduced willingness, or in some cases lack of capital, to continue writing business in accordance with state regulations and rating agency requirements. Although the timing is uncertain, we expect the lull in admitted market competition to be advantageous to companies with sufficient capital, and expect long term competition to normalize as either new capital explores opportunities that might arise or premiums and products adjust to the current market dynamics.
The personal residential homeowners insurance industry is strictly regulated. As a result, it is difficult for insurance companies to differentiate their products, which creates low barriers to entry (other than regulatory capital and other requirements) and results in a highly competitive market based largely on price and the customer experience. The nature, size and experience of our primary competitors varies across the states in which we do business.
Several states, including Florida, have insurance mechanisms that provide insurance to consumers who are not otherwise able to obtain coverage in the private insurance market. The largest such insurance mechanism is Florida’s Citizens Property Insurance Corporation (“Citizens”). The degree to which these state-authorized insurance mechanisms compete with private insurers such as the Insurance Entities varies over time depending on market and public policy considerations beyond our control. Currently, due to adverse market conditions including the proliferation of claims-related litigation, UPCIC and other authorized insurers
have filed and received approval of rate increases in Florida that in many instances exceed the amount by which Citizens may increase its rates in any single year. Citizens’ rate changes are limited by law, and accordingly, in times of rising insurance rates, its premiums can significantly lag those of the authorized market. This in turn causes Citizens to increasingly become the low-cost option for many policyholders; in essence, Citizens has a statutorily-created, and ultimately consumer-subsidized, pricing advantage over authorized insurers operating in the state, including the Insurance Entities. This is evidenced in the current market by the rapid growth in policy count Citizens experienced in 2021 and expects to continue experiencing in 2022.
Price
Pricing has generally been defined by “hard” and “soft” cyclical markets. Hard markets are those in which policy premiums are increasing (as a result of periods of capital shortages resulting in a lack of insurance availability, relatively low levels of price competition, and more selective underwriting of risks). Soft markets are those in which pricing has stabilized or is decreasing (as
a result of periods of greater capital availability, relatively high levels of price competition and less restrictive underwriting standards). Many factors influence the pricing environment, including, but not limited to, catastrophic events, loss experience, GDP growth/contraction, inflation, interest rates, legislation, primary insurance and reinsurance capacity and availability, share-of-wallet competition, the prevalence of litigation including(including abuses with assignments of benefits, solicited claims and other first-party litigation), technological advancements in distribution, underwriting, claims management and overall operational efficiencies, and the risk appetite of competitors.
Our successful track record in writing homeowners insurance in catastrophe-exposed areas has enabled us to develop sophisticated risk selection and pricing techniques that strive to identify desirable risks and accurately price the risk of loss while allowing us to be competitive in our target markets. This risk selection and pricing approach allows us to offer competitive products in areas that have a high demand for property insurance.
The premiums we charge are based on rates specific to individual risks and locations and are generally subject to regulatory review and approval before they are implemented. We periodically submit our rate revisions to regulators as required by law or as we deem necessary or appropriate for our business. The premiums we charge to policyholders are affected by legislative enactments and administrative rules, including state-mandated programs in Florida requiring residential property insurance companies like us to provide premium discounts when policyholders verify that insured properties have certain construction features, such as windstorm loss reduction techniques or devices.
Customer Experience
Drivers of the customer experience include reliability and value, financial strength and ease-of-use. We strive to provide excellent reliability and value through the strength of our distribution networks, high-quality service to our policyholders and independent agents, our claims handling ability and product features tailored to our markets.
Our Insurance Entities, UPCIC and APPCIC, are both currently rated “A” (“Exceptional”) by Demotech, Inc. (“Demotech”), which is a rating agency specializing in evaluating the financial stability of insurers. In addition, our combined capital surplus was approximately $317.6 million at December 31, 2019.
The current trends in the industry in regard to ease-of-use suggest an increased focus on utilizing technology in the distribution channel, enabling technology and machine learning in the underwriting domain, as well as utilizing actionable intelligence in claims management services. We believe there is significant opportunity to improve the customer experience across all consumer touch points. We are committed to delivering solutions to enable the consumer to prepare, protect and recover from losses as well as to learn about insurance. We believe effective integration and knowledge transfer to the consumer will result in improved customer satisfaction and encourage consumer retention. In addition, UVE’s strong operating teams and streamlined in-house value-added services drive competitive rates andstrive to provide value to consumers through operating efficiencies across the end users.business. Our monthly weighted average renewal retention rate for the year ended December 31, 20192021 was 89.2%87.5%.
Reinsurance
Reinsurance enables UVE’sthe Insurance Entities to limit potential exposures to catastrophic events. Reinsurance contracts are typically classified as treaty or facultative contracts. Treaty reinsurance provides coverage for all or a portion of a specified group or class of risks ceded by the primary insurer, while facultative reinsurance provides coverage for specific individual risks. Within each classification, reinsurance can be further classified as quota share or excess of loss. Quota-share reinsurance is where the primary insurer and the reinsurer share proportionally or pro-rata in the direct premiums and losses of the insurer. Excess-of-loss reinsurance indemnifies the direct insurer or reinsurer for all or a portion of the loss in excess of an agreed upon amount or retention.
Developing and implementing our reinsurance strategy to adequately protect our balance sheet and Insurance Entities in the event of one or more catastrophes while maintaining efficient reinsurance costs has been a key strategic priority for UVE. For 2019, UVE2021, the Insurance Entities utilized excess of loss reinsurance.reinsurance in various forms. The benefits of the reinsurance strategy in 20192021 and the specific programs are further discussed in “Item 7—Management’s Discussion and Analysis of Financial ConditionsCondition and Results of Operations.”
In order to limit our potential exposure to catastrophic events, wethe Insurance Entities purchase significant reinsurance from third-party reinsurers and the Florida Hurricane Catastrophe Fund (the “FHCF”). The FLOIRFlorida Office of Insurance Regulation (“FLOIR”) requires us,the Insurance Entities, like all residential property insurance companies doing business in Florida, to have a certain amount of capital and reinsurance coverage in order to cover losses upon the occurrence of a single catastrophic event and a series of catastrophic events occurring in the same hurricane season. Our 2019-2020The Insurance Entities’ respective 2021-2022 reinsurance program meets and provides reinsurance in excess ofprograms meet the FLOIR’s requirements, which are based on, among other things, the probable maximum losssuccessfully demonstrating cohesive and comprehensive reinsurance programs that we would incur from an individual catastrophic event estimated to occur once in every 100 years based on our portfolio of insured risks andsatisfy a series of stress test catastrophe loss scenarios based on past historical events. In respect toSimilarly, the single catastrophic event,Insurance Entities’ respective 2021-2022 reinsurance programs meet the nature, severitystress test and locationreview requirements of Demotech, Inc., for maintaining Financial Stability Ratings® of A (Exceptional).
FHCF is a legislatively-created entity in Florida that provides a layer of reimbursement (reinsurance) protection at a price that is typically lower than what would otherwise be available in the third-party reinsurance market. The purpose of the event giving riseFHCF is to protect and advance the state’s interest in maintaining residential property insurance capacity in Florida by providing reimbursements to insurers for a portion of their Florida hurricane losses. Most property and casualty insurers operating in Florida, including the Insurance Entities, are subject to assessment if the FHCF lacks sufficient claims-paying resources to meet its reimbursement obligations to insurers. FHCF assessments are added to policyholders’ premiums and are collected and remitted by the insurers, including the Insurance Entities. All homeowner insurance companies that write business in Florida, including the Insurance Entities, are required to obtain a specified minimum level of reimbursement protection through the FHCF. Insurance companies then are able to optionally purchase additional FHCF coverage. The Insurance Entities currently purchase reimbursement protection at the maximum level offered by the FHCF. Currently, the FHCF provides $17 billion of aggregate capacity annually to its participating insurers, which may be adjusted by statute from time to time and which is allocated among participating insurers according to factors such a probable maximum loss
differs for each insurer depending onas the insurer’s portfolio of insured risks, including, among other things, the geographic concentration of insured value within the insurer’s portfolio. Accordingly, a particular catastrophic event could be a one-in-100 year loss event for one insurance company while having a greater or lesser probability of occurrence for another insurance company.participating insurers’ relative hurricane exposures and their respective coverage elections.
We believe our retentionthe Insurance Entities’ retentions under the respective reinsurance program isprograms are appropriate and structured to protect our customers. We test the sufficiency of our reinsurance programprograms by subjecting ourthe Insurance Entities’ personal residential exposures to statistical testing using a third-party hurricane model, RMS RiskLink v18.1 (Build 1945). This model combines simulations of the natural occurrence patterns and characteristics of hurricanes, tornadoes, earthquakes and other catastrophes with information on property values, construction types and occupancy classes. The model outputs provide information concerning the potential for large losses before they occur, so companies can prepare for their financial impact. Furthermore, as part of our operational excellence initiatives, we continually look to enable new technology to refine our data intelligence on catastrophe risk modeling.
Seasonality
The nature of our business tends to be seasonal during the year, reflecting consumer behaviors in connection with the Florida residential real estate market and the hurricane season. We have historically experienced higher direct premiums written just prior to the second quarter of our fiscal year and lower direct premiums written approaching the fourth quarter, as a result of consumer behaviors in the Florida residential real estate market and the hurricane season affecting coastal states. See “Part I—Item 1A—Risk Factors—Factors���Risks Relating to Our Business—Business and Operations—Our financial condition and operating results and the financial condition and operating results of our Insurance Entities may be adversely affected byare subject to the cyclical nature of the property and casualty insurance business.”
Government Regulation
We are subject to extensive regulation in the markets we serve, primarily at the state level, and will become subject to the regulations of additional states in which we seek to conduct business in the future. These regulations cover all aspects of our business and are generally designed to protect the interests of policyholders, as opposed to the interests of shareholders. Such regulations relate to authorized lines of business, capital and surplus requirements, allowable rates and forms, investment parameters, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, market conduct, maximum amount allowable for premium financing service charges and a variety of other financial and non-financial components of our business. From time to time, states also enact legislation designed to increase consumer protections and curtail fraud or abuses in the insurance market. In 2019, the Florida legislature adopted laws increasing Florida policyholders’ rights when they assign rights of recovery under their policies to third party vendors. These laws also aim to reduce lawsuits initiated against the policyholders’ insurers by vendors holding these assignments. Among other things, the new laws require vendors to notify insurers of amounts in dispute, allow insurers to make pre-suit settlement offers or seek resolution through alternative dispute resolution mechanisms, and in certain situations preclude the vendors from recovering attorneys’ fees or require the vendors to pay the insurers’ attorneys’ fees. Similarly, in 2021, the Florida legislature adopted reforms intended to address the proliferation of first-party claims litigation that has caused adverse consequences throughout the state’s residential property insurance market. On the other hand, policymakers’ decisions to not change existing laws has allowed, and might continue to allow, certain adverse interpretations of law and resulting litigation to continue or worsen. Among other things, these new laws require an insured to notify the insurer before commencing litigation and give the insurer an opportunity to make a written offer that, in certain situations, can limit the amount of attorneys’ fees otherwise recoverable from the insurer. See “Item 1A-Risk Factors-Risks“Part I—Item 1A—Risk Factors—Risks Relating to the Insurance Industry-We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth and profitability.”
Examinations
As part of their regulatory oversight process, state insurance departments conduct periodic financial examinations of the books, records, accounts and operations of insurance companies that are authorized to transact business in their states. In general, insurance regulatory authorities defer to the insurance regulatory authority in the state in which an insurer is domiciled; however, insurance regulatory authorities in any state in which we operate may conduct examinations at their discretion. Under Florida law, the periodic financial examinations generally occur every five years, although the FLOIR or other states may conduct limited or full scope reviews more frequently. In addition, state insurance regulatory authorities may make inquiries, conduct investigations and administer market conduct examinations with respect to insurers’ compliance with applicable insurance laws and regulations. These inquiries or examinations may address, among other things, the form and content of disclosures to consumers, advertising, sales practices, underwriting and claims practices, cancellation and nonrenewal procedures and complaint handling. The reports arising from insurance authorities’ examination processes typically are available to the public at the conclusion of the examinations. In addition, insurance companies and other companies are subject to other types of audits, examinations or other similar inquiries by governmental authorities based on the nature of the business they conduct.
Insurance Holding Company Laws
UVE, as the ultimate parent company of the Insurance Entities, is subject to certain laws of the State of Florida governing insurance holding company systems. These laws, among other things, (i) require us to file periodic information with the FLOIR, including information concerning our capital structure, ownership, financial condition and general business operations, (ii) regulate certain transactions between us and our affiliates, including the amount of dividends and other distributions, the terms of surplus notes
and amounts that our affiliates can charge the Insurance Entities for services such as policy administration and claims administration, and (iii) restrict the ability of any one person to acquire certain levels of our voting securities without prior regulatory approval.
The Florida Insurance Code prohibits any person from acquiring control of the Insurance Entities or their holding companies unless that person has filed a notification with specified information with the FLOIR and has obtained the FLOIR’s prior approval. Under the Florida Insurance Code, acquiring 10% or more of the voting securities of an insurance company or its parent company is presumptively considered an acquisition of control of the insurance company, although such presumption may be rebutted. Some state insurance laws require prior notification to state insurance regulators of an acquisition of control of a non-domiciliary insurance company doing business in that state.
Insurance holding company regulations also govern the amount any affiliate of the holding company may charge the Insurance Entities for services (e.g., claims adjustment, administration, management fees and commissions). Further, insurance holding company regulations may also require prior approval of insurance regulators for amendments to or terminations of certain affiliate agreements.
Florida holding company laws also require certain insurers to submit an Own Risk and Solvency Assessment, or ORSA, summary report to the FLOIR each year, summarizing the insurer’s evaluation of the adequacy of its risk management framework. The Company filed its most recent ORSA summary report in December 2019.2021.
Capital Requirements
State insurance authorities monitor insurance companies’ solvency and capital requirements using various statutory requirements and industry ratios. Initially, states require minimum capital levels based on the lines of business written by a company and set requirements regarding the ongoing amount and composition of capital. Certain state regulators also require state deposits in their respective states. See “Part II—Item 8—Note 5 (Insurance Operations)” for more information about state deposits. As a company grows, additional capital measures and standards may be implemented by a regulator. Regulatory authorities use a risk-based capital (“RBC”) model published by the National Association of Insurance Commissioners (“NAIC”) to monitor and regulate the capital adequacy and solvency of licensed property and casualty insurance companies. These guidelines measure three major areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing, (ii) declines in asset values arising from credit risk and (iii) other business risks. Most states, including Florida, have enacted the NAIC guidelines as statutory requirements, and insurers having less surplus than required by applicable statutes and ratios are subject to varying degrees of regulatory action depending on the level of capital inadequacy. As of December 31, 2019,2021, the Insurance Entities’ RBC ratios exceed applicable statutory requirements. See “Part I—Item 1A—Risk Factors—Risks Relating to the Insurance Industry—The amount of statutory capital and surplus that each of the Insurance Entities has and the amount of statutory capital and surplus it must hold can vary and are sensitive to a number of factors outside of our control, including market conditions and the regulatory environment and rules.”
Restrictions on Dividends and Distributions
As a holding company with no significant business operations of its own, we rely on dividend payments from our subsidiaries as our principal source of cash to pay dividends, purchase our common shares, support subsidiary operations and development, and meet our short- and long-term obligations. Dividends paid by our subsidiaries other than the Insurance Entities are not
subject to the statutory restrictions set forth in the Florida Insurance Code. However, insurance holding company regulations govern the amount that any affiliate within the holding company system may charge any of the Insurance Entities for services. See “Part I—Item 1A—Risk Factors—Risks Relating to the Insurance Industry—We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth and profitability.” Dividends paid by UVE to our shareholders in 20192021 were paid from the earnings of UVE and our subsidiaries other than the Insurance Entities.
State insurance laws govern the payment of dividends by insurance companies. The maximum amount of dividends that can be paid by Florida insurance companies such as the Insurance Entities without prior approval of the Commissioner of the FLOIR is subject to restrictions relating to statutory surplus. The maximum dividend that may be paid by the Insurance Entities to their immediate parent company without prior approval is limited to the lesser of statutory net income from operations of the preceding calendar year or statutory unassigned surplus as of the preceding year end.
Underwriting and Marketing Restrictions
During the past several years, variousFrom time to time, regulatory and legislative bodies in Florida and in other states have adopted or proposed new laws or regulations to address the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations (i) restrict certain policy non-renewals or cancellations and require advance notice on certain policy non-renewals and (ii) from a practical standpoint, limit or delay rate changes for a specified period during or after a catastrophe event. Most states, including Florida, also have insurance laws requiring that rate schedules and other information be filed and
approved by the insurance regulatory authority in advance of being implemented. The insurance regulatory authority may disapprove a rate filing if it finds that the proposed rates would be inadequate, excessive or unfairly discriminatory. Rates, which are not necessarily uniform for all insurers, vary by many factors including class of business, hazard covered, risk location and size of risk.
Most states, including Florida, require licensure or insurance regulatory authority approval prior to the marketing of new insurance products. Typically, licensure review is comprehensive and includes a review of a company’s business plan, solvency, reinsurance, character and experience of its officers and directors, rates, forms and other financial and non-financial aspects of the company. The insurance regulatory authorities may prohibit entry into a new market by not granting a license or by withholding approval for an insurer to write new lines of business. The Company is subject to comprehensive regulatory oversight and regulations, which include periodic reporting to regulators and regulatory examsexaminations to assure the Company maintains compliance with statutory requirements, and the payment of fees, premium taxes and assessments in order to maintain its licenses.
Privacy and Information Security Regulation
Federal and state laws and regulations require financial institutionscertain business entities to protect the security and confidentiality of non-public personal information and to notify customers and other individuals about their policies and practices relating to their collection and disclosure of customer information and their practices relating to protecting the security and confidentiality of that information. In 2017, theThe NAIC issued a model law on cybersecurity, which is leading to adoption of the same or similar provisions in the states where we do business. In addition, some states have adopted, and others might adopt, cybersecurity regulations that differ from proposed model acts or from the laws enacted in other states. Federal and state lawmakers and regulatory bodies may be expected to consider additional or more detailed regulation regarding these subjects and the privacy and security of non-public personal information. See “Part I—Item 1A—Risk Factors—Risks Relating to Our Business—Business and Operations—Breaches of our information systems or denial of service on our website could have an adverse impact on our business and reputation.”
Statutory Insurance Organizations
Many states in which the Insurance Entities operate have statutorily-mandated insurance organizations or other insurance mechanisms in which the Insurance Entities are required to participate or to potentially pay assessments. Each state has insurance guaranty association laws providing for the payment of policyholders’ claims when insurance companies doing business in that state become insolvent. These guaranty associations typically are funded by assets of the failed insurance companies and by assessments on insurance companies transacting business in the respective states. When the Insurance Entities are subject to assessments, they generally must remit the assessed amounts to the guaranty associations. The Insurance Entities subsequently seek to recover the assessed amounts through recoupments from policyholders. In the event the Insurance Entities are not able to fully recoup the amounts of those assessments, such unrecovered amounts can be credited against future assessments, or the remaining receivable may be written off. While we cannot predict the amount or timing of future guaranty association assessments, we believe that any such assessments will not have a material effect on our financial position or results of operations. See “Part I—Item 1A—Risk Factors—Risks Relating to the Insurance Industry—Regulations limiting rate changes and requiring us to participate in loss sharing or assessments may decrease our profitability.”
Several states, including Florida, haveHuman Capital Resources
The Company is a vertically integrated insurance mechanisms that provideholding company with its employees performing substantially all insurance to consumers who are not otherwise able to obtain coverage in the private insurance market. The largest such insurance mechanism is Florida’s Citizens Property Insurance Corporation. The degree to which these state-authorized insurance mechanisms compete with private insurers such as theand support related services for our Insurance Entities, varies over time depending on marketincluding policy underwriting, marketing, online distribution, risk management and public policy considerations beyond our control. In addition, these insurance mechanisms often rely on assessments of insurers to cover any operating shortfalls.
FHCF is a state-sponsored entity in Florida that provides a layer of reinsurance protection at a price that is typically lower than what would otherwise be available in the third-party reinsurance market. The purpose of the FHCF is to protect and advance the state’s interest in maintaining insurance capacity in Florida by providing reimbursements to insurers for a portion of their catastrophe hurricane losses. Most property and casualty insurers operating in Florida, including the Insurance Entities, are subject to assessment if the FHCF lacks sufficient claims-paying resources to meet its reimbursement obligations to insurers. FHCF assessments are added to policyholders’ premiums and are collected and remitted by the Insurance Entities. In addition, all homeowner insurance companies that write business in Florida, including the Insurance Entities, are required to obtain a form of reinsurance through the FHCF. Currently, the FHCF provides $17 billion of aggregate capacity annually to its participating insurers, which may be adjusted by statute from time to time.
Employees
claims management. As of February 5, 2020,1, 2022, we had 8051,047 full-time employees.employees, of whom 93% are based in Florida. Approximately 63% of our employees work in our claims management operations. Of these employees, 47% comprise our in-house claims litigation team. In the event we experience an unusually high volume of claims due to a hurricane or severe weather event, in addition to cross-trained staff, the Company utilizes outsourced third-party adjusters and outsourced call center support to maintain regulatory and internal service standards.
Our other policy functions, underwriting and risk management and marketing and online distribution employ approximately 6% and 17% of our employees, respectively. We sell our insurance products primarily through our network of licensed independent agents or through a relatively small team of licensed agents comprising our in-house distribution sales force, mostly limited to online sales. More than 52% of our employees have received insurance licenses from the State of Florida, and we reimburse employees for costs associated with acquiring and maintaining insurance licensing.
Our business is dependent on adequate levels of staff to service our new business and policies in force, adjudicate reported claims and provide support services to the Company. Support services consist of technology, human resources, finance, corporate and internal audit teams. We anticipate staffing needs and make changes to our staff to assure our regulatory requirements are met and our service standards to customers are achieved.
Given our focus on operational excellence and continuous improvement, our objective is to create a collaborative work environment with many opportunities for advancement in order to attract energetic and entrepreneurial talent. To that end, we provide extensive training and development sessions, strong benefits, and competitive pay to employees at all levels in the organization, including equity awards to key contributors.
We continue our support of diversity to create an inclusive culture and deliver a sustainable talent model to enhance performance and broaden perspectives.
We did not furlough or terminate any employees due to COVID-19. None of our employees are represented by a labor union.
Available Information
UVE was incorporated in Delaware in 1990, with UPCIC becoming licensed in Florida in 1997. Our corporate headquarters areis located in Fort Lauderdale, FL. Our investor website is UniversalInsuranceHoldings.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments thereto, are available, free of charge, through our website as soon as reasonably practicable after their filing with the Securities and Exchange Commission (“SEC”). These filings are also available on the SEC’s website at sec.gov.
We are subject to a variety of material risks, the most significant of which are described below. Our business, results of operations, liquidity and financial condition could be materially and adversely affected by any of these risks or additional risks.
RISKS RELATING TO OUR BUSINESS AND OPERATIONS
The COVID-19 pandemic could have material and long-term adverse consequences on our business, financial condition, results of operations and liquidity and capital resources.
The public health crisis created by the COVID-19 pandemic and the resulting and continuing impact on the global, national and local economies, as well as on the American workforce, could significantly disrupt and materially impact our business, including:
•our ability to successfully maintain operations and meet the costs associated with those operations while maintaining the safety and wellness of our employees, independent agents, policyholders and vendors;
•the impact on demand for our products by agents and policyholders during the current protracted economic downturn;
•the ability or willingness of policyholders to pay premiums;
•the prompt payment of receivables by reinsurers and policyholders;
•a decline in the value of our investment securities, which make up a significant portion of our financial resources;
•a decline in the credit ratings of our debt securities;
•increases to our claims costs due to inflation caused by factors such as building materials, supply chain disruption and labor shortages;
•our ability to meet regulatory requirements;
•our ability to attract and retain, and to effectively train and supervise, employees;
•our ability to anticipate, understand and respond to potential changes in consumer or employee behaviors and preferences arising from past and future directives and guidance related to social distancing, teleworking and similar considerations; and
•our ability to maintain relationships with key vendors, and those vendors’ willingness or ability to perform services for us as expected.
As a provider of services typically categorized as essential, we are required to maintain operations and continue to pay claims to policyholders. Uncertainty around claims patterns including impediments to adjusting claims in the field could negatively impact our ability to timely and properly pay claims and establish reserves. In addition, prolonged disruptions of the supply chain or shortages in labor in key areas of the economy such as construction will adversely affect our claims costs. Access to capital, if needed, could be hampered, and the cost of external capital could be elevated.
In addition, COVID-19 has reduced our ability to bring litigated matters to an efficient conclusion. Cases have continued to mount as courts altered operations to respond to the pandemic, which have delayed proceedings further, thereby adding to the already existing backlog. This has caused litigation related to first-party claims we are defending and subrogation actions we are
pursuing to be held in suspense and delayed. Additionally, this has caused an increase in our number of claims in litigation. Even as restrictions related to COVID-19 are reduced going forward, the backlog in the judicial system may take months and possibly years to be alleviated.
Broader adverse economic consequences and losses incurred by reinsurers as a result of COVID-19 could erode capital and contribute to an increase in the cost of reinsurance as well as an increase in counterparty credit risk. Legislative, regulatory or judicial actions that encourage or mandate premium payment grace periods, prevent cancellations for non-payment of premium, require us to cover losses when our policies did not provide coverage or excluded coverage, or order us to provide premium refunds or make other accommodations, could reduce our liquidity and increase both our losses and operating costs. Forced liquidation of stressed investment securities could result in realized losses during periods of dysfunction and volatility in capital markets. An increase in the demand and frequency of reporting by regulators could place stress on our ability to accurately and timely meet those and existing demands, and a delay or denial in regulatory rate approvals could contribute to financial stress. While most of our workforce is continuing to work remotely, we are more vulnerable to cyber threats.
The extent to which COVID-19 impacts our business will depend on future developments – including any resurgence or variants of COVID-19, the availability of effective treatments and the distribution of vaccines – and while we are not able to estimate the impact that COVID-19 will have on our future financial results and financial condition, it could be material. To the extent the COVID-19 pandemic adversely affects our future business and financial results, it may also have the effect of heightening many of the other risks described below.
As a property and casualty insurer, we may face significant losses fromwhen catastrophes and severe weather events.events occur.
Because of the exposure of our property and casualty business to catastrophic events, our operating results and financial condition may varyhave varied significantly from one period to the next, and our historical results of operations may not be indicative of future results of operations. Property damage resulting from catastrophes is the greatest risk of loss we face in the ordinary course of our business. Catastrophes can be caused by various natural and man-made disasters, including hurricanes, wildfires, tornadoes, tropical storms, sinkholes, windstorms, hailstorms, explosions, earthquakes and acts of terrorism. Because of our concentration in Florida, and in particular in Broward, Palm Beach and Miami-Dade counties, we are exposed to hurricanes and windstorms, and other catastrophes affecting Florida. We have incurred and may in the future incur catastrophe losses in Florida or elsewhere in excess of those experienced in prior years; those estimated by catastrophe models we use; the average expected level used in pricing; and our current reinsurance coverage limits. We are also subject to claims arising from weather events such as rain, hail and high winds. Additionally, in Florida, the prevalence of represented and litigated claims has led to a significant number of non-catastrophe claims being filed in conjunction with, or during the course of, catastrophe claims. The nature and level of future catastrophes, and the incidence and severity of weather conditions in any future period, and the impact of catastrophes on behaviors related to non-catastrophe claims cannot be predicted and could be material tomaterially and adversely impact our operations.
The loss estimates developed by the models we use are dependent upon assumptions or scenarios incorporated by a third-party developer and by us. However, ifWhen these assumptions or scenarios do not reflect the characteristics of future catastrophic events that affect areas covered by our policies or the resulting economic conditions, then we could have exposure forbecome exposed to losses not covered by our reinsurance program, which could adversely affect our financial condition, profitability and results of operations. Further, although we use widely recognized and commercially available models to estimate hurricane loss exposure, other models exist that might produce higher or lower loss estimates. See “—The inherent uncertainty of models and our relianceWe rely on such models as a tool to evaluate risk, and those models are inherently uncertain and may have an adverse effect on our financial results.not accurately predict existing or future losses.” Despite our catastrophe management programs, we retain material exposure to catastrophic events. Our liquidity could also be constrained by a catastrophe, or multiple catastrophes, which could have a negative impact on our business. Catastrophes have eroded and in the future may erode our statutory surplus or ability to obtain adequate reinsurance which could negatively affect our ability to write new or renewal business. Catastrophic claim severity could beis impacted by the effects of inflation and increases in insured value and factors such as the overall claims, legal and litigation environments in affected areas, in addition to the geographic concentration of insured property.
Actual claims incurred have exceeded, and in the future may exceed, reserves established for claims, adversely affecting our operating results and financial conditioncondition.
We maintain loss reserves to cover our estimated ultimate liability for unpaid losses and LAE for reported and unreported claims as of the end of each accounting period. The reserve for losses and LAE is reported net of receivables for subrogation. Recorded claim reserves in the property and casualty business are based on our best estimates of what the ultimate settlement and administration of claims will cost, both reported and incurred but not reported (“IBNR”). These estimates, which generally involve actuarial projections, are based on management’s assessment of known facts and circumstances, including our experience with similar cases, actual claims paid, historical trends involving claim payment patterns, pending levels of unpaid claims and contractual terms. External factors are also considered, which include but are not limited to changes in the law, court decisions, changes to regulatory requirements, economic conditions including inflation as experienced in 2021, and consumer behavior. Many of these factors are not quantifiable and are subject to change over time. The current Florida homeowners’ insurance market is adversely impacted by changes in claimant behaviors resulting in losses and LAE exceeding historical trends, amounts experienced in other states, and amounts we previously estimated. The increases in losses and LAE are attributable to the active solicitation of claims activity by policyholder representatives, high levels of represented claims compared to historical patterns or patterns seen in other states, and a proliferation of inflated claims filed by policyholder representatives and vendors. These trends are facilitated by Florida’s legal climate, including the one-way
threat of one-way attorneys’ fees against insurers and the relatively high cost of defending against inflated claims in relation to amounts in dispute.
Additionally, there might besometimes is a significant reporting lag between the occurrence of an event and the time it is reported to us. The inherent uncertainties of estimating reserves are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made. The deterioration in the current Florida market also has produced an increased number of claims that are filed or re-opened well after the alleged dates of loss. We continually refine reserve estimates as experience develops and as subsequent claims are reported and settled. Adjustments to reserves are reflected in the financial statement results of the periods in which such estimates are changed. The adverse conditions in Florida and inflationary pressure causing increases in the costs of building materials and labor have resulted in our paid losses exceeding prior reserve estimates and in increases in our current estimates of unpaid losses and LAE. Because setting reserves is inherently uncertain and claims conditions may change over time, the ultimate cost of losses has varied and, in the future, may vary materially from recorded reserves, and such variance may continue to adversely affect our operating results and financial condition. The full extent of the ongoing disruptions and claims behaviors in the Florida market is unknown and still unfolding.
Subrogation is a significant component of our total net reserves for losses and LAE. Starting in 2016, there has been a significant increase in our efforts to pursue subrogation against third parties responsible for property damage losses to our insureds. More recently, changes in Florida’s claims environment and legal climate have reduced the effectiveness of our efforts to properly apportion losses through subrogation. Responsible parties are increasingly using delays and defensive tactics to avoid subrogation and increase its costs, which in turn decreases its effectiveness. We have reducedIn some instances, our estimate of losses expectedability to be recovered through subrogation. Nonetheless, ourrecover subrogation judgments against responsible parties also is being delayed or impeded by limitations on jury trials and similar changes to judicial processes due to COVID-19. Our ability to recover recorded amounts remains subject to significant uncertainty, including risks inherent in litigation, and in collectability of the recorded amounts.amounts and potential law changes or judicial decisions that can hinder or reduce the effectiveness of subrogation.
IfWhen we fail to accurately and adequately price the risks we underwrite, we may not be able to generate sufficient premiums to pay losses and expenses and we may experience other negative impacts on our profitability and financial condition, including harm to our competitive position.
Our results of operations and financial condition depend on our ability to underwrite and set premium rates accurately for a variety of risks. Rate adequacy is necessary to generate sufficient premiums to pay losses, LAE, reinsurance costs and underwriting expenses and to earn a profit. In order to price our products accurately and adequately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. We have partnered with an industry leading homeowners insurance data aggregator and have over 23 years of claims experience to leverage during the rate making process, most of which is in the State of Florida. During the Underwriting and rating process we also collect and leverage data points related to age, location, and construction characteristics that have rating implications, and establish Insurance to Value estimates for proper rating. Our ability to price our products accurately and adequately is subject to a number of risks and uncertainties, some of which are outside our control, including:
•the availability of sufficient and reliable data;
•regulatory review periods or delays in approving filed rate changes or our failure to gain regulatory approval;
•the uncertainties that inherently underlie estimates and assumptions;
•the ability to anticipate unforeseen adverse market trends or other emerging costs in the rate making process;
•changes in legal standards, claim resolution practices and restoration costs; and
•legislatively imposed consumer initiatives.
In addition,As a result, we could underprice risks, which would negatively affect our profit margins and result in significant underwriting losses. We could also overprice risks, which could reduce the number of policies we write and our competitiveness. In either event, our profitability could be materially and adversely affected. If our policies are overpriced or underpriced by geographic area, policy type or other characteristics, we also mightmay not be able to achieve desirable diversification in our risks. These concerns are compounded when Florida’s statutorily-created residual property insurance market, Citizens, provides insurance based on rates substantially below its actuarial indication and at resulting premiums lower than those of admitted insurers such as the Insurance Entities.
Unanticipated increases in the severity or frequency of claims may adversely affect our profitability and financial condition.
Changes in the severity or frequency of claims may affect our profitability. Changes in homeowners’ claim severity can be and have been driven by inflation in the construction industry, in building materials and in home furnishings and by other economic and environmental factors, including increased demand for services and supplies in areas affected by catastrophes, market conditions, supply chain disruptions and labor shortages attributable in part to COVID-19 and related factors, and prevailing attitudes towards insurers and the claims process, including increases in the number of litigated claims or claims involving representation. However, changes in the level of the severity of claims are not limited to the effects of inflation and demand surge in these various sectors of the economy. Increases in claim severity can also arise from unexpected events that are inherently difficult to predict. A significantSignificant long-term increaseincreases in claim frequency could have an adverse effect on our operating results and financial condition. Further, the level of claim frequency we experience may varyvaries from period to period, or from region to region, and may not be sustainable over the longer term.region. Although we pursue various loss management initiatives in order to mitigate future increases in claim severity, there can be no assurances that these initiatives will successfully identify or reduce the effect of future increases in claim severity.
The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations.
We utilize a number of strategies to mitigate our risk exposure, such as:
•engaging in rigorous underwriting;
•carefully evaluating terms and conditions of our policies and binding guidelines; and
•ceding risk to reinsurers.
However, there are inherent limitations in all of these strategies, and no assurance can be given that an event or series of events will not result in loss levels in excess of our probable maximum loss models, or that our non-catastrophe forecasts or modeling is accurate, which could have a material adverse effect on our financial condition or results of operations. It is also possible that losses could manifest themselves in ways that we do not anticipate and that our risk mitigation strategies are not designed to address. Such a manifestation of losses could have a material adverse effect on our financial condition and results of operations.
Because we rely on independent insurance agents, the loss of these independent agent relationships and the business they control or our ability to attract new independent agents could have an adverse impact on our business.
We currently market our policies to a broad range of prospective policyholders through approximately 4,300 independent insurance agents in Florida as well as approximately 5,5005,900 independent insurance agents outside of Florida. As a result, our business depends on the marketing efforts of these independent agents and on our ability to offer products and services that meet their and their customers’ requirements. These independent insurance agents maintain the primary customer relationship. Independent agents typically represent other insurance companies in addition to representing us, and such agents are not obligated to sell or promote our products. Other insurance companies may pay higher commissions than we do, provide services to the agents that we do not provide, or may be more attractive to the agents than we are. In Florida the statutorily-created residual market currently offers policies at premium levels that in some areas and for some coverage types are lower than premiums the Insurance Entities charge, which must be approved by the Florida Office of Insurance Regulation and cannot be inadequate, excessive or unfairly discriminatory. We cannot provide assurance that we will retain our current relationships, or be able to establish new relationships, with independent agents. The loss of these marketing relationships could adversely affect our ability to attract new agents, retain our agency network, or write new or renewal insurance policies, which could materially adversely affect our business, financial condition and results of operations.
The inherent uncertainty of models and our relianceWe rely on such models as a tool to evaluate risk, and those models are inherently uncertain and may have an adverse effect on our financial results.not accurately predict existing or future losses.
Along with other insurers in the industry, we use models developed by third-party vendors in assessing our exposure to catastrophe losses, and these models assume various conditions and probability scenarios, most of which are not known to us or are not within our control. These models may not accurately predict future losses or accurately measure losses incurred. Catastrophe models, which have been evolving since the early 1990s, use historical information about various catastrophes, detailed information about our in-force business and certain assumptions or judgments that are proprietary to the modeling firms. While we use this information in connection with our pricing and risk management activities, there are limitations with respect to their usefulness in predicting losses in any reporting period. Examples of these limitations are significant variations in estimates between models and modelers and material increases and decreases in model results due to changes and refinements of the underlying data elements and assumptions. Such limitations lead to questionable predictive capability and post-event measurements that have not been well understood or proven to be sufficiently reliable. In addition, the models are not necessarily reflective of company or state-specific policy language, demand surge for labor and materials, consumer behavior, prevailing or changing claims, legal and litigation environments, or loss settlement expenses, all of which are subject to wide variation by catastrophe.
Reinsurance may be unavailable in the future at currentreasonable levels and prices or on reasonable terms, which may limit our ability to write new business or to adequately mitigate our exposure to loss.
Our reinsurance program is designed to mitigate our exposure to catastrophes. Market conditions beyond our control determine the availability and cost of the reinsurance we purchase and the ability of the FHCF to reimburse insurers at levels contemplated by their reimbursement contracts. No assurances can be made that reinsurance will remain continuously available to us to the same extent and on the same or similar terms and rates as are currently available. In addition, our ability to afford reinsurance to reduce our catastrophe risk may be dependent upon our ability to adequately and timely adjust premium rates for our costs, and there are no assurances that the terms and rates for our current reinsurance program will continue to be available next year or that we will be able to adjust our premiums. The Insurance Entities are responsible for losses related to catastrophic events with incurred losses in excess of coverage provided by our reinsurance program and the FHCF, and for losses that otherwise are not covered by the reinsurance program. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we would have to either accept an increase in our exposure risk, reduce our insurance writings, seek rate adjustments at levels that might not be approved or might adversely affect policy retention, or develop or seek other alternatives, which could have an adverse effect on our profitability and results of operations.
Reinsurance subjects us to the credit risk of our reinsurers, which could have a material adverse effect on our operating results and financial condition.
Reinsurance does not legally discharge us from our primary liability for the full amount of the risk we insure, although it does make the reinsurer liable to us in the event of a claim. As such, we are subject to credit risk with respect to our reinsurers. The collectability of reinsurance recoverables is subject to uncertainty arising from a number of factors, including (i) our reinsurers’ financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract or (ii) whether insured losses meet the qualifying conditions and are recoverable under our reinsurance contracts for covered events or are excluded. Further, if a reinsurer fails to pay an amount due to us within 90 days of such amount coming due, we are required by certain statutory accounting rules to account for a portion of this unpaid amount as a non-admitted asset, which would negatively impact our equity.statutory surplus. Our inability to collect a material recovery from a reinsurer, or to collect such recovery in a timely fashion, could have a material adverse effect on our operating results, financial condition, liquidity and surplus.
Our financial condition and operating results and the financial condition and operating results of our Insurance Entities may be adversely affected byare subject to the cyclical nature of the property and casualty insurance business.
The property and casualty insurance market is cyclical and has experienced periods characterized by relatively high levels of price competition, less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively lower levels of competition, more selective underwriting standards and relatively high premium rates. As premium levels increase, and competitors perceive an increased opportunity for profitability, there may be new entrants to the market or expansion by existing participants which could then lead to increased competition, a reduction in premium rates, less favorable policy terms and fewer opportunities to underwrite insurance risks. This couldThese conditions can have a material adverse effect on our results of operations and cash flows. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers, including changes resulting from multiple and/or catastrophic hurricanes mayand from increases in represented and litigated claims, affect the cycles of the property and casualty insurance business significantly. Negative market conditions maycan impair our ability to write insurance at rates that we consider adequate and appropriate relative to the risk written. IfTo the extent that we cannot write insurance at appropriate rates, our business would be materially and adversely affected. We cannot predict whether market conditions will improve, remain constant or deteriorate. An extended period of negative market conditions could have a material adverse effect on our business, financial condition and results of operations.
Because we conduct the majority of our business in Florida, our financial results depend on the regulatory, economic and weather conditions in Florida.
Though we are licensed to transact insurance business in other states, we write a majority of our premium in Florida. Therefore, prevailing regulatory, consumer behavior, legal, economic, political, demographic, competitive, weather and other conditions in Florida disproportionately affect our revenues and profitability. ChangesAdverse changes in these conditions could make doing business in Florida as opposed to other states less attractive for us and would have a more pronounced effect on us than it would on other insurance companies that are more geographically diversified throughout the United States. Further, a single catastrophic event, or a series of such events, specifically affecting Florida, particularly in the more densely populated areas of the state, have had and could in the future have a disproportionately adverse impact on our business, financial condition and results of operations. This is particularly true in certain Florida counties where we write a high concentration of policies such that a catastrophic event, or series of catastrophic events, in these counties have had and could in the future have a significant impact on our business, financial condition and results of operations. The fact that our business is concentrated in Florida subjects us to increased exposure to certain catastrophic events and destructive weather patterns such as hurricanes, tropical storms and tornadoes.tornadoes and to the ensuing claims-related behaviors that have characterized the Florida market in recent years.
Changing climate conditions may adversely affect our financial condition, profitability or cash flows.
Although the incidence and severity of weather conditions are largely unpredictable, the frequency and severity of property claims generally increase when severe weather conditions occur. Longer-term weather trends may be changing, and new types of catastrophe losses may be developing due to climate change, a phenomenon that has been associated with greenhouse gases and extreme weather events linked to rising temperatures, including effects on global weather patterns, greenhouse gases, sea, land and air temperature, sea levels, rain and snow. To the extent the frequency or severity of weather events is exacerbated due to climate change, we may experience increases in catastrophe losses in both coastal and non-coastal areas. This may cause an increase in claims-related and/or reinsurance costs or may negatively affect our ability to provide homeowners insurance to our policyholders in the future. Governmental entities may also respond to climate change by enacting laws and regulations that may adversely affect our cost of providing homeowners insurance in the future. In addition to the inherent uncertainties associated with studying, understanding and modeling changing climate conditions, available analyses and models in this area typically relate to potential meteorological or sea level impacts and generally are not intended to analyze or predict impacts on insured losses.
We have entered new markets and mayexpect that we will continue to do so, but there can be no assurance that our diversification and growth strategy will be effective.effective.
We seek to take advantage of prudent opportunities to expand our core business into other states where we believe the independent agent distribution channel is strong. As a result of a number of factors, including the difficulties of finding appropriate expansion opportunities and the challenges of operating in unfamiliar markets, there can be no assurance that we may notwill be successful in this diversification even after investing significant time and resources to develop and market products and
services in additional states. Initial timetables for expansion may not be achieved, and price and profitability targets may not be feasible. Because our business and experience are based substantially on the Florida insurance market, we may not understand all of the risks associated with entering into an unfamiliar market. For example, the occurrence of significant winter storms in certain states we have expanded into may limithas in some circumstances limited the effectiveness of our revenue and risk diversification strategy by decreasing revenue we expected to receive outside of the Florida hurricane season or increasingincreased our overall risk in ways we had not anticipated when entering those markets. This inexperience in certain new markets could affect our ability to price risks adequately and develop effective underwriting standards. External factors, such as compliance with state regulations, especially when different than the regulations of other states in which we do business, obtaining new licenses, competitive alternatives and shifting customer preferences, may also affect the successful implementation of our geographic growth strategy. Such external factors and requirements may increase our costs and potentially affect the speed with which we will be able to pursue new market opportunities. There can be no assurance that we will be successful in expanding into any one state or combination of states. Failure to manage these risks successfully could have a material adverse effect on our business, results of operations and financial condition.
Our success depends, in part, on our ability to attract and retain talented employees, and the loss of any one of our key personnel could adversely impact our operations.
The success of our business depends, in part, on the leadership and performance of our executive management team and key employees and on our ability to attract, retain and motivate talented employees. An absence of the leadership and performance of the executive management team or our inability to retain talented employees could significantly impact our future performance. Competition for these individuals is intense and our ability to operate successfully may be impaired if we are not effective in filling critical leadership positions, in developing the talent and skills of our human resources, in assimilating new executive talent into our organization, or in deploying human resource talent consistent with our business goals.
We could be adversely affected if our controls designed to ensure compliance with guidelines, policies and legal and regulatory standards are not effective.
Our business is highly dependent on the ability to engage on a daily basis in a large number of insurance underwriting, claims processing and investment activities, many of which are highly complex, must be performed expeditiously and may involve opportunities for human judgment and errors. These activities often are subject to internal guidelines and policies, as well as legal and regulatory standards. In addition, these legal and regulatory standards maycan be subject to varying interpretations. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. Our failure to comply with these guidelines, policies or standards could lead to financial loss, unanticipated risk exposure, regulatory sanctions or penalties, civil or administrative litigation, or damage to our reputation.
The failure of our claims professionals to effectively manage claims could adversely affect our insurance business and financial results.
We rely primarily on our claims professionals to facilitate and oversee the claims adjustment process for our policyholders. Many factors could affect the ability of our claims professionals to effectively manage claims by our policyholders, including:
•the accuracy of our adjusters as they make their assessments and submit their estimates of damages;
•the training, background and experience of our claims representatives;
•the ability of our claims professionals to ensure consistent and timely claims handling;
•the ability of our claims professionals to translate the information provided by adjusters into acceptable claims resolutions; and
•the ability of our claims professionals to maintain and update our claims handling procedures and systems as they evolve over time based on claims and geographical trends in claims reporting as well as consumer behaviors affecting claims handling.
Any failure to effectively manage the claims adjustment process, including failure to pay claims accurately and in a timely manner and failure to oversee third-party claims adjusters, could lead to material litigation, regulatory penalties or sanctions, undermine our reputation in the marketplace and with our network of independent agents, impair our corporate image and negatively affect our financial results.
Litigation or regulatory actions could result in material settlements, judgments, fines or penalties and consequently have a material adverse impact on our financial condition and reputation.
From time to time, we are subject to civil or administrative actions and litigation. This is especially the case in Florida, where insurance companies, including the Insurance Entities, have experienced increases in first-party litigation due largely to the state’s one-way attorneys’ fee statute and resulting litigation climate. Although we strive to pay meritorious claims in a fair and prompt manner, civil litigation can result when we do not pay insurance claims in the amounts or at the times demanded by policyholders or their representatives. We also may be subject to litigation or administrative actions arising from the conduct of our business and the regulatory authority of state insurance departments.departments or other agencies having oversight or enforcement authority over the various aspects of our business. Further, we are subject to other types of litigation inherent in operating our businesses, employing personnel, contracting with vendors and otherwise carrying out our affairs. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage have arisen and may in the future arise, including judicial expansion of policy coverage and the impact of new theories of liability, plaintiffs targeting property and casualty insurers in purported class-action litigation relating to claims-handlingclaims-
handling and other practices, and adverse changes in loss cost trends, including inflationary pressures in home repair costs or other legal or regulatory conditions incentivizing increases in disputed or litigated claims. Multiparty or class action claims mayand similar types of actions, especially when incentivized by potential recoveries by representative plaintiffs and their attorneys, present additional exposure to substantial economic, non-economic or punitive damage awards. Current and future litigationLitigation or regulatory matters have negatively affected and may in the future negatively affect us by resulting in the payment of substantial awards or settlements, increasing legal and compliance costs, requiring us to change certain aspects of our business operations, diverting management attention from other business issues, harming our reputation with agents and customers or making it more difficult to retain current customers and to recruit and retain employees or agents.
Our future results are dependent in part on our ability to successfully operate in a highly competitive insurance industry.
The property and casualty insurance industry is highly competitive. We compete against large national carriers that have greater capital resources and longer operating histories, regional carriers and managing general agencies, as well as newly formed and less-capitalized companies that might have more aggressive underwriting or pricing strategies. Many of these entities may also be affiliated with other entities that have greater financial and other resources than we have. Competitors mayWhen competitors attempt to increase market share by lowering rates. In that case,rates, we wouldcan experience reductions in our underwriting margins, or a decline in sales of our insurance policies could decline as customers purchase lower-priced products from our competitors. Competitors also might adopt more prompt or more effective solutions to adverse market conditions than we are able to implement, providing those competitors with a competitive advantage through lower losses and loss adjustment expenses, more competitive premium levels, or the ability to expand their businesses. Additionally, due to statutorily-imposed limits on rate increases, Florida’s residual property insurance market, Citizens, often charges lower premiums in hard insurance markets than the Insurance Entities are able to charge in accordance with applicable regulatory approvals, actuarial standards and prudent financial management. In hard markets such as the current Florida market, insurance agents and their customers therefore increasingly choose Citizens over private market insurers like the Insurance Entities for their residential property insurance coverage. Because of the competitive nature of the insurance industry, including competition for producers such as independent agents, there can be no assurance that we will continue to develop and maintain productive relationships with independent agents, effectively compete with our industry rivals, or that competitive pressures will not have a material adverse effect on our business, operating results or financial condition.
A downgrade in our Financial Stability Rating®Rating® may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition.
Financial Stability Ratings®Ratings® and similar ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business. On an ongoing basis, rating agencies review the financial performance and condition of insurers and could downgrade or change the outlook on an insurer’s ratings due to, for example, a change in an insurer’s statutory capital; a change in a rating agency’s determination of the amount of risk-adjusted capital required to maintain a particular rating; a change in the perceived adequacy of an insurer’s reinsurance program; an increase in the perceived risk of an insurer’s investment portfolio; a reduced confidence in management or a host of other considerations that may or may not be within an insurer’s knowledge or control. Demotech has assigned a Financial Stability Rating®Rating® of A for each Insurance Entity. Because these ratings are subject to continuous review, the retention of these ratings cannot be assured. A downgrade in or withdrawal of these ratings, or a decision by Demotech to require us to make a capital infusion into the Insurance Entities to maintain their ratings, may adversely affect our liquidity, operating results and financial condition. In addition, our failure to maintain a financial strength rating acceptable in the secondary mortgage market would adversely affect our ability to write new and renewal business. Financial Stability Ratings®Ratings® are primarily directed towards policyholders of the Insurance Entities, and are not evaluations directed toward the protection of our shareholders, and are not recommendations to buy, sell or hold securities.
Breaches of our information systems or denial of service on our website could have an adverse impact on our business and reputation.
Our ability to effectively operate our business depends on our ability, and the ability of certain third-party vendors and business partners, to access our computer systems to perform necessary business functions, such as providing quotes and product pricing, billing and processing premiums, administering claims and reporting our financial results. Our business and operations rely on the secure and efficient processing, storage and transmission of customer and company data, including policyholders’ nonpublic personal information, including financial information, and proprietary business information, on our computer systems and networks. Unauthorized access to personally identifiable information, even if not financial information, could be damaging to all affected parties. There have been several highly publicized cases involving financial services companies, consumer-based
companies and other companies, as well as governmental and political organizations, reporting breaches in the security of their websites, networks or other systems. Some of the publicized breaches have involved sophisticated and targetedBreaches can involve attacks intended to obtain unauthorized access to nonpublic personal information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, including through the introduction of computer viruses or malware, cyberattacks and other means. There havemeans; breaches can also been several highly publicized cases where hackers have requested “ransom” payments in exchange for not disclosing customer information. Other publicized breaches have involvedinvolve human error, such as employees falling victim to phishing schemes or computer coding errors that may inadvertently leave data exposed.
Our computer systems may beare vulnerable to unauthorized access and hackers, computer viruses and other scenarios in which our data may be exposed or compromised. Cyberattacks can originate from a variety of sources, including third parties who are affiliated with foreign governments or employees acting negligently or in a manner adverse to our interests. Third parties may seek to gain access to our systems either directly or using equipment or security passwords belonging to employees, customers, third-party service providers or other users of our systems. Our systems also may inadvertently expose, through a computer programming error or otherwise, confidential information as well as that of our customers and third parties with whom we interact.
Our computer systems have been, and likely will continue to be, subject to cyber hacking activities, computer viruses, other malicious codes or other computer-related penetrations. To date, we are not awareThis is especially the case as the number of a material breach of cybersecurity.our employees working remotely has increased. We commit significant resources to administrative and technical controls to prevent cyber incidents and protect our information technology, but our preventative actions to reduce the risk of cyber threats may be insufficient to prevent physical and electronic break-ins and other cyberattacks or security breaches, including those due to human vulnerabilities. Any such event could damage our computers or systems; compromise our confidential information as well as that of our customers and third parties with whom we interact; significantly impede or interrupt business operations, including denial of service on our website; and could result in violations of applicable privacy and other laws, financial loss to us or to our policyholders, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure and reputational harm, all of which could have a material adverse effect on us. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities, exposures, or information security events. Due to the complexity and interconnectedness of our systems, the process of enhancing our protective measures can itself create a risk of systems disruptions and security issues.
The increase in the use of cloud technologies and in consumer preference for online transactions can heighten these and other operational risks. Certain aspects of the security of such technologies are unpredictable or beyond our control, and this lack of transparency may inhibit our ability to discover a failure by cloud service providers to adequately safeguard their systems and prevent cyberattacks that could disrupt our operations and result in misappropriation, corruption or loss of confidential and other information. In addition, there is a risk that encryption and other protective measures, despite their sophistication, may be defeated, particularly to the extent that new computing technologies vastly increase the speed and computing power available.
In addition, any significant data security breach of our independent agents or third-party vendors could harm our business and reputation.
We may not be able to effectively implement or adapt to changes in technology, which may result in interruptions to our business or a competitive disadvantage.
Developments in technology are affecting the insurance business. We believe that the development and implementation of new technologies will require additional investment of our capital resources in the future, and it is possible that we may not be able to effectively implement or adapt to new technologies. We have not determined the amount of resources and the time that this development and implementation may require, which may result in short-term, unexpected interruptions to our business, or may result in a competitive disadvantage in price and/or efficiency, as we endeavor to develop or implement new technologies.
Lack of effectiveness of exclusions and other loss limitation methods in the insurance policies we write or changes in laws and/or potential regulatory approaches relating to them could have a material adverse effect on our financial condition or our results of operations.
ManyAll of the policies we issue include exclusions or other conditions that define and limit coverage, whichcoverage. These exclusions and conditions are designed to manage our exposure to certain risk types of risksor risk characteristics and expanding theories of legal liability. In addition, our policies and applicable law limitlimits the time period during which a policyholder may bring a claim under the policy. It is possible that a courtregulatory authority would refuse to approve or regulatory authoritya court could nullify or void an exclusion or limitation or interpret existing coverages more broadly than we anticipate, or that legislation could be enacted modifying or barring the use of these exclusions or limitations. This could result in higher than anticipated losses and LAE by extending coverage beyond our underwriting intent or increasing the number or size of claims, which could have a material adverse effect on our operating results. In some instances, these changesthe intended effects of approved policy language and court interpretation of the same may not become apparent until sometime after we have issued the insurance policies that are affected by the change.and case law sets a precedent for legal interpretation of them. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued.
RISKS RELATING TO INVESTMENTS
We are subject to market risk, which may adversely affect investment income.
Our primary market risk exposures are changes in equity prices and interest rates, which impact our investment income and returns. A declineDeclines in market interest rates could have an adverse effect on our investment income asto the extent that we invest cash in new interest-bearing investments that may yield less than our portfolio’s average rate of return. A decline in market interest rates could also lead us toreturn or purchase longer-term or riskier assets in order to obtain adequate investment yields resulting in a duration gap when compared to the duration of liabilities. An increaseIncreases in market interest rates could also have an adverse effect on the value of our investment portfolio by decreasing the fair values of the available-for-sale debt securities that comprise a large portion of our investment portfolio. Similarly, a declinedeclines in the equities markets could adversely affect our existing portfolio. Increases in the equities markets might increase returns on our existing portfolio but could reduce the attractiveness of future investments.
Our overall financial performance is dependentdepends in part on the returns on our investment portfolio.
The performance of our investment portfolio is independent of the revenue and income generated from our insurance operations, and there is typically no direct correlation between the financial results of these two activities. Thus, to the extent that our investment portfolio does not perform well due to the factors discussed above or otherwise, our results of operations may be materially adversely affected even if our insurance operations perform favorably. Further, because the returns on our
investment portfolio could be volatile,are subject to market volatility, our overall results of operations could likewise be volatile from period to period even if we do not experience significant financial variances in our insurance operations.
RISKS RELATING TO THE INSURANCE INDUSTRY
We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth and profitability.
The laws and regulations affecting the insurance industry are complex and subject to change. Compliance with these laws and regulations may increase the costs of running our business and may even slow our ability to respond effectively and quickly to operational opportunities. Moreover, these laws and regulations are administered and enforced by a number of different governmental authorities, including state insurance regulators, the U.S. Department of Justice, and state attorneys general, each of which exercises a degree of interpretive latitude. Consequently, we are also subject to the risk that compliance with any particular regulator’s or enforcement authority’s interpretation of a legal issue may not result in compliance with another’s interpretation of the same issue, particularly when compliance is judged in hindsight. In addition, there is risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue may change over time to our detriment, or that changes in the overall legal environment may cause us to change our views regarding the actions we need to take from a legal risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow and achieve or improve the profitability of our business. We also have been affected by, and in the future may continue to be affected by, decisions or inaction by state legislatures that result in the continuation or worsening of adverse market conditions. Furthermore, in some cases, these laws and regulations are designed to protect or benefit the interests of a specific constituency rather than a range of constituencies. For example, state insurance laws and regulations are generally intended to protect or benefit purchasers or users of insurance products, and not shareholders. In many respects, these laws and regulations limit our ability to grow and improve the profitability of our business or effectively respond to changing market conditions, and may place constraints on our ability to meet our revenue and net profit goals.
The Insurance Entities are highly regulated by state insurance authorities in Florida, the state in which each is domiciled, and UPCIC and APPCIC are also regulated by state insurance authorities in the other states in which they conduct business. Such regulations, among other things, require that certain transactions between the Insurance Entities and their affiliates must be fair and reasonable and require prior notice and non-disapproval of such transactions by the applicable state insurance authority. State regulations also limit the amount of dividends and other payments that can be made by the Insurance Entities without prior regulatory approval and impose restrictions on the amount and type of investments the Insurance Entities may make. Other state regulations require insurance companies to file insurance premium rate schedules and policy forms for review and approval, restrict our ability to cancel or non-renew policies and determine the accounting standards we use in preparation of our consolidated financial statements. These regulations also affect many other aspects of the Insurance Entities’ businesses. Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance efforts and other expenses of doing business. If the Insurance Entities fail to comply with applicable regulatory requirements, the regulatory agencies can revoke or suspend the Insurance Entities’ licenses, withhold required approvals, require corrective action, impose operating limitations, impose penalties and fines or pursue other remedies available under applicable laws and regulations.
State insurance regulatory agencies conduct periodic examinations of the Insurance Entities on a wide variety of matters, including policy forms, premium rates, licensing, trade and claims practices, investment standards and practices, statutory capital and surplus requirements, reserve and loss ratio requirements and transactions among affiliates. Further, the Insurance Entities are required to file quarterly, annual and other reports with state insurance regulatory agencies relating to financial condition, holding company issues and other matters. We also are subject to the oversight and jurisdiction of certain other non-insurance regulatory agencies. These agencies typically have the authority to review, examine or investigate certain aspects of our business related to the laws they administer.
Regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us. This could adversely affect our ability to operate our business both directly and potentially indirectly through reputational damage.
State legislatures and insurance regulators regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, can be made for the benefit of the consumer, or for other reasons, at the direct or indirect expense of insurers, and thus could have an adverse effect on our financial condition and results of operations. In other instances, decisions by policymakers to not address adverse market conditions through effective changes to underlying statutes has caused, and in the future might continue to cause, an adverse effect on our financial conditions and results of operations.
Over the course of many years, the state insurance regulatory framework has come under public scrutiny and members of Congress have discussed proposals to provide for federal chartering of insurance companies. We can make no assurances regarding the potential impact of state or federal measures that may change the nature or scope of insurance regulation.
UVE is a holding company and, consequently, its cash flow is dependent on dividends and other permissible payments from its subsidiaries.
UVE is a holding company that conducts no insurance operations of its own. All operations are conducted by the Insurance Entities and by other operating subsidiaries, most of which support the business of the Insurance Entities. As a holding company, UVE’s sources of cash flow consist primarily of dividends and other permissible payments from its subsidiaries. The ability of our non-insurance company subsidiaries to pay dividends may be adversely affected by reductions in the premiums or number of policies written by the Insurance Entities, by changes in the terms of the parties’ contracts, or by changes in the regulation of insurance holding company systems. UVE depends on such payments for general corporate purposes, for its capital management activities and for payment of any dividends to its common shareholders. The ability of the Insurance Entities to make such payments is limited by applicable law, as set forth in “Item 1—Business—Government Regulation—Restrictions on Dividends and Distributions.” For more details on our cash flows, see “Item“Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Regulations limiting rate changes and requiring us to participate in loss sharing or assessments may decrease our profitability.
From time to time, public policy preferences and perceptions affect the insurance market, including insurers’ efforts to effectively maintain rates that allow us to reach targeted levels of rate adequacy and profitability. Despite efforts to address rate needs and other operational issues analytically, facts and history demonstrate that public policymakers, when faced with untoward events and adverse public sentiment, canhave acted and may in the future act in ways that impede our ability to maintain a satisfactory correlation between rates and risk. This has included, and in the future may include, policymakers’ failures to take steps to address the causes of adverse market conditions. Such acts or failures to act may affect our ability to obtain approval for rate changes that may be requiredwe believe are necessary to attain rate adequacy along with targeted levels of profitability and returns on equity. Additionally, because the Insurance Entities typically must obtain regulatory approval prior to changing rates, delays in the filing, review or implementation of rate changes can adversely affect our ability to attain rate adequacy. This is especially the case in hard markets such as the current Florida market, where many insurers are submitting filings for significant rate increases and consequently thereby affecting the FLOIR’s workload and affecting its ability to timely review filings. Our ability to afford reinsurance required to reduce our catastrophe risk also may be dependent upon thedepends in part on our ability to adjust rates for our costs.
Additionally, we are required to participate in guaranty funds for insolvent insurance companies and other statutory insurance entities. The guaranty funds and other statutory entities periodically levy assessments against all applicable insurance companies doing business in the state and the amounts and timing of those assessments are unpredictable. Although we seek to recoup these assessments from our policyholders, we might not be able to fully do so and at any point in time or for any period, our operating results and financial condition could be adversely affected by any of these factors.
The amount of statutory capital and surplus that each of the Insurance Entities has and the amount of statutory capital and surplus it must hold can vary and are sensitive to a number of factors outside of our control, including market conditions and the regulatory environment and rules.
The Insurance Entities are subject to RBC standards and other minimum capital and surplus requirements imposed under applicable state laws. The RBC standards, based upon the Risk-Based Capital Model Act adopted by the NAIC, require us to report our results of RBC calculations to the FLOIR and the NAIC. These RBC standards provide for different levels of regulatory attention depending upon the ratio of an insurance company’s total adjusted capital, as calculated in accordance with NAIC guidelines, to its authorized control level RBC. Authorized control level RBC is determined using the NAIC’s RBC formula, which measures the minimum amount of capital that an insurance company needs to support its overall business operations.
An insurance company with total adjusted capital that (i) is at less than 200% of its authorized control level RBC, or (ii) falls below 300% of its RBC requirement and also fails a trend test, is deemed to be at a “company action level,” which would require the insurance company to file a plan that, among other things, contains proposals of corrective actions the company intends to take that are reasonably expected to result in the elimination of the company action level event. Additional action level events occur when the insurer’s total adjusted capital falls below 150%, 100%, and 70% of its authorized control level RBC. The lower the percentage, the more severe the regulatory response, including, in the event of a mandatory control level event (total adjusted capital falls below 70% of the insurer’s authorized control level RBC), placing the insurance company into receivership.
In addition, the Insurance Entities are required to maintain certain minimum capital and surplus and to limit premiums written to specified multiples of capital and surplus. Our Insurance Entities could exceed these ratios if their volume increases faster than anticipated or if their surplus declines due to catastrophe or non-catastrophe losses or excessive underwriting and operational expenses.
Any failure by the Insurance Entities to meet the applicable RBC or minimum statutory capital requirements imposed by the laws of Florida (or other states where we currently or may eventually conduct business) could subject them to further examination or corrective action imposed by state regulators, including limitations on our writing of additional business, state supervision or liquidation,receivership, which could have a material adverse impact on our reputation and financial condition. Any such failure also could adversely affect our Financial Stability RatingsRatings®.
Any changes in existing RBC requirements, minimum statutory capital requirements, or applicable writings ratios may require us to increase our statutory capital levels, which we may be unable to do, or require us to reduce the amount of premiums we write, which could adversely affect our business and our operating results.
RISKS RELATING TO DEBT OBLIGATIONS
To service our debt, we will require a significant amount of cash. Our Insurance Entitiesability to generate cash depends on many factors.
In November 2021, we issued and sold $100 million of 5.625% Senior Unsecured Notes due 2026 (the “Notes”). See “Part II—Item 8—Note 7 (Long-term debt).” Our ability to make payments on or to refinance our indebtedness, including our ability to meet our obligations under the Notes, and to fund our operations depends on our ability to generate cash and may depend on our access to the capital markets. These will depend on our financial and operating performance, which are subject to examinationgeneral economic, financial, competitive, legislative, regulatory and actions by state insurance departments.capital market conditions that are beyond our control. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be unable to obtain new financing or to fund our obligations to our customers and business partners, implement our business plans, sell assets, seek additional capital or restructure or refinance our indebtedness, including the Notes. As a result, we may be unable to meet our obligations under the Notes. In the absence of sufficient capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet debt service and other obligations. We may not be able to consummate those dispositions of assets or obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due, including obligations under the Notes.
The Insurance Entities are subjectOur indebtedness could adversely affect our financial results and prevent us from fulfilling our obligations under the Notes.
In addition to extensive regulationthe currently outstanding indebtedness of the Company and its subsidiaries, we may be able to borrow substantial additional indebtedness in the statesfuture. If new indebtedness is incurred in which they do business. State insurance regulatory agencies conduct periodic examinationsaddition to our current debt levels, the related risks that we now face could increase. Our indebtedness, including the indebtedness we may incur in the future, could have important consequences for the holders of the Insurance Entities on a wide variety of matters, including policy forms, premium rates, licensing, trade and claims practices, investment standards and practices, statutoryNotes, including:
•limiting our ability to satisfy our obligations with respect to the Notes;
•increasing our vulnerability to general adverse economic conditions;
•limiting our ability to obtain additional financing to fund future working capital, and surplus requirements, reserve and loss ratio requirements and transactions among affiliates. Further, the Insurance Entities are required to file quarterly, annualcapital expenditures and other reportsgeneral corporate requirements;
•requiring a substantial portion of our cash flows from operations for the payment of principal of and interest on our indebtedness and thereby reducing our ability to use our cash flows to fund working capital, capital expenditures and general corporate requirements;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry; and
•putting us at a disadvantage compared to competitors with state insurance regulatory agencies relating to financial condition, holding company issues and other matters. If an insurance company fails to obtain required licenses or approvals, or if the Insurance Entities fail to comply with other regulatory requirements, the regulatory agencies can suspend or revoke their licenses, withdraw or withhold required approvals, require corrective action and impose operating limitations, penalties or other remedies available under applicable laws and regulations. See “Item 1—Business—Government Regulation.”less indebtedness.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
Real Estate Owned and Used in Operations
We conduct our insurance operations primarily from two locations, our general corporate offices located at 1110 West Commercial Boulevard, Fort Lauderdale, Florida 33309. Substantially all33309 and an office building located at 5341 Northwest 33rd Avenue, Fort Lauderdale, Florida 33309, which we purchased during fiscal 2019. The renovation project for this office building was completed during 2021.
The majority of this spaceour operations is fully utilized for its intended purpose.conducted from these two facilities. We believe that our facilities and equipment are generally well maintained, in good operating conditions and suitable and adequate for our present operations.
Real Estate Owned and Under Development
In 2019, we purchased an office building located at 5341 Northwest 33rd Avenue, Fort Lauderdale, Florida 33309, which will The current facilities are expected to be used to meetadequate for our staffing needs to accommodate our foreseeable future insurance operations. Construction began in 2019, and we anticipate completion ofoperations for the building in 2020.near future.
There are no mortgage or lease arrangements for our real estate owned property.
Lawsuits and other legal proceedings are filed against the Company from time to time. Many of these lawsuitslegal proceedings involve claims under policies that we underwrite and reserve for as an insurer. We are also involved in various other legal proceedings and litigation unrelated to claims under our
policies that arise in the ordinary course of business operations. Management
believes that any liabilities that may arise as a result of these legal matters will not have a material adverse effect on our financial condition or results of operations. The Company contests liability and/or the amount of damages as appropriate in each pending matter.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal matters when those matters present loss contingencies that are both probable and estimable.
Legal proceedings are subject to many uncertain factors that generally cannot be predicted with assurance,certainty, and the Company may be exposed to losses in excess of any amounts accrued. The Company currently estimates that the reasonably possible losses for legal proceedings, whether in excess of a related accrued liability or where there is no accrued liability, and for which the Company is able to estimate a possible loss, are immaterial. This represents management’s estimate of possible loss with respect to these matters and is based on currently available information. These estimates of possible loss do not represent our maximum loss exposure, and actual results may vary significantly from current estimates.
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ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock, par value $0.01 per share, is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “UVE.” As of February 24, 2020,22, 2022, there were 40 registered shareholders of record of our common stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.
As of December 31, 20192021 and 2018,2020, there was one shareholder of our Series A Cumulative Convertible Preferred Stock (“Series A Preferred Stock”). We declared and paid aggregate dividends to this holder of record of the company’s Series A Preferred Stock of $10,000 for each of the years ended December 31, 20192021 and 2018.2020.
Stock Performance Graph
The following graph and table compare the cumulative total stockholder return of our common stock from December 31, 20142016 through December 31, 20192021 with the performance of: (i) Standard & Poor’s (“S&P”) 500 Index, (ii) Russell 2000 Index and (iii) S&P Insurance Select Industry Index. We are a constituent of the Russell 2000 Index and the S&P Insurance Select Industry Index. S&P Insurance Select Industry Index consists of all publicly traded insurance underwriters in the property and casualty sector in the United States.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Period Ended |
Index | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 | | 12/31/2021 |
Universal Insurance Holdings, Inc. | | $ | 99.12 | | | $ | 140.19 | | | $ | 106.22 | | | $ | 60.01 | | | $ | 71.05 | |
S&P 500 Index | | 121.83 | | | 116.49 | | | 153.17 | | | 181.35 | | | 233.41 | |
Russell 2000 Index | | 114.65 | | | 102.02 | | | 128.06 | | | 153.62 | | | 176.39 | |
S&P Insurance Select Industry Index | | 113.29 | | | 106.98 | | | 136.56 | | | 132.74 | | | 163.45 | |
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| | | | | | | | | | | | | | | | | | | | |
| | Period Ended |
Index | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 |
Universal Insurance Holdings, Inc. | | $ | 116.49 |
| | $ | 147.39 |
| | $ | 146.09 |
| | $ | 206.63 |
| | $ | 156.55 |
|
S&P 500 Index | | 101.38 |
| | 113.51 |
| | 138.29 |
| | 132.23 |
| | 173.86 |
|
Russell 2000 Index | | 95.59 |
| | 115.95 |
| | 132.94 |
| | 118.30 |
| | 148.49 |
|
S&P Insurance Select Industry Index | | 106.38 |
| | 129.59 |
| | 146.81 |
| | 138.64 |
| | 176.97 |
|
We have generated these comparisons using data supplied by S&P Global Market Intelligence (Centennial, Colorado). The graph and table assume an investment of $100 in our common stock and in each of the three indices on December 31, 20142016 with all dividends being reinvested on the ex-dividend date. The closing price of our common stock as of December 31, 20192021 (the last trading day of the year) was $27.99$17.00 per share. The stock price performance in the graph and table are not intended to forecast the future performance of our common stock and may not be indicative of future price performance.
Dividend Policy
Future cash dividend payments are subject to business conditions, our financial position and requirements for working capital and other corporate purposes, as well as to compliance with the applicable provisions of the Delaware General Corporation Law. Subject to these qualifications, we expect to continue our regular practice of paying a comparable quarterly dividend to our stockholders. See “Part I—Restrictions on Dividends and Distributions,” “Item 1A—Risk Factors-RisksFactors—Risks Relating to Insurance Industry” and “Part II, II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Registrant Purchases of Equity Securities
The table below presents our common stock repurchased by UVE during the three months ended December 31, 2019.
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| | | | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid per Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
10/1/2019 - 10/31/2019 | | — |
| | $ | — |
| | — |
| | — |
|
11/1/2019 - 11/30/2019 | | 417,316 |
| | $ | 28.77 |
| | 417,316 |
| | — |
|
12/1/2019 - 12/31/2019 | | 150,000 |
| | $ | 28.20 |
| | 150,000 |
| | 1,012,473 |
|
Total for the three months ended December 31, 2019 | | 567,316 |
| | $ | 28.62 |
| | 567,316 |
| | 1,012,473 |
|
| |
(1) | Average price paid per share does not reflect brokerage commissions paid to acquire shares in open market transactions. |
| |
(2) | Number of shares was calculated using a closing price at December 31, 2019 of $27.99 per share. |
We may repurchase shares from time to time at our discretion, based on ongoing assessments of our capital needs, the market price of our common stock and general market conditions. We will fund the share repurchase program with cash from operations. During 2019, there were three authorized repurchase plans in effect:
On December 12, 2018,November 3, 2020, we announced that our Board of Directors authorized the repurchase of up to $20 million of outstanding shares of our common stock through May 31, 2020November 3, 2022 (the “May 2020 Share Repurchase Program”), pursuant to which we repurchased 606,342 shares of our common stock at an aggregate price of $20.0 million. We completed the May 2020 Share Repurchase Program in May 2019.
On May 6, 2019, we announced that our Board of Directors authorized the repurchase up to $40 million of outstanding shares of our common stock through December 31, 2020 (the “December 2020 Share Repurchase Program”), pursuant to which we repurchased 1,466,575 shares of our common stock at an aggregate price of $40 million. We completed the December 2020 Share Repurchase Program in November 2019.
On November 6, 2019, we announced that our Board of Directors authorized the repurchase of up to $40 million of outstanding shares of our common stock through December 31, 2021 (the “December 2021“November 2022 Share Repurchase Program”). Under the December 2021November 2022 Share Repurchase Program, we repurchased 403,142162,591 shares of our common stock from November 20192020 through December 20192021 at an aggregate cost of approximately $11.7$2.2 million.
In total, during During the yearthree months ended December 31, 2019, we repurchased an aggregate of 2,337,8252021, no shares of our common stock were repurchased pursuant to this authorization. As of December 31, 2021, we have the May 2020ability to purchase up to approximately $17.8 million of our common stock under the November 2022 Share Repurchase Program, the December 2020 Share Repurchase Program and the December 2021 Share Repurchase Program at an aggregate price of approximately $66.2 million.Program.
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ITEM 6. | SELECTED FINANCIAL DATARESERVED |
The following selected historical consolidated financial data should be read in conjunction with our consolidated financial statements and notes thereto and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth elsewhere in the Annual Report on Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period.
The following tables present historical selected consolidated financial data of Universal Insurance Holdings, Inc. and Subsidiaries for the five years ended December 31, 2019 (in thousands, except per share data):
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| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Statement of Income Data: | | | | | | | | | | |
Revenue: | | | | | | | | | | |
Direct premiums written | | $ | 1,292,721 |
| | $ | 1,190,875 |
| | $ | 1,055,886 |
| | $ | 954,617 |
| | $ | 883,409 |
|
Change in unearned premium | | (59,600 | ) | | (69,235 | ) | | (56,688 | ) | | (33,390 | ) | | (46,617 | ) |
Direct premium earned | | 1,233,121 |
| | 1,121,640 |
| | 999,198 |
| | 921,227 |
| | 836,792 |
|
Ceded premium earned | | (390,619 | ) | | (353,258 | ) | | (310,405 | ) | | (288,811 | ) | | (332,793 | ) |
Premiums earned, net | | 842,502 |
| | 768,382 |
| | 688,793 |
| | 632,416 |
| | 503,999 |
|
Net investment income (1) | | 30,743 |
| | 24,816 |
| | 13,460 |
| | 9,540 |
| | 5,155 |
|
Other revenues (2) | | 55,633 |
| | 49,876 |
| | 47,093 |
| | 41,039 |
| | 36,330 |
|
Total revenue | | 939,351 |
| | 823,816 |
| | 751,916 |
| | 685,289 |
| | 546,544 |
|
Costs and expenses: | | | | | | | | | | |
Losses and loss adjustment expenses | | 603,406 |
| | 414,455 |
| | 350,428 |
| | 301,229 |
| | 187,739 |
|
Policy acquisition costs | | 177,530 |
| | 157,327 |
| | 138,846 |
| | 125,979 |
| | 88,218 |
|
Other operating costs | | 94,898 |
| | 99,161 |
| | 92,158 |
| | 95,198 |
| | 95,564 |
|
Total expenses | | 875,834 |
| | 670,943 |
| | 581,432 |
| | 522,406 |
| | 371,521 |
|
Income before income taxes | | 63,517 |
| | 152,873 |
| | 170,484 |
| | 162,883 |
| | 175,023 |
|
Income tax expense | | 17,003 |
| | 35,822 |
| | 63,549 |
| | 63,473 |
| | 68,539 |
|
Net income | | $ | 46,514 |
| | $ | 117,051 |
| | $ | 106,935 |
| | $ | 99,410 |
| | $ | 106,484 |
|
Per Share Data: | | | | | | | | | | |
Basic earnings per common share | | $ | 1.37 |
| | $ | 3.36 |
| | $ | 3.07 |
| | $ | 2.85 |
| | $ | 3.06 |
|
Diluted earnings per common share | | $ | 1.36 |
| | $ | 3.27 |
| | $ | 2.99 |
| | $ | 2.79 |
| | $ | 2.97 |
|
Dividends declared per common share | | $ | 0.77 |
| | $ | 0.73 |
| | $ | 0.69 |
| | $ | 0.69 |
| | $ | 0.63 |
|
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Balance Sheet Data: | | | | | | | | | | |
Total invested assets | | $ | 914,586 |
| | $ | 908,154 |
| | $ | 730,023 |
| | $ | 651,601 |
| | $ | 489,435 |
|
Cash and cash equivalents | | 182,109 |
| | 166,428 |
| | 213,486 |
| | 105,730 |
| | 197,014 |
|
Total assets | | 1,719,852 |
| | 1,858,390 |
| | 1,454,999 |
| | 1,060,007 |
| | 993,548 |
|
Unpaid losses and loss adjustment expenses | | 267,760 |
| | 472,829 |
| | 248,425 |
| | 58,494 |
| | 98,840 |
|
Unearned premiums | | 661,279 |
| | 601,679 |
| | 532,444 |
| | 475,756 |
| | 442,366 |
|
Long-term debt | | 9,926 |
| | 11,397 |
| | 12,868 |
| | 15,028 |
| | 24,050 |
|
Total liabilities | | 1,225,951 |
| | 1,356,757 |
| | 1,015,011 |
| | 688,817 |
| | 700,456 |
|
Total stockholders’ equity | | $ | 493,901 |
| | $ | 501,633 |
| | $ | 439,988 |
| | $ | 371,190 |
| | $ | 293,092 |
|
Shares outstanding end of period | | 32,638 |
| | 34,783 |
| | 34,735 |
| | 35,052 |
| | 35,110 |
|
Book value per share | | $ | 15.13 |
| | $ | 14.42 |
| | $ | 12.67 |
| | $ | 10.59 |
| | $ | 8.35 |
|
Return on average equity (ROE) | | 9.2 | % | | 24.1 | % | | 25.7 | % | | 29.4 | % | | 41.8 | % |
| | | | | | | | | | |
Selected Data: | | | | | | | | | | |
Loss and loss adjustment expense ratio (3) | | 71.6 | % | | 53.9 | % | | 50.9 | % | | 47.6 | % | | 37.2 | % |
General and administrative expense ratio (4) | | 32.3 | % | | 33.4 | % | | 33.5 | % | | 34.9 | % | | 36.3 | % |
Combined Ratio (5) | | 103.9 | % | | 87.3 | % | | 84.4 | % | | 82.5 | % | | 73.5 | % |
| |
(1) | Net investment income excludes net realized gains (losses) on sale of securities and net change in unrealized gains (losses) of equity securities. |
| |
(2) | Other revenue consists of commission revenue, policy fees, and other revenue. |
| |
(3) | The loss and loss adjustment expense ratio is calculated by dividing losses and loss adjustment expenses by premiums earned, net. |
| |
(4) | The general and administrative expense ratio is calculated by dividing general and administrative expense, excluding interest expense, by premiums earned, net. Interest expense was $248 thousand, $346 thousand, $348 thousand, $421 thousand and $963 thousand for the years ended December 31, 2019, 2018, 2017, 2016 and 2015, respectively. |
| |
(5) | The combined ratio is the sum of the losses and loss adjustment expense ratio and the general and administrative expense ratio. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to assist in an understanding of our financial condition and results of operations and should be read in conjunction with our consolidated financial statements and accompanying notes in “Item 8—Financial Statements and Supplementary Data” below. Except for the historical information contained herein, the discussions in this MD&A contain forward-looking statements that involve risks and uncertainties. Our future results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed above under “Cautionary Note Regarding Forward-Looking Statements” and “Part I, Item 1A—Risk Factors.”
Overview
We are a vertically integrated holding company offering property and casualty insurance and value-added insurance services. We develop, market, and underwrite insurance products for consumers predominantly in the personal residential homeowners lines of business and perform substantially all other insurance-related services for our primary insurance entities, including risk management, claims management and distribution. Our primary insurance entities, UPCIC and APPCIC, offer insurance products through both our appointed independent agent network and our online distribution channels across 1819 states (primarily in Florida), with licenses to write insurance in an additional two states. In the second quarter of 2019, we surrendered our license in West Virginia, a state in which we did not write any premium. Also during the second quarter of 2019, we received a Certificate of Authority in Wisconsin, approving UPCIC as a licensed insurance company in Wisconsin. The Insurance Entities seek to produce an underwriting profit (defined as earned premium minus losses, LAE, policy acquisition costs and other operating costs) over the long term; maintain a conservative balance sheet to prepare for years in which the Insurance Entities are not able to achieve an underwriting profit; and generate investment income from invested assets.
Revenues
Revenues
We generate revenue primarily from the collection of insurance premiums. Other sources of revenue include: commissions paid by our reinsurers to our reinsurance intermediary subsidiary BARC on reinsurance it places for the Insurance Entities; policy fees collected from policyholders by our managing general agent subsidiary, ERA (formerly Universal Risk Advisors, Inc.); and financing fees charged to policyholders who choose to defer premium payments. In addition, our subsidiary Alder receives fees from the Insurance Entities for claims-handling services. The Insurance Entities are reimbursed for these fees on claims that are subject to recovery under the Insurance Entities’ respective reinsurance programs. These fees, after expenses, are recorded in the consolidated financial statements as an adjustment to LAE. We also generate income by investing our assets.
The nature of our business tends to be seasonal during the year, reflecting consumer behaviors in connection with the Florida residential real estate market and the hurricane season. The amount of direct premiums written tends to increase just prior to the second quarter and tends to decrease approaching the fourth quarter.
Trends and Geographical Distribution
In recent years,Florida Trends
We are currently working through a cycle to improve long-term rate adequacy and earnings for the Insurance Entities by increasing rates and managing exposures, while taking advantage of what we believe to be opportunities in a dislocated market. The Florida personal residentiallines homeowners’ market currently can be characterized as a “hard market”, where insurance market has been characterized by increased lossespremium rates are escalating, insurers are reducing coverages, and LAE dueunderwriting standards are tightening as insurers closely monitor insurance rates and manage coverage capacity. Due to abuses and inflated claims. These conditions have continued to worsen and have reached levels well beyond historical norms and levels experienced in other jurisdictions. The adverse conditions in the Florida market and factors more generally affecting the U.S. and global reinsurance markets, reinsurance capacity in recent years has also been subject to less favorable pricing or terms. These market forces decrease competition among admitted insurers, and ultimately result in the increased use of Citizens, which was created to be the State’s residual property insurance market. In recent years, in response to adverse behaviors and conditions in the Florida residential market, most admitted market competitors have sought and often received approval for significant rate increases. Meanwhile, Citizens’ rate increases are limited by law, resulting in its policies, in a hard market, becoming priced lower than admitted market policies. This causes Citizens to become viewed as a desirable alternative to the admitted market as admitted market insurers manage through the hard market challenges. Our Insurance Entities likewise have taken and continue to take action to manage through this hard market by increasing rates and prudently managing exposures while also maintaining their competitive position in the market and supporting our current policyholders and agents.
While addressing rate adequacy for the Insurance Entities, we continue to experience inflated costs for losses and LAE in the Florida market, where an industry has developed around the solicitation, filing and litigation of personal residential insurance market can be attributed largely toclaims. These dynamics have been made worse by the proliferationlitigation financing industry which in some cases funds these actions. These behaviors are a chief contributing factor for the rate increases in this market. These behaviors result in a pattern of continued increases in year-over-year levels of represented claims, involving both public adjustersthe inflation of purported claim amounts, and attorneys, as well asincreased demands for attorneys’ fees. Active solicitation of personal residential claims in Florida by aggressive estimates and demands put forth bypolicyholder representatives, remediation companies and repair companies. In many cases, policyholders have representation even before the claims are filed or before the company is ablecompanies has led to provide an initial assessment of damages. In other instances, policyholder representatives are taking opportunities occasioned by hurricanes or other events to solicit customers to file other claims or to re-open prior claims, sometimes years after the purported dates of loss. These actions adversely affect bothincrease in the frequency and severity of losses as otherwise understood based onpersonal residential claims in Florida exceeding historical patternslevels and patternslevels seen in other jurisdictions. Information prepared by the Florida Office of Insurance Regulation also shows that claims in Florida are litigated at a substantially disproportionate rate when compared to other states. This is largely due to a Florida statute providing a one-way right of attorneys’ fees against insurers which has, when coupled with certain other statutes and judicial rulings, produced a legal environment in Florida that encourages litigation, in many cases without regard to the underlying merits of the claims. The one-way right to attorneys’ fees essentially means that unless an insurer’s position is entirely upheld in litigation, the insurer must pay the plaintiff’s attorneys’ fees in addition to its own defense costs. This affects not only claims that are litigated to resolution, but also the settlement discussions that take place with nearly all litigated claims. This one-way right to attorney fees creates a nearly risk-free environment, and incentive, for attorneys to pursue litigation against insurers. The result has been a substantial increase in represented and litigated claims in Florida, far outpacing levels experienced in other states. See “Part I—Item 1A—Risk Factors—Risks Relating
In April 2021, the Florida legislature passed a bill intending to Our Business—Actualcurtail the adverse claim trends impacting the Florida homeowners’ insurance market. Most provisions of the bill went into effect on July 1, 2021. Among its provisions, the bill creates a new pre-suit notice requirement wherein an insured must make a formal monetary demand of a residential property insurer before commencing suit. The Company has established an internal team to review and respond to these pre-suit demands in a further effort to resolve disputes before litigation ensues. Another provision of the new law reduces the time period in which to file a new or reopened claim to two years following the date of loss. Other changes include attempting to curtail the solicitation of certain roof claims incurredand to limit referral fees in connection with certain types of claims. Opponents of the reforms have exceeded,challenged certain parts of the new law, including obtaining an injunction against provisions that limit the solicitation of roof claims. In light of the recent enactment of these reforms and the litigation that has ensued, it is premature to assess whether the reforms will have their intended effect. Whether these changes are beneficial to consumers, insurers, insurance company holding systems or the residential property insurance market as a whole may not be fully known for some time.
Despite our initiatives, such as those mentioned above, our costs to settle claims in Florida have increased for the future may exceed,reasons mentioned above. For example, the Company has previously increased its current year loss estimates and increased estimates associated with prior years’ claims. Over the past three years, even as we have increased our estimates of prospective losses each year, we have recorded adverse claim development on prior years’ loss reserves establishedand further strengthened current year losses during the year to address the increasing impact Florida’s market disruptions, as well as the impact of rising costs of building materials and labor, have had on the claims process and the establishment of reserves for claims, adversely affecting our operating resultslosses and financial condition.LAE. The full extent and duration of these market disruptions and inflationary pressures are unknown and still unfolding, and we will monitor the impact of such disruptions on the recording and reporting of claim costs.
The Company has taken a series of steps over time to mitigate the financial impact of these negative trends in the Florida market. We also have closely monitored rate levels, especially in the Florida market, and have submitted rate filings annually based upon the evolving data. However, because rate filings rely upon past loss and expense data and take time to develop, file and implement, we can experience significant delays between identifying needed rate adjustments, gaining approval of rate changes, and ultimately collecting the resulting increased premiums. In addition, the Company has implemented several initiatives in its claims department in response to the adverse market trends. We utilize our process called Fast Track, which is an initiative to handle straightforward, meritorious claims as promptly as possible to mitigate the adverse impacts that can be seen with claims
that remain open for longer periods. In addition, we increased our emphasis on subrogation to reduce our net losses while also recovering policyholders’ deductibles when losses are attributable to the actions of others. We have an internal staff of trained water remediation experts to address the extraordinary number of purported water damage claims filed by policyholders and vendors. We developed a specialized in-house unit for responding to the unique aspects of represented claims, and we have substantially increased our in-house legal staff in an effort to address the increase in litigated or represented claims as cost-effectively as possible.
Additionally, we have taken steps to implement new claim settlement rules associated with the Florida legislation passed in 2019 designed to reduce the negative effects of claims involving assignments of benefits (“AOB”). See “Part I,I— Item 1—Business—Government Regulation.” An AOB is a document signed by a policyholder that allows a third party to be paid for services performed for an insured homeowner who would normally be reimbursed by the insurance company directly after making a claim. ThePrior to the AOB reform legislation, the Company has seenexperienced an increase in the use of AOBs involving litigation by Florida policyholders. Claims paid under an AOB often involve unnecessary litigation, with the Company required to pay both its own defense costs and those of the plaintiff, and, as a result, cost the Company significantly more than claims settled when an AOB is not involved. In 2019, the Florida legislature passed legislation designed to increase consumer protections against AOB abuses and reduce AOB-related litigation. While the Florida legislation addressing abuses associated with AOBs may be beneficial in reducing one aspect of the concerns affecting the Florida market, the overall impact of the deterioration in claims-related tactics and behaviors, including other first-party litigation, thus far has continued to outpace any benefits arising from the 2019 AOB reform legislation. More recently, following legislation adopted in Florida’s 2021 legislative session, we have established procedures and dedicated personnel to a new pre-suit notice and offer process. The new process requires policyholders or their attorneys to notify insurers at least ten days before commencing litigation and allows insurers an opportunity to make pre-suit settlement offers. The policyholders’ ability to recover attorneys’ fees is determined according to a scale that compares the early monthsultimate outcomes of the cases to the insurers’ pre-suit offers. Although this new legislation.
Despite our initiatives,process is intended to reduce claims litigation and encourage settlements, it is too early to evaluate whether it will be successful in limiting the types of settlement demands and litigation that have plagued the Florida market or in offsetting other factors adversely affecting the market such as those mentioned above, ourincreased costs to settle claims in Florida have increased for the reasons mentioned above. For example, the Company has previously increased its current year loss estimatesof building materials and increased estimates associated with prior years’ claims. Over the past three years, even as we have increased our estimates of prospective losses each year, we have recorded adverse claim development on prior years’ loss reserves and further strengthened current year losses during the year to address the increasing impact Florida’s market disruptions have had on the claims process and the establishment of reserves for losses and LAE. The full extent and duration of these market disruptions is unknown and still unfolding, and we will monitor the impact of such disruptions on the recording and reporting of claim costs.labor.
Geographical Distribution
Direct premiums written continue to increase across the states in which we conduct business. As a result of our business strategy, rate changes and marketing anddisciplined underwriting initiatives, we have seen increasesa decrease in policy count, but an increase in in-force premium and total insured value in almost all states for the past three years. Direct premiums written for states outside of Florida increased 27.6%6.1%, representing a $49.0$16.2 million increase during 2019.2021. Direct premiumpremiums written for Florida increased 5.2%11.0%, representing a $52.8$137.6 million increase during 2019.
2021. The following table provides direct premiums written for Florida and other states for the years ended December 31, 20192021 and 20182020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended | | Growth Year Over Year |
| | December 31, 2021 | | December 31, 2020 | | | | |
State | | Direct Premiums Written | | % | | Direct Premiums Written | | % | | $ | | % |
Florida | | $ | 1,388,318 | | | 83.1 | % | | $ | 1,250,748 | | | 82.4 | % | | $ | 137,570 | | | 11.0 | % |
Other states | | 282,934 | | | 16.9 | % | | 266,731 | | | 17.6 | % | | 16,203 | | | 6.1 | % |
Grand total | | $ | 1,671,252 | | | 100.0 | % | | $ | 1,517,479 | | | 100.0 | % | | $ | 153,773 | | | 10.1 | % |
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| | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended | | Growth Year Over Year |
| | December 31, 2019 | | December 31, 2018 | | | | |
State | | Direct Premiums Written | | % | | Direct Premiums Written | | % | | $ | | % |
Florida | | $ | 1,066,112 |
| | 82.5 | % | | $ | 1,013,290 |
| | 85.1 | % | | $ | 52,822 |
| | 5.2 | % |
Other states | | 226,609 |
| | 17.5 | % | | 177,585 |
| | 14.9 | % | | 49,024 |
| | 27.6 | % |
Grand total | | $ | 1,292,721 |
| | 100.0 | % | | $ | 1,190,875 |
| | 100.0 | % | | $ | 101,846 |
| | 8.6 | % |
TheWe seek to grow and generate long-term rate adequate premium in each state where we offer policies. Our diversification strategy seeks to increase business outside of Florida and to improve geographical distribution of our policieswithin Florida. Premium growth outside Florida is a measure monitored by management in force, premium in force and total insured value for Florida by county were as follows as of December 31, 2019 (dollars in thousands, roundedits efforts to the nearest thousand): meet that objective.
|
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| | | | | | Premium | | | | Total Insured | | |
County | | Policy Count | | % | | In Force | | % | | Value | | % |
South Florida | | | | | | | | | | | | |
Broward | | 104,535 |
| | 15.8 | % | | $ | 227,526 |
| | 21.3 | % | | $ | 27,799,324 |
| | 16.9 | % |
Miami-Dade | | 95,904 |
| | 14.5 | % | | 208,466 |
| | 19.5 | % | | 21,671,891 |
| | 13.1 | % |
Palm Beach | | 88,590 |
| | 13.3 | % | | 175,956 |
| | 16.4 | % | | 25,326,196 |
| | 15.4 | % |
South Florida exposure | | 289,029 |
| | 43.6 | % | | 611,948 |
| | 57.2 | % | | 74,797,411 |
| | 45.4 | % |
Other significant* Florida counties | | | | | | | | | | | | |
Pinellas | | 44,940 |
| | 6.8 | % | | 51,162 |
| | 4.8 | % | | 8,726,553 |
| | 5.3 | % |
Hillsborough | | 27,998 |
| | 4.2 | % | | 36,248 |
| | 3.4 | % | | 7,050,687 |
| | 4.3 | % |
Pasco | | 25,506 |
| | 3.9 | % | | 29,742 |
| | 2.8 | % | | 8,585,067 |
| | 5.2 | % |
Escambia | | 18,622 |
| | 2.8 | % | | 29,404 |
| | 2.7 | % | | 5,754,391 |
| | 3.5 | % |
Collier | | 21,239 |
| | 3.2 | % | | 26,522 |
| | 2.5 | % | | 3,696,519 |
| | 2.2 | % |
Total other significant* counties | | 138,305 |
| | 20.9 | % | | 173,078 |
| | 16.2 | % | | 33,813,217 |
| | 20.5 | % |
| | | | | | Premium | | | | Total Insured | | |
Summary for all of Florida | | Policy Count | | % | | In Force | | % | | Value | | % |
South Florida exposure | | 289,029 |
| | 43.6 | % | | 611,948 |
| | 57.2 | % | | 74,797,411 |
| | 45.4 | % |
Total other significant* counties | | 138,305 |
| | 20.9 | % | | 173,078 |
| | 16.2 | % | | 33,813,217 |
| | 20.5 | % |
Other Florida counties | | 235,009 |
| | 35.5 | % | | 285,008 |
| | 26.6 | % | | 56,044,220 |
| | 34.1 | % |
Total Florida | | 662,343 |
| | 100.0 | % | | $ | 1,070,034 |
| | 100.0 | % | | $ | 164,654,848 |
| | 100.0 | % |
|
| |
* | Significant counties are defined as greater than 2.5% of total premium in force as of December 31, 2019. |
The geographical distribution of our policies in force, premium in force and total insured value across all states were as follows, as of December 31, 2019, 20182021, 2020 and 20172019 (dollars in thousands, rounded to the nearest thousand):
| | | | As of December 31, 2019 | | As of December 31, 2021 |
| | | | | | Premium | | | | Total Insured | | | | | Premium | | Total Insured | |
State | | Policy Count | | % | | In Force | | % | | Value | | % | State | | Policy Count | | % | | In Force | | % | | Value | | % |
Florida | | 662,343 |
| | 74.6 | % | | $ | 1,070,034 |
| | 82.5 | % | | $ | 164,654,848 |
| | 64.3 | % | Florida | | 695,533 | | | 73.7 | % | | $ | 1,395,476 | | | 83.1 | % | | $ | 203,062,948 | | | 63.3 | % |
North Carolina | | North Carolina | | 58,644 | | | 6.2 | % | | 57,534 | | | 3.4 | % | | 22,703,801 | | | 7.1 | % |
Georgia | | 42,637 |
| | 4.8 | % | | 49,615 |
| | 3.8 | % | | 17,536,031 |
| | 6.9 | % | Georgia | | 41,097 | | | 4.4 | % | | 53,956 | | | 3.2 | % | | 19,057,338 | | | 5.9 | % |
North Carolina | | 58,283 |
| | 6.6 | % | | 49,420 |
| | 3.8 | % | | 19,150,001 |
| | 7.5 | % | |
Massachusetts | | 13,596 |
| | 1.5 | % | | 17,991 |
| | 1.4 | % | | 8,312,929 |
| | 3.2 | % | Massachusetts | | 16,793 | | | 1.8 | % | | 23,790 | | | 1.4 | % | | 11,467,490 | | | 3.6 | % |
Virginia | | Virginia | | 23,306 | | | 2.5 | % | | 21,069 | | | 1.3 | % | | 13,854,648 | | | 4.3 | % |
Alabama | | Alabama | | 14,484 | | | 1.5 | % | | 19,966 | | | 1.2 | % | | 5,725,381 | | | 1.8 | % |
Indiana | | 18,291 |
| | 2.1 | % | | 16,643 |
| | 1.3 | % | | 6,458,310 |
| | 2.5 | % | Indiana | | 17,744 | | | 1.9 | % | | 19,018 | | | 1.1 | % | | 6,810,107 | | | 2.1 | % |
Minnesota | | 12,466 |
| | 1.4 | % | | 16,035 |
| | 1.2 | % | | 5,881,338 |
| | 2.3 | % | Minnesota | | 11,934 | | | 1.2 | % | | 18,216 | | | 1.1 | % | | 6,372,221 | | | 2.0 | % |
New Jersey | | New Jersey | | 14,844 | | | 1.6 | % | | 18,054 | | | 1.1 | % | | 9,523,904 | | | 3.0 | % |
South Carolina | | 16,682 |
| | 1.9 | % | | 15,705 |
| | 1.2 | % | | 5,575,934 |
| | 2.2 | % | South Carolina | | 17,563 | | | 1.8 | % | | 17,976 | | | 1.1 | % | | 6,860,210 | | | 2.1 | % |
Virginia | | 16,313 |
| | 1.8 | % | | 14,111 |
| | 1.1 | % | | 8,415,470 |
| | 3.3 | % | |
Pennsylvania | | 16,874 |
| | 1.9 | % | | 13,726 |
| | 1.1 | % | | 6,922,815 |
| | 2.7 | % | Pennsylvania | | 13,930 | | | 1.5 | % | | 14,688 | | | 0.9 | % | | 6,528,352 | | | 2.0 | % |
Alabama | | 11,186 |
| | 1.3 | % | | 12,998 |
| | 1.0 | % | | 3,923,446 |
| | 1.5 | % | |
New Jersey | | 7,145 |
| | 0.8 | % | | 7,554 |
| | 0.6 | % | | 3,824,506 |
| | 1.5 | % | |
Maryland | | Maryland | | 6,615 | | | 0.7 | % | | 6,003 | | | 0.4 | % | | 2,802,756 | | | 0.9 | % |
Michigan | | 3,417 |
| | 0.4 | % | | 4,089 |
| | 0.3 | % | | 1,399,470 |
| | 0.5 | % | Michigan | | 3,476 | | | 0.4 | % | | 4,572 | | | 0.3 | % | | 1,585,940 | | | 0.5 | % |
Maryland | | 4,181 |
| | 0.5 | % | | 3,474 |
| | 0.3 | % | | 1,600,113 |
| | 0.6 | % | |
New York | | New York | | 2,808 | | | 0.3 | % | | 3,814 | | | 0.2 | % | | 1,898,297 | | | 0.6 | % |
Delaware | | Delaware | | 1,819 | | | 0.2 | % | | 2,316 | | | 0.1 | % | | 1,061,987 | | | 0.3 | % |
Hawaii | | 2,090 |
| | 0.2 | % | | 1,930 |
| | 0.2 | % | | 881,476 |
| | 0.3 | % | Hawaii | | 1,773 | | | 0.2 | % | | 1,974 | | | 0.1 | % | | 903,844 | | | 0.3 | % |
Delaware | | 1,273 |
| | 0.1 | % | | 1,500 |
| | 0.1 | % | | 673,331 |
| | 0.3 | % | |
New York | | 1,183 |
| | 0.1 | % | | 1,244 |
| | 0.1 | % | | 646,130 |
| | 0.3 | % | |
Illinois | | Illinois | | 786 | | | 0.1 | % | | 1,006 | | | — | % | | 409,660 | | | 0.1 | % |
New Hampshire | | 249 |
| | — | % | | 181 |
| | — | % | | 135,254 |
| | 0.1 | % | New Hampshire | | 369 | | | — | % | | 301 | | | — | % | | 235,154 | | | 0.1 | % |
Illinois | | 152 |
| | — | % | | 166 |
| | — | % | | 65,006 |
| | — | % | |
Iowa | | Iowa | | 75 | | | — | % | | 92 | | | — | % | | 34,396 | | | — | % |
Total | | 888,361 |
| | 100.0 | % | | $ | 1,296,416 |
| | 100.0 | % | | $ | 256,056,408 |
| | 100.0 | % | Total | | 943,593 | | | 100.0 | % | | $ | 1,679,821 | | | 100.0 | % | | $ | 320,898,434 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
| | | | | | Premium | | | | Total Insured | | |
State | | Policy Count | | % | | In Force | | % | | Value | | % |
Florida | | 728,211 | | | 73.9 | % | | $ | 1,252,916 | | | 82.4 | % | | $ | 192,504,430 | | | 63.6 | % |
Georgia | | 46,678 | | | 4.7 | % | | 57,251 | | | 3.8 | % | | 20,141,751 | | | 6.7 | % |
North Carolina | | 62,849 | | | 6.4 | % | | 55,307 | | | 3.6 | % | | 21,500,109 | | | 7.1 | % |
Virginia | | 23,546 | | | 2.4 | % | | 20,226 | | | 1.3 | % | | 12,959,884 | | | 4.3 | % |
Massachusetts | | 15,090 | | | 1.5 | % | | 20,161 | | | 1.3 | % | | 9,507,917 | | | 3.1 | % |
Indiana | | 19,839 | | | 2.0 | % | | 18,328 | | | 1.2 | % | | 7,171,623 | | | 2.4 | % |
Minnesota | | 12,730 | | | 1.3 | % | | 17,863 | | | 1.2 | % | | 6,252,822 | | | 2.1 | % |
Alabama | | 13,632 | | | 1.4 | % | | 17,409 | | | 1.2 | % | | 4,953,449 | | | 1.6 | % |
South Carolina | | 17,877 | | | 1.8 | % | | 16,886 | | | 1.1 | % | | 6,297,270 | | | 2.1 | % |
Pennsylvania | | 17,183 | | | 1.7 | % | | 14,540 | | | 1.0 | % | | 7,394,773 | | | 2.4 | % |
New Jersey | | 11,576 | | | 1.2 | % | | 12,915 | | | 0.9 | % | | 6,684,386 | | | 2.2 | % |
Maryland | | 5,664 | | | 0.6 | % | | 4,816 | | | 0.3 | % | | 2,226,324 | | | 0.7 | % |
Michigan | | 3,494 | | | 0.4 | % | | 4,290 | | | 0.3 | % | | 1,478,595 | | | 0.5 | % |
New York | | 1,936 | | | 0.2 | % | | 2,251 | | | 0.2 | % | | 1,159,105 | | | 0.4 | % |
Hawaii | | 2,031 | | | 0.2 | % | | 1,983 | | | 0.1 | % | | 901,401 | | | 0.3 | % |
Delaware | | 1,581 | | | 0.2 | % | | 1,908 | | | 0.1 | % | | 870,728 | | | 0.3 | % |
Illinois | | 497 | | | 0.1 | % | | 580 | | | — | % | | 235,593 | | | 0.1 | % |
New Hampshire | | 409 | | | — | % | | 312 | | | — | % | | 238,121 | | | 0.1 | % |
Iowa | | 7 | | | — | % | | 7 | | | — | % | | 2,774 | | | — | % |
Total | | 984,830 | | | 100.0 | % | | $ | 1,519,949 | | | 100.0 | % | | $ | 302,481,055 | | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2018 |
| | | | | | Premium | | | | Total Insured | | |
State | | Policy Count | | % | | In Force | | % | | Value | | % |
Florida | | 637,926 |
| | 77.0 | % | | $ | 1,015,666 |
| | 85.1 | % | | $ | 156,118,955 |
| | 68.3 | % |
North Carolina | | 55,047 |
| | 6.6 | % | | 43,770 |
| | 3.7 | % | | 17,124,104 |
| | 7.5 | % |
Georgia | | 37,652 |
| | 4.6 | % | | 40,395 |
| | 3.4 | % | | 14,584,974 |
| | 6.4 | % |
Massachusetts | | 11,796 |
| | 1.4 | % | | 15,522 |
| | 1.3 | % | | 7,020,121 |
| | 3.1 | % |
South Carolina | | 15,117 |
| | 1.8 | % | | 14,477 |
| | 1.2 | % | | 4,818,760 |
| | 2.1 | % |
Indiana | | 16,059 |
| | 1.9 | % | | 13,305 |
| | 1.1 | % | | 5,464,439 |
| | 2.4 | % |
Pennsylvania | | 15,454 |
| | 1.9 | % | | 10,762 |
| | 0.9 | % | | 6,158,602 |
| | 2.7 | % |
Minnesota | | 9,466 |
| | 1.1 | % | | 10,632 |
| | 0.9 | % | | 4,352,908 |
| | 1.9 | % |
Virginia | | 10,354 |
| | 1.3 | % | | 8,437 |
| | 0.7 | % | | 5,053,973 |
| | 2.2 | % |
Alabama | | 6,817 |
| | 0.8 | % | | 7,187 |
| | 0.6 | % | | 2,304,683 |
| | 1.0 | % |
New Jersey | | 3,683 |
| | 0.4 | % | | 3,763 |
| | 0.3 | % | | 1,870,394 |
| | 0.8 | % |
Michigan | | 2,388 |
| | 0.3 | % | | 2,879 |
| | 0.2 | % | | 940,051 |
| | 0.4 | % |
Maryland | | 3,070 |
| | 0.4 | % | | 2,539 |
| | 0.2 | % | | 1,161,678 |
| | 0.5 | % |
Hawaii | | 2,176 |
| | 0.3 | % | | 1,937 |
| | 0.2 | % | | 887,555 |
| | 0.4 | % |
Delaware | | 1,073 |
| | 0.1 | % | | 1,230 |
| | 0.1 | % | | 555,055 |
| | 0.2 | % |
New York | | 461 |
| | 0.1 | % | | 432 |
| | 0.1 | % | | 228,334 |
| | 0.1 | % |
New Hampshire | | 114 |
| | — | % | | 86 |
| | — | % | | 62,436 |
| | — | % |
Total | | 828,653 |
| | 100.0 | % | | $ | 1,193,019 |
| | 100.0 | % | | $ | 228,707,022 |
| | 100.0 | % |
| | | | As of December 31, 2017 | | As of December 31, 2019 |
| | | | | | Premium | | | | Total Insured | | | | | Premium | | Total Insured | |
State | | Policy Count | | % | | In Force | | % | | Value | | % | State | | Policy Count | | % | | In Force | | % | | Value | | % |
Florida | | 618,280 |
| | 80.9 | % | | $ | 926,087 |
| | 87.6 | % | | $ | 146,624,470 |
| | 73.9 | % | Florida | | 662,343 | | | 74.6 | % | | $ | 1,070,034 | | | 82.5 | % | | $ | 164,654,848 | | | 64.3 | % |
Georgia | | Georgia | | 42,637 | | | 4.8 | % | | 49,615 | | | 3.8 | % | | 17,536,031 | | | 6.9 | % |
North Carolina | | 48,866 |
| | 6.4 | % | | 36,993 |
| | 3.5 | % | | 14,275,508 |
| | 7.2 | % | North Carolina | | 58,283 | | | 6.6 | % | | 49,420 | | | 3.8 | % | | 19,150,001 | | | 7.5 | % |
Georgia | | 31,305 |
| | 4.1 | % | | 32,343 |
| | 3.1 | % | | 11,380,109 |
| | 5.7 | % | |
Massachusetts | | 10,132 |
| | 1.3 | % | | 13,162 |
| | 1.2 | % | | 5,857,450 |
| | 3.0 | % | Massachusetts | | 13,596 | | | 1.5 | % | | 17,991 | | | 1.4 | % | | 8,312,929 | | | 3.2 | % |
Indiana | | Indiana | | 18,291 | | | 2.1 | % | | 16,643 | | | 1.3 | % | | 6,458,310 | | | 2.5 | % |
Minnesota | | Minnesota | | 12,466 | | | 1.4 | % | | 16,035 | | | 1.2 | % | | 5,881,338 | | | 2.3 | % |
South Carolina | | 13,769 |
| | 1.8 | % | | 13,372 |
| | 1.3 | % | | 4,120,728 |
| | 2.1 | % | South Carolina | | 16,682 | | | 1.9 | % | | 15,705 | | | 1.2 | % | | 5,575,934 | | | 2.2 | % |
Indiana | | 11,622 |
| | 1.5 | % | | 9,236 |
| | 0.9 | % | | 3,768,044 |
| | 1.9 | % | |
Virginia | | Virginia | | 16,313 | | | 1.8 | % | | 14,111 | | | 1.1 | % | | 8,415,470 | | | 3.3 | % |
Pennsylvania | | 10,554 |
| | 1.4 | % | | 7,292 |
| | 0.7 | % | | 4,047,997 |
| | 2.1 | % | Pennsylvania | | 16,874 | | | 1.9 | % | | 13,726 | | | 1.1 | % | | 6,922,815 | | | 2.7 | % |
Minnesota | | 4,769 |
| | 0.6 | % | | 5,198 |
| | 0.5 | % | | 2,103,731 |
| | 1.1 | % | |
Virginia | | 4,908 |
| | 0.6 | % | | 3,867 |
| | 0.4 | % | | 2,263,923 |
| | 1.1 | % | |
Alabama | | 2,861 |
| | 0.4 | % | | 2,934 |
| | 0.3 | % | | 895,380 |
| | 0.5 | % | Alabama | | 11,186 | | | 1.3 | % | | 12,998 | | | 1.0 | % | | 3,923,446 | | | 1.5 | % |
New Jersey | | 877 |
| | 0.1 | % | | 858 |
| | — | % | | 428,072 |
| | 0.2 | % | New Jersey | | 7,145 | | | 0.8 | % | | 7,554 | | | 0.6 | % | | 3,824,506 | | | 1.5 | % |
Michigan | | 1,330 |
| | 0.2 | % | | 1,574 |
| | 0.1 | % | | 491,906 |
| | 0.2 | % | Michigan | | 3,417 | | | 0.4 | % | | 4,089 | | | 0.3 | % | | 1,399,470 | | | 0.5 | % |
Maryland | | 2,354 |
| | 0.3 | % | | 1,901 |
| | 0.2 | % | | 869,685 |
| | 0.4 | % | Maryland | | 4,181 | | | 0.5 | % | | 3,474 | | | 0.3 | % | | 1,600,113 | | | 0.6 | % |
Hawaii | | 2,009 |
| | 0.3 | % | | 1,830 |
| | 0.2 | % | | 842,740 |
| | 0.4 | % | Hawaii | | 2,090 | | | 0.2 | % | | 1,930 | | | 0.2 | % | | 881,476 | | | 0.3 | % |
Delaware | | 828 |
| | 0.1 | % | | 903 |
| | — | % | | 400,076 |
| | 0.2 | % | Delaware | | 1,273 | | | 0.1 | % | | 1,500 | | | 0.1 | % | | 673,331 | | | 0.3 | % |
New York | | 54 |
| | — | % | | 52 |
| | — | % | | 27,191 |
| | — | % | New York | | 1,183 | | | 0.1 | % | | 1,244 | | | 0.1 | % | | 646,130 | | | 0.3 | % |
New Hampshire | | New Hampshire | | 249 | | | — | % | | 181 | | | — | % | | 135,254 | | | 0.1 | % |
Illinois | | Illinois | | 152 | | | — | % | | 166 | | | — | % | | 65,006 | | | — | % |
Total | | 764,518 |
| | 100.0 | % | | $ | 1,057,602 |
| | 100.0 | % | | $ | 198,397,010 |
| | 100.0 | % | Total | | 888,361 | | | 100.0 | % | | $ | 1,296,416 | | | 100.0 | % | | $ | 256,056,408 | | | 100.0 | % |
Also see “Results“Results of Operations” below and “Item“Part I—Item 1A—Risk Factors—Risks Relating to Our Business—Business and Operations—Because we conduct the majority of our business in Florida, our financial results depend on the regulatory, economic and weather conditions in Florida” for discussion on geographical diversification.
KEY PERFORMANCE INDICATORS
The Company considers the measures and ratios in the following discussion to be key performance indicators for its businesses. Management believes that these indicators are helpful in understanding the underlying trends in the Company’s businesses. Some of these indicators are reported on a quarterly basis and others on an annual basis. Please also refer to “Item 8—Note 2 (Summary of Significant Accounting Policies)” for definitions of certain other terms we use when describing our financial results.
These indicators may not be comparable to other performance measures used by the Company’s competitors and should only be evaluated together with our consolidated financial statements and accompanying notes.
Definitions of Key Performance Indicators
Book Value Per Common Share ― total stockholders’ equity, adjusted for preferred stock liquidation, divided by the number of common shares outstanding as of a reporting period. Book value per common share is the excess of assets over liabilities at a reporting period attributed to each share of stock. Changes in book value per common share informs shareholders of retained equity in the Company on a per share basis which may assist in understanding market value trends for the Company’s stock.
Combined Ratio ― the combined ratiois a measure of underwriting profitability for a reporting period and is calculated by dividing total operating costs and expenses (which is made up of losses and LAE and general and administrative expenses) by premiums earned, net, which is net of ceded premiums earned. Changes to the combined ratio over time provide management with an understanding of costs to operate its business in relation to net premiums it is earning and the impact of rate, underwriting and other business management actions on underwriting profitability. A combined ratio below 100% indicates underwriting profit; a combined ratio above 100% indicates underwriting losses.
Core Loss Ratio― a common operational metric used in the insurance industry to describe the ratio of current accident year expected losses and LAE to premiums earned. Core loss ratio is an important measure identifying profitability trends of premiums in force. Core losses consists of all other losses and LAE, excluding weather events beyond those expected and prior years’ reserve development. The financial benefit from the management of claims, including claim fees ceded to reinsurers, is recorded in the consolidated financial statements as a reduction to core losses. Debt-to-Equity Ratio ― long-term debt divided by stockholders’ equity. This ratio helps management measure the amount of financing leverage in place in relation to equity and future leverage capacity.
Debt-to-Total Capital Ratio― long-term debt divided by the sum of total stockholders’ equity and long-term debt (often referred to as total capital resources). This ratio helps management measure the amount of financing leverage in place (long-term debt) in relation to total capital resources and future leverage capacity.
Direct Premiums Written (“DPW”) ― reflects the total value of policies issued during a periodbefore considering premiums ceded to reinsurers. Direct premiums written, comprised of renewal premiums, endorsements and new business, is initially recorded as unearned premium in the balance sheet which is then earned pro-rata over the next year or remaining policy term. Direct premiums written reflects current trends in the Company’s sale of property and casualty insurance products and amounts that will be recognized as earned premiums in the future.
DPW (Florida) ― includes only DPW in the state of Florida. This measure allows management to analyze growth in our primary market and is also a measure of business concentration risk.
Expense Ratio (Including Policy Acquisition Cost Ratio and Other Operating Cost Ratio) ― calculated as general and administrative expenses as a percentage of premiums earned, net. General and administrative expenses is comprised of policy acquisition costs and other operating costs, which includes such items as underwriting costs, facilities and corporate overhead. The expense ratio, including the sub-expense ratios of policy acquisition cost ratio and other operating cost ratio, are indicators to management of the Company’s cost efficiency in acquiring and servicing its business and the impact of expense items to overall profitability.
Losses and Loss Adjustment Expense Ratio or Loss and LAE Ratio ― a measure of the cost of claims and claim settlement expenses incurred in a reporting period as a percentage of premiums earned in that same reporting period. Losses and LAE incurred in a reporting period includes both amounts related to the current accident year and prior accident years, if any, referred to as development. Ultimate losses and LAE are based on actuarial estimates with changes in those estimates recognized in the period the estimates are revised. Losses and LAE consist of claim costs arising from claims occurring and settling in the current period, an estimate of claim costs for reported but unpaid claims, an estimate of unpaid claim costs for incurred-but-not-reported claims and an estimate of claim settlement expenses associated with reported and unreported claims which occurred during the reporting period. The loss and LAE ratio can be measured on a direct basis, which includes losses and LAE divided by direct earned premiums, or on a net basis, which includes losses and LAE after amounts have been ceded to reinsurers divided by net earned premiums (i.e., direct premium earned less ceded premium earned). The net loss and LAE ratio is a measure of underwriting profitability after giving consideration to the effect of reinsurance. Trends in the net loss and LAE ratio are an indication to management of current and future profitability.
Monthly Weighted Average Renewal Retention Rate ― measures the monthly average of policyholders that renew their policies over the period of a calendar year. This measure allows management to assess customer retention.
Premiums Earned, Net ― the pro-rata portion of current and previously written premiums that the Company recognizes as earned premium during the reporting period, net of ceded premium earned. Ceded premiums are premiums paid or payable by the Company for reinsurance protection. Written premiums are considered earned and are recognized pro-rata over the policy coverage period. Premiums earned, net is a measure that allows management to identify revenue trends.
Policies in Force ― represents the number of active policies with coverage in effect as of the end of the reporting period. The change in the number of policies in force is a growth measure and provides management with an indication of progress toward achieving strategic objectives. Inherent seasonality in our business makes this measure more useful when comparing each quarter’s balance to the same quarter in prior years.
Premium in Force ― is the amount of the annual direct written premiums previously recorded by the Company for policies which are still active as of the reporting date. This measure assists management in measuring the level of insured exposure and progress toward meeting revenue goals for the current year, and provides an indication of business available for renewal in the next twelve months. Inherent seasonality in our business makes this measure more useful when comparing each quarter’s balance to the same quarter in prior years.
Return on Average Equity (“ROAE”) ― calculated by dividing earnings (loss) per common share by average book value per common share. Average book value per common share is computed as the sum of book value per common share at the beginning and the end of a period, divided by two. ROAE is a capital profitability measure of how effectively management creates profits per common share.
Total Insured Value ― represents the amount of insurance limits available on a policy for a single loss based on all policies active as of the reporting date.This measure assists management in measuring the level of insured exposure.
Unearned Premiums― represents the portion of direct premiums corresponding to the time period remaining on an insurance policy and available for future earning by the Company. Trends in unearned premiums generally indicate expansion, if growing, or contraction, if reducing, which are important indicators to management. Inherent seasonality in our business makes this measure more useful when comparing each quarter’s balance to the same quarter in prior years.
Weather events― an estimate of losses and LAE from weather events occurring during the current accident year that exceed initial estimates of expected weather events when establishing the core loss ratio for each accident year. This metric informs management of factors impacting overall current year profitability.
REINSURANCE
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events. Reinsurance contracts are typically classified as treaty or facultative contracts. Treaty reinsurance provides coverage for all or a portion of a specified group or class of risks ceded by the primary insurer, while facultative reinsurance provides coverage for specific individual risks. Within each classification, reinsurance can be further classified as quota share or excess of loss. Quota-share reinsurance is where the primary insurer and the reinsurer share proportionally or pro-rata in the direct premiums and losses of the insurer. Excess-of-loss reinsurance indemnifies the direct insurer or reinsurer for all or a portion of the loss in excess of an agreed upon amount or retention.
Developing and implementing our reinsurance strategy to adequately protect our balance sheet and Insurance Entities in the event of one or more catastrophes while maintaining efficient reinsurance costs has been a key strategic priority for us. In order to limit the Insurance Entities’ potential exposure to catastrophic events, we purchase significant reinsurance from third-party reinsurers and the FHCF.Florida Hurricane Catastrophe Fund (“FHCF”). The FLOIRFlorida Office of Insurance Regulation (“FLOIR”) requires the Insurance Entities, like all residential property insurance companies doing business in Florida, to have a certain amount of capital and reinsurance coverage in order to cover losses upon the occurrence of a single catastrophic event and a series of catastrophic events occurring in the same hurricane season. The Insurance Entities’ 2019-2020respective 2021-2022 reinsurance programs meet the FLOIR’s requirements, which are based on, among other things, successfully demonstrating a cohesive and comprehensive reinsurance programprograms that protectsprotect the policyholders of our Insurance Entities as well as satisfying a series of stress test catastrophe loss scenarios based on past historical events.
Similarly, the Insurance Entities’ respective 2021-2022 reinsurance programs meet the stress test and review requirements of Demotech, Inc., for maintaining Financial Stability Ratings® of A (Exceptional).
We believe the Insurance Entities’ retentions under their respective reinsurance programs are appropriate and structured to protect policyholders. We test the sufficiency of the reinsurance programs by subjecting the Insurance Entities’ personal residential exposures to statistical testing using a third-party hurricane model, RMS RiskLink v18.1 (Build 1945). This model combines simulations of the natural occurrence patterns and characteristics of hurricanes, tornadoes, earthquakes and other catastrophes with information on property values, construction types and occupancy classes. The model outputs provide information concerning the potential for large losses before they occur, so companies can prepare for their financial impact. Furthermore, as part of our operational excellence initiatives, we continually look to enable new technology to refine our data intelligence on catastrophe risk modeling.
Effective June 1, 2019,2021, the Insurance Entities entered into multiple reinsurance agreements comprising our 2019-20202021-2022 reinsurance program. See “Item 8—1—Note 4 (Reinsurance).”
UPCIC’s 2019-20202021-2022 Reinsurance Program
•First event All States retention of $43 million; First$45 million during the 2021 Atlantic hurricane season; first event Non-Florida retention of $10$15 million.
•All States first event tower expandedreinsurance protection extends to $3.34$3.364 billion an increasewith no co-participation in any of $170 million over the final 2018-2019 program.layers and no limitation on loss adjustment expenses for the non-catastrophe bond Cosaint Re Pte. Ltd. traditional reinsurance while maintaining the same favorable historical deposit premium payment schedules.
•Assuming a first event completely exhausts the $3.34$3.364 billion tower, the second event exhaustion point would be $1.3 billion, an increase of $262 million over the final 2018-2019 program on the same assumptions.$1.101 billion.
•Full reinstatement available for all private marketon $1.06 billion of the $1.356 billion of non-FHCF first event catastrophe layerscoverage for guaranteed second event coverage. For all layers purchased belowbetween $45 million and the projected FHCF retention, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, UPCIC haswe have purchased enough reinstatement premium protection (“RPP”("RPP") limit to pay the premium necessary for the reinstatement of these coverages.
Private market reinsurance coverage continues to be structured into layers. This structure utilizes a cascading feature such that any layers above a $111 million attachment point are excess of loss over the immediately preceding layer. If the aggregate limit of the preceding layer is exhausted, the next layer cascades down in its place for future events.
•Specific 3rd and 4th event private market catastrophe excess of loss coverage of $76$86 million in excess of $35$25 million provides robust frequency protection for a multiple event storm season.events during the treaty period.
•For the FHCF Reimbursement ContractsContract effective June 1, 2019,2021, UPCIC has continued the election of the 90% coverage level. The total mandatoryWe estimate the FHCF layer is estimated towill provide approximately $2.038$1.963 billion of coverage for UPCIC, which inures to the benefit of the open market coverage secured from private reinsurers.
•Secured $383 million of new catastrophe capacity with contractually agreed limits that extend coverage to include the 2022 and 2023 wind seasons. This amount does not include the single limit of $150 million of protection for named windstorm events, which now definitively includes the 2022 wind season and potentially could include the 2023 wind season depending on loss activity in the 2022 wind season, that UPCIC obtained in March 2021 when it entered into a three-year reinsurance agreement with Cosaint Re Pte. Ltd., a reinsurance entity incorporated in Singapore that correspondingly issued notes in a Rule 144A offering to raise proceeds to collateralize its obligations under this agreement.
The first-event All States program described above for UPCIC includes coverage from a captive insurance arrangement that UVE established which inures to the benefit of UPCIC. This intercompany transaction provides UPCIC approximately $13.2 million of reinsurance protection on the first layer of UPCIC’s first-event All States program. This transaction eliminates in consolidation effectively increasing the first event retention noted above to $58.2 million for the consolidated group in the event this limit is exhausted.
The captive insurance arrangement effective June 1, 2021 through May 31, 2022 was terminated effective December 1, 2021, pursuant to the terms of the agreement. In connection with the termination of the agreement, and according to its terms, certain funds held in trust were released to the beneficiary (i.e., UPCIC) and the balance was remitted to the grantor (i.e., UVE) in December 2021. The termination of the agreement results in a first-event All States retention of $58.2 million for UPCIC for the period of December 1, 2021 to May 31, 2022, which is outside of the traditional Atlantic hurricane season.
Reinsurers
The following table below provides the A.M. Best and S&P financial strength ratings for each of the largest third-party reinsurers in UPCIC’s 2019-20202021-2022 reinsurance program:
|
| | | | | | | | | | | | | |
Reinsurer | | A.M. Best | | S&P |
Allianz Risk Transfer | | A+ | | AA-AA |
Arch Reinsurance LimitedEverest Re | | A+ | | A+ |
Chubb Tempest Reinsurance Ltd. | | A++ | | AA |
Everest Reinsurance CompanyMunich Re | | A+ | | A+AA- |
MunichRenaissance Re | | A+ | | AA-A+ |
Renaissance Re | | A+ | | A+ |
Various Lloyd’s of London Syndicates | | A | | A+ |
Florida Hurricane Catastrophe Fund (1) | | N/A | | N/A |
(1)No rating is available, because the fund is not rated.
APPCIC’s 2019-20202021-2022 Reinsurance Program
•First event All States retention of $2$2.5 million.
•All States first event tower of $30.7 million.$38 million with no co-participation in any of the layers and no limitation on loss adjustment expenses while maintaining the same favorable historical deposit premium payment schedules.
•Full reinstatement available for all private market first event catastrophe layers for guaranteed second event coverage. For the layer purchased belowbetween $2.5 million and the projected FHCF retention, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, APPCIC haswe have purchased enough RPP limit to pay the premium necessary for the reinstatement of this coverage.
Private market reinsurance coverage continues to be structured into layers. This structure utilizes a cascading feature such that any layers above the $2 million attachment point are excess of loss over the immediately preceding layer. If the aggregate limit of the preceding layer is exhausted, the next layer cascades down in its place for future events.
•APPCIC also purchases extensive multiple line excess per risk reinsurance with various reinsurers due to the high-value risks it insures in both the personal residential and commercial multiple peril lines of business. Under this multiple line excess per risk contract, APPCIC has coverage of $8.5 million in excess of $500 thousand$0.5 million ultimate net loss for each risk and each property loss, and $1 million in excess of $0.3 million for each casualty loss. A $19.5 million aggregate limit applies to the term of the contract for property-related losses and a $2.0$2 million aggregate limit applies to the term of the contract for casualty-related losses. This contract also contains a profit-sharing feature if specific performance measures are met.
•For the FHCF Reimbursement ContractsContract effective June 1, 2019,2021, APPCIC has continued the election of the 90% coverage level. The total mandatoryWe estimate the FHCF layer is estimated towill provide approximately $14.8$18.4 million of coverage for APPCIC, which inures to the benefit of the open market coverage secured from private reinsurers.
Reinsurers
The following table below provides the A.M. Best and S&P financial strength ratings for each of the largest third-party reinsurers in APPCIC’s 2019-20202021-2022 reinsurance program:
|
| | | | | | | | | | | | | |
Reinsurer | | A.M. Best | | S&P |
Everest Reinsurance Company | | A+ | | A+ |
Chubb Tempest Reinsurance Ltd. | | A++ | | AA |
Lancashire Insurance Company Limited | | A | | A- |
Various Lloyd’s of London Syndicates | | A | | A+ |
Florida Hurricane Catastrophe Fund (1) | | N/A | | N/A |
(1)No rating is available, because the fund is not rated.
The total cost of the 2019-20202021-2022 reinsurance programs for UPCIC and APPCIC, excluding internal reinsurance discussed above, is projected to be $420$584 million, representing approximately 33.5%35% of estimated direct premium earned for the 12-month treaty period.
The following selected historical consolidated financial data should be read in conjunction with our consolidated financial statements and notes thereto and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations” set forth elsewhere in the Annual Report on Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period.
The following tables present historical selected consolidated financial data of Universal Insurance Holdings, Inc. and Subsidiaries for the five years ended December 31, 2021 (in thousands, except per share data):
YEAR ENDED DECEMBER
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
Statement of Income Data: | | | | | | | | | | |
Revenue: | | | | | | | | | | |
Direct premiums written | | $ | 1,671,252 | | | $ | 1,517,479 | | | $ | 1,292,721 | | | $ | 1,190,875 | | | $ | 1,055,886 | |
Change in unearned premium | | (74,634) | | | (121,856) | | | (59,600) | | | (69,235) | | | (56,688) | |
Direct premium earned | | 1,596,618 | | | 1,395,623 | | | 1,233,121 | | | 1,121,640 | | | 999,198 | |
Ceded premium earned | | (561,155) | | | (472,060) | | | (390,619) | | | (353,258) | | | (310,405) | |
Premiums earned, net | | 1,035,463 | | | 923,563 | | | 842,502 | | | 768,382 | | | 688,793 | |
Net investment income (1) | | 12,535 | | | 20,393 | | | 30,743 | | | 24,816 | | | 13,460 | |
Other revenues (2) | | 71,993 | | | 65,437 | | | 55,633 | | | 49,876 | | | 47,093 | |
Total revenue | | 1,121,851 | | | 1,072,770 | | | 939,351 | | | 823,816 | | | 751,916 | |
Costs and expenses: | | | | | | | | | | |
Losses and loss adjustment expenses | | 779,205 | | | 758,810 | | | 603,406 | | | 414,455 | | | 350,428 | |
Policy acquisition costs | | 226,167 | | | 199,102 | | | 177,530 | | | 157,327 | | | 138,846 | |
Other operating costs | | 88,066 | | | 90,627 | | | 94,898 | | | 99,161 | | | 92,158 | |
Total expenses | | 1,093,438 | | | 1,048,539 | | | 875,834 | | | 670,943 | | | 581,432 | |
Income before income taxes | | 28,413 | | | 24,231 | | | 63,517 | | | 152,873 | | | 170,484 | |
Income tax expense | | 8,006 | | | 5,126 | | | 17,003 | | | 35,822 | | | 63,549 | |
Net income | | $ | 20,407 | | | $ | 19,105 | | | $ | 46,514 | | | $ | 117,051 | | | $ | 106,935 | |
Per Share Data: | | | | | | | | | | |
Basic earnings per common share | | $ | 0.65 | | | $ | 0.60 | | | $ | 1.37 | | | $ | 3.36 | | | $ | 3.07 | |
Diluted earnings per common share | | $ | 0.65 | | | $ | 0.60 | | | $ | 1.36 | | | $ | 3.27 | | | $ | 2.99 | |
Dividends declared per common share | | $ | 0.77 | | | $ | 0.77 | | | $ | 0.77 | | | $ | 0.73 | | | $ | 0.69 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | As of December 31, |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
Balance Sheet Data: | | | | | | | | | | |
Total invested assets | | $ | 1,093,680 | | | $ | 919,924 | | | $ | 914,586 | | | $ | 908,154 | | | $ | 730,023 | |
Cash and cash equivalents | | 250,508 | | | 167,156 | | | 182,109 | | | 166,428 | | | 213,486 | |
Total assets | | 2,056,141 | | | 1,758,741 | | | 1,719,852 | | | 1,858,390 | | | 1,454,999 | |
Unpaid losses and loss adjustment expenses | | 346,216 | | | 322,465 | | | 267,760 | | | 472,829 | | | 248,425 | |
Unearned premiums | | 857,769 | | | 783,135 | | | 661,279 | | | 601,679 | | | 532,444 | |
Long-term debt (3) | | 103,676 | | | 8,456 | | | 9,926 | | | 11,397 | | | 12,868 | |
Total liabilities | | 1,626,439 | | | 1,309,479 | | | 1,225,951 | | | 1,356,757 | | | 1,015,011 | |
Total stockholders’ equity | | $ | 429,702 | | | $ | 449,262 | | | $ | 493,901 | | | $ | 501,633 | | | $ | 439,988 | |
Shares outstanding end of period | | 31,221 | | | 31,137 | | | 32,638 | | | 34,783 | | | 34,735 | |
Book value per share | | $ | 13.76 | | | $ | 14.43 | | | $ | 15.13 | | | $ | 14.42 | | | $ | 12.67 | |
Return on average equity (ROE) | | 4.6 | % | | 4.1 | % | | 9.2 | % | | 24.1 | % | | 25.7 | % |
| | | | | | | | | | |
Selected Data: | | | | | | | | | | |
Loss and loss adjustment expense ratio (4) | | 75.3 | % | | 82.2 | % | | 71.6 | % | | 53.9 | % | | 50.9 | % |
General and administrative expense ratio (5) | | 30.2 | % | | 31.4 | % | | 32.3 | % | | 33.4 | % | | 33.5 | % |
Combined Ratio (6) | | 105.5 | % | | 113.6 | % | | 103.9 | % | | 87.3 | % | | 84.4 | % |
(1)Net investment income excludes net realized gains (losses) on sale of investments and net change in unrealized gains (losses) of equity securities.
(2)Other revenue consists of commission revenue, policy fees, and other revenue.
(3)For the year ended December 31, 2019 COMPARED TO YEAR ENDED DECEMBER 31, 20182021, long-term debt includes a private placement of $100 million of 5.625% Senior Unsecured Notes due 2026. See “Part II—Item 8—Note 7 (Long-term debt).”
(4)The loss and loss adjustment expense ratio is calculated by dividing losses and loss adjustment expenses by premiums earned, net.
(5)The general and administrative expense ratio is calculated by dividing general and administrative expense, excluding interest expense, by premiums earned, net. Interest expense was $652 thousand, $102 thousand, $248 thousand, $346 thousand and $348 thousand for the years ended December 31, 2021, 2020, 2019, 2018 and 2017, respectively.
(6)The combined ratio is the sum of the losses and loss adjustment expense ratio and the general and administrative expense ratio.
RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
2021 Financial and Business Highlights (comparisons are to 20182020 unless otherwise specified)
•Direct premiums written overall grew by $101.8$153.8 million, or 8.6%10.1%, to $1,292.7$1,671.3 million.
•Policies in force decreased by 41,237, or 4.2%, to 943,593, at December 31, 2021 from 984,830 at December 31, 2020.
•In Florida, direct premiums written grew by $52.8$137.6 million, or 5.2%11.0%, and in our Other States,other states, direct premiums written grew by $49.0$16.2 million, or 27.6%6.1%.
•Premiums earned, net grew by $74.1$111.9 million, or 9.6%12.1%, to $842.5$1,035.5 million during the year ended December 31, 2021.
•FLOIR approved an overall 14.9% rate increase in September 2021 for UPCIC on Florida personal residential homeowners’ line of business, effective September 2021 for new business and November 2021 for renewals. FLOIR approved an overall 3.9% additional rate increase due to higher reinsurance expenses effective January 2022 for new business and March 2022 for renewal business. Rate increases are in the process of being implemented in other states (Minnesota, Virginia, North Carolina, Alabama) with an average increase of 17.8%.
•Net investment income was $12.5 million compared to $20.4 million.
•Net realized gains on investments were $5.9 million compared to $63.4 million in the prior period. Prior period gains were the result of management’s efforts to realize gains on securities, which was intended to boost statutory surplus in UPCIC.
•Total revenues increased by $115.5$49.1 million, or 14.0%4.6%, to $939.4$1,121.9 million.
•Net loss and LAE ratio was 71.6% asdecreased to 75.3% during the year ended December 31, 2021 compared to 53.9%, driven by82.2% during the factors outlined below.year ended December 31, 2020.
Expense ratio improved to 32.3% from 33.4%.
Net income decreased by $70.5 million, or 60.3%, to $46.5 million.
•Diluted earnings per common share (“EPS”) decreased by $1.91, or 58.4%,was $0.65 compared to $1.36 per common share.$0.60 in the prior period.
•Weighted average diluted common shares outstanding were lower by 4.3%2.1% to 34.231.3 million shares atas of December 31, 20192021 from 35.832.0 million shares atas of December 31, 2018.2020.
•Book value per share increaseddecreased by $0.71,$0.67, or 4.9%4.6%, to $15.13$13.76 at December 31, 20192021 from $14.42$14.43 at December 31, 2018.2020.
•Declared and paid dividends per common share of $0.77, including a $0.13 special dividend in December 2019.2021.
•Repurchased 2,337,825116,886 shares in 20192021 at an aggregate cost of $66.2$1.6 million.
| |
• | Offered Universal DirectSM in all 18 states in which the Company writes policies as of December 31, 2019.
|
UPCIC commenced•Offered Clovered.com in all 19 states in which the Company writes policies as of December 31, 2021.
•Entered into a committed, unsecured $35 million revolving credit line with JP Morgan Chase.
•Completed private placement of $100 million of 5.625% Senior Unsecured Notes due 2026 to support growth.
YEAR ENDED DECEMBER 31, 2021 COMPARED TO YEAR ENDED DECEMBER 31, 2020
Net income was $20.4 million for the year ended December 31, 2021, compared to net income of $19.1 million for the same period in 2020, an increase of $1.3 million, or 6.8%. Diluted EPS for 2021 was $0.65 compared to $0.60 in 2020, an increase of $0.05, or 8.3%. Weighted average diluted common shares outstanding for the year ended December 31, 2021 were lower by 2.1% to 31.3 million shares from 32.0 million shares for the same period of the prior year. Benefiting the year ended December 31, 2021 were increases in premiums earned, net, an increase in commission revenue, partially offset by a decrease in net investment income, a decrease in realized gains year over year and unrealized losses during 2021 compared to modest unrealized gains in 2020, policy fees and other revenue and an increase in operating costs and expenses. Direct premium earned and premiums earned, net were up 14.4% and 12.1%, respectively, due to direct premium written growth in 16 of the 19 states in which we are licensed and writing homeowners policiesduring the past 12 months as a result of rate increases implemented during 2020 and 2021, partially offset by higher costs for reinsurance flowing through to premiums earned, net. The net loss and LAE ratio was 75.3% for the year ended December 31, 2021, compared to 82.2% for the same period in Illinois.
2020 reflecting a decrease in excess weather events beyond those expected and lower prior years reserve development, partially offset by higher core net losses. As a result of the above and further explained below, the combined ratio for the year ended December 31, 2021 was 105.6% compared to 113.5% for the year ended December 31, 2020. See “Overview—Trends and Geographical Distribution—Florida Trends” regarding our response to the Florida market.
A detailed discussion of our results of operations follows the table below (in thousands, except per share data).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | | | | |
| | Years Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % |
PREMIUMS EARNED AND OTHER REVENUES | | | | | | | | |
Direct premiums written | | $ | 1,671,252 | | | $ | 1,517,479 | | | $ | 153,773 | | | 10.1 | % |
Change in unearned premium | | (74,634) | | | (121,856) | | | 47,222 | | | (38.8) | % |
Direct premium earned | | 1,596,618 | | | 1,395,623 | | | 200,995 | | | 14.4 | % |
Ceded premium earned | | (561,155) | | | (472,060) | | | (89,095) | | | 18.9 | % |
Premiums earned, net | | 1,035,463 | | | 923,563 | | | 111,900 | | | 12.1 | % |
Net investment income | | 12,535 | | | 20,393 | | | (7,858) | | | (38.5) | % |
Net realized gains (losses) on investments | | 5,892 | | | 63,352 | | | (57,460) | | | (90.7) | % |
Net change in unrealized gains (losses) of equity securities | | (4,032) | | | 25 | | | (4,057) | | | NM |
Commission revenue | | 41,649 | | | 33,163 | | | 8,486 | | | 25.6 | % |
Policy fees | | 22,713 | | | 23,773 | | | (1,060) | | | (4.5) | % |
Other revenue | | 7,631 | | | 8,501 | | | (870) | | | (10.2) | % |
Total premiums earned and other revenues | | 1,121,851 | | | 1,072,770 | | | 49,081 | | | 4.6 | % |
OPERATING COSTS AND EXPENSES | | | | | | | | |
Losses and loss adjustment expenses | | 779,205 | | | 758,810 | | | 20,395 | | | 2.7 | % |
General and administrative expenses | | 314,233 | | | 289,729 | | | 24,504 | | | 8.5 | % |
Total operating costs and expenses | | 1,093,438 | | | 1,048,539 | | | 44,899 | | | 4.3 | % |
INCOME BEFORE INCOME TAXES | | 28,413 | | | 24,231 | | | 4,182 | | | 17.3 | % |
Income tax expense | | 8,006 | | | 5,126 | | | 2,880 | | | 56.2 | % |
NET INCOME | | $ | 20,407 | | | $ | 19,105 | | | $ | 1,302 | | | 6.8 | % |
Other comprehensive income (loss), net of taxes | | (18,911) | | | (17,618) | | | (1,293) | | | 7.3 | |
COMPREHENSIVE INCOME | | $ | 1,496 | | | $ | 1,487 | | | $ | 9 | | | 0.6 | % |
DILUTED EARNINGS PER SHARE DATA: | | | | | | | | |
Diluted earnings per common share | | $ | 0.65 | | | $ | 0.60 | | | $ | 0.05 | | | 8.3 | % |
Weighted average diluted common shares outstanding | | 31,307 | | | 31,972 | | | (665) | | | (2.1) | % |
| | | | | | | | |
Direct premiums written increased by $153.8 million, or 10.1%, for the year ended December 31, 2021, driven by premium growth within our Florida business of $137.6 million, or 11.0%, and premium growth in our other states business of $16.2 million, or 6.1%, as compared to the same period of the prior year. Rate increases approved in 2020 and 2021 for Florida and for certain other states, as discussed below, were the principal driver of higher written premiums. In total, policies in force declined 41,237, or 4.2%, from 984,830 at December 31, 2020 to 943,593 at December 31, 2021. A summary of the recent rate increases which are driving increases in written premium are as follows:
|
| | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change |
| | 2019 | | 2018 | | $ | | % |
PREMIUMS EARNED AND OTHER REVENUES | | | | | | | | |
Direct premiums written | | $ | 1,292,721 |
| | $ | 1,190,875 |
| | $ | 101,846 |
| | 8.6 | % |
Change in unearned premium | | (59,600 | ) | | (69,235 | ) | | 9,635 |
| | (13.9 | )% |
Direct premium earned | | 1,233,121 |
| | 1,121,640 |
| | 111,481 |
| | 9.9 | % |
Ceded premium earned | | (390,619 | ) | | (353,258 | ) | | (37,361 | ) | | 10.6 | % |
Premiums earned, net | | 842,502 |
| | 768,382 |
| | 74,120 |
| | 9.6 | % |
Net investment income | | 30,743 |
| | 24,816 |
| | 5,927 |
| | 23.9 | % |
Net realized gains (losses) on investments | | (12,715 | ) | | (2,089 | ) | | (10,626 | ) | | 508.7 | % |
Net change in unrealized gains (losses) of equity securities | | 23,188 |
| | (17,169 | ) | | 40,357 |
| | NM |
|
Commission revenue | | 26,101 |
| | 22,438 |
| | 3,663 |
| | 16.3 | % |
Policy fees | | 21,560 |
| | 20,275 |
| | 1,285 |
| | 6.3 | % |
Other revenue | | 7,972 |
| | 7,163 |
| | 809 |
| | 11.3 | % |
Total premiums earned and other revenues | | 939,351 |
| | 823,816 |
| | 115,535 |
| | 14.0 | % |
OPERATING COSTS AND EXPENSES | | | | | | |
| | |
Losses and loss adjustment expenses | | 603,406 |
| | 414,455 |
| | 188,951 |
| | 45.6 | % |
General and administrative expenses | | 272,428 |
| | 256,488 |
| | 15,940 |
| | 6.2 | % |
Total operating costs and expenses | | 875,834 |
| | 670,943 |
| | 204,891 |
| | 30.5 | % |
INCOME BEFORE INCOME TAXES | | 63,517 |
| | 152,873 |
| | (89,356 | ) | | (58.5 | )% |
Income tax expense | | 17,003 |
| | 35,822 |
| | (18,819 | ) | | (52.5 | )% |
NET INCOME | | $ | 46,514 |
| | $ | 117,051 |
| | $ | (70,537 | ) | | (60.3 | )% |
Other comprehensive income (loss), net of taxes | | 28,374 |
| | (4,748 | ) | | 33,122 |
| | NM |
|
COMPREHENSIVE INCOME | | $ | 74,888 |
| | $ | 112,303 |
| | $ | (37,415 | ) | | (33.3 | )% |
DILUTED EARNINGS PER SHARE DATA: | | | | | | | | |
Diluted earnings per common share | | $ | 1.36 |
| | $ | 3.27 |
| | $ | (1.91 | ) | | (58.4 | )% |
Weighted average diluted common shares outstanding | | 34,233 |
| | 35,786 |
| | (1,553 | ) | | (4.3 | )% |
•In May 2020, the FLOIR approved an overall 12.4% rate increase for UPCIC on Florida personal residential homeowners’ line of business, effective May 2020 for new business and July 2020 for renewals.
•In October 2020, the FLOIR approved an overall 7.6% rate increase for UPCIC on Florida personal residential dwelling lines of business, effective October 2020 for new business and December 2020 for renewals.
•In December 2020, the FLOIR approved an overall 7.0% rate increase for UPCIC on Florida personal residential homeowners’ line of business, effective December 2020 for new business and March 2021 for renewals.
•In September 2021, the FLOIR approved an overall 14.9% rate increase for UPCIC on Florida personal residential homeowners’ line of business, effective September 2021 for new business and November 2021 for renewals.
•In December 2021, the FLOIR approved an overall 3.9% rate increase for UPCIC on Florida personal residential homeowners’ line of business, effective January 2022 for new business and March 2022 for renewals.
•In addition, during the past year, rate increases for UPCIC were approved in Alabama, Georgia, Indiana, Minnesota, North Carolina, and Virginia.
These rate increases are applied on new business submissions and renewals from the effective date of their renewal, and then are earned subsequently over the policy period. The recent rate increases in Florida are in response to rising claim costs driven by higher costs of material and labor associated with claims, the cost of weather events, the rising cost of catastrophe and other reinsurance protecting policyholders and, more importantly, the impact of “social inflation” on claims as claim settlements increasingly have involved inflated demands, representation and litigation. In addition, the Insurance Entities’ policies provide for coverage limits to be adjusted at renewal based on third-party data sources that monitor factors such as changes in costs for residential building materials and labor.
During 2021, management continued efforts to prudently manage policy counts and exposures and implemented new measures intended to slow the growth of written premiums relating to new business compared to prior years while the above rate increases were taking effect. Reduced new business writings, when coupled with natural attrition among policies and selected policy non-renewals, resulted in a decrease in policies in force during 2021. In total we wrote policies in 19 states during 2021 and 2020. In addition, we are authorized to do business in Tennessee and Wisconsin and are proceeding with product filings in those states. At December 31, 2021, premium in force increased $159.9 million, or 10.5%, and total insured value increased $18.4 billion, or 6.1%, compared to December 31, 2020.
Direct premium earned increased by $201.0 million, or 14.4%, for the year ended December 31, 2021, reflecting the earning of premiums written over the past 12 months, including the benefit of rate changes and the changes in policies in force during that time.
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events and other covered events. Ceded premium represents premiums paid to reinsurers for this protection and is a cost which reduces net written and net earned premiums. Ceded premium earned increased $89.1 million, or 18.9%, for the year ended December 31, 2021 as compared to the same period of the prior year. The increase in reinsurance costs reflects an increase in the value of exposures we insure; increased pricing when compared to the expired reinsurance program and differences in the structure and design of the respective programs. Reinsurance costs, as a percentage of direct premium earned, increased from 33.8% in 2020 to 35.1% in 2021 primarily due to the general increase in the pricing of reinsurance which generally takes effect prior to primary rate increases. Reinsurance costs associated with each year’s reinsurance program are earned over the annual policy period which typically runs from June 1st to May 31st. See the discussion above for the Insurance Entities’ 2021-2022 reinsurance program and “Part II—Item 8— Note 4 (Reinsurance).”
Premiums earned, net of ceded premium earned, grew by 12.1%, or $111.9 million, to $1,035.5 million for the year ended December 31, 2021, reflecting an increase in direct premium earned offset by increased costs for reinsurance.
Net investment income was $12.5 million for the year ended December 31, 2021, compared to $20.4 million for the same period in 2020, a decrease of $7.9 million, or 38.5%. This decrease is largely attributable to significantly lower yields on the reinvested portfolio following the sale of a majority of available-for-sale debt securities in the portfolio that were in an unrealized gain position in the third and fourth quarters of 2020. In the first quarter of 2020, our investment portfolio was adversely impacted by the COVID-19 pandemic-induced market dislocation, but subsequently recovered, generating unrealized gains that were substantially higher than amounts prior to the pandemic. During the third and fourth quarters of 2020, we took advantage of the recovery by monetizing the increase in fair value, generating $56.4 million in net realized gains from the sale of available-for-sale debt securities.
Market rates during the reinvestment of our portfolio in the second half of 2020 were considerably lower than the book yields of the portfolio prior to the sale. Additionally, interest income was down $0.9 million in 2021 compared to the same period of the prior year due to significantly lower yields on cash sweep and short-term cash investing.
Total invested assets were $1,093.7 million as of December 31, 2021 compared to $919.9 million as of December 31, 2020. The increase is attributable to the reinvestment of investment returns and additional contributions to the investment portfolio from excess cash, partially offset by dispositions of equity securities and investment real estate. Cash and cash equivalents were $250.5 million at December 31, 2021 compared to $167.2 million at December 31, 2020, an increase of 49.9%. This increase is largely attributable to the receipt of $100.0 million in proceeds from the private placement of the 5.625% Senior Unsecured Notes and payment of related debt issuance costs of approximately $3.3 million. See “Part II—Item 8—Note 7 (Long-term debt)” and below “Analysis of Financial Condition” for more information. Cash and cash equivalents are invested short term
until needed to settle loss and LAE payments, reinsurance premium payments and operating cash needs or until they are deployed by our investment advisors.
Yields from cash and cash equivalents, short-term investments and the available-for-sale debt portfolio are dependent on the composition of the portfolio, future market forces, monetary policy and interest rate policy from the Federal Reserve. During most of 2021, the Federal Reserve has broadly been maintaining lower interest rates, which has impacted the effective yields on newly purchased available-for-sale securities and overnight cash purchases and short-term investments. This trend changed in late 2021 as inflation worries began to impact the financial markets, including the markets’ concern over future Federal Reserve actions of rate hikes and other actions to address inflation concern. As a result, we saw increased yields on securities purchased in late 2021 and increased unrealized losses on our portfolio as increased market yields negatively impact the fair value of much of our debt securities. As discussed above, due to the significant sale of our securities during the third quarter and fourth quarter of 2020, it is expected that future portfolio returns will reflect book yields based on the low yielding market conditions when the portfolio was reinvested.
We sell investments, including securities, from our investment portfolio from time to time to meet our investment objectives or take advantage of market opportunities. During the year ended December 31, 2021, sales of available-for-sale debt securities resulted in a net realized gain of $0.2 million, sales of equity securities resulted in a net realized gain of $2.8 million, the sale of two investment real estate properties, which includes one classified as assets held for sale in 2021, resulted in a realized gain of $2.7 million, and one real estate property classified as assets held for sale in 2021 resulted in a realized gain of $0.2 million, in total generating a net realized gain of $5.9 million. During the year ended December 31, 2020, sales of available-for-sale debt securities resulted in a net realized gain of $56.9 million and sales of equity securities resulted in a net realized gain of $6.5 million, in total generating a net realized gain of $63.4 million. In 2020, we took the opportunity to realize the increase in fair value of available-for-sale debt securities to increase the statutory surplus of UPCIC. See “Part II—Item 8—Note 3 (Investments).”
There was a $4.0 million net unrealized loss in equity securities during the year ended December 31, 2021 compared to a nominal net unrealized gain during the year ended December 31, 2020. Net change in unrealized gains or losses reflected on the income statement are the result of changes in the fair market value of our equity securities during the period for securities still held at the end of the reported period and the reversal of unrealized gains or losses for securities sold during the period. See “Part II—Item 8—Note 3 (Investments).”
Commission revenue is comprised principally of brokerage commissions we earn from third-party reinsurers (excluding the FHCF) on reinsurance placed for the Insurance Entities. Commission revenue is earned pro-rata over the reinsurance policy period which runs from June 1st to May 31st of the following year. For the year ended December 31, 2021, commission revenue was $41.6 million, compared to $33.2 million for the year ended December 31, 2020. The increase in commission revenue of $8.5 million, or 25.6%, for the year ended December 31, 2021 was primarily due to increased commissions from third-party reinsurers earned on increased reinsurance premiums which is attributable due to growth in our insured values, as well as the difference in pricing and structure associated with our reinsurance program when compared to the prior year.
Policy fees for the year ended December 31, 2021 were $22.7 million compared to $23.8 million for the same period in 2020. The decrease of $1.1 million, or 4.5%, was the result of a decrease in the combined total number of new and renewal policies written during the year ended December 31, 2021 compared to the same period in 2020 in states where we are permitted to charge this fee.
Other revenue, representing revenue from policy installment fees, premium financing and other miscellaneous income, was $7.6 million for the year ended December 31, 2021 compared to $8.5 million for the same period in 2020.
The following table presents losses and LAE incurred on a direct, ceded and net basis expressed in dollars and as a percent of the respective amounts of premiums earned. These amounts are further categorized as (i) core losses, (ii) weather events for the current accident year and (iii) prior years’ reserve development (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 |
| | | | Loss | | | | Loss | | | | Loss |
| | Direct | | Ratio | | Ceded | | Ratio | | Net | | Ratio |
Premiums earned | | $ | 1,596,618 | | | | | $ | 561,155 | | | | | $ | 1,035,463 | | | |
Losses and loss adjustment expenses: | | | | | | | | | | | | |
Core losses | | $ | 696,775 | | | 43.6 | % | | $ | 20 | | | — | % | | $ | 696,755 | | | 67.3 | % |
Weather events* | | 28,000 | | | 1.8 | % | | — | | | — | % | | 28,000 | | | 2.7 | % |
Prior years’ reserve development | | 464,669 | | | 29.1 | % | | 410,219 | | | 73.1 | % | | 54,450 | | | 5.3 | % |
Total losses and loss adjustment expenses | | $ | 1,189,444 | | | 74.5 | % | | $ | 410,239 | | | 73.1 | % | | $ | 779,205 | | | 75.3 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 |
| | | | Loss | | | | Loss | | | | Loss |
| | Direct | | Ratio | | Ceded | | Ratio | | Net | | Ratio |
Premiums earned | | $ | 1,395,623 | | | | | $ | 472,060 | | | | | $ | 923,563 | | | |
Losses and loss adjustment expenses: | | | | | | | | | | | | |
Core losses | | $ | 538,826 | | | 38.6 | % | | $ | 316 | | | 0.1 | % | | $ | 538,510 | | | 58.3 | % |
Weather events* | | 256,917 | | | 18.4 | % | | 94,954 | | | 20.1 | % | | 161,963 | | | 17.6 | % |
Prior years’ reserve development | | 284,315 | | | 20.4 | % | | 225,978 | | | 47.9 | % | | 58,337 | | | 6.3 | % |
Total losses and loss adjustment expenses | | $ | 1,080,058 | | | 77.4 | % | | $ | 321,248 | | | 68.1 | % | | $ | 758,810 | | | 82.2 | % |
| | | | | |
* | Includes only weather events beyond expected. |
See “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for change in liability for unpaid losses and LAE.
Management looks at losses and LAE in three areas, as described below and represented in the tables above, each of which has different drivers that impact reported results. As a result, these components of losses and LAE are described separately. Overall losses and LAE, net of reinsurance recoveries, were $779.2 million resulting in a 75.3% net loss and LAE ratio for the year ended December 31, 2021. This compares to $758.8 million resulting in a 82.2% net loss and LAE ratio for the year ended December 31, 2020. Increased ceded premiums also impact the ratio calculations such that the net loss and LAE ratio for the year ended December 31, 2021 also reflects higher relative reinsurance costs compared to the same period in 2020, which contributed an overall increase of 1.5 percentage points to the net loss and LAE ratio. See the discussion above for the Insurance Entities’ 2021-2022 reinsurance programs and “Part II—Item 8—Note 4 (Reinsurance).”
The factors impacting losses and LAE are as follows:
•Core losses
◦Our core losses consist of all losses and LAE for the current year excluding both weather events for the current year beyond those anticipated in our regular accrual process and prior years’ reserve development. Core losses were 67.3% of net premium earned for the year ended December 31, 2021 compared to 58.3% for the same period in 2020. These losses and loss ratios benefit from the potential profits generated through the management of claims by our claims adjusting affiliate, including claim fees ceded to reinsurers, which are described below, reducing core losses. The core loss ratio for 2020 and 2021 reflects actions taken by management to increase its loss pick to accrue for current accident year reserves. Core losses also increase as premium volume increases year over year. Although the Insurance Entities received rate increases in Florida and certain other states, management has elected not to decrease the core loss ratio compared to the prior year but to increase it and to monitor results until management sees loss costs stabilize in Florida and certain other states. During 2021, management increased the core loss ratio in the second quarter of 2021 by one loss ratio point, in the third quarter of 2021 by an additional one loss ratio point and then in the fourth quarter by an additional two and one half loss ratio points ending the year at a 44.5% loss ratio before the benefit of claim service fees. These increases in the expected ultimate losses made during 2021 were retroactive to January 1, 2021 in all three cases. These increases reflect recent and ongoing trends in weather-related claims, higher expected costs for building materials and labor as a result of inflationary pressure as well as the continuing prevalence of solicited, represented, and litigated claims in Florida resulting in increased claims frequencies, losses and loss adjustment expenses.
•Weather events beyond those expected
◦During 2021 there were a number of weather events which in total exceeded amounts included in our core loss ratio by $28.0 million and are reflected in the above chart.
◦During the year ended December 31, 2020, there were a significant number of storms including Hurricane Sally which in the aggregate significantly exceeded core loss ratio expectations. The number of adverse weather events and resulting claims during the fourth quarter of 2020 exceeded weather event claims reported during the first three quarters. Reported losses from Hurricane Sally significantly benefited from our catastrophe reinsurance protection. Our reinsurance program reduced our direct estimate of Hurricane Sally ultimate losses of $133.4 million to $43.0 million on a net basis after estimated reinsurance recoveries. Other weather events resulting in losses with only limited benefit from our catastrophe reinsurance protection included Hurricanes Isaias, Eta, Delta and Zeta and other unnamed storms tracked by an industry numerically assigned identifier. These weather events during 2020 resulted in direct losses of $123.5 million and $119.0 million net after reinsurance. In 2020 the Company experienced the highest level of unnamed weather events when compared to the previous three years.
•Prior years’ reserve development
◦Two drivers influence the amounts recorded as prior years’ reserve development, namely: (i) changes to prior estimates of direct and net ultimate losses on prior accident years excluding major hurricanes and (ii) changes to prior estimates of direct and net ultimate losses on hurricanes.
▪For the year ended December 31, 2021, prior years’ reserve development totaled $464.7 million of direct losses and $54.5 million of net unfavorable loss development after the benefit of reinsurance.
•For hurricanes, prior years’ reserve development for the year ended December 31, 2021 was the result of a direct increase in the ultimate losses for several hurricanes of $420.4 million offset by ceded hurricane losses of $410.8 million resulting in net unfavorable development of $9.6 million. Direct losses increased for Hurricanes Irma, Sally, Michael, Matthew and Florence. Net development for Hurricane Irma was $20.6 million as a result of limitations on loss adjustment expenses on losses ceded to the Florida Hurricane CAT Fund and the exhaustion of third party coverage on Hurricane Irma and favorable development on Hurricanes Sally and Michael of $11.0 million as a result of changes in amounts ceded to the All States reinsurance coverage which has a lower retention.
•Excluding hurricanes, there was $44.3 million of direct and $44.9 million net prior years’ reserve development during the year ended December 31, 2021. This development, primarily from the 2020, 2019 and 2017 accident years, primarily resulted from the settlement on litigated claims exceeding prior estimated amounts.
•For the year ended December 31, 2020 prior years’ reserve development totaled $284.3 million of direct losses and $58.3 million of net losses after the benefit of reinsurance.
•Prior years’ reserve development, excluding hurricanes described below, was $42.1 million direct and $40.2 million net of reinsurance for the year ended December 31, 2020. This development largely resulted from increased prior-year non-hurricane companion claims in the run up to the expiration of limitations period for Hurricane Irma claims, the emergence of claims associated with AOB litigated claims, and an increase in reopened claims. In 2019, the Florida legislature enacted legislation intended to reduce abuses with claims involving AOB. Prior to the effective date of the new law, the Company experienced an increase in claims reported by vendors seeking to pursue their claims under the prior law. In many instances, these claims have since further developed into litigated claims during 2020. Also, Hurricane Irma made landfall in 2017. In accordance with Florida law, the deadline for filing Hurricane Irma claims expired three years later in September 2020. As a result, in 2020 the Company experienced adverse development due to non-hurricane companion claims reported with new Hurricane Irma claims reported as the deadline approached. In 2020, claims associated with these issues continued to adversely develop; and Florida’s one-way attorneys’ fee statute and overall negative legal environment have led to increased litigation and higher losses and LAE.
•For the year ended December 31, 2020, development of direct and net losses on previously reported hurricanes was $242.2 million direct and $18.1 million net after the benefit of reinsurance. This was principally driven by continued adverse development of previous estimated losses and LAE on Hurricanes Irma, Michael, Florence and Matthew. Net development for the year ended December 31, 2020 principally resulted from an increase in our previously estimated losses and LAE on Hurricane Irma for claims which are not eligible for recovery from the FHCF.
•Florida law in effect at the time of Hurricane Irma barred new, supplemental or reopened claims for loss caused by the peril of windstorm or hurricane unless notice is provided within three years of the event. In September 2020, the three-year period following Hurricane Irma expired. The Company continues to adjust and settle Hurricane Irma claims that were reported prior to the expiration of the three-year period.
The financial benefit generated by our claims adjusting affiliate from the management of claims, including claim fees ceded by our Insurance Entities to reinsurers, was $11.9 million for the year ended December 31, 2021, compared to $17.3 million during the year ended December 31, 2020, driven by the recoveries from reinsurers and internal claim services. The benefit was recorded in the consolidated financial statements as a reduction to losses and LAE.
For the year ended December 31, 2021, general and administrative expenses were $314.2 million, compared to $289.7 million during the same period in 2020, as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | Change |
| | 2021 | | 2020 | | $ | | % |
| | $ | | Ratio | | $ | | Ratio | | | | |
Premiums earned, net | | $ | 1,035,463 | | | | | $ | 923,563 | | | | | $ | 111,900 | | | 12.1 | % |
General and administrative expenses: | | | | | | | | | | | | |
Policy acquisition costs | | 226,167 | | | 21.8 | % | | 199,102 | | | 21.6 | % | | 27,065 | | | 13.6 | % |
Other operating costs | | 88,066 | | | 8.5 | % | | 90,627 | | | 9.8 | % | | (2,561) | | | (2.8) | % |
Total general and administrative expenses | | $ | 314,233 | | | 30.3 | % | | $ | 289,729 | | | 31.4 | % | | $ | 24,504 | | | 8.5 | % |
(1) Other operating costs includes $652 and $102 of interest expense for the years ended December 31, 2021 and 2020, respectively. |
General and administrative expenses increased by $24.5 million, which was the result of increases in policy acquisition costs of $27.1 million primarily due to commissions and premium taxes associated with increased premium, and a decrease in other operating costs of $2.6 million. The expense ratio as a percentage of premiums earned, net was 30.3% for the year ended December 31, 2021 compared to 31.4% for the year ended December 31, 2020.
•The increase in policy acquisition costs as a percentage of premiums earned, net during the year ended December 31, 2021 was a result of higher reinsurance costs reducing premiums earned, net in a greater proportion than the prior year. The commission rate paid to agents on the renewal of Florida policies was reduced 2 percentage points effective April 1, 2021, which will benefit future periods as the new rate structure applies prospectively.
•The decrease in other operating costs of $2.6 million reflects lower performance compensation, lower share-based compensation, lower marketing and distribution costs, and lower costs associated with employee medical benefits. The other operating cost ratio for the year ended December 31, 2021 was 8.5% compared to 9.8% in the year ended December 31, 2020. This reduction, which was partially offset by higher reinsurance costs, reflects several factors including economies of scale as we continue to grow premium, efficiencies gained from leveraging technology and spending discipline.
As a result of the above, the combined ratio for the year ended December 31, 2021was 105.6%compared to 113.5% for the same period in 2020. The decrease reflects improved underwriting results when compared to the same period of 2020. The reduction was the result of decreases in both the loss and LAE ratio and expense ratio as described above.
Income tax expense increased by $2.9 million to $8.0 million, or 56.2%, for the year ended December 31, 2021, when compared to income tax expense of $5.1 million for the year ended December 31, 2020. Our effective tax rate increased to 28.2% for the year ended December 31, 2021, as compared to 21.2% for the year ended December 31, 2020. Benefiting the 2020 effective tax rate was a non-recurring liability adjustment of 9.7 points of the effective tax rate. Benefiting 2021 effective tax rate was a non-recurring one-year Florida state income tax reduction which benefited the effective tax rate by 1.4 points when compared to 2020. Significant recurring items which impacted the effective tax rate in 2021 were a lower level of disallowed or non-deductible compensation of 2.1 points of the effective tax rate compared to 6.2 points of the effective tax rate in 2020 and a higher impact from excess tax shortfalls from stock-based compensation of 2.3 points of the effective tax in 2021 when compared to 0.4 points in 2020. See “Part II—Item 8—Note 12 (Income Taxes)” for an a table of items impacting the effective tax rate and an explanation of the change in our effective tax rates.
Other comprehensive loss, net of taxes for the year ended December 31, 2021 was $18.9 million compared to other comprehensive loss of $17.6 million for the same period in 2020, reflecting after-tax changes in fair value of available-for-sale debt securities held in our investment portfolio and reclassifications out of accumulated other comprehensive income for available-for-sale debt securities sold. See “Part II—Item 8—Note 14 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income (loss), net of taxes for these periods.
YEAR ENDED DECEMBER 31, 2020 COMPARED TO YEAR ENDED DECEMBER 31, 2019
A detailed discussion of our results of operations follows the table below (in thousands, except per share data).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change |
| | 2020 | | 2019 | | $ | | % |
PREMIUMS EARNED AND OTHER REVENUES | | | | | | | | |
Direct premiums written | | $ | 1,517,479 | | | $ | 1,292,721 | | | $ | 224,758 | | | 17.4 | % |
Change in unearned premium | | (121,856) | | | (59,600) | | | (62,256) | | | 104.5 | % |
Direct premium earned | | 1,395,623 | | | 1,233,121 | | | 162,502 | | | 13.2 | % |
Ceded premium earned | | (472,060) | | | (390,619) | | | (81,441) | | | 20.8 | % |
Premiums earned, net | | 923,563 | | | 842,502 | | | 81,061 | | | 9.6 | % |
Net investment income | | 20,393 | | | 30,743 | | | (10,350) | | | (33.7) | % |
Net realized gains (losses) on investments | | 63,352 | | | (12,715) | | | 76,067 | | | NM |
Net change in unrealized gains (losses) of equity securities | | 25 | | | 23,188 | | | (23,163) | | | (99.9) | % |
Commission revenue | | 33,163 | | | 26,101 | | | 7,062 | | | 27.1 | % |
Policy fees | | 23,773 | | | 21,560 | | | 2,213 | | | 10.3 | % |
Other revenue | | 8,501 | | | 7,972 | | | 529 | | | 6.6 | % |
Total premiums earned and other revenues | | 1,072,770 | | | 939,351 | | | 133,419 | | | 14.2 | % |
OPERATING COSTS AND EXPENSES | | | | | | | | |
Losses and loss adjustment expenses | | 758,810 | | | 603,406 | | | 155,404 | | | 25.8 | % |
General and administrative expenses | | 289,729 | | | 272,428 | | | 17,301 | | | 6.4 | % |
Total operating costs and expenses | | 1,048,539 | | | 875,834 | | | 172,705 | | | 19.7 | % |
INCOME BEFORE INCOME TAXES | | 24,231 | | | 63,517 | | | (39,286) | | | (61.9) | % |
Income tax expense | | 5,126 | | | 17,003 | | | (11,877) | | | (69.9) | % |
NET INCOME | | $ | 19,105 | | | $ | 46,514 | | | $ | (27,409) | | | (58.9) | % |
Other comprehensive income (loss), net of taxes | | (17,618) | | | 28,374 | | | (45,992) | | | NM |
COMPREHENSIVE INCOME | | $ | 1,487 | | | $ | 74,888 | | | $ | (73,401) | | | (98.0) | % |
DILUTED EARNINGS PER SHARE DATA: | | | | | | | | |
Diluted earnings per common share | | $ | 0.60 | | | $ | 1.36 | | | $ | (0.76) | | | (55.9) | % |
Weighted average diluted common shares outstanding | | 31,972 | | | 34,233 | | | (2,261) | | | (6.6) | % |
Net income was $19.1 million for the year ended December 31, 2020, compared to net income of $46.5 million for the same period in 2019.
Diluted EPS for the year ended December 31, 2020 was $0.60 compared to $1.36 in 2019, a decrease of $0.76, or 55.9%. Weighted average diluted common shares outstanding for the year ended December 31, 2020 were lower by 6.6% to 32.0 million shares from 34.2 million shares for the same period of the prior year. Benefiting the year ended December 31, 20192020 were increases in premiums earned, net, earned premium,realized gains on investments, commission revenue, policy fees and other revenue, offset by a decrease in net investment income, commission revenue and increasesa lower level of unrealized gains in the net change in unrealized gainsfair value of our equity securities offset by realized losses on investmentsin 2020 and increased total operating costs for losses and LAEexpenses. Direct premium earned and general and administrative costs. Direct andpremiums earned, net earned premium were up 8.6%13.2% and 9.9%9.6%, respectively, due to growth of policies in almost all states in which we are licensed and writing during the past 12 months.months and rate increases implemented during 2020, offset by higher costs for reinsurance flowing through to premiums earned, net. Increases in losses and LAE were the result of several factors including (1) premium growth and change in mix between Florida and other states, (2) reduced financial benefit from the management of claims including claim fees ceded to reinsurers, (3) increased estimated core losses and LAE for the current year compared to prior year, (4)(2) premium growth and change in mix between Florida and other states and (3) increased adverse development onweather events. The increase was partially offset by a reduced level of prior years’ loss and LAE reserves and (5) weather eventsreserve development in excess of plan this year.2020.
Policy count, premium in force and total insured value increased at December 31, 2019 when compared to December 31, 2018. Direct premiums written increased by $101.8$224.8 million, or 8.6%17.4%, for the year ended December 31, 2019,2020, driven by growth within our Florida business of $52.8$184.6 million, or 5.2%17.3%, and growth in our other states business of $49.0$40.1 million, or 27.6%17.7%, as compared to the same period of the prior year. Rate increases in Florida and in certain other states along with slightly improved retention were also a source ofcontributed to the premium growth. Premium in force increased in every state in which we are writing at December 31, 2020 compared to December 31, 2019. We implemented new guidelines during the year ended December 31, 20192020 on new business to address emerging loss trends that have impactedsince slowed the rate of growth in Florida. Direct premiums earned increasedFlorida in every statecertain territories during December 31, 2020. We actively wrote policies in which19 states during 2020 compared to 18 in 2019. In addition, we are writingauthorized to do business in Tennessee and Wisconsin and are proceeding with product filings in those states. During the second quarter of 2020 the Company withdrew its application to write business in Connecticut. Policies in force, premium in force and total insured value all increased as of December 31, 2020 when compared to December 31, 2018. In early March 2019, we commenced writing in Illinois, and we are now actively writing policies in 17 states in addition to our home state of Florida.2019.
Direct premium earned increased by $111.5$162.5 million, or 9.9%13.2%, for the year ended December 31, 2019,2020, reflecting the earning of premiums written over the past 12 months and changes in rates and policy countpolicies in force during that time.
Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events orand other covered events. Ceded premium represents amounts paid to reinsurers for this protection. Ceded premium earned increased $37.4$81.4 million, or 10.6%20.8%, for the year ended December 31, 2019.2020 as compared to the same period of the prior year. The increase in reinsurance costs reflects both an increase in costs associated with the increase in exposures we insure, reinstatement premiums emerging during the year and increased pricing when compared to the expired reinsurance program. Reinsurance costs, as a percentage of direct premium earned, increased from 31.5% in 2018 to 31.7% in 2019. This year2019 to 33.8% in 2020. During the fourth quarter of 2020 the Company recorded additional ceded earnedwritten premiums had a lower level of additional costs from ceded earned$18.5 million representing reinstatement premiums $2.6on Hurricane Sally losses of which $7.7 million in 2019, compared to $20.7 million in 2018. Thesewas unearned at December 31, 2020. Reinsurance costs relate to additional reinsurance costs from Hurricane Irma. Excluding reinstatement premiums, ceded premiums earned were 31.5% of direct premiums earned in 2019 compared to 29.7% in 2018. The increase in the ratio is a result of higher costs for the Company’s 2019-2020 reinsurance program, compared to the expired program. Costs associated with each year’s reinsurance program are earned over the June 1st to May 31st twelve-month coverage period. See the discussion above for the new 2019-2020Insurance Entities’ 2020-2021 reinsurance program and “Item 1—“Part II—Item 8— Note 4 (Reinsurance).”
Premiums earned, net of ceded premium earned, grew by 9.6%, or $74.1$81.1 million, to $842.5$923.6 million for the year ended December 31, 2019,2020, reflecting thean increase in direct premiumspremium earned partially offset by increased costs offor reinsurance.
Net investment income was $30.7$20.4 million for the year ended December 31, 2019,2020, compared to $24.8$30.7 million for the year ended December 31, 2018, an increasesame period in 2019, a decrease of $5.9$10.4 million, or 23.9%33.7%. The increasedecrease is driven by lower trends in market yields. During 2020, the combinationCompany sold most securities in an unrealized gain position to recognize market value appreciation. The total amount of securities sold was $1.1 billion. As a result, the Company reinvested its portfolio into similar securities yielding current market rates, which in many cases is a reduction from the book yields of the growth in cash and invested assets comparedportfolio prior to the prior yearsale and benefits from higher yielding assets offset by a lower trend in yields on cash and short term investments during 2019. Total invested assets were $914.6 million with an average fixed income credit ratingreinvestment. The book yield of A+ during the year endedavailable-for-sale debt securities was 3.08% at December 31, 2019 compared to $908.2 million with an average fixed credit rating of A+ for the same period in 2018. The duration of fixed income securities was 3.5 years1.16% at both December 31, 2019 and 2018.2020, a reduction of 62.3%. Total invested assets were $919.9 million as of December 31, 2020 compared to $914.6 million as of December 31, 2019. Cash and cash equivalents were $167.2 million at December 31, 2020 compared to $182.1 million at December 31, 2019, compared to $166.4 million at December 31, 2018, an increasea decrease of 9.4%8.2%. Cash and cash equivalents are invested short term until needed to settle payments to reinsurers, loss and LAE payments, reinsurance premium payments and operating cash needs.
needs or until they are deployed by our investment advisors.
Yields from cash and cash equivalents, short-term investments and the fixed incomeavailable-for-sale debt portfolio are dependent on future market forces, monetary policy and interest rate policy from the Federal Reserve. In 2019, theThe Federal Reserve loweredhas broadly been lowering and maintaining lower interest rates, which has impacted the effective yields on new fixed incomeavailable-for-sale portfolio and overnight cash purchases.purchases and short-term investments. The impact from thisoverall trend in 2019 has been somewhat limited as investments maturelower interest rates on new purchases of securities over manythe past year and lower returns on cash and cash equivalents and short-term investments. As discussed below, due to the significant sale of securities during the third quarter of 2020, it is expected that future yearsportfolio returns will reflect lower book yields based on the effective maturity of the portfolio, subjecting only the current year redemptions to the lower interest rate environment. The Company’s investment strategy is to invest in assets with multi-year effective maturities, locking in book yields for future years, which dampers the impact that market fluctuations have on current investment income.
conditions.
We sell securitiesinvestments from our investment portfolio and real estate investments from time to time to meet our investment objectives. As further described in “Item 1—Note 3 (Investments)”, we realize both gains and losses on the saleobjectives or take advantage of securities and real estate. We sold securities and investment real estate duringmarket opportunities. During the year ended December 31, 2019. Net2020, sales of realized gains, salesavailable-for-sale debt securities resulted in a net realized lossgain of $12.7$56.9 million duringand sales of equity securities resulted in net realized gain of $6.5 million, in total generating net realized gain of $63.4 million. We took the opportunity to monetize an increase in fair value of these securities to enhance surplus for UPCIC. The proceeds from the sale of available-for-sale debt securities are in the process of reinvestment. During the year ended December 31, 2019, compared tosales of equity securities resulted in net realized losses of $14.4 million, sales of available-for-sale debt securities resulted in net realized gains of $0.5 million and the sale of an investment real estate property resulted in a realized gain of $1.2 million, in total generating net realized loss of $2.1 million for the year ended December 31, 2018. The realized losses during the year ended December 31, 2019 resulted primarily from the sale of equity securities, whereas the realized loss for the year ended December 31, 2018 resulted primarily from the sale of municipal securities, which were liquidated in light of their diminished after-tax returns following the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).$12.7 million. See “Item 1—“Part II—Item 8—Note 3 (Investments).”
There was a $23.2 millionnominal favorable net unrealized gain in equity securities during the year ended December 31, 20192020 compared to a $17.2$23.2 million unfavorablefavorable net unrealized lossgain during the year ended December 31, 2018.2019. Unrealized gains or losses reflected on the income statement are the result of changes in the fair market value of our equity securities during the period for securities still held and the reversal of unrealized gains or losses for securities sold during the period. See “Item 1—“Part II—Item 8—Note 3 (Investments).”
During 2020, the COVID-19 pandemic disrupted the financial markets. In the first quarter of 2020, our investment portfolio was negatively impacted, but has since substantially recovered. We took advantage of the recovery with the realization of gains on our available-for-sale debt securities discussed above. We believe the adverse impact to our investment portfolio was minimized during this COVID-19-induced market dislocation as a result of our conservative investment strategy’s focus on capital preservation and adequate liquidity to pay claims. We believe the high credit rating and shorter duration foundation of our portfolio and portfolio diversification will help us weather these difficult market conditions, thereby limiting the impact of future economic financial market downturns on the portfolio. Recent market yields have been lower when compared to prior years and we expect that trend to continue, negatively impacting future investment returns on our portfolio. We will continue to monitor the impact of COVID-19 on our portfolio. Significant uncertainties and emerging risks still exist regarding the potential long-term impact of COVID-19 on the credit markets and our investment portfolio.
Commission revenue is comprised principally of brokerage commissions we earn from third-party reinsurers (excluding the FHCF) on reinsurance placed for the Insurance Entities. Commission revenue is earned pro-rata over the reinsurance policy period which runs from June 1st to May 31st of the following year. For the year ended December 31, 2019,2020, commission revenue was $26.1$33.2 million, an increase of $3.7 million, or 16.3%, compared to $22.4$26.1 million for the year ended December 31, 2018.2019. The increase in commission revenue of $7.1 million, or 27.1%, for the year ended December 31, 2020 was primarily due to increased commissions from third-party
reinsurers earned on increased reinsurance premiums due to growth in our exposures, as well as the difference in pricing and structure associated with our reinsurance program when compared to the prior year.
Policy fees for the year ended December 31, 20192020 were $21.6$23.8 million compared to $20.3$21.6 million for the same period in 2018.2019. The increase of $1.3$2.2 million, or 6.3%10.3%, was the result of an increase in the total number of new and renewedrenewal policies written during the year ended December 31, 20192020 compared to the same period in 2018.
2019.
Other revenue, representing revenue from policy installment fees, premium financing and other miscellaneous income, was $8.0$8.5 million for the year ended December 31, 20192020 compared to $7.2$8.0 million for the same period in 2018.2019.
LossesThe following table presents losses and LAE incurred on a direct, ceded and net basis expressed in dollars and as a percent of cededthe respective amounts of earned premium. These amounts are further categorized as 1) core losses, for the year ended December 31, 2019 were $603.4 million compared to $414.5 million in the same period in 2018, an increase of $189.0 million, or 45.6%.
|
| | | | | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31, 2019 |
| | Direct | | Loss Ratio | | Ceded | | Loss Ratio | | Net | | Loss Ratio |
Premiums earned | | $ | 1,233,121 |
| | | | $ | 390,619 |
| | | | $ | 842,502 |
| | |
Losses and loss adjustment expenses: | | | | | | | | | | | | |
Weather events* | | $ | 45,562 |
| | 3.7 | % | | $ | 6,912 |
| | 1.8 | % | | $ | 38,650 |
| | 4.6 | % |
Prior year adverse/(favorable) reserve development | | 562,303 |
| | 45.6 | % | | 474,235 |
| | 121.4 | % | | 88,068 |
| | 10.4 | % |
All other losses and loss adjustment expenses | | 476,739 |
| | 38.7 | % | | 51 |
| | — | % | | 476,688 |
| | 56.6 | % |
Total losses and loss adjustment expenses | | $ | 1,084,604 |
| | 88.0 | % | | $ | 481,198 |
| | 123.2 | % | | $ | 603,406 |
| | 71.6 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2018 |
| | Direct | | Loss Ratio | | Ceded | | Loss Ratio | | Net | | Loss Ratio |
Premiums earned | | $ | 1,121,640 |
| | | | $ | 353,258 |
| | | | $ | 768,382 |
| | |
Losses and loss adjustment expenses: | | | | | | | | | | | | |
Weather events* | | $ | 395,000 |
| | 35.2 | % | | $ | 380,250 |
| | 107.6 | % | | $ | 14,750 |
| | 1.9 | % |
Prior year adverse/(favorable) reserve development | | 622,028 |
| | 55.5 | % | | 522,506 |
| | 147.9 | % | | 99,522 |
| | 13.0 | % |
All other losses and loss adjustment expenses | | 308,295 |
| | 27.5 | % | | 8,112 |
| | 2.3 | % | | 300,183 |
| | 39.1 | % |
Total losses and loss adjustment expenses | | $ | 1,325,323 |
| | 118.2 | % | | $ | 910,868 |
| | 257.8 | % | | $ | 414,455 |
| | 53.9 | % |
*Includes only weather events beyond expected. Items included in2) weather events for the current accident year may differ from items includedand 3) prior years’ reserve development (dollars in quarterly reporting.thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31, 2020 |
| | Direct | | Loss Ratio | | Ceded | | Loss Ratio | | Net | | Loss Ratio |
Premiums earned | | $ | 1,395,623 | | | | | $ | 472,060 | | | | | $ | 923,563 | | | |
Losses and loss adjustment expenses: | | | | | | | | | | | | |
Core losses | | $ | 538,826 | | | 38.6 | % | | $ | 316 | | | 0.1 | % | | $ | 538,510 | | | 58.3 | % |
Weather events* | | 256,917 | | | 18.4 | % | | 94,954 | | | 20.1 | % | | 161,963 | | | 17.6 | % |
Prior years’ reserve development | | 284,315 | | | 20.4 | % | | 225,978 | | | 47.9 | % | | 58,337 | | | 6.3 | % |
Total losses and loss adjustment expenses | | $ | 1,080,058 | | | 77.4 | % | | $ | 321,248 | | | 68.1 | % | | $ | 758,810 | | | 82.2 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For The Year Ended December 31, 2019 |
| | Direct | | Loss Ratio | | Ceded | | Loss Ratio | | Net | | Loss Ratio |
Premiums earned | | $ | 1,233,121 | | | | | $ | 390,619 | | | | | $ | 842,502 | | | |
Losses and loss adjustment expenses: | | | | | | | | | | | | |
Core losses | | $ | 476,739 | | | 38.7 | % | | $ | 51 | | | — | % | | $ | 476,688 | | | 56.6 | % |
Weather events* | | 45,562 | | | 3.7 | % | | 6,912 | | | 1.8 | % | | 38,650 | | | 4.6 | % |
Prior years’ reserve development | | 562,303 | | | 45.6 | % | | 474,235 | | | 121.4 | % | | 88,068 | | | 10.4 | % |
Total losses and loss adjustment expenses | | $ | 1,084,604 | | | 88.0 | % | | $ | 481,198 | | | 123.2 | % | | $ | 603,406 | | | 71.6 | % |
*Includes only current weather events beyond those expected.
See “Item“Part II—Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for change in liability for unpaid losses and LAE.
LossesManagement evaluates losses and LAE in three areas, as described below and represented in the tables above, each of which have different drivers which impact reported results. As a result, these components of losses and LAE are described separately. Overall losses and LAE, net of ceded losses, increased during the year ended December 31, 2019 principally due to five key factors: (1) increased lossesreinsurance recoveries, were $758.8 million resulting in connection with the growth in our underlying business; (2) reduced benefits from claim settlement fees ceded to reinsurers as hurricanes claims conclude; (3) an increase in our direct corea 82.2% net loss ratio (as defined below) from 33.9% in 2018 to 38.9% in 2019; (4) an increase in weather events when compared to the prior year, and; (5) prior year adverse development.
The net calendar year lossand LAE ratio for the year ended December 31, 2020. This compares to $603.4 million resulting in a 71.6% net loss and LAE ratio for the year ended December 31, 2019.
The factors impacting losses and LAE are as follows:
Core losses
Our core losses consist of all losses and LAE, except weather events beyond those expected and prior years’ reserve development. We establish core loss reserves by applying a direct loss percentage (loss pick) to direct premium earned. The loss pick is set by management each year with input coming out of the annual study performed by our independent third-party
actuary. Our loss pick before the claims management benefits described below, which we increased in 2019 as a result of higher loss trends in Florida, was 71.6%increased slightly (0.9 loss ratio points) in 2020.
The core losses and loss ratios in the above table benefit from favorable claim management adjustment benefits derived from certain ceded claim fees or other benefits, which are described below, reducing core losses. Core losses for the year, after favorable claim management adjusting benefits for the year ended 2020 were 38.6% of direct premium earned compared to 53.9%38.7% for the same period in 2019. Although the core loss ratio only slightly changed year over year, core loss and LAE has increased and reserves increased resulting from higher premium volume and the impact of primary rate increases approved in 2020.
Weather events beyond those expected
During the year ended December 31, 2020, there were a significant number of storms including Hurricane Sally compared to prior years which in the aggregate exceeded core loss ratio expectations. The number of adverse weather events and resulting claims during the fourth quarter exceeded weather event claims reported during the first three quarters. Reported losses from Hurricane Sally significantly benefited from our catastrophe reinsurance protection. Our reinsurance program reduced our direct estimate of Hurricane Sally ultimate losses of $133.4 million to $43.0 million on a net basis after estimated reinsurance recoveries. Other weather events resulting in losses with only limited benefit from our catastrophe reinsurance protection included Hurricanes Isaias, Eta, Delta and Zeta and other unnamed storms tracked by an industry numerically assigned identifier. These weather events totaled direct losses of $123.5 million and $119.0 million net after reinsurance. In 2020 the Company experienced the highest level of unnamed weather events when compared to the previous three years.
During the year ended December 31, 2019, weather events totaled $45.6 million direct and $38.7 million net, principally for Hurricane Dorian and other weather events beyond those expected.
Prior years’ reserve development
Management identifies two drivers which influence amounts recorded as prior years’ reserve development, namely: (i) changes to prior estimates of direct and net ultimate losses on prior accident years excluding major hurricanes and (ii) changes in prior estimates of direct and net ultimate losses on hurricanes. During the year ended December 31, 2020, prior years’ reserve development totaled $284.3 million of direct losses and $58.3 million of net losses after the benefit of reinsurance.
Prior years’ reserve development, excluding hurricanes described above, was $42.1 million direct and $40.2 million net of reinsurance for the year ended December 31, 2020. This development largely resulted from increased prior-year non-hurricane companion claims in the run up to the expiration of limitations period for Hurricane Irma claims, the emergence of claims associated with AOB litigated claims, and an increase in reopened claims. In 2019, the Florida legislature enacted legislation intended to reduce abuses with claims involving AOB. Prior the effective date of the new law, the Company experienced an increase in claims reported by vendors seeking to pursue their claims under the prior law. In many instances, these claims have since further developed into litigated claims during 2020. Also, Hurricane Irma made landfall in 2017. In accordance with Florida law, the deadline for filing Hurricane Irma claims expired three years later in September 2020. As a result, in 2020 the Company experienced adverse development due to non-hurricane companion claims reported with new Hurricane Irma claims reported as the deadline approached. In 2020, claims associated with these issues continued to adversely develop, Florida’s one-way attorneys’ fee statute and overall negative legal environment have led to increased litigation and higher losses and LAE.
For the year ended December 31, 2020, development of direct and net losses on previously reported hurricanes was $242.2 million direct and $18.1 million net after the benefit of reinsurance. This was principally driven by continued adverse development of previous estimated losses and LAE on Hurricanes Irma, Michael, Florence and Matthew. Net development for the year ended December 31, 2020 principally resulted from an increase in our previously estimated losses and LAE on Hurricane Irma for claims which are not eligible for recovery from the FHCF.
As noted above, Florida law bars new, supplemental or reopened claim for loss caused by the peril of windstorm or hurricane unless notice is provided within three years of the event. In September 2020, the three-year period following Hurricane Irma expired. The Company continues to adjust and settle Hurricane Irma claims that were reported prior to the expiration of the three-year period.
For the year ended December 31, 2019, direct prior years’ reserve development of $562.3 million was principally due to increased ultimate direct losses and LAE for Hurricane Irma, which were fully ceded, while net prior years’ reserve development of $88.1 million was principally due to a change in the allocation of estimated reinsurance recoveries on Hurricane Michael losses from our Non-Florida reinsurance coverage to the All States reinsurance coverage. The Non-Florida reinsurance coverage has a lower retention and the change in the allocation of reinsurance recoveries to the All States reinsurance coverage resulted in higher retained losses.
The net loss and LAE ratio for the year ended December 31, 2020 was 82.2% compared to 71.6% for the prior year. The increase of 17.710.6% loss ratio points was a result of: (1) reduced financial benefit from the management of claims, including claims fees ceded to reinsurers (9.0increase in weather (13.0% loss ratio points); and (2) increasedan increase in estimated core losses and LAE ratio for the current year (8.5(1.7% loss ratio points); and (3) increased weather in excess principally the result of plan (2.7 loss ratio points).higher reinsurance costs. The increase was partially offset by a lower level of prior year adverseyears’ reserve development on prior years’ losslosses and LAE reserves (2.5(4.1% loss ratio points).
During the fourth quarter, the Company recorded adverse development on prior years’ loss estimates as claims from prior years continue to be resolved at higher-than-anticipated values notwithstanding prior efforts to review and re-estimate those amounts.
The Company continues to experience increased costs for losses and LAE in the Florida market where an industry has developed around the solicitation, filing and litigation of personal residential claims, process, resulting in historically higha pattern of continued increased year over year levels of represented claims, inflation of purported claim amounts, and inflated claims.increased demands for attorneys’ fee. Active solicitation of personal residential claims in Florida by policyholder representatives, remediation companies and repair companies has led to aan increase in the frequency and severity of personal residential claims in the stateFlorida exceeding historical levels in Florida and levels seen in other jurisdictions.
Prior year adverse development was the result of the following factors:
In the A Florida market, claims understood to have been satisfactorily resolved and closed are being re-opened, sometimes years later, typically with representation from policyholder representatives or vendors who actively solicit policyholders for the purpose of filing claims.
Both the frequency (number of claims) and severity (cost ofstatute providing a claim) of claims in Florida have risen beyond anticipated levels, largely driven by consumer behavior responding to the industry that has arisen around profiting from such claims. This in turn is facilitated by Florida’s legal climate, including the one-way threatright of attorneys’ fees against insurers, coupled with other adverse statutes and the relatively high cost of defending against inflated claims demands in relation to amounts in dispute.
Wejudicial rulings, have reduced our estimate for subrogation recoveries due to changes in the Florida claims andfurther produced a legal environment. Subrogation reduces an insurer’s net losses and results in recoveries of policyholders’ deductibles. Historically, the subrogation process often has resulted in a straightforward apportionment of losses based upon parties’ respective responsibilities. However, adverse conditions and claims-related behaviorsenvironment in Florida have ledthat encourages litigation, in many cases without regard to a proliferation of represented claims, claims that are inflated or of questionable merit, and claims that are reported or re-opened well after the purported dates of loss. Losses and LAE patterns associated with these claims differ from historical patterns an from industry norms found in other states. Accordingly, we have reduced our estimate of subrogation recoveries to recognize that conditions in Florida likewise could impact the effectiveness of our subrogation efforts by reducing amounts otherwise owed to us and our policyholders and by increasing our subrogation costs. Losses are recorded, net of estimated subrogation recoveries in the financial statements. Estimated subrogation recoveries totaled $73.0 million at December 31, 2019 compared to $99.0 million at December 31, 2018. During 2019, we reduced our estimate of subrogation recoveries by $40.7 million.
Direct and ceded losses include prior year reserve development on major hurricanes where the settlement of claims and the re-estimation of expected costs for losses and LAE remaining to be settled exceed previously carried reserves. In 2019, for Hurricanes Irma, Florence, Michael and Matthew, we recorded adverse development of $469.9 million of gross losses and $465.4 million of ceded losses resulting in $4.5 million net impact. This compares to only one hurricane having adverse development in 2018 of $513 million of gross losses and $513 million of ceded losses, resulting in zero net losses in 2018 from Hurricane Irma. In addition, we recorded $2.6 million in 2019, compared to $20.7 million in 2018, of contractually based costs for reinstatement premiums as a result of adverse development of ceded losses for Hurricane Irma recorded during 2019 and 2018.
In addition, loss trends for the current year indicate expected losses that are higher than previously anticipated, resulting in an increase to our estimate for current year losses recorded during the fourth quarter. “Core loss ratio” is a common operational metric used in the insurance industry to describe the ratio of current accident year expected losses to premiums earned. Our core loss ratio for direct losses occurring in the current year increased to 38.9% for the year to date period ended December 31, 2019. This compares to 33.9% for the year ended December 31, 2018. During 2019, we saw increases in severity and frequency of claims, especially those claims represented by third party vendors, and increased litigation. Overall, adverse market conditions in Florida as described above are increasing the cost to resolve claims, which then is reflected in our core loss ratio. In addition, as summarized above, we have reduced our estimated benefit of subrogation recoveries based on current actuarial projections. The increase in the underlying core loss and LAE ratio also reflects continued geographic expansion into states outsidecircumstances of Florida where non-catastrophe loss ratios are generally higher than in Florida.the claims.
TheseThe market trends in losses and LAE in Florida have led us to file onin February 7, 2020 for an overall 12.4% rate increase in Florida.Florida, which was approved effective May 18, 2020 for new business and July 7, 2020 for renewals. In addition we filed and received approval on December 31, 2020 to further increase our rates in Florida by an additional 7.0% in response to higher reinsurance costs associated with the reinsurance program we put into effect June 1, 2020. This rate filing, if approved, would bechange was effective as of May 25, 2020. We also continue to makeDecember 31, 2020 for new business and March 1, 2021 for renewal business. In addition, we implemented changes to certain new business underwriting guidelines, reduced new business writings in certain Florida counties and to developdeveloped and implemented specialized claims and litigation management efforts to address market trends which we believe are driving up claim costs. Nonetheless, the deterioration of the Florida residential insurance market, fostered by the proliferation of represented and litigated claims, thus far has outpaced the benefits of these initiatives.
The financial benefit from the management of claims ceded, including claim fees ceded to reinsurers, was $3.2$17.3 million for the year ended December 31, 2019,2020, compared to $72.2$3.2 million during the year ended December 31, 2018.2019, driven primarily by the recoveries from reinsurers in excess of costs and the financial impact of internal claim services on the expected core loss ratio. The reduction in the benefit was in line with the runoff of claims from hurricanes which occurred in 2017 and 2018. The financial benefit from the management of claims fees ceded to reinsurers was recorded in the condensed consolidated financial statements as a reduction to losses and LAELAE.
General and included as a reduction to All other losses and loss adjustmentadministrative expenses in the chart above.
For were $289.7 million for the year ended December 31, 2019, general and administrative expenses were $272.4 million,2020, compared to $256.5$272.4 million during the same period in 20182019 as detailed below (dollars in thousands):
| | | | For the Years Ended December 31, | | Change | | For The Years Ended December 31, | | Change |
| | 2019 | | 2018 | | $ | | % | | 2020 | | 2019 | | $ | | % |
| | $ | | Ratio | | $ | | Ratio | | | | | | $ | | Ratio | | $ | | Ratio | | | | |
Premiums earned, net | | $ | 842,502 |
| | | | $ | 768,382 |
| | | | $ | 74,120 |
| | 9.6 | % | Premiums earned, net | | $ | 923,563 | | | | | $ | 842,502 | | | | | $ | 81,061 | | | 9.6 | % |
General and administrative expenses: | | | | | | | | | | | | | General and administrative expenses: | | | | | | | |
Policy acquisition costs | | 177,530 |
| | 21.1 | % | | 157,327 |
| | 20.5 | % | | 20,203 |
| | 12.8 | % | Policy acquisition costs | | 199,102 | | | 21.6 | % | | 177,530 | | | 21.1 | % | | 21,572 | | | 12.2 | % |
Other operating costs | | 94,898 |
| | 11.2 | % | | 99,161 |
| | 12.9 | % | | (4,263 | ) | | (4.3 | )% | |
Other operating costs (1) | | Other operating costs (1) | | 90,627 | | | 9.8 | % | | 94,898 | | | 11.2 | % | | (4,271) | | | (4.5) | % |
Total general and administrative expenses | | $ | 272,428 |
| | 32.3 | % | | $ | 256,488 |
| | 33.4 | % | | $ | 15,940 |
| | 6.2 | % | Total general and administrative expenses | | $ | 289,729 | | | 31.4 | % | | $ | 272,428 | | | 32.3 | % | | $ | 17,301 | | | 6.4 | % |
(1)Other operating costs includes $102 and $248 of interest expense for the years ended December 31, 2020 and 2019, respectively. | | (1)Other operating costs includes $102 and $248 of interest expense for the years ended December 31, 2020 and 2019, respectively. |
General and administrative costsexpenses increased by $15.9$17.3 million, which was primarily the result of increases in policy acquisition costs of $20.2$21.6 million due to commissions associated with increased premium volume and a $6.5 million non-recurring audit settlement benefit in 2018 related to premium taxes, offset by a decrease in other operating costs of $4.3 million. AsThe expense ratio as a percentage of premiums earned, premiums, general and administrative costsnet decreased from 33.4% of earned premiums32.3% for the year ended December 31, 20182019 to 32.3% of earned premiums31.4% for the year ended December 31, 2019. Thesame period in 2020. Our increase in policy acquisition costs continued to be driven by increased premium volume and continued geographic expansion into states that typically have higher commission rates as compared to Florida. Other operating costs ratio for the year ended December 31, 20192020 was due to a non-recurring benefit of $6.5 million recorded in 2018 related to a refund of prior year premium taxes as a result of an audit settlement with the Florida Department of Revenue, which reduced the policy acquisition costs ratio by 0.8 percentage points in 2018. Excluding this benefit in the prior year, the overall total general and administrative expense ratio in 2019 would have improved 1.90 percentage points9.8% compared to the same period in 2018 before the impact of the premium tax refund. Other operating costs11.2% for the year ended December 31, 2019, decreased $4.3 million, reflecting lower amounts recorded for executiveshare-based compensation and temporary employee expenses, offset by added costs to support the growthperformance bonuses in business. Other operating costs as a percentage of earned premium decreased from 12.9% of net earned premium for the year ended December 31, 2018 compared to 11.2% of net earned premium for the same period in 2019.
Overall, the expense ratio for 2019 (general and administrative expenses as a percentage of net premiums earned) benefited from reduced executive compensation, a lower level of costs from reinstatement premiums impacting premiums earned2020 and economies of scale as general and administrative expensesother operating costs did not increase at the same rate as revenuespremiums earned, net. In addition, due to the COVID-19 pandemic, travel and auto expenses along with meal and entertainment were lower in 2020 when compared to the same period of 2018 excluding the non-recurring premium tax benefit.
prior year.
Income tax expense decreased by $18.8$11.9 million, or 52.5%69.9%, for the year ended December 31, 2019,2020, primarily as a result of a 58.5%61.9% reduction in income before income taxes, when compared with the year ended December 31, 2018.2019. Our effectiveestimated tax rate increased(“ETR”) decreased to 21.2% for the year ended December 31, 2020, as compared to 26.8% for the year ended December 31, 2019, as compared to 23.4% for the year ended December 31, 2018.2019. The effective tax rate increased slightlyETR decreased as a result of a higher ratio of permanent items relative to the amount of income before taxes, principally non-deductible compensation, offset byand a lowerhigher level of excessdiscrete tax benefit. See “Item 8—Note 12 (Income Taxes)” for an explanation of the change in our effective tax rates.
benefits.
Other comprehensive income,loss, net of taxes for the year ended December 31, 20192020 was $28.4$17.6 million, of net unrealized gains related to debt securities available-for-sale compared to other comprehensive lossincome of $4.7$28.4 million related to net unrealized losses on debt securities available-for-sale for the same period in 2018.2019, reflecting reclassifications out of cumulative other comprehensive income for available-for-sale debt securities sold and after-tax changes in fair value of available-for-sale debt securities held in our investment portfolio. See “Item“Part II—Item 8—Note 1411 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income and loss for these periods.
YEAR ENDED DECEMBER 31, 2018 COMPARED TO YEAR ENDED DECEMBER 31, 2017
Net income was $117.1 million for the year ended December 31, 2018, an increase of $10.1 million, or 9.5%, compared to $106.9 million for the year ended December 31, 2017. The year ended December 31, 2018 is comparatively better due to continued growth of premiums, investment income and other sources revenue. Results in 2018 also include the impact of two hurricanes, Florence and Michael, and an increase in losses and LAE for the strengthening of loss reserves of prior accident years. Reserve strengthening was driven by higher than expected claim costs from prior years relating to litigation, reopened claims and increases in loss settlement trends above carried values. Net unrealized losses on equity securities was $17.2 million in 2018, reducing net income. Also impacting 2018 was a lower effective tax rate. Diluted earnings per common share increased by $0.28 to $3.27 for the year ended December 31, 2018 compared to $2.99 per share for the year ended December 31, 2017, reflecting the increase in net income and a slight decrease in our weighted average diluted shares outstanding. A more detailed discussion of our results of operations follows the table below (in thousands, except per share data).
|
| | | | | | | | | | | | | | | |
| | (in thousands) | | | | |
| | Years Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
PREMIUMS EARNED AND OTHER REVENUES | | | | | | | | |
Direct premiums written | | $ | 1,190,875 |
| | $ | 1,055,886 |
| | $ | 134,989 |
| | 12.8 | % |
Change in unearned premium | | (69,235 | ) | | (56,688 | ) | | (12,547 | ) | | 22.1 | % |
Direct premium earned | | 1,121,640 |
| | 999,198 |
| | 122,442 |
| | 12.3 | % |
Ceded premium earned | | (353,258 | ) | | (310,405 | ) | | (42,853 | ) | | 13.8 | % |
Premiums earned, net | | 768,382 |
| | 688,793 |
| | 79,589 |
| | 11.6 | % |
Net investment income | | 24,816 |
| | 13,460 |
| | 11,356 |
| | 84.4 | % |
Net realized gains (losses) on investments | | (2,089 | ) | | 2,570 |
| | (4,659 | ) | | NM |
|
Net change in unrealized gains (losses) of equity securities | | (17,169 | ) | | — |
| | (17,169 | ) | | NM |
|
Commission revenue | | 22,438 |
| | 21,253 |
| | 1,185 |
| | 5.6 | % |
Policy fees | | 20,275 |
| | 18,838 |
| | 1,437 |
| | 7.6 | % |
Other revenue | | 7,163 |
| | 7,002 |
| | 161 |
| | 2.3 | % |
Total premiums earned and other revenues | | 823,816 |
| | 751,916 |
| | 71,900 |
| | 9.6 | % |
OPERATING COSTS AND EXPENSES | | | | | | | | |
Losses and loss adjustment expenses | | 414,455 |
| | 350,428 |
| | 64,027 |
| | 18.3 | % |
General and administrative expenses | | 256,488 |
| | 231,004 |
| | 25,484 |
| | 11.0 | % |
Total operating costs and expenses | | 670,943 |
| | 581,432 |
| | 89,511 |
| | 15.4 | % |
INCOME BEFORE INCOME TAXES | | 152,873 |
| | 170,484 |
| | (17,611 | ) | | (10.3 | )% |
Income tax expense | | 35,822 |
| | 63,549 |
| | (27,727 | ) | | (43.6 | )% |
NET INCOME | | $ | 117,051 |
| | $ | 106,935 |
| | $ | 10,116 |
| | 9.5 | % |
Other comprehensive income (loss), net of taxes | | (4,748 | ) | | 127 |
| | (4,875 | ) | | NM |
|
COMPREHENSIVE INCOME | | $ | 112,303 |
| | $ | 107,062 |
| | $ | 5,241 |
| | 4.9 | % |
DILUTED EARNINGS PER SHARE DATA: | | | | | | | | |
Diluted earnings per common share | | $ | 3.27 |
| | $ | 2.99 |
| | $ | 0.28 |
| | 9.4 | % |
Weighted average diluted common shares outstanding | | 35,786 |
| | 35,809 |
| | (23 | ) | | NM |
|
Direct premiums written increased by $135.0 million, or 12.8%, for the year ended December 31, 2018, driven by growth within our Florida business of $89.3 million, or 9.7%, as compared to the same period of the prior year, and growth in our Other States business of $45.7 million, or 34.6%, as compared to the same period of the prior year. Florida growth was driven by growth in policy count as well as the impact of an average statewide rate increase of 3.4%, which was approved in early December 2017 and effective for new business beginning on December 7, 2017 and for renewal business beginning on January 26, 2018. Other States growth was driven by continued increase in our agent force, authorization to write in new states (New Hampshire) and organic growth from our existing agent force. As of December 31, 2018, we were actively writing policies in 16 states other than our home state of Florida. Also contributing to growth in Florida and other states is growth in our online platform Universal DirectSM.
Direct premium earned increased by $122.4 million, or 12.3%, for the year ended December 31, 2018, reflecting the earning of premiums written over the past 12 months and changes in rates and policy count during that time.
Ceded premium earned increased by $42.9 million, or 13.8%, for the year ended December 31, 2018. The increase was the result of: (1) a general increase in costs for the Company’s 2018-2019 reinsurance program fueled by growth, compared to the expiring program; and (2) $20.7 million of fully earned reinstatement premiums relating to increases in the Company’s estimated losses associated with third quarter 2017 storm, Hurricane Irma. Ceded premium earned as a percent of direct premium earned was 31.5% for the year ended December 31, 2018 compared to 31.1% for the year ended December 31, 2017.
Premiums earned, net of ceded premium earned, grew by 11.6%, or $79.6 million, to $768.4 million for the year ended December 31, 2018, reflecting the increase in direct premium and ceded premium earned, both of which are discussed above.
Net investment income was $24.8 million for the year ended December 31, 2018, compared to $13.5 million for the year ended December 31, 2017, an increase of $11.4 million, or 84.4%. The increase is the result of several factors including the growth in cash and invested assets compared to the prior year and an increase in book yields, 2.82% in 2018 compared to 1.81% in 2017, which resulted from a shift in asset mix and rising interest rates. Total invested assets were $908.2 million with an average fixed income credit rating of A+ during the year ended December 31, 2018 compared to $730.0 million with an average fixed credit rating of AA- for the same period in 2017. Cash and cash equivalents were $166.4 million at December 31, 2018 compared to $213.5 million at December 31, 2017, a decrease of 22.0%. Cash and cash equivalents are invested short term until needed to settle payments to reinsurers, loss and LAE payments and operating cash needs.
We periodically sell securities from our investment portfolio from time to time when opportunities arise or when circumstances could result in greater losses or lower yields if held. We sold debt securities available-for-sale and equity securities during the year ended December 31, 2018, generating net realized losses of $2.1 million compared to net realized gains of $2.6 million for the year ended December 31, 2017. The investment securities sold during the year ended December 31, 2018 were comprised primarily of municipal securities, which were liquidated in light of their diminished after-tax returns following the enactment of the Tax Act.
The year ended December 31, 2018 included an unrealized loss of $17.2 million, resulting from a decline in the market value of our equity securities portfolio during that period. We highlight that this line item was added during the year ended December 31, 2018, as a result of the adoption of new accounting guidance for equity securities. See “Item 8—Note 14 (Other Comprehensive Income (Loss))” for more information. The comparable change in unrealized gains (losses) within our equity portfolio for the prior period in 2017 was $2.5 million of pretax loss, which was not included in net income in the prior period in 2017 but was included in other comprehensive income (loss), which is presented net of taxes.
Commission revenue is comprised principally of brokerage commissions we earn from reinsurers on reinsurance placed for the Insurance Entities. For the year ended December 31, 2018, commission revenue was $22.4 million, compared to $21.3 million for the year ended December 31, 2017. The increase in commission revenue of $1.2 million, or 5.6%, for the year ended December 31, 2018 was primarily the result of increased ceded premiums in 2018 compared to 2017 as a result of commissions earned from higher ceded premiums under the Company’s June 1, 2018 renewal of its 2018-2019 Reinsurance Program. Commission revenue from reinstatement premiums was $2.7 million in 2018 versus $2.6 million in 2017.
Policy fees for the year ended December 31, 2018, were $20.3 million compared to $18.8 million for the same period in 2017. The increase of $1.4 million, or 7.6%, was the result of an increase in the number of new and renewal policies written during the year ended December 31, 2018 compared to the same period in 2017.
Other revenue, representing revenue from policy installment fees, premium financing and other miscellaneous income, was $7.2 million for the year ended December 31, 2018 compared to $7.0 million for the same period in 2017.
Losses and LAE, net of reinsurance were $414.5 million for the year ended December 31, 2018 compared to $350.4 million for the same period in 2017 as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2018 |
| | | | Loss | | | | Loss | | | | Loss |
| | Direct | | Ratio | | Ceded | | Ratio | | Net | | Ratio |
Premiums earned | | $ | 1,121,640 |
| | | | $ | 353,258 |
| | | | $ | 768,382 |
| | |
Losses and loss adjustment expenses: | | | | | | | | | | | | |
Weather events* | | $ | 395,000 |
| | 35.2 | % | | $ | 380,250 |
| | 107.6 | % | | $ | 14,750 |
| | 1.9 | % |
Prior year adverse/(favorable) reserve development | | 622,028 |
| | 55.5 | % | | 522,506 |
| | 147.9 | % | | 99,522 |
| | 13.0 | % |
All other losses and loss adjustment expenses | | 308,295 |
| | 27.5 | % | | 8,112 |
| | 2.3 | % | | 300,183 |
| | 39.1 | % |
Total losses and loss adjustment expenses | | $ | 1,325,323 |
| | 118.2 | % | | $ | 910,868 |
| | 257.8 | % | | $ | 414,455 |
| | 53.9 | % |
| | | | | | | | | | | | |
| | For the Year Ended December 31, 2017 |
| | | | Loss | | | | Loss | | | | Loss |
| | Direct | | Ratio | | Ceded | | Ratio | | Net | | Ratio |
Premiums earned | | $ | 999,198 |
| | | | $ | 310,405 |
| | | | $ | 688,793 |
| | |
Losses and loss adjustment expenses: | | | | | | | | | | | | |
Weather events* | | $ | 446,700 |
| | 44.7 | % | | $ | 417,543 |
| | 134.5 | % | | $ | 29,157 |
| | 4.2 | % |
Prior year adverse/(favorable) reserve development | | 37,173 |
| | 3.7 | % | | 9,674 |
| | 3.1 | % | | 27,499 |
| | 4.0 | % |
All other losses and loss adjustment expenses | | 295,249 |
| | 29.5 | % | | 1,477 |
| | 0.5 | % | | 293,772 |
| | 42.7 | % |
Total losses and loss adjustment expenses | | $ | 779,122 |
| | 78.0 | % | | $ | 428,694 |
| | 138.1 | % | | $ | 350,428 |
| | 50.9 | % |
|
| |
* | Includes only weather events beyond expected. Items included in weather events for the year may differ from items included in quarterly reporting. |
See “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for change in liability for unpaid losses and LAE.
During the year ended December 31, 2018, we increased gross reserves to account for the impact of Hurricane Irma, a 2017 hurricane, by $513 million to a total of $959.7 million. Substantially all the 2018 development was covered under our reinsurance contracts. The development on claims associated with Hurricane Irma in 2018 resulted from increased litigation, new and reopened claims and higher costs to settle the remaining claims from that event.
Net results during the year ended December 31, 2018 include: charges to losses and LAE of $14.8 million net ($395 million gross) due to the impact of two hurricanes, Hurricanes Florence and Michael; $99.5 million net allocated to strengthen prior accident year’s loss reserves. Prior years reserve strengthening resulted from Hurricane Irma companion claims, which propagated into non-cat systemic claims representation in Florida, resulting in an increase in prior year development. This strengthening resulted in an increase in the frequency (number of claims) and severity (cost of the claim) of non-catastrophe claims spanning several prior accident years, including reopened claims, newly reported claims, increased litigation and increased loss settlements of claims above carried values. Operational focus in the fourth quarter of 2018 was centered on accelerating the settlement of claims to reduce the number of claims outstanding. The increase in prior accident year claim severity and claim frequency reflects the trends and dynamics in the Florida market particularly AOB, systemic claims representation and solicitation of prior years’ claims in the post Irma environment. An AOB is a document signed by a policyholder that allows a third party to be paid for claim services performed for an insured homeowner who would be normally be reimbursed by the insurance company directly after making a claim. We have generally seen an increase in the use of AOBs by Florida policyholders. Claims paid under an AOB often involve unnecessary litigation and as a result cost significantly more than claims settled when an AOB is not involved, with most of the increase going to the attorneys or representatives of policyholders. In August 2018, the Company announced the appointment of a Chief Legal Officer to lead the legal efforts in response to the growing AOB claims and their related increase in litigated claims and costs. We continue to monitor assignment of benefits legislation in Florida and continue to take steps to address the Florida
market dynamics. See “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for five-year development data.
All other net losses and LAE were $300.2 million, or 39.1% of net earned premium, and $293.8 million, or 42.7% of net earned premium for the years ended December 31, 2018 and 2017, respectively. Our claims services entity generated a net benefit of $72.2 million and $33.5 million to net losses and LAE for settling claims for the years ended December 31, 2018 and 2017, respectively. These amounts reduced net losses and LAE as a percentage of net earned premium by 9.4 and 4.8 percentage points for the years ended December 31, 2018 and 2017, respectively. Reinstatement premium of $20.7 million recorded during the year ended December 31, 2018 increased the net losses and LAE ratio by 1.4 percentage points.
For the year ended December 31, 2018, general and administrative expenses were $256.5 million, compared to $231.0 million for the same period in 2017, as detailed below (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | Change |
| | 2018 | | 2017 | | $ | | % |
| | $ | | Ratio | | $ | | Ratio | | | | |
Premiums earned, net | | $ | 768,382 |
| | | | $ | 688,793 |
| | | | $ | 79,589 |
| | 11.6 | % |
General and administrative expenses: | | | | | | | | | | | | |
Policy acquisition costs | | 157,327 |
| | 20.5 | % | | 138,846 |
| | 20.2 | % | | 18,481 |
| | 13.3 | % |
Other operating costs | | 99,161 |
| | 12.9 | % | | 92,158 |
| | 13.3 | % | | 7,003 |
| | 7.6 | % |
Total general and administrative expenses | | $ | 256,488 |
| | 33.4 | % | | $ | 231,004 |
| | 33.5 | % | | $ | 25,484 |
| | 11.0 | % |
Although costs were up overall, general and administrative costs as a percentage of earned premiums decreased from 33.5% of earned premiums in 2017 to 33.4% of earned premiums in 2018. The increase in general and administrative expenses of $25.5 million was primarily the result of increases in policy acquisition costs of $18.5 million due to commissions associated with increased premium volume and continued premium growth in states that have higher commission rates compared to Florida, and to a lesser extent due to an increase in other operating costs of $7.0 million. Policy acquisition costs for the year ended December 31, 2018 included the receipt of a $6.5 million benefit related to a settlement of prior year premium tax audits with the Florida Department of Revenue. Other operating costs increased by $7.0 million in 2018, which was primarily driven by increases in salary, share-based compensation and a lower level of expenses recovered in 2018 from reinsurers compared to amounts recovered in 2017 related to Hurricane Irma. Other operating costs in 2018 reflected lower amounts spent on advertising and temporary employee expenses. Other operating costs as a percentage of earned premium reduced from 13.3% of earned premium in 2017 to 12.9% of earned premium in 2018.
The expense ratio in 2018 was impacted by the costs noted above and the ratio was further increased by 0.9% due to an increase in fully earned reinstatement premiums paid in 2018 reducing premiums earned, net (the denominator in the ratio). Overall, the expense ratio (general and administrative expenses as a percentage of net earned premiums) benefited from economies of scale as general and administrative expenses did not increase at the same rate as revenues.
Income tax expense decreased by $27.7 million, or 43.6%, for the year ended December 31, 2018, when compared with the year ended December 31, 2017. Our effective tax rate decreased to 23.4% for the year ended December 31, 2018, as compared to 37.3% for the year ended December 31, 2017. The decrease in both income tax expense and our effective tax rate was primarily the result of the Tax Act. See “Item 8—Note 12 (Income Taxes)” for an explanation of the change in our effective tax rates.
Other comprehensive income (loss), net of taxes for the year ended December 31, 2018 was $4.7 million of net unrealized losses related to debt securities available-for-sale compared to other comprehensive income of $0.1 million related to net unrealized gains on debt securities available-for-sale and equity securities for 2017. On January 1, 2018 we adopted ASU 2016-01. See “Item 8—Note 14 (Other Comprehensive Income (Loss))” for additional information about the amounts comprising other comprehensive income and loss for these periods and for a discussion of the adoption.
ANALYSIS OF FINANCIAL CONDITION AS OF DECEMBER 31, 20192021 COMPARED TO DECEMBER 31, 20182020
We believe that cash flows generated from operations will be sufficient to meet our working capital requirements for at least the next twelve months. We invest amounts considered to be in excess of current working capital requirements.
The following table summarizes, by type, the carrying values of investments as of the dates presented (in thousands):
| | | | As of December 31, | | | As of December 31, |
Type of Investment | | 2019 | | 2018 | Type of Investment | | 2021 | | 2020 |
Available-for-sale debt securities | | $ | 855,284 |
| | $ | 820,438 |
| Available-for-sale debt securities | | $ | 1,040,455 | | | $ | 819,861 | |
| Equity securities | | 43,717 |
| | 63,277 |
| Equity securities | | 47,334 | | | 84,887 | |
Investment real estate, net | | 15,585 |
| | 24,439 |
| Investment real estate, net | | 5,891 | | | 15,176 | |
Total | | $ | 914,586 |
| | $ | 908,154 |
| Total | | $ | 1,093,680 | | | $ | 919,924 | |
See “Item“Part II—Item 8—Consolidated Statements of Cash Flows” for explanations of changes in investments and “Item 8—Note 3 (Investments).” for explanations on changes in investments. Investment real estate, net was reduced $8.9by $9.3 million during 20192021 as a result of the sale of two investment properties.real estate properties, one which was classified as assets held for sale earlier in 2021 . The gain on the sale of thethese two investment properties was $1.2$2.7 million.
Restricted cash and cash equivalents decreased by $10.1 million to $2.6 million as of December 31, 2021 as a result of the release of collateral held by a reinsurance captive arrangement between affiliates that was terminated effective December 1, 2021, pursuant to the terms of the agreement. In connection with the termination of the agreement, the affiliates agreed to release funds held in trust due to UPCIC and the balance to the participant of the separate account (UVE) in December 2021. See “Part II—Item 8—Note 18 (Variable Interest Entities)” for more information.
Prepaid reinsurance premiums represent the portion of unearned ceded written premium that will be earned pro-rata over the coverage period of our reinsurance program, which runs from June 1st to May 31st of the following year. The increase of $32.5$25.3 million to $175.2$241.0 million as of December 31, 20192021 was primarily due primarily to additional ceded written premium and the reinsurance costs relating to our 2021-2022 catastrophe reinsurance program beginning June 1, 2021, less amortization of ceded written premium for the reinsurance costs relating to our 2019-2020 catastrophe reinsurance programearned since the beginning June 1, 2019, less amortization of prepaid reinsurance premiums recorded during 2019.the program.
Reinsurance recoverable represents the estimated amount of paid and unpaid losses, LAE and other expenses that are expected to be recoverablerecovered from reinsurers. The decreaseincrease of $225.4$25.2 million to $193.2$185.6 million as of December 31, 20192021 was primarily due to the collectionincreased estimate of amounts recoverable from reinsurers relating to settled claims from hurricanes and other events.covered by our reinsurance contracts.
Premiums receivable, net represents amounts receivable from policyholders. The increasedecrease in premiums receivable, net of $4.0$2.0 million to $63.9$64.9 million as of December 31, 20192021 relates to the growth and consumer payment behavior of our business. The amount of direct premiums written tends to increase just prior to the second quarter and tends to decrease approaching the fourth quarter.
Property and equipment, net increased by $6.4 million during 2019 primarily as the result of the purchase of a new office building in Fort Lauderdale, Florida, which will be used to meet the staffing needs of the company as the business continues to expand.
Deferred policy acquisition costs increased(“DPAC”) decreased by $7.2$1.8 million to $91.9$108.8 million as of December 31, 2019,2021, which is consistent with the underlying premium growth.growth and changes to the Company’s commission structure. See “Item“Part II—Item 8—Note 5 (Insurance Operations)” for a roll-forward in the balance of our deferred policy acquisition costs.DPAC.
Income taxes recoverable represents tax payments in excess ofthe difference between estimated tax obligations and tax payments made to taxing authorities. As of December 31, 2021, the balance recoverable was $16.9 million, representing amounts due from taxing authorities which totaled $34.3at that date, compared to a balance recoverable of $30.6 million recoverable as of December 31, 2019 compared to $11.2 million recoverable as of December 31, 2018.2020. Income taxes recoverable as of December 31, 20192021 will either be refunded or applied to future periods forto offset future federal and state income taxes payable.tax obligations.
Deferred income taxes represent the estimated tax asset or tax liability caused by temporary differences between the tax return basis of certain assets and liabilities and amounts recorded in the financial statements. During the year ended December 31, 2021, the deferred income tax asset, net increased by $10.0 million to $16.3 million. Deferred income taxes reverse in future years as the temporary differences between book and tax reverse. During the year ended
Other assets increased by $7.2 million to $22.0 million as of December 31, 2019, the deferred income tax asset-net decreased by $11.2 million to $3.4 million2021, primarily due to an increase in the deferred tax liabilitydriven from increases in unrealized gains in investments.receivable due from brokers relating to securities sold from our investment portfolio which settled after December 31, 2021.
See “Item“Part II—Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for a roll-forward in the balance of our unpaid losses and LAE. Unpaid losses and LAE decreasedincreased by $205.1$23.8 million to $267.8$346.2 million as of December 31, 2019.2021. The reductionincrease in unpaid losses and LAE was principally due to increases in the settlement ofcore loss ratio, increases in the estimated amounts to settle claims from previous hurricane and storm events, as morethe impact of inflation on estimated claims from those events concluded during the year ended December 31, 2019. Overall unpaid lossessettlements and LAE decreased, as claim settlements exceeded new emerging claims.increased litigation costs. Unpaid losses and LAE are net of estimated subrogation recoveries of $73$119 million as of December 31, 20192021 compared to $99$71 million as of December 31, 2018.2020.
Unearned premiums represent the portion of direct premiums written that will be earned pro-rata in the future. The increase of $59.6$74.6 million to $661.3$857.8 million as of December 31, 20192021 reflects both organic growth and rate increases.
the increase in written premiums of our business.
Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The increase of $4.8$4.1 million from December 31, 20182020 to $31.0$53.7 million as of December 31, 20192021 reflects customer payment behavior and organic growth.behavior.
We exclude any net negative cash balances, if any, from cash and cash equivalents that we have with any single financial institution.institution based on aggregating the book balance of all accounts at the institution which have the right of offset. If the aggregation results in a net negative book balance, that balance is reclassified from cash and cash equivalents in our Consolidated Balance Sheet to book overdraft. These amounts represent outstanding checks or drafts not yet presented to the financial institution and are reclassified to liabilities and presented as book overdraft in our Consolidated Balance Sheetsexcess of amounts on deposit at each balance sheet date.the financial institutions. We maintain a short-term cash investment strategy sweep to maximize investment returns on cash balances. Due to sweep activities, certain outstanding items are recorded as book overdrafts, whichBook overdraft totaled $90.4$26.8 million as of December 31, 2019,2021, compared to $102.8$59.4 million as of December 31, 2018.2020. The decrease of $12.4$32.6 million is the result of higher cash balances available for offset as of December 31, 20192021 compared to December 31, 2018.2020.
Reinsurance payable, net, represents the unpaid reinsurance premium installments owed to reinsurers, unpaid reinstatement premiums due to reinsurers and cash advances received from reinsurers, if any. On June 1st of each year, we renew our core catastrophe reinsurance program and record the estimated annual cost of our reinsurance program. These estimated annual costs are increased or decreased during the year based on premium adjustments or as a result of new placements during the year. The annual cost initially increases reinsurance payable, which is then reduced as installment payments are made over the policy period of the reinsurance, which typically runs from June 1st to May 31st. The balance increased by $29.3$178.4 million to $122.6$188.7 million as of December 31, 20192021 as a result of an acceleration of payments in December 2020 for amounts typically paid in January and April of the following year relating to the 2020-2021 reinsurance program. There was no similar acceleration of payment made for the year ended December 31, 2021 relating to the 2021-2022 reinsurance program.
Other liabilities and accrued expenses decreased by $25.0 million to $27.3 million as of December 31, 2021, primarily driven by decreases in the collection of advanced reinsurance commission of $14.0 million and payable for unsettled security purchases of $8.8 million. Advance reinsurance commission represents the early collection of reinsurance commissions as a result of the increased costs associated withCompany settling its reinsurance obligations before the 2019-2020 reinsurance program.contractual due date. Payables for securities purchased represents payables relating to available-for-sale debt securities purchases which settled after December 31, 2020. There were payables for securities purchased totaling $8.8 million as of December 31, 2020. There were no payables for securities purchased as of December 31, 2021.
Capital resources, net decreasedincreased by $9.2$75.7 million during the year ended December 31, 2019,2021, reflecting decreasesa net increase in total stockholders’ equity and long-term debt. The reductiondecrease in stockholders’ equity was principally the result of our benefits coming from our 2021 net income and share-based compensation offset by declines in the after-tax changes in the fair value of available-for-sale debt securities, treasury stock repurchasesshares purchases and dividends to shareholders mostly offset by our 2019shareholders. Available-for-sale debt securities in the portfolio experienced net income, share-based compensation, and after-tax changesunrealized losses of $24.6 million (before tax) in fair value2021, which caused the net unrealized gain position of our investment portfolio$4.4 million at December 31, 2020 to decrease to a net unrealized gains in 2019.loss position of $20.2 million at December 31, 2021. Current market outlooks, signaling further Federal Reserve tightening, could have a negative impact on the valuation of available-for-sale debt securities. See “Item“Part II—Item 8—Consolidated Statements of Stockholders’ Equity” and “Item 8—Note 8 (Stockholders’ Equity).”
for an explanation of changes in treasury shares. The reductionincrease in long-term debt of $95.2 million was primarily the result of cash proceeds from the Notes, net of debt issuance costs of $96.7 million offset by principal payments on long-term debt of $1.5 million was the result of principal payments on debt during 2019.2021. See “—Liquidity and Capital Resources” and “Item 8—Note 8 (Stockholders’ Equity)” for explanation of changes in treasury stock.more information.
Additional paid-in-capital increased by $9.7$4.8 million primarily from share-based compensation expense of $13.0 million, stock issued of $0.1 million and stock option exercises of $2.7$5.8 million for the year ended December 31, 2019.2021. This was offset by the common stock value acquired and cancelled through cashless stock option exercise and tax withholdings on the intrinsic value of stock option exercise, restricted stock vested, performance units vested, and restricted stock units vested for share-based payment transactions of $6.1$1.1 million for the year ended December 31, 2019.2021.
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet its short- and long-term obligations. Funds generated from operations have been sufficient and we expect them to be sufficient to meet our current and long term liquidity requirementsrequirements. See discussion below regarding the COVID-19 pandemic’s impact. Also see the discussion above under “Overview—Trends—Impact of the COVID-19 Pandemic” regarding our response to the COVID-19 pandemic, the financial impact to us, our general outlook and we expect that, inplans to monitor the future, funds from operations will continue to meet such requirements.economic consequences of the COVID-19 pandemic.
The balance of cash and cash equivalents, excluding restricted cash, as of December 31, 20192021 was $182.1$250.5 million, compared to $166.4$167.2 million at December 31, 2018.2020. See “Item“Part II—Item 8—Consolidated Statements of Cash Flows” for a reconciliation of the balance of cash and cash equivalents between December 31, 20192021 and 2018.2020. The increase in cash and cash equivalents was driven by cash flows generated from operating and investingfinancing activities in excess of thosecash flows used for financingin investing activities. We maintain a short-termOur cash investment strategy at times includes cash sweep to maximize investment returns on cash balances. Due to these sweep activities, certain outstanding items are routinely recorded asinvestments where the right of offset against other bank accounts does not exist. A book overdraft occurs when aggregating the book balance of all accounts at a financial institution for accounts which have the right of offset, and if the aggregation results in the consolidated financial statements.a net negative book balance, that balance is reclassified from cash and cash equivalents in our Consolidated Balance Sheet to book overdraft. Cash and cash equivalents balances are available to settle
book overdrafts, and to pay reinsurance premiums, expenses and claims. Reinsurance premiums are paid in installments during the reinsurance policy period, which runs from June 1st to May 31st of the following year. The FHCF isreimbursement premiums are paid in three installments on August 1st, October 1st, and December 1st, and third-party reinsurance ispremiums are generally paid in four installments on July 1st, October 1st, January 1st and April 1st, resulting in significant payments at those times. See “Item“Part II—Item 8—Note 15 (Commitments and Contingencies)” and “Contractual Obligations”“—Material Cash Requirements” for more information.
During 2019,2020, there was one significant hurricane, Hurricane Sally, in which occurred, Hurricane Dorian, where claims were withinestimated losses benefited from UPCIC’s retention under its reinsurance program. There were no other significant hurricane events experienced by the Company during 2019. The Company’s reinsurance program provides sufficient liquidity in the form of cash advances for paid losses ceded to the reinsurers. During 2019,2021, the Company routinely collected amounts ceded to reinsurers and, as in the past did not have to use funds in the Company’s investment portfolio.
See “Results of Operations” for more information.
The balance of restricted cash and cash equivalents as of December 31, 20192021 and 20182020 represents cash equivalents on deposit with certain regulatory agencies in the various states in which our Insurance Entities do business. Restricted cash and cash equivalents also includes collateral held by a reinsurance captive arrangement with one of the Insurance Entities reported as a VIE in the condensed consolidated financial statements. The amount of collateral held was $10.1 million as of December 31, 2020. See “Part II—Item 8—Note 18 (Variable Interest Entities)” for more information.
Liquidity is required at the holding company for us to cover the payment of general operating expenses and contingencies, dividends to shareholders (if and when authorized and declared by our Board of Directors), payment for the possible repurchase of our common stock (if and when authorized by our Board of Directors), payment of income taxes, net of amounts received from affiliates,our tax obligations, capital contributioncontributions to subsidiaries, if needed, and interest and principal payments on outstanding debt obligations if any.of the holding company. See “Part II—Item 8—Note 5 (Insurance Operations).” The declaration and payment of future dividends to our shareholders, and any future repurchases of our common stock, will be at the discretion of our Board of Directors and will depend upon many factors, including our operating results, financial condition, debt covenants and any regulatory constraints. New regulations or changes to existing regulations imposed on the Company and its affiliates may also impact the amount and timing of future dividend payments to the parent. Principal sources of liquidity for the holding company include dividends paid by our service entities generated from income earned on fees paid by the Insurance Entities to affiliated companies for general agency, inspections and claims adjusting services. Dividends are also paid from income earned from brokerage commissions earned on reinsurance contracts placed by BARC and policy fees. We also maintain high quality investments in our portfolio as a source of liquidity along with ongoing interest and dividend income from those investments. As discussed in “Item 8—Note 5 (Insurance Operations),” there are limitations on the dividends the Insurance Entities may pay to their immediate parent company, Protection Solutions, Inc. (“PSI”, formerly known as Universal Insurance Holding Company of Florida).
The maximum amount of dividends that can be paid by Florida insurance companies without prior approval of the FLOIR is subject to restrictions as referenced below and in “Item 8—Note 5 (Insurance Operations).” TheDividends from the Insurance Entities can only be paid from accumulated unassigned funds derived from net operating profits and net realized capital gains. Subject to such accumulated unassigned funds, the maximum dividend that may be paid by the Insurance Entities to PSI without prior approval (an “ordinary dividend”) is further limited to the lesser of statutory net income from operations of the preceding calendar year or statutory unassigned surplus as of the preceding year end. During the years ended December 31, 2019,2021 and 20182020 the Insurance Entities did not pay dividends to PSI.
On November 23, 2021, we entered into Note Purchase Agreements with certain institutional accredited investors and qualified institutional buyers pursuant to which we issued and sold $100 million of 5.625% Senior Unsecured Notes due 2026 and we intend to use the net proceeds for general corporate purposes, including growth capital. If necessary, the Company also has amounts available under our unsecured revolving loan as discussed in “Part II—Item 8—Note 7 (Long-term debt).”
Liquidity for the Insurance Entities is primarily required to cover payments for reinsurance premiums, claims payments including potential payments of catastrophe losses (offset by recovery of any reimbursement amounts under our reinsurance agreements), fees paid to affiliates for managing general agency services, inspections and claims adjusting services, agent commissions, premium and income taxes, regulatory assessments, general operating expenses, and interest and principal payments on debt obligations. The principal source of liquidity for the Insurance Entities consists of the revenue generated from the collection of premiums earned, net, premiums, interest and dividend income from the investment portfolio, the collection of reinsurance recoverable and financing fees.
Our insurance operations provide liquidity as premiums are generally received months or even years before potential losses are paid under the policies written. In the event of catastrophic events, many of our reinsurance agreements provide for “cash advances”advance” whereby reinsurers advance or prepay amounts to us, thereby providing liquidity, which we utilize in the claim settlement process. In addition, the Insurance Entities maintain substantial investments in highly liquid, marketable securities, which would generate funds upon sale. The average credit rating on our available-for-sale securities was A+ as of December 31, 2021 and December 31, 2020. Credit ratings are a measure of collection risk on invested assets. Credit ratings are provided by third party nationally recognized rating agencies and are periodically updated. Management establishes guidelines for minimum credit rating and overall credit rating for all investments. The duration of our available-for-sale securities was 4.4 years as of December 31, 2021 compared to 4.0 years at December 31, 2020. Duration is a measure of a bond’s sensitivity to interest rate changes and is used by management to limit the potential impact of longer-term investments.
The Insurance Entities are responsible for losses related to catastrophic events in excess of coverage provided by the Insurance Entities’ reinsurance programs orand retentions before our reinsurance protection commences. Also, the Insurance Entities are responsible for all other losses that otherwise may not be covered by the reinsurance programs and any amounts arising in the
event of a reinsurer default. Losses or a default by reinsurers may have a material adverse effect on either of the Insurance Entities or on our business, financial condition, results of operations and liquidity.
As noted above, the Tax Act has decreased the statutory corporate tax rate from 35.0% to 21.0% for tax years beginning after December 31, 2017. Going forward, the Company continues to expect an overall benefit from the Act, primarily from lower statutory tax rates offset by certain other provisions, principally the provision limiting the deductibility of certain executive compensation.
Capital Resources
Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks and facilitate continued business growth. The following table provides our stockholders’ equity, total long-term debt, total capital resources, debt-to-total capital ratio and debt-to-equity ratio for the periods presented (dollars in thousands):
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2021 | | 2020 |
Stockholders’ equity | | $ | 429,702 | | | $ | 449,262 | |
Total long-term debt | | 103,676 | | | 8,456 | |
Total capital resources | | $ | 533,378 | | | $ | 457,718 | |
| | | | |
Debt-to-total capital ratio | | 19.4 | % | | 1.8 | % |
Debt-to-equity ratio | | 24.1 | % | | 1.9 | % |
|
| | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
Stockholders’ equity | | $ | 493,901 |
| | $ | 501,633 |
|
Total long-term debt | | 9,926 |
| | 11,397 |
|
Total capital | | $ | 503,827 |
| | $ | 513,030 |
|
| | | | |
Debt-to-total capital ratio | | 2.0 | % | | 2.2 | % |
Debt-to-equity ratio | | 2.0 | % | | 2.3 | % |
The debt-to-total capital ratio is total long-term debt divided by total capital resources, whereas the debt-to-equity ratio is total long-term debt divided by stockholders’ equity. These ratios help management measure the amount of financing leverage in place in relation to equity and future leverage capacity.The Insurance Entities are required annually to comply with the NAIC RBC requirements. RBC requirements prescribe a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC’s RBC requirements are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of weak or deteriorating condition. As of December 31, 2019,2021, based on calculations using the appropriate NAIC RBC formula, the Insurance Entities’Entities reported and respective total adjusted capital was in excess of the requirements. Failure by the Insurance Entities to maintain the required level of statutory capital and surplus could result in the suspension of their authority to write new or renewal business, other regulatory actions, or ultimately, in the revocation of their certificate of authority by the FLOIR.
In 2006, UPCIC entered into a $25.0 million surplus note with the State Board of Administration of Florida (the “SBA”) under Florida’s Insurance Capital Build-Up Incentive Program (the “ICBUI”). The surplus note has a twenty-year term, and accrueswith quarterly payments of interest adjusted quarterly based on the 10-year Constant Maturity Treasury Index. UPCIC is in compliance with each of the loan’s covenants as implemented by rules promulgated by the SBA. An event of default will occur under the surplus note, as amended, if UPCIC: (i) defaults in the payment of the surplus note; (ii) fails to submit quarterly filings to the FLOIR; (iii) fails to maintain at least $50 million of surplus during the term of the surplus note, except for certain situations; (iv) misuses proceeds of the surplus note; (v) makes any misrepresentations in the application for the program; (vi) pays any dividend when principal or interest payments are past due under the surplus note; or (vii) fails to maintain a level of surplus and reinsurance sufficient to cover in excess of UPCIC’s 1-in-100 year probable maximum loss as determined by a hurricane loss model accepted by the Florida Commission on Hurricane Loss Projection Methodology as certified by the FLOIR annually. To avoid a penalty rate, UPCIC must maintain either a ratio of net written premium to surplus of 2:1 or a ratio of gross written premium of 6:1 according to a calculation method set forth in the surplus note. As of December 31, 2019,2021, UPCIC’s net written premium to surplus ratio and gross written premium to surplus ratio were in excess of the required minimums and, therefore, UPCIC is not subject to increases in interest rates. See “Part II—Item 8—Note 7 (Long-term debt)” for additional details. At December 31, 2019,2021, UPCIC was in compliance with the terms of the surplus note.note and with each of the loan’s covenants as implemented by rules promulgated by the SBA. Total adjusted capital surplus, which includes the surplus note, was in excess of regulatory requirements for both UPCIC and APPCIC.
As discussed in “Part II—Item 8—Note 7 (Long-term debt),” we entered into a credit agreement and related revolving loan with JPMorgan Chase Bank, N.A. in August 2021 which makes available an unsecured revolving credit facility with an aggregate commitment not to exceed $35.0 million. Borrowings under the Revolving Loan mature 364 days after the date of the loan. The Revolving Loan contains customary financial covenants. As of December 31, 2021, the Company was in compliance with all applicable covenants, including financial covenants. We had not drawn any amounts under the Revolving Loan as of December 31, 2021.
In November 2021, we completed a private placement offering through which we issued and sold $100 million of 5.625% Senior Unsecured Notes due 2026 (the “Notes”) to certain institutional accredited investors and qualified institutional buyers. The Notes mature on November 26, 2026, at which time the entire $100.0 million of principal is due and payable. At any time on or after November 23, 2023, the Company may redeem all or part of the Notes. See “Part II—Item 8—Note 7 (Long-term debt)” for additional details. As of December 31, 2021, we were in compliance with all applicable covenants, including financial covenants.
We will also continue to evaluate opportunities to access the debt capital markets to raise additional capital. We anticipate any proceeds would be used for general corporate purposes, including investing in the capital and surplus of the Insurance Entities.
In addition to the liquidity generally provided from operations, we maintain a conservative, well-diversified investment portfolio, predominantly comprised of fixed income securities with an average credit rating of A+, that focuses on capital preservation and providing an adequate source of liquidity for potential claim payments and other cash needs. The portfolio’s secondary investment objective is to provide a total rate of return with emphasis on investment income. Historically, we have consistently generated funds from operations, allowing our cash and invested assets to grow. We have not had to liquidate investment holdings to fund either operations or financing activities.
Impact of COVID-19 Pandemic
Towards the latter part of 2020 there had been a significant recovery in the fair value of invested assets since the low point on or about March 23, 2020 and in the third and fourth quarters of 2020, the Company sold many of its securities in an unrealized gain position to take advantage of the recovery in asset values. The proceeds from the sales of available-for-sale debt securities in the third and fourth quarters of 2020 have been fully reinvested. The sales took advantage of increased market prices occurring on our available-for-sale debt investment portfolio. As a result of the sales and reinvestment of available-for-sale debt securities, it is expected that future portfolio investment income will lower, as reinvestment rates reflect market rates which are below the book yields of the securities sold.
The impact of the COVID-19 pandemic on the credit markets remains a key risk as the world continues to navigate its consequences and the efforts taken by governments to accelerate and stimulate a financial recovery. We remain in regular contact with our advisors to monitor the credit quality of the issuers of the securities in our portfolio and discuss appropriate responses to credit downgrades or changes in companies’ credit outlook. We believe these measures, when combined with the inherent liquidity generated by our business model and in our investment portfolio, will allow us to continue to meet our short- and long-term obligations.
Looking Forward
We continue to monitor a range of financial metrics related to our business. Although we have not yet experienced material adverse impacts on our business or liquidity, conditions are subject to change depending on the extent of the economic downturn, and the pace and extent of an economic recovery. Significant uncertainties exist with the potential long-term impact of the COVID-19 pandemic, including unforeseen newly emerging risks that could affect us. We will continue to monitor the broader economic impacts of the COVID-19 pandemic and its impact on our operations and financial condition including liquidity and capital resources.
Common Stock Repurchases
We may repurchase shares from time to time at our discretion, based on ongoing assessments of our capital needs, the market price of our common stock and general market conditions. We will fund the share repurchase program with cash from operations.
In total, during the year ended December 31, 2019,2021, we repurchased an aggregate of 2,337,825116,886 shares of our common stock in the open market at an aggregate purchase price of $66.2$1.6 million. Also see “Part II, II—Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Registrant Purchases of Equity Securities” for share repurchase activity during 20192021 and the three months ended December 31, 2019.
2021.
Cash Dividends
The following table summarizes the dividends declared and paid by the Company during the year ended December 31, 2019:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Dividend | | Shareholders | | Dividend | | Cash Dividend |
2021 | | Declared Date | | Record Date | | Payable Date | | Per Share Amount |
First Quarter | | March 1, 2021 | | March 11, 2021 | | March 18, 2021 | | $ | 0.16 | |
Second Quarter | | April 22, 2021 | | May 14, 2021 | | May 21, 2021 | | $ | 0.16 | |
Third Quarter | | July 19, 2021 | | August 2, 2021 | | August 9, 2021 | | $ | 0.16 | |
Fourth Quarter | | November 15, 2021 | | December 10, 2021 | | December 17, 2021 | | $ | 0.29 | |
|
| | | | | | | | | | |
| | Dividend | | Shareholders | | Dividend | | Cash Dividend |
2019 | | Declared Date | | Record Date | | Payable Date | | Per Share Amount |
First Quarter | | January 31, 2019 | | March 11, 2019 | | March 25, 2019 | | $ | 0.16 |
|
Second Quarter | | April 10, 2019 | | May 3, 2019 | | May 10, 2019 | | $ | 0.16 |
|
Third Quarter | | June 5, 2019 | | July 3, 2019 | | July 17, 2019 | | $ | 0.16 |
|
Fourth Quarter | | November 14, 2019 | | December 13, 2019 | | December 20, 2019 | | $ | 0.29 |
|
Reinsurance Recoverable
The following table provides total unpaid loss and LAE, net of related reinsurance recoverable for the dates presented (in thousands):
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
Unpaid loss and LAE, net | | $ | 83,468 | | | $ | 75,471 | |
IBNR loss and LAE, net | | 146,888 | | | 127,472 | |
Total unpaid loss and LAE, net | | $ | 230,356 | | | $ | 202,943 | |
| | | | |
Reinsurance recoverable on unpaid loss and LAE | | $ | 6,560 | | | $ | 18,957 | |
Reinsurance recoverable on IBNR loss and LAE | | 109,300 | | | 100,565 | |
Total reinsurance recoverable on unpaid loss and LAE | | $ | 115,860 | | | $ | 119,522 | |
|
| | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 |
Unpaid loss and LAE, net | | $ | 54,156 |
| | $ | 55,765 |
|
IBNR loss and LAE, net | | 90,383 |
| | 23,699 |
|
Total unpaid loss and LAE, net | | $ | 144,539 |
| | $ | 79,464 |
|
| | | | |
Reinsurance recoverable on unpaid loss and LAE | | $ | 9,119 |
| | $ | 47,103 |
|
Reinsurance recoverable on IBNR loss and LAE | | 114,102 |
| | 346,262 |
|
Total reinsurance recoverable on unpaid loss and LAE | | $ | 123,221 |
| | $ | 393,365 |
|
Statutory Loss Ratios
Underwriting results of insurance companies are frequently measured by their combined ratios, which is the sum of the loss and expense ratios described in the following paragraph. However, investment income, federal income taxes and other non-underwriting income or expense are not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and service operations. Underwriting results are considered profitable when the combined ratio is under 100% and unprofitable when the combined ratio is over 100%.
The following table provides the statutory loss ratios, expense ratios and combined ratios for the periods indicated for the Insurance Entities:
|
| | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 |
Loss and LAE Ratio (1) | | | | |
UPCIC | | 72 | % | | 63 | % |
APPCIC | | 26 | % | | 63 | % |
Expense Ratio (1) | | |
| | |
|
UPCIC | | 36 | % | | 35 | % |
APPCIC | | 53 | % | | 70 | % |
Combined Ratio (1) | | |
| | |
|
UPCIC | | 108 | % | | 98 | % |
APPCIC | | 79 | % | | 133 | % |
| |
(1) | The ratios are net of ceded premiums and losses and LAE, including premiums ceded to our catastrophe reinsurers which comprise a significant cost, and losses and LAE ceded to reinsurers. The expense ratio includes management fees and commissions, which are based on market rates, paid to an affiliate of the Insurance Entities in the amount of $104.6 million and $95.1 million for UPCIC for the years ended December 31, 2019 and 2018, respectively, and $0.6 million for each of the years ended December 31, 2019 and 2018 for APPCIC. The management fees and commissions paid to the affiliate are eliminated in consolidation. |
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
Loss and LAE Ratio (1) | | | | |
UPCIC | | 77 | % | | 84 | % |
APPCIC | | 62 | % | | 34 | % |
Expense Ratio (1) | | | | |
UPCIC | | 35 | % | | 36 | % |
APPCIC | | (17) | % | | 50 | % |
Combined Ratio (1) | | | | |
UPCIC | | 112 | % | | 120 | % |
APPCIC | | 45 | % | | 84 | % |
(1)The ratios are net of ceded premiums and losses and LAE, including premiums ceded to our catastrophe reinsurers which comprise a significant cost, and losses and LAE ceded to reinsurers. The expense ratio includes management fees and commissions, which are based on market rates, paid to an affiliate of the Insurance Entities in the amount of $135.2 million and $118.1 million for UPCIC for the years ended December 31, 2021 and 2020, respectively, and $0.9 million for each of the years ended December 31, 2021 and 2020 for APPCIC. The management fees and commissions paid to the affiliate are eliminated in consolidation.
Ratings
The Insurance Entities’ financial strength is rated by a rating agency to measure the Insurance Entities’ ability to meet their financial obligations to its policyholders. The agency maintains a letter scale Financial Stability Rating®Rating® system ranging from A”“A” (A double prime) to L“L” (licensed by state regulatory authorities).
In December 2019,2021, Demotech, Inc. affirmed the Financial Stability Rating®Rating® of “A” for the Insurance Entities. According to Demotech, Inc., the assigned rating represents a company’s continued positive surplus related to policyholders, liquidity of invested assets, an acceptable level of financial leverage, reasonable loss and LAE reserves, and realistic pricing. The ratings of the Insurance Entities are subject to at least annual review by Demotech, Inc., and may be revised upward or downward or revoked at the sole discretion of Demotech, Inc. Financial Stability Ratings® are primarily directed towards policyholders, and are not evaluations directed toward the protection of investors in a company, including holders of a company’s common stock, and are not recommendations to buy, sell or hold securities. See “Item“Part I—Item 1A—Risk Factors—Risks Relating to Our Business—Business and Operations—A downgrade in our Financial Stability Rating®Rating® may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition.”
The 5.625% Senior Unsecured Notes due 2026 were assigned a rating of “A” by Egan-Jones Ratings Company in October 2021. There are three notches in the rating categories assigned by Egan-Jones Ratings Company (e.g., A- A, and A+), except for AAA and those deep into speculative grade, i.e., CC, C, and D, which do not have notches. According to Egan-Jones Ratings Company, the assigned rating pertains solely to their view of current and prospective credit quality. Their rating does not address pricing, liquidity, or other risks associated with holding investments in the issuer (UVE). Their rating is dependent on numerous factors including the reliability, accuracy, and quality of the data used in determining the credit rating.
Contractual ObligationsOff-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity, or capital resources of the Company, except for multi-year reinsurance contract commitments for future years that will be recorded at the commencement of the coverage period. See “Part II—Item 8—Note 15 (Commitments and Contingencies)” for more information.
Material Cash Requirements
The following table represents our contractual obligationsmaterial cash requirements for which cash flows are fixed or determinable as of December 31, 20192021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | Next 12 months | | Beyond 12 months | | | | |
Reinsurance payable and multi-year commitments (1) | | $ | 493,306 | | | $ | 282,930 | | | $ | 210,376 | | | | | |
Unpaid losses and LAE, direct (2) | | 346,216 | | | 195,266 | | | 150,950 | | | | | |
Long-term debt (3) | | 135,381 | | | 7,195 | | | 128,186 | | | | | |
Total material cash requirements | | $ | 974,903 | | | $ | 485,391 | | | $ | 489,512 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | Over 5 years |
Reinsurance payable and multi-year commitments (1) | | $ | 325,743 |
| | $ | 122,581 |
| | $ | 203,162 |
| | $ | — |
| | $ | — |
|
Unpaid losses and LAE, direct (2) | | 267,760 |
| | 163,601 |
| | 77,918 |
| | 19,279 |
| | 6,962 |
|
Long-term debt | | 10,514 |
| | 1,629 |
| | 4,738 |
| | 3,035 |
| | 1,112 |
|
Total contractual obligations | | $ | 604,017 |
| | $ | 287,811 |
| | $ | 285,818 |
| | $ | 22,314 |
| | $ | 8,074 |
|
| |
(1) | The 1-3 years amount represents the payment of reinsurance premiums payable under multi-year commitments. See “Item 8—Note 15 (Commitments and Contingencies).” |
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(2) | There are generally no notional or stated amounts related to unpaid losses and LAE. Both the amounts and timing of future loss and LAE payments are estimates and subject to the inherent variability of legal and market conditions affecting the obligations and make the timing of cash outflows uncertain. The ultimate amount and timing of unpaid losses and LAE could differ materially from the amounts in the table above. Further, the unpaid losses and LAE do not represent all the obligations that will arise under the contracts, but rather only the estimated liability incurred through December 31, 2019. Unpaid losses and LAE are net of estimated subrogation recoveries. In addition, these balances exclude amounts recoverable from our reinsurance program. See “Item 8—Note 4 (Reinsurance).” |
(1)Amount represents the payment of reinsurance premiums payable under multi-year commitments. See “Part II—Item 8—Note 15 (Commitments and Contingencies).”
(2)There are generally no notional or stated amounts related to unpaid losses and LAE. Both the amounts and timing of future loss and LAE payments are estimates and subject to the inherent variability of legal and market conditions affecting the obligations and make the timing of cash outflows uncertain. The ultimate amount and timing of unpaid losses and LAE could differ materially from the amounts in the table above. Further, the unpaid losses and LAE do not represent all the obligations that will arise under the contracts, but rather only the estimated liability incurred through December 31, 2021. Unpaid losses and LAE are net of estimated subrogation recoveries. In addition, these balances exclude amounts recoverable from our reinsurance program. See “Part II—Item 8—Note 4 (Reinsurance).”
(3)Long-term debt consists of a Surplus note and 5.625% Senior unsecured notes. See “Part II—Item 8—Note 7 (Long-term debt).”
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of the general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the cost of paying losses and LAE.
Insurance premiums are established before we know the amount of loss and LAE and the extent to which inflation may affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to charge adequate rates, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation also affects the market value of our investment portfolio and the investment rate of return. Any future economic changes which result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred loss and LAE and thereby materially adversely affect future liability requirements.
Arrangements with Variable Interest Entities We entered into a reinsurance captive arrangement with a VIE in the normal course of business, and consolidated the VIE since we are the primary beneficiary.
For a further discussion of our involvement with the VIE, see “Part II—Item 8—Note 2 (Summary of Significant Accounting Policies)” and “Item 8—Note 18 (Variable Interest Entities).”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Liability for Unpaid Losses and LAE
A liability, net of estimated subrogation, is established to provide for the estimated costs of paying losses and LAE under insurance policies the Insurance Entities have issued. Underwriting results are significantly influenced by an estimate of a liability for unpaid losses and LAE. The liability is an estimate of amounts necessary to settle all outstanding claims, including claims that have been incurred, but not yet reported as of the financial statement date. The process of estimating loss reserves requires significant judgment due to a number of variables, such as the type, severity and jurisdiction of loss, economic conditions including inflation, social attitudes, judicial decisions and legislative development and changes in claims handling procedures. These variables will inherently result in an ultimate liability that will differ from initial estimates. See “Item“Part I—Item 1A—Risk Factors—Risks Relating to Our Business—Business and Operations—Actual claims incurred have exceeded, and in the future may exceed, reserves established for claims, adversely affecting our operating results and financial condition.” We revise our reserve for unpaid losses as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we determine the adjustments are necessary. We estimate and accrue our right to subrogate reported or estimated claims against other parties. Subrogated claims are recorded at amounts estimated to be received from the subrogated parties, net of expenses and netted against unpaid losses and LAE.
See “Item“Part II—Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for a discussion of the Company’s basis and methodologies used to establish its liability for unpaid losses and LAE along with the following quantitative disclosures:
•Five-year accident year table on incurred claim and allocated claim adjustment expenses, net of reinsurance including columns of:
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◦ | IBNR—Total of Incurred-but-not-reported liabilities plus expected development (redundancy) on reported claims by accident year, and |
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◦ | Claim counts—cumulative number of reported claims by accident year. |
◦IBNR—Total of Incurred-but-not-reported liabilities plus expected development (redundancy) on reported claims by accident year, and
◦Claim counts—cumulative number of reported claims by accident year.
•Five-year accident year table on cumulative paid claims and allocated claim adjustment expenses, net of reinsurance,
•Reconciliation of net incurred and paid claims development tables to the liability for unpaid losses and LAE in the consolidated balance sheet,
•Duration—a table of the average historical claims duration for the past five years, and
•Reconciliation of the change in liability for unpaid losses and LAE presented in the consolidated financial statements.
We utilize independent actuaries to help establish liabilities for unpaid losses, anticipated loss recoveries and LAE. We do not discount the liability for unpaid losses and LAE for financial statement purposes. In establishing the liability for unpaid losses and LAE, actuarial judgment is relied upon in order to make appropriate assumptions to estimate a best estimate of ultimate losses. There are inherent uncertainties associated with this estimation process, especially when a company is undergoing changes in its claims settlement practices, when a company has limited experience in a certain area or when behaviors of policyholders are influenced by external factors and/or market dynamics. As an example, a dramatic change occurred during calendar year 2015 when we realigned our adjusting teams as well as launched our Fast Track initiative, reducing settlement costs and strengthening case reserve adequacy for claims reported during the year. These changes have had a meaningful influence on development pattern selections applied to 2013 through 2017 accident year claims in the reserving estimates for each of the methods described in “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses).” More recently, since 2016 there has been a significant increase in efforts to pursue subrogation against third parties responsible for property damage losses to our insureds. As a result, anticipated subrogation recoveries are reviewed and estimated on a stand-alone basis in the Company’s reserve analysis. Market dynamics in Florida include the use of assignments of benefits (“AOB”) and the resulting increase in litigation against the Company. As a result of the use of AOBs, as well as the continued overall increase in represented claims and claims-related abuses in Florida, we have increased our estimates of ultimate losses for the most recent and prior accident years.
Factors Affecting Reserve Estimates
Reserve estimates are developed based on the processes and historical development trends discussed in “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” to the consolidated financial statements. These estimates are considered in conjunction with known facts and interpretations of circumstances and factors including our experience with similar cases, actual claims paid, differing payment patterns and pending levels of unpaid claims, loss management programs, product mix and
contractual terms, changes in law and regulation, judicial decisions, and economic conditions. When these types of changes are experienced, actuarial judgment is applied in the determination and selection of development factors in order to better reflect new trends or expectations. For example, if a change in law is expected to have a significant impact on the development of claim severity, actuarial judgment is applied to determine appropriate development factors that will most accurately reflect the expected impact on that specific estimate. This example appropriately describes the reserving methodology selection for use in estimating sinkhole liabilities after the passing of legislation, as noted in “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” to the consolidated financial statements. Another example would be when a change in economic conditions is expected to affect the cost of repairs to property; actuarial judgment is applied to
determine appropriate development factors to use in the reserve estimate that will most accurately reflect the expected impacts on severity development.
Changes in homeowners current year claim severity are generally influenced by inflation in the cost of building materials, the cost of construction and property repair services, the cost of replacing home furnishings and other contents, the types of claims that qualify for coverage, the presence of third party representation, such as legal or repair contractors which(which serve to inflate claim expenses,expenses) and other economic and environmental factors. We employ various loss management programs to mitigate the effects of these factors.
Key assumptions that may materially affect the estimate of the reserve for loss and LAE relate to the effects of emerging claim and coverage issues. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claimclaims and coveragecoverages may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent, lengthening the time to final settlement, or by increasing the number or size of claims. Key assumptions that are premised on future emergence that are inconsistent with historical loss reserve development patterns include but are not limited to:
•Adverse changes in loss cost trends, including inflationary pressures in home repair costs;
•Judicial expansion of policy coverage and the impact of new theories of liability; and
•Plaintiffs targeting property and casualty insurers in purported class action litigation related to claims-handling and other practices.
As loss experience for the current year develops for each type of loss, the reserves for loss and LAE are monitored relative to initial assumptions until they are judged to have sufficient statistical credibility. From that point in time and forward, reserves are re-estimated using statistical actuarial processes to reflect the impact loss trends have on development factors incorporated into the actuarial estimation processes.
Causes of Reserve Estimate Uncertainty
Since reserves are estimates of the unpaid portions of claims and claims expenses that have occurred, the establishment of appropriate reserves, including reserves for catastrophes, requires regular reevaluation and refinement of estimates to determine ultimate loss and LAE estimates.
At each reporting date, the highest degree of uncertainty in reserve estimates arises from claims remaining to be settled for the current accident year and the most recent preceding accident year, and claims that have occurred but have not been reported. The estimate for the current accident year contains the greatest degree of uncertainty because it contains the greatest proportion of losses that have not been reported or settled but must be estimated as of the current reporting date. During the first year after the end of an accident year, a large portion of the total losses for that accident year are settled. When accident year losses paid through the end of the first year following the initial accident year are incorporated into updated actuarial estimates, the trends inherent in the settlement of claims emerge more clearly. Consequently, this is the point in time at which the largest re-estimates of losses for an accident year can occur. After the second year, the losses paid for the accident year typically relate to claims that are more difficult to settle, such as those involving litigation.
Reserves for Catastrophe Losses
Loss and LAE reserves also include reserves for catastrophe losses. Catastrophe losses are an inherent risk of the property-casualty insurance industry that have contributed, and will continue to contribute, to potentially material year-to-year fluctuations in results of operations and financial position. A catastrophe is an event that produces significant insured losses before reinsurance and involves multiple first party policyholders, or an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are commonly caused by various natural events including high winds, tornadoes, wildfires, winter storms, tropical storms and hurricanes.
The estimation of claims and claims expense reserves for catastrophes also comprises estimates of losses from reported and unreported claims, primarily for damage to property. In general, estimates for catastrophe reserves are based on claim adjuster inspections and the application of historical loss development factors as described previously and in “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” to the consolidated financial statements. However, depending on the nature
of the catastrophe, as noted above, the estimation process can be further complicated. For example, for hurricanes, complications could include the inability of insureds to be able to promptly report losses, limitations placed on claims adjusting staff affecting their ability to inspect losses, determining whether losses are covered by our homeowners policy (generally for damage caused by wind or wind driven rain) or specifically excluded coverage caused by flood, estimating additional living expenses or assessing the impact of demand surge and exposure to mold damage. The effects of numerous other considerations, include the timing of a catastrophe in relation to other events, such as at or near the end of a financial reporting period, which can affect the availability of information needed to estimate reserves for that reporting period. In these situations, practices are adapted to accommodate these circumstances in order to determine a best estimate of losses from a catastrophe.
Key Actuarial Assumptions That Affect the Loss and LAE Estimate
The aggregation of estimates for reported losses and IBNR forms the reserve liability recorded in the Consolidated Balance Sheets.
At any given point in time, the recorded loss and LAE reserves represent our best estimate of the ultimate settlement and administration cost of insured claims incurred and unpaid. Since the process of estimating loss and LAE reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, ultimate liability may exceed or be less than these estimates. Reserves for losses and LAE are revised as additional information becomes available, and adjustments, if any, are reflected in earnings in the periods in which they are determined.
In selecting development factors and averages described in “Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” to the consolidated financial statements, due consideration is given to how the historical experience patterns change from one year to the next over the course of several consecutive years of recent history. Predictions surrounding these patterns drive the estimates that are produced by each method, and are based on statistical techniques that follow standard actuarial practices.
In compliance with annual statutory reporting requirements, our appointed independent actuary provides a Statement of Actuarial Opinion (“SAO”) indicating that carried loss and LAE reserves recorded at each annual balance sheet date make a reasonable provision for all of the Insurance Entities’ unpaid loss and LAE obligations under the terms of contracts and agreements with our policyholders. Recorded reserves are compared to the indicated range provided in the actuary’s report accompanying the SAO. At December 31, 2019,2021, the recorded amount for net loss and LAE falls within the range determined by the Company’s appointed independent actuaries and approximates their best estimate.actuary.
Potential Reserve Estimate Variability
The methods employed by actuaries include a range of estimated unpaid losses, each reflecting a level of uncertainty. Projections of loss and LAE liabilities are subject to potentially large variability in the estimation process since the ultimate disposition of claims incurred prior to the financial statement date, whether reported or not, is subject to the outcome of events that have not yet occurred. Examples of these events include jury decisions, court interpretations, legislative changes, public attitudes and social/economic conditions such as inflation. Any estimate of future costs is subject to the inherent limitation on one’s ability to predict the aggregate course of future events. It should therefore be expected that the actual emergence of losses and LAE will vary, perhaps materially, from any estimate.
In selecting the range of reasonable estimates, the range of indications produced by the various methods is inspected,evaluated, the relative strengths and weaknesses of each method are considered, and from those inputs a range of estimates can be selected. For reasons cited above, this range of estimated ultimate losses is typically smaller for older, more mature accident periods and greater for more recent, less mature accident periods. The greatest level of uncertainty is associated with the most recent accident years, and particularly years during which catastrophe events occurred.
The inherent uncertainty associated with our loss and LAE liability is magnified due to our concentration of property business in catastrophe-exposed and litigious states, primarily Florida. In 2018, for example, loss and expense payments for Hurricane Irma claims exceeded initial liability estimates that were established at year-end 2017, which was shortly after the event occurred. This unexpected development was partially due to the influence of plaintiff attorneys in the claim filing process; both at initial contact prior to coverage validation or damage assessment, and after claims were settled and closed which resulted in a large number of claims being reopened during the year. In 2019, UPCIC continued to experience unanticipated unfavorable development on losses from claims being reopened and new claims being opened due to public adjusters encouraging policyholders to file new claims. Due to the relatively low frequency and inherent uncertainty of catastrophe events, the parameters utilized in loss estimation methodologies are updated whenever new information emerges.
The following table summarizes the effect on net loss and LAE reserves and net income, net of tax in the event of reasonably likely changes in the severity of claims considered in establishing loss and LAE reserves. The range of reasonably likely changes in the severity of our claims was established based on a review of changes in loss year development and applied loss and LAE reserves as a whole. The selected range of changes does not indicate what could be the potential best or worst case or likely scenarios (dollars in thousands):
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Year ended December 31, 2021 |
| | | | Percent Change in |
Change in Reserves | | Reserves | | Net Income |
-20.0% | | $ | 276,973 | | | 244 | % |
-15.0% | | 294,284 | | | 183 | % |
-10.0% | | 311,594 | | | 122 | % |
-5.0% | | 328,905 | | | 61 | % |
Base | | 346,216 | | | — | |
5.0% | | 363,527 | | | (61) | % |
10.0% | | 380,838 | | | (122) | % |
15.0% | | 398,148 | | | (183) | % |
20.0% | | 415,459 | | | (244) | % |
Adequacy of Reserve Estimates
We believe our net loss and LAE reserves are appropriately established based on available methodology, facts, technology, laws and regulations. We calculate and record a single best reserve estimate, in conformance with generally accepted actuarial standards, for reported and unreported losses and LAE losses and as a result we believe no other estimate is better than our recorded amount.
Due to the uncertainties involved, the ultimate cost of losses and LAE may vary materially from recorded amounts, which are based on our best estimates. The liability for unpaid losses and LAE at December 31, 20192021 is $267.8$346.2 million.
Reinsurance
In the normal course of business, we seek to reduce the risk of loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. While ceding premiums to reinsurers reduces our risk of exposure in the event of catastrophic losses, it also reduces our potential for greater profits in the event that such catastrophic events do not occur. We believe that the extent of our reinsurance level of protection is typical of, or exceeds, that of other insurers actively writing in the Florida homeowners insurance market. Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance agreement and consistent with the establishment of our gross liability. The Insurance Entities’ reinsurance policies do not relieve them from their obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses; consequently, allowances are established for amounts deemed uncollectible from reinsurers. No such allowance was deemed necessary as of December 31, 2019.
Recent Accounting Pronouncements Not Yet Adopted
None
In December 2019, the Financial Accounting Standards Board (“FASB”) revised U.S. GAAP with the issuance of Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions and clarifying certain requirements regarding franchise taxes, goodwill, consolidated tax expenses and annual effective tax rate calculations. The ASU is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the impact of this standard on our consolidated financial statements.
In June 2016, the FASB revised U.S. GAAP with the issuance of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), that introduces a new process for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new ASU will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income and (4) beneficial interests in securitized financial assets. The ASU changes the current practice of recording a permanent write down (other than temporary impairment) for probable credit losses, which is more restrictive than the new ASU requirement that would estimate credit losses, then recorded through a temporary allowance account that can be re-measured as estimated credit losses change. The ASU further limited estimated credit losses relating to available-for-sale securities to the amount which fair value is below amortized cost. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We do not believe that this standard will have a material impact on our consolidated financial statements.
In August 2018, the FASB revised U.S. GAAP with the issuance of ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU removes, modifies and adds certain disclosure requirements associated with fair value measurements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. We are currently evaluating our timeline for the adoption of this ASU, which only affects the presentation of certain disclosures and is not expected to impact our results of operations, financial position or liquidity.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market risk is the potential for economic losses due to adverse changes in fair market value of available-for-sale debt securities, equity securities (“Financial Instruments”) and investment real estate. We carry all of our Financial Instruments at fair market value and investment real estate at net book value in our statement of financial condition. Our investment portfolio as of December 31, 20192021 is comprised of available-for-sale debt securities and equitiesequity securities, carried at fair market value, which exposeexposes us to changing market conditions, specifically interest rates and equity price changes.
The primary objectives of the investment portfolio are the preservation of capital and providing adequate liquidity for potential claim payments and other cash needs. The portfolio’s secondary investment objective is to provide a total rate of return with an emphasis on investment income. None of our investments in risk-sensitive Financial Instruments were entered into for trading purposes.
See “Item“Part II—Item 8—Note 3 (Investments)” and “Item 1—Business—Investments” for more information about our Financial Instruments.
Interest Rate Risk
Interest rate risk is the sensitivity of the fair market value of a fixed-rate Financial Instrument to changes in interest rates. Generally, when interest rates rise, the fair market value of our fixed-rate Financial Instruments declines over the remaining term of the agreement.declines.
The following tables provide information about our fixed income Financial Instruments as of December 31, 20192021 compared to December 31, 2018,2020, which are sensitive to changes in interest rates. The tables present the expected cash flows of Financial
Instruments based on years to effective maturity using amortized cost compared to fair market value and the related book yield compared to coupon yield (dollars in thousands):
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| | December 31, 2019 |
| | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Other | | Total |
Amortized cost | | $ | 106,961 |
| | $ | 107,705 |
| | $ | 59,350 |
| | $ | 124,596 |
| | $ | 98,477 |
| | $ | 331,082 |
| | $ | 165 |
| | $ | 828,336 |
|
Fair market value | | $ | 107,259 |
| | $ | 108,516 |
| | $ | 60,105 |
| | $ | 128,599 |
| | $ | 101,345 |
| | $ | 349,259 |
| | $ | 201 |
| | $ | 855,284 |
|
Coupon rate | | 2.46 | % | | 2.58 | % | | 3.06 | % | | 3.52 | % | | 3.50 | % | | 3.64 | % | | 7.50 | % | | 3.28 | % |
Book yield | | 2.46 | % | | 2.44 | % | | 2.77 | % | | 3.27 | % | | 3.03 | % | | 3.47 | % | | 6.31 | % | | 3.08 | % |
* Years to effective maturity - 3.5 years | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Other | | Total |
Amortized cost | | $ | 123,110 |
| | $ | 109,690 |
| | $ | 114,580 |
| | $ | 55,542 |
| | $ | 121,363 |
| | $ | 301,454 |
| | $ | 5,388 |
| | $ | 831,127 |
|
Fair market value | | $ | 122,333 |
| | $ | 108,564 |
| | $ | 112,917 |
| | $ | 54,309 |
| | $ | 119,945 |
| | $ | 297,214 |
| | $ | 5,156 |
| | $ | 820,438 |
|
Coupon rate | | 2.04 | % | | 2.35 | % | | 2.63 | % | | 2.99 | % | | 3.32 | % | | 3.90 | % | | 6.15 | % | | 3.11 | % |
Book yield | | 1.88 | % | | 2.24 | % | | 2.43 | % | | 2.83 | % | | 3.18 | % | | 3.68 | % | | 5.96 | % | | 2.94 | % |
* Years to effective maturity - 3.5 years | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Other | | Total |
Amortized cost | | $ | 30,183 | | | $ | 97,826 | | | $ | 99,528 | | | $ | 152,982 | | | $ | 180,558 | | | $ | 499,417 | | | $ | 698 | | | $ | 1,061,192 | |
Fair market value | | $ | 30,163 | | | $ | 97,433 | | | $ | 98,751 | | | $ | 150,046 | | | $ | 176,711 | | | $ | 486,657 | | | $ | 694 | | | $ | 1,040,455 | |
Coupon rate | | 1.34 | % | | 1.82 | % | | 2.23 | % | | 2.62 | % | | 2.65 | % | | 2.59 | % | | 3.53 | % | | 2.46 | % |
Book yield | | 0.50 | % | | 0.71 | % | | 0.87 | % | | 1.10 | % | | 1.28 | % | | 1.70 | % | | 3.54 | % | | 1.34 | % |
* Years to effective maturity - 5.4 years | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Other | | Total |
Amortized cost | | $ | 31,333 | | | $ | 58,790 | | | $ | 107,735 | | | $ | 179,872 | | | $ | 133,872 | | | $ | 303,880 | | | $ | 165 | | | $ | 815,647 | |
Fair market value | | $ | 31,578 | | | $ | 58,868 | | | $ | 108,412 | | | $ | 180,011 | | | $ | 134,740 | | | $ | 306,041 | | | $ | 211 | | | $ | 819,861 | |
Coupon rate | | 2.75 | % | | 1.88 | % | | 2.15 | % | | 3.12 | % | | 2.51 | % | | 2.41 | % | | 7.50 | % | | 2.52 | % |
Book yield | | 2.12 | % | | 0.59 | % | | 0.84 | % | | 0.71 | % | | 1.07 | % | | 1.59 | % | | 6.31 | % | | 1.16 | % |
* Years to effective maturity - 5.4 years | | | | | | | | | | | | |
All securities, except those with perpetual maturities, were categorized in the tables above utilizing years to effective maturity. Effective maturity takes into consideration all forms of potential prepayment, such as call features or prepayment schedules, that shorten the lifespan of contractual maturity dates.
Equity Price Risk
Equity price risk is the potential for loss in fair value of Financial Instruments in common stock and mutual funds from adverse changes in the prices of those Financial Instruments.
The following table provides information about the Financial Instruments in our investment portfolio subject to price risk as of the dates presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| | Fair Value | | Percent | | Fair Value | | Percent |
Equity securities: | | | | | | | | |
Common stock | | $ | 3,683 | | | 7.8 | % | | $ | 2,435 | | | 2.9 | % |
Mutual funds | | 43,651 | | | 92.2 | % | | 82,452 | | | 97.1 | % |
Total equity securities | | $ | 47,334 | | | 100.0 | % | | $ | 84,887 | | | 100.0 | % |
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| | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | Fair Value | | Percent | | Fair Value | | Percent |
Equity securities: | | | | | | | | |
Common stock | | $ | 2,377 |
| | 5.4 | % | | $ | 15,564 |
| | 24.6 | % |
Mutual funds | | 41,340 |
| | 94.6 | % | | 47,713 |
| | 75.4 | % |
Total equity securities | | $ | 43,717 |
| | 100.0 | % | | $ | 63,277 |
| | 100.0 | % |
A hypothetical decrease of 20% in the market prices of each of the equity securities held at December 31, 20192021 and 20182020 would have resulted in a decrease of $8.7$9.5 million and $12.7$17.0 million, respectively, in the fair market value of those securities.
The COVID-19 pandemic presents new and emerging uncertainty to the financial markets. See further discussion in “Part II—Item 7— Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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ItemITEM 8. | Financial Statements and supplementary dataFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Universal Insurance Holdings, Inc. and Subsidiaries
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying balance sheets of Universal Insurance Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, the related statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2019,2021, and the related notes and schedules (collectively referred to as the “financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019,2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in the COSO framework.
Basis for Opinion
The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management's Report on Internal Control over Financial Reporting.”Reporting”. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit period of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Liability for Unpaid Losses and Loss Adjustment Expenses
As described in Note - Refer to Notes 2 and 17 to the financial statements, theFinancial Statements
Critical Audit Matter Description
The Company’s estimated liability for unpaid losses and loss adjustment expenseexpenses (LAE) totaled $267.8$346.2 million at December 31, 2019.2021. The balance consists of three components: (1) an amount determined from current loss reports for individual cases reported but unpaid based on past experience of similar cases settled, (2) an amount for claims incurred but not reported and development of reported claims based on a range of actuarial methodologies and assumptions, and (3) an amount for expenses for investigating and the settlement of reported and unreported claims. Estimating the liability for unpaid losses and LAE requires significant judgment relating to factors such as claim development patterns, severity, type and jurisdiction of loss, economic conditions, legislative developmentdevelopments, and a variety of actuarial assumptions. Management engages an independent actuarial firm to prepare an actuarial analysis of unpaid losses and LAE and provide a statement of actuarial opinion on management’s estimate of unpaid losses and LAE. Estimating the liability for unpaid losses and LAE is inherently uncertain, dependent on management judgementmanagement’s judgment, and significantly impacted by claim and actuarial factors and conditions whichthat may change over time. The ultimate settlement of unpaid losses and LAE may vary materially from the recorded liability, and such variance may adversely affect the Company’s financial results. For these reasons, we identified the estimate of unpaid losses and LAE as a critical audit matter, as it involved especially subjective auditor judgment.
The primaryHow the Critical Audit Matter was Addressed in the Audit
Our audit procedures we performedrelated to address this critical audit matter included:the liability for unpaid losses and LAE included the following, among others:
Obtaining•We obtained an understanding, evaluatingevaluated the design, and testingtested the operating effectiveness of key controls over the process and data used by management to estimate the liability for unpaid losses and LAE, including those controls related to the estimation of and management’s review of the estimated liability offor unpaid losses and LAE.
Testing•We tested the completeness, integrity, and accuracy of the underlying data used by the Company’s actuary, such as paid loss data, case reserve data, loss adjustment expense data and loss development tables;tables.
Verifying the consistency of the estimation process between years,•We evaluated management’s selection of itsprior year estimate for unpaid losses and LAE reviewing historical estimates and reported loss ratios;
Obtaining and reviewing the independent actuarial report and gaining an understanding fromfactors leading to changes in the actuary of the objectives and scope of their work, consistency of methods and assumptions usedestimate recognized in the current year as comparedyear. With the assistance of our actuarial specialist, we assessed the reasonableness of management’s revisions to previous years;
Assessing the adverse development of prior estimates of the liabilityestimate for unpaid losses and LAELAE.
•With assistance from our actuarial specialist, we evaluated the appropriateness and requesting explanations of changes in these estimates to understand significant factors on the development of prior estimates. We held discussions with the external independent actuary, internal actuary, and membersrespective weighting of the executive management team and obtained corroborating evidence in order to draw a conclusion about the assumptions and judgment usedactuarial methodologies selected by management inused to develop the unpaid losses and LAE reserve estimate. As part of this evaluation, we tested the reasonableness of significant assumptions by comparing them to current year.and forecasted Company and industry data.
/s/ Plante & Moran, PLLC
Certified Public Accountants
We have served as the Company’s auditor since 2002.
Chicago, Illinois
March 2, 2020
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2021 | | 2020 |
ASSETS | | | | |
Available-for-sale debt securities, at fair value, net of allowance for credit loss of $489 and $186 (amortized cost: $1,061,192 and $815,647) | | $ | 1,040,455 | | | $ | 819,861 | |
| | | | |
Equity securities, at fair value (cost: $51,151 and $84,667) | | 47,334 | | | 84,887 | |
Investment real estate, net | | 5,891 | | | 15,176 | |
Total invested assets | | 1,093,680 | | | 919,924 | |
Cash and cash equivalents | | 250,508 | | | 167,156 | |
Restricted cash and cash equivalents | | 2,635 | | | 12,715 | |
Prepaid reinsurance premiums | | 240,993 | | | 215,723 | |
Reinsurance recoverable | | 185,589 | | | 160,417 | |
Premiums receivable, net | | 64,923 | | | 66,883 | |
Property and equipment, net | | 53,682 | | | 53,572 | |
Deferred policy acquisition costs | | 108,822 | | | 110,614 | |
Income taxes recoverable | | 16,947 | | | 30,576 | |
Deferred income tax asset, net | | 16,331 | | | 6,284 | |
Other assets | | 22,031 | | | 14,877 | |
Total assets | | $ | 2,056,141 | | | $ | 1,758,741 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
LIABILITIES: | | | | |
Unpaid losses and loss adjustment expenses | | $ | 346,216 | | | $ | 322,465 | |
Unearned premiums | | 857,769 | | | 783,135 | |
Advance premium | | 53,694 | | | 49,562 | |
| | | | |
Book overdraft | | 26,759 | | | 59,399 | |
Reinsurance payable, net | | 188,662 | | | 10,312 | |
Commission payable | | 22,315 | | | 23,809 | |
Other liabilities and accrued expenses | | 27,348 | | | 52,341 | |
Long-term debt, net | | 103,676 | | | 8,456 | |
Total liabilities | | 1,626,439 | | | 1,309,479 | |
Commitments and Contingencies (Note 15) | | 0 | | 0 |
STOCKHOLDERS’ EQUITY: | | | | |
Cumulative convertible preferred stock, $.01 par value | | — | | | — | |
Authorized shares - 1,000 | | | | |
Issued shares - 10 and 10 | | | | |
Outstanding shares - 10 and 10 | | | | |
Minimum liquidation preference - $9.99 and $9.99 per share | | | | |
Common stock, $.01 par value | | 470 | | | 468 | |
Authorized shares - 55,000 | | | | |
Issued shares - 47,018 and 46,817 | | | | |
Outstanding shares - 31,221 and 31,137 | | | | |
Treasury shares, at cost - 15,797 and 15,680 | | (227,115) | | | (225,506) | |
Additional paid-in capital | | 108,202 | | | 103,445 | |
Accumulated other comprehensive income (loss), net of taxes | | (15,568) | | | 3,343 | |
Retained earnings | | 563,713 | | | 567,512 | |
Total stockholders’ equity | | 429,702 | | | 449,262 | |
Total liabilities and stockholders’ equity | | $ | 2,056,141 | | | $ | 1,758,741 | |
|
| | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
ASSETS | | | | |
Available-for-sale debt securities, at fair value (amortized cost: $828,336 and $831,127) | | $ | 855,284 |
| | $ | 820,438 |
|
Equity securities, at fair value (cost: $43,523 and $86,271) | | 43,717 |
| | 63,277 |
|
Investment real estate, net | | 15,585 |
| | 24,439 |
|
Total invested assets | | 914,586 |
| | 908,154 |
|
Cash and cash equivalents | | 182,109 |
| | 166,428 |
|
Restricted cash and cash equivalents | | 2,635 |
| | 2,635 |
|
Prepaid reinsurance premiums | | 175,208 |
| | 142,750 |
|
Reinsurance recoverable | | 193,236 |
| | 418,603 |
|
Premiums receivable, net | | 63,883 |
| | 59,858 |
|
Property and equipment, net | | 41,351 |
| | 34,991 |
|
Deferred policy acquisition costs | | 91,882 |
| | 84,686 |
|
Income taxes recoverable | | 34,283 |
| | 11,159 |
|
Deferred income tax asset, net | | 3,351 |
| | 14,586 |
|
Other assets | | 17,328 |
| | 14,540 |
|
Total assets | | $ | 1,719,852 |
| | $ | 1,858,390 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
LIABILITIES: | | | | |
Unpaid losses and loss adjustment expenses | | $ | 267,760 |
| | $ | 472,829 |
|
Unearned premiums | | 661,279 |
| | 601,679 |
|
Advance premium | | 30,975 |
| | 26,222 |
|
Accounts payable | | 2,099 |
| | 3,059 |
|
Book overdraft | | 90,401 |
| | 102,843 |
|
Reinsurance payable, net | | 122,581 |
| | 93,306 |
|
Other liabilities and accrued expenses | | 40,930 |
| | 45,422 |
|
Long-term debt | | 9,926 |
| | 11,397 |
|
Total liabilities | | 1,225,951 |
| | 1,356,757 |
|
Commitments and Contingencies (Note 15) | |
|
| |
|
|
STOCKHOLDERS’ EQUITY: | | | | |
Cumulative convertible preferred stock, $.01 par value | | — |
| | — |
|
Authorized shares - 1,000 | | | | |
Issued shares - 10 and 10 | | | | |
Outstanding shares - 10 and 10 | | | | |
Minimum liquidation preference - $9.99 and $9.99 per share | | | | |
Common stock, $.01 par value | | 467 |
| | 465 |
|
Authorized shares - 55,000 | | | | |
Issued shares - 46,707 and 46,514 | | | | |
Outstanding shares - 32,638 and 34,783 | | | | |
Treasury shares, at cost - 14,069 and 11,731 | | (196,585 | ) | | (130,399 | ) |
Additional paid-in capital | | 96,036 |
| | 86,353 |
|
Accumulated other comprehensive income (loss), net of taxes | | 20,364 |
| | (8,010 | ) |
Retained earnings | | 573,619 |
| | 553,224 |
|
Total stockholders’ equity | | 493,901 |
| | 501,633 |
|
Total liabilities and stockholders’ equity | | $ | 1,719,852 |
| | $ | 1,858,390 |
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
PREMIUMS EARNED AND OTHER REVENUES | | | | | | |
Direct premiums written | | $ | 1,671,252 | | | $ | 1,517,479 | | | $ | 1,292,721 | |
Change in unearned premium | | (74,634) | | | (121,856) | | | (59,600) | |
Direct premium earned | | 1,596,618 | | | 1,395,623 | | | 1,233,121 | |
Ceded premium earned | | (561,155) | | | (472,060) | | | (390,619) | |
Premiums earned, net | | 1,035,463 | | | 923,563 | | | 842,502 | |
Net investment income | | 12,535 | | | 20,393 | | | 30,743 | |
Net realized gains (losses) on investments | | 5,892 | | | 63,352 | | | (12,715) | |
Net change in unrealized gains (losses) of equity securities | | (4,032) | | | 25 | | | 23,188 | |
Commission revenue | | 41,649 | | | 33,163 | | | 26,101 | |
Policy fees | | 22,713 | | | 23,773 | | | 21,560 | |
Other revenue | | 7,631 | | | 8,501 | | | 7,972 | |
Total premiums earned and other revenues | | 1,121,851 | | | 1,072,770 | | | 939,351 | |
OPERATING COSTS AND EXPENSES | | | | | | |
Losses and loss adjustment expenses | | 779,205 | | | 758,810 | | | 603,406 | |
General and administrative expenses | | 314,233 | | | 289,729 | | | 272,428 | |
Total operating costs and expenses | | 1,093,438 | | | 1,048,539 | | | 875,834 | |
INCOME BEFORE INCOME TAXES | | 28,413 | | | 24,231 | | | 63,517 | |
Income tax expense | | 8,006 | | | 5,126 | | | 17,003 | |
NET INCOME | | $ | 20,407 | | | $ | 19,105 | | | $ | 46,514 | |
Basic earnings per common share | | $ | 0.65 | | | $ | 0.60 | | | $ | 1.37 | |
Weighted average common shares outstanding - Basic | | 31,218 | | | 31,884 | | | 33,893 | |
Diluted earnings per common share | | $ | 0.65 | | | $ | 0.60 | | | $ | 1.36 | |
Weighted average common shares outstanding - Diluted | | 31,307 | | | 31,972 | | | 34,233 | |
Cash dividend declared per common share | | $ | 0.77 | | | $ | 0.77 | | | $ | 0.77 | |
|
| | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
PREMIUMS EARNED AND OTHER REVENUES | | | | | | |
Direct premiums written | | $ | 1,292,721 |
| | $ | 1,190,875 |
| | $ | 1,055,886 |
|
Change in unearned premium | | (59,600 | ) | | (69,235 | ) | | (56,688 | ) |
Direct premium earned | | 1,233,121 |
| | 1,121,640 |
| | 999,198 |
|
Ceded premium earned | | (390,619 | ) | | (353,258 | ) | | (310,405 | ) |
Premiums earned, net | | 842,502 |
| | 768,382 |
| | 688,793 |
|
Net investment income | | 30,743 |
| | 24,816 |
| | 13,460 |
|
Net realized gains (losses) on investments | | (12,715 | ) | | (2,089 | ) | | 2,570 |
|
Net change in unrealized gains (losses) of equity securities | | 23,188 |
| | (17,169 | ) | | — |
|
Commission revenue | | 26,101 |
| | 22,438 |
| | 21,253 |
|
Policy fees | | 21,560 |
| | 20,275 |
| | 18,838 |
|
Other revenue | | 7,972 |
| | 7,163 |
| | 7,002 |
|
Total premiums earned and other revenues | | 939,351 |
| | 823,816 |
| | 751,916 |
|
OPERATING COSTS AND EXPENSES | | | | | | |
Losses and loss adjustment expenses | | 603,406 |
| | 414,455 |
| | 350,428 |
|
General and administrative expenses | | 272,428 |
| | 256,488 |
| | 231,004 |
|
Total operating costs and expenses | | 875,834 |
| | 670,943 |
| | 581,432 |
|
INCOME BEFORE INCOME TAXES | | 63,517 |
| | 152,873 |
| | 170,484 |
|
Income tax expense | | 17,003 |
| | 35,822 |
| | 63,549 |
|
NET INCOME | | $ | 46,514 |
| | $ | 117,051 |
| | $ | 106,935 |
|
Basic earnings per common share | | $ | 1.37 |
| | $ | 3.36 |
| | $ | 3.07 |
|
Weighted average common shares outstanding - Basic | | 33,893 |
| | 34,856 |
| | 34,841 |
|
Diluted earnings per common share | | $ | 1.36 |
| | $ | 3.27 |
| | $ | 2.99 |
|
Weighted average common shares outstanding - Diluted | | 34,233 |
| | 35,786 |
| | 35,809 |
|
Cash dividend declared per common share | | $ | 0.77 |
| | $ | 0.73 |
| | $ | 0.69 |
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | For the Years Ended December 31, | | | For the Years Ended December 31, |
| | 2019 | | 2018 | | 2017 | | | 2021 | | 2020 | | 2019 |
Net income | | $ | 46,514 |
| | $ | 117,051 |
| | $ | 106,935 |
| Net income | | $ | 20,407 | | | $ | 19,105 | | | $ | 46,514 | |
Other comprehensive income (loss) | | 28,374 |
| | (4,748 | ) | | 127 |
| |
Other comprehensive income (loss), net of taxes | | Other comprehensive income (loss), net of taxes | | (18,911) | | | (17,618) | | | 28,374 | |
Comprehensive income (loss) | | $ | 74,888 |
| | $ | 112,303 |
| | $ | 107,062 |
| Comprehensive income (loss) | | $ | 1,496 | | | $ | 1,487 | | | $ | 74,888 | |
The accompanying notes to consolidated financial statements are an integral part of these statements.
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the Consolidated Balance Sheets (in thousands):
Depreciation expense related to investment real estate for the periods presented (in thousands):
The Company seeks to reduce its risk of loss by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers, generally as of the beginning of the hurricane season on June 1st of each year. The Company’s current reinsurance programs consist principally of catastrophe excess of loss reinsurance, subject to the terms and conditions of the applicable agreements. TheNotwithstanding the purchase of such reinsurance, the Company is responsible for certain retained loss amounts before reinsurance attaches and for insured losses related to catastrophes and other events that exceed coverage provided by the reinsurance programs. The Company remains responsible for the settlement of insured losses irrespective of whether any of the reinsurers fail to make payments otherwise due.
To reduce credit risk for amounts due from reinsurers, the Insurance Entities seek to do business with financially sound reinsurance companies and regularly evaluate the financial strength of all reinsurers used.
The following table presents ratings from rating agencies and the unsecured amounts due from the reinsurers whose aggregate balance exceeded 3% of the Company’s stockholders’ equity as of the dates presented (in thousands):
The Company’s reinsurance arrangements had the following effect on certain items in the Consolidated Statements of Income for the periods presented (in thousands):
The following prepaid reinsurance premiums and reinsurance recoverable are reflected in the Consolidated Balance Sheets as of the dates presented (in thousands):
The following table presents the beginning and ending balances and the changes in DPAC for the periods presented (in thousands):
The Insurance Entities are subject to regulations and standards of the Florida Office of Insurance Regulation (“FLOIR”). UPCICThe Insurance Entities are also is subject to regulations and standards of regulatory authorities in other states where it isthey are licensed, although as a Florida-domiciled insurer, itsinsurers, their principal regulatory authority is the FLOIR. These standards requireand regulations include a requirement that the Insurance Entities to maintain specified levels of statutory capital and restrict the timing and amount of dividends and other distributions that may be paid by the Insurance Entities to the parent company. Except in the case of extraordinary dividends, these standards generally permit dividends to be paid from statutory unassigned surplus of the regulated subsidiary and are limited based on the regulated subsidiary’s level of statutory net income and statutory capital and surplus. The maximum dividend that may be paid by UPCIC and APPCICthe Insurance Entities to their immediate parent company, Protection Solutions, Inc. (“PSI”, formallyformerly known as Universal Insurance Holding Company of Florida), without prior regulatory approval is limited by the provisions of the Florida Insurance Code. These dividends are referred to as “ordinary dividends.” However, if the dividend, together with other dividends paid within the preceding twelve months, exceeds this statutory limit or is paid from sources other than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval.
In accordance with Florida Insurance Code, and based on the calculations performed by the Company as of December 31, 2019,2021, UPCIC has the capacity to pay ordinary dividends of $12.1 million during 2020. APPCIC, based on its surplus position and earnings history as of December 31, 2019, is unable to pay any ordinary dividends during 2020.2022. APPCIC, based on its accumulated earnings history as of December 31, 2021, is unable to pay any ordinary dividends during 2022. For the years ended December 31, 20192021 and 2018, 02020, no dividends were paid from UPCIC or APPCICthe Insurance Entities to PSI.
The Insurance Entities are required by various state laws and regulations to maintain certain assets in depository accounts. The following table represents assets held by insurance regulators as of the dates presented (in thousands):
Property and equipment consisted of the following as of the dates presented (in thousands):
Long-term debt consists of the following as of the dates presented (in thousands):
On November 9, 2006, UPCIC entered into a $25.0 million surplus note with the State Board of Administration of Florida (the “SBA”) under Florida’s Insurance Capital Build-Up Incentive Program (the “ICBUI”). The surplus note has a twenty-year term and accrues interest, adjusted quarterly based on the 10-year Constant Maturity Treasury Index. The carrying amount of the surplus note is included in the statutory capital and surplus of UPCIC of approximately $9.9$7.0 million as of December 31, 2019.2021.
UPCIC is in compliance with each of the loan’s covenants as implemented by rules promulgated by the SBA. An event of default will occur under the surplus note, as amended, if UPCIC: (i) defaults in the payment of the surplus note; (ii) fails to submit quarterly filings to the FLOIR; (iii) fails to maintain at least $50 million of surplus during the term of the surplus note, except for certain situations; (iv) misuses proceeds of the surplus note; (v) makes any misrepresentations in the application for the program; (vi) pays any dividend when principal or interest payments are past due under the surplus note; or (vii) fails to maintain a level of surplus and reinsurance sufficient to cover in excess of UPCIC’s 1-in-100 year probable maximum loss as determined by a hurricane loss model accepted by the Florida Commission on Hurricane Loss Projection Methodology as certified by the FLOIR annually. To avoid a penalty rate, UPCIC must maintain either a ratio of net written premium to surplus of at least 2:1 or a ratio of gross written premiums to surplus of at least 6:1 according to a calculation method set forth in the surplus note. As of December 31, 2019,2021, UPCIC’s net written premium to surplus ratio and gross written premium to surplus ratio werewas in excess of the required minimums and, therefore, UPCIC is not subject to the penalty rate. The surplus note ranks subordinate in right of payment to the Senior Unsecured Notes and Unsecured Revolving Loan described below.
The following table provides certain information for the convertible Series A preferred stock as of the dates presented (in thousands, except conversion factor):
The Series A Preferred Stock pays a cumulative dividend of $0.25 per share per quarter. The Company declared and paid aggregate dividends to the holder of record of the Company’s Series A Preferred Stock of $10 thousand for each of the years ended December 31, 20192021 and 2018.2020.
From time to time, the Company’s Board of Directors may authorize share repurchase programs under which the Company may repurchase shares of the Company’s common stock in the open market. The following table presents repurchases of the Company’s common stock for the periods presented (in thousands, except total number of shares repurchased and per share data):
The Company declared dividends on its outstanding shares of common stock to its shareholders of record as follows for the periods presented (in thousands, except per share amounts):
Applicable provisions of the Delaware General Corporation Law may affect the ability of the Company to declare and pay dividends on its Common Stock. In particular, pursuant to the Delaware General Corporation Law, a company may pay dividends out of its surplus, as defined, or out of its net profits, for the fiscal year in which the dividend is declared and/or the preceding year. Surplus is defined in the Delaware General Corporation Law to be the excess of net assets of the company over capital. Capital is defined to be the aggregate par value of shares issued. Moreover, the ability of the Company to pay dividends, if and when declared by its Board of Directors, may be restricted by regulatory limits on the amount of dividends, which the Insurance Entities are permitted to pay the Company.
Awards under the Incentive Plan may include incentive stock options, non-qualified stock option awards (“Stock Option”), stock appreciation rights, non-vested shares of common stock, restricted stock awards (“Restricted Stock”), performance share units (“PSUs”), restricted stock units (“RSUs”), and other share-based awards and cash-based incentive awards. Awards under the Incentive Plan may be granted to employees, directors, consultants or other persons providing services to the Company or its affiliates.
The following table provides certain information related to Stock Options, Restricted Stock, PSUs and RSUs duringfor the year ended December 31, 20192021 (in thousands, except per share data):
The financial statements of the Registrant should be read in conjunction with the consolidated financial statements in “Item 8.”
Universal Insurance Holdings, Inc. (the “Company”) is a Delaware corporation incorporated in 1990. The Parent Company is an insurance holding company whose wholly-owned subsidiaries perform all aspects of insurance underwriting, distribution and claims. Through its wholly-owned subsidiaries, including Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC”), the Parent Company is principally engaged in the property and casualty insurance business offered primarily through a network of independent agents. Risk from catastrophic losses is managed through the use of reinsurance agreements.
Certain amounts in the prior periods’ consolidated financial statements have been reclassified in order to conform to current period presentation. Such reclassifications had no effect on net income or stockholders’ equity.
The following table provides certain information related to the Company’s property and casualty operations as of, and for the periods presented (in thousands):