UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

☒

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

2020

or

☐

☐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

UNIVERSAL INSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

65-0231984

uve-20201231_g1.jpg
UNIVERSAL INSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware65-0231984
(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer


Identification No.)

1110 WestW. Commercial Blvd., Suite 100, Fort Lauderdale, Florida 33309

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (954) 958-1200

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.01$0.01 Par Value

UVE

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None.


Securities registered pursuant to Section 12(g) of the Act:
None.
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    ☒  Yes    ☐  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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.

Large accelerated filer

☒

☐

Accelerated filer

☐

☒

Non-accelerated filer

☐

Smaller Reporting Company

reporting company

☐

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

State the aggregate

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 30, 2017: $813,691,897.

2020, the last trading day of the registrant’s most recently completed second fiscal quarter: $505,691,628

Indicate the number of shares outstanding of Common Stock of Universal Insurance Holdings, Inc. as of February 14, 2018: 34,863,056

22, 2021: 31,205,653.

Table



DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Contents

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 2021, 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

Page No.

Page No.

Item 1.

5

Item 1.

Business

3

Item 1A.

27

12

Item 1B.

37

21

Item 2.

21

Item 2.

Properties

37

Item 3.

37

22

Item 4.

38

22

Item 5.

39

23

Item 6.

43

24

Item 7.

44

26

Item 7A.

66

53

Item 8.

68

55

Item 9.

102

91

Item 9A.

102

91

Item 9B.

102

91

Item 10.

103

92

Item 11.

103

92

Item 12.

103

92

Item 13.

103

92

Item 14.

103

92

Item 15.

104

92

Item 16.

104

95

96

Signatures

107

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

2


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Table of Contents

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 ABOUTREGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, the following discussionthis 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. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Risk Factors.” 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.


4

PART I

ITEM

ITEM 1.

BUSINESS

INTRODUCTION

Overview
Universal Insurance Holdings, Inc. (“UVE,” and together with its wholly-owned subsidiaries, “we,” “our,” “us,” or “the Company”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 largest private personal residential homeowners insurance company in Florida by direct written premium in-force, with a 10.1% market share aslines of September 30, 2017, according to the most recent data reported by the Florida Office of Insurance Regulation (the “FLOIR”). Webusiness and perform substantially all aspects ofother insurance-related services for our primary insurance underwriting, policy issuance, general administrationentities, including risk management, claims management, and claims processing and settlement internally through our vertically integrated operations.distribution. Our two wholly-owned licensedprimary insurance subsidiaries areentities, Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC” and together with UPCIC, the “Insurance Entities”). UPCIC currently writes homeowners, offer insurance policiesproducts through both our appointed independent agent network and our online distribution channels across 19 states (primarily in 16 states (Alabama, Delaware, Florida, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, South Carolina and Virginia)Florida), with $1,049.5 millionlicenses to write insurance in two additional states. 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 conservative balance sheet to prepare for years in which the Insurance Entities are not able to achieve an underwriting profit; and generate investment income on assets.
Trends - Impact of COVID-19
The global COVID-19 pandemic has had a profound worldwide effect on social interactions and on the global, national and local economies. We took early measures in March 2020, in advance of governmental mandates, to help reduce the internal spread of COVID-19 by directing substantially all employees to work from home. In addition to this measure to secure the health and wellness of our employees, we worked to facilitate our personnel being able to continue safely providing services to the Company’s policyholders and independent agents, fulfilling our financial and reporting obligations, including responding to regulatory requirements and guidelines, and generally maintaining business continuity. As a provider of residential homeowners’ insurance offered in hurricane-prone areas and being headquartered in Florida, we had previously developed contingency plans to address catastrophic events and were prepared to maintain operations as COVID-19 unfolded. As a result of our disaster preparedness, most employees were immediately prepared to work from home while the Company addressed emerging workflow issues to enable employees to remain effective in fulfilling their roles. Since the first week of engaging our work from home strategy, nearly all aspects of our business have been, and continue to be, conducted remotely while striving to maintain the quality of our service standards.
Subsequent to March 2020, we have not seen a material impact from COVID-19 on our business, our financial position, our liquidity, or our ability to service our policyholders and maintain critical operations. 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 material impact from COVID-19, the ultimate impact of the pandemic on our business and on the economy in general cannot be predicted.
Our level of direct premiums written premium forduring the year ended December 31, 2017. UPCIC is also licensed to issue policies2020 was strong and outperformed the same period in Iowa, New Hampshire, and West Virginia. APPCIC currently writes homeowners and Commercial Residential (as defined herein) insurance policiesthe prior year. We are cautiously optimistic in Florida, with $6.4 million in direct written premium for the year ended December 31, 2017. We believeour belief that our longevitycustomers and agent force will continue to renew and place business with us, especially our customers in hurricane-exposed states. In the event there is a slow-down in the Florida market and our resulting depth of experience will enable us to continue to successfully grow our business in both hard (i.e., periods of capital shortages resulting in a lack of insurance availability, relatively low levels of price competition, more selective underwriting of risks and relatively high premium rates) and soft markets (i.e., periods of relatively high levels of price competition, less restrictive underwriting standards and generally low premium rates). Our business outside of Florida represents approximately 26% of our total insured value as of December 31, 2017.

We generate revenues primarily from theproduction and/or collection of premiums. Other sources of revenue include: commissions paid by our reinsurerspremiums, we intend to our reinsurance intermediary subsidiary on reinsurance it places for the Insurance Entities; policy fees collected from policyholders by our managing general agent subsidiary; service revenue from claims handling on ceded claims; and financing fees charged to policyholders who choose to defer premium payments. We also generate income by investing our assets.

Over the past several years, we have grown our business both within Florida and elsewhere in the United States through our distribution network of approximately 8,800 licensed independent agents. In writing business, we adhere to a disciplined underwriting approach – writing risks that are priced adequately and meet our underwriting standards – designed to achieve profitable growth as opposed to merely increasing the total number of policies written. We believe we are better positioned than many of our competitors to expand profitably and service our policyholders due to our established internal capabilities; protection afforded us by our reinsurance program; our experienced management team that successfully navigated prior active hurricane seasons, including 2017, 2016, 2005 and 2004; our strong surplus and capital base; our success in growing organically in Florida without relying on the

3

Table of Contents

assumption of policies from Citizens Property Insurance Corporation (“Citizens”), the Florida state-sponsored insurer of last resort; and our growing geographic diversification. We also believe that our reinsurance program is structured such that, in the event of an active hurricane season, we are able to pay policyholder claims, maintain sufficient surplus to grow profitably and take advantage of the resulting market dislocation that could potentially follow.

Below is an organization chart that summarizes our corporate structure:

The Insurance Entities are our insurance operating subsidiaries. Most of our policies are written by UPCIC. Universal Risk Advisors (“URA”) is our managing general agent and manages our distribution network and negotiates our reinsurance. Universal Inspection Corporation (“UIC”) conducts inspections as part of our underwriting process, and Universal Adjusting Corporation (“UAC”) manages our claims processing and adjustment functions. Blue Atlantic Reinsurance Corporation (“BARC”) is our reinsurance intermediary. These service companies are vertically aligned with our Insurance Entitiesmeasures to maintain quality throughout the policy origination and claim settlement process. In addition, our servicing subsidiaries help reduce the costs typically associated with outsourced business functions, enhance our ability to expand geographically due to economies of scale in our operations and allow us to expand our business incrementally and more effectively.

OUR STRATEGY

Pursue Profitable Growth with a Focus on Organic Development

We continue to pursue profitable growth both within Florida and through expansion into other states,liquidity while continuing to expand Universal DirectSM and adding new products when prudent (such as the Fire, Commercial Multi-Peril, and Other Liability (collectively, “Commercial Residential”) lines of business in Florida that we introduced in late in 2016). Each of these areas is discussed further below.

•

Florida - We intend to continue profitably growing our business organically in Florida through our established network of approximately 4,300 independent Florida agents, the top 20% of whom originated approximately 71% of our total Florida direct written premium for the year ended December 31, 2017, and approximately 1,600 of whom have written business with our company for over a decade. Many of our competitors have experienced growth in recent years primarily as a result of assuming policies from Citizens. Because we perform all of our own marketing and underwriting as part of our organic growth strategy, we believe that we are more deliberate in seeking out profitable business from our independent agent force and selective in the policies we write as compared to Citizens, which generally must provide coverage to policyholders who

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Table of Contents

have been unable to obtain insurance elsewhere. We have not assumed any policies from Citizens or its predecessor, Florida Residential Property and Casualty Joint Underwriting Association, since a single, small transaction in 1998, and have no plans to do so in the future. By contrast, some of our competitors in the Florida market collectively assumed more than 785,000 policies from Citizens since January 1, 2014. As of September 30, 2017, Citizens had approximately 452,000 policies outstanding (down from a peak level of approximately 1.5 million policies in late 2011). We believe that our continuing commitment to organic growth and to servicing our policyholders has created not only a superior premium base but also positive, long-term relationships with our independent agents and policyholders, which will foster our continued growth in and outside of Florida. For the nine months ended September 30, 2017, we issued 136,367 new policies, compared to 70,335 new policies issued by Citizens and 712,166 new policies (in each case, excluding mobile homeowners and farmowners) issued by the remaining top 25 personal residential homeowners and Commercial Residential insurers in Florida combined during the same period, according to the most recent data published by the FLOIR.

Other States – We intend to continue our geographical expansion outside of Florida primarily to take advantage of opportunities to write profitable business as well as to diversify our revenue and risk. We target states with underserved homeowners insurance markets where we believe there is price adequacy for our products and where policyholders would benefit from our market knowledge and integrated service model. In new markets, we seek to replicate the successful growth strategy we implemented in Florida, including the careful appointment of new agents that we believe will generate profitable business for our Company. We intend to leverage our existing agent network to generate new relationships and business. We will continue in our commitment to careful, profitable business growth through such independent agents, with the intent to grow quickly when the opportunity arises, including following any market dislocation. Our strategy involves taking the time to learn about each new market and its unique risks in order to carefully develop our own policy forms, rates and informed underwriting standards. We also believe further geographic diversification will decrease our relative reinsurance costs as our risk profile changes to include more risks not tied to the Florida hurricane exposure. We believe that such diversification will produce more earnings stability as we expand to states with different market cycles than Florida and where the risks insured could offset Florida losses during an active hurricane season such as 2017 which included the impact of Hurricane Irma. Apart from Florida, we currently write homeowners insurance policies in Alabama, Delaware, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, and Virginia, and are also licensed to issue policies in Illinois, Iowa, New Hampshire, and West Virginia. As of December 31, 2017, policies outside of Florida accounted for 26% of our total insured value, or $51.8 billion, as compared to 21% as of December 31, 2016.

•

Universal DirectSM – In April 2016, the Company launched a direct-to-consumer online platform, called Universal DirectSM, which enables homeowners to directly purchase, pay for and bind homeowners policies online without the need to directly interface with any intermediaries. Designed to simplify the process of purchasing homeowners insurance, Universal DirectSM includes an intuitive interface, real-time quotes, educational materials, support tools and a seamless purchasing process. Customers have the ability to manage their policies, select payment plans and make payments online, while also having access to live customer support agents, by phone or online, for additional assistance as needed. Universal DirectSM was offered in all 16 states in which the Company offers policies as of December 31, 2017 as follows: Pennsylvania, Minnesota, Alabama, Indiana, South Carolina, Delaware, Georgia, Florida, Hawaii, North Carolina, Virginia, Massachusetts, Maryland, New Jersey, Michigan and New York. During the year ended December 31, 2017, 7,361 policies were written pursuant to Universal DirectSM representing $8.6 million in direct written premium compared to 1,320 policies written representing $1.4 million in direct written premium during the year ended December 31, 2016.

New Products – We evaluate potential new product offerings, such as the Commercial Residential business we launched in Florida late in 2016, and look to add new products to our portfolio when prudent after careful consideration and substantial planning and development. On August 3, 2016 we announced that APPCIC received authorization from the FLOIR to amend its Certificate of Authority to add Commercial Residential lines of business in Florida. During the fourth quarter of 2016, our rates were approved and we wrote our first Commercial Residential policy.Expansion into the Commercial Residential business is a step forward for the Company, and will allow us to tap into a large complementary market that will advance our organic growth strategy. We believe there is an opportunity in the Commercial Residential marketplace in Florida and expect to leverage our robust independent agent distribution network to grow this new product. While we view the Commercial Residential market as an untapped opportunity, we intend to approach this expansion cautiously in order to establish a solid framework onto which we can build our Commercial Residential portfolio in order to ensure proper risk selection and that adequate pricing is achieved.

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Table of Contents

Optimize our Reinsurance Program as our Risk Profile Changes

We will continue to obtain what we believe to be appropriate reinsurance limits, coverage and terms so that our policyholders and shareholders are adequately protected in the event of an active hurricane season. Significant additional new capital entering portions of the reinsurance marketplace has afforded us the opportunity to obtain favorable pricing and contract terms in recent years. Our dedicated reinsurance team at BARC includes seasoned industry professionals whom we hired from Willis Re almost 12 years ago, as well as additional key personnel more recently from leading global reinsurance intermediaries. BARC differentiates us from our competitors by enabling us to act as our own reinsurance intermediary, developing a bespoke reinsurance program tailored to our needs in both soft and hard reinsurance markets. This team has developed and enhanced existing strong long-term relationships with world leading reinsurance companies, providing better efficiency in the manner in which we buy reinsurance. We had in excess of 60 reinsurance partners for the 2017-2018 reinsurance year from companies in the United States, Bermuda, London, Continental Europe and Asia. BARC works in conjunction with URA in providing these services. We also receive reinsurance intermediary services from Guy Carpenter and thereby benefit from its depth of experience and knowledge of market standards. Guy Carpenter works closely with our teams at BARC and URA in designing our reinsurance program and allowing us to obtain favorable pricing. Our internal team and Guy Carpenter continually evaluate prevailing costs and the level of coverage that we determine is necessary in order to proactively capitalize on favorable market conditions.

Effective June 1, 2015, we eliminated our quota share reinsurance arrangements; purchased additional excess of loss catastrophe cover; and converted from a two-tower reinsurance program to a single tower reinsurance program covering our nationwide business based on our improving financial condition, our evaluation of market conditions and our changing coverage needs. We also supplemented this nationwide reinsurance program with a stand-alone supplemental non-Florida catastrophe reinsurance program for the 2017-2018 period, which provides coverage for catastrophic events affecting states outside of Florida in which we write policies. We believe that restructuring our reinsurance program in this manner and continuously re-evaluating that structure has allowed us to take advantage of attractive reinsurance pricing and terms and to retain profitable business by eliminating our quota share program, while still maintaining reinsurance coverage that we believe is sufficient to protect our policyholderscapital and shareholders. As an example, our reinsurance program generally performed as designed following Hurricane Irma in 2017, limiting the net loss and loss adjustment expenses (“LAE”) to our net retention levels. Further, fees generated from our service subsidiary companies produced income after Hurricane Irma, and this, combined with other benefits derived from our reinsurance program, helped to offset losses and reduce the overall effect that Hurricane Irma had on our consolidated financial statements.policyholders. See “Part II—Item 7 – Management’s7—Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Overview”Operations—Liquidity and Capital Resources.”

Business Strategy
UVE’s strategic focus is on creating a best-in-class experience for further discussion about Hurricane Irma.

Continueour customers. We have more than 20 years of experience providing protection solutions. In 2020 we continued our focus on disciplined underwriting, maintained a resilient balance sheet backed by our reinsurance programs, enhanced our reserves, expanded our geographic footprint, and implemented our catastrophe rapid response teams during the COVID-19 pandemic, which accelerated our use of digital technology for adjusting claims. We have made substantial efforts in recent years to Buildimprove and Enhanceenhance our claims operation, including reductions in our claim resolution times, utilization of digital applications where applicable to adjust claims, and an intensified effort to collect subrogation for the benefit of the Insurance Entities and their policyholders. Our differentiated capabilities support the Insurance Entities across all aspects of the insurance value chain to provide our customers with a streamlined experience, and we continue to evaluate ways in which we can improve the customer experience.

5

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 for properties valued in excess of $1 million. In addition, APPCIC writes commercial residential multi-peril insurance.
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 statutory capital surplus was approximately $373.6 million at December 31, 2020.
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”), partners with a third-party reinsurance broker 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 Operations

Over the last decade,Management

Our subsidiary, Universal Adjusting Corporation d/b/a Alder Adjusting (“Alder”), manages our claims processing and adjustment functions from claim inception to conclusion, which we have developed a proprietary claims administration system thatbelieve allows us to efficiently process nearly all aspectsincrease efficiency and provide a high level of claims resolution for our policyholders. Our technology system has shortened claims handling and processing times, reduced associated claims resolution costs and has generated positive feedback from our policyholders and independent insurance agents. In addition, we launched ourcustomer service. Alder’s Fast Track initiative (“Fast Track”) initiative in 2015, which expediteshas expedited the claims settlement process to close certain types of claims in as little as 24 hours.hours through analysis and on-site field adjusting. The initiative sends select field adjusterscompany has increased its use of technology to make on-site evaluations, with authorizationinspect properties and adjust claims and has adopted certain new precautionary protocols for those inspections still performed in the field. In addition to make payments to policyholders for certain types of claims. Our internalour in-house claims operation, allowswe assign a certain percentage of field inspections to third-party adjusters. Our relationships with these adjusters enable us to identify any trends or problems that may become apparent as claims are processed such that we can revise and bolster our underwriting guidelines as necessary in order to continue adequately pricing risks. Further, we continue to retain select third-party Florida claims administrators and adjusters as well as one national administrator to perform field services for and adjust a portion of our claims in order to maintain our relationships with them so that they can assist us during periods of high claims volume in providingprovide high quality and timely service tofollowing a catastrophe, such as a hurricane in coastal states, and during any other period of unusually high claim volume. Through our policyholders. We recognize the importance of claims processingcontinuous improvement and willoperational excellence initiatives, we continue to investevaluate ways in this functionality.

Maintain an Emphasiswhich we can improve the customer’s claims experience on Underwriting Discipline

We seek to generate a consistent underwriting profit onrolling basis. Alder’s data intelligence allows the business we write in hard and soft markets through carefully developed underwriting guidelines informed by our experience in evaluating risks and in handling and processing claims. By focusing on identifying and assessing key risks and exposures in the market, we believe we are able to accurately price eligible risks and generate consistent profits. We assumed only one small group of policies from Citizens’ predecessor in 1998 when we first began our operations. Since then, we have grown our business by leveraging our network of approximately 4,300 independent agents in Florida, and by expanding to other geographic areas that present market opportunities. We periodically review the renewal rates and quality of business generated by our independent agents to ensure underwriting profitability and work with agents where we believe improvement is warranted. As a result of this organic expansionInsurance Entities, ERA and our vertically integrated structure, all of our operating units possess extensive knowledge of the personal residential homeowners insurance market.

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Provide High Quality Servicereinsurance partners to our Policyholders

We strive to provide excellent customer service to each of our policyholders throughout every aspect of our business. We believe our vertically integrated business model provides a superior level of customer service for our policyholders, enhancing our reputationidentify trends and increasing the likelihood that our policyholders will renew their policies with us. We believe that when policyholders have high levels of customer satisfaction with our Company, we are able to strengthen our reputation and relationships with our independent insurance agent network. We are committed to managing our losses, loss adjustment expenses and claims administration procedures through prudent underwriting and the use of internal claims adjustment services. We believe our personnel growth and commitment to an in-house claims handling process has improved the policyholder experience and, therefore, our relationship with the policyholders agents, which we believe increases retention of policies in-force. Our monthly weighted average renewal retention rate for the year ended December 31, 2017 was 88.1%.

OUR COMPETITIVE STRENGTHS

We believe that our success, historical growth and ability to capitalize on our future growth prospects are a result of the following competitive strengths of our business and management team.

Experienced Leadership Team

We have a deep and experienced leadership team with extensive experience in the Florida personal residential homeowners insurance market. Our Chief Executive Officer, Sean P. Downes, has more than 25 years of experience in the insurance industry. Prior to Mr. Downes’ arrival, all of our claims processing was outsourced to third parties. When Mr. Downes joined our company in 1999, he oversaw our claims operations and later oversaw the development of our vertically integrated structure. Mr. Downes has worked in the Florida insurance industry during all of its most recent active hurricane seasons. In particular, Mr. Downes led the claims team of a multi-line insurance claims adjusting corporation following Hurricane Andrew and served as Chief Operating Officer of UPCIC during the 2005 and 2004 active hurricane seasons. Jon W. Springer, our President and Chief Risk Officer, has over 25 years of experience in the insurance industry, including nine years leading a team of reinsurance specialists for Willis Re before joining us to implement and oversee our reinsurance program. Prior to becoming our President and Chief Risk Officer, Mr. Springer was Chief Operating Officer and an Executive Vice President of URA and BARC.

We believe this leadership team has led us in a strategic direction that has realized many benefits for our shareholders and policyholders, evidenced in part by the 155.0% increase in our stockholders’ equity and the 136.1% increase in policyholders’ surplus that we have realized since their tenure began. Further, they are supported by a group of highly qualified individuals with industry expertise and extensive operational experience, which enables us to capitalize on our experience of having emerged from the 2004, 2005, and 2017 active hurricane seasons in sound financial condition, whereas many of our competitors are new to the market and have not experienced the challenges of an active Florida hurricane season.

Vertically Integrated Structure

We are vertically integrated with substantially all aspects of insurance underwriting, policy issuance, general administration and claims processing and settlement performed internally. Our ability to provide these services ourselves allows us to compress the cycle time of claim resolution in order to promptly pay valid claims and to control claims handling costs. In particular, by performing our own claims adjustment processes, we can better expedite meritorious claims as well as devote attention to potentially suspicious or inflated claims. As a result, we are generally able to begin the adjustment and mitigation process much earlier than if we relied more heavily on third parties, thereby reducing LAE and ultimate loss payouts. Our statutory net loss and LAE ratio for the nine months ended September 30, 2017 was 53.0%, lower than most of our peer companies. We are also able to retain a significant portion of the management and service fees that we and, indirectly, our reinsurers would otherwise pay to third parties for rendering such services. We do, however, intend to continue having a small portion of claims handled by select third parties, as we believe that maintaining relationships with third-party service providers will benefit us in the event we need their assistance in handling claims due to a catastrophic event.

In the future, we will continue to capitalize on our vertically integrated structure by retaining certain fees that we pay to our subsidiary service providers for, managing general agent, reinsurance brokerage, adjusting and other services. We currently administer 100% of all claims and outsource 35% of on-site field adjustment assignments, and thereby retain a corresponding portion of fees that would have otherwise been paid to external adjusters. These cost efficiencies will help us better withstand the financial impact of potential catastrophic storms. We also continue to retain select third-party claims adjusters to perform field services and adjust the remaining portion of our claims in order to maintain our relationships with them, so they can assist us during periods of high claims volume in providing high quality and timely service to our policyholders. Accordingly, we believe we are able to reduce expenses during non-catastrophe years while providing a high level of customer service during all years.

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Robust Independent Agent Distribution Network

We have developed long-term relationships with a network of approximately 8,800 licensed independent insurance agents – with approximately 4,300 in Florida and approximately 4,500 outside of Florida. Of our 4,300 independent Florida agents, approximately 1,600 have written business with us for over a decade. Our relationships with our Florida independent agents are critical to our success in growing our business in the future and are key differentiators when compared with competitors that have relied upon assumptions of policies from Citizens for their growth and, as a result, may not have developed the same degree of loyalty with as large a group of independent agents in Florida. We believe we have been able to build this network due to our reputation, commitment to the Florida market, experience, and integrity inrefine the underwriting process as well as our consistencyand guidelines to adequately price risk and identify needed adjustments. Our claims management operations provide cost-effective solutions in offering our products through hardservicing claims for the Insurance Entities and soft markets. Further, the responsiveness of our operating units duegenerates additional fee income from adjusting claims ceded to our vertically integrated structure enhances our relationships with our independent agents. By developing and controlling our proprietary technology system, we can rapidly respond to enhancement requests from our independent agents regarding our policy processing system.

Strong Balance Sheet, with a Proven Capital Return Strategy

reinsurers.

We have a strong balance sheet,substantially grown our in-house claims litigation team to more effectively and efficiently protect our rights in litigation, including a stable investment portfolio, a conservative reserve position, a strong and growing capital base, and a proven capital return strategy. Our investment portfolio is largely fixed maturities with a modest allocation of equities and real estate. Our fixed maturities portfolio is ~99% investment grade securities with a AA- average credit rating. We have a strong and growing capital position that contains minimal goodwill, no intangible assets, and minimal debt. We take a conservative approach to loss reserving, and have madethrough subrogation. Reflecting our substantial efforts in recent years to improve and enhance our claims operation, including the additionoperations and to address emerging claim trends, approximately 57% of our Fast Track team (which has reduced claim resolution time) and an intensified effort to collect subrogation. Since the Company was formedemployees work in 1997, we have posted substantial growth in stockholders’ equity and book value per share. We have demonstrated an ability and willingness to return capital to our shareholders, paying both a regular dividend and, over each of the past six years a special dividend, as well as repurchasing shares of our common stock in the open market and in private transactions.

MARKET

Florida

According to the U.S. Census Bureau, at June 30, 2017, Florida was the third largest state in terms of population, with approximately 21 million people. The University of Florida Bureau of Economic and Business Research estimates that Florida is expected to reach a population of approximately 26 million people by 2040,claims management operations, an increase of 41%19% since February 5, 2020. Of these employees, 38% comprise our in-house claims litigation team. Subrogation is the act of seeking reimbursement from 2010. Property ownershipa third party that caused an insurance loss to the insured for the amount we paid on the insured’s behalf.

Distribution
We market and development represent key driverssell our products primarily through our network of over 10,200 licensed independent agents (4,400 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 Florida economy. Becausestates in which we write business.
6

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 its location, Floridawhich 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 enable 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 19 states in which we do business as of December 31, 2020.
In 2019, we introduced a multi-rater quote-to-bind platform, CloveredSM, 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 exposedUVE’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 increased riskongoing basis.
Investments
Funds in excess of hurricanes duringoperating needs from the entire six monthsInsurance Entities and UVE are invested through 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 AtlanticInsurance Entities are subject to regulation and supervision by the Florida Office of Insurance Regulation (“FLOIR”). See below under “—Government 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—Item 8—Note 3 (Investments)” and “Part 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 19 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 in Tennessee and Wisconsin. During 2020, our total direct premiums written was 82.4% in Florida and 17.6% 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 seek to address the hurricane season, which spans fromrisk exposure in the state (from June 1 through November 30. Eight hurricanes30) 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 including Hurricanes Charley, Katrina, Ritahurricane seasons (during which eight hurricanes made landfall in coastal states), as well as following the 2017, 2018 and Wilma, caused combined estimated nationwide property damage of over $127 billion, a significant portion of which occurred in Florida. In September 2017, Hurricane Irma caused an estimated $17.2 billion in property damage, the majority of which occurred in Florida.2019 hurricane seasons. Given the potential for significant personal property damage, the availability of personal residentialhomeowners insurance and claims servicing are vitally important to Floridacoastal states’ residents.

The Florida residential insurance market is highly fragmented and dominated by in-state insurance companies,benefits of UVE’s reinsurance strategy in 2020 and the state’s residual insurance market, Citizens. Significant dislocationspecific programs are further discussed below and in the Florida property insurance market began following Hurricane Andrew in 1992“Item 7—Management’s Discussion and accelerated following the 2004Analysis of Financial Condition and 2005 hurricane seasons. National and regional insurers significantly reduced their shareResults of the market in Florida between 1999 and 2012. As national and regional insurance companies reduced their exposure in Florida, Citizens, which was at the time and remains today, by law, an insurer of last resort, increased efforts to provide affordable residential insurance to those residents unable to obtain coverage in the private market. As a result, Citizens’ policy count grew from roughly 800,000 policies in 2005 to a peak level of approximately 1.5 million policies in late 2011. To reduce Citizens’ risk exposure, beginning in 2010, Florida’s elected officials encouraged Citizens to focus on reducing the size of its portfolio by returning policies to the private market. Depopulation efforts have been successful, as Citizens’ policy count at September 30, 2017 was approximately 452,000. To be eligible for a Citizens policy, an applicant must either be denied comparable coverage offers from the private insurance market or have received coverage offerings from the private insurance market requiring premium payments that are more than 15% higher than a comparable Citizens policy.

According to data compiled by the FLOIR, Citizens was the second largest residential insurer in Florida as of September 30, 2017, with a market share of approximately 8.1% based on total direct premiums written in-force for personal residential insurance (excluding mobile homeowners and farmowners). As of December 31, 2017, less than 1,000 of our 618,280 Florida in-force policies, or 0.1%, were assumed from Citizens’ predecessor, as compared to some of our competitors that collectively have assumed more than 785,000 policies from Citizens since January 1, 2014. We believe we have the opportunity to significantly expand the size of our personal residential homeowners insurance business both inside and outside of Florida by pursuing organic growth, and have demonstrated this ability within Florida since 1998 and outside of Florida since 2008.

8

Operations.”
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All residential insurance companies that write business in Florida, including the Insurance Entities, are required to obtain a form of reinsurance through the Florida Hurricane Catastrophe Fund (the “FHCF”), a state-sponsored entity that provides a layer of reinsurance protection at a price that is typically lower than what would otherwise be available in the general 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. Currently, the FHCF provides $17 billion of aggregate capacity annually to its participating insurers, which may be adjusted by statute from time to time.

Other States

While we are concentrated in Florida, part of our strategy is to continue our geographic expansion outside of Florida primarily, to take advantage of opportunities to write profitable business as well as to diversify our revenue and risk. We are targeting states with underserved homeowners insurance markets where we believe there is price adequacy for our products and where policyholders would benefit from our market knowledge and integrated service model. We currently write homeowners insurance policies in Alabama, Delaware, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, and Virginia, and are also licensed to issue policies in Illinois, Iowa, New Hampshire, and West Virginia. We look to expand to markets that have opportunities for reasoned, profitable growth and that allow us to position ourselves to take advantage of market dislocation opportunities similar to what we capitalized on in Florida (e.g. following the 2017, 2005 and 2004 hurricane seasons).

COMPETITION


Competition
The market for personal residential homeowners insurance is highly competitive. In our primary market, Florida, there are approximately 127 licensed insurance companiesmany of the states in which we write business, we compete with small or regional insurers that write residential homeowners insurance policies.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 “Item“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.”

The table below shows policy count, direct written premium in-force Within the Florida marketplace, due to the dislocating weather events of the past couple years and total insured value byother market share (excluding mobile homeownersconditions, such as a proliferation of first-party litigation, competition has waned as a result of some insurers’ reduced desire, or in some cases lack of capital, to continue writing business in accordance with state regulations and farmowners) forrating agency requirements. We expect the top 20lull in 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 Florida laws, 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 by direct written premiumto 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. 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, UPCIC and other authorized insurers have filed and received approval of rate increases in Florida asthat in many instances exceed the amount by which Citizens Property Insurance Corporation may increase its rates in any single year. Accordingly, Citizens Property Insurance Corporation has become, and might increasingly be, price-competitive with UPCIC.
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 September 30, 2017,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 most recent date thatpricing 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 information is publicly available. We compete to varying degreesprevalence of litigation (including abuses with allassignments of these companiesbenefits, solicited claims and others, including large national carriers.

9

Tableother first-party litigation), technological advancements in distribution, underwriting, claims management and overall operational efficiencies, and the risk appetite of Contents

 

 

Florida Homeowners Insurance Market - Personal Residential -

 

 

 

Ranked by Direct Written Premium In-Force*

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Written

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policies

 

 

Percentage

 

 

Premium

 

 

Percentage

 

 

Total Insured

 

 

Percentage

 

Company Name

 

in-Force

 

 

Distribution

 

 

in-Force

 

 

Distribution

 

 

Value**

 

 

Distribution

 

Universal Insurance Holdings, Inc.

 

 

612,670

 

 

 

10.5

%

 

$

927,593

 

 

 

10.1

%

 

$

140,293,797

 

 

 

7.5

%

Citizens Property Insurance

   Corporation

 

 

389,990

 

 

 

6.7

%

 

 

745,951

 

 

 

8.1

%

 

 

93,360,665

 

 

 

5.0

%

Tower Hill

 

 

353,530

 

 

 

6.0

%

 

 

635,426

 

 

 

6.9

%

 

 

152,405,375

 

 

 

8.1

%

Federated National Insurance

   Company

 

 

277,379

 

 

 

4.7

%

 

 

487,640

 

 

 

5.3

%

 

 

98,376,805

 

 

 

5.2

%

Heritage Insurance Holdings, Inc.

 

 

232,854

 

 

 

4.0

%

 

 

439,461

 

 

 

4.8

%

 

 

75,153,790

 

 

 

4.0

%

USAA

 

 

219,057

 

 

 

3.7

%

 

 

403,752

 

 

 

4.4

%

 

 

66,863,296

 

 

 

3.6

%

Progressive

 

 

341,891

 

 

 

5.8

%

 

 

398,679

 

 

 

4.3

%

 

 

112,792,465

 

 

 

6.0

%

Security First Insurance Company

 

 

342,192

 

 

 

5.8

%

 

 

378,932

 

 

 

4.1

%

 

 

94,267,005

 

 

 

5.0

%

HCI Group, Inc.

 

 

135,154

 

 

 

2.3

%

 

 

345,804

 

 

 

3.8

%

 

 

42,596,761

 

 

 

2.3

%

United Insurance Holdings Corp.

 

 

177,340

 

 

 

3.0

%

 

 

301,781

 

 

 

3.3

%

 

 

71,438,025

 

 

 

3.8

%

First Protective Insurance Company

 

 

117,170

 

 

 

2.0

%

 

 

295,098

 

 

 

3.2

%

 

 

66,800,316

 

 

 

3.6

%

St. Johns Insurance Company, Inc.

 

 

169,181

 

 

 

2.9

%

 

 

257,153

 

 

 

2.8

%

 

 

72,357,431

 

 

 

3.9

%

American Integrity Insurance

   Company of Florida

 

 

237,913

 

 

 

4.1

%

 

 

256,563

 

 

 

2.8

%

 

 

82,883,738

 

 

 

4.4

%

People’s Trust Insurance Company

 

 

129,626

 

 

 

2.2

%

 

 

248,733

 

 

 

2.7

%

 

 

38,458,616

 

 

 

2.1

%

Florida Peninsula Holdings, LLC

 

 

114,201

 

 

 

1.9

%

 

 

244,551

 

 

 

2.7

%

 

 

41,938,043

 

 

 

2.2

%

Federal Insurance Company

 

 

33,479

 

 

 

0.6

%

 

 

200,750

 

 

 

2.2

%

 

 

62,136,743

 

 

 

3.3

%

Southern Fidelity

 

 

131,073

 

 

 

2.2

%

 

 

179,617

 

 

 

2.0

%

 

 

33,363,734

 

 

 

1.8

%

American International Group, Inc.

 

 

14,894

 

 

 

0.3

%

 

 

172,063

 

 

 

1.9

%

 

 

45,122,732

 

 

 

2.4

%

Allstate Corp. (Castle Key)

 

 

168,793

 

 

 

2.9

%

 

 

169,003

 

 

 

1.8

%

 

 

31,979,446

 

 

 

1.7

%

Safepoint Insurance Company

 

 

71,904

 

 

 

1.2

%

 

 

140,932

 

 

 

1.5

%

 

 

16,695,872

 

 

 

0.9

%

Total - Top 20 Insurers

 

 

4,270,291

 

 

 

72.8

%

 

$

7,229,482

 

 

 

78.7

%

 

$

1,439,284,655

 

 

 

76.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total - All Insurers

 

 

5,858,776

 

 

 

100.0

%

 

$

9,167,584

 

 

 

100.0

%

 

$

1,875,697,224

 

 

 

100.0

%

competitors.

*

The information displayed in the table above is compiled and published by the FLOIR as of September 30, 2017, based on information filings submitted quarterly by all Florida licensed insurance companies and downloaded from FLOIR’s database as of February 9, 2018. Such information is presented for each individual company or aggregated by the company’s operating subsidiaries’ market share results in Florida. State Farm Florida Insurance Company does not report this type of information to the FLOIR. Dollar values are in thousands, rounded to the nearest thousand.

**

Total insured values are for policies in-force that include wind coverage.

We compete primarily on the basis of the strength of our distribution networks, high-quality service to our independent agents and policyholders, our reputation and commitment to the Florida market, claims handling ability, product features tailored to our markets and price, among other factors. Our successful track record in writing residential homeowners insurance in catastrophe-exposed areas has enabled us to develop sophisticated risk selection and pricing techniques that endeavorstrive to identify desirable risks and accurately reflectprice the risk of loss while allowing us to be competitive in our target markets. This risk selection and pricing approach allows us to profitably offer competitive products in areas that have a high demand for property insurance yet are underserved by the national carriers. Each of the Insurance Entities is currently rated “A” (“Exceptional”) by Demotech, Inc. (“Demotech”), a rating agency specializing in evaluating the financial stability of insurers.

PRODUCTS AND DISTRIBUTION

Products

Our focus and our primary product is personal residential homeowner insurance, which accounts for the vast majority of business that we write. Our homeowners insurance products provide policyholders with the ability to receive homeowners, renters, condominium, dwelling, fire, other structures, personal property, personal liability and personal articles coverages. For the year ended December 31, 2017, we wrote an average of 19,829 new policies per month, an increase of 18.3% as compared to the prior year, and residential

10

Table of Contents

homeowners policies produced direct written premium of $982.4 million. Homeowners insurance policies accounted for 93.0% of our total direct written premium, with the remaining 7.0% comprised of Commercial Residential and fire and allied lines coverage.

The nature of our business, with respect to both claims and sales, tends to be seasonal over the course of a year, reflecting consumer behaviors in connection with the Florida residential real estate market and the need to be insured before the start of the hurricane season. The amount of written premium tends to increase just prior to the second quarter of our fiscal year and to decrease approaching the fourth quarter. We also face cyclicality resulting from hard and soft market cycles. See “Item 1A—Risk Factors—Risks Relating to Our Business—Our financial condition and operating results and the financial condition and operating results of our Insurance Entities may be adversely affected by the cyclical nature of the property and casualty insurance business.”

The geographical distribution of our policies in-force, in-force premium and total insured value for Florida by county were as follows as of December 31, 2017 (dollars in thousands, rounded to the nearest thousand):

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

In-Force

 

 

 

 

 

 

Total Insured

 

 

 

 

 

County

 

Count

 

 

%

 

 

Premium

 

 

%

 

 

Value

 

 

%

 

South Florida

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broward

 

 

92,991

 

 

 

15.1

%

 

$

184,217

 

 

 

19.9

%

 

$

24,626,640

 

 

 

16.8

%

Palm Beach

 

 

79,122

 

 

 

12.8

%

 

 

144,032

 

 

 

15.6

%

 

 

21,790,700

 

 

 

14.9

%

Miami-Dade

 

 

82,352

 

 

 

13.3

%

 

 

165,001

 

 

 

17.8

%

 

 

18,516,985

 

 

 

12.6

%

South Florida exposure

 

 

254,465

 

 

 

41.2

%

 

 

493,250

 

 

 

53.3

%

 

 

64,934,325

 

 

 

44.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other significant* Florida counties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pinellas

 

 

39,366

 

 

 

6.4

%

 

 

45,955

 

 

 

5.0

%

 

 

6,893,810

 

 

 

4.7

%

Hillsborough

 

 

26,248

 

 

 

4.2

%

 

 

33,540

 

 

 

3.6

%

 

 

6,188,844

 

 

 

4.2

%

Escambia

 

 

19,173

 

 

 

3.1

%

 

 

29,943

 

 

 

3.2

%

 

 

5,489,568

 

 

 

3.8

%

Collier

 

 

21,039

 

 

 

3.4

%

 

 

27,011

 

 

 

2.9

%

 

 

3,572,248

 

 

 

2.4

%

Lee

 

 

26,534

 

 

 

4.3

%

 

 

26,254

 

 

 

2.8

%

 

 

4,158,638

 

 

 

2.8

%

Polk

 

 

18,309

 

 

 

3.0

%

 

 

25,030

 

 

 

2.7

%

 

 

5,529,038

 

 

 

3.8

%

Pasco

 

 

23,575

 

 

 

3.8

%

 

 

24,170

 

 

 

2.6

%

 

 

7,615,170

 

 

 

5.2

%

Brevard

 

 

19,354

 

 

 

3.1

%

 

 

24,078

 

 

 

2.6

%

 

 

3,944,004

 

 

 

2.7

%

Total other significant* counties

 

 

193,598

 

 

 

31.3

%

 

 

235,981

 

 

 

25.4

%

 

 

43,391,320

 

 

 

29.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In-Force

 

 

 

 

 

 

Total Insured

 

 

 

 

 

Summary for all of Florida

 

Count

 

 

%

 

 

Premium

 

 

%

 

 

Value

 

 

%

 

South Florida exposure

 

 

254,465

 

 

 

41.2

%

 

 

493,250

 

 

 

53.3

%

 

 

64,934,325

 

 

 

44.3

%

Total other significant* counties

 

 

193,598

 

 

 

31.3

%

 

 

235,981

 

 

 

25.4

%

 

 

43,391,320

 

 

 

29.6

%

Other Florida counties

 

 

170,217

 

 

 

27.5

%

 

 

196,856

 

 

 

21.3

%

 

 

38,298,825

 

 

 

26.1

%

Total Florida

 

 

618,280

 

 

 

100.0

%

 

$

926,087

 

 

 

100.0

%

 

$

146,624,470

 

 

 

100.0

%

insurance.

*

Significant counties defined as greater than 2.5% of total in-force premium as of December 31, 2017.

11

Table of Contents

The geographical distribution of our policies in-force, in-force premium and total insured value across all states were as follows, as of December 31, 2017, 2016 and 2015 (dollars in thousands, rounded to the nearest thousand):

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

In-Force

 

 

 

 

 

 

Total Insured

 

 

 

 

 

State

 

Count

 

 

%

 

 

Premium

 

 

%

 

 

Value

 

 

%

 

Florida

 

 

618,280

 

 

 

80.9

%

 

$

926,087

 

 

 

87.6

%

 

$

146,624,470

 

 

 

73.9

%

North Carolina

 

 

48,866

 

 

 

6.4

%

 

 

36,993

 

 

 

3.5

%

 

 

14,275,508

 

 

 

7.2

%

Georgia

 

 

31,305

 

 

 

4.1

%

 

 

32,343

 

 

 

3.1

%

 

 

11,380,109

 

 

 

5.7

%

South Carolina

 

 

13,769

 

 

 

1.8

%

 

 

13,372

 

 

 

1.3

%

 

 

4,120,728

 

 

 

2.1

%

Massachusetts

 

 

10,132

 

 

 

1.3

%

 

 

13,162

 

 

 

1.2

%

 

 

5,857,450

 

 

 

3.0

%

Indiana

 

 

11,622

 

 

 

1.5

%

 

 

9,236

 

 

 

0.9

%

 

 

3,768,044

 

 

 

1.9

%

Pennsylvania

 

 

10,554

 

 

 

1.4

%

 

 

7,292

 

 

 

0.7

%

 

 

4,047,997

 

 

 

2.1

%

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

%

Maryland

 

 

2,354

 

 

 

0.3

%

 

 

1,901

 

 

 

0.2

%

 

 

869,685

 

 

 

0.4

%

Hawaii

 

 

2,009

 

 

 

0.3

%

 

 

1,830

 

 

 

0.2

%

 

 

842,740

 

 

 

0.4

%

Michigan

 

 

1,330

 

 

 

0.2

%

 

 

1,574

 

 

 

0.1

%

 

 

491,906

 

 

 

0.2

%

Delaware

 

 

828

 

 

 

0.1

%

 

 

903

 

 

 

0.0

%

 

 

400,076

 

 

 

0.2

%

New Jersey

 

 

877

 

 

 

0.1

%

 

 

858

 

 

 

0.0

%

 

 

428,072

 

 

 

0.2

%

New York

 

 

54

 

 

 

0.0

%

 

 

52

 

 

 

0.0

%

 

 

27,191

 

 

 

0.0

%

Total

 

 

764,518

 

 

 

100.0

%

 

 

1,057,602

 

 

 

100.0

%

 

 

198,397,010

 

 

 

100.0

%

 

 

As of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

In-Force

 

 

 

 

 

 

Total Insured

 

 

 

 

 

State

 

Count

 

 

%

 

 

Premium

 

 

%

 

 

Value

 

 

%

 

Florida

 

 

577,783

 

 

 

84.6

%

 

$

862,332

 

 

 

90.2

%

 

$

134,493,470

 

 

 

79.1

%

North Carolina

 

 

41,393

 

 

 

6.1

%

 

 

30,858

 

 

 

3.2

%

 

 

11,972,066

 

 

 

7.0

%

Georgia

 

 

24,257

 

 

 

3.6

%

 

 

23,849

 

 

 

2.5

%

 

 

8,450,315

 

 

 

5.0

%

South Carolina

 

 

12,230

 

 

 

1.8

%

 

 

12,393

 

 

 

1.3

%

 

 

3,592,203

 

 

 

2.1

%

Massachusetts

 

 

7,451

 

 

 

1.1

%

 

 

9,964

 

 

 

1.0

%

 

 

4,352,990

 

 

 

2.6

%

Indiana

 

 

6,835

 

 

 

1.0

%

 

 

5,381

 

 

 

0.6

%

 

 

2,162,967

 

 

 

1.3

%

Pennsylvania

 

 

5,303

 

 

 

0.8

%

 

 

3,677

 

 

 

0.4

%

 

 

1,925,226

 

 

 

1.1

%

Minnesota

 

 

2,089

 

 

 

0.3

%

 

 

2,251

 

 

 

0.2

%

 

 

896,969

 

 

 

0.5

%

Virginia

 

 

269

 

 

 

0.0

%

 

 

224

 

 

 

0.0

%

 

 

130,556

 

 

 

0.1

%

Alabama

 

 

624

 

 

 

0.1

%

 

 

624

 

 

 

0.1

%

 

 

182,456

 

 

 

0.1

%

Maryland

 

 

1,756

 

 

 

0.2

%

 

 

1,413

 

 

 

0.1

%

 

 

640,919

 

 

 

0.4

%

Hawaii

 

 

1,767

 

 

 

0.2

%

 

 

1,689

 

 

 

0.2

%

 

 

756,428

 

 

 

0.4

%

Michigan

 

 

538

 

 

 

0.1

%

 

 

651

 

 

 

0.1

%

 

 

190,360

 

 

 

0.1

%

Delaware

 

 

621

 

 

 

0.1

%

 

 

663

 

 

 

0.1

%

 

 

289,941

 

 

 

0.2

%

New Jersey

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

New York

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

 

682,916

 

 

 

100.0

%

 

 

955,969

 

 

 

100.0

%

 

 

170,036,866

 

 

 

100.0

%

12

Table of Contents

 

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

In-Force

 

 

 

 

 

 

Total Insured

 

 

 

 

 

State

 

Count

 

 

%

 

 

Premium

 

 

%

 

 

Value

 

 

%

 

Florida

 

 

550,800

 

 

 

88.2

%

 

$

821,631

 

 

 

92.6

%

 

$

127,705,731

 

 

 

84.0

%

North Carolina

 

 

34,084

 

 

 

5.4

%

 

 

25,411

 

 

 

2.9

%

 

 

9,981,069

 

 

 

6.6

%

Georgia

 

 

17,425

 

 

 

2.8

%

 

 

16,013

 

 

 

1.8

%

 

 

5,716,851

 

 

 

3.8

%

South Carolina

 

 

10,479

 

 

 

1.7

%

 

 

11,744

 

 

 

1.3

%

 

 

3,135,568

 

 

 

2.1

%

Massachusetts

 

 

4,720

 

 

 

0.8

%

 

 

6,455

 

 

 

0.7

%

 

 

2,790,054

 

 

 

1.8

%

Indiana

 

 

2,694

 

 

 

0.4

%

 

 

2,146

 

 

 

0.3

%

 

 

851,536

 

 

 

0.6

%

Pennsylvania

 

 

1,017

 

 

 

0.2

%

 

 

738

 

 

 

0.1

%

 

 

360,991

 

 

 

0.2

%

Minnesota

 

 

251

 

 

 

0.0

%

 

 

277

 

 

 

0.0

%

 

 

108,337

 

 

 

0.1

%

Virginia

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Alabama

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Maryland

 

 

1,278

 

 

 

0.2

%

 

 

1,026

 

 

 

0.1

%

 

 

464,081

 

 

 

0.3

%

Hawaii

 

 

1,523

 

 

 

0.2

%

 

 

1,547

 

 

 

0.2

%

 

 

680,701

 

 

 

0.4

%

Michigan

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Delaware

 

 

396

 

 

 

0.1

%

 

 

407

 

 

 

0.0

%

 

 

181,857

 

 

 

0.1

%

New Jersey

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

New York

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

 

624,667

 

 

 

100.0

%

 

 

887,395

 

 

 

100.0

%

 

 

151,976,776

 

 

 

100.0

%

Also see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 1A—Risk Factors—Risks Relating to Our Business—Because we conduct the substantial majority of our business in Florida, our financial results depend on the regulatory, economic and weather conditions in Florida” for discussion on geographical diversification.

Product Pricing

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, orsuch as windstorm loss reduction features.

13

Tabletechniques or devices.

Customer Experience
Drivers of Contents

The following table shows UPCIC’s most recently approved rate changes. All percentage increasesthe customer experience include reliability and decreases are expressed as statewide averages.

 

 

2017 Rate Changes

 

 

2016 Rate Changes

 

 

2015 Rate Changes

 

 

 

 

 

 

 

Percentage Increase

 

 

 

 

 

 

Percentage Increase

 

 

 

 

 

 

Percentage Increase

 

 

 

Effective Dates

 

State

 

(Decrease)

 

 

Effective Dates

 

State

 

(Decrease)

 

 

Effective Dates

 

State

 

(Decrease)

 

Homeowners

 

December 7, 2017 for new business;     January 26, 2018 for renewal business

 

FL

 

3.40%

 

 

None

 

FL

 

None

 

 

April 15, 2015 for new business;     May 25, 2015 for renewal business

 

FL

 

 

2.20%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

None

 

NC

 

None

 

 

None

 

NC

 

None

 

 

June 1, 2015 for new business and renewal business

 

NC

 

 

0.60%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

None

 

SC

 

None

 

 

None

 

SC

 

None

 

 

November 20, 2015 for new business;     January 6, 2016 for renewal business

 

SC

 

 

2.46%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

None

 

GA

 

 

None

 

 

June 1, 2016 for new business and renewal business

 

GA

 

 

7.50%

 

 

None

 

GA

 

None

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fire

 

February 3, 2018 for new business;     March 25, 2018 for renewal business

 

FL

 

 

6.00%

 

 

August 31, 2016 for new business;     October 19, 2016 for renewal business

 

FL

 

 

3.70%

 

 

April 20, 2015 for new business;     June 5, 2015 for renewal business

 

FL

 

 

4.90%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

None

 

NC

 

None

 

 

None

 

NC

 

None

 

 

April 1, 2015 for new business and renewal business

 

NC

 

 

1.22%

 

Distribution

value, financial strength and ease-of-use. We marketstrive to provide excellent reliability and sellvalue through the strength of our products primarily throughdistribution networks, high-quality service to our network of approximately 8,800 licensedpolicyholders and independent agents, which we continueour claims handling ability and product features tailored to build bothour markets.

The current trends in Floridathe industry in regard to ease-of-use suggest an increased focus on utilizing technology in the distribution channel, enabling technology and machine learning in other states.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 strive to our independent agent force, we offer policiesprovide value to consumers through our online platform Universal DirectSM as described further below. Of our independent agents,operating efficiencies across the top 20% accounted for approximately 90% of our direct written premiumbusiness. Our monthly weighted average renewal retention rate for the year ended December 31, 2017. Currently, we have approximately 4,300 independent agents in Florida and approximately 4,500 independent agents outside2020 was 88.8%.
8

Reinsurance
Reinsurance enables UVE’s 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 Florida. Our relationships with independent agents and their relationships with their customers are critical to our ability to identify, attract and retain profitable business. See “Item 1A—Risk Factors—Risks Relating to Our Business—Because we rely on independent insurance agents,a specified group or class of risks ceded by the lossprimary insurer, while facultative reinsurance provides coverage for specific individual risks. Within each classification, reinsurance can be further classified as quota share or excess of these independent agent relationshipsloss. Quota-share reinsurance is where the primary insurer and the business they controlreinsurer share proportionally or our ability to attract new independent agents could have an adverse impact on our business.” We have developed our independent agency distribution channel since our inception, and we believe we have built significant credibility and loyalty within the independent agent communitypro-rata in the states in which we operate, particularly Florida. We actively participate in the recruitmentdirect premiums and training of our independent agents and provide each agency with training sessions on topics such as submitting claims and underwriting guidelines, either over the phone or through an internet portal. We also engage a third-party market representative to assist in ongoing training and recruitment initiatives in alllosses of the states in which we write business.

A key part of our distribution strategy is to utilize an attractive commission-based compensation plan as an incentiveinsurer. Excess-of-loss reinsurance indemnifies the direct insurer or reinsurer for independent agents to place business with us. We also attempt to provide excellent service to our independent agents and brokers, maintaining a

14

Table of Contents

long-standing partnership with our independent agents and a consistent presence in our target markets through hard and soft market cycles. Our internal staff and specialists provide support to our independent agents, including use of various technologies to assist with the delivery of service to our policyholders. Our independent agents have access to all policy and payment information through our online, proprietary system. This system allows our independent agents to provide quotes within minutes, and because we control our technology, we are able to quickly respond to agents who need troubleshooting assistance or who offer recommendations for improvement. This system has evolved into a highly valued tool that enables agents to quickly understand the status of a policy and assist their clients with any policy-related questions. We regularly monitor and enhance the system to provide the best point of sale tools possible. Agents are provided dedicated internal contacts should they need assistance, and agencies are proactively contacted on a quarterly basis to solicit feedback.

As a result of the superior service and compensation we provide, we have relatively little turnover among many of our key independent agents. Approximately 1,600, or 18%, of our independent agents have relationships with us that span a decade or more.

In addition to distributing our products through our independent agent network, we also utilize our unique direct-to-consumer platform, Universal DirectSM, to sell products directly to consumers. In April 2016, the Company launched a direct-to-consumer online platform called Universal DirectSM, which enables 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 16 states in which the Company offers policies as of December 31, 2017. During the year ended December 31, 2017, 7,361 policies were written representing $8.6 million in direct written premium, as compared to 1,320 policies written representing $1.4 million in direct written premium during the year ended December 31, 2016.

Services

We are vertically integrated with substantially all aspects of insurance underwriting, policy issuance, general administration and claims processing and settlement performed internally, which allows us to retain a majority of the economics associated with the issuance and administration of our insurance policies in-force. Vertical integration also maintains quality service throughout the policy life cycle. Below is a summary of the services we provide.

Underwriting

All underwriting is performed internally utilizing our state-approved underwriting manuals as the basis of our rate-making and risk assessment. Our manuals have been developed and enhanced over a number of years based on our deep knowledge of the homeowners insurance industry, and based on an ongoing analysis of our own loss experience. Initially, all new business must be submitted to us through our proprietary policy processing system and risk criteria, which allows our independent agent partners to generate quotes and bind policies subject to compliance with our binding authority guidelines and risk criteria. Policies that are bound by either independent agents or through Universal DirectSM are further reviewed by our underwriting staff for accuracy of data, including reports of on-site inspections. Our underwriting process is constantly evolving as new and different type of risks and claim types become prevalent. However, see “Item 1A—Risk Factors—Risks Relating to Our Business—The failure of the risk mitigation strategies we utilize could have a material adverse effect on our financial condition or results of operations.”

Policy Administration

We have developed a proprietary suite of applications that provide underwriting, policy and claim administration services, including billing, policy maintenance, inspections, refunds, commissions and data analysis. Our proprietary rating engine aligns with various state requirements to support our geographic expansion. This sophisticated policy processing system is solely managed by our employees, and enhancements are implemented while adhering to strict internal control requirements to ensure business continuity.

Claims Administration

We closely manage all aspects of the claims process, from processing the initial filing to claim conclusion. When a policyholder contacts us to report a claim, members of our claims department create a claim file and aggregate the appropriate supporting documentation. Claims are then reviewed by our managers and staff adjusters, who assess the extent of the loss, complete on-site investigations when required, and determine the resources needed to adjust each claim. We perform or supervise the adjusting services rendered for our policyholders at all stages of the claims process, which we believe allows us to reduce cost and provide a high level of customer service. We assign a small percentage of field inspections to third-party adjusters in order to maintain relationships that will allow us to continue to provide high quality and timely service following a catastrophe or any other period of unusually high claim volume, such as the increase in claims that occurred after Hurricane Irma in September 2017.

15

Table of Contents

Reinsurance Intermediary

We manage our reinsurance program through our internal reinsurance intermediary, BARC, in conjunction with URA. Approximately 10 years ago, we hired a dedicated team of reinsurance specialists from Willis Re, including our President and Chief Risk Officer, Jon W. Springer, to design a customized reinsurance strategy for us and to develop our in-house analytical capabilities. Our reinsurance team has an average of 25 years of knowledge and expertise of the reinsurance industry. We have two experienced actuaries and analytics modeling personnel on staff at BARC to assist in evaluating and designing our reinsurance program. Not only do we receive a portion of the fees that otherwise would be paidloss in commissions to a third-party reinsurance intermediary, we also develop and maintain long-term relationships with our reinsurers. We also utilize Guy Carpenter as a third-party reinsurance intermediary as needed, enabling us to capitalize on its market experience and knowledge as well as our internal capabilities. Guy Carpenter works closely with our teams at BARC and URA in designing our reinsurance program to obtain favorable pricing, as well as continually evaluating prevailing costs and the levelexcess of coverage we feel we need in order to capitalize on favorable market conditions.

REINSURANCE

an agreed upon amount or retention.

Developing and implementing our reinsurance strategy to adequately protect usour balance sheet and Insurance Entities in the event of one or more catastrophes while maintaining efficient reinsurance costs has been a key focusstrategic priority for our leadership team.UVE. For 2020, UVE utilized excess of loss reinsurance. The benefits of the reinsurance strategy in 20172020 and the specific programs are further discussed in “Item 7 —7—Management’s Discussion and Analysis of Financial ConditionsCondition and Results of Operations.” In recent years, the property and casualty insurance market has experienced a substantial increase in the availability of property catastrophe reinsurance resulting from the increased supply of capital from non-traditional reinsurance providers, including private capital and hedge funds. This increased capital supply, coupled with a lack of recent significant catastrophic activity in Florida and elsewhere around the world, and underwriting improvements, such as Florida’s wind mitigation efforts to strengthen homes subject to wind events, has reduced the cost of property catastrophe reinsurance, directly benefitting significant reinsurance buyers, such as us.

In order to limit our potential exposure to catastrophic events, we purchase significant reinsurance from third-party reinsurers. We rely on third-party reinsurers and the FHCF, and do not have any captive or affiliated reinsurance arrangements in place.Florida Hurricane Catastrophe Fund (the “FHCF”). The FLOIR requires us, andlike 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 2017-20182020-2021 reinsurance program meets and provides reinsurance in excess of the FLOIR’s requirements, which are based on, among other things, the probable maximum loss that we would incur from an individual catastrophic event estimated to occur once in every 100 years, based on our portfolio of insured risks and a series of stress test catastrophe loss scenarios based on past historical events. As respectsIn respect to the single catastrophic event, the nature, severity and location of the event giving rise to such a probable maximum loss differs for each insurer depending on 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.

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 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 Insurance Entities. 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 and which is allocated among participating insurers according to factors such as the participating insurers’ relative hurricane exposures and their respective coverage elections.
We believe our retention under the reinsurance program is appropriate and structured to protect our policyholders.customers. We test the sufficiency of our reinsurance program by subjecting our personal residential exposures to statistical testing using a third-party hurricane model, RMS RiskLink v17.0v18.1 (Build 1825)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.

UPCIC’s 2017-2018 Reinsurance Program

Third-Party Reinsurance

Our annual reinsurance program, which is segmented into layersimpact. Furthermore, as part of coverage, as is industry practice, protects us against excess propertyour operational excellence initiatives, we continually look to enable new technology to refine our data intelligence on catastrophe losses. Our 2017-2018 reinsurance program includes the mandatory coverage required by lawrisk modeling.

Seasonality
The nature of our business tends to be placedseasonal during the year, reflecting consumer behaviors in connection with the FHCF, in which weFlorida residential real estate market and the hurricane season. We have elected to participate at 90%, or the highest level, and also includes private reinsurance below, alongside and above the FHCF layer. In placing our 2017-2018 reinsurance program, we obtained multiple years of coverage for an additional portion of the program. We believe this multi-year arrangement will allow us to capitalize on favorable pricing and contract terms and conditions and allow us to mitigate uncertainty with respecthistorically experienced higher direct premiums written just prior to the price of future reinsurance coverage, our single largest cost. (For 2015-2016, we eliminated our quota share reinsurance effective as of June 1, 2015, while obtaining additional excess of loss catastrophe coverage. We believe that this new structure will continue to protect us in years in which a catastrophe may occur, and in non-catastrophe years will decrease our reinsurance costs and increase the amount of premium we retain. These lower costs and higher premium retention will enable us to further increase our stockholders’ equity in order to profitably grow our business.)

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The total cost of UPCIC’s private catastrophe reinsurance program for all states as described below, effective June 1, 2017 through May 31, 2018, is $155.5 million. In addition, UPCIC has purchased reinstatement premium protection as described below, the cost of which is $25.7 million. The largest private participants in UPCIC’s reinsurance program include leading reinsurance companies and providers such as Nephila Capital, Everest Re, RenaissanceRe, Chubb Tempest Re and Lloyd’s of London syndicates.

We have used the model results noted above to stress test the completeness of the program by simulating a recurrence of the 2004 calendar year, in which four large catastrophic hurricanes made landfall in Florida. This season is considered to be the worst catastrophic year in Florida’s recorded history. Assuming the reoccurrence of the 2004 calendar year events, including the same geographic path of each such hurricane, the modeled estimated net loss to us in 2017 with the reinsurance coverage described herein would be approximately $84 million (after tax, net of all reinsurance recoveries), the same as it would have been in 2016. We estimate that, based on our portfolio of insured risks as of December 31, 2017 and 2016, a repeat of the four 2004 calendar year events would have exhausted approximately 27.0% and 25.0%, respectively,second quarter of our property catastrophe reinsurance coverage.

UPCIC’s Retention

UPCIC hasfiscal year and lower direct premiums written approaching the fourth quarter, as a net retentionresult of $35 million per catastrophe event for losses incurred, in all states, up to a first event loss of $2.778 billion. UPCIC also purchases a separate underlying catastrophe program to further reduce its retention for all losses occurring in any state other than Florida (the “Other States Reinsurance Program”). UPCIC retains only $5 million under its Other States Reinsurance Programconsumer behaviors in the first eventFlorida residential real estate market and only $1 million under its Other States Reinsurance Program for the second through fourth events. These retention amounts are gross of any potential tax benefit we would receive in paying such losses.

First Layer

Immediately above UPCIC’s net retention, we have $55 million of reinsurance coverage from third-party reinsurers for up to four separate catastrophic events, for all states. Specifically, we have purchased reinsurance coverage for the first and third catastrophic events, and each such coverage allows for one reinstatement upon the payment of reinstatement premiums, which would cover the second and fourth catastrophic events. This coverage has been obtained from three contracts as follows:

68.33% of $55 million in excess of $35 million provides coverage on a multi-year basis through May 31, 2019;

31.67% of $55 million in excess of $35 million provides coverage for the 2017-2018 period; and

100% of $55 million in excess of $35 million and in excess of $110 million otherwise recoverable (from the first and second events) provides the third and fourth event coverage for the 2017-2018 period.

For the first two contracts above, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event, we have purchased reinstatement premium protection to pay the required premium necessary for the reinstatement of these coverages.

Second Layer

Above the first layer, for losses exceeding $90 million, we have purchased a second layer of coverage for losses up to $445 million – in other words, for the next $355 million of losses. This coverage has been obtained from two contracts as follows:

58% of $355 million in excess of $90 million provides coverage through May 31, 2020; and

42% of $355 million in excess of $90 million provides coverage for the 2017-2018 period

In this layer, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event, we have purchased reinstatement premium protection insurance to pay the required premium necessary for the reinstatement of these coverages. Both of these contracts extend coverage to all states.

Third Layer

Above the first and second layers, we have purchased a third layer of coverage for losses up to $540 million – in other words, for the next $95 million of losses. This coverage was obtained from two contracts as follows:

68.33% of $95 million in excess of $445 million provides coverage on a multi-year basis through May 31, 2019; and

31.67% of $95 million in excess of $445 million provides coverage for the 2017-2018 period.

In this layer, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event, we have purchased reinstatement premium protection insurance to pay the required premium necessary for the reinstatement of these coverages. Both of these contracts extend coverage to all states.

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Fourth, Fifth and Sixth Layers

In the fourth, fifth and sixth layers, we have purchased reinsurance for $55 million of coverage in excess of $540 million in losses incurred by us (net of the FHCF layer), $193 million of coverage in excess of $595 million in losses incurred by us (net of the FHCF layer), and $125 million of coverage in excess of $788 million, respectively, for a total of $878 million of coverage (net of the FHCF layer) by third-party reinsurers. With respect to the fourth layer, to the extent that all of our coverage or a portion thereof is exhausted in a catastrophic event, we have purchased reinstatement premium protection to pay the required premium necessary for the reinstatement of this coverage. All three layers’ coverage extends to all states.

UPCIC structures its reinsurance coverage into layers and utilizes a cascading feature such that the second, third, fourth, fifth and sixth reinsurance layers all attach at $90 million. Any layers above the $90 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. This means that, unless losses exhaust the top layer of our coverage, we are exposed to only $35 million in losses, pre-tax, per catastrophe for each of the first four events. In addition to tax benefits that could reduce our ultimate loss, we anticipate that certain fees paid to our subsidiary service providers by our Insurance Entities and, indirectly, our reinsurers, would also increase during an active hurricane season which could also offset claim-related losses we would have to pay on our insurance policies. The subsidiary companies, and UPCIC in particular, experienced a significant volume of claims from Hurricane Irma which surpassed the Company’s per occurrence retention of $35 million and triggered its reinsurance program. The program responded according exactly to plan and the weighted average of funds received from third party reinsurance partners was less than 4 business days.  Fees paid to our subsidiary service providers increased due to both the volume of claims administered as well as additional premiums paid to reinstate reinsurance coverage. 

Other States Reinsurance Program

The total cost of UPCIC’s private catastrophe reinsurance program for other states as described below, effective June 1, 2017 through May 31, 2018, is $8.9 million. In addition, UPCIC has purchased reinstatement premium protection as described below, the cost of which is $1.85 million.

Effective June 1, 2017 through June 1, 2018, under an excess catastrophe contract specifically covering risks located outside the state of Florida and intended to further reduce UPCIC’s $35 million net retention, as noted above, UPCIC has obtained catastrophe coverage of $30 million in excess of $5 million covering certain loss occurrences, including hurricanes, in states outside of Florida. This catastrophe coverage has a second full limit available with additional premium calculated pro rata as to amount and 100% as to time, as applicable. All catastrophe layers are placed with a cascading feature so that all capacity could be made available in excess of $5 million under certain loss scenarios. Further, UPCIC purchased subsequent catastrophe event excess of loss reinsurance specifically covering risks outside of Florida to cover certain levels of loss through four catastrophe events including hurricanes. Specifically, UPCIC obtained catastrophe coverage that covers 100% of $4,000,000 excess of $1,000,000 in excess of $4,000,000 otherwise recoverable. This coverage has two free reinstatements and a total of $12,000,000 of coverage available to UPCIC.

In certain circumstances involving a first catastrophic event impacting both Florida and other states, UPCIC’s retention could result in pre-tax net liability as low as $5,000,000 – the $35 million net retention under the all states reinsurance program could be offset by as much as $30 million in coverage under the Other States Reinsurance Program – or 1.6% of UPCIC’s statutory policyholders’ surplus as of December 31, 2017.

FHCF

UPCIC’s third-party reinsurance program supplements the FHCF coverage we are required to purchase every year. The limit and retention of the FHCF coverage we receive each year is subject to upward or downward adjustment based on, among other things, submitted exposures to the FHCF by all participants. As of June 1, 2017, we estimate our FHCF coverage includes a maximum provisional limit of 90% of $2,075.5 million, or $1,868 million, in excess of $618 million. The estimated premium that UPCIC plans to cede to the FHCF for the 2017 hurricane season is $124 million.

Coverage purchased from third-party reinsurers, as described above, adjusts to provide coverage for certain losses not otherwise covered by the FHCF. The FHCF coverage cannot be reinstated once exhausted, but it does provide coverage for multiple events. The FHCF coverage extends only to losses to our Florida portfolio due to a declared hurricane that causes storm losses in Florida.

The third-party reinsurance we purchase for UPCIC is therefore net of FHCF recovery. When our FHCF and third-party reinsurance coverages are taken together, UPCIC has reinsurance coverage of up to $2,778 million for the first event, as illustrated by the graphic below. Should a catastrophic event occur, we would retain up to $35 million pre-tax for each catastrophic event, and would also be responsible for any additional losses that exceed our top layer of coverage.

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UPCIC All States 1st Event

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UPCIC Other States (Non-Florida) 1st Event

APPCIC’s 2017-2018 Reinsurance Program

Third-Party Reinsurance

The total cost of APPCIC’s private catastrophe and multiple line excess reinsurance program, effective June 1, 2017 through May 31, 2018, is $1.88 million. In addition, APPCIC has purchased reinstatement premium protection as described below, the cost of which is $59,500. The largest private participants in APPCIC’s reinsurance program include leading reinsurance companies such as Everest Re, Chubb Tempest Re, Hiscox, Hannover Ruck, and Lloyd’s of London syndicates.

APPCIC’s Retention

APPCIC has a net retention of $2 million for all losses per catastrophe event for losses incurred up to a first event loss of $28.1 million. This retention amount is gross of any potential tax benefit we would receive in paying such losses.

First Layer

Immediately above APPCIC’s net retention we have $3.2 million of reinsurance coverage from third-party reinsurers. Specifically, we have purchased reinsurance coverage for the first event, and such coverage allows for one reinstatement upon the payment of reinstatement premiums, which would cover the second and potentially more catastrophic events. We have purchased reinstatement premium protection to pay the required premium necessary for the initial reinstatement of this coverage for a second catastrophic event.

Second and Third Layers

In the second and third layers, we have purchased reinsurance for $1.7 million of coverage in excess of $5.2 million in losses incurred by us (net of the FHCF layer) and $7 million of coverage in excess of $6.9 million in losses incurred by us (net of the FHCF layer), respectively.

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APPCIC structures its reinsurance coverage into layers and utilizes a cascading feature such that the second and third reinsurance layers all attach at $2 million. 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. This means that, unless losses exhaust the top layer of our coverage, we are only exposed to $2 million in losses, pre-tax, per catastrophe for each of the first two events. In addition to tax benefits that could reduce our ultimate loss, we anticipate that certain fees paid to our subsidiary service providers by our Insurance Entities and, indirectly, our reinsurers would also increase during an active hurricane season, which could also offset losses we would have to pay on our insurance policies.

FHCF

APPCIC’s third-party reinsurance program is used to supplement the FHCF reinsurance we are required to purchase every year. The limit and retention of the FHCF coverage we receive each year is subject to upward or downward adjustment based on, among other things, submitted exposures to the FHCF by all participants. As of June 1, 2017, we estimate our FHCF coverage includes a maximum provisional limit of 90% of $15.8 million, or $14.2 million, in excess of $4.7 million. The estimated premium that APPCIC plans to cede to the FHCF for the 2017 hurricane season is $943 thousand. Factoring in our estimated coverage under the FHCF, we purchase coverage alongside our FHCF coverage from third-party reinsurers as described above, which adjusts to provide coverage for certain losses not otherwise covered by the FHCF. The FHCF coverage cannot be reinstated once exhausted, but it does provide coverage for multiple events. The FHCF coverage extends only to losses to our portfolio due to a declared hurricane that causes storm losses in Florida.

The third-party reinsurance we purchase for APPCIC is therefore net of FHCF recovery. When our FHCF and third-party reinsurance coverages are taken together, APPCIC has reinsurance coverage of up to $28.1 million, as illustrated by the graphic below. Should a catastrophic event occur, we would retain $2 million pre-tax for each catastrophic event, and would also be responsible for any additional losses that exceed our top layer of coverage.

APPCIC 1st Event

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Multiple Line Excess of Loss

APPCIC also purchases extensive multiple line excess per risk reinsurance with various reinsurers due to the high valued 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 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 million aggregate limit applies to the term of the contract for casualty-related losses. This contract also contains a profit sharing feature available to APPCIC if the contract meets specific performance measures.

INVESTMENTS

We invest excess funds for each of the Insurance Entities and UVE. We have retained third-party investment advisers to advise us and manage our investment portfolio and short-term cash investments. Our Board’s Investment Committee oversees these advisers and reports overall investment results to our Board of Directors, at least on a quarterly basis.

The investment activities of the Insurance Entities are subject to regulation and supervision by the FLOIR.affecting coastal states. See “—Government Regulation and Initiatives.” 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) and the amount of total investments in preferred stock and common stock. While we seek to appropriately limit the size and scope of investments in our portfolio, UVE is not similarly restricted by Florida law. Therefore, the investments made by UVE may differ from those made by the Insurance Entities. We do not purchase 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. Our investment portfolio’s secondary investment objective is to provide a total rate of return with an emphasis on investment income. We focus on relatively short-term investments, with approximately 8.0% of the fair value of our portfolio with contractual maturities due in one year or less, and another 44.7% due after one year but before five years.

See ““Part I—Item 8—Note 3 (Investments)” and “Item 1A—Risk Factors—Risks Relating to Investments” for more information about our investments.

LIABILITY FOR UNPAID LOSSES AND LAE

We generally use the terms “loss” or “losses” to refer to both loss and LAE net of estimated subrogation recoveries. We establish reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we estimate we will be required to pay in the future. Our policy is to establish these loss reserves after considering all information known to us at each reporting period. Accordingly, at any given point in time, our loss reserve represents our best estimate of the ultimate settlement and administration cost of our insured claims incurred and unpaid net of estimated receivables for subrogation. Since the process of estimating loss 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, our ultimate liability will likely differ from these estimates. See “Item 1A—Risk Factors—Risks Relating to Our Business—Actual claims incurred may exceed current reserves established for claimsBusiness and may adversely affect ourOperations—Our financial condition and 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.

When a claim involving a probable loss is reported, we establish a liability for the estimated amount of our ultimate loss and LAE payments. The estimate of the amount of the ultimate loss is based upon such factors as the type of loss, jurisdiction of the occurrence, knowledge of the circumstances surrounding the claim, severity of injury or damage, potential for ultimate exposure, estimate of liability on the part of the insured, past experience with similar claims and the applicable policy provisions. Opportunities for subrogation are also identified for further analysis and collection from third parties. All newly reported claims begin with an initial average liability. That claim is then evaluated and the liability is adjusted upward or downward according to the facts and damages of that particular claim. As discussed above, we maintain an in-house claims staff that monitors and directs all aspects of our claims process, and oversees claims processed by third parties. In addition, management aggregates liabilities to provide for losses incurred but not reported (“IBNR”). 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.

The estimates of the liability for unpaid losses, anticipated subrogation recoveries, and LAE are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, changes in social attitudes, inflation and economic conditions. As loss and expense experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for unpaid losses and LAE. Adjustments are reflected in results of operations in the period in which

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they are made and the liabilities may deviate substantially from prior estimates. See “Item 1A—Risk Factors—Risks Relating to Our Business—Actual claims incurred may exceed current reserves established for claims and may adversely affect our operating results and financial condition.”

ENTERPRISE RISK MANAGEMENT

We maintain a dedicated Enterprise Risk Management (“ERM”) function that is responsible for analyzing and reporting the Company’s risks; facilitating monitoring to ensure the Company’s risks remain within its appetites, limits and tolerances; and ensuring, on an ongoing basis, that our ERM objectives are met. This includes ensuring proper risk controls are in place; risks are effectively identified, assessed, and managed; and key risks to which the Company is exposed are appropriately disclosed. The ERM function plays an important role in fostering the Company’s risk management culture and practices.

In lightcyclical nature of the segment of theproperty and casualty insurance industry in which we operate, we maintain a moderate to high appetite for underwriting risk that seeks to provide profitable growth for our shareholders while managing our risk with disciplined pricing and portfolio management standards. We mitigate our underwriting risk with sound reinsurance protection, effective operational policies and procedures, and capital management strategies.

Enterprise Risk Management Structure and Governance

Our Board of Directors (“the Board”) oversees enterprise risk through its standing committees. The Risk Committee receives a comprehensive periodic risk reports, which describes the Company’s key risk exposures using quantitative and qualitative assessments and includes information about breaches or exceptions. The Company also has other risk-focused committees such as the Audit Committee and the Investment Committee. These other committees are comprised of various risk and technical experts and have overlapping membership, enabling consistent and holistic management of risks. These committees report directly or indirectly to the Board.

Enterprise Risk Management Framework

Our ERM framework provides a platform to assess the risk/return profiles of risks throughout the organization to enable enhanced

decision making by business leaders. The ERM framework also guides the development and implementation of mitigation strategies to reduce exposures to these risks to acceptable levels. Our ERM framework includes the following elements:

Risk Culture: Risk management is an integral part of the Company’s culture and is embedded in our business processes in accordance with our risk philosophy. As the cornerstone of the ERM framework, a culture of prudent risk management reinforced by senior management plays an important role in the effective management of risks we assume relative to risk targets and limits. Our Risk Assessment Process uses qualitative and quantitative methods to assess key risks through a comprehensive approach, which analyzes established and emerging risks in conjunction with other risks.

business.”

Risk Appetite and Tolerance Statements: We communicate to management the amount of risk the Company is willing to accept through risk tolerance statements, which take into account the interactions and aggregation of risks across multiple risk areas. These statements provide a framework for managing the Company from an overall risk point of view.

Risk Targets and Limits: Risk targets are established and managed in conjunction with strategic planning and set the desired range of risk that the Company seeks to assume. Risk Limits establish the maximum amount of each risk that the Company is willing to assume to remain within the Company’s risk tolerance.

Business Specific Limits/Controls: These limits/controls provide additional safeguards against undesired risk exposures and are embedded in business processes. Examples include: maximum retention limits, pricing and underwriting reviews, per issuer limits, concentration limits, and standard treaty language.

Proactive risk monitoring and reporting enable early detection and mitigation of emerging risks. We monitor adherence to risk targets and limits through the ERM function, which reports regularly to the Risk Committee. The frequency of monitoring is tailored to the significance of each risk. Risk escalation channels coupled with open communication lines enhance the mitigants explained above. The Company has devoted significant resources to developing its ERM program and expects to continue to do so in the future. Nonetheless, the risk remains that the Company’s policies and procedures to identify, manage, and monitor risks may not be fully effective. Many of the Company’s methods for managing risk are based on historical information, which may not be a good predictor of future risk exposures. Management of operational, legal, and regulatory risk relies on policies and procedures which may not be fully effective under all scenarios.

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Government Regulation and Initiatives

We are subject to extensive regulation in the markets we serve, primarily at the state level, and will bebecome subject to the regulations of any otheradditional 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.

Financial Reporting

The Insurance Entities prepare From time to time, states also enact legislation designed to increase consumer protections and file with variouscurtail fraud or abuses in the insurance regulatory authorities quarterlymarket. 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

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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 annual audited financial statements in accordance with requirements established bycertain situations preclude the National Associationvendors from recovering attorneys’ fees or require the vendors to pay the insurers’ attorneys’ fees.  On the other hand, policymakers’ decisions to not change existing laws has allowed, and might continue to allow, certain adverse interpretations of Insurance Commissioners (“NAIC”)law and adopted by administrative rules in Florida asresulting litigation to continue or worsen. See “Part I—Item 1A-Risk Factors-Risks Relating to the Insurance Entities’ domiciliary state. The Insurance Entities’ financial statementsIndustry-We are prepared in accordance with statutory accounting principles, which differ from United States generally accepted accounting principles.

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 domiciledauthorized 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. The financial examination reports are typically available to the public at the conclusion of the examination process. In addition, state insurance regulatory authorities may make inquiries, conduct investigations and administer market conduct examinations with respect to insurers’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’authorities’ examination processes typically are available to the public at the conclusion of the examinations.

NAIC

The NAIC is an organization whose mandate is to benefit state insurance regulatory authorities and consumers by promulgating model insurance laws and regulations for adoption by the states. The NAIC also provides standardized insurance industry accounting and reporting guidance through its Accounting Practices and Procedures Manual (the “Manual”). However, model insurance laws and regulations are only effective when adopted by the states, and statutory accounting and reporting principles continue to be established by individual state laws, regulations and permitted practices. Changes to the Manual or modifications by the various state insurance departments may impact the statutory capital and surplus of the Insurance Entities. We cannot predict what additional compliance costs these pending model laws or regulations may impose if adopted by Florida or other states in the future.

Insurance Holding Company Laws

UVE, as the ultimate parent company of the Insurance Entities, is subject to the insurance holding companycertain laws of the State of Florida.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’sFLOIR’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 U.S. 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. These laws may discourage potential acquisition proposals and may delay, deter or prevent an acquisition of control of UVE (in particular through an unsolicited transaction), even if the shareholders of UVE might consider such transaction to be desirable. See “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.”

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Insurance holding company regulations also govern the amount any affiliate of the holding company may charge insurance affiliatesthe 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 annually to submit an Own Risk and Solvency Assessment, or ORSA, summary report to the FLOIR each year, beginning in 2017, summarizing the insurer’s evaluation of the adequacy of its risk management framework. In December 2017, theThe Company completed and filed its firstmost recent ORSA with FLOIR.

summary report in December 2020.

Capital Requirements

State insurance authorities monitor insurance companies’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. StateCertain state regulators also require the deposit of state deposits in each state.their respective states. See “Item“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”(“RBC”) model published by the NAICNational 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, 2017,2020, the Insurance Entities’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.”

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Restrictions on Dividends and Distributions

As a holding company with no significant business operations of its own, UVE relieswe rely on dividend payments from itsour subsidiaries as itsour principal sourcessource of cash to pay dividends, purchase UVEour common shares, support subsidiary operations and development, and meet itsour 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 “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.” Dividends paid by UVE to our shareholders in 20172020 were paid from the earnings of UVE and its subsidiaries. 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 UVEtheir 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. During the year ended December 31, 2017, UPCIC paid $30.0 million in dividends to its immediate parent company, Universal Insurance Holding Company of Florida (“UVECF”). During the year ended December 31, 2016, the Insurance Entities did not pay dividends to UVECF.

Underwriting and Marketing Restrictions

During the past several years, various 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 increaseschanges for a specified period during or decrease rates permitted to be charged.

after a catastrophe event. Most states, including Florida, also have insurance laws requiring that rate schedules and other information be filed withand approved by the insurance regulatory authority.authority in advance of being implemented. The insurance regulatory authority may disapprove a rate filing if it finds that the proposed rates arewould 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 athe 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.

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Table The Company is subject to comprehensive regulatory oversight and regulations, which include periodic reporting to regulators and regulatory examinations to assure the Company maintains compliance with statutory requirements, and the payment of Contents

fees, premium taxes and assessments in order to maintain its licenses.

Privacy and Information Security Regulation

Federal and state laws and regulations require financial institutions 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 late 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 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’policyholders’ claims when insurance companies doing business in that state become insolvent. These guaranty associations typically are funded 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 “Item“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, have

Human 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 Citizens. 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. Also, 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.

EMPLOYEES

claims management. As of February 9, 2018,2, 2021, we had 558909 full-time employees.employees, of whom 92% are based in Florida. Reflecting our substantial efforts in recent years to improve and enhance our claims operations and to address emerging

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claim trends, approximately 57% of our employees work in our claims management operations, an increase of 19% since February 5, 2020. Of these employees, 38% 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 & risk management and marketing & online distribution employ approximately 8% and 19% 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 57% 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

Available Information
Our internet addresscorporate headquarters are located in Fort Lauderdale, FL. Our investor website is http://www.universalinsuranceholdings.com, and our telephone number is (954) 958-1200.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”(“SEC”). The SEC maintains an internet site that contains our SECThese filings are also available on the SEC’s website at https://www.sec.gov.

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ITEM 1A.RISK FACTORS

sec.gov.


ITEM 1A.RISK FACTORS
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

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 OUR Business

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;
•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. Access to capital, if needed, could be hampered, and the cost of external capital could be elevated.
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In addition, COVID-19 has reduced our ability to bring litigated matters to an efficient conclusion. Some courts have been unable to respond effectively to social distancing measures due to lack of technology or infrastructure and to the fragmented nature of local court systems. In many states, all civil trials were suspended or the number of civil trials taking place has been greatly limited. 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. In turn, this has caused an increase in our number of claims in litigation.

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. The nature and level of future catastrophes and the incidence and severity of weather conditions in any future period 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 resultsnot 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 result in extraordinary losses and have a negative impact on our net income and business. Catastrophes have eroded and in the future may alsoerode our statutory surplus or ability to obtain adequate reinsurance which could negatively affect our ability to write new or renewal business. IncreasesCatastrophic claim severity is impacted by the effects of inflation and increases in theinsured value and factors such as the overall claims, legal and litigation environments in affected areas, in addition to the geographic concentration of insured property and the effects of inflation could increase the severity of claims from catastrophic events in the future.

property.

Actual claims incurred have exceeded, and in the future may exceed, current reserves established for claims, and may adversely affectaffecting our operating results and financial condition.

We maintain loss reserves to cover our estimated ultimate liability for unpaid losses and LAE for reported and unreported claims incurred 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 IBNR.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 and economic conditions.consumer behavior. Many of these factors are not quantifiable.

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 attorneys’ fees against insurers and the relatively high cost of defending against inflated claims in relation to amounts in dispute.

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Additionally, there may 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 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 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. In some instances, our ability to recover 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 theserecorded amounts isremains subject to significant uncertainty, including risks inherent in litigation, and in the collectability of the recorded amounts.

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Tableamounts and potential law changes or judicial decisions that can hinder or reduce the effectiveness of Contents

Our success depends in part on our abilitysubrogation.

When we fail to accurately and adequately price the risks we underwrite.

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 22 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 may not be able to achieve desirable diversification in our risks.

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 and prevailing attitudes towards insurers and the claims process.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, and may not be sustainable over the longer term.or from region to 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.

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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 orand 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 4,3004,400 independent insurance agents in Florida as well as approximately 4,5005,800 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’

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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. 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 reliance

We 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. However, theseThese 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, and detailed information about our in-force business.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.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 adjust premium rates for our cost,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’
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financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract;contract or (ii) whether insured losses meet the qualifying conditions and are recoverable under our reinsurance contracts for covered events such as windstorms, vandalism, brush fires, earthquakes and riots or are excluded explicitly for events such as a terrorism event; and changes in market conditions.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 an unadmitteda non-admitted asset, which couldwould negatively impact our 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 which could thenor expansion by existing participants lead to increased

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competition, a significant 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, may 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 substantial 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 Alabama, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, North Carolina, New York, Pennsylvania, South Carolina, Virginia and West Virginia,other states, we write a substantial 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 which mirrors the distribution and concentration of the population in Florida. We currently have a large concentration of in-force policies written in the coastal counties of Broward, Palm Beach and Miami-Dade 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. While we actively manage our exposure to catastrophic events through our underwriting process and the purchase of reinsurance, theThe 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.

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 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. The science regarding climate change is still emerging and developing. However, toTo 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 and in the future, may enter new markets and expect 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 an unfamiliar market,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 isare 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 riskrisks adequately and develop effective underwriting standards. External factors, such as compliance with state regulations,
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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.

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Our success depends, in part, on our ability to attract and retain talented employees, and the loss of Contents

Lossany one of our key executivespersonnel 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 otherwise attractretain talented employees could significantly impact our future performance. Competition for these individuals is intense and retain talent could affect our operations.

Our future operations will depend in large part on the efforts of our Chief Executive Officer, Sean P. Downes, and of our President and Chief Risk Officer, Jon W. Springer, both of whom have served in executive roles at UVE or its affiliates for many years. The loss of the services provided by Mr. Downes or Mr. Springer could have a material adverse effect on our financial condition and results of operations. Further, our ability to operate successfully operate may also 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.complex, must be performed expeditiously and 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 can be subject to varying interpretations. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’ssystem’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 departmentprofessionals to effectively manage claims could adversely affect our insurance business and financial results and capital requirements.

results.

We rely primarily on our claims departmentprofessionals to facilitate and oversee the claims adjustment process for our policyholders. Many factors could affect the ability of our claims departmentprofessionals 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 departmentprofessionals to ensure consistent claims handling;

•the ability of our claims departmentprofessionals to translate the information provided by adjusters into acceptable claims resolutions; and

•

the ability of our claims department to maintain and update its claims handling procedures and systems as they evolve over time based on claims and geographical trends in claims reporting.

•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 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 us.

our financial condition and reputation.

From time to time, we are subject to civil or administrative actions and litigation. CivilThis is especially the case in Florida, where insurance companies, including the Insurance Entities, have experienced increases in first-party litigation frequently resultsdue 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. 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-handling and other practices, and adverse changes in loss cost trends, including inflationary pressures in home repair costs.costs or other legal or regulatory conditions incentivizing increases in disputed or litigated claims. Multiparty or class action claims may 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.

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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. 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’scompany’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’sinsurer’s ratings due to, for example, a change in an insurer’sinsurer’s statutory capital; a change in a rating agency’sagency’s determination of the amount of risk-adjusted capital required to maintain a particular rating; a change in the perceived adequacy of an insurer’sinsurer’s reinsurance program; an increase in the perceived risk of an insurer’sinsurer’s investment portfolio; a reduced confidence in management or a host of other considerations that may or may not be within an insurer’sinsurer’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’ personally identifiablenonpublic personal information, including financial information, and proprietary business information, on our computer systems and networks. There have been several highly publicized cases involvingUnauthorized access to personally identifiable information, even if not 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 targetedinformation, could be damaging to all affected parties. Breaches can involve attacks intended to obtain unauthorized access to confidentialnonpublic 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.

involve 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. Cyber-attacksCyberattacks 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 aware of a material breach of cybersecurity. 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 cyber-attackscyberattacks or security breaches.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

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interconnectedness of our systems, the process of enhancing our protective measures can itself create a risk of systems disruptions and security issues.

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The increasedincrease 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 cyber-attackscyberattacks 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.

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.

Many

All 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

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. A declinerates, which impact our investment income and returns. Declines 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’sportfolio’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 fixed maturityavailable-for-sale debt securities that comprise a large portion of our investment portfolio. A declineSimilarly, declines in the qualityequities markets adversely affect our existing portfolio. Increases in the equities markets might increase returns on our existing portfolio but reduce the attractiveness of our investment portfolio as a result of adverse economic conditions or otherwise could cause realized losses on securities.

future investments.

Our overall financial performance is dependentdepends in part on the returns on our investment portfolio, which could have a material adverse effect on our financial condition or results of operations or cause such results to be volatile.

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.

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Risks Relating to the Insurance Industry

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’sregulator’s or enforcement authority’sauthority’s interpretation of a legal issue may not result in compliance with another’s another’s
19

interpretation of the same issue, particularly when compliance is judged in hindsight. In addition, there is risk that any particular regulator’sregulator’s or enforcement authority’sauthority’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 meetingmeet 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 isand APPCIC are also regulated by state insurance authorities in the other states in which it conductsthey 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 have.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’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 or withdraw 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.
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.

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 recentother 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, thatmost of which support the business of the Insurance Entities. As a holding company, UVE’sUVE’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’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“Item 1—Business—Government Regulation and Initiatives—Regulation—Restrictions on Dividends and Distributions.” For more details on our

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cash flows, see ““Part II—Item 7—Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

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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. Our ability to afford reinsurance required to reduce our catastrophe risk may be dependent upon thealso depends in part on our ability to adjust rates for our cost.

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 premiums 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, which could have a material adverse impact on our reputation and financial condition.

Any such failure also could adversely affect our Financial Stability Ratings®.

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.

Our Insurance Entities are subject to examination and actions by state insurance departments.

The Insurance Entities are subject to extensive regulation in the states in which they do business. 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. If an insurance company fails to obtain required licenses or approvals, or if the Insurance Entities fail to comply with other regulatory requirements,

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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 and Initiatives.”

Risks Relating to Debt Obligations

Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or our ability to obtain credit on acceptable terms.

The capital and credit markets at times have experienced extreme volatility and disruption. In some cases, the markets have exerted downward pressure on the availability of liquidity and credit capacity. In the event that we need access to additional capital to pay our operating expenses, make payments on our indebtedness, pay for capital expenditures or fund acquisitions, our ability to obtain such capital may be limited and the cost of any such capital may be significant. Our access to additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to our industry, and credit capacity, as well as lenders’ perception of our long- or short-term financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. If a combination of these factors were to occur, our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain financing on favorable terms.

RISKS RELATING TO OWNERSHIP OF OUR COMMON STOCK

The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.

Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for them. The market price for our common stock could fluctuate significantly for various reasons, including:

our operating and financial performance and prospects;

our quarterly or annual earnings or those of other companies in our industry;

the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock or the stock of other companies in our industry;

being targeted by short sellers;

the failure of research analysts to cover our common stock;

general economic, industry and market conditions;

strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;

new laws or regulations or new interpretations of existing laws or regulations applicable to our business, or other adverse regulatory actions;

changes in accounting standards, policies, guidance, interpretations or principles;

material litigation or government investigations;

changes in general conditions in the United States and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;

negative perceptions of the residential insurance market or the prospects of residential insurers in Florida or other key markets in which we operate;

changes in key personnel;

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•

sales of common stock by us, our principal stockholders or members of our management team;

the granting or exercise of employee stock options; and

volume of trading in our common stock.

In addition, in recent years, the stock market has regularly experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially reduce our share price.

Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.

Our Board of Directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium over the market price, and adversely affect the market price and the voting and other rights of the holders of our common stock.

Future sales of our common stock may depress our stock price.

Sales of a substantial number of shares of our common stock in the public market or otherwise, by us or by a major shareholder, could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.

In addition, we may issue additional shares of our common stock from time to time in the future in amounts that may be significant. The sale of substantial amounts of our common stock, or the perception that these sales may occur, could adversely affect our stock price.

As of December 31, 2017, there were 1,325,024 shares issuable upon the exercise of outstanding and exercisable stock options, 1,882,092 shares issuable upon the exercise of outstanding stock options that are unvested and 204,580 additional shares of performance share units outstanding. The market price of the common shares may be depressed by the potential exercise of these options or grant of these shares. The holders of these options are likely to exercise them when we would otherwise be able to obtain additional capital on more favorable terms than those provided by the options.

ITEM

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM

ITEM 2.

PROPERTIES

Real Estate Owned and Used in Operations
We conduct our insurance operations primarily from our company-owned campusgeneral corporate offices located at 1110 West Commercial Boulevard, Fort Lauderdale, Florida 33309, which contains approximately 68,500 square feet33309. Substantially all of office space. The this space is fully utilized for its intended purpose. We believe that our
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facilities on our campusand 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 be used to meet our staffing needs to accommodate our foreseeable future insurance operations. Construction began in 2019, and we anticipate completion of the building in early 2021.
There are no mortgagesmortgage or lease arrangements for the buildings on our campus and all are adequately covered by insurance.

real estate owned property.

ITEM

ITEM 3.

LEGAL PROCEEDINGS

Lawsuits are filed against the Company from time to time. Many of these lawsuits 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.

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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.


ITEM

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable

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applicable.

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PART


PART II


ITEM

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, (“Common Stock”), is quotedlisted and traded on the New York Stock Exchange LLC (“NYSE”) under the symbol UVE.

The following table sets forth the daily close prices of the Common Stock, as reported by the NYSE:

 

 

 

 

 

 

 

 

 

 

Dividends

 

For the Year Ended December 31, 2017

 

High

 

 

Low

 

 

Declared

 

First Quarter

 

$

29.10

 

 

$

23.35

 

 

$

0.14

 

Second Quarter

 

$

26.20

 

 

$

22.25

 

 

$

0.14

 

Third Quarter

 

$

25.95

 

 

$

16.50

 

 

$

0.14

 

Fourth Quarter

 

$

27.35

 

 

$

23.15

 

 

$

0.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

For the Year Ended December 31, 2016

 

High

 

 

Low

 

 

Declared

 

First Quarter

 

$

22.49

 

 

$

16.44

 

 

$

0.14

 

Second Quarter

 

$

19.77

 

 

$

16.41

 

 

$

0.14

 

Third Quarter

 

$

25.71

 

 

$

18.26

 

 

$

0.14

 

Fourth Quarter

 

$

28.50

 

 

$

19.40

 

 

$

0.27

 

“UVE.” As of February 14, 2018,22, 2021, there were 3432 registered shareholders of record of our Common Stock.

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, 20172020 and 2016,2019, 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, 20172020 and 2016.

Applicable provisions of the Delaware General Corporation Law may affect our ability to declare and pay dividends on our 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. See “Part I – Restrictions on Dividends and Distributions,” “Item 1A –Risk Factors – Risks Relating to Insurance Industry”, and “Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

39

Table of Contents

2019.

Stock Performance Graph

The following graph comparesand table compare the cumulative total stockholder return of UVE’s Common Stockour common stock from December 31, 20122015 through December 31, 20172020 with the cumulative total return of theperformance of: (i) Standard & Poor’s (“S&P”) 500 Index, (ii) Russell 2000 Index and (iii) S&P Insurance Select Industry Index. TheWe 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

 

12/31/13

 

 

12/31/14

 

 

12/31/15

 

 

12/31/16

 

 

12/31/17

 

Universal Insurance Holdings, Inc.

 

$

351.12

 

 

$

514.25

 

 

$

599.24

 

 

$

757.98

 

 

$

750.52

 

S&P 500 Index

 

 

132.39

 

 

 

150.51

 

 

 

152.59

 

 

 

170.84

 

 

 

208.14

 

Russell 2000 Index

 

 

138.82

 

 

 

145.62

 

 

 

139.19

 

 

 

168.85

 

 

 

193.58

 

S&P Insurance Select Industry Index

 

 

146.15

 

 

 

157.85

 

 

 

167.93

 

 

 

204.57

 

 

 

231.75

 

uve-20201231_g2.gif

Period Ended
Index12/31/201612/31/201712/31/201812/31/201912/31/2020
Universal Insurance Holdings, Inc.$126.52 $125.41 $177.37 $134.38 $75.93 
S&P 500 Index111.96 136.40 130.42 171.49 203.04 
Russell 2000 Index121.31 139.08 123.76 155.35 186.36 
S&P Insurance Select Industry Index121.82 138.00 130.32 166.35 161.70 
23

We have generated these comparisons using data supplied by S&P Global Market Intelligence (Centennial, Colorado). The graph assumesand table assume an investment of $100 in UVE’s Common Stockour common stock and in each of the three indices on December 31, 20122015 with all dividends being reinvested on the ex-dividend date. The closing price of UVE’s Common Stock onour common stock as of December 29, 201731, 2020 (the last trading day of the year) was $27.35$15.11 per share. The stock price performance onin the graph isand table are not necessarilyintended to forecast the future performance of our stock and may not be indicative of future price performance.

The stock prices used to calculate total shareholder return for UVE are based upon the prices of our common shares quoted and traded on NYSE.

In prior years, we have compared our performance to the SNL Insurance P&C, which includes all publicly traded insurance underwriters in the property and casualty sector in the United States, as well as the NYSE Composite Index.  In our Form 10-K for the year ended December 31, 2018, we will no longer use these indices because the indices reflected above are more widely recognized as benchmark indices by the investor community. Additionally, we added the Russell 2000 Index since we are a constituent and it provides an appropriate small and mid-cap benchmark index.

40

Table of Contents

 

 

Period Ended

 

Index

 

12/31/13

 

 

12/31/14

 

 

12/31/15

 

 

12/31/16

 

 

12/31/17

 

Universal Insurance Holdings, Inc.

 

$

351.12

 

 

$

514.25

 

 

$

599.24

 

 

$

757.98

 

 

$

750.52

 

NYSE Composite Index

 

 

126.28

 

 

 

134.81

 

 

 

129.29

 

 

 

144.73

 

 

 

171.83

 

SNL Insurance P&C Index

 

 

132.48

 

 

 

152.15

 

 

 

157.39

 

 

 

185.75

 

 

 

212.37

 

We believe that the increase in stock price and increase in the total return performance relative to other indices since the first quarter of 2013 is generally attributable to the changes made in the Company’s executive leadership, which has led to an increase in our profitability, as well as to our focus on long-term capital growth and strategic initiatives intended to increase shareholder value such as share repurchases and increasing cash dividends per share over that timeframe. Other contributing factors may include moving to the NYSE, obtaining greater analyst coverage and engaging a leading global investment adviser to manage our investment portfolio, among others.

Future Dividend Policy

Future cash dividend payments are subject to business conditions, our financial position and requirements for working capital and other corporate purposes.

Unregistered Salespurposes, 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-Risks Relating to Insurance Industry” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Registrant Purchases of Equity Securities and Use of Proceeds

The table below presents our purchases ofcommon stock repurchased by UVE Common Stock during the three months ended December 31, 2017.

2020.
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)
10/1/2020 - 10/31/202084,888 $12.21 84,888 — 
11/1/2020 - 11/30/2020104,817 $12.74 104,817 — 
12/1/2020 - 12/31/20202,991 $14.05 2,991 1,284,443 
Total for the three months ended December 31, 2020192,696 $12.53 192,696 1,284,443 

41

Table

(1)Average price paid per share does not reflect brokerage commissions paid to acquire shares in open market transactions.
(2)Number of Contents

 

 

 

 

 

 

 

 

 

Total Number of

 

 

Maximum Number

 

 

 

 

 

 

 

 

 

 

Shares Purchased

 

 

of Shares That

 

 

 

 

 

 

 

 

 

 

As Part of

 

 

May Yet be

 

 

 

 

 

 

 

 

 

 

Publicly

 

 

Purchased Under

 

 

Total Number of

 

 

Average Price

 

 

Announced

 

 

the Plans or

 

 

Shares Purchased

 

 

Paid per Share (1)

 

 

Plans or Programs

 

 

Programs (2)

 

10/1/17 - 10/31/17

 

-

 

 

$

-

 

 

 

-

 

 

 

-

 

11/1/17 - 11/30/17

 

-

 

 

$

-

 

 

 

-

 

 

 

-

 

12/1/17 - 12/31/17

 

10,000

 

 

$

25.67

 

 

 

10,000

 

 

 

723,572

 

Total for the three months ended December 31, 2017

 

10,000

 

 

$

25.67

 

 

 

10,000

 

 

 

723,572

 

(1)

Average price paid per share does not reflect brokerage commissions paid to acquire shares in open market transactions.

shares was calculated using a closing price at December 31, 2020 of $15.11 per share.

(2)

Number of shares was calculated using a closing price at December 29, 2017 of $27.35 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 2017,2020, there were two authorized repurchase plans in effect:

•On June 13, 2016,November 6, 2019, we announced that theour Board of Directors authorized the repurchase of up to $20$40 million of outstanding shares of our outstanding common stock through December 31, 20172021 (the “2017“December 2021 Share Repurchase Program”), pursuant to which we repurchased 861,2961,968,220 shares of our common stock at an aggregate cost of approximately $20.0 million.$40.0 million. We completed the 2017December 2021 Share Repurchase Program in December 2017.

November 2020.

•On September 5, 2017,November 3, 2020, we announced that our Board of Directors authorized the repurchase of up to $20 million of our outstanding common stock through December 31, 2018 (the “2018 Share Repurchase Program”). We repurchased 8,192 shares of our common stock under the 2018through November 3, 2022 (the “November 2022 Share Repurchase Program”). Under the November 2022 Share Repurchase Program, we repurchased 45,705 shares of our common stock from November 2020 through December 2020 at an aggregate cost of approximately $0.6 million.

In total, during the year ended December 31, 2017 at an aggregate cost of approximately $0.2 million.

During the year ended December 31, 2017,2020, we repurchased an aggregate of 770,5591,610,783 shares of UVE’sour common stock inpursuant to the open market.

42

TableDecember 2021 Share Repurchase Program and the November 2022 Share Repurchase Program at an aggregate price of Contents

approximately $28.9 million.

ITEM 6.SELECTED FINANCIAL DATA

ITEM 6.SELECTED FINANCIAL DATA

The following selected historical consolidated financial data should be read in conjunction with theour consolidated financial statements and notes thereto and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearingset 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 providepresent historical selected consolidated financial information asdata of Universal Insurance Holdings, Inc. and Subsidiaries for the periods presentedfive years ended December 31, 2020 (in thousands, except per share data):

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums written

 

$

1,055,886

 

 

$

954,617

 

 

$

883,409

 

 

$

789,577

 

 

$

783,894

 

Change in unearned premium

 

 

(56,688

)

 

 

(33,390

)

 

 

(46,617

)

 

 

(12,260

)

 

 

4,583

 

Direct premium earned

 

 

999,198

 

 

 

921,227

 

 

 

836,792

 

 

 

777,317

 

 

 

788,477

 

Ceded premium earned

 

 

(310,405

)

 

 

(288,811

)

 

 

(332,793

)

 

 

(450,440

)

 

 

(520,822

)

Premiums earned, net

 

 

688,793

 

 

 

632,416

 

 

 

503,999

 

 

 

326,877

 

 

 

267,655

 

Investment income

 

 

13,460

 

 

 

9,540

 

 

 

5,155

 

 

 

2,375

 

 

 

1,928

 

Other revenues (1)

 

 

47,093

 

 

 

41,039

 

 

 

36,330

 

 

 

34,397

 

 

 

38,466

 

Total revenue

 

 

751,916

 

 

 

685,289

 

 

 

546,544

 

 

 

369,276

 

 

 

301,159

 

Losses and loss adjustment expenses

 

 

350,428

 

 

 

301,229

 

 

 

187,739

 

 

 

123,275

 

 

 

108,615

 

Policy acquisition costs

 

 

138,846

 

 

 

125,979

 

 

 

88,218

 

 

 

33,502

 

 

 

21,685

 

Other operating costs

 

 

92,158

 

 

 

95,198

 

 

 

95,564

 

 

 

84,895

 

 

 

70,303

 

Total expenses

 

 

581,432

 

 

 

522,406

 

 

 

371,521

 

 

 

241,672

 

 

 

200,603

 

Income before income taxes

 

 

170,484

 

 

 

162,883

 

 

 

175,023

 

 

 

127,604

 

 

 

100,556

 

Income taxes, net

 

 

63,549

 

 

 

63,473

 

 

 

68,539

 

 

 

54,616

 

 

 

41,579

 

Net income

 

$

106,935

 

 

$

99,410

 

 

$

106,484

 

 

$

72,988

 

 

$

58,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

3.07

 

 

$

2.85

 

 

$

3.06

 

 

$

2.17

 

 

$

1.64

 

Diluted earnings per common share

 

$

2.99

 

 

$

2.79

 

 

$

2.97

 

 

$

2.08

 

 

$

1.56

 

Dividends declared per common share

 

$

0.69

 

 

$

0.69

 

 

$

0.63

 

 

$

0.55

 

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total invested assets

 

$

730,023

 

 

$

651,601

 

 

$

489,435

 

 

$

423,581

 

 

$

354,440

 

Cash and cash equivalents

 

 

213,486

 

 

 

105,730

 

 

 

197,014

 

 

 

115,397

 

 

 

117,275

 

Total assets

 

 

1,454,999

 

 

 

1,060,007

 

 

 

993,548

 

 

 

911,774

 

 

 

920,090

 

Unpaid losses and loss adjustment expenses

 

 

248,425

 

 

 

58,494

 

 

 

98,840

 

 

 

134,353

 

 

 

159,222

 

Unearned premiums

 

 

532,444

 

 

 

475,756

 

 

 

442,366

 

 

 

395,748

 

 

 

383,488

 

Long-term debt

 

 

12,868

 

 

 

15,028

 

 

 

24,050

 

 

 

30,610

 

 

 

37,240

 

Total liabilities

 

 

1,015,011

 

 

 

688,817

 

 

 

700,456

 

 

 

692,858

 

 

 

744,481

 

Total stockholders' equity

 

$

439,988

 

 

$

371,190

 

 

$

293,092

 

 

$

199,916

 

 

$

175,609

 

Shares outstanding end of period

 

 

34,735

 

 

 

35,052

 

 

 

35,110

 

 

 

34,102

 

 

 

35,366

 

Book value per share

 

$

12.67

 

 

$

10.59

 

 

$

8.35

 

 

$

5.86

 

 

$

4.97

 

Return on average equity (ROE)

 

 

25.7

%

 

 

29.4

%

 

 

41.8

%

 

 

38.4

%

 

 

34.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expense ratio (2)

 

 

50.9

%

 

 

47.6

%

 

 

37.2

%

 

 

37.7

%

 

 

40.6

%

General and administrative expense ratio (3)

 

 

33.5

%

 

 

34.9

%

 

 

36.3

%

 

 

35.8

%

 

 

33.9

%

Combined Ratio (4)

 

 

84.4

%

 

 

82.5

%

 

 

73.5

%

 

 

73.5

%

 

 

74.5

%

(1)

Other revenue consists of commission revenue, policy fees, and other revenue.

(2)

The loss and loss adjustment expense ratio is calculated by dividing losses and loss adjustment expenses by premiums earned, net.


(3)

The general and administrative expense ratio is calculated by dividing general and administrative expense, excluding interest expense, by premiums earned, net. Interest expense was $348 thousand, $421 thousand, $963 thousand, $1,486 thousand and $1,166 thousand for the years ended December 31, 2017, 2016, 2015, 2014, and 2013, respectively.

24

(4)

The combined ratio is the sum of the losses and loss adjustment expense ratio and the general and administrative expense ratio.

Years Ended December 31,
20202019201820172016
Statement of Income Data:
Revenue:
Direct premiums written$1,517,479 $1,292,721 $1,190,875 $1,055,886 $954,617 
Change in unearned premium(121,856)(59,600)(69,235)(56,688)(33,390)
Direct premium earned1,395,623 1,233,121 1,121,640 999,198 921,227 
Ceded premium earned(472,060)(390,619)(353,258)(310,405)(288,811)
Premiums earned, net923,563 842,502 768,382 688,793 632,416 
Net investment income (1)20,393 30,743 24,816 13,460 9,540 
Other revenues (2)65,437 55,633 49,876 47,093 41,039 
Total revenue1,072,770 939,351 823,816 751,916 685,289 
Costs and expenses:
Losses and loss adjustment expenses758,810 603,406 414,455 350,428 301,229 
Policy acquisition costs199,102 177,530 157,327 138,846 125,979 
Other operating costs90,627 94,898 99,161 92,158 95,198 
Total expenses1,048,539 875,834 670,943 581,432 522,406 
Income before income taxes24,231 63,517 152,873 170,484 162,883 
Income tax expense5,126 17,003 35,822 63,549 63,473 
Net income$19,105 $46,514 $117,051 $106,935 $99,410 
Per Share Data:
Basic earnings per common share$0.60 $1.37 $3.36 $3.07 $2.85 
Diluted earnings per common share$0.60 $1.36 $3.27 $2.99 $2.79 
Dividends declared per common share$0.77 $0.77 $0.73 $0.69 $0.69 
 As of December 31,
 20202019201820172016
Balance Sheet Data:
Total invested assets$919,924 $914,586 $908,154 $730,023 $651,601 
Cash and cash equivalents167,156 182,109 166,428 213,486 105,730 
Total assets1,758,741 1,719,852 1,858,390 1,454,999 1,060,007 
Unpaid losses and loss adjustment expenses322,465 267,760 472,829 248,425 58,494 
Unearned premiums783,135 661,279 601,679 532,444 475,756 
Long-term debt8,456 9,926 11,397 12,868 15,028 
Total liabilities1,309,479 1,225,951 1,356,757 1,015,011 688,817 
Total stockholders’ equity$449,262 $493,901 $501,633 $439,988 $371,190 
Shares outstanding end of period31,137 32,638 34,783 34,735 35,052 
Book value per share$14.43 $15.13 $14.42 $12.67 $10.59 
Return on average equity (ROE)4.1 %9.2 %24.1 %25.7 %29.4 %
Selected Data:
Loss and loss adjustment expense ratio (3)82.2 %71.6 %53.9 %50.9 %47.6 %
General and administrative expense ratio (4)31.4 %32.3 %33.4 %33.5 %34.9 %
Combined Ratio (5)113.6 %103.9 %87.3 %84.4 %82.5 %


43

Table

(1)Net investment income excludes net realized gains (losses) on sale of Contents

investments 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 $102 thousand, $248 thousand, $346 thousand, $348 thousand and $421 thousand for the years ended December 31, 2020, 2019, 2018, 2017 and 2016, respectively.
(5)The combined ratio is the sum of the losses and loss adjustment expense ratio and the general and administrative expense ratio.
25


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 help the reader understand theassist in an understanding of our financial condition and results of operations and financial condition of UVE. MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and accompanying notes in Part II,“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 8 below.

1A—Risk Factors.”

Overview

UVE is

We develop, market, and underwrite insurance products for consumers predominantly in the largest private personal residential insurance company in Florida by direct written premium in-force, with approximately 10.1% market share ashomeowners lines of September 30, 2017, according to the most recent data reported by the FLOIR. Webusiness and perform substantially all aspects ofother insurance-related services for our primary insurance underwriting, policy issuance, general administrationentities, including risk management, claims management and claims processing and settlement internally through our vertically integrated operations.distribution. Our wholly-owned licensedprimary insurance subsidiaries,entities, UPCIC and APPCIC, currently write personal residentialoffer insurance policies predominantly in Florida with $924.0 million in direct written premium for the year ended December 31, 2017. UPCIC also writes residential homeowners insurance policies in Alabama, Delaware, Georgia, Hawaii, Indiana, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, and Virginia with $131.9 million in direct written premium for the year ended December 31, 2017, and is licensed to issue policies in Iowa, New Hampshire, and West Virginia. We believe thatproducts through both our longevity in the Florida marketappointed independent agent network and our resulting depth of experience will enable usonline distribution channels across 19 states (primarily in Florida), with licenses to continuewrite insurance in an additional two states. The Insurance Entities seek to successfully grow our businessproduce 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 both hardwhich the Insurance Entities are not able to achieve an underwriting profit; and soft markets.

generate investment income from invested assets.

Revenues
We generate revenuesrevenue primarily from the collection of insurance premiums. The nature of our business tends to be seasonal, reflecting consumer behaviors in connection with the Florida residential real estate market and the hurricane season. The amount of direct written premium tends to increase just prior to the second quarter of our fiscal year and tends to decrease approaching the fourth quarter. Other sources of revenue include: commissions paid by our reinsurers to our reinsurance intermediary subsidiary BARC on reinsurance it places for the Insurance Entities, service revenue from claims handling on ceded claims,Entities; policy fees collected from policyholders by our managing general agent subsidiary, URA,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.

Over the past several years, we have grown our business both within Florida and elsewhere in the United States through our distribution network of approximately 8,800 licensed independent agents. Our goals are to profitably grow our business, invest in our vertically integrated structure, expand our independent agent network, and return value to shareholders. Some of our key strategies include increasing our policies in force in Florida through continued profitable and organic growth; expanding into other states to diversify our revenue and risk; optimizing our reinsurance program; and continuing to provide high quality service to our policyholders. We believe each of these strategies has contributed towards an increase in earnings and earnings per share as well as an improvement in our overall financial condition. See “—Results of Operations” below for a discussion of our annual results for 2017 compared to the same period in 2016.

Our overall organic growth strategy emphasizes taking prudent measures to increase our footprint, policy count and improve the quality

The nature of our business rather than merely increasing our market share. Our focus on long-term capital strength and organic growth allows ustends to be selective in the risks we accept. Our goal is to write risks that are priced adequately and meet our underwriting standards. We believe that our strategy of organically expanding our premium growth through our independent agent distribution network and through Universal DirectSM, streamlining claims management and balancing appropriate pricing with disciplined underwriting standards will maximize our profitable growth. We also intend to continue our expansion outside of Florida in markets that allow us to write profitable business and to diversify our revenue and risk. Upon entering new markets, we leverage our existing independent agent network to generate new local relationships and business and we take the time to learn about each new market and any of its unique risks in order to carefully develop our own policy forms, rates and informed underwriting standards. Our expansion efforts differ from many of our competitors that have grown in recent years primarily through assumption of policies from Citizens, Florida’s statutory residual property insurance market.

As a result of our organic growth strategy and initiatives, we have seen increases in policy count and insured value in all states for over two years. The percentage of our total insured value for states outside of Florida increased from 21% as of December 31, 2016 to 26% as of December 31, 2017. The following table provides direct written premium for Florida and other states for the years ended December 31, 2017 and 2016 (dollars in thousands):

 

 

For the Years Ended

 

 

Growth

Year Over Year

 

 

 

December 31, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

State

 

Direct Written Premium

 

 

%

 

 

Direct Written Premium

 

 

%

 

 

$

 

 

%

 

Florida

 

$

923,962

 

 

 

87.5

%

 

$

860,647

 

 

 

90.2

%

 

$

63,315

 

 

 

7.4

%

Other states

 

 

131,924

 

 

 

12.5

%

 

 

93,970

 

 

 

9.8

%

 

 

37,954

 

 

 

40.4

%

Grand total

 

$

1,055,886

 

 

 

100.0

%

 

$

954,617

 

 

 

100.0

%

 

$

101,269

 

 

 

10.6

%

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Recent Developments

Hurricane Irma Overview

Hurricane Irma made initial landfall in the Florida Keys on September 10, 2017 as a Category 4 storm on the Saffir-Simpson Hurricane Scale. Hurricane Irma was an extremely destructive event that caused a wide swath of damage across the entire Florida peninsula and throughout the Southeastern United States. Although Hurricane Irma was a devastating catastrophic event, the ultimate net financial impact to UVE was substantially limited by both our comprehensive reinsurance program and benefits received as a result of our vertically integrated structure as discussed below.

The initial net loss and LAE reported by the Company in the third quarter of 2017 related to Hurricane Irma was $37.0 million. In the fourth quarter this amount lowered to $27.8 million by favorable revisions to ceded losses and LAE of $9.2 million to reflect recoveries related to our Other States Reinsurance Program (as further discussed below). Additionally, our service company subsidiaries generated substantial additional revenues following Hurricane Irma that led to approximately $35.0 million of estimated pretax profit generated by service company subsidiariesseasonal during the fourth quarter of 2017. In total, for the year, ended December 31, 2017, the Company estimates that profit attributable to increased service revenues exceeded the Company’s net retained losses attributable to Hurricane Irma by approximately $7.2 million on a pretax basis.

The discussion below provides additional commentary surrounding the various effects of Hurricane Irma on the Company’s financial results.

Comprehensive Reinsurance Program

Our comprehensive reinsurance program substantially limited the net losses from Hurricane Irma, as gross losses and LAE were contained well within the limits of our catastrophe reinsurance program, and certain aspects of our program served to reduce our overall net retention.

During the quarter ended September 30, 2017, the Company recorded gross losses and loss adjustment expenses of $452.0 million resulting from Hurricane Irma, reflecting gross losses and LAE of $450.0 million at UPCIC and $2.0 million at APPCIC. The Company’s reinsurance protection performed as expected, reducing exposure to the maximum retention limits, limiting net losses and loss adjustment expenses from Hurricane Irma to $37.0 million. Under the Company’s reinsurance program, UPCIC cedes losses and LAE greater than $35.0 million in all states up to a maximum of $2.78 billion, while APPCIC cedes losses and LAE greater than $2.0 million up to a maximum amount of $28.1 million.

During the quarter ended December 31, 2017, the Company revised its estimated gross losses and loss adjustment expenses to $446.7 million, reflecting gross losses and LAE of $444.7 million at UPCIC and $2.0 million at APPCIC. This revision to gross losses at UPCIC was to account for claims experience during the fourth quarter, and we note that as of February 9, 2018, the Company has received 68,634 claims relating to Hurricane Irma, of which 57,799, or approximately 84%, have already been closed. As discussed above, the Company’s reinsurance program limited net losses and loss adjustment expenses from Hurricane Irma to $37 million. Because gross losses and LAE in states outside of Florida are projected to be $12.8 million (which is above our $5.0 million Non-Florida retention) additional recoveries from our Other States Reinsurance Program during the fourth quarter served to reduce UPCIC’s aggregate retention from $35.0 million to $27.2 million. After adding in APPCIC’s net retention of $2.0 million, this resulted in a total net retention of losses and loss adjustment expenses of $29.2 million related to Hurricane Irma for the year ended December 31, 2017.

Additionally, the Company experienced approximately $2.4 million of gross losses and loss adjustment expenses related to hailstorms in Minnesota that occurred in June 2017. As a result of Hurricane Irma satisfying an otherwise recoverable provision within our Other States Reinsurance Program, the Company’s retention in states outside of Florida was reduced to $1.0 million from $5.0 million. This resulted in an effective savings of $1.4 million recorded in the fourth quarter of 2017 on the Minnesota hailstorm events, as the Company retained only the first $1.0 million of losses on the event. Through May 31, 2018, our Other States Reinsurance Program will continue to have a net retention of $1.0 million as a result of the otherwise recoverable provision having been satisfied.

See “—2017/2018 Reinsurance Program” below for a more detailed discussion of the Company’s reinsurance program.

Vertically Integrated Structure

As previously described, due to our vertically integrated structure, the Company retains certain revenues and/or fees that are paid to our subsidiary service companies for various services provided, including reinsurance brokerage, claims adjusting and other services. This benefit is particularly notable during large catastrophic events such as Hurricane Irma, which result in a substantial number of claims by our policyholders, leading to increased activity at our service company subsidiaries. This higher activity led to an increase in service income that helped to reduce the effect that Hurricane Irma had on our consolidated financial statements.

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During a major storm such as Hurricane Irma when losses exceed our net retention, claims service costs are passed on to our reinsurance partners, who reimburse the Insurance Entities for losses and loss adjustment expenses that were incurred relating to losses above the Company’s net retention. These reimbursements for loss adjustment expenses benefit the Company’s service entities by providing incremental revenue which is funded by the reinsurers, resulting in incremental profits to the service entities. The billing for services between the Company’s service companies and Insurance Entities is based on “arm’s length” market rates and approved by our regulator, the FLOIR.

As a result of Hurricane Irma, the quarter and year ended December 31, 2017 included the benefit of additional net revenues within our service provider subsidiaries, particularly UAC and BARC, which led to a higher level of profitability than would otherwise be the case in a quarter or year with more typical service activity. In aggregate, the Company estimates that these additional revenues at service company subsidiaries resulted in approximately $35.0 million of net pretax benefit during the fourth quarter and full year 2017. This benefit related primarily to two factors: (1) as a result of the increased level of claims following Hurricane Irma, UAC, which manages our claims processing and adjustment functions, experienced a significant increase in net revenues and net profit in the months following the storm, and (2) Commission Revenue included a benefit of approximately $2.0 million related to reinstatement premium commissions received by BARC.

Other Factors

In addition to the items discussed above, Hurricane Irma resulted in various other effects on our ongoing business, in particular with respect to premium writings and policy fee income. We experienced an increased level of premium volume, including an increase in both new and renewal business, as well as a corresponding increase in policy fee income, during both the quarter ending September 30, 2017 and the quarter ending December 31, 2017.

Several days after Hurricane Irma made landfall, the FLOIR issued an emergency order that temporarily suspended policy cancellations and nonrenewals by insurance companies. Specifically, the order barred insurance companies from cancelling or non-renewing policies between September 4, 2017 and October 15, 2017; barred the cancellation or nonrenewal of policies covering residential properties damaged by Hurricane Irma until at least 90 days after the properties are repaired; and required that any cancellations or nonrenewals issued or mailed from August 25, 2017 through September 3, 2017 were withdrawn and reissued no earlier than October 15, 2017. The effect of the emergency order, coupled with policyholders’ increased attention to maintaining coverage prior to and following the hurricane, resulted in increased levels of premium and policy fee volume as compared to both the prior year and our internal expectations.

In addition, the emergency order extended the time periods applicable to certain actions, including reviews of rate filings. This resulted in an extension of the review period for our previously submitted Florida rate filing (which was for an average statewide increase of 3.4%). We initially anticipated that the FLOIR’s review of our rate filing would be completed in September 2017, but as a result of Hurricane Irma and the corresponding emergency order, the rates were approved in early December 2017. We began using the newly approved rates on December 7, 2017 for new business and on January 26, 2018 for renewal business.

The Tax Cuts and Jobs Act of 2017 (“the Tax Act”)

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Tax Act”) was enacted, thereby significantly changing the Internal Revenue Code. Notable changes include a reduction in the federal corporate tax rate from 35.0% to 21.0% effective January 1, 2018. The Tax Act's impact on the Company in 2017 was a non-cash charge to earnings for the re-measurement of deferred taxes. Although the Company anticipates an overall benefit from the reduction of lower tax rates in 2018, we are unable to make definitive estimates on the impact of the reduction, due to the final impact of the Act being subject to changes in interpretations, assumptions, and additional guidance that may be issued by the Internal Revenue Service. See “Item 8—Note 12 (Income Taxes).”

2017 Highlights

•

Direct premiums written overall grew $101.3 million, or 10.6%, to $1,055.9 million, compared year-over-year to 2016.

Net earned premiums grew by $56.4 million, or 8.9%, to $688.8 million, compared year-over-year to 2016.

Total revenues increased by $66.6 million, or 9.7%, to $751.9 million, compared year-over-year to 2016.

Although Hurricane Irma caused substantial losses, our vertically integrated structure and comprehensive reinsurance program substantially limited the overall financial impact from this damaging storm.

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•

Expense ratio improved from 35.0% to 33.5%, compared year-over-year to 2016.

Net income increased by $7.5 million, or 7.6%, to $106.9 million, compared year-over-year to 2016.

Diluted EPS increased by $0.20 to $2.99 per common share, compared year-over-year to 2016.

Declared and paid dividends per common share of $0.69, including a $0.13 special dividend in December 2017.

Repurchased approximately 771,000 shares in 2017 at an aggregate cost of $18.1 million.

•

Offered Universal DirectSM in all 16 states in which the Company writes policies as of December 31, 2017.

UPCIC received a Certificate of Authority from Illinois and Iowa.

UPCIC commenced writing homeowners policies in New Jersey and New York.

UPCIC received regulatory approval for and implemented an overall 3.4% rate increase in Florida.

2017 – 2018 Reinsurance Program

Developing and implementing our reinsurance strategy to adequately protect us in the event of one or more catastrophes while maintaining efficient reinsurance costs has been a key focus for our leadership team. We believe that our reinsurance program is structured such that if we were to experience an active hurricane season like the hurricane seasons in 2017, 2016, 2005 and 2004 we are able to pay policyholder claims, maintain sufficient surplus to grow profitably and take advantage of the resulting market dislocation that could potentially follow. Effective June 1, 2017, we entered into multiple reinsurance agreements comprising our 2017-2018 reinsurance program. See “Item 8—Note 4 (Reinsurance).”

Reinsurance Generally

We use reinsurance to reduce our exposure to catastrophic losses primarily through excess of loss reinsurance. We believe that the overall terms of the 2017-2018 reinsurance program are more favorable than the 2016-2017 and 2015-2016 reinsurance program. We eliminated our quota share reinsurance arrangements effective June 1, 2015; purchased additional excess of loss catastrophe cover; converted the exposure of all UPCIC states from a two-tower reinsurance program to a single tower reinsurance program; purchased a stand-alone non-Florida supplemental catastrophe reinsurance program; realized cost reductions in part due to market conditions and our preparation and efforts to manage risk exposure; and further enhanced our reinsurance coverage terms and conditions.

We believe that restructuring our reinsurance program and re-evaluating that structure on an ongoing basis has allowed us to take advantage of attractive reinsurance pricing, while still maintaining reinsurance coverage that we believe is sufficient to protect our policyholders and shareholders. While we believe the changes to the current reinsurance program are beneficial, there can be no assurance that our actual results of operations or financial condition will be positively affected. The Insurance Entities remain responsible for insured losses notwithstanding the failure of any reinsurer to make payments otherwise due to the Insurance Entities. Below is a description of our 2017-2018 reinsurance program for each of the Insurance Entities.

UPCIC Reinsurance Program

UPCIC’s reinsurance program, which runs from June 1 through May 31 of the following year, consists of various forms of catastrophe coverage. Under the 2017-2018 reinsurance program, UPCIC has a net retention of $35 million per catastrophe event for all losses incurred up to a first event loss of $2.778 billion. UPCIC also purchases a separate supplemental underlying cover to further reduce its retention for all losses occurring in states outside of Florida. With this cover, UPCIC retains only $5 million under its program in its non-Florida states. In certain circumstances involving a catastrophic event affecting both Florida and other states, UPCIC’s retention could result in pre-tax net liability as low as $5 million – the $35 million net retention under the all states reinsurance program could be offset by as much as $30 million in coverage under the Other States (non-Florida) Reinsurance Program. These retention amounts are gross of any potential tax benefit we would receive in paying such losses. UPCIC has mandatory catastrophe coverage through the FHCF plus voluntary catastrophe coverage with private reinsurers.

UPCIC structures its reinsurance coverage into layers and utilizes a cascading feature such that the second, third, fourth, fifth and sixth reinsurance layers all attach at $90 million. Any layers above the $90 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. Further, UPCIC buys four dedicated limits of $55 million in excess of $35 million for the first four catastrophe events. This means

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that, unless losses exhaust the top layer of our coverage, we are exposed to only $35 million in losses, pre-tax, per catastrophe for each of the first four events.

The estimated total net cost of UPCIC’s FHCF and catastrophe related coverage, including reinstatement premium protection coverage, is $315.9 million. The largest private participants in UPCIC’s program include Allianz Risk Transfer, Axis Specialty Limited, Everest Reinsurance, Renaissance Reinsurance, Chubb Tempest Reinsurance various Lloyd’s of London syndicates, and FHCF. The table below provides the A.M. Best and S&P financial strength ratings for each of the largest third-party reinsurers in UPCIC’s 2017-2018 reinsurance program.

Reinsurer

A.M. Best

S&P

Allianz Risk Transfer

A+

AA-

Axis Specialty Limited

A+

A+

Everest Reinsurance Company

A+

A+

Renaissance Re

A+

AA-

Chubb Tempest Re

A++

AA

Various Lloyd’s of London Syndicates

A

A+

Florida Hurricane Catastrophe Fund

-

AA

APPCIC Reinsurance Program

APPCIC’s reinsurance program, which runs from June 1 through May 31 of the following year, consists of various forms of catastrophe and multiple line excess of loss coverage. Under the 2017-2018 reinsurance program, APPCIC has a net retention on its catastrophe program of $2 million for all losses per catastrophe event for losses incurred up to a first event loss of $28.1 million. The retention amount is gross of any potential tax benefit we would receive in paying such losses. APPCIC has mandatory catastrophe coverage through the FHCF plus voluntary catastrophe coverage with private reinsurers.

APPCIC structures its catastrophe reinsurance coverage into layers and utilizes a cascading feature such that the second and third reinsurance layers all attach at $2 million. 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. This means that, unless losses exhaust the top layer of our coverage, we are only exposed to $2 million in losses, pre-tax, per catastrophe for each of the first two events.

APPCIC’s multiple line excess of loss reinsurance program has a property retention of $0.5 million with coverage up to $8.5 million per individual property loss and a casualty retention of $0.3 million with coverage up to $1.0 million per individual casualty loss.

The estimated total net cost of APPCIC’s FHCF, per risk and catastrophe related coverage, including reinstatement premium protection coverage is $2.8 million. The largest private participants in APPCIC’s program include Everest Reinsurance Company, Chubb Tempest Reinsurance Ltd., Hiscox Insurance Co (Bermuda) Ltd, Hannover Ruck SE and various Lloyd’s of London syndicates. The table below provides the A.M. Best and S&P financial strength ratings for each of the largest third-party reinsurers in APPCIC’s 2017-2018 reinsurance program.

Reinsurer

A.M. Best

S&P

Everest Reinsurance Company

A+

A+

Chubb Tempest Reinsurance Ltd.

A++

AA

Hiscox Insurance Co (Bermuda) Ltd.

A

A

Hannover Ruck SE

A+

AA-

Various Lloyd’s of London Syndicates

A

A+

critical accounting policies AND ESTIMATES

Use of Estimates

The preparation of financial statements in conformity with U.S. 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. Our primary use of estimates include, use

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of estimate in the recognition of liabilities for unpaid losses, loss adjustment expenses, subrogation recoveries and reinsurance recoveries which are described below.

Recognition of Premium Revenues

Direct and ceded premiums are recognized as revenue on a pro rata basis over the policy term or over the term of the reinsurance agreement. The portion of direct premiums that will be earned in the future are deferred and reported as unearned premiums. The portion of ceded premiums that will be earned in the future is deferred and reported as prepaid reinsurance premiums.

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 Company estimates and accrues its 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 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 loss adjustment expenses 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:

o

IBNR-Total of Incurred-but-not-reported liabilities plus expected development on reported claims by accident year and

o

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 tables to the consolidated financial statements- Reconciliation of net incurred and paid claims development table to the liability for claims and claim adjustment expenses in the Consolidated Balance Sheet.

Duration- a table of the average historical claims duration for the past five years

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 whenconsumer behaviors of policyholders are influenced by external factors and/or market dynamics. Claims reported in 2013 and 2014, for example, benefited from several initiatives designed to expedite claim closure rates and reduce settlement costs on claims introduced in our claims department during those 24 months. A more 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 continuing expansion of assignment of benefits (“AOB”) and the resulting increase in litigation against the Company. As a result of the continuing and growing use of AOB’s in this manner, 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

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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, deductibles and other economic and environmental factors. We employ various loss management programs to mitigate the effect 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 claim and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent 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.

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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 reserve represents our best estimate of the ultimate settlement and administration cost of insured claims incurred and unpaid. Since the process of estimating loss 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, 2017, the recorded amount for net loss and LAE falls within the range determined by the appointed independent actuaries and approximates their best estimate.

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, 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 coastal states, primarily Florida. As an example, the 2004 and 2005 hurricanes created great uncertainty in determining ultimate losses for these natural catastrophes due to issues related to applicability of deductibles, availability and cost of repair services and materials, and other factors. UPCIC experienced unanticipated unfavorable loss development on catastrophe losses from claims related to 2004 and 2005 being reopened and new claims being opened due to public adjusters encouraging policyholders to file new claims, and from homeowners’ association assessments related to condominium policies. Due to the inherent uncertainty, the parameters of the loss estimation methodologies are updated on an annual basis as new information emerges.

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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 losses and IBNR 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 may vary materially from recorded amounts, which are based on our best estimates. The liability for unpaid losses and LAE at December 31, 2017 is $248.4 million.

Deferred Policy Acquisition Costs/Deferred Ceding Commissions

We incur acquisition costs in connection with the productionFlorida residential real estate market and the hurricane season. The amount of new and renewal insurance policies which are deferred and recognized over the life of the underlying insurance policy. Acquisition costs not yet recognized are deferred and reported as “Deferred Policy Acquisition Costs”. Acquisition costs are commissions and state premium taxes incurred in acquiring insurance policies that relateddirect premiums written tends to increase just prior to the successful production of newsecond quarter and renewal business. Wetends to decrease approaching the fourth quarter.

Trends and Geographical Distribution
In recent years, the Florida personal residential insurance market has been characterized by increased losses and LAE due to abuses and inflated claims. These conditions have collected ceding commissions from certain reinsurerscontinued to worsen and have reached levels well beyond historical norms and levels experienced in connection with our use of quota share reinsurance contracts. We record the amount of ceding commissions or defer such amounts over the terms of the applicable reinsurance contracts.other jurisdictions. The deferred ceding commissions were offset against the deferred policy acquisition costs with the net result presented as “deferred policy acquisition costs, net” on our Consolidated Balance Sheets. As of December 31, 2017, deferred policy acquisition costs, were $73.1 million compared to deferred policy acquisition costs of $64.9 million as of December 31, 2016.

Provision for Premium Deficiency

We evaluate and recognize losses on insurance contracts when estimated future claims, deferred policy acquisition costs, and maintenance costs under a group of existing policy contracts will exceed anticipated future premiums and investment income. The determination of the provision for premium deficiency requires estimation of the costs of losses, catastrophic reinsurance and policy maintenance to be incurred and investment income to be earned over the remaining policy period. Management has determined that a provision for premium deficiency was not warranted as of December 31, 2017.

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 writingadverse conditions in the Florida personal residential insurance market. Amounts recoverable from reinsurers are estimated in a manner consistent withmarket can be attributed largely to the provisionsproliferation of the reinsurance agreementrepresented claims, involving both public adjusters 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, 2017.


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Table of Contents

Results of Operations

year ended December 31, 2017 COMPARED TO YEAR ENDED December 31, 2016

Net income increased by $7.5 million, or 7.6%, to $106.9 million for the year ended December 31, 2017 compared to $99.4 million for the year ended December 31, 2016. Net income for the year ended December 31, 2017 included growth within each revenue category, continued underwriting profitability despite the impact from Hurricane Irma during the year, and a reduction in our effective tax rate. Diluted earnings per common share increased by $0.20 to $2.99 for the year ended December 31, 2017 compared to $2.79 per share for the year ended December 31, 2016, primarily as a result of an increase in net income and offset by modest increase in weighted average diluted shares outstanding. A more detailed discussion of this and other factors follows the table below.

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

Change

 

 

 

2017

 

 

2016

 

 

$

 

 

%

 

PREMIUMS EARNED AND OTHER REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums written

 

$

1,055,886

 

 

$

954,617

 

 

$

101,269

 

 

 

10.6

%

Change in unearned premium

 

 

(56,688

)

 

 

(33,390

)

 

 

(23,298

)

 

 

69.8

%

Direct premium earned

 

$

999,198

 

 

$

921,227

 

 

$

77,971

 

 

 

8.5

%

Ceded premium earned

 

 

(310,405

)

 

 

(288,811

)

 

 

(21,594

)

 

 

7.5

%

Premiums earned, net

 

 

688,793

 

 

 

632,416

 

 

 

56,377

 

 

 

8.9

%

Net investment income (expense)

 

 

13,460

 

 

 

9,540

 

 

 

3,920

 

 

 

41.1

%

Net realized gains (losses) on investments

 

 

2,570

 

 

 

2,294

 

 

 

276

 

 

 

12.0

%

Commission revenue

 

 

21,253

 

 

 

17,733

 

 

 

3,520

 

 

 

19.8

%

Policy fees

 

 

18,838

 

 

 

16,880

 

 

 

1,958

 

 

 

11.6

%

Other revenue

 

 

7,002

 

 

 

6,426

 

 

 

576

 

 

 

9.0

%

Total premiums earned and other revenues

 

 

751,916

 

 

 

685,289

 

 

 

66,627

 

 

 

9.7

%

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

350,428

 

 

 

301,229

 

 

 

49,199

 

 

 

16.3

%

General and administrative expenses

 

 

231,004

 

 

 

221,177

 

 

 

9,827

 

 

 

4.4

%

Total operating costs and expenses

 

 

581,432

 

 

 

522,406

 

 

 

59,026

 

 

 

11.3

%

INCOME BEFORE INCOME TAXES

 

 

170,484

 

 

 

162,883

 

 

 

7,601

 

 

 

4.7

%

Income tax expense

 

 

63,549

 

 

 

63,473

 

 

 

76

 

 

 

0.1

%

NET INCOME

 

$

106,935

 

 

$

99,410

 

 

$

7,525

 

 

 

7.6

%

Other comprehensive income (loss), net of taxes

 

 

127

 

 

 

(2,402

)

 

 

2,529

 

 

NM

 

COMPREHENSIVE INCOME

 

$

107,062

 

 

$

97,008

 

 

$

10,054

 

 

 

10.4

%

For the year ended December 31, 2017, our growth in direct premiums written increased by 10.6% overall to $1,055.9 million, including an increase of 7.4% to $924.0 million within Florida and an increase of 40.4% to $131.9 million in our Other States book. Growth within Florida includes both continued organic growth and the positive effect of increased policyholder retention and the associated premium volume surrounding Hurricane Irma (as discussed above in the Recent Developments - Hurricane Irma Overview), while growth in our Other States book includes continued expansion within states where we already had a presence prior to 2017,attorneys, as well as by aggressive estimates and demands put forth by remediation and repair companies. In many cases, policyholders have representation even before the additionclaims are filed or before the Company is able to provide an initial assessment of two new states duringdamages. 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 year (New Jerseypurported dates of loss. These conditions are fostered in large part by the one-way right to attorneys’ fees against insurers provided under the Florida Insurance Code. These actions adversely affect both the frequency and New York).

Direct premiums earned increased by 8.5%severity of losses as otherwise understood based on historical patterns and patterns experienced in other states. See “Part I—Item 1A—Risk Factors—Risks Relating to $999.2 million for the year ended December 31, 2017, from $921.2 millionOur Business and Operations—Actual claims incurred have exceeded, and in the prior year. future may exceed, reserves established for claims, adversely affecting our operating results and financial condition.”

The increase in direct earned premium reflectsCompany has taken a series of steps over time to mitigate the growth within both our Florida and Other States books, as discussed above, which has occurred over the past 12 months.

Ceded premium earned was $310.4 million for the year ended December 31, 2017, compared to $288.8 million for the year ended December 31, 2016. The increase in ceded earned premiumsfinancial impact of $21.6 million is attributable to increased costs associated with our 2017/2018 reinsurance program (which runs from June 1 to May 31 of the following year), reflecting increased ceded exposure from policy growth as well as coverage and limit improvements as compared to the 2016/2017 reinsurance program. Our overall reinsurance spend as a percentage of direct premiums earned held steady at 31% for the year ended December 31, 2017 as compared to the prior year.

Net premiums earned increased by 8.9% to $688.8 million for the year ended December 31, 2017, compared to $632.4 million for the year ended December 31, 2016. The growth was the result of the increase in direct premiums earned and was partially offset by the increase in ceded premium earned, both of which are discussed above.

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Table of Contents

Net investment income was $13.5 million for the year ended December 31, 2017, compared to $9.5 million for the year ended December 31, 2016, representing an increase of 41.1%. The $4.0 million increase in net investment income is principally the result of the increasing size of our investment portfolio, coupled with favorable marketthese negative trends and actions taken to increase portfolio yield while maintaining high credit quality. Total average investments were $666.3 million with an average credit rating of AA- during the year ended December 31, 2017 compared to $592.6 million with an average credit rating of AA- for the same period in 2016.

We periodically sell investment securities from our portfolio of securities available for sale when opportunities arise or when circumstances could result in greater losses if such securities continue to be held. We sold investment securities available for sale during the year ended December 31, 2017 resulting in a net realized gain of $2.6 million compared to a net realized gain of $2.3 million during the year ended December 31, 2016.

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, 2017, commission revenue grew by $3.6 million, or 19.8%, to $21.3 million, compared to $17.7 million for the year ended December 31, 2016. The increase was the result of overall changes in the structure of the reinsurance programs in effect, the amount of premiums paid for reinsurance on our growing exposures and the types of reinsurance contracts used in each program, as well as a benefit of approximately $2.0 million related to reinstatement premium commissions received by BARC following Hurricane Irma, discussed aboveFlorida market. We also have closely monitored rate levels, especially in the Recent Developments - Hurricane Irma Overview.

Policy fees are fees collected from policyholders by our wholly-owned managing general agent for business that is written through that subsidiary. Policy fees for the year ended December 31, 2017 grew by $1.9 million, or 11.6% to $18.8 million compared to $16.9 million for the year ended December 31, 2016. The increase was the result of growth in the number of policies written during the year ended December 31, 2017 compared to the same period in 2016.

Other revenue represents revenue from policy installment fees, premium financingFlorida market, and other miscellaneous income. Other revenue for the year ended December 31, 2017 grew by $576,000, or 9.0%, to $7.0 million compared to $6.4 million for the year ended December 31, 2016. The increase reflects growth in the number of policies written during the year ended December 31, 2017 compared to the same period in 2016, as well as consumer behavior underlying the composition of our insurance portfolio.

Losses and LAE, net of reinsurance were $350.4 million for the year ended December 31, 2017 compared to $301.2 million for the same period in 2016 as follows:

 

 

For the Year Ended December 31, 2017

 

 

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Premiums earned

 

$

999,198

 

 

 

 

 

 

$

310,405

 

 

 

 

 

 

$

688,793

 

 

 

 

 

Losses and loss adjustment expenses (LAE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hurricane Irma losses and loss adjustment

   expenses

 

$

446,700

 

 

 

44.7

%

 

$

417,543

 

 

 

134.5

%

 

$

29,157

 

 

 

4.2

%

All other losses and loss adjustment expenses

 

 

332,422

 

 

 

33.3

%

 

 

11,151

 

 

 

3.6

%

 

 

321,271

 

 

 

46.7

%

Total losses and loss adjustment expenses

 

$

779,122

 

 

 

78.0

%

 

$

428,694

 

 

 

138.1

%

 

$

350,428

 

 

 

50.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31, 2016

 

 

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Premiums earned

 

$

921,227

 

 

 

 

 

 

$

288,811

 

 

 

 

 

 

$

632,416

 

 

 

 

 

Losses and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weather events*

 

$

51,400

 

 

 

5.6

%

 

$

5,300

 

 

 

1.8

%

 

$

46,100

 

 

 

7.3

%

All other losses and loss adjustment

    expenses

 

 

251,636

 

 

 

27.3

%

 

 

(3,493

)

 

 

-1.2

%

 

 

255,129

 

 

 

40.3

%

Total losses and loss adjustment expenses

 

$

303,036

 

 

 

32.9

%

 

$

1,807

 

 

 

0.6

%

 

$

301,229

 

 

 

47.6

%

       *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.

During the year ended December 31, 2017, the Company recorded gross losses and LAE of $446.7 million resulting from Hurricane Irma. The Company’s reinsurance program limited losses from Hurricane Irma to $29.2 million, which added 4.2 percentage points to the net losses and LAE ratio for the year ended December 31, 2017. For additional details surrounding Hurricane Irma losses, see

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Table of Contents

Recent Developments - Hurricane Irma Overview discussed above.have submitted rate filings based upon evolving data. In addition, the Company experienced approximately $2.4 million of gross losses and loss adjustment expenses relatedhas implemented several initiatives in its claims department in response to hailstorms in Minnesotathe 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 occurred in June/July of 2017,can be seen with claims that remain open for which the Company ultimately recorded only $1.0 million oflonger 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 LAE. This recovery wasvendors. We developed a resultspecialized in-house unit for responding to the unique aspects of aggregate loss clauses withinrepresented claims, and we have substantially increased our reinsurance program triggered by Hurricane Irma. Weather eventsin-house legal staff in 2016 were comprisedan effort to address the increase in litigated or represented claims as cost-effectively as possible.

26

Additionally, we have taken steps to implement claim settlement rules associated with the Florida legislation passed in 2019 designed to reduce the negative effects of a seriesclaims involving assignments of severe storms in the first quarter, as well as the impact of Hurricane Hermine in the third quarter and Hurricane Matthew in the fourth quarter.

In the fourth quarter of 2017, the Company recorded reserve of $44.7 million for the reserve strengthening comprised of 1) $26.4 million for unfavorable prior year reserve development related to accident years 2013, 2015 and 2016 and 2) $18.3 million for unfavorable development for the 2017 accident year. Each year reserve re-estimates, as described in “Item 8-Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)benefits (“AOB”). See “Part I— Item 1—Business—Government Regulation.”, are conducted and the difference between indicated reserves based on new reserve estimates and the previously recorded estimate is recorded and included in “Losses and loss adjustment expenses” in the Consolidated Statements of Income. 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 generally seenexperienced an increase in the use of AOB’sAOBs 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. Reserve re-estimatesIn 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 2017 resultedreducing one aspect of the concerns affecting the Florida market, the overall impact of the deterioration in unfavorable prior year reserve development of $27.7 million, comparedclaims-related tactics and behaviors, including other first-party litigation, thus far has continued to favorable prior year reserve development of $4.7 millionoutpace benefits arising from the 2019 AOB reform legislation.

Despite our initiatives, such as those mentioned above, our costs to settle claims in 2016. Unfavorable priorFlorida have increased for the reasons mentioned above. For example, the Company has previously increased its current year loss reserveestimates 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 in 2017 relatedon prior years’ loss reserves and further strengthened current year losses during the year to accident years 2013, 2015,address the increasing impact Florida’s market disruptions have had on the claims process and 2016, primarily asthe 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.
Direct premiums written continue to increase across the states we conduct business. As a result of our business strategy, rate changes and marketing and underwriting initiatives, we have seen increases in policy count, 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 litigation frequency surrounding17.7%, representing a $40.1 million increase during 2020. Direct premium for Florida increased 17.3%, representing a $184.6 million increase during 2020. The following table provides direct premiums written for Florida and other states for the AOB issue withinyears ended December 31, 2020 and 2019 (dollars in thousands):
For the Years EndedGrowth
Year Over Year
December 31, 2020December 31, 2019
StateDirect Premiums Written%Direct Premiums Written%$%
Florida$1,250,748 82.4 %$1,066,112 82.5 %$184,636 17.3 %
Other states266,731 17.6 %226,609 17.5 %40,122 17.7 %
Grand total$1,517,479 100.0 %$1,292,721 100.0 %$224,758 17.4 %
We seek to grow and generate long-term rate adequate premium in each state where we offer policies, including Florida. Diversified sources of business are an important objective and premium growth outside Florida is a measure monitored by management toward meeting that objective.

27

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, 2020, 2019 and 2018 (dollars in thousands, rounded to the nearest thousand):
As of December 31, 2020
PremiumTotal Insured
StatePolicy Count%In Force%Value%
Florida728,211 73.9 %$1,252,916 82.4 %$192,504,430 63.6 %
Georgia46,678 4.7 %57,251 3.8 %20,141,751 6.7 %
North Carolina62,849 6.4 %55,307 3.6 %21,500,109 7.1 %
Virginia23,546 2.4 %20,226 1.3 %12,959,884 4.3 %
Massachusetts15,090 1.5 %20,161 1.3 %9,507,917 3.1 %
Indiana19,839 2.0 %18,328 1.2 %7,171,623 2.4 %
Minnesota12,730 1.3 %17,863 1.2 %6,252,822 2.1 %
Alabama13,632 1.4 %17,409 1.2 %4,953,449 1.6 %
South Carolina17,877 1.8 %16,886 1.1 %6,297,270 2.1 %
Pennsylvania17,183 1.7 %14,540 1.0 %7,394,773 2.4 %
New Jersey11,576 1.2 %12,915 0.9 %6,684,386 2.2 %
Maryland5,664 0.6 %4,816 0.3 %2,226,324 0.7 %
Michigan3,494 0.4 %4,290 0.3 %1,478,595 0.5 %
New York1,936 0.2 %2,251 0.2 %1,159,105 0.4 %
Hawaii2,031 0.2 %1,983 0.1 %901,401 0.3 %
Delaware1,581 0.2 %1,908 0.1 %870,728 0.3 %
Illinois497 0.1 %580 — %235,593 0.1 %
New Hampshire409 — %312 — %238,121 0.1 %
Iowa7 — %7 — %2,774 — %
Total984,830 100.0 %$1,519,949 100.0 %$302,481,055 100.0 %
As of December 31, 2019
PremiumTotal Insured
StatePolicy Count%In Force%Value%
Florida662,343 74.6 %$1,070,034 82.5 %$164,654,848 64.3 %
Georgia42,637 4.8 %49,615 3.8 %17,536,031 6.9 %
North Carolina58,283 6.6 %49,420 3.8 %19,150,001 7.5 %
Massachusetts13,596 1.5 %17,991 1.4 %8,312,929 3.2 %
Indiana18,291 2.1 %16,643 1.3 %6,458,310 2.5 %
Minnesota12,466 1.4 %16,035 1.2 %5,881,338 2.3 %
South Carolina16,682 1.9 %15,705 1.2 %5,575,934 2.2 %
Virginia16,313 1.8 %14,111 1.1 %8,415,470 3.3 %
Pennsylvania16,874 1.9 %13,726 1.1 %6,922,815 2.7 %
Alabama11,186 1.3 %12,998 1.0 %3,923,446 1.5 %
New Jersey7,145 0.8 %7,554 0.6 %3,824,506 1.5 %
Michigan3,417 0.4 %4,089 0.3 %1,399,470 0.5 %
Maryland4,181 0.5 %3,474 0.3 %1,600,113 0.6 %
Hawaii2,090 0.2 %1,930 0.2 %881,476 0.3 %
Delaware1,273 0.1 %1,500 0.1 %673,331 0.3 %
New York1,183 0.1 %1,244 0.1 %646,130 0.3 %
New Hampshire249 — %181 — %135,254 0.1 %
Illinois152 — %166 — %65,006 — %
Total888,361 100.0 %$1,296,416 100.0 %$256,056,408 100.0 %
28

As of December 31, 2018
PremiumTotal Insured
StatePolicy Count%In Force%Value%
Florida637,926 77.0 %$1,015,666 85.1 %$156,118,955 68.3 %
North Carolina55,047 6.6 %43,770 3.7 %17,124,104 7.5 %
Georgia37,652 4.6 %40,395 3.4 %14,584,974 6.4 %
Massachusetts11,796 1.4 %15,522 1.3 %7,020,121 3.1 %
South Carolina15,117 1.8 %14,477 1.2 %4,818,760 2.1 %
Indiana16,059 1.9 %13,305 1.1 %5,464,439 2.4 %
Pennsylvania15,454 1.9 %10,762 0.9 %6,158,602 2.7 %
Minnesota9,466 1.1 %10,632 0.9 %4,352,908 1.9 %
Virginia10,354 1.3 %8,437 0.7 %5,053,973 2.2 %
Alabama6,817 0.8 %7,187 0.6 %2,304,683 1.0 %
New Jersey3,683 0.4 %3,763 0.3 %1,870,394 0.8 %
Michigan2,388 0.3 %2,879 0.2 %940,051 0.4 %
Maryland3,070 0.4 %2,539 0.2 %1,161,678 0.5 %
Hawaii2,176 0.3 %1,937 0.2 %887,555 0.4 %
Delaware1,073 0.1 %1,230 0.1 %555,055 0.2 %
New York461 0.1 %432 0.1 %228,334 0.1 %
New Hampshire114 — %86 — %62,436 — %
Total828,653 100.0 %$1,193,019 100.0 %$228,707,022 100.0 %
Also see “Results of Operations” below and “Part I—Item 1A—Risk Factors—Risks Relating to Our Business and Operations—Because we conduct the majority of our business in Florida, policies.

Allour 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 ― the ratio of 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. The combined ratio and changes to the 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 condensed 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.
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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 adjustment expensesand 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.
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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. The 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’ respective 2020-2021 reinsurance programs meet the FLOIR’s requirements, which are based on, among other things, successfully demonstrating cohesive and comprehensive reinsurance programs that protect the policyholders of our Insurance Entities as well as satisfying a series of stress test catastrophe loss scenarios based on past historical events.
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, 2020, the Insurance Entities entered into multiple reinsurance agreements comprising our 2020-2021 reinsurance program. See “Part II—Item 8—Note 4 (Reinsurance).”
UPCIC’s 2020-2021 Reinsurance Program
•First event All States retention of $43 million; first event Non-Florida retention of $15 million.
•All States first event tower extends to $3.36 billion with no co-participation in any of the layers, no limitations on loss adjustment expenses and no accelerated deposit premiums.
•Assuming a first event completely exhausts the $3.36 billion tower, the second event exhaustion point would be $1.343 billion.
•Full reinstatement available for all private market first event catastrophe layers for guaranteed second event coverage. For all layers purchased between $90 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 has purchased enough reinstatement premium protection (“RPP”) limit to pay the premium necessary for the reinstatement of these coverages.
•Effective September 1, 2020, UPCIC purchased RPP limit for the layer attaching at $45 million. Combined with the RPP limit purchased at June 1, 2020, UPCIC has purchased enough RPP limit to pay for the premium necessary for the reinstatement of all catastrophe layers between $45 million and the projected FHCF retention.
•Specific 3rd and 4th event private market catastrophe excess of loss coverage of $76 million in excess of $35 million provides frequency protection for a multiple event storm season.
•For the FHCF Reimbursement Contracts effective June 1, 2020, UPCIC has continued the election of the 90% coverage level. We estimate the total mandatory FHCF layer will provide approximately $2.008 billion of coverage for UPCIC, which inures to the benefit of the open market coverage secured from private reinsurers.
•Secured $197 million of new catastrophe capacity with contractually agreed limits that extend coverage to include the 2021 and 2022 wind seasons. In total, UPCIC has $420 million of multi-year capacity with coverage extending to include the 2021 wind season or beyond.
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Reinsurers
The table below provides the A.M. Best and S&P financial strength ratings for each of the largest third-party reinsurers in UPCIC’s 2020-2021 reinsurance program:

ReinsurerA.M. BestS&P
Allianz Risk TransferA+AA-
Arch Reinsurance LimitedA+A+
Chubb Tempest Reinsurance Ltd.A++AA
Munich ReA+AA-
Renaissance ReA+A+
Various Lloyd’s of London SyndicatesAA+
Florida Hurricane Catastrophe Fund (1)N/AN/A
(1)No rating is available, because the fund is not rated.
APPCIC’s 2020-2021 Reinsurance Program
•First event All States retention of $3 million.
•All States first event tower of $43.6 million with no co-participation in any of the layers, no limitation on loss adjustment expenses and no accelerated deposit premiums.
•Full reinstatement available for all private market first event catastrophe layers for guaranteed second event coverage. For the layer purchased between $3 million and the projected FHCF retention, to the extent that all coverage or a portion thereof is exhausted in a catastrophic event and reinstatement premium is due, APPCIC purchased enough RPP limit to pay the premium necessary for the reinstatement of this coverage.
•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 $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 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 Contracts effective June 1, 2020, APPCIC has continued the election of the 90% coverage level. The total mandatory FHCF layer is estimated to provide approximately $22.5 million of coverage for APPCIC, which inures to the benefit of the open market coverage secured from private reinsurers.
Reinsurers
The table below provides the A.M. Best and S&P financial strength ratings for each of the largest third-party reinsurers in APPCIC’s 2020-2021 reinsurance program:
ReinsurerA.M. BestS&P
Chubb Tempest Reinsurance Ltd.A++AA
Lancashire Insurance Company LimitedAA-
Various Lloyd’s of London SyndicatesAA+
Florida Hurricane Catastrophe Fund (1)N/AN/A
(1)No rating is available, because the fund is not rated.
The total cost of the 2020-2021 reinsurance programs for UPCIC and APPCIC is projected to be $499.8 million, representing approximately 34.0% of estimated direct premium earned for the 12-month treaty period.

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Results of Operations
YEAR ENDED DECEMBER 31, 2020 COMPARED TO YEAR ENDED DECEMBER 31, 2019
2020 Financial and Business Highlights (comparisons are to 2019 unless otherwise specified)
•Direct premiums written overall grew by $224.8 million, or 17.4%, to $1,517.5 million.
•In Florida, direct premiums written grew by $184.6 million, or 17.3%, and in our other states, direct premiums written grew by $40.1 million, or 17.7%.
•Premiums earned, net grew by $81.1 million, or 9.6%, to $923.6 million.
•Net realized gains were $321.3$56.9 million from sales of available-for-sale securities and net realized gains were $6.5 million from the sales of equity securities.
•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 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.
•Total revenues increased by $133.4 million, or 14.2%, to $1,072.8 million.
•Weather events in excess of plan for named hurricanes and other severe weather events occurred during the year ended December 31, 2020, resulting in a $162.0 million impact after reinsurance.
•Net loss and LAE ratio was 82.2% as compared to 71.6%, driven by severe weather and prior years’ reserve development.
•Diluted earnings per common share (“EPS”) was $0.60 compared to $1.36.
•Weighted average diluted common shares outstanding were lower by 6.6% to 32.0 million shares as of December 31, 2020 from 34.2 million shares as of December 31, 2019.
•Book value per share decreased by $0.70, or 4.6%, to $14.43 at December 31, 2020 from $15.13 at December 31, 2019.
•Declared and paid dividends per common share of $0.77, including a $0.13 special dividend in December 2020.
•Repurchased 1,610,783 shares in 2020 at an aggregate cost of $28.9 million.
•Offered Universal DirectSM in all 19 states in which the Company writes policies as of December 31, 2020.
•Contributed $114 million of capital to UPCIC during 2020 to support insurance operations.
•UPCIC commenced writing homeowners policies in Iowa.
•Received Certificate of Authority from Tennessee.

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A detailed discussion of our results of operations follows the table below (in thousands, except per share data).
Years Ended December 31,Change
20202019$%
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 earned1,395,623 1,233,121 162,502 13.2 %
Ceded premium earned(472,060)(390,619)(81,441)20.8 %
Premiums earned, net923,563 842,502 81,061 9.6 %
Net investment income20,393 30,743 (10,350)(33.7)%
Net realized gains (losses) on investments63,352 (12,715)76,067 NM
Net change in unrealized gains (losses) of equity securities25 23,188 (23,163)(99.9)%
Commission revenue33,163 26,101 7,062 27.1 %
Policy fees23,773 21,560 2,213 10.3 %
Other revenue8,501 7,972 529 6.6 %
Total premiums earned and other revenues1,072,770 939,351 133,419 14.2 %
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses758,810 603,406 155,404 25.8 %
General and administrative expenses289,729 272,428 17,301 6.4 %
Total operating costs and expenses1,048,539 875,834 172,705 19.7 %
INCOME BEFORE INCOME TAXES24,231 63,517 (39,286)(61.9)%
Income tax expense5,126 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 outstanding31,972 34,233 (2,261)(6.6)%
Net income was $19.1 million for the year ended December 31, 2017,2020, compared to $255.1net 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, 2020 were increases in premiums earned, net, realized gains on investments, commission revenue, policy fees and other revenue, offset by a decrease in net investment income, a lower level of unrealized gains in the fair value of our equity securities in 2020 and increased total operating costs and expenses. Direct premium earned and premiums earned, net were up 13.2% and 9.6%, respectively, due to growth of policies in almost all states in which we are licensed and writing during the past 12 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) increased estimated core losses and LAE for the current year compared to prior year, (2) premium growth and change in mix between Florida and other states and (3) increased adverse weather events. The increase was partially offset by a reduced level of prior years’ reserve development in 2020.
Direct premiums written increased by $224.8 million, or 17.4%, for the year ended December 31, 2020, driven by growth within our Florida business of $184.6 million, or 17.3%, and growth in our other states business of $40.1 million, or 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 also contributed 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, 2020 on new business to address emerging loss trends that have since slowed the rate of growth in Florida in certain territories during December 31, 2020. We actively wrote policies in 19 states during 2020 compared to 18 in 2019. In addition, we are authorized 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, 2019.
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Direct premium earned increased by $162.5 million, or 13.2%, for the year ended December 31, 2020, reflecting the earning of premiums written over the past 12 months and changes in rates and 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 amounts paid to reinsurers for this protection. Ceded premium earned increased $81.4 million, or 20.8%, for the year ended December 31, 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 31.7% in 2019 to 33.8% in 2020. During the fourth quarter of 2020 the Company recorded additional ceded written premiums of $18.5 million representing reinstatement premiums on Hurricane Sally losses of which $7.7 million was unearned at December 31, 2020. Reinsurance 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 Insurance Entities’ 2020-2021 reinsurance program and “Part II—Item 8— Note 4 (Reinsurance).”
Premiums earned, net of ceded premium earned, grew by 9.6%, or $81.1 million, to $923.6 million for the year ended December 31, 2020, reflecting an increase in direct premium earned offset by increased costs for reinsurance.
Net investment income was $20.4 million for the year ended December 31, 2020, compared to $30.7 million for the same period in 2019, a decrease of $10.4 million, or 33.7%. The decrease is driven by lower trends in market yields. During 2020, the Company 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 portfolio prior to the sale and reinvestment. The book yield of the available-for-sale debt securities was 3.08% at December 31, 2019 compared to 1.16% at December 31, 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, a decrease of 8.2%. 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 future market forces, monetary policy and interest rate policy from the Federal Reserve. The Federal Reserve has broadly been lowering and maintaining lower interest rates, which has impacted the effective yields on new available-for-sale portfolio and overnight cash purchases and short-term investments. The overall trend has been lower interest rates on new purchases of securities over the 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 portfolio returns will reflect lower book yields based on current market conditions.
We sell investments 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, 2020, sales of available-for-sale debt securities resulted in net realized gain of $56.9 million and 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, sales 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 $12.7 million. See “Part II—Item 8—Note 3 (Investments).”
There was a nominal favorable net unrealized gain in equity securities during the year ended December 31, 2020 compared to a $23.2 million favorable net unrealized gain during the year ended December 31, 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 “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, 2020, commission revenue was $33.2 million, compared to $26.1 million for the year ended December 31, 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
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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, 2020 were $23.8 million compared to $21.6 million for the same period in 2019. The increase of $2.2 million, or 10.3%, was the result of an increase in the total number of new and renewal policies written during the year ended December 31, 2020 compared to the same period in 2019.
Other revenue, representing revenue from policy installment fees, premium financing and other miscellaneous income, was $8.5 million for the year ended December 31, 2020 compared to $8.0 million for the same period in 2019.
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 earned premium. These amounts are further categorized as 1) core losses, 2) weather events for the current accident year and 3) prior years’ reserve development (dollars in thousands):
For The Year Ended December 31, 2020
DirectLoss RatioCededLoss RatioNetLoss 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 development284,315 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
DirectLoss RatioCededLoss RatioNetLoss 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 development562,303 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 “Part II—Item 8—Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for change in liability for unpaid losses and LAE.
Management 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 reinsurance recoveries, were $758.8 million resulting in a 82.2% net loss and 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
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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 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 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 10.6% loss ratio points was a result of: (1) increase in weather (13.0% loss ratio points); and (2) an increase in estimated core losses and LAE ratio for the current year (1.7% loss ratio points) principally the result of higher reinsurance costs. The increase was partially offset by a lower level of prior years’ reserve development on prior years’ losses and LAE reserves (4.1% loss ratio points).
37

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, resulting in a pattern of continued increased year over year levels of represented claims, inflation of purported claim amounts, and increased demands for attorneys’ fee. Active solicitation of personal residential claims in Florida by policyholder representatives, remediation companies and repair companies has led to an increase in the frequency and severity of personal residential claims in Florida exceeding historical levels and levels seen in other jurisdictions. A Florida statute providing a one-way right of attorneys’ fees against insurers, coupled with other adverse statutes and judicial rulings, have further produced a legal environment in Florida that encourages litigation, in many cases without regard to the underlying circumstances of the claims.
The market trends in losses and LAE led us to file in February 2020 for an overall 12.4% rate increase in 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 change was effective December 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 developed 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 $17.3 million for the year ended December 31, 2020, compared to $3.2 million during the year ended December 31, 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 benefit was recorded in the consolidated financial statements as a reduction to losses and LAE.
General and administrative expenses were $289.7 million for the year ended December 31, 2020, compared to $272.4 million during the same period in 2016. The increase reflects increased losses due to growth in exposures and an increase in the losses and LAE ratio excluding Hurricane Irma of 6.4 percentage points when compared to calendar year 2016 as presented in the table above. The 6.4 percentage point increase reflects prior accident year reserve development accounting 4.0 percentage points, continued geographic expansion into states outside of Florida where non-catastrophe loss ratios are generally higher than in Florida, and the marketplace dynamics inside of Florida including increased challenges faced by insurers when policyholders assign benefits underlying their policies to third parties and the growth in litigation arising from these assignments.

For the year ended December 31, 2017, general and administrative expenses were $231.0 million, compared to $221.2 million for the same period in 20162019 as detailed below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

For the Years Ended December 31,

 

 

Change

 

For the Years Ended December 31,Change

2017

 

 

2016

 

 

$

 

 

%

 

20202019$%

$

 

 

Ratio

 

 

$

 

 

Ratio

 

 

 

 

 

 

 

 

 

$Ratio$Ratio

Premiums earned, net

$

688,793

 

 

 

 

 

 

$

632,416

 

 

 

 

 

 

$

56,377

 

 

 

8.9

%

Premiums earned, net$923,563 $842,502 $81,061 9.6 %

General and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses:

Policy acquisition costs

 

138,846

 

 

 

20.2

%

 

 

125,979

 

 

 

19.9

%

 

 

12,867

 

 

 

10.2

%

Policy acquisition costs199,102 21.6 %177,530 21.1 %21,572 12.2 %

Other operating costs(1)

 

92,158

 

 

 

13.3

%

 

 

95,198

 

 

 

15.1

%

 

 

(3,040

)

 

 

(3.2

%)

90,627 9.8 %94,898 11.2 %(4,271)(4.5)%

Total general and administrative expenses

$

231,004

 

 

 

33.5

%

 

$

221,177

 

 

 

35.0

%

 

$

9,827

 

 

 

4.4

%

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 year ended December 31, 2020 and 2019, respectively.
(1)Other operating costs includes $102 and $248 of interest expense for the year ended December 31, 2020 and 2019, respectively.

For the year ended December 31, 2017, general

General and administrative expenses increased by $9.8$17.3 million, or 4.4% to $231.0 million, driven by an increasewhich was the result of increases in policy acquisition costs of $12.9$21.6 million or 10.2%, and which was partiallydue to commissions associated with increased premium volume offset by a decrease in other operating costs of $3.0 million, or 3.2%.$4.3 million. The increase in policy acquisition costs primarily reflects the growth in premium volume described above but also includes an increase in the amount of bonus commissions paid to independent agents for achieving certain levels of premium production and retention. Other operating costs decreased $3.0 million primarily driven by decrease in insurance cost, legal and consulting. The operating expense ratio improved as resulta percentage of economies of scale.

Income tax expensepremiums earned, net decreased from 32.3% for the year ended December 31, 20172019 to 31.4% for the same period in 2020. Our increase in policy acquisition costs continued to be driven by increased by $0.1 million, or 0.1%, to $63.5 millionpremium volume and continued geographic expansion into states that typically have higher commission rates as compared to $63.5 millionFlorida. Other operating costs ratio for the year ended December 31, 2016. See “Item 8—Note 12 (Income Taxes)”2020 was 9.8% compared to 11.2% for the year ended December 31, 2019, reflecting lower share-based compensation and performance bonuses in 2020 and economies of scale as other operating costs did not increase at the same rate as premiums 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 prior year.

Income tax expense decreased by $11.9 million, or 69.9%, for the year ended December 31, 2020, primarily as a reconciliation fromresult of a 61.9% reduction in income before income taxes, when compared with the statutoryyear ended December 31, 2019. Our estimated tax rate (“ETR”) decreased to 21.2% for the year ended December 31, 2020, as compared to 26.8% for the year ended December 31, 2019. The ETR decreased as a result of a higher ratio of permanent items relative to the amount of income before taxes, principally non-deductible compensation, and a higher level of discrete tax rates to our effective tax rates for these periods.

Comprehensive income includes net income and other comprehensive income or loss. benefits.

Other comprehensive income,loss, net of taxes for the year ended December 31, 20172020 was $0.1$17.6 million, compared to a lossother comprehensive income of $2.4$28.4 million for the same period in 2016. Other comprehensive income (loss) represents after tax changes to equity which are not recognized in net income, including changes in the fair value of securities available for sale held in our investment portfolio and any2019, reflecting reclassifications out of cumulative other comprehensive income for available-for-sale debt securities sold.sold and after-tax changes in fair value of available-for-sale debt securities held in our investment portfolio. See ““Part II—Item 8—Note 1411 (Other Comprehensive Income (Loss)).”

for additional information about the amounts comprising other comprehensive income for these periods.


55

38

Table of Contents


YEAR ended DecemberENDED DECEMBER 31, 20162019 COMPARED TO YEAR ENDED DECEMBER 31, 2015

Net2018

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
20192018$%
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 earned1,233,121 1,121,640 111,481 9.9 %
Ceded premium earned(390,619)(353,258)(37,361)10.6 %
Premiums earned, net842,502 768,382 74,120 9.6 %
Net investment income30,743 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 securities23,188 (17,169)40,357 NM
Commission revenue26,101 22,438 3,663 16.3 %
Policy fees21,560 20,275 1,285 6.3 %
Other revenue7,972 7,163 809 11.3 %
Total premiums earned and other revenues939,351 823,816 115,535 14.0 %
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses603,406 414,455 188,951 45.6 %
General and administrative expenses272,428 256,488 15,940 6.2 %
Total operating costs and expenses875,834 670,943 204,891 30.5 %
INCOME BEFORE INCOME TAXES63,517 152,873 (89,356)(58.5)%
Income tax expense17,003 35,822 (18,819)(52.5)%
NET INCOME46,514 $117,051 $(70,537)(60.3)%
Other comprehensive income (loss), net of taxes28,374 (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 outstanding34,233 35,786 (1,553)NM
Benefiting the year ended December 31, 2019 were increases in net earned premium, net investment income, decreasedcommission revenue and increases in the net change in unrealized gains of equity securities, offset by $7.1realized losses on investments and increased operating costs for losses and LAE and general and administrative costs. Direct and net earned premium were up 8.6% and 9.9%, respectively, due to growth in all states in which we are licensed and writing during the past 12 months. 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) adverse development on prior years’ loss and LAE reserves and (5) weather events in excess of plan this year.
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 million, or 6.6%8.6%, for the year ended December 31, 2019, driven by growth within our Florida business of $52.8 million, or 5.2%, and growth in our other states business of $49.0 million, or 27.6%, as compared to $99.4the same period of the prior year. Rate increases in Florida and in certain other states along with slightly improved retention were also a source of premium growth. We implemented new guidelines during the year ended December 31, 2019 on new business to address emerging loss trends that have impacted the rate of growth in Florida. Direct premiums earned increased in every state in which we are writing compared to December 31, 2018. In early March 2019, we commenced writing in Illinois, and as of December 31, 2019 we were actively writing policies in 17 states in addition to our home state of Florida.
Direct premium earned increased by $111.5 million, or 9.9%, for the year ended December 31, 2019, reflecting the earning of premiums written over the past 12 months and changes in rates and policy count during that time.
39

Reinsurance enables our Insurance Entities to limit potential exposures to catastrophic events or other covered events. Ceded premium represents amounts paid to reinsurers for this protection. Ceded premium earned increased $37.4 million, or 10.6%, for the year ended December 31, 2019. Reinsurance costs, as a percentage of direct premium earned, increased from 31.5% in 2018 to 31.7% in 2019. This year ceded earned premiums had a lower level of additional costs from ceded earned reinstatement premiums, $2.6 million in 2019, compared to $20.7 million in 2018. These 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 1 to May 31 coverage period. See the discussion above for the new 2019-2020 reinsurance program and “Part II—Item 8—Note 4 (Reinsurance).”
Premiums earned, net of ceded premium earned, grew by 9.6%, or $74.1 million, to $842.5 million for the year ended December 31, 2016 compared to2019, reflecting the year ended December 31, 2015. increase in direct premiums earned partially offset by increased costs of reinsurance.
Net investment income was impacted by $51.4 million in gross losses and LAE associated with weather events occurring in 2016. Weather events in 2016 were comprised of a series of severe storms in the first quarter of 2016 and then the impact of two hurricanes in 2016, Hermine in the third quarter and Matthew in the fourth quarter. Premium growth and the elimination of our quota share reinsurance contracts effective June 1, 2015, and a lower expense ratio are significant factors behind our 2016 results and comparison to prior years periods. Diluted earnings per common share decreased by $0.18, or 6.0%, to $2.79 for the year ended December 31, 2016 compared to $2.97 per share the year ended December 31, 2015, as a result of a decrease in net income and a slight decrease in weighted average shares outstanding (diluted). A more detailed discussion of this and other factors follows the table below.

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

Change

 

 

 

2016

 

 

2015

 

 

$

 

 

%

 

PREMIUMS EARNED AND OTHER REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums written

 

$

954,617

 

 

$

883,409

 

 

$

71,208

 

 

 

8.1

%

Change in unearned premium

 

 

(33,390

)

 

 

(46,617

)

 

 

13,227

 

 

 

-28.4

%

Direct premiums earned

 

 

921,227

 

 

 

836,792

 

 

 

84,435

 

 

 

10.1

%

Ceded premiums earned

 

 

(288,811

)

 

 

(332,793

)

 

 

43,982

 

 

 

-13.2

%

Premiums earned, net

 

 

632,416

 

 

 

503,999

 

 

 

128,417

 

 

 

25.5

%

Net investment income (expense)

 

 

9,540

 

 

 

5,155

 

 

 

4,385

 

 

 

85.1

%

Net realized gains (losses) on investments

 

 

2,294

 

 

 

1,060

 

 

 

1,234

 

 

 

116.4

%

Commission revenue

 

 

17,733

 

 

 

14,870

 

 

 

2,863

 

 

 

19.3

%

Policy fees

 

 

16,880

 

 

 

15,440

 

 

 

1,440

 

 

 

9.3

%

Other revenue

 

 

6,426

 

 

 

6,020

 

 

 

406

 

 

 

6.7

%

Total premiums earned and other revenues

 

 

685,289

 

 

 

546,544

 

 

 

138,745

 

 

 

25.4

%

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

301,229

 

 

 

187,739

 

 

 

113,490

 

 

 

60.5

%

General and administrative expenses

 

 

221,177

 

 

 

183,782

 

 

 

37,395

 

 

 

20.3

%

Total operating costs and expenses

 

 

522,406

 

 

 

371,521

 

 

 

150,885

 

 

 

40.6

%

INCOME BEFORE INCOME TAXES

 

 

162,883

 

 

 

175,023

 

 

 

(12,140

)

 

 

-6.9

%

Income tax expense

 

 

63,473

 

 

 

68,539

 

 

 

(5,066

)

 

 

-7.4

%

NET INCOME

 

$

99,410

 

 

$

106,484

 

 

$

(7,074

)

 

 

-6.6

%

Other comprehensive income (loss), net of taxes

 

 

(2,402

)

 

 

(2,171

)

 

 

(231

)

 

 

10.6

%

COMPREHENSIVE INCOME

 

$

97,008

 

 

$

104,313

 

 

$

(7,305

)

 

 

-7.0

%

Premium earned, net in the current period includes premium written over the past 12 months and any changes in rates or policy count during that time. Premiums earned, net were $632.4$30.7 million for the year ended December 31, 2016,2019, compared to $504.0$24.8 million for the year ended December 31, 2015.2018, an increase of $5.9 million, or 23.9%. The increase in net earned premiumsis driven by the combination of $128.4 million, or 25.5%, includes an increase in direct earned premiums of $84.4 million and a decrease in ceded earned premiums of $44.0 million. The increase in direct earned premium includes organicthe growth in all states during 2016 as well as rate changes that took effect over the past twelve months. Direct written premiums increased $71.2 million or 8.1% which was made up of an increase in Florida business of $42.9 million or 5.3% overcash and invested assets compared to the prior year and direct written premiumsbenefits from higher yielding assets offset by a lower trend in other states increased $28.3yields on cash and short term investments during 2019. Total invested assets were $914.6 million or 43.0%with an average fixed income credit rating of A+ during the year ended 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 3.8 years at December 31, 2019 compared to 3.6 years at December 31, 2018. Cash and cash equivalents were $182.1 million at December 31, 2019 compared to $166.4 million at December 31, 2018, an increase of 9.4%. Cash and cash equivalents are invested short term until needed to settle payments to reinsurers, loss and LAE payments and operating cash needs.

Yields from the fixed income portfolio are dependent on future market forces, monetary policy and interest rate policy from the Federal Reserve. In 2019, the Federal Reserve lowered interest rates, which impacted effective yields on new fixed income and overnight cash purchases. The impact from this trend in 2019 has been somewhat limited as investments mature over many future years based on the prior year.

Our reinsurance programs run from June 1 to May 31effective maturity of the following year. In June 2015,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.

We sell securities 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 eliminated quota share reinsurancerealize both gains and losses on the sale of securities and real estate. We sold securities and investment real estate during the year ended December 31, 2019. Net of realized gains, sales resulted in a cut off basis. Ceded earned quota share premiums in 2015 were $97.5net realized loss of $12.7 million and none in 2016 as a result ofduring the termination of the quota share. Ceded earned premiums relating to our catastrophe reinsurance program were $235.3 million in 2015year ended December 31, 2019 compared to $288.8 million in 2016. The increase in the ceded earned premiums relating to our catastrophe reinsurance program relate to coverage and limit improvements over 2015.

Net investment income was $9.5net realized loss of $2.1 million for the year ended December 31, 2016, an increase2018. The realized losses during the year ended December 31, 2019 resulted primarily from the sale of 85.1%, compared to $5.2 millionequity securities, whereas the realized loss for the year ended December 31, 2015. The increase2018 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”). See “Part II—Item 8—Note 3 (Investments).”

There was a $23.2 million favorable net investment income of $4.4 million is principally the result of increasesunrealized gain in our fixed income investment portfolio fueled by cash flows generated from operations and actions taken to increase yield by investing these new funds along with maturities in higher yieldequity securities while maintaining high credit quality. Total average investments were $592.6 million during the year ended December 31, 20162019 compared to $470.4a $17.2 million in the same period in 2015.

56

Table of Contents

We sold investment securities available for saleunfavorable net unrealized loss during the year ended December 31, 2016 resulting2018 Unrealized gains or losses are the result of changes in a net realized gainthe fair market value of $2.3 million compared to a net realized gain of $1.1 millionour equity securities during the year ended December 31, 2015.

period for securities still held 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 reinsurers on reinsurance placed for the Insurance Entities. Commission revenue is earned pro-rata over the reinsurance policy period which runs from June 1 to May 31 of the following year. For the year ended December 31, 20162019, commission revenue was $17.7$26.1 million, an increase of $3.7 million, or 16.3%, compared to $14.9$22.4 million for the year ended December 31, 2015. The increase in commission revenue of $2.9 million, or 19.3%, was the result of overall changes in the structure of the reinsurance programs in effect during the year ended December 31, 2016, compared to the year ended December 31, 2015, including an increase in our exposures covered by reinsurance.

2018.

Policy fees for the year ended December 31, 2016,2019, were $16.9$21.6 million compared to $15.4$20.3 million for the same period in 2015.2018. The increase of $1.4$1.3 million, or 9.3%6.3%, was the result of an increase in the number of new and renewal policies written during the year ended December 31, 20162019 compared to the same period in 2015.

2018.

Other revenue, for the year ended December 31, 2016 was $6.4 million compared to $6.0 million for the same period in 2015. Other revenue representsrepresenting revenue from policy installment fees, premium financing and other miscellaneous income. The increase of $406 thousand, or 6.7% reflects an increase in the number of policies written during the year ended December 31, 2016 compared to the same period in 2015 and consumer behavior underlying the composition of our insurance portfolio.

Losses and LAE, net of reinsurance were $301.2income, was $8.0 million for the year ended December 31, 20162019 compared to $187.7$7.2 million for the same period in 2015 as follows:

2018.

 

 

For the Year Ended December 31, 2016

 

 

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Premiums earned

 

$

921,227

 

 

 

 

 

 

$

288,811

 

 

 

 

 

 

$

632,416

 

 

 

 

 

Losses and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

$

251,636

 

 

 

27.3

%

 

$

(3,493

)

 

 

-1.2

%

 

$

255,129

 

 

 

40.3

%

Weather events*

 

 

51,400

 

 

 

5.6

%

 

 

5,300

 

 

 

1.8

%

 

 

46,100

 

 

 

7.3

%

Total losses and loss adjustment expenses

 

$

303,036

 

 

 

32.9

%

 

$

1,807

 

 

 

0.6

%

 

$

301,229

 

 

 

47.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31, 2015

 

 

 

Direct

 

 

Loss Ratio

 

 

Ceded

 

 

Loss Ratio

 

 

Net

 

 

Loss Ratio

 

Premiums earned

 

$

836,792

 

 

 

 

 

 

$

332,793

 

 

 

 

 

 

$

503,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total losses and loss adjustment expenses

 

$

214,491

 

 

 

25.6

%

 

$

26,752

 

 

 

8.0

%

 

$

187,739

 

 

 

37.2

%

40

* Includes only weather events beyond expected.


Losses and LAE, net of ceded 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
LossLossLoss
DirectRatioCededRatioNetRatio
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 expenses476,739 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
LossLossLoss
DirectRatioCededRatioNetRatio
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 expenses308,295 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 in weather events for the year may differ from items included in quarterly reporting.
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.

On

Losses and LAE, net of ceded losses, increased during the year ended December 31, 2019 principally due to five key factors: (1) increased losses 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 core 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 loss ratio for the year ended December 31, 2019 was 71.6% compared to 53.9% in the prior year. The increase of 17.7 loss ratio points was a direct basis,result of: (1) reduced financial benefit from the management of claims, including claims fees ceded to reinsurers (9.0 loss ratio points); (2) increased estimated core losses and LAE ratio for the current year (8.5 loss ratio points); and (3) increased weather in excess of plan (2.7 loss ratio points). The increase was partially offset by a lower level of prior year adverse development on prior years’ loss and LAE reserves (2.5 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 $88.5costs for losses and LAE in the Florida market where an industry has developed around the personal residential claims process, resulting in historically high levels of represented claims and inflated claims. Active solicitation of personal residential claims in Florida by policyholder representatives, remediation companies and repair companies has led to a frequency and severity of personal residential claims in the state exceeding historical levels in Florida and levels seen in other jurisdictions.
Prior year adverse development was the result of the following factors:
•In the 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 of 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
41

claims. This in turn is facilitated by Florida’s legal climate, including the one-way threat of attorneys’ fees against insurers and the relatively high cost of defending against inflated claims demands in relation to amounts in dispute.
•We have reduced our estimate for subrogation recoveries due to changes in the Florida claims and 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 behaviors in Florida have led 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 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 over year principallyreserve 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 weather eventsadverse 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 2016 ($51.4 million), coupled withthe 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 outside of Florida where non-catastrophe loss ratios are generally higher than in Florida.
These market trends in losses and LAE in Florida have led us to file, on February 7, 2020, for an overall 12.4% rate increase in Florida. This rate filing, if approved, would be effective as of May 25, 2020. We also continue to make changes to certain new business guidelines and to develop specialized claims and litigation management efforts to address market trends driving up claim costs.
The financial benefit from the management of claims ceded, including claim fees ceded to reinsurers, was $3.2 million for the year ended December 31, 2019, compared to $72.2 million during the year ended December 31, 2018. 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 result of increases in premiums earned ($23.0 million) and increasedreduction to losses and LAE related to the current year. Weather events in 2016 were comprised of a series of severe storms in the first quarter of 2016 and then the impact of two hurricanes in 2016, Hermine in the third quarter and Matthew in the fourth quarter. Ceded losses in 2016 were down $24.9 million principallyincluded as a result of the termination of the quota share reinsurance agreement in 2015. As a result of the above, the net loss and LAE ratios, or netreduction to All other losses and LAE as a percentage of net earned premiums, were 47.6% and 37.2% during the years ended December 31, 2016 and 2015, respectively.

Each year reserve re-estimates, as described in “Item 8-Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)”, are conducted and the difference between indicated reserves based on new reserve estimates and the previously recorded estimate is recorded and included in “Losses and loss adjustment expenses”expenses in the Consolidated Statements of Income. Reserve re-estimates in 2016 and 2015 resulted in favorable development of $4.7 million and $0.3 million, respectively.

chart above.

For the year ended December 31, 2016,2019, general and administrative expenses were $221.2$272.4 million, compared to $183.8$256.5 million during the same period in 2018, as detailed below (dollars in thousands):
For the Years Ended December 31,Change
20192018$%
$Ratio$Ratio
Premiums earned, net$842,502 $768,382 $74,120 9.6 %
General and administrative expenses:
Policy acquisition costs177,530 21.1 %157,327 20.5 %20,203 12.8 %
Other operating costs94,898 11.2 %99,161 12.9 %(4,263)(4.3)%
Total general and administrative expenses$272,428 32.3 %$256,488 33.4 %$15,940 6.2 %
42

General and administrative costs increased by $15.9 million, which was primarily the result of increases in policy acquisition costs of $20.2 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. As a percentage of earned premiums, general and administrative costs decreased from 33.4% of earned premiums for the year ended December 31, 2018 to 32.3% of earned premiums for the year ended December 31, 2019. The increase in policy acquisition costs and ratio for the year ended December 31, 2019 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 points compared to the same period in 2018 before the impact of the premium tax refund. Other operating costs for the year ended December 31, 2019 decreased $4.3 million, reflecting lower amounts recorded for executive compensation and temporary employee expenses, offset by added costs to support the growth 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 2015 as follows (dollars in thousands):

2019.

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For the Years Ended December 31,

 

 

Change

 

 

2016

 

 

2015

 

 

$

 

 

%

 

 

$

 

 

Ratio

 

 

$

 

 

Ratio

 

 

 

 

 

 

 

 

 

Premiums earned, net

$

632,416

 

 

 

 

 

 

$

503,999

 

 

 

 

 

 

$

128,417

 

 

 

25.5

%

General and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policy acquisition costs

 

125,979

 

 

 

19.9

%

 

 

88,218

 

 

 

17.5

%

 

 

37,761

 

 

 

42.8

%

Other operating costs

 

95,198

 

 

 

15.1

%

 

 

95,564

 

 

 

19.0

%

 

 

(366

)

 

 

(0.4

%)

Total general and administrative expenses

$

221,177

 

 

 

35.0

%

 

$

183,782

 

 

 

36.5

%

 

$

37,395

 

 

 

20.3

%

ForOverall, the year ended December 31, 2016, general and administrative expenses were $221.2 million, compared to $183.8 millionexpense ratio for the same period in 2015. The overall net increase in general and administrative expenses of $37.4 million, or 20.3%, includes a $37.5 million increase in acquisitions costs, a $7.0 million increase in other operating costs and a $7.1 million decrease in stock-based compensation. The increase in acquisition and operating costs were incurred to support the increase of policies in force. The increase in acquisition costs also reflects the absence, during 2016, of ceding commission subsequent to the elimination of quota share reinsurance in June 2015. The expense ratio-net or general2019 (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 earned premiums, was 35.0%and economies of scale as general and administrative expenses did not increase at the same rate as revenues when compared to the same period of 2018 excluding the non-recurring premium tax benefit.

Income tax expense decreased by $18.8 million, or 52.5%, for the year ended December 31, 2016 compared to 36.5% for the same period in 2015. The decrease in the expense ratio resulted from the economies of scale caused by our higher premium volume as compared to the prior period and a reduction in stock-based compensation, partially offset by an increase in net acquisition costs resulting from the absence of ceding commission in 2016.

Income taxes decreased by $5.1 million, or 7.4% primarily2019, as a result of a decrease58.5% reduction in income before income taxes.taxes, when compared with the year ended December 31, 2018. Our effective tax rate increased to 26.8% for the year ended December 31, 2019, as compared to 23.4% for the year ended December 31, 2018. The effective tax rate decreasedincreased slightly as a result of permanent items relative to 39.0% from 39.2% for the years ended December 31, 2016 and 2015, respectively.income before taxes, principally non-deductible compensation, offset by a lower level of excess tax benefit. See “Item“Part II—Item 8—Note 12 (Income Taxes)” for a reconciliation froman explanation of the statutory income tax rates tochange in our effective tax rates for these periods.

Comprehensive income includes net income and otherrates.

Other comprehensive income, or loss. Thenet of taxes for the year ended December 31, 2019 was $28.4 million of net unrealized gains related to debt securities available-for-sale compared to other comprehensive loss of $4.7 million related to net unrealized losses on debt securities available-for-sale for the years ended December 31, 2016 and 2015, reflect after tax changessame period in fair value of securities held in our portfolio of securities available for sale and reclassification out of cumulative other comprehensive income for securities sold.2018. See “Item“Part II—Item 8—Note 14 (Other Comprehensive Income (Loss)).”

for additional information about the amounts comprising other comprehensive income and loss for these periods.



43

ANALYSIS OF FINANCIAL CONDITION AS OF DECEMBER 31, 20172020 COMPARED TO DECEMBER 31, 2016

2019

We believe that cash flows generated from operations will be sufficient to meet our working capital requirements for at least the next twelve months. Our policy is toWe 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

 

2017

 

 

2016

 

Type of Investment20202019

Fixed maturities

 

$

639,334

 

 

$

584,361

 

Available-for-sale debt securitiesAvailable-for-sale debt securities$819,861 $855,284 

Equity securities

 

 

62,215

 

 

 

50,803

 

Equity securities84,887 43,717 

Short-term investments

 

 

10,000

 

 

 

5,002

 

Investment real estate, net

 

 

18,474

 

 

 

11,435

 

Investment real estate, net15,176 15,585 

Total

 

$

730,023

 

 

$

651,601

 

Total$919,924 $914,586 

See “Item“Part II—Item 8—Consolidated Statements of Cash Flows” for explanations of changes in investments.

investments and “Item 8—Note 3 (Investments).”

Restricted cash and cash equivalents increased $10.1 million to $12.7 million as of December 31, 2020 as a result of collateral held by a reinsurance captive arrangement with one of the Insurance Entities reported as a Variable Interest Entity (“VIE”) in the consolidated financial statements. 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 inpro-rata over the future.coverage period of our reinsurance program, which runs from June 1st to May 31st of the following year. The increase of $8.4$40.5 million to $132.8$215.7 million as of December 31, 20172020 was due primarily to additional ceded written premium for increasedthe reinsurance costs relating to our 2017-20182020-2021 catastrophe reinsurance program beginning June 1, 2017.

2020, less amortization of prepaid reinsurance premiums recorded during 2020.

Reinsurance recoverable represents the estimated amount of paid and unpaid losses, LAE and LAEother expenses that are recoverableexpected to be recovered from reinsurers. The increasedecrease of $182.3$32.8 million to $182.4$160.4 million as of December 31, 20172020 was primarily due to Hurricane Irma.

the collection of amounts due 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 increase in premiums receivable, net of $2.7$3.0 million to $56.5$66.9 million as of December 31, 20172020 relates to bothgrowth and consumer payment behavior of our business. The amount of direct premiums written during a calendar year tends to increase just prior to the growth insecond quarter and seasonality oftends to decrease approaching the Company’s business.

Deferred policy acquisition costsfourth quarter.

Property and equipment, net increased $8.1by $12.2 million to $73.1$53.6 million as of December 31, 2017,2020, primarily as the result of new spend on capitalized software expenditures and, to a lesser extent, the remaining capitalized costs to outfit 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, and new IT equipment to address work-from-home IT equipment needs during the COVID-19 pandemic.
Deferred policy acquisition costs (“DPAC”) increased by $18.7 million to $110.6 million as of December 31, 2020, which is in lineconsistent with the underlying premium growth. See “Item 8 — “Part II—Item 8—Note 5 (Insurance Operations)” for a roll-forward in the balance of our deferred policy acquisition costs.

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Table of Contents

DPAC.

Income taxes recoverable increased $6.2represents the difference between estimated tax obligations and tax payments made to taxing authorities. As of December 31, 2020, the balance recoverable was $30.6 million, representing amounts due from taxing authorities at that date, compared to $9.5a balance recoverable of $34.3 million as of December 31, 2017, from $3.3 million as of December 31, 2016. The increase represents amounts due from taxing jurisdictions within one year and when income taxes payments exceed income tax liabilities.2019. Income taxes recoverable as of December 31, 2017 were $9.5 million, which represents amounts recoverable or to2020 will be applied to future periods forto offset future federal and state income taxes.

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 represent temporary differences between U.S. GAAP and tax basis of a company's assets and liabilities.amounts recorded in the financial statements. During the year ended December 31, 2017,2020, the deferred income tax asset, net deferred tax assets decreasedincreased by $1.4$2.9 million to $9.3 million, primarily due to$6.3 million. Deferred income taxes reverse in future years as the re-measurement of deferredtemporary differences between book and tax assets and liabilities as a result of the enactment of the Tax Cuts and Jobs Act of 2017 on December 22, 2017. The legislation made broad and complex changes to the Internal Revenue Code including a reduction in the federal corporate tax rate from 35% to 21% effective January 1, 2018. Affecting the Company in 2017 was a $4.7 million non-cash charge to earnings for the re-measurement of net deferred tax assets as a result of the new lower rates.

reverse.

See “Item 8 — “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 increased $189.9by $54.7 million to $248.4$322.5 million during the year endedas of December 31, 2017.2020. The increase in 2017unpaid losses and LAE was a resultprincipally due to increased 2020 weather in excess of plan reduced by the settlement of claims from previous hurricane and storm events, as more newly reported and expected claims from 2020 exceeded prior year claim settlements. Overall unpaid losses recorded in the third and fourth quarters of 2017 for Hurricane Irma.LAE increased, as new emerging claims exceeded claim settlements. Unpaid losses and LAE are net of estimated subrogation recoveries. The Company recorded $446.7recoveries of $71 million in losses for Hurricane Irma and paid $263.9 million byas of December 31, 2017, offset by $270.12020 compared to $73 million in reinsurance payments.

as of December 31, 2019.

44

Unearned premium representspremiums represent the portion of direct premiums written premium that will be earned pro ratapro-rata in the future. The increase of $56.7$121.9 million to $532.4$783.1 million as of December 31, 2017 2020 reflects both organic growth and the seasonality of our business, as described under “– Overview”.

which varies from month to month.

Advance premium represents premium payments made by policyholders ahead of the effective date of the policies. The increase of $8.4$18.6 million from December 31, 2019 to $26.2$49.6 million as of December 31, 20172020 reflects both customer payment behavior and organic growthgrowth.
We exclude net negative cash balances, if any, from cash and seasonalitycash equivalents that we have with any single financial 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 business as described under “– Overview”.

Reinsurance payable, net increase of $29.5 millionConsolidated Balance Sheet to $110.4 million as of December 31, 2017, which represents the unpaid ceded written premiums owed to reinsurers in connection with the renewal of the Company’s 2017/2018 catastrophe reinsurance program, (which began June 1, 2017), includes $26.8 million in cash advances received from reinsurers in connection with Hurricane Irma’s anticipated recoveries.

Book overdraftsbook overdraft. These amounts represent outstanding checks or drafts not yet presented to the financial institution in excess of cashamounts on deposit and are examined monthly to determine if legal right of offset exists for accounts withat the same banking institution. In 2017, the Company implementedfinancial institutions. We maintain a new short-term cash investment cashstrategy sweep to maximize investment returns on cash balances. Due to the sweep activities, certain outstanding items were recorded as book overdrafts totaling $36.7Book overdraft totaled $59.4 million as of December 31, 2017.

2020, compared to $90.4 million as of December 31, 2019. The decrease of $31.0 million is the result of lower cash balances available for offset as of December 31, 2020 compared to December 31, 2019.

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 catastrophe reinsurance program and record the estimated annual cost of our reinsurance program. The annual cost initially increases reinsurance payable, which is then reduced as installment payments are made over the policy period of the reinsurance, which runs from June 1st to May 31st. The balance decreased by $112.3 million to $10.3 million as of December 31, 2020 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.
Other liabilities and accrued expenses increased by $7.4$30.7 million to $45.1$52.3 million as of December 31, 20172020, primarily driven by an increase in the collection of advanced reinsurance commission of $15.4 million received by BARC, payable for unsettled security purchases of $8.8 million and an increase of $8.9 million due to timing of accrued obligations. Advance reinsurance commission represents the early collection of reinsurance commissions by BARC as a result of increased expenses that relatethe Company settling its reinsurance obligations before the contractual due date. Payable for securities purchased represents payables relating to Hurricane Irma and costs, suchavailable-for-sale debt securities purchases which settled after December 31, 2020. There were payable for securities purchased totaling $8.8 million as commissions and taxes, related to increases in our business.

of December 31, 2020. There were no payable for securities purchased as of December 31, 2019.

Capital resources, increased net decreased by $66.6$46.1 million and includes increasesduring the year ended December 31, 2020, reflecting decreases in stockholders’ equity of $68.8 million offset by aand long-term debt. The reduction in long-term debt of $2.2 million. The increases in stockholders’ equity was principally the result of 2017 net income offset byour treasury stock purchases,repurchases and dividends to shareholders offset by our 2020 net income and stock basedshare-based compensation. In addition, accumulated other comprehensive income, net of taxes decreased by $17.0 million as a result of realized gains on the sale of available-for-sale debt securities during the period. See “Part II—Item 8—Consolidated Statements of Stockholders’ Equity” and “Item 8—Note 8 (Stockholders’ Equity)” for an explanation of changes in treasury stock. The reduction in long-term debt of $1.5 million was the result of principal payments on debt during 2017.2020. 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 $3.9by $7.4 million resultingprimarily from share-based compensation expense of $10.5 million, stock option exercises of $5.6 million and common stock issued of $0.6$8.7 million for the year ended December 31, 2017.2020. This was offset by the common stock value acquired and cancelled through cashless stock option exercise and tax withholdings on the intrinsic value of restricted stock option exercisevested, performance units vested, and performancerestricted stock units vested for share-based payment transactions of $12.8$1.3 million for the year ended December 31, 2017.

Accumulated other comprehensive income (loss), net of taxes decreased to a $6.3 million loss as of December 31, 2017, compared to a $6.4 million loss as of December 31, 2016. This decrease reflects the after-tax changes in fair value of our investment portfolio’s unrealized losses during 2017.

2020.


Liquidity and Capital Resources

Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet its shortshort- 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 requirements and we expect that, in the future, funds from operationsrequirements. We will continue to meet such requirements.

59

Tablemonitor liquidity as the economic consequences of Contents

COVID-19 continue to unfold. See discussion below regarding the COVID-19 pandemic’s impact. Also see the discussion above under “Overview—Trends—Impact of COVID-19” regarding our response to COVID-19, the financial impact to us in 2020, our general outlook and plans to monitor the economic consequences of COVID-19.

The balance of cash and cash equivalents as of December 31, 20172020 was $213.5$167.2 million, compared to $105.7$182.1 million at December 31, 2016.2019. 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, 20172020 and 2016.2019. The increasedecrease in cash and cash equivalents was driven by significant cash flows generated from operatingused in financing activities in excess of those usedgenerated from operating and investing activities. We have not experienced an adverse impact on our liquidity as a result of the COVID-19 pandemic. Our cash investment strategy at times includes cash investments 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 investingaccounts which have the right of offset, and financing activities. In 2017,if the Company implementedaggregation results in a new short-term investmentnet negative book balance, that balance is reclassified from cash sweepand cash equivalents in our Consolidated Balance Sheet to maximize investment returns on cash balances. Due to the sweep activities, certain outstanding items were recorded as “Book Overdraft” in the Consolidated Financial Statements.book overdraft. Cash and cash equivalents balances are available to settle book overdrafts, pay expenses and to pay reinsurance premiums, expenses and claims.

Reinsurance premiums are paid in installments during the reinsurance policy period, which runs from

45

June 1st to May 31st of the following year. The FHCF reimbursement premiums are paid in three installments on August 1st, October 1st and December 1st, and third-party reinsurance are generally paid in four installments on July 1st, October 1st, January 1st and April 1st, resulting in significant payments at those times. See “Part II—Item 8—Note 15 (Commitments and Contingencies)” and “—Contractual Obligations” for more information.
During the third and fourth quarters of 2017,2020, there was one significant hurricane which occurred, Hurricane IrmaSally, where estimated losses benefited from UPCIC’s reinsurance program. During 2019, there was a significant liquidity event to the Company.one hurricane which occurred, Hurricane Dorian, where claims were within UPCIC’s retention under its reinsurance program. The Company’s reinsurance program performed as expected providingprovides sufficient liquidity in the form of cash advances for paid losses ceded to the reinsurers. During 2017,2020, the Company routinely collected a total of $270.1 million fromamounts ceded to reinsurers and, paid $263.9 million of losses that were covered underas in the reinsurance program. In addition, certain costs were recovered from the reinsurers. All ceded losses during 2017 were out of amounts prefunded to the Company under the cash advance provision of the reinsurance agreements, andpast did not affecthave 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, 20172020 and 2016 includes2019 represents cash equivalents on deposit with certain regulatory agencies in the various states in which our Insurance Entities do business.

Liquiditybusiness and, in 2020, 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 UVE and its non-insurance subsidiariesmore 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, capital contributions to subsidiaries, if needed, and interest and principal payments on outstanding debt obligations of the holding company, if any. The declaration and payment of future dividends by UVE to itsour shareholders, and any future repurchases of UVEour 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. Principal sources of liquidity for UVE and its non-insurance subsidiariesthe holding company include revenuesdividends paid by our service entities generated from income earned on fees paid by the Insurance Entities to affiliated companies for policy administration,general agency, inspections and claims adjusting services. Additional sources of liquidity includeDividends are also paid from income earned from brokerage commissions earned on reinsurance contracts placed by BARC and policy fees. UVEWe also maintainsmaintain high quality investments which arein our portfolio as a source of liquidity along with ongoing interest and dividend income and would generate funds upon sale.from those investments. As discussed in “Item 8 – 8—Note 5 (Insurance Operations),” there are limitations on the dividends the Insurance Entities may pay to their immediate parent company, UVECF.

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 Commissioner of the FLOIR is subject to restrictions relating to statutory surplus.as referenced below and in “Item 8—Note 5 (Insurance Operations).” The maximum dividend that may be paid by the Insurance Entities to UVECFPSI 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. During the yearyears ended December 31, 2017, UPCIC paid $30.0 million to UVECF. The2020 and 2019 the Insurance Entities did not pay dividends to UVECF during the year December 31, 2016.

PSI.

Liquidity for the Insurance Entities is primarily required to cover payments for reinsurance premiums, claims payments including potential payments of catastrophe losses offset(offset by recovery of any reimbursement amounts under our reinsurance agreements,agreements), fees paid to affiliates for managing general agency services, inspections and claims adjusting services, agent commissions, premiumspremium 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, and the collection of reinsurance recoverable.

recoverable and financing fees.

Our insurance operations provide liquidity in thatas 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 the Company’sour reinsurance agreements provide for “cash advance” whereby reinsurers advance or prepay amounts to the Company,us, thereby providing liquidity, which the Company utilizeswe 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, 2020 and December 31, 2019. 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 4.0 years as of December 31, 2020 compared to 3.8 years at December 31, 2019. 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 or deductiblesand retentions before the Company’sour reinsurance protection commences. Also, the Company isInsurance 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 reinsurer 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. The Act’s impact on the Company in 2017 was a non-cash charge to earnings for the re-measurement of net deferred taxes. Going forward the Company expects to see 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.

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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 stockholderstockholders’ equity, total long-term debt, total capital debt to equityresources, debt-to-total capital ratio and debt-to-equity ratio for the periods presented (dollars in thousands):

 

As of December 31,

 

 

2017

 

 

2016

 

 As of December 31,

Stockholders' equity

 

$

439,988

 

 

$

371,190

 

20202019
Stockholders’ equityStockholders’ equity$449,262 $493,901 

Total long-term debt

 

 

12,868

 

 

 

15,028

 

Total long-term debt8,456 9,926 

Total capital

 

$

452,856

 

 

$

386,218

 

Total capital$457,718 $503,827 

 

 

 

 

 

 

 

 

Debt-to-total capital ratio

 

 

2.8

%

 

 

3.9

%

Debt-to-total capital ratio1.8 %2.0 %

Debt-to-equity ratio

 

 

2.9

%

 

 

4.0

%

Debt-to-equity ratio1.9 %2.0 %

The debt-to-total capital ratio is total long-term debt divided by total capital resources, whereas 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, 2017,2020, 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, 2017,2020, 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. At December 31, 2017,2020, UPCIC was in compliance with the terms of the surplus note. Total adjusted capital surplus, which includes the surplus note, was in excess of regulatory requirements for both UPCIC and APPCIC.

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 Companyportfolio’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. During March 2020, we initially saw extreme instability and dysfunction in the fixed income market, which settled down as the Federal Reserve provided liquidity to that marketplace in the latter part of March. Subsequent to March 2020, we took advantage of the market recovery and recognized $56.6 million of net realized gains on the sales of our available-for-sale debt securities that were in an unrealized gain position. In addition to monetizing an unrealized gain that was recognized in stockholders’ equity under the United States Generally Accepted Accounting Principles (“U.S. GAAP”) on a consolidated basis for available-for-sale debt securities and carried at fair value, the realized gains served to increase surplus for UPCIC since available-for-sale debt securities are generally carried at amortized cost under statutory accounting rules.
Impact of COVID-19 Pandemic
Although volatility in the markets remains a key risk as the world continues to navigate the consequences of the COVID-19 pandemic, there has been significant recovery in values since the low point on or about March 23, 2020. The proceeds from the sales of available-for-sale debt securities discussed above are in the process of reinvestment which accounts for a temporary increase in cash and cash equivalents as of December 31, 2020. 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
47

securities, it is expected that future portfolio investment income will reflect current market rates which are below the book yield of the securities sold. We remain in regular contact with our advisors to monitor credit actions taken to issuers of our securities and discuss appropriate responses to those actions. 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.
We implemented certain premium payment grace periods in Florida and other states to assist policyholders affected by COVID-19. In addition, we have waived late payment fees that otherwise would apply to those policyholders. To date we have not seen significant use of these grace periods. However, the effects of stay-at-home orders are still unfolding and some affected policyholders might not have yet had their next premium payments come due. We are not able at this time to estimate the number of policyholders who might avail themselves of an extended grace period. Generally, a significant number of our policies are subject to payment by mortgage companies, which are likely to continue remitting payments as scheduled. Our collection experience since March 2020 was consistent with our average experience. This reflects on the nature of homeowners’ insurance and the priority that mortgage companies and policyholders place on maintaining coverage for insured properties. We will monitor this as the impact of COVID-19 and its economic consequences are felt by our policyholders.
Looking Forward
We continue to monitor a range of financial metrics related to our business. Although we have not experienced material adverse impacts on our business or liquidity, conditions are subject to change depending on the duration of governmental stay-at-home directives, 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 COVID-19, including unforeseen newly emerging risks that could affect us. We will continue to monitor the broader economic impacts of COVID-19 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 itsour discretion, based on ongoing assessments of theour capital needs, of the Company, the market price of itsour common stock and general market conditions. The CompanyWe will fund the share repurchase program with cash from operations. During the year ended December 31, 2017, there were two authorized repurchase plans in effect:

On June 13, 2016, the Company announced that its Board of Directors authorized the repurchase of up to $20 million of the Company’s outstanding common stock through December 31, 2017 pursuant to which the Company repurchased 861,296 shares of our common stock at an average price of $23.18 per share on the open market. The Company completed the 2017 Share Repurchase Program in December 2017.

On September 5, 2017, our Board of Directors authorized the repurchase of up to $20 million of the Company’s outstanding common stock through December 31, 2018. The Company repurchased 8,192 shares of common stock under the 2018 Share Repurchase ProgramIn total, during the year ended December 31, 2017 at an aggregate cost of approximately $0.2 million.

During the year ended December 31, 2017,2020, we repurchased an aggregate of 770,5591,610,783 shares of UVE’sour common stock in the open market.market at an aggregate purchase price of $28.9 million. Also see “Part II, II—Item 5 — Unregistered Sales5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities and UseSecurities—Registrant Purchases of Proceeds”Equity Securities” for share repurchase activity during 2020 and the three months ended December 31, 2017.

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2020.

Cash Dividends

The following table summarizes the dividends declared and paid by the Company during the year ended December 31, 2017:

2020:

 

 

Dividend

 

Shareholders

 

Dividend

 

Cash Dividend

 

2017

 

Declared Date

 

Record Date

 

Payable Date

 

Per Share Amount

 

First Quarter

 

January 23, 2017

 

February 17, 2017

 

March 2, 2017

 

$

0.14

 

Second Quarter

 

April 12, 2017

 

June 14, 2017

 

July 3, 2017

 

$

0.14

 

Third Quarter

 

August 31, 2017

 

September 12, 2017

 

October 24, 2017

 

$

0.14

 

Fourth Quarter

 

November 16, 2017

 

November 27, 2017

 

December 4, 2017

 

$

0.27

 

DividendShareholdersDividendCash Dividend
2020Declared DateRecord DatePayable DatePer Share Amount
First QuarterFebruary 11, 2020March 12, 2020March 19, 2020$0.16 
Second QuarterApril 16, 2020May 14, 2020May 21, 2020$0.16 
Third QuarterJuly 6, 2020July 31, 2020August 7, 2020$0.16 
Fourth QuarterNovember 16, 2020December 11, 2020December 18, 2020$0.29 

Liability for Unpaid Losses and LAE

We are required to periodically estimate and reflect on our balance sheet the amount needed to pay losses and related LAE on reported and unreported claims, net of estimated subrogation. See “Item 1—Business—Liability for Unpaid Losses and LAE,” for a description of this process. The following table sets forth a reconciliation of beginning and ending liability for unpaid losses and LAE, net of subrogation as shown in our consolidated financial statements for the periods presented (in thousands):

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Balance at beginning of year

 

$

58,494

 

 

$

98,840

 

 

$

134,353

 

Less: Reinsurance recoverable

 

 

(106

)

 

 

(13,540

)

 

 

(47,350

)

Net balance at beginning of year

 

 

58,388

 

 

 

85,300

 

 

 

87,003

 

Incurred (recovered) related to:

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

 

322,929

 

 

 

305,919

 

 

 

188,040

 

Prior years

 

 

27,499

 

 

 

(4,690

)

 

 

(301

)

Total incurred

 

 

350,428

 

 

 

301,229

 

 

 

187,739

 

Paid related to:

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

 

215,274

 

 

 

229,761

 

 

 

123,952

 

Prior years

 

 

127,522

 

 

 

98,380

 

 

 

65,490

 

Total paid

 

 

342,796

 

 

 

328,141

 

 

 

189,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net balance at end of year

 

 

66,020

 

 

 

58,388

 

 

 

85,300

 

Plus: Reinsurance recoverable

 

 

182,405

 

 

 

106

 

 

 

13,540

 

Balance at end of year

 

$

248,425

 

 

$

58,494

 

 

$

98,840

 

Reinsurance Recoverable

During 2017 the liability for unpaid losses and loss adjustment expenses increased by $189.9 million from $58.5 million as of December 31, 2016 to $248.4 million as of December 31, 2017. This increase was primarily a result of Hurricane Irma, for which the Company has reinsurance recoverable of $182.4 million. Other factors leading to the increase include the increase in our underlying exposure due to increased writings in Florida and other states, as well as prior year adverse development reserve of $27.5 million, primarily driven by AOB related claims within our Florida book, including the increased litigation frequency experienced during 2017 surrounding the AOB issue.

Based upon consultations with our independent actuarial consultants and their statement of opinion on losses and LAE, we believe that the liability for unpaid losses and LAE is currently adequate to cover all claims and related expenses that may arise from incidents reported and IBNR, net of estimated subrogation. Our carried reserves as of December 31, 2017 were confirmed by our year end independent actuarial analysis and are in excess of their point or central estimate of their findings. Our annual actuarial process includes two reviews during the year by our independent actuarial firm. We use these external reviews to confirm data and emerging trends to observed changes. The actuarial process, including the external independent reviews, results in re-estimates of carried reserves for both current and prior accident years. See “Item 7- (Liability for Unpaid Losses and LAE)” and “Item 8 - Note 17 (Liability for Unpaid Losses and Loss Adjustment Expenses)” for a further discussion of the actuarial estimation process used for loss and LAE reserving. As a result of the ongoing actuarial process, reserves for the current accident year were strengthened in the fourth quarter to align with 2016 full year actuarial loss estimates and the impact of weather events that occurred in 2016. Re-estimates of each prior accident year’s ultimate losses and LAE were performed during the year and changes resulting in both favorable and unfavorable development were recorded. We believe the changes we have made in adjudicating and settling claims are conservatively reflected in the actuarial process. We will continue to validate our actuarial process as the benefits of our accelerated claims settlement

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process become more apparent and will continue to monitor policyholder AOB and the resulting increase in litigation. The cumulative redundancy or deficiency in prior year reserve changes is reflected in the chart above.

The following table provides total unpaid loss and LAE, net of related reinsurance recoverable for the dates presented (in thousands):

 

Years Ended December 31,

 

 

2017

 

 

2016

 

Years Ended December 31,

Unpaid Loss and LAE, net

 

$

58,669

 

 

$

63,699

 

20202019
Unpaid loss and LAE, netUnpaid loss and LAE, net$75,471 $54,156 

IBNR loss and LAE, net

 

 

7,351

 

 

 

(5,311

)

IBNR loss and LAE, net127,472 90,383 

Total unpaid loss and LAE, net

 

$

66,020

 

 

$

58,388

 

Total unpaid loss and LAE, net$202,943 $144,539 

 

 

 

 

 

 

 

 

Reinsurance recoverable on unpaid loss and LAE

 

$

57,261

 

 

$

856

 

Reinsurance recoverable on unpaid loss and LAE$18,957 $9,119 

Reinsurance recoverable on IBNR loss and LAE

 

 

125,144

 

 

 

(750

)

Reinsurance recoverable on IBNR loss and LAE100,565 114,102 

Total reinsurance recoverable on unpaid loss and LAE

 

$

182,405

 

 

$

106

 

Total reinsurance recoverable on unpaid loss and LAE$119,522 $123,221 


48

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,

 

 

2017

 

 

2016

 

Years Ended December 31,

Loss Ratio (1)

 

 

 

 

 

 

 

 

20202019
Loss and LAE Ratio (1)Loss and LAE Ratio (1)

UPCIC

 

 

56

%

 

 

50

%

UPCIC84 %72 %

APPCIC

 

 

82

%

 

 

30

%

APPCIC34 %26 %

Expense Ratio (1)

 

 

 

 

 

 

 

 

Expense Ratio (1)  

UPCIC

 

 

35

%

 

 

36

%

UPCIC36 %36 %

APPCIC

 

 

47

%

 

 

55

%

APPCIC50 %53 %

Combined Ratio (1)

 

 

 

 

 

 

 

 

Combined Ratio (1)  

UPCIC

 

 

91

%

 

 

86

%

UPCIC120 %108 %

APPCIC

 

 

129

%

 

 

85

%

APPCIC84 %79 %

(1)

The ratios are net of ceded premiums and losses, including premiums ceded to the Company’s 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 $84.7 million and $78.0 million for UPCIC for the years ended December 31, 2017 and 2016, respectively, and $0.6 million and $0.7 million for the years ended December 31, 2017 and 2016, respectively, for APPCIC. The management fees and commissions paid to the affiliate are eliminated in consolidation.

(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 $118.1 million and $104.6 million for UPCIC for the years ended December 31, 2020 and 2019, respectively, and $0.9 million and $0.6 million for each of the years ended December 31, 2020 and 2019, respectively, 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 November 2017,2020, 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 loss adjustment expenseLAE 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 and Operations—A downgrade in our Financial Stability Rating®Rating® may

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have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity, operating results and financial condition.”


Off-Balance Sheet Arrangements
The Company does not have any off-balance 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.
49

Contractual Obligations

The following table represents our contractual obligations for which cash flows are fixed or determinable as of December 31, 20172020 (in thousands):

 

 

 

 

 

Less than

 

 

 

 

 

 

 

 

 

 

Over 5

 

 

Total

 

 

1 year

 

 

1-3 years

 

 

3-5 years

 

 

years

 

TotalLess than
1 year		1-3 years3-5 yearsOver 5
years

Unpaid losses and LAE, direct (1)

 

$

248,425

 

 

$

126,697

 

 

$

71,795

 

 

$

39,003

 

 

$

10,930

 

Reinsurance payable and multi-year commitments (1)Reinsurance payable and multi-year commitments (1)$209,930 $10,312 $199,618 $— $— 
Unpaid losses and LAE, direct (2)Unpaid losses and LAE, direct (2)322,465 195,413 93,515 25,475 8,062 

Long-term debt

 

 

14,205

 

 

 

1,755

 

 

 

5,061

 

 

 

3,205

 

 

 

4,184

 

Long-term debt8,623 1,523 4,510 2,590 — 

Total contractual obligations

 

$

262,630

 

 

$

128,452

 

 

$

76,856

 

 

$

42,208

 

 

$

15,114

 

Total contractual obligations$541,018 $207,248 $297,643 $28,065 $8,062 

(1)

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 of the obligations that will arise under the contracts, but rather only the estimated liability incurred through December 31, 2017.


(1)The 1-3 years 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, 2020. 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).”
Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principlesGAAP, 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 U.S. 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 “Part I—Item 1A—Risk Factors—Risks Relating to Our 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
50

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 “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:
◦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 serve to inflate claim 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 claims and coverages 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.
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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, 2020, the recorded amount for net loss and LAE falls within the range determined by the appointed independent actuaries and approximates their best estimate.
52

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 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.
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, 2020 is $322.5 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, 2020.
Recent Accounting Pronouncements Not Yet Adopted

In February 2018, the FASB revised U.S. GAAP with the issuance of ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220)- Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in response to the enactment on December 22, 2017 of the Tax Act. Topic 220 allows for a reclassification from accumulated OCI to retained earnings for the stranded tax effects resulting from the remeasurement of deferred tax balances. Prior to the issuance of Topic 220, OCI was not impacted by the remeasurement of deferred taxes. Without this reclassification the tax effects of items in OCI would not reflect the appropriate tax rate. When Topic 220 is adopted, the Company will be required to provide certain disclosures regarding its accounting policy and effect of the implementation of the reclassification of the stranded tax effects in OCI. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. When adopted by the Company this ASU will result in a reclassification of approximately $1.4 million from OCI to retained earnings.

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In March 2017,2019, the Financial Accounting Standards Board (“FASB”) revised U.S. GAAP with the issuance of Accounting Standards Update (“ASU”) 2017-08, Receivables – Nonrefundable Fees2019-12, Income Taxes (Topic 740). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions and Other Costs to amend the amortization period forclarifying certain purchased callable debt securities held at a premium. Current U.S. GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. The new ASU shortens the amortization period of certain purchased callable debt securities to the earliest call date.requirements regarding franchise taxes, goodwill, consolidated tax expenses and annual effective tax rate calculations. The ASU is effective for fiscal yearsinterim and annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early2020, with early adoption is permitted. Under the current U.S. GAAP, you could consider the call dates and estimate if you had a large number of similar securities and you were basing your judgment on actual experience. Our service provider (who processes the accounting for our investment transactions) has many similar securities on their system and can make that type of determination. As a result, we currently account for the amortization under the proposed ASU and there will be no impact to our results of operations, financial position or liquidity.

In November 2016, the FASB revised U.S. GAAP with the issuance of the ASU 2016-18, Statement of Cash Flows (Topic 230: Restricted Cash to reduce diversity in the classification and presentation of changes in restricted cash in the statement of cash flows. The new ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The balance of restricted cash is currentlyWe do not material and is not expected to be material and we will comply with the new ASU requirements at the time of adoption. The adoption of this ASU will result in a change in the presentation only in the statement of cash flows which is not expected to be material.

In August 2016, the FASB revised U.S. GAAP with the issuance of ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments intended to reduce diversity in practice in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new ASU will apply to: 1) debt prepayment or debt extinguishment costs, 2) settlement of zero-coupon debt instruments, 3) contingent consideration payments made after business combination, 4) proceeds from the settlement of insurance claims, 5) proceeds from the settlement of corporate-owned life insurance policies, 6) distributions received from equity method investments, 7) beneficial interests in securitization transactions, and 8) separately identifiable cash flows and application of the predominance principle. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Historically, the items outlined above have not been applicable to the Company. Should they occur in the future, we will address them in accordance with the new ASU upon and subsequent to adoption.

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 are currently evaluating the impact thatbelieve this standard will have a material impact on our consolidated financial statements.

In January 2016, the FASB revised U.S. GAAP with the issuance of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities to improve the recognition and measurement of financial instruments. The new ASU requires certain equity investments to be measured at fair value with changes in fair value reported in earnings and requires changes in instrument-specific credit risk for financial liabilities recorded at fair value under the fair value option to be reported in other comprehensive income (“OCI”). The new ASU is effective for fiscal years beginning after December 15, 2017. The adoption of this ASU will impact how we account for unrealized gains and losses for equity investments which will be through the income statement and may result in a change of presentation in the statement of cash flows. Upon adoption on January 1st 2018, a cumulative effect adjustment of $4.4 million to the balance sheet will be made to reclassify unrealized losses on equity securities to retained earnings from other comprehensive income.

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ITEM

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 fixed maturities,available-for-sale debt securities, equity securities and short-term investments (“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, 2017,2020 is comprised of fixed maturitiesavailable-for-sale debt securities and equity securities, exposingcarried at fair market value, which expose us to changes inchanging market conditions, specifically interest rates and equity prices.

price changes.

The primary objectives of the investment portfolio are the preservation of capital and providing adequate liquidity for claimspotential claim payments and other cash needs. The portfolio’s secondary investment objective is to provide a total rate of return with an
53

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 value of our fixed-rate Financial Instruments declines.

The following table providestables provide information about our fixed income Financial Instruments as of December 31, 2020 compared to December 31, 2019, which are sensitive to changes in interest rates. The table presentstables present the expected cash flows of principal amounts and related weighted average interest rates by expected maturity dates for Financial Instruments available for sale as ofbased on years to effective maturity using amortized cost compared to fair market value and the dates presented (inrelated book yield compared to coupon yield (dollars in thousands):

 

 

December 31, 2017

 

 

 

Amortized Cost

 

 

Fair Value

 

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Other (1)

 

 

Total

 

 

Total

 

Fixed income Financial Instruments

 

$

51,846

 

 

$

85,309

 

 

$

61,215

 

 

$

60,968

 

 

$

27,832

 

 

$

132,530

 

 

$

234,015

 

 

$

653,715

 

 

$

649,334

 

Weighted average interest rate

 

 

1.87

%

 

 

1.82

%

 

 

2.18

%

 

 

2.16

%

 

 

2.76

%

 

 

4.02

%

 

 

3.08

%

 

 

2.83

%

 

 

2.83

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Amortized Cost

 

 

Fair Value

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

 

Other (1)

 

 

Total

 

 

Total

 

Fixed income Financial Instruments

 

$

48,919

 

 

$

46,183

 

 

$

84,855

 

 

$

41,500

 

 

$

57,071

 

 

$

88,861

 

 

$

229,072

 

 

$

596,461

 

 

$

589,363

 

Weighted average interest rate

 

 

2.03

%

 

 

2.41

%

 

 

1.87

%

 

 

2.15

%

 

 

2.26

%

 

 

4.53

%

 

 

2.96

%

 

 

2.79

%

 

 

2.78

%

December 31, 2020
20212022202320242025ThereafterOtherTotal
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 rate2.75 %1.88 %2.15 %3.12 %2.51 %2.41 %7.50 %2.52 %
Book yield2.12 %0.59 %0.84 %0.71 %1.07 %1.59 %6.31 %1.16 %
* Years to effective maturity - 5.4 years
December 31, 2019
20202021202220232024ThereafterOtherTotal
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 rate2.46 %2.58 %3.06 %3.52 %3.50 %3.64 %7.50 %3.28 %
Book yield2.46 %2.44 %2.77 %3.27 %3.03 %3.47 %6.31 %3.08 %
* Years to effective maturity - 4.7 years

(1)

Comprised of mortgage-backed and asset-backed securities which have multiple maturity dates, and perpetual maturity securities, and are presented separately forAll securities, except those with perpetual maturities, were categorized in the purposes of this table.

The tables above represent average contract ratesutilizing years to effective maturity. Effective maturity takes into consideration all forms of potential prepayment, such as call features or prepayment schedules, that differ fromshorten the book yieldlifespan of the fixed maturities. The fixed income Financial Instruments in our available for sale portfolio are comprised of United States government and agency securities, corporate bonds, municipal bonds, redeemable preferred stock, mortgage-backed and asset-backed securities and certificates of deposit. Duration is a measure of interest rate sensitivity expressed as a number of years. The weighted average duration of the fixedcontractual maturity Financial Instruments in our available for sale portfolio at December 31, 2017 was 2.6 years.

To a lesser extent, we also have exposure to interest on our debt obligations which are in the form of a surplus note. The surplus note accrues interest at an adjustable rate based on the 10-year Constant Maturity Treasury rate.

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.

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The following table provides information about the Financial Instruments in our available for saleinvestment portfolio subject to price risk as of the dates presented (in thousands):

 

December 31, 2017

 

 

December 31, 2016

 

December 31, 2020December 31, 2019

 

Fair Value

 

 

Percent

 

 

Fair Value

 

 

Percent

 

Fair ValuePercentFair ValuePercent

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

Common stock

 

$

18,811

 

 

 

30.2

%

 

$

93

 

 

 

0.2

%

Common stock$2,435 2.9 %$2,377 5.4 %

Mutual funds

 

 

43,404

 

 

 

69.8

%

 

 

50,710

 

 

 

99.8

%

Mutual funds82,452 97.1 %41,340 94.6 %

Total equity securities

 

$

62,215

 

 

 

100.0

%

 

$

50,803

 

 

 

100.0

%

Total equity securities$84,887 100.0 %$43,717 100.0 %


A hypothetical decrease of 20% in the market prices of each of the equity securities held at December 31, 20172020 and 20162019 would have resulted in a decrease of $12.4$17.0 million and $10.2$8.7 million, respectively, in the fair value of those securities.

67

Table

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 Contents

Financial Condition and Results of Operations.”
54


Item

ITEM 8.

Financial Statements and supplementary data

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PAGE

PAGE

69

56

70

58

71

59

71

59

72

60

73

61

74

63

68


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Table of Contents


Report of Independent RegisteredRegistered 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, 20172020 and 2016,2019, 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, 2017,2020, 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, 2017,2020, 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, 20172020 and 20162019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017,2020, 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, 2017,2020, 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“Management's Report on Internal Control over Financial 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 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.

56

Liability for Unpaid Losses and Loss Adjustment Expenses - Refer to Notes 1 and 17 to the financial statements

Critical Audit Matter Description

The Company’s estimated liability for unpaid losses and loss adjustment expense (LAE) totaled $322.5 million at December 31, 2020. 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 developments, 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 judgement and significantly impacted by claim and actuarial factors and conditions which 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.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the liability for unpaid losses and LAE included the following, among others:

•We obtained an understanding, evaluated the design, and tested 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 of unpaid losses and LAE;
•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;
•We verified the consistency of the estimation process between the current year and those used in prior years and assessed the reasonableness of management’s selection of its estimate for unpaid losses and LAE;
•With assistance from our actuarial specialist, we reviewed the reasonableness of the methods and assumptions used by the Company and their engaged actuary to develop their unpaid losses and LAE reserve estimate;
•We evaluated management’s prior year estimate for unpaid losses and LAE and the factors leading to changes in the estimate recognized in the current year. With the assistance of our actuarial specialist, we assessed the reasonableness of management’s revisions to the estimate for unpaid losses and LAE.


/s/ Plante & Moran, PLLC

Certified Public Accountants


We have served as the Company’s auditor since 2002.


Chicago, Illinois

February 23, 2018

69

26, 2021
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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

December 31,

 

2017

 

 

2016

 

As of December 31,

 

 

 

 

 

 

 

20202019

ASSETS

 

 

 

 

 

 

 

ASSETS

Fixed maturities, at fair value

$

639,334

 

 

$

584,361

 

Equity securities, at fair value

 

62,215

 

 

 

50,803

 

Short-term investments, at fair value

 

10,000

 

 

 

5,002

 

Available-for-sale debt securities, at fair value, net of allowance for credit loss of $186 (amortized cost: $815,647 and $828,336)Available-for-sale debt securities, at fair value, net of allowance for credit loss of $186 (amortized cost: $815,647 and $828,336)$819,861 $855,284 
Equity securities, at fair value (cost: $84,667 and $43,523)Equity securities, at fair value (cost: $84,667 and $43,523)84,887 43,717 

Investment real estate, net

 

18,474

 

 

 

11,435

 

Investment real estate, net15,176 15,585 

Total invested assets

 

730,023

 

 

 

651,601

 

Total invested assets919,924 914,586 

 

 

 

 

 

 

 

Cash and cash equivalents

 

213,486

 

 

 

105,730

 

Cash and cash equivalents167,156 182,109 

Restricted cash and cash equivalents

 

2,635

 

 

 

2,635

 

Restricted cash and cash equivalents12,715 2,635 

Prepaid reinsurance premiums

 

132,806

 

 

 

124,385

 

Prepaid reinsurance premiums215,723 175,208 

Reinsurance recoverable

 

182,405

 

 

 

106

 

Reinsurance recoverable160,417 193,236 

Premiums receivable, net

 

56,500

 

 

 

53,833

 

Premiums receivable, net66,883 63,883 

Property and equipment, net

 

32,866

 

 

 

32,162

 

Property and equipment, net53,572 41,351 

Deferred policy acquisition costs, net

 

73,059

 

 

 

64,912

 

Deferred policy acquisition costsDeferred policy acquisition costs110,614 91,882 

Income taxes recoverable

 

9,472

 

 

 

3,262

 

Income taxes recoverable30,576 34,283 

Deferred income tax asset, net

 

9,286

 

 

 

10,674

 

Deferred income tax asset, net6,284 3,351 

Other assets

 

12,461

 

 

 

10,707

 

Other assets14,877 17,328 

Total assets

$

1,454,999

 

 

$

1,060,007

 

Total assets$1,758,741 $1,719,852 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITYLIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:

 

 

 

 

 

 

 

LIABILITIES:

Unpaid losses and loss adjustment expenses

$

248,425

 

 

$

58,494

 

Unpaid losses and loss adjustment expenses$322,465 $267,760 

Unearned premiums

 

532,444

 

 

 

475,756

 

Unearned premiums783,135 661,279 

Advance premium

 

26,216

 

 

 

17,796

 

Advance premium49,562 30,975 

Accounts payable

 

2,866

 

 

 

3,187

 

Book overdraft

 

36,715

 

 

 

—

 

Book overdraft59,399 90,401 

Reinsurance payable, net

 

110,381

 

 

 

80,891

 

Reinsurance payable, net10,312 122,581 

Income taxes payable

 

—

 

 

 

—

 

Commission payableCommission payable23,809 21,431 

Other liabilities and accrued expenses

 

45,096

 

 

 

37,665

 

Other liabilities and accrued expenses52,341 21,598 

Long-term debt

 

12,868

 

 

 

15,028

 

Long-term debt8,456 9,926 

Total liabilities

 

1,015,011

 

 

 

688,817

 

Total liabilities1,309,479 1,225,951 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 15)

 

 

 

 

 

 

 

Commitments and Contingencies (Note 15)00

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:STOCKHOLDERS’ EQUITY:

Cumulative convertible preferred stock, $.01 par value

 

—

 

 

 

—

 

Cumulative convertible preferred stock, $.01 par value0 0 

Authorized shares - 1,000

 

 

 

 

 

 

 

Authorized shares - 1,000

Issued shares - 10 and 10

 

 

 

 

 

 

 

Issued shares - 10 and 10

Outstanding shares - 10 and 10

 

 

 

 

 

 

 

Outstanding shares - 10 and 10

Minimum liquidation preference - $9.99 and $9.99 per share

 

 

 

 

 

 

 

Minimum liquidation preference - $9.99 and $9.99 per share

Common stock, $.01 par value

 

458

 

 

 

453

 

Common stock, $.01 par value468 467 

Authorized shares - 55,000

 

 

 

 

 

 

 

Authorized shares - 55,000

Issued shares - 45,778 and 45,324

 

 

 

 

 

 

 

Outstanding shares - 34,735 and 35,052

 

 

 

 

 

 

 

Treasury shares, at cost - 11,043 and 10,272

 

(105,123

)

 

 

(86,982

)

Issued shares - 46,817 and 46,707Issued shares - 46,817 and 46,707
Outstanding shares - 31,137 and 32,638Outstanding shares - 31,137 and 32,638
Treasury shares, at cost - 15,680 and 14,069Treasury shares, at cost - 15,680 and 14,069(225,506)(196,585)

Additional paid-in capital

 

86,186

 

 

 

82,263

 

Additional paid-in capital103,445 96,036 

Accumulated other comprehensive income (loss), net of taxes

 

(6,281

)

 

 

(6,408

)

Accumulated other comprehensive income (loss), net of taxes3,343 20,364 

Retained earnings

 

464,748

 

 

 

381,864

 

Retained earnings567,512 573,619 

Total stockholders' equity

 

439,988

 

 

 

371,190

 

Total liabilities and stockholders' equity

$

1,454,999

 

 

$

1,060,007

 

Total stockholders’ equityTotal stockholders’ equity449,262 493,901 
Total liabilities and stockholders’ equityTotal liabilities and stockholders’ equity$1,758,741 $1,719,852 


The accompanying notes to consolidated financial statements are an integral part of these statements.

70

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

PREMIUMS EARNED AND OTHER REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Direct premiums written

 

$

1,055,886

 

 

$

954,617

 

 

$

883,409

 

Change in unearned premium

 

 

(56,688

)

 

 

(33,390

)

 

 

(46,617

)

Direct premium earned

 

 

999,198

 

 

 

921,227

 

 

 

836,792

 

Ceded premium earned

 

 

(310,405

)

 

 

(288,811

)

 

 

(332,793

)

Premiums earned, net

 

 

688,793

 

 

 

632,416

 

 

 

503,999

 

Net investment income (expense)

 

 

13,460

 

 

 

9,540

 

 

 

5,155

 

Net realized gains (losses) on investments

 

 

2,570

 

 

 

2,294

 

 

 

1,060

 

Commission revenue

 

 

21,253

 

 

 

17,733

 

 

 

14,870

 

Policy fees

 

 

18,838

 

 

 

16,880

 

 

 

15,440

 

Other revenue

 

 

7,002

 

 

 

6,426

 

 

 

6,020

 

Total premiums earned and other revenues

 

 

751,916

 

 

 

685,289

 

 

 

546,544

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

350,428

 

 

 

301,229

 

 

 

187,739

 

General and administrative expenses

 

 

231,004

 

 

 

221,177

 

 

 

183,782

 

Total operating costs and expenses

 

 

581,432

 

 

 

522,406

 

 

 

371,521

 

INCOME BEFORE INCOME TAXES

 

 

170,484

 

 

 

162,883

 

 

 

175,023

 

Income tax expense

 

 

63,549

 

 

 

63,473

 

 

 

68,539

 

NET INCOME

 

$

106,935

 

 

$

99,410

 

 

$

106,484

 

Basic earnings per common share

 

$

3.07

 

 

$

2.85

 

 

$

3.06

 

Weighted average common shares outstanding - Basic

 

 

34,841

 

 

 

34,919

 

 

 

34,799

 

Diluted earnings per common share

 

$

2.99

 

 

$

2.79

 

 

$

2.97

 

Weighted average common shares outstanding - Diluted

 

 

35,809

 

 

 

35,650

 

 

 

35,884

 

Cash dividend declared per common share

 

$

0.69

 

 

$

0.69

 

 

$

0.63

 


For the Years Ended December 31,
202020192018
PREMIUMS EARNED AND OTHER REVENUES
Direct premiums written$1,517,479 $1,292,721 $1,190,875 
Change in unearned premium(121,856)(59,600)(69,235)
Direct premium earned1,395,623 1,233,121 1,121,640 
Ceded premium earned(472,060)(390,619)(353,258)
Premiums earned, net923,563 842,502 768,382 
Net investment income20,393 30,743 24,816 
Net realized gains (losses) on investments63,352 (12,715)(2,089)
Net change in unrealized gains (losses) of equity securities25 23,188 (17,169)
Commission revenue33,163 26,101 22,438 
Policy fees23,773 21,560 20,275 
Other revenue8,501 7,972 7,163 
Total premiums earned and other revenues1,072,770 939,351 823,816 
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses758,810 603,406 414,455 
General and administrative expenses289,729 272,428 256,488 
Total operating costs and expenses1,048,539 875,834 670,943 
INCOME BEFORE INCOME TAXES24,231 63,517 152,873 
Income tax expense5,126 17,003 35,822 
NET INCOME$19,105 $46,514 $117,051 
Basic earnings per common share$0.60 $1.37 $3.36 
Weighted average common shares outstanding - Basic31,884 33,893 34,856 
Diluted earnings per common share$0.60 $1.36 $3.27 
Weighted average common shares outstanding - Diluted31,972 34,233 35,786 
Cash dividend declared per common share$0.77 $0.77 $0.73 


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Net income

 

$

106,935

 

 

$

99,410

 

 

$

106,484

 

Other comprehensive income (loss)

 

 

127

 

 

 

(2,402

)

 

 

(2,171

)

Comprehensive income (loss)

 

$

107,062

 

 

$

97,008

 

 

$

104,313

 

 For the Years Ended December 31,
 202020192018
Net income$19,105 $46,514 $117,051 
Other comprehensive income (loss), net of taxes(17,618)28,374 (4,748)
Comprehensive income (loss)$1,487 $74,888 $112,303 
The accompanying notes to consolidated financial statements are an integral part of these statements.

71

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2017, 20162020, 2019 and 2015

2018

(in thousands)  

thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Common

 

 

Preferred

 

 

Common

 

 

Preferred

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

Total

 

Treasury SharesCommon
Shares
Issued		Preferred
Shares
Issued		Common
Stock
Amount		Preferred
Stock
Amount		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Treasury
Stock		Total
Stockholders’
Equity
Balance, December 31, 2017Balance, December 31, 2017(11,043)45,778 10 $458 $— $86,186 $464,748 $(6,281)$(105,123)$439,988 
Cumulative effect of change in accounting
principle (ASU 2016-01)		Cumulative effect of change in accounting
principle (ASU 2016-01)		— — — — — — (3,601)3,601 — 0 
Balance, January 1, 2018Balance, January 1, 2018(11,043)45,778 10 458 — 86,186 461,147 (2,680)(105,123)439,988 
Vesting of performance share unitsVesting of performance share units(43)(1)127 — 1 — (1)— — (1,273)(1,273)
Grants and vesting of restricted stockGrants and vesting of restricted stock(4)(1)80 — 1 — (1)— — (154)(154)
Stock option exercisesStock option exercises(1,314)(1)1,890 — 19 — 36,568 — — (47,772)(11,185)
Retirement of treasury sharesRetirement of treasury shares1,361 (1)(1,361)— (14)— (49,185)— — 49,199 0 
Purchases of treasury stockPurchases of treasury stock(688)— — — — — — — (25,276)(25,276)
Share-based compensationShare-based compensation— — — — — 12,786 — — — 12,786 
Net incomeNet income— — — — — — 117,051 — — 117,051 
Other comprehensive income (loss), net of taxesOther comprehensive income (loss), net of taxes— — — — — — — (4,748)— (4,748)
Reclassification of income taxes upon
adoption of ASU 2018-02		Reclassification of income taxes upon
adoption of ASU 2018-02		— — — — — — 582 (582)— 0 
Declaration of dividends
($0.73 per common share and
$1.00 per preferred share)
Declaration of dividends
($0.73 per common share and
$1.00 per preferred share)
— — — — — — (25,556)— — (25,556)
Balance, December 31, 2018Balance, December 31, 2018(11,731)46,514 10 465 — 86,353 553,224 (8,010)(130,399)501,633 

 

Shares

 

 

Shares

 

 

Stock

 

 

Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders'

 

 

Issued

 

 

Issued

 

 

Amount

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Equity

 

Balance, December 31, 2014

 

 

44,769

 

 

 

12

 

 

$

448

 

 

$

—

 

 

$

40,987

 

 

$

222,469

 

 

$

(1,835

)

 

$

(62,153

)

 

$

199,916

 

Vesting of performance share unitsVesting of performance share units(56)(1)148 — 2 — (2)— — (2,069)(2,069)
Grants and vesting of restricted stockGrants and vesting of restricted stock(41)(1)50 — — — — — — (1,183)(1,183)
Vesting of restricted stock unitsVesting of restricted stock units(10)(1)25 — — — — — — (259)(259)

Stock option exercises

 

 

751

 

 

 

—

 

 

 

7

 

 

 

—

��

 

 

3,807

 

 

 

—

 

 

 

—

 

 

 

(8,101

)

 

 

(4,287

)

Stock option exercises(79)(1)151 — 2 — 2,661 — — (2,622)41 

Grants and vesting of restricted stock

 

 

615

 

 

 

—

 

 

 

6

 

 

 

—

 

 

 

(6

)

 

 

—

 

 

 

—

 

 

 

(7,344

)

 

 

(7,344

)

Purchase of preferred stock

 

 

—

 

 

 

(2

)

 

 

—

 

 

 

—

 

 

 

(256

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(256

)

Common stock issuedCommon stock issued— 5 — — — 147 — — — 147 
Retirement of treasury sharesRetirement of treasury shares186 (1)(186)— (2)— (6,131)— — 6,133 0 

Purchases of treasury stock

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(18,649

)

 

 

(18,649

)

Purchases of treasury stock(2,338)— — — — — — — (66,186)(66,186)

Reclassification of contingently redeemable common stock to common stock

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

19,000

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

19,000

 

Retirement of treasury shares

 

 

(610

)

 

 

—

 

 

 

(6

)

 

 

—

 

 

 

(15,439

)

 

 

—

 

 

 

—

 

 

 

15,445

 

 

 

—

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

17,386

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

17,386

 

Share-based compensation— — — — — 13,008 — — — 13,008 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

106,484

 

 

 

—

 

 

 

—

 

 

 

106,484

 

Net income— — — — — — 46,514 — — 46,514 

Change in net unrealized gains (losses) (1)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(2,171

)

 

 

—

 

 

 

(2,171

)

Excess tax benefit (shortfall), net (2)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

5,310

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

5,310

 

Declaration of dividends

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(22,297

)

 

 

—

 

 

 

—

 

 

 

(22,297

)

Balance, December 31, 2015

 

 

45,525

 

 

 

10

 

 

 

455

 

 

 

—

 

 

 

70,789

 

 

 

306,656

 

 

 

(4,006

)

 

 

(80,802

)

 

 

293,092

 

Stock option exercises

 

 

124

 

 

 

—

 

 

 

1

 

 

 

—

 

 

 

905

 

 

 

—

 

 

 

—

 

 

 

(6,238

)

 

 

(5,332

)

Other comprehensive income (loss), net of taxesOther comprehensive income (loss), net of taxes— — — — — — — 28,374 — 28,374 
Declaration of dividends
($0.77 per common share and
$1.00 per preferred share)
Declaration of dividends
($0.77 per common share and
$1.00 per preferred share)
— — — — — — (26,119)— — (26,119)
Balance, December 31, 2019Balance, December 31, 2019(14,069)46,707 10 467 — 96,036 573,619 20,364 (196,585)493,901 
Cumulative effect of change in accounting
principle (ASU 2016-13)		Cumulative effect of change in accounting
principle (ASU 2016-13)		— — — — — — (597)597 — 0 
Balance, January 1, 2020Balance, January 1, 2020(14,069)46,707 10 467 — 96,036 573,022 20,961 (196,585)493,901 
Vesting of performance share unitsVesting of performance share units(25)(1)83 — 1 — (1)— — (646)(646)
Vesting of restricted stockVesting of restricted stock(4)(1)— — — — — — — (61)(61)
Grants and issue of stock awardsGrants and issue of stock awards— (1)1 — — — 30 — — — 30 
Vesting of restricted stock unitsVesting of restricted stock units(35)(1)90 — — — — — — (608)(608)
Retirement of treasury sharesRetirement of treasury shares64 (1)(64)— — — (1,315)— — 1,315 0 

Purchases of treasury stock

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(8,510

)

 

 

(8,510

)

Purchases of treasury stock(1,611)— — — — — — — (28,921)(28,921)

Treasury shares reissued

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,670

 

 

 

—

 

 

 

—

 

 

 

2,330

 

 

 

10,000

 

Retirement of treasury shares

 

 

(325

)

 

 

—

 

 

 

(3

)

 

 

—

 

 

 

(6,235

)

 

 

—

 

 

 

—

 

 

 

6,238

 

 

 

—

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

10,288

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

10,288

 

Share-based compensation— — — — — 8,695 — — — 8,695 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

99,410

 

 

 

—

 

 

 

—

 

 

 

99,410

 

Net income— — — — — — 19,105 — — 19,105 

Change in net unrealized gains (losses) (1)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(2,402

)

 

 

—

 

 

 

(2,402

)

Excess tax benefit (shortfall), net (2)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,154

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,154

)

Declaration of dividends

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(24,202

)

 

 

—

 

 

 

—

 

 

 

(24,202

)

Balance, December 31, 2016

 

 

45,324

 

 

 

10

 

 

 

453

 

 

 

—

 

 

 

82,263

 

 

 

381,864

 

 

 

(6,408

)

 

 

(86,982

)

 

 

371,190

 

Vesting of performance share units

 

 

115

 

 

 

—

 

 

 

1

 

 

 

—

 

 

 

(1

)

 

 

—

 

 

 

—

 

 

 

(1,183

)

 

 

(1,183

)

Stock option exercises

 

 

804

 

 

 

—

 

 

 

8

 

 

 

—

 

 

 

5,578

 

 

 

—

 

 

 

—

 

 

 

(11,625

)

 

 

(6,039

)

Common stock issued

 

 

26

 

 

 

—

 

 

 

1

 

 

 

—

 

 

 

634

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

635

 

Purchases of treasury stock

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(18,141

)

 

 

(18,141

)

Retirement of treasury shares

 

 

(491

)

 

 

—

 

 

 

(5

)

 

 

—

 

 

 

(12,803

)

 

 

—

 

 

 

—

 

 

 

12,808

 

 

 

—

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

10,515

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

10,515

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

106,935

 

 

 

—

 

 

 

—

 

 

 

106,935

 

Change in net unrealized gains (losses) (1)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

127

 

 

 

—

 

 

 

127

 

Declaration of dividends

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(24,051

)

 

 

—

 

 

 

—

 

 

 

(24,051

)

Balance, December 31, 2017

 

 

45,778

 

 

 

10

 

 

$

458

 

 

$

—

 

 

$

86,186

 

 

$

464,748

 

 

$

(6,281

)

 

$

(105,123

)

 

$

439,988

 

Other comprehensive income (loss), net of taxesOther comprehensive income (loss), net of taxes— — — — — — — (17,618)— (17,618)
Declaration of dividends
($0.77 per common share and
$1.00 per preferred share)
Declaration of dividends
($0.77 per common share and
$1.00 per preferred share)
— — — — — — (24,615)— — (24,615)
Balance, December 31, 2020Balance, December 31, 2020(15,680)46,817 10 $468 $— $103,445 $567,512 $3,343 $(225,506)$449,262 

(1)

Represents change in fair

(1)All shares acquired represent shares tendered to cover the strike price for options and tax withholdings on the intrinsic value of available for sale investments, netstock options exercised, restricted stock vested, performance share units vested, or restricted stock units vested. These shares have been cancelled by the Company.
The accompanying notes to consolidated financial statements are an integral part of income tax provision of $76 thousand for the year ended December 31, 2017 and a change in fair value of available for sale investments, net of income tax benefit of $1,486 thousand and $1,369 thousand for the years ended December 31, 2016 and 2015, respectively.

these statements.

(2)

Excess tax benefits (shortfall), net for the years ended December 31, 2016 and 2015 were recognized in additional paid-in capital. For the year ended December 31, 2017 excess tax benefits (shortfall) were recognized in income tax expense in the consolidated statements of income when the share-based awards vest or are settled. See “—Note 2 (Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements).”

60

UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
202020192018
Cash flows from operating activities:
Net Income$19,105 $46,514 $117,051 
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense526 453 467 
Depreciation and amortization5,107 4,957 4,820 
Amortization of share-based compensation8,695 13,008 12,786 
Reversal of provision for credit losses on available-for-sale debt securities(605)0 0 
Book overdraft increase (decrease)(31,002)(12,442)66,128 
Net realized (gains) losses sale on investments(63,352)12,715 2,089 
Net change in unrealized gains (losses) of equity securities(25)(23,188)17,169 
Amortization of premium/accretion of discount, net4,629 1,663 1,482 
Deferred income taxes2,789 1,972 (3,740)
Excess tax (benefit) shortfall from share-based compensation237 (641)(5,427)
Other162 411 196 
Issuance of common stock30 147 0 
Net change in assets and liabilities relating to operating activities:
Prepaid reinsurance premiums(40,515)(32,458)(9,944)
Reinsurance recoverable32,819 225,367 (236,198)
Premiums receivable, net(3,525)(4,475)(3,823)
Accrued investment income1,544 (330)(1,149)
Income taxes recoverable3,470 (22,483)3,741 
Deferred policy acquisition costs, net(18,732)(7,196)(11,627)
Other assets862 (2,498)(968)
Unpaid losses and loss adjustment expenses54,705 (205,069)224,404 
Unearned premiums121,856 59,600 69,235 
Commission payable2,378 1,341 8,248 
Reinsurance payable, net(112,269)29,275 (17,075)
Other liabilities and accrued expenses21,872 (6,798)(7,766)
Advance premium18,587 4,753 6 
Net cash provided by (used in) operating activities29,348 84,598 230,105 
Cash flows from investing activities:
Proceeds from sale of property and equipment182 38 35 
Purchases of property and equipment(17,216)(11,314)(6,731)
Purchases of equity securities(116,265)(1,351)(25,803)
Purchases of available-for-sale debt securities(1,074,629)(221,647)(437,635)
Purchases of investment real estate, net(7)(883)(6,375)
Proceeds from sales of equity securities81,559 29,680 8,285 
Proceeds from sales of available-for-sale debt securities1,008,436 77,790 134,591 
Proceeds from sales of investment real estate0 10,537 0 
Maturities of available-for-sale debt securities139,982 145,476 111,347 
Maturities of short-term investments0 0 10,000 
Net cash provided by (used in) investing activities22,042 28,326 (212,286)
Cash flows from financing activities:
Preferred stock dividend(10)(10)(10)
Common stock dividend(24,547)(26,106)(25,508)
Issuance of common stock for stock option exercises0 239 102 
Purchase of treasury stock(28,921)(66,186)(25,276)
Payments related to tax withholding for share-based compensation(1,315)(3,709)(12,714)
Repayment of debt(1,470)(1,471)(1,471)
Net cash provided by (used in) financing activities(56,263)(97,243)(64,877)
Cash and cash equivalents, and restricted cash and cash equivalents:
Net increase (decrease) during the period(4,873)15,681 (47,058)
Balance, beginning of period184,744 169,063 216,121 
Balance, end of period$179,871 $184,744 $169,063 
Supplemental cash and non-cash flow disclosures:
Interest paid$102 $248 $346 
Income taxes paid$21 $38,945 $41,996 
Income tax refund$1,390 $789 $747 
The accompanying notes to consolidated financial statements are an integral part of these statements.

72

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

(in thousands)

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

106,935

 

 

$

99,410

 

 

$

106,484

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Bad debt expense

 

 

501

 

 

 

406

 

 

 

611

 

Depreciation and amortization

 

 

4,058

 

 

 

3,242

 

 

 

2,033

 

Amortization of share-based compensation

 

 

10,515

 

 

 

10,288

 

 

 

17,386

 

Amortization of original issue discount on debt

 

 

10

 

 

 

149

 

 

 

521

 

Accretion of deferred credit

 

 

—

 

 

 

(149

)

 

 

(521

)

Book overdraft increase (decrease)

 

 

36,715

 

 

 

—

 

 

 

(5,924

)

Net realized (gains) losses on investments

 

 

(2,570

)

 

 

(2,294

)

 

 

(1,060

)

Amortization of premium/accretion of discount, net

 

 

3,994

 

 

 

3,481

 

 

 

1,831

 

Deferred income taxes

 

 

1,309

 

 

 

4,724

 

 

 

(693

)

Excess tax (benefits) shortfall from share-based compensation

 

 

(5,793

)

 

 

1,154

 

 

 

(5,310

)

Other

 

 

35

 

 

 

31

 

 

 

42

 

Issuance of common stock

 

 

634

 

 

 

—

 

 

 

—

 

Net change in assets and liabilities relating to operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid reinsurance premiums

 

 

(8,421

)

 

 

(9,712

)

 

 

75,832

 

Reinsurance recoverable

 

 

(182,299

)

 

 

22,747

 

 

 

32,334

 

Reinsurance receivable, net

 

 

186

 

 

 

167

 

 

 

7,115

 

Premiums receivable, net

 

 

(3,162

)

 

 

(3,249

)

 

 

(385

)

Accrued investment income

 

 

(708

)

 

 

(1,514

)

 

 

(298

)

Income taxes recoverable

 

 

(417

)

 

 

1,004

 

 

 

255

 

Deferred policy acquisition costs, net

 

 

(8,147

)

 

 

(4,893

)

 

 

(34,359

)

Other assets

 

 

(1,860

)

 

 

767

 

 

 

(2,533

)

Unpaid losses and loss adjustment expenses

 

 

189,931

 

 

 

(40,346

)

 

 

(35,513

)

Unearned premiums

 

 

56,688

 

 

 

33,390

 

 

 

46,618

 

Accounts payable

 

 

(321

)

 

 

2,809

 

 

 

(3,743

)

Reinsurance payable, net

 

 

29,490

 

 

 

7,306

 

 

 

7,519

 

Income taxes payable

 

 

—

 

 

 

—

 

 

 

3,510

 

Other liabilities and accrued expenses

 

 

9,287

 

 

 

(505

)

 

 

625

 

Advance premium

 

 

8,420

 

 

 

(7,017

)

 

 

6,894

 

Net cash provided by (used in) operating activities

 

 

245,010

 

 

 

121,396

 

 

 

219,271

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of property and equipment

 

 

23

 

 

 

36

 

 

 

86

 

Purchases of property and equipment

 

 

(4,618

)

 

 

(8,223

)

 

 

(11,869

)

Payments to acquire a business

 

 

—

 

 

 

—

 

 

 

(1,000

)

Purchases of equity securities

 

 

(89,302

)

 

 

(66,688

)

 

 

(65,038

)

Purchases of fixed maturities

 

 

(180,604

)

 

 

(320,131

)

 

 

(178,198

)

Purchases of short-term investments

 

 

(10,000

)

 

 

—

 

 

 

(87,538

)

Purchases of investment real estate, net

 

 

(7,218

)

 

 

(5,496

)

 

 

(6,220

)

Proceeds from sales of equity securities

 

 

77,640

 

 

 

60,558

 

 

 

41,456

 

Proceeds from sales of fixed maturities

 

 

26,179

 

 

 

86,018

 

 

 

38,379

 

Proceeds from sales of short-term investments

 

 

—

 

 

 

—

 

 

 

12,500

 

Maturities of fixed maturities

 

 

97,191

 

 

 

54,615

 

 

 

74,390

 

Maturities of short-term investments

 

 

5,000

 

 

 

25,000

 

 

 

100,000

 

Net cash provided by (used in) investing activities

 

 

(85,709

)

 

 

(174,311

)

 

 

(83,052

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

 

(10

)

 

 

(10

)

 

 

(10

)

Common stock dividend

 

 

(24,001

)

 

 

(24,192

)

 

 

(22,287

)

Issuance of common stock for stock option exercises

 

 

—

 

 

 

119

 

 

 

511

 

Purchase of treasury stock

 

 

(18,141

)

 

 

(8,510

)

 

 

(18,649

)

Sale of treasury stock

 

 

—

 

 

 

2,965

 

 

 

—

 

Purchase of preferred stock

 

 

—

 

 

 

—

 

 

 

(256

)

Payments related to tax withholding for share-based compensation

 

 

(7,223

)

 

 

(5,451

)

 

 

(12,141

)

Excess tax benefits (shortfall) from share-based compensation

 

 

—

 

 

 

(1,154

)

 

 

5,310

 

Repayment of debt

 

 

(2,170

)

 

 

(2,136

)

 

 

(8,470

)

Borrowings under promissory note

 

 

—

 

 

 

—

 

 

 

1,390

 

Net cash provided by (used in) financing activities

 

 

(51,545

)

 

 

(38,369

)

 

 

(54,602

)

Net increase (decrease) in cash and cash equivalents

 

 

107,756

 

 

 

(91,284

)

 

 

81,617

 

Cash and cash equivalents at beginning of period

 

 

105,730

 

 

 

197,014

 

 

 

115,397

 

Cash and cash equivalents at end of period

 

$

213,486

 

 

$

105,730

 

 

$

197,014

 

Supplemental cash and non-cash flow disclosures:

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

348

 

 

$

421

 

 

$

963

 

Income taxes paid

 

$

68,883

 

 

$

63,378

 

 

$

65,383

 

Income tax refund

 

$

434

 

 

$

5,633

 

 

$

—

 



The following table summarizes our cash and cash equivalents and restricted cash and cash equivalents within the Consolidated Balance Sheets (in thousands):
As of December 31,
202020192018
Cash and cash equivalents$167,156 $182,109 $166,428 
Restricted cash and cash equivalents (1)12,715 2,635 2,635 
Total cash and cash equivalents and restricted cash and cash equivalents$179,871 $184,744 $169,063 

(1) See “—Note 5 (Insurance Operations),” for a discussion of the nature of the restrictions for restricted cash and cash equivalents and “—Note 18 (Variable Interest Entities),” for a discussion of restricted cash held in a trust account.

The accompanying notes to consolidated financial statements are an integral part of these statements.

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UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations, Basis of Presentation and Consolidation

Universal Insurance Holdings, Inc. (“UVE”, and together with its wholly-owned subsidiaries, “the Company”) is a Delaware corporation incorporated in 1990. UVE with its wholly-owned subsidiaries (the “Company”),The Company is a vertically integrated insurance holding company performing all aspects of insurance underwriting, distribution and claims. Through its wholly-owned insurance company subsidiaries, Universal Property & Casualty Insurance Company (“UPCIC”) and American Platinum Property and Casualty Insurance Company (“APPCIC”), and together referred to aswith UPCIC, the “Insurance Entities,”Entities”), the Company is principally engaged in the property and casualty insurance business offered primarily through its network of independent agents. Risk from catastrophic losses is managed through the use of reinsurance agreements. The Company’s primary product is residential homeowners’ insurance currently offered in sixteen19 states as of December 31, 2017,2020, including Florida, which comprises the vast majority of the Company’s in-force policies. policies in force. See “—Note 5 (Insurance Operations),” for more information regarding the Company’s insurance operations.

The Company generates revenues primarily from the collection of premiums and investsinvestment returns on funds invested on cash flows in excess of those retained and used for claims-paying obligations and insurance operations. Other significant sources of revenue include brokerage commissions collected from reinsurers on certain reinsurance programs placed byon behalf of the Insurance Entities, policy fees collected from policyholders by ourthe Company’s wholly-owned managing general agencyagent (“MGA”) subsidiary and payment plan fees charged to policyholders who choose to pay their premiums in installments.

The consolidated financial statementsCompany’s wholly-owned adjusting company receives claims-handling fees from the Insurance Entities. 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 losses and loss adjustment expense (“LAE”).

The Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The consolidated financial statementsConsolidated Financial Statements include the accounts of UVE and its wholly-owned subsidiaries.subsidiaries, as well as variable interest entities (“VIE”) in which the Company is determined to be the primary beneficiary. All material intercompany balances and transactions have been eliminated in consolidation.

To conform to the current period presentation, certain amounts in the prior periods’ consolidated financial statements and notes have been reclassified. Such reclassifications were of an immaterial amount and had no effect on net income or stockholders’ equity.

Consolidated Statement of Cash Flows – Additional Disclosure

As discussed in “—Note 8 (Stockholders’ Equity)”, in April 2016 the Company entered into a Purchase and Exchange Agreement with RenaissanceRe Ventures Ltd. pursuant to which the Company sold an aggregate of 583,771 shares of UVE common stock at a price of $17.13 per share for a total consideration of $10 million of which $7.035 million represents cancellation of outstanding indebtedness, non-cash portion, and the balance of $2.965 million was received in cash. The non-cash portion of the transaction has been excluded from the consolidated statement of cash flows.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’s primary use of estimates areis in the recognition of liabilities for unpaid losses, loss adjustment expenses, and subrogation recoveries, and reinsurance recoveries. Actual results could differ from those estimates.


NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recently Adopted Accounting Pronouncements
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic ASC 326), which introduces a new process for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new ASU applies to premiums receivable, reinsurance recoverable and available-for-sale debt securities. The ASU replaces the current practice of recording a permanent write down (other than temporary impairment) for probable credit losses with a new requirement that would estimate credit losses and record those estimated losses through a temporary allowance account that can be re-measured as estimates of 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 Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The Company recorded a decrease to retained earnings of $0.6 million as of January 1, 2020 for the cumulative after-tax effect of adopting ASC 326.
Accounting Policies
The significant accounting policies followed by the Company are summarized as follows:

Consolidation Policy: The Financial Statements include the accounts of the Company, its wholly-owned subsidiaries and VIEs in which the Company is determined to be the primary beneficiary. This analysis includes a review of the VIE’s capital structure, related contractual relationships and terms, nature of the VIE’s operations and purpose, nature of the VIE’s interests issued and the Company’s involvement with the entity. When assessing the need to consolidate a VIE, the Company evaluates
63

the design of the VIE as well as the related risks to which the entity was designed to expose the variable interest holders. The primary beneficiary is the entity that has both (i) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the Company’s decision-making ability and its ability to influence activities that significantly affect the economic performance of the VIE.
Cash and Cash Equivalents.The Company includes in cash equivalents all short-term, highly liquid investments that are readily convertible to known amounts of cash and have an original maturity of three months or less. These amounts are carried at cost, which approximates fair value. The Company excludes any net negative cash balances from cash and cash equivalents that the Company has with any single financial institution. 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 the Company’s Consolidated Balance Sheets.

Restricted Cash and Cash Equivalents.The Company classifies amounts of cash and cash equivalents that are restricted in terms of their use and withdrawal separately onin the face of the Consolidated Balance Sheets. See “—Note 5 (Insurance Operations),” and “—Note 18 (Variable Interest Entities)”for a discussion ofdiscussions on the nature of the restrictions.

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Investment, Securities Available for Sale. All investment The Company’s investments in debt securities and short-term investments are classified as available for sale and consist of fixed maturities, equity securities and short-term investmentsavailable-for-sale with maturities of greater than three months. InvestmentAvailable-for-sale debt securities available for saleand short-term investments are recorded at fair value onin the consolidated balance sheet.Consolidated Balance Sheet, net of any allowance for credit losses, if any. Unrealized gains and losses, excluding the credit loss portion, on available-for-sale debt securities available for saleand short-term investments are excluded from earnings and reported as a component of other comprehensive income (“OCI”), net of related deferred taxes until reclassified to earnings upon the consummation of a sales transaction with an unrelated third party or when the decline in fair value is deemed other than temporary.

party. Gains and losses realized on the disposition of investmentavailable-for-sale debt securities available for sale are determined on the FIFOfirst in, first out (“FIFO”) basis and credited or charged to income. Premium and discount on investment securities are amortized and accreted using the interest method and charged or credited to investment income.

Other Than Temporary Impairment. The assessment

Allowance for Credit Losses-Available-For-Sale Securities. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the impairment of a security’s fair value is other than temporary is performed using a portfolio review as well as a case-by-case review considering a wide range of factors. There are a number of assumptions and estimates inherentdecline in evaluating impairments and determining if they are other than temporary, including: 1) the Company’s ability and intent to hold the investment for a period of time sufficient to allow for an anticipated recovery in value; 2) the expected recoverability of principal and interest; 3) the extent and length of time to which the fair value has beenresulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, for fixed maturity securities or cost for equity securities and short-term investments referredany changes to as severity and duration; 4) the financial condition, near-term and long-term prospectsrating of the issue or issuer, including relevant industry conditionssecurity by rating agencies, market sentiment and trends and implications of rating agency actionsadverse conditions specifically related to the security, among other quantitative and offering prices referred to asqualitative factors utilized at establishing an estimate for credit quality; and 5)losses. If the specific reasonsassessment indicates that a credit loss exists, the present values of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in OCI.
Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense and are reported as general and administrative expenses. Losses are charged against the allowance when management believes an available-for-sale debt security is confirmed as uncollected or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available-for-sale securities totaled $3.6 million as of December 31, 2020 and is evaluated in a significant unrealized loss position, including market conditions which could affect liquidity. Additionally, once assumptions and estimatesthe estimate for credit losses. Accrued interest receivable is included under Other Assets in the Consolidated Balance Sheet.
Investment, Equity Securities.The Company’s investments in equity securities are made, any number of changesrecorded at fair value in facts and circumstances could cause the Company to subsequently determine that an impairment is other than temporary, including: 1) general economic conditions that are worse than previously forecasted or that have a greater adverse effect on a particular issuer or industry sector than originally estimated; 2)Consolidated Balance Sheet with changes in the facts and circumstances related to a particular issue or issuer’s ability to meet allfair value of its contractual obligations; and 3) changesequity securities reported in facts and circumstances obtained that causes acurrent period earnings in the Consolidated Statements of Income within net change in our ability or intent to hold a security to maturity or until it recovers in value. Management’s intent and ability to holdunrealized gains (losses) of equity securities is a determination that is made at each respective balance sheet date giving consideration to factors known to management for each individual issuer of securities such as credit quality and other publicly available information.

they occur.

Investment Real Estate.Investment real estate is recorded at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Real estate taxes, interest and other costs incurred during development and construction of properties are capitalized. Income and expenses from income producing real estate are reported under net investment income. Investment real estate is evaluated for impairment when events or circumstances indicate the carrying value may not be recoverable.

Premiums Receivable.Generally, premiums are collected prior to or during the policy period as permitted under the Insurance EntitiesEntities’ payment plans. Credit risk is minimized through the effective administration of policy payment plans whereby the rules governing policy cancellation minimize exposure to credit risk.circumstances in which the Company extends insurance coverage without having received the corresponding premiums. The Company performs a policy levelpolicy-level evaluation to determine the extent the premiums receivable balance exceeds the unearned premiums balance. TheUnder ASC 326 and given the short-term nature of these receivables, the Company then ages this exposureemployed the aging method to establishestimate credit losses by pooling receivables based on the levels of delinquency and evaluating current conditions and reasonable and supportable forecasts. As of December 31, 2020 and 2019, the Company recorded estimated credit losses of $0.6 million and an allowance for doubtful accounts based on prior credit experience. As of December 31, 2017 and 2016, the Company recorded allowances for doubtful accounts in the amounts of $680 thousand and $527 thousand,$0.7 million, respectively.

Property and Equipment.Property and equipment is recorded at cost less accumulated depreciation and areis depreciated on the straight-line basis over the estimated useful life of the assets. Estimated useful life of all property and equipment ranges from three years for equipment to twenty-seven-and-one-half years for buildings and improvements. Expenditures for improvements
64

are capitalized and depreciated over the remaining useful life of the asset. Routine repairs and maintenance are expensed as incurred. Website development costs are capitalized and amortized over three years. Software is capitalized and amortized over three years. The Company reviews its property and equipment for impairment annually and/or whenever changes in circumstances indicate that the carrying amount may not be recoverable.

Recognition of Premium Revenues.Direct and ceded premiums are recognized as revenue on a pro rata basis over the policy term or over the term of the reinsurance agreement. The portion of direct premiums that will be earned in the future is deferred and reported as unearned premiums. The portion of ceded premiums that will be earned in the future is deferred and reported as prepaid reinsurance premiums (ceded unearned premiums).

Recognition of Commission Revenue. Commission revenue generated from reinsurance brokerage commission earned on ceded premium by the Insurance Entities is recognized over the term of the reinsurance agreements.

Policy Fees.Policy fees, which represents fees paid by policyholders to the Managing General Agent (MGA)’sMGA’s on all new and renewal insurance policies, are generally recognized as income upon policy inception.

inception, which coincides with related service obligations.

Other Revenue. The Company offers its policyholders the option of paying their policy premiums in full at inception or in installments. The Company charges fees to its policyholders that elect to pay their premium in installments and records such fees as revenue as the Company bills the fees to the policyholder.

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Deferred Policy Acquisition Costs. The Company defers direct commissions and premium taxes relating to the successfulacquisition or renewal of insurance policies and defers the costs until recognized as expense over the terms of the policies to which they are related. Commissions on ceded premiums are deferred and amortized over the effective period of the related reinsurance policies. Deferred policy acquisition costs and deferred ceding commissions are netted for balance sheet presentation purposes and are recorded at their estimated realizable value.

Intangible Assets.

Goodwill.Goodwill and indefinite-lived intangible assets arising from the acquisition of a business is initially measured at cost and not subject to amortization. We assessThe Company assesses goodwill and indefinite-lived intangible assets for potential impairments at the end of each fiscal year, or during the year if an event or other circumstance indicates that wethe Company may not be able to recover the carrying amount of the asset. Goodwill is included under Other Assets in the Consolidated Balance Sheets.

Insurance Liabilities. Unpaid losses and loss adjustment expenses (“LAE”) are provided for as claims are incurred. The provision for unpaid losses and loss adjustment expensesLAE includes: (1) the accumulation of individual case estimates for claims and claim adjustment expenses reported prior to the close of the accounting period; (2) estimates for unreported claims based on industry data;data and actuarial analysis and (3) estimates of expenses for investigating and adjusting claims based on the experience of the Company and the industry. The Company estimates and accrues its 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 related costs and netted against unpaid losses and LAE.

Inherent in the estimates of ultimate claims and subrogation are expected trends in claim severity, frequency and other factors that may vary as claims are settled. The amount of uncertainty in the estimates is significantly affected by such factors as the amount of claims experience relative to the development period, knowledge of the actual facts and circumstances and the amount of insurance risk retained. In addition, the Company’s policyholders are subject to adverse weather conditions, such as hurricanes, tornados,tornadoes, ice storms and tropical storms. The actuarial methods for making estimates for unpaid losses, LAE and subrogation recoveries and for establishing the resulting net liability are periodically reviewed, and any adjustments are reflected in current earnings.

Provision for Premium Deficiency. It is the Company’s policy to evaluate and recognize losses on insurance contracts when estimated future claims, deferred policy acquisition costs and maintenance costs under a group of existing contracts will exceed anticipated future premiums. NoNaN accruals for premium deficiency were considered necessary as of December 31, 20172020 and 2016.

Reinsurance. 2019.

Reinsurance. Ceded written premium is recorded upon the effective date of the reinsurance contracts and earned over the contract period. Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance agreements and consistent with the establishment of the gross insurance liability to the Company. Allowances areUnder ASC 326 and given the short-term nature of these receivables, the Company considered the effects of credit enhancements (i.e. funds withheld liability, letters of credit and trust arrangements) and other qualitative factors that allowed it to conclude there was no material risk exposure. There is 0 estimated credit loss allowance as of December 31, 2020 established under ASC 326 and the Company did not have an allowance for uncollectible amounts deemed uncollectible if any.

due from reinsurers as of December 31, 2019.

Income Taxes. The Company accounts for income taxes under the asset and liability method, that recognizes the amount of income taxes payable or refundable for the current year and recognizes deferred tax assets and liabilities based on the tax rates expected to be in effect during the periods in which the temporary differences reverse. Temporary differences arise when income or expenses are recognized in different periods onin the consolidated financial statements than on the tax returns. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized. Income taxes includesinclude both estimated federal and state income taxes.

Income (Loss) Per Share of Common Stock. Basic earnings per share excludes dilution and is computed by dividing the Company’s net income (loss) available to common stockholders, by the weighted-average number of shares of Common Stock outstanding during the period. Diluted earnings per share is computed by dividing the Company’s net income (loss) available to common stockholders, by the weighted average number of shares of Common Stock outstanding during the period plus the impact of all potentially dilutive common shares, primarily preferred stock, unvested shares and options. The dilutive impact of
65

stock options and unvested shares is determined by applying the treasury stock method and the dilutive impact of the preferred stock is determined by applying the “if converted” method.

Fair Value Measurements. The Company’s policy is to record transfers of assets and liabilities, if any, between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. There were no0 transfers during the years ended December 31, 20172020 or 2016.

2019.

Share-based Compensation.The Company accounts for share-based compensation based on the estimated grant-date fair value. The Company recognizes these compensation costs in general and administrative expenses and generally amortizes them on a straight-line basis over the requisite service period of the award, which is the vesting term. Individual tranches of performance-based awards are amortized separately since the vesting of each tranche is either subject to independent annual measures.measures or time vesting. The fair value of stock option

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awards areis estimated using the Black-Scholes option pricing model with the grant-date assumptions discussed in “—Note 9 (Share-Based Compensation).” The fair value of the restricted share grants, performance share units and restricted stock units are determined based on themarket price on the date of grant.

Statutory Accounting. UPCIC and APPCIC are highly regulated and prepare and file financial statements in conformity with the statutory accounting practices prescribed or permitted by the Florida Office of Insurance Regulation (the “FLOIR”) and the National Association of Insurance Commissioners (“NAIC”), which differ from U.S. GAAP. The FLOIR requires that insurance companies domiciled in Florida to prepare their statutory financial statements in accordance with the NAIC Accounting Practices and Procedures Manual (the “Manual”), as modified by the FLOIR. Accordingly, the admitted assets, liabilities and capital and surplus of UPCIC and APPCIC as of December 31, 20172020 and 20162019 and the results of operations and cash flows, for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, for their regulatory filings have been prepared in accordance with statutory accounting principles as promulgated by the FLOIR and the NAIC. The statutory accounting principles are more restrictive than U.S. GAAP and are designed primarily to demonstrate the ability to meet obligations to policyholders and claimants.

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) revised U.S. GAAP with the issuance of Accounting Standard Update (“ASU”) 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions. The new ASU requires excess income tax benefits (windfalls) and deficiencies (shortfalls) to be recognized in the income statement when the awards vest or are settled. The former guidance required the recognition of excess tax benefits or deficiencies in stockholders’ equity. In addition, all income tax-related cash flows resulting from share-based payments will be reported as operating activities in the statement of cash flows under the new ASU. The ASU also, allows the Company to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting; clarifies that all cash payments for tax withholdings made on an employee’s behalf should be presented as a financing activity on the Company’s statement of cash flows; provides an accounting policy election to account for forfeitures as they occur; and modifies the calculation of dilutive earnings per share to no longer use proceeds from tax benefits or deficiencies. The Company adopted this ASU effective January 1, 2017, which resulted in the recognition of an excess tax benefit of $5.8 million for the twelve months ended December 31, 2017.


NOTE 3 – INVESTMENTS

Securities Available

Results for Sale

reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP.

Available-for-Sale Securities
The following table provides the cost or amortized cost and fair value of available-for-sale debt securities available for sale as of the dates presented (in thousands):

 

December 31, 2017

 

 

Cost or

 

 

Gross

 

 

Gross

 

 

 

 

 

December 31, 2020

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

Amortized
Cost		Allowance for Expected Credit LossesGross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:Debt Securities:

U.S. government obligations and agencies

 

$

60,481

 

 

$

—

 

 

$

(877

)

 

$

59,604

 

U.S. government obligations and agencies$59,529 $0 $157 $(55)$59,631 

Corporate bonds

 

 

228,336

 

 

 

476

 

 

 

(1,308

)

 

 

227,504

 

Corporate bonds416,758 (148)3,571 (337)419,844 

Mortgage-backed and asset-backed securities

 

 

221,956

 

 

 

19

 

 

 

(2,523

)

 

 

219,452

 

Mortgage-backed and asset-backed securities319,377 0 1,175 (615)319,937 

Municipal bonds

 

 

120,883

 

 

 

599

 

 

 

(1,187

)

 

 

120,295

 

Municipal bonds11,990 0 138 0 12,128 

Redeemable preferred stock

 

 

12,059

 

 

 

485

 

 

 

(65

)

 

 

12,479

 

Redeemable preferred stock7,993 (38)424 (58)8,321 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

22,584

 

 

 

47

 

 

 

(3,820

)

 

 

18,811

 

Mutual funds

 

 

45,456

 

 

 

179

 

 

 

(2,231

)

 

 

43,404

 

Short-term investments

 

 

10,000

 

 

 

—

 

 

 

—

 

 

 

10,000

 

Total

 

$

721,755

 

 

$

1,805

 

 

$

(12,011

)

 

$

711,549

 

Total$815,647 $(186)$5,465 $(1,065)$819,861 

December 31, 2019
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
Debt Securities:
U.S. government obligations and agencies$53,688 $864 $(188)$54,364 
Corporate bonds457,180 19,179 (141)476,218 
Mortgage-backed and asset-backed securities304,285 7,400 (606)311,079 
Municipal bonds3,397 103 (4)3,496 
Redeemable preferred stock9,786 427 (86)10,127 
Total$828,336 $27,973 $(1,025)$855,284 

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Table of Contents

 

 

December 31, 2016

 

 

 

Cost or

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

 

$

74,937

 

 

$

—

 

 

$

(670

)

 

$

74,267

 

Corporate bonds

 

 

192,328

 

 

 

402

 

 

 

(1,300

)

 

 

191,430

 

Mortgage-backed and asset-backed securities

 

 

216,679

 

 

 

135

 

 

 

(2,038

)

 

 

214,776

 

Municipal bonds

 

 

94,794

 

 

 

130

 

 

 

(3,727

)

 

 

91,197

 

Redeemable preferred stock

 

 

12,723

 

 

 

125

 

 

 

(157

)

 

 

12,691

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

214

 

 

 

—

 

 

 

(121

)

 

 

93

 

Mutual funds

 

 

53,900

 

 

 

407

 

 

 

(3,597

)

 

 

50,710

 

Short-term investments

 

 

5,000

 

 

 

2

 

 

 

—

 

 

 

5,002

 

Total

 

$

650,575

 

 

$

1,201

 

 

$

(11,610

)

 

$

640,166

 


The following table provides the credit quality of investmentavailable-for-sale debt securities with contractual maturities or the issuer of such securities as of the dates presented (in(dollars in thousands):

 

December 31, 2017

 

 

December 31, 2016

 

 

 

 

 

 

% of Total

 

 

 

 

 

 

% of Total

 

December 31, 2020December 31, 2019

Comparable Ratings

 

Fair Value

 

 

Fair Value

 

 

Fair Value

 

 

Fair Value

 

% of Total% of Total
Average Credit RatingsAverage Credit RatingsFair ValueFair ValueFair ValueFair Value

AAA

 

$

135,237

 

 

 

20.8

%

 

$

131,260

 

 

 

22.3

%

AAA$337,462 41.2 %$372,442 43.6 %

AA

 

 

292,496

 

 

 

45.1

%

 

 

275,480

 

 

 

46.7

%

AA89,681 10.9 %99,103 11.6 %

A

 

 

134,505

 

 

 

20.7

%

 

 

107,418

 

 

 

18.2

%

A230,290 28.1 %238,766 27.9 %

BBB

 

 

80,566

 

 

 

12.4

%

 

 

67,263

 

 

 

11.4

%

BBB160,662 19.6 %143,889 16.8 %

BB and Below

 

 

2,919

 

 

 

0.4

%

 

 

3,444

 

 

 

0.6

%

BB and Below233 0 %0 0 

No Rating Available

 

 

3,611

 

 

 

0.6

%

 

 

4,498

 

 

 

0.8

%

No Rating Available1,533 0.2 %1,084 0.1 %

Total

 

$

649,334

 

 

 

100.0

%

 

$

589,363

 

 

 

100.0

%

Total$819,861 100.0 %$855,284 100.0 %

The tablestable above include comparableincludes credit quality ratings by Standard and Poor’s Rating Services, Inc. (“S&P”), Moody’s Investors Service, Inc. and Fitch Ratings, Inc.

The Company has presented the highest rating of the three rating agencies for each investment position.

The following table summarizes the cost or amortized cost and fair value of mortgage-backed and asset-backed securities as of the dates presented (in thousands):

 

December 31, 2017

 

 

December 31, 2016

 

 

Cost or

 

 

 

 

 

 

Cost or

 

 

 

 

 

 

Amortized

 

 

 

 

 

 

Amortized

 

 

 

 

 

December 31, 2020December 31, 2019

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

Amortized
Cost		Fair ValueAmortized
Cost		Fair Value

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

Agency

 

$

118,014

 

 

$

116,014

 

 

$

110,724

 

 

$

109,022

 

Agency$153,937 $153,758 $143,723 $144,729 

Non-agency

 

 

17,676

 

 

 

17,488

 

 

 

19,408

 

 

 

19,265

 

Non-agency54,231 54,666 71,140 75,896 

Asset-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities:

Auto loan receivables

 

 

35,105

 

 

 

34,962

 

 

 

37,390

 

 

 

37,429

 

Auto loan receivables68,188 68,440 42,767 43,127 

Credit card receivables

 

 

38,844

 

 

 

38,719

 

 

 

38,640

 

 

 

38,568

 

Credit card receivables7,878 7,891 21,145 21,487 

Other receivables

 

 

12,317

 

 

 

12,269

 

 

 

10,517

 

 

 

10,492

 

Other receivables35,143 35,182 25,510 25,840 

Total

 

$

221,956

 

 

$

219,452

 

 

$

216,679

 

 

$

214,776

 

Total$319,377 $319,937 $304,285 $311,079 

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The following table summarizes the fair value and gross unrealized losses ontables summarize available-for-sale debt securities, available for sale, aggregated by major investment categorysecurity type and length of time that individual securities have been in a continuous unrealized loss position, for which no allowance for expected credit losses has been recorded as of the dates presented (in thousands):

 

December 31, 2017

 

 

Less Than 12 Months

 

 

12 Months or Longer

 

December 31, 2020

 

Number of

 

 

 

 

 

 

Unrealized

 

 

Number of

 

 

 

 

 

 

Unrealized

 

Less Than 12 Months12 Months or Longer

 

Issues

 

 

Fair Value

 

 

Losses

 

 

Issues

 

 

Fair Value

 

 

Losses

 

Number of
Issues		Fair ValueUnrealized
Losses		Number of
Issues		Fair ValueUnrealized
Losses

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:Debt Securities:

U.S. government obligations and agencies

 

 

7

 

 

$

35,464

 

 

$

(301

)

 

 

9

 

 

$

24,140

 

 

$

(576

)

U.S. government obligations and agencies8 $31,729 $(55)0 $0 $0 

Corporate bonds

 

 

159

 

 

 

142,208

 

 

 

(792

)

 

 

39

 

 

 

29,796

 

 

 

(516

)

Corporate bonds27 28,791 (162)0 0 0 

Mortgage-backed and asset-backed securities

 

 

83

 

 

 

137,481

 

 

 

(955

)

 

 

37

 

 

 

70,218

 

 

 

(1,568

)

Mortgage-backed and asset-backed securities42 112,462 (615)0 0 0 

Municipal bonds

 

 

36

 

 

 

28,265

 

 

 

(246

)

 

 

30

 

 

 

48,370

 

 

 

(941

)

Municipal bonds0 0 0 0 0 0 

Redeemable preferred stock

 

 

21

 

 

 

2,464

 

 

 

(65

)

 

 

—

 

 

 

—

 

 

 

—

 

Redeemable preferred stock2 688 (12)0 0 0 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

2

 

 

 

17,846

 

 

 

(3,820

)

 

 

—

 

 

 

—

 

 

 

—

 

Mutual funds

 

 

3

 

 

 

25,338

 

 

 

(135

)

 

 

1

 

 

 

9,171

 

 

 

(2,096

)

Total

 

 

311

 

 

$

389,066

 

 

$

(6,314

)

 

 

116

 

 

$

181,695

 

 

$

(5,697

)

Total79 $173,670 $(844)0 $0 $0 

 

 

December 31, 2016

 

 

 

Less Than 12 Months

 

 

12 Months or Longer

 

 

 

Number of

 

 

 

 

 

 

Unrealized

 

 

Number of

 

 

 

 

 

 

Unrealized

 

 

 

Issues

 

 

Fair Value

 

 

Losses

 

 

Issues

 

 

Fair Value

 

 

Losses

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

 

 

11

 

 

$

70,453

 

 

$

(608

)

 

 

2

 

 

$

3,504

 

 

$

(62

)

Corporate bonds

 

 

116

 

 

 

96,379

 

 

 

(1,219

)

 

 

4

 

 

 

3,250

 

 

 

(80

)

Mortgage-backed and asset-backed securities

 

 

73

 

 

 

149,928

 

 

 

(1,923

)

 

 

5

 

 

 

9,660

 

 

 

(115

)

Municipal bonds

 

 

69

 

 

 

79,402

 

 

 

(3,726

)

 

 

—

 

 

 

—

 

 

 

—

 

Redeemable preferred stock

 

 

50

 

 

 

6,340

 

 

 

(158

)

 

 

—

 

 

 

—

 

 

 

—

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

1

 

 

 

18

 

 

 

(7

)

 

 

2

 

 

 

75

 

 

 

(115

)

Mutual funds

 

 

3

 

 

 

28,020

 

 

 

(774

)

 

 

2

 

 

 

11,529

 

 

 

(2,823

)

Total

 

 

323

 

 

$

430,540

 

 

$

(8,415

)

 

 

15

 

 

$

28,018

 

 

$

(3,195

)

67

Evaluating Investments


December 31, 2019
Less Than 12 Months12 Months or Longer
Number of
Issues		Fair ValueUnrealized
Losses		Number of
Issues		Fair ValueUnrealized
Losses
Debt Securities:
U.S. government obligations and agencies2 $3,836 $(108)4 $23,186 $(80)
Corporate bonds18 16,808 (107)7 5,866 (34)
Mortgage-backed and asset-backed securities42 58,023 (245)26 34,985 (361)
Municipal bonds0 0 0 1 276 (4)
Redeemable preferred stock6 630 (8)4 1,489 (78)
Total68 $79,297 $(468)42 $65,802 $(557)
Unrealized losses on available-for-sale debt securities in Other Than Temporary Impairment (“OTTI”)

Asthe above table as of December 31, 2017,2020 have not been recognized into income as credit losses because the Company held fixed maturity and equity securities that were in an unrealized loss position as presented in the table above. For fixed maturity securities with significant declines in value, the Company performs quarterly fundamental credit analysis on a security-by-security basis, which includes considerationissuers are of high credit quality (investment grade securities), management does not intend to sell and credit ratings, review of relevant industry analyst reports and other available market data. For fixed maturity, equity securities and short-term investments, the Company considers whether it has the intent and abilityis likely management will not be required to holdsell the securities for a period of time sufficientprior to recover its cost basis. Wheretheir anticipated recovery, and the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the security’s decline in fair value is consideredlargely due to changes in interest rates and other than temporary and is recorded in earnings. Based on our analysis, our fixed income portfolio is of high quality and we believe we will recover the amortized cost basis of our fixed income securities. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. Additionally, the Company considers management’s intent and ability to hold the securities until recovery and its credit analysis of the individual issuers of the securities. Based on this process and analysis, management has no reason to believe the unrealized losses for securities available for sale as of December 31, 2017 are other than temporary.

As of December 31, 2017, the Company held approximately $9.2 million equity securities that were in an unrealized loss position twelve months or longer. The unrealized loss on these securities was $2.1 million. Based on our analysis, the company believes each security will recover in a reasonable period of time and the Company has the intent and ability to hold them until recovery.market conditions. There were no OTTI losses recognized in the periodsmaterial factors impacting any one category or specific security requiring an accrual for credit loss. The issuers continue to make principal and interest payments on the equity portfolio.

79

Tablebonds. The fair value is expected to recover as the bonds approach maturity.

Results for reporting periods occurring before January 1, 2020 continue to be reported in accordance with previously applicable U.S. GAAP and not presented under ASC 326, which was adopted by the Company on January 1, 2020.
The following table presents a reconciliation of Contents

the beginning and ending balances for expected credit losses on available-for-sale debt securities (in thousands):

Corporate BondsRedeemable
Preferred Stock		Total
Balance, December 31, 2019$0 $0 $0 
Cumulative effect adjustment as of January 1, 2020665 126 791 
Increase (decrease)(517)(88)(605)
Balance, December 31, 2020$148 $38 $186 
See “—Note 2 (Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements)” for more information about the methodology and significant inputs used to measure the amount related to expected credit losses on available-for-sale debt securities.
The following table presents the amortized cost and fair value of investments with contractual maturities as of the date presented (in thousands): 

 

December 31, 2017

 

 

Cost or

 

 

 

 

 

December 31, 2020

 

Amortized Cost

 

 

Fair Value

 

Amortized CostFair Value

Due in one year or less

 

$

51,846

 

 

$

51,804

 

Due in one year or less$31,333 $31,578 

Due after one year through five years

 

 

235,323

 

 

 

233,849

 

Due after one year through five years480,269 482,031 

Due after five years through ten years

 

 

56,806

 

 

 

56,677

 

Due after five years through ten years270,152 272,445 

Due after ten years

 

 

75,725

 

 

 

75,073

 

Due after ten years33,728 33,596 

Mortgage-backed and asset-backed securities

 

 

221,956

 

 

 

219,452

 

Perpetual maturity securities

 

 

12,059

 

 

 

12,479

 

Perpetual maturity securities165 211 

Total

 

$

653,715

 

 

$

649,334

 

Total$815,647 $819,861 

Expected

All securities, except those with perpetual maturities, may differ fromwere categorized in the table 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 maturities because borrowers may have the right to call or prepay with or without penalty.

maturity dates.

68

The following table provides certain information related to available-for-sale debt securities, available for saleequity securities and investment real estate during the periods presented (in thousands):

 

 

Years Ended

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

Proceeds from sales and maturities (fair value)

 

$

206,010

 

 

$

226,191

 

Gross realized gains

 

$

2,873

 

 

$

2,329

 

Gross realized losses

 

$

(303

)

 

$

(35

)

Years Ended December 31,
202020192018
Proceeds from sales and maturities (fair value):
Available-for-sale debt securities$1,148,418 $223,266 $255,938 
Equity securities$81,559 $29,680 $8,285 
Gross realized gains on sale of securities:
Available-for-sale debt securities$57,378 $790 $326 
Equity securities$6,438 $367 $714 
Gross realized losses on sale of securities:
Available-for-sale debt securities$(464)$(298)$(3,129)
Equity securities$0 $(14,787)$0 
Realized gains on sales of investment real estate$0 $1,213 $0 

In the third quarter of 2020, the Company took advantage of the market recovery and recognized $53.8 million of net realized gains on the sales of our available-for-sale debt securities that were in an unrealized gain position.
The following table presents the components of net investment income, comprised primarily of interest and dividends for the periods presented (in thousands):

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Fixed maturities

 

$

12,375

 

 

$

9,523

 

 

$

5,642

 

Equity securities

 

 

1,799

 

 

 

1,414

 

 

 

1,143

 

Short-term investments

 

 

22

 

 

 

75

 

 

 

246

 

Other (1)

 

 

1,459

 

 

 

734

 

 

 

409

 

Total investment income

 

 

15,655

 

 

 

11,746

 

 

 

7,440

 

Less: Investment expenses (2)

 

 

(2,195

)

 

 

(2,206

)

 

 

(2,285

)

Net investment (expense) income

 

$

13,460

 

 

$

9,540

 

 

$

5,155

 

Years Ended December 31,
202020192018
Available-for-sale debt securities$19,091 $24,989 $18,198 
Equity securities2,445 2,648 2,978 
Available-for-sale short-term investments0 0 145 
Cash and cash equivalents (1)960 5,176 5,540 
Other (2)1,050 1,008 915 
Total investment income23,546 33,821 27,776 
Less: Investment expenses (3)(3,153)(3,078)(2,960)
Net investment income$20,393 $30,743 $24,816 

(1)

(1)Includes interest earned on cash and cash equivalents and restricted cash and cash equivalents. Also includes
(2)Includes investment income earned on real estate investments.

(2)

(3)

Includes bankcustodial fees, investment accounting and advisory fees, and expenses associated with real estate investments.

Equity Securities
The following table provides the unrealized gains and losses recognized for the periods presented on equity securities still held at the end of the reported period (in thousands):
Years Ended December 31,
202020192018
Unrealized gains and (losses) recognized during the reported period
on equity securities still held at the end of the reporting period		$25 $4,163 $(17,169)

69

Investment Real Estate

Investment real estate consisted of the following as of the dates presented (in thousands):

As of December 31,

December 31, 2017

 

 

December 31, 2016

 

20202019

Income Producing:

 

 

 

 

 

 

 

Income Producing:

Investment real estate

$

6,918

 

 

$

6,918

 

Investment real estate$14,685 $14,679 

Less: Accumulated depreciation

 

(460

)

 

 

(281

)

Less: Accumulated depreciation(1,699)(1,284)

 

6,458

 

 

 

6,637

 

12,986 13,395 

Non-Income Producing:

 

 

 

 

 

 

 

Non-Income Producing:

Properties under development

 

12,016

 

 

 

4,798

 

Investment real estateInvestment real estate2,190 2,190 

Investment real estate, net

$

18,474

 

 

$

11,435

 

Investment real estate, net$15,176 $15,585 

80

Table

During the year ended December 31, 2019, the Company completed the sale of Contents

an investment real estate property. The Company received net cash proceeds of approximately $10.5 million and recognized a pre-tax gain of approximately $1.2 million that is included in net realized gains (losses) on investments in the Consolidated Statements of Income for the year ended December 31, 2019.

Depreciation expense related to investment real estate for the periods presented (in thousands):
Years Ended December 31,
202020192018
Depreciation expense on investment real estate$415 $414 $410 

NOTE 4 – REINSURANCE

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 program consistsprograms 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 deductiblecertain retained loss amounts before reinsurance attaches and for insured losses related to catastrophes and other events in excess ofthat exceed coverage provided by itsthe reinsurance program.programs. The Company remains responsible for the settlement of insured losses irrespective of whether any of itsthe reinsurers fail to make payments otherwise due to the Company.

The Company eliminated the quota share ceded by UPCIC to its reinsurers beginning with the reinsurance program effective June 1, 2015. Under the quota share contracts that were effective June 1, 2014 through May 31, 2015, the quota share ceded by UPCIC to its reinsurers was 30%. By eliminating the quota share, the Company expects to increase its profitability by retaining all premiums. The elimination of the quota share also decreases the amount of losses and LAE that may be ceded by UPCIC and effectively increases the amount of risk retained by UPCIC and the Company. The elimination of the quota share also eliminates ceding commissions earned from the Company’s quota share reinsurer during the contract term and eliminates deferred ceding commissions, netted against deferred policy acquisition costs.

The following table presents quota-share cession rates by reinsurance program and the years they were in effect:

due.

Reinsurance Program

Cession Rate

June 2014 - May 2015

30%

June 2015 - May 2016

0%

June 2016 - May 2017

0%

June 2017 - May 2018

0%

Amounts recoverable from reinsurers are estimated in a manner consistent with the termsprovisions of the reinsurance contracts.contracts and consistent with the establishment of the gross liability for losses, LAE and other expenses. Reinsurance premiums, losses and LAE are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Ceding commissions received in connection with quota share reinsurance are deferred and netted against deferred policy acquisition costs and amortized over the effective period of the related insurance policies.

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 Company’s reinsurers whose aggregate balance exceeded 3% of the Company’s stockholders’ equity as of the dates presented (in thousands):

 

 

Ratings as of December 31, 2017

 

 

 

 

 

 

 

Standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Poor's

 

Moody's

 

Due from as of

 

 

 

AM Best

 

Rating

 

Investors

 

December 31,

 

Reinsurer

 

Company

 

Services

 

Service, Inc.

 

2017

 

 

2016

 

Allianz Risk Transfer

 

A+

 

AA-

 

n/a

 

$

105,573

 

 

$

—

 

Florida Hurricane Catastrophe Fund (1)

 

n/a

 

n/a

 

n/a

 

 

52,054

 

 

 

46,364

 

Renaissance Reinsurance Ltd

 

A+

 

AA-

 

A1

 

 

22,545

 

 

 

—

 

Total (2)

 

 

 

 

 

 

 

$

180,172

 

 

$

46,364

 

(1)

No rating is available, because the fund is not rated.

(2)

Amounts represent prepaid reinsurance premiums reinsurance receivables, net recoverables for paid and unpaid losses, including incurred but not reported reserves, loss adjustment expenses, and offsetting reinsurance payables.

 Ratings as of December 31, 2020 
  Standard   
AM Bestand Poor’s
Rating		Moody’s
Investors		Due from as of
December 31,
ReinsurerCompanyServices, Inc.Service, Inc.20202019
Florida Hurricane Catastrophe Fund “FHCF” (1)n/an/an/a$121,298 $199,647 
Allianz Risk Transfer (Bermuda) Ltd.A+AA-Aa396,652 0 
Allianz Risk TransferA+AA-Aa321,087 19,269 
Renaissance Reinsurance Ltd.A+A+A118,285 0 
Total (2)$257,322 $218,916 

81

(1)No rating is available, because the fund is not rated.
(2)Amounts represent prepaid reinsurance premiums and net recoverables for paid and unpaid losses, including incurred but not reported reserves, and loss adjustment expenses.
70

Table of Contents


The Company’s reinsurance arrangements had the following effect on certain items in the Consolidated Statements of Income for the periods presented (in thousands):

 

For the Year Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

Losses and Loss

 

 

Premiums

 

 

Premiums

 

 

Adjustment

 

For the Year Ended December 31, 2020

 

Written

 

 

Earned

 

 

Expenses

 

Premiums
Written		Premiums
Earned		Losses and Loss
Adjustment
Expenses

Direct

 

$

1,055,886

 

 

$

999,198

 

 

$

779,122

 

Direct$1,517,479 $1,395,623 $1,080,058 

Ceded

 

 

(318,826

)

 

 

(310,405

)

 

 

(428,694

)

Ceded(512,576)(472,060)(321,248)

Net

 

$

737,060

 

 

$

688,793

 

 

$

350,428

 

Net$1,004,903 $923,563 $758,810 

 

 

For the Year Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Losses and Loss

 

 

 

Premiums

 

 

Premiums

 

 

Adjustment

 

 

 

Written

 

 

Earned

 

 

Expenses

 

Direct

 

$

954,617

 

 

$

921,227

 

 

$

303,036

 

Ceded

 

 

(298,523

)

 

 

(288,811

)

 

 

(1,807

)

Net

 

$

656,094

 

 

$

632,416

 

 

$

301,229

 

 

For the Year Ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

Losses and Loss

 

 

Premiums

 

 

Premiums

 

 

Adjustment

 

For the Year Ended December 31, 2019

 

Written

 

 

Earned

 

 

Expenses

 

Premiums
Written		Premiums
Earned		Losses and Loss
Adjustment
Expenses

Direct

 

$

883,409

 

 

$

836,792

 

 

$

214,491

 

Direct$1,292,721 $1,233,121 $1,084,604 

Ceded

 

 

(256,961

)

 

 

(332,793

)

 

 

(26,752

)

Ceded(423,076)(390,619)(481,198)

Net

 

$

626,448

 

 

$

503,999

 

 

$

187,739

 

Net$869,645 $842,502 $603,406 

For the Year Ended December 31, 2018
Premiums
Written		Premiums
Earned		Losses and Loss
Adjustment
Expenses
Direct$1,190,875 $1,121,640 $1,325,323 
Ceded(363,201)(353,258)(910,868)
Net$827,674 $768,382 $414,455 
The following prepaid reinsurance premiums (payable) and reinsurance recoverable and receivable are reflected in the Consolidated Balance Sheets as of the dates presented (in thousands):

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Prepaid reinsurance premiums

 

$

132,806

 

 

$

124,385

 

 

 

 

 

 

 

 

 

 

Reinsurance recoverable on unpaid losses and LAE

 

$

182,405

 

 

$

106

 

Reinsurance recoverable (payable) on paid losses

 

 

—

 

 

 

(1,532

)

Reinsurance receivable, net

 

 

—

 

 

 

186

 

Reinsurance recoverable (payable) and receivable

 

$

182,405

 

 

$

(1,240

)

As of December 31,
20202019
Prepaid reinsurance premiums$215,723 $175,208 
Reinsurance recoverable on paid losses and LAE$40,895 $70,015 
Reinsurance recoverable on unpaid losses and LAE119,522 123,221 
Reinsurance recoverable$160,417 $193,236 

NOTE 5 – INSURANCE OPERATIONS

Deferred Policy Acquisition Costs net

The Company defers certain costs in connection with written policies,premium, called Deferred Policy Acquisition Costs (“DPAC”), net of corresponding amounts of ceded reinsurance commissions, called Deferred Reinsurance Ceding Commissions (“DRCC”). Net DPAC is amortized over the effective period of the related insurance and reinsurance policies.

82

71

Table of Contents


The following table presents the beginning and ending balances and the changes in DPAC net of DRCC, for the periods presented (in thousands):

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

DPAC, beginning of year

 

$

64,912

 

 

$

60,019

 

 

$

54,603

 

Capitalized Costs

 

 

144,849

 

 

 

130,243

 

 

 

116,954

 

Amortization of DPAC

 

 

(136,702

)

 

 

(125,350

)

 

 

(111,538

)

DPAC, end of year

 

$

73,059

 

 

$

64,912

 

 

$

60,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DRCC, beginning of year

 

$

—

 

 

$

—

 

 

$

28,943

 

Ceding Commissions Written

 

 

—

 

 

 

—

 

 

 

(5,276

)

Earned Ceding Commissions

 

 

—

 

 

 

—

 

 

 

(23,667

)

DRCC, end of year

 

$

—

 

 

$

—

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DPAC (DRCC), net, beginning of year

 

$

64,912

 

 

$

60,019

 

 

$

25,660

 

Capitalized Costs, net

 

 

144,849

 

 

 

130,243

 

 

 

122,230

 

Amortization of DPAC (DRCC), net

 

 

(136,702

)

 

 

(125,350

)

 

 

(87,871

)

DPAC (DRCC), net, end of year

 

$

73,059

 

 

$

64,912

 

 

$

60,019

 

Years Ended December 31,
202020192018
DPAC, beginning of year$91,882 $84,686 $73,059 
Capitalized Costs217,886 184,039 174,814 
Amortization of DPAC(199,154)(176,843)(163,187)
DPAC, end of year$110,614 $91,882 $84,686 

Regulatory Requirements and Restrictions

The Insurance Entities are subject to regulations and standards of the FLOIR. UPCICFlorida Office of Insurance Regulation (“FLOIR”). The 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”, formerly known as Universal Insurance Holding Company of the Florida (“UVECF”)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, 2017,2020, UPCIC has the capacity to pay ordinary dividends of $36.2$2.1 million during 2018.2021. APPCIC, does not meet the earning’s or surplus regulatory requirementsbased on its accumulated earnings history as of December 31, 2020, is unable to pay any ordinary dividends during 2018.2021. For the yearyears ended December 31, 2017, UPCIC paid dividends of $30.0 million to UVECF. No2020 and 2019, 0 dividends were paid from APPCICthe Insurance Entities to UVECF for the year ended December 31, 2017.  

PSI.

The Florida Insurance Code requires an insurance companiescompany to maintain capitalization equivalent to the greater of ten10 percent of the insurer’s total liabilities but not less thanor $10.0 million. The following table presents the amount of capital and surplus calculated in accordance with statutory accounting principles, which differ from U.S. GAAP, and an amount representing ten percent of total liabilities for both UPCIC and APPCICthe Insurance Entities as of the dates presented (in thousands):

 

As of December 31,

 

 

2017

 

 

2016

 

As of December 31,
2020 (1)2019 (2)
Statutory capital and surplusStatutory capital and surplus
UPCICUPCIC$360,707 $301,120 
APPCICAPPCIC$12,918 $16,433 

Ten percent of total liabilities

 

 

 

 

 

 

 

 

Ten percent of total liabilities

UPCIC

 

$

72,633

 

 

$

57,560

 

UPCIC$98,682 $99,228 

APPCIC

 

$

572

 

 

$

464

 

APPCIC$1,793 $621 

Statutory capital and surplus

 

 

 

 

 

 

 

 

UPCIC

 

$

307,686

 

 

$

313,753

 

APPCIC

 

$

16,633

 

 

$

17,280

 

(1)Statutory capital and surplus for UPCIC at December 31, 2020 includes a $77 million capital contribution funded in February 2021 by UVE through PSI, the Insurance Entities’ parent company, which the FLOIR permitted to be included in the statutory capital and surplus at December 31, 2020 under statutory accounting principles. This contribution was not recognized on a U.S. GAAP basis at December 31, 2020.
(2)Statutory capital and surplus for UPCIC at December 31, 2019 includes a $30 million capital contribution funded in February 2020 by UVE through PSI, the Insurance Entities’ parent company, which the FLOIR permitted to be included in the statutory capital and surplus at December 31, 2019 under statutory accounting principles. This contribution was not recognized on a U.S. GAAP basis at December 31, 2019.
As of the dates in the table above, both UPCIC and APPCICthe Insurance Entities each exceeded the minimum statutory capitalization requirement. UPCIC also met the capitalization requirements of the other states in which it is licensed as of December 31, 2017. UPCIC and APPCIC2020. The Insurance Entities each are also required to adhere to prescribed premium-to-capital surplus ratios and each have met those requirements at such dates. Combined
72

Through PSI, UVE recorded contributions for the periods presented (in thousands):
Years Ended December 31,
202020192018
Capital Contributions - UPCIC$114,000 $0 $0 
The following table summarizes combined net income (loss) for UPCIC and APPCIC, asthe Insurance Entities determined in accordance with statutory accounting practices is $35.6 million, $58.2 million and $53.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.

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Through UVECF, the Insurance Entities’ parent company, UVE made capital contributions for the periods presented (in thousands):

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016*

 

 

2015

 

Capital Contributions

 

$

—

 

 

$

2,000

 

 

$

—

 

Years Ended December 31,
202020192018
Combined net income (loss)$(104,339)$(49,917)$3,118 

*UVECF made this contribution to APPCIC’s capital in conjunction with APPCIC’s request for FLOIR approval to transact commercial residential insurance products in Florida.

The FLOIR granted APPCIC’s request.

UPCIC and APPCICInsurance Entities each are required annually to comply with the NAIC risk-based capital (“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 RBC requirements are used by regulators to determine appropriate regulatory actions relating to insurers who show signs of a weak or deteriorating condition. As of December 31, 2017,2020, based on calculations using the appropriate NAIC RBC formula, UPCIC’s and APPCIC’sthe Insurance Entities each reported total adjusted capital was in excess of the requirements.

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):

 

As of December 31,

 

As of December 31,

 

2017

 

 

2016

 

20202019

Restricted cash and cash equivalents

 

$

2,635

 

 

$

2,635

 

Restricted cash and cash equivalents$2,635 $2,635 

Investments

 

$

3,910

 

 

$

3,952

 

Investments$3,550 $3,419 

NOTE 6 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of the dates presented (in thousands):

 

As of December 31,

 

As of December 31,

 

2017

 

 

2016

 

20202019

Land

 

$

4,489

 

 

$

4,489

 

Land$5,344 $5,344 

Building

 

 

17,644

 

 

 

17,633

 

Building24,091 24,091 

Computers

 

 

5,589

 

 

 

5,577

 

Computers9,186 7,885 

Furniture

 

 

1,637

 

 

 

1,381

 

Furniture2,012 2,002 

Automobiles and other vehicles

 

 

6,857

 

 

 

5,523

 

Automobiles and other vehicles11,544 9,481 

Software

 

 

2,646

 

 

 

2,035

 

Software7,166 2,835 

Total

 

 

38,862

 

 

 

36,638

 

Total59,343 51,638 

Less: Accumulated depreciation

 

 

(10,829

)

 

 

(8,527

)

Net of accumulated deprecation

 

 

28,033

 

 

 

28,111

 

Less: Accumulated depreciation and amortizationLess: Accumulated depreciation and amortization(20,043)(17,074)
Net of accumulated depreciation and amortizationNet of accumulated depreciation and amortization39,300 34,564 

Construction in progress

 

 

4,833

 

 

 

4,051

 

Construction in progress14,272 6,787 

Property and equipment, net

 

$

32,866

 

 

$

32,162

 

Property and equipment, net$53,572 $41,351 

Depreciation and amortization expense was $3.9$4.7 million, $3.1$4.5 million and $1.9$4.4 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.

The following table provides realized gains (losses) on the disposal of property and equipment during the periods presented (in thousands):

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Realized gain (loss) on disposal

 

$

(35

)

 

$

(31

)

 

$

(26

)


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NOTE 7 – LONG-TERM DEBT

Long-term debt consists of the following as of the dates presented (in thousands):

 

As of December 31,

 

 

2017

 

 

2016

 

Surplus note

$

12,868

 

 

$

14,338

 

Promissory note

 

—

 

 

 

690

 

Total

$

12,868

 

 

$

15,028

 

As of December 31,
20202019
Surplus note$8,456 $9,926 

Surplus Note

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 $12.9$8.5 million as of December 31, 2017.

2020.

The effective interest rate paid on the surplus note was 2.31%1.05%, 1.88%2.32% and 2.21%2.89% for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively. Any payment of principal or interest by UPCIC on the surplus note must be approved by the Commissioner of the OIR.FLOIR. Quarterly principal payments of $368 thousand are due through 2026. Aggregate principal payments of approximately $1.5 million were made during each of the years ended December 31, 2017, 20162020, 2019 and 2015.

2018.

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, 2017,2020, 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.

the penalty rate.

Maturities

The following table provides an estimate of principal payments to be made for the amounts due on the surplus note as of December 31, 20172020 (in thousands):

2018

 

$

1,471

 

2019

 

 

1,471

 

2020

 

 

1,471

 

2021

 

 

1,471

 

2021$1,471 

2022

 

 

1,471

 

20221,471 
202320231,471 
202420241,471 
202520251,471 

Thereafter

 

 

5,513

 

Thereafter1,101 

Total

 

$

12,868

 

Total$8,456 

Interest Expense

Interest expense was $0.3$0.1 million, $0.4$0.2 million, and $1.0$0.3 million for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.

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NOTE 8 – STOCKHOLDERS’ EQUITY

Cumulative Convertible Preferred Stock

As of December 31, 20172020 and 2016,2019, the Company had shares outstanding of Series A Preferred Stock. Each share of Series A Preferred Stock is convertible by the Company into shares of Common Stock.

common stock.

74

The following table provides certain information for the convertible Series A preferred stock as of the dates presented (in thousands, except conversion factor):

 

As of December 31,

 

 As of December 31,

 

2017

 

 

2016

 

 20202019

Shares issued and outstanding

 

 

10

 

 

 

10

 

Shares issued and outstanding10 10 

Conversion factor

 

 

2.50

 

 

 

2.50

 

Conversion factor2.50 2.50 

Common shares resulting if converted

 

 

25

 

 

 

25

 

Common shares resulting if converted25 25 

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, 20172020 and 2016.

2019.

Common Stock

The following table summarizes

Shares Repurchased
From time to time, the activity relating toCompany’s Board of Directors may authorize share repurchase programs under which the Company may repurchase shares of the Company’s Common Stock during the periods presented (in thousands):

 

 

Issued

 

 

Treasury

 

 

Outstanding

 

 

 

Shares

 

 

Shares

 

 

Shares

 

Balance, as of December 31, 2014

 

 

44,769

 

 

 

(9,667

)

 

 

35,102

 

Shares repurchased

 

 

—

 

 

 

(748

)

 

 

(748

)

Options exercised

 

 

751

 

 

 

—

 

 

 

751

 

Restricted stock grant

 

 

615

 

 

 

—

 

 

 

615

 

Shares acquired through cashless exercise (1)

 

 

—

 

 

 

(610

)

 

 

(610

)

Shares cancelled

 

 

(610

)

 

 

610

 

 

 

—

 

Balance, as of December 31, 2015

 

 

45,525

 

 

 

(10,415

)

 

 

35,110

 

Shares repurchased

 

 

—

 

 

 

(441

)

 

 

(441

)

Shares reissued

 

 

—

 

 

 

584

 

 

 

584

 

Options exercised

 

 

124

 

 

 

—

 

 

 

124

 

Shares acquired through cashless exercise (1)

 

 

—

 

 

 

(325

)

 

 

(325

)

Shares cancelled

 

 

(325

)

 

 

325

 

 

 

—

 

Balance, as of December 31, 2016

 

 

45,324

 

 

 

(10,272

)

 

 

35,052

 

Shares repurchased

 

 

—

 

 

 

(771

)

 

 

(771

)

Vesting of performance share units

 

 

115

 

 

 

—

 

 

 

115

 

Shares reissued

 

 

—

 

 

 

—

 

 

 

—

 

Options exercised

 

 

804

 

 

 

—

 

 

 

804

 

Common stock issued

 

 

26

 

 

 

—

 

 

 

26

 

Shares acquired through cashless exercise (1)

 

 

—

 

 

 

(491

)

 

 

(491

)

Shares cancelled

 

 

(491

)

 

 

491

 

 

 

—

 

Balance, as of December 31, 2017

 

 

45,778

 

 

 

(11,043

)

 

 

34,735

 

(1)

All shares acquired represent shares tendered to cover the strike price for options and tax withholdings on the intrinsic value of options exercised or performance share units or restricted stock (as defined in “—Note 9 (Share-Based Compensation)”) vested. These shares have been cancelled by the Company.

In April 2016, the Company sold 583,771 shares of UVE common stock in a private placement to RenRe Ventures at a price of $17.13 per share for total consideration of $10 million, which was comprised of $2.965 million in cash and $7.035 million in cancellation of outstanding indebtedness, including accrued interest.

In June 2016, UVE announced that its Board of Directors authorized a share repurchase program under which UVE may repurchase in the open market in compliance with Exchange Act Rule 10b-18 up to $20 million of its outstanding shares of common stock through December 31, 2017. UVE repurchased 861,296 shares, at an aggregate price of approximately $20.0 million, pursuant to such repurchase program through December 31, 2017.

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Table of Contents

In September 2017, the Board of Directors authorized a share repurchase program under which UVE may repurchase in the open market in compliance with Exchange Act Rule 10b-18, up to $20 million of its outstanding shares of common stock through December 31, 2018. UVE repurchased 8,192 shares, at an aggregate price of approximately $0.2 million, pursuant to such repurchase program through December 31, 2017.

During the year ended December 31, 2017, UVE repurchased an aggregate of 770,559 shares of its common stock in the open market in compliance with Exchange Act Rule 10b-18 at amarket. The following table presents repurchases of the Company’s common stock for the periods presented (in thousands, except total costnumber of $18.1 million.

shares repurchased and per share data):

Total Number of SharesAverage
DollarRepurchased During the YearAggregatePrice per
ExpirationAmountEnded December 31,PurchaseSharePlan
Date AuthorizedDateAuthorized20202019PriceRepurchasedCompleted
November 3, 2020November 3, 2022$20,000 45,705 0 $593 $12.98 
November 6, 2019December 31, 2021$40,000 1,565,078 403,142 $40,000 $20.32 November 2020
May 6, 2019December 31, 2020$40,000 0 1,466,575 $40,000 $27.27 November 2019
December 12, 2018May 31, 2020$20,000 0 468,108 $14,513 $31.00 May 2019
Dividends Declared

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):

 

For the Years Ended December 31,

 

 

2017

 

 

2016

 

 

2015

 

 For the Years Ended December 31,

 

Per Share

 

 

Aggregate

 

 

Per Share

 

 

Aggregate

 

 

Per Share

 

 

Aggregate

 

 202020192018

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

Per Share
Amount		Aggregate
Amount (1)		Per Share
Amount		Aggregate
Amount (1)		Per Share
Amount		Aggregate
Amount (1)

First Quarter

 

$

0.14

 

 

$

4,932

 

 

$

0.14

 

 

$

4,915

 

 

$

0.12

 

 

$

4,237

 

First Quarter$0.16 $5,219 $0.16 $5,572 $0.14 $4,904 

Second Quarter

 

$

0.14

 

 

$

4,887

 

 

$

0.14

 

 

$

4,913

 

 

$

0.12

 

 

$

4,283

 

Second Quarter$0.16 $5,164 $0.16 $5,545 $0.14 $4,920 

Third Quarter

 

$

0.14

 

 

$

4,830

 

 

$

0.14

 

 

 

4,903

 

 

$

0.12

 

 

$

4,275

 

Third Quarter$0.16 $5,130 $0.16 $5,476 $0.16 $5,592 

Fourth Quarter

 

$

0.27

 

 

 

9,392

 

 

$

0.27

 

 

 

9,461

 

 

$

0.27

 

 

$

9,492

 

Fourth Quarter$0.29 $9,092 $0.29 $9,516 $0.29 $10,130 

(1)Includes dividend equivalents due to employees who hold performance share units or restricted share units which are subject to time-vesting conditions.
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.

75

Restrictions limiting the payment of dividends by UVE

UVE pays dividends to shareholders, which are funded by earnings on investments and distributions from the earnings of its consolidated subsidiaries. Generally, other than as disclosed above and in “—Note 7 (Long-Term(Long-Term Debt),” there are no restrictions for UVE limiting the payment of dividends. However, UVE’s ability to pay dividends to shareholders may be affected by restrictions on the ability of the Insurance Entities to pay dividends to UVE through UVECF.PSI. See “—Note 5 (Insurance(Insurance Operations),” for a discussion of these restrictions. There are no such restrictions for UVE’s non-insurance consolidated subsidiaries. Notwithstanding the restriction on the net assets of the Insurance Entities, UVE received distributions from the earnings of its non-insurance consolidated subsidiaries of $122.2$151.0 million, $46.9$121.3 million and $58.2$96.6 million during the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively. DuringUVE made capital contributions of $114.0 million to UPCIC during the year ended December 31, 2016,2020. See “—Note 5(Insurance Operations),” for details of the capital contributions UVE made a capital contributionto UPCIC and the timing of $2.0 million to APPCIC, in conjunction with APPCIC’s plan to begin writing commercial residential products in Florida. There were nosuch contributions. UVE did 0t make any capital contributions by UVE to the Insurance EntitiesUPCIC during the years ended December 31, 20172019 and 2015. 2018. There were 0 capital contributions by UVE to APPCIC during the years ended December 31, 2020, 2019 and 2018,
The Company prepares and files a consolidated federal tax return for UVE and its consolidated subsidiaries with all U.S. GAAP tax related entries recorded on the books of UVE.

subsidiaries.

NOTE 9 – SHARE-BASED COMPENSATION

Equity Compensation Plan

Under the Company’s 2009 Omnibus Incentive Plan, as amended (the “Incentive Plan”), 2,064,493927,525 shares remained reserved for issuance and were available for new awards under the Incentive Plan as of December 31, 2017.

2020.

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 Stockcommon stock, restricted stock awards (“Restricted Stock”), restricted stock units, 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.

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Table of Contents

The following table provides certain information related to Stock Options, Restricted Stock, PSUs and PSUs duringRSUs for the year ended December 31, 20172020 (in thousands, except per share data):

 

For the Year Ended December 31, 2017

 

 

Stock Options

 

 

Performance

Share Units

 

For the Year Ended December 31, 2020

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

Stock OptionsRestricted StockPerformance
Share Units		Restricted
Stock Units

 

 

 

 

 

Average

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

Number of
Options (2)		Weighted
Average
Exercise
Price per
Share (1)		Aggregate
Intrinsic
Value		Weighted
Average
Remaining
Term		Number of Shares (2)Weighted
Average
Grant Date
Fair Value
per Share (1)		Number
of Share
Units (2)		Weighted
Average
Grant Date
Fair Value
per Share Units (1)		Number of Share Units (2)Weighted Average Grant Date Fair Value per Share Units (1)

 

 

 

 

 

Exercise

 

 

Aggregate

 

 

Average

 

 

Number

 

 

Grant Date

 

 

Number of

 

 

Price per

 

 

Intrinsic

 

 

Remaining

 

 

of Share

 

 

Fair Value

 

 

Options (2)

 

 

Share (1)

 

 

Value

 

 

Term

 

 

Units (2)

 

 

per Share (1)

 

Outstanding as of December 31, 2016

 

 

3,214

 

 

$

15.77

 

 

 

 

 

 

 

 

 

 

 

173

 

 

$

23.18

 

Outstanding as of
December 31, 2019		Outstanding as of
December 31, 2019		2,025 $27.28 16 $30.85 149 $32.13 25 $26.47 

Granted

 

 

797

 

 

 

27.20

 

 

 

 

 

 

 

 

 

 

 

147

 

 

 

27.20

 

Granted1,214 17.77 0 0 0 0 342 16.13 

Forfeited

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

n/a

 

 

n/a

 

Forfeited(5)31.64 0 0 0 0 0 0 

Exercised

 

 

(804

)

 

 

6.95

 

 

 

 

 

 

 

 

 

 

n/a

 

 

n/a

 

Exercised0 0 n/an/an/an/an/an/a

Vested

 

n/a

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

(115

)

 

 

23.18

 

Vestedn/an/a(16)30.85 (83)31.76 (90)19.49 

Expired

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

n/a

 

 

n/a

 

Expired(132)22.84 n/an/an/an/an/an/a

Outstanding as of December 31, 2017

 

 

3,207

 

 

$

20.82

 

 

$

20,935

 

 

 

6.18

 

 

 

205

 

 

$

26.07

 

Exercisable as of December 31, 2017

 

 

1,325

 

 

$

18.62

 

 

$

11,570

 

 

 

4.47

 

 

 

 

 

 

 

 

 

Outstanding as of
December 31, 2020		Outstanding as of
December 31, 2020		3,102 $23.74 $32 7.220 $0 66 $32.59 277 $15.97 
Exercisable as of
December 31, 2020		Exercisable as of
December 31, 2020		1,653 $26.00 $0 5.67

(1)Unless otherwise specified, such as in the case of the exercise of Stock Options, the per share prices were determined using the closing price of the Company’s Common Stock as quoted on the exchanges on which the Company was listed. Shares issued upon exercise of options represent original issuances in private transactions pursuant to Section 4(2) of the Securities Act of 1933, as amended or issuances under the Company’s Incentive Plan.
(2)All shares outstanding as of December 31, 2020, are expected to vest.

(1)

Unless otherwise specified, such as in the case of the exercise of Stock Options, the per share prices were determined using the closing price of the Company’s Common Stock as quoted on the exchanges on which the Company was listed. Shares issued upon exercise of options represent original issuances in private transactions pursuant to Section 4(2) of the Securities Act of 1933, as amended or issuances under the Company's Incentive Plan.

n/aNot applicable

(2)

All shares outstanding as of December 31, 2017 are expected to vest.

76

n/a

Not applicable

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The following table provides certain information in connection with the Company’s share-based compensation arrangements for the periods presented (in thousands):

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Compensation expense:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

$

6,907

 

 

$

3,641

 

 

$

1,389

 

Restricted stock

 

 

—

 

 

 

3,433

 

 

 

15,997

 

Performance share units

 

 

3,608

 

 

 

3,214

 

 

 

—

 

Total

 

$

10,515

 

 

$

10,288

 

 

$

17,386

 

Deferred tax benefits:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

$

2,640

 

 

$

1,392

 

 

$

532

 

Restricted stock

 

 

—

 

 

 

1,312

 

 

 

4,816

 

Performance share units

 

 

1,379

 

 

 

1,229

 

 

 

—

 

Total

 

$

4,019

 

 

$

3,933

 

 

$

5,348

 

Realized tax benefits:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

$

5,831

 

 

$

724

 

 

$

5,369

 

Restricted stock

 

 

—

 

 

 

4,326

 

 

 

—

 

Performance share units

 

 

1,264

 

 

 

—

 

 

 

—

 

Total

 

$

7,095

 

 

$

5,050

 

 

$

5,369

 

Excess tax benefits (shortfall) (1):

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

$

5,548

 

 

$

642

 

 

$

5,310

 

Restricted stock

 

 

—

 

 

 

(1,796

)

 

 

—

 

Performance share units

 

 

245

 

 

 

—

 

 

 

—

 

Total

 

$

5,793

 

 

$

(1,154

)

 

$

5,310

 

Weighted average fair value per option or share:

 

 

 

 

 

 

 

 

 

 

 

 

Stock option grants

 

$

10.18

 

 

$

6.01

 

 

$

6.34

 

Restricted stock grants

 

$

—

 

 

$

—

 

 

$

26.04

 

Performance share unit grants

 

$

27.20

 

 

$

23.18

 

 

$

—

 

Intrinsic value of options exercised

 

$

15,256

 

 

$

1,894

 

 

$

14,734

 

Fair value of restricted stock vested

 

$

—

 

 

$

11,319

 

 

$

17,505

 

Fair value of performance share units vested

 

$

3,307

 

 

$

—

 

 

$

—

 

Cash received for strike price and tax withholdings

 

$

—

 

 

$

119

 

 

$

519

 

Shares acquired through cashless exercise (2)

 

 

491

 

 

 

325

 

 

 

611

 

Value of shares acquired through cashless exercise (2)

 

$

12,808

 

 

$

6,238

 

 

$

15,445

 

(1)

Excess tax benefits (shortfalls) for the years ended December 31, 2016 and 2015 were recognized in additional paid in capital and within income through December 31, 2017.

(2)

All shares acquired represent shares tendered to cover the strike price for options and tax withholdings on the intrinsic value of options exercised, Restricted Stock vested or PSUs vested. These shares have been canceled by the Company.

Years Ended December 31,
202020192018
Compensation expense:
Stock options$4,519 $6,516 $7,579 
Restricted stock514 3,104 609 
Performance share units945 2,508 4,598 
Restricted stock units2,717 880 0 
Total$8,695 $13,008 $12,786 
Deferred tax benefits:
Stock options$719 $1,522 $1,877 
Restricted stock0 47 8 
Performance share units52 185 945 
Restricted stock units106 0 0 
Total$877 $1,754 $2,830 
Realized tax benefits:
Stock options$0 $577 $7,957 
Restricted stock0 37 0 
Performance share units275 1,163 920 
Restricted stock units0 0 0 
Total$275 $1,777 $8,877 
Excess tax benefits (shortfall):
Stock options$(209)$415 $5,330 
Restricted stock0 (18)0 
Performance share units(28)244 97 
Restricted stock units0 0 0 
Total$(237)$641 $5,427 
Weighted average fair value per option or share:
Stock option grants$3.67 $9.82 $11.74 
Restricted stock grants$0 $30.73 $33.64 
Performance share unit grants$0 $33.47 $32.51 
Restricted stock unit grants$16.13 $26.47 $0 
Intrinsic value of options exercised$0 $2,343 $32,217 
Fair value of restricted stock vested$252 $2,783 $632 
Fair value of performance share units vested$2,151 $5,520 $3,726 
Fair value of restricted stock units vested$1,559 $657 $0 
Cash received for strike price and tax withholdings$0 $238 $120 
Shares acquired through cashless exercise (1)64 186 1,361 
Value of shares acquired through cashless exercise (1)$1,315 $6,133 $49,199 

(1)All shares acquired represent shares tendered to cover the strike price for options and tax withholdings on the intrinsic value of Stock Options exercised, Restricted Stock vested, PSUs vested or RSUs vested. These shares have been canceled by the Company.
77

The following table provides the amount of unrecognized compensation expense as of the most recent balance sheet date and the weighted average period over which those expenses will be recorded for both Stock Options, Restricted Stock, PSUs and PSUsRSUs (dollars in thousands):

 

As of December 31, 2017

 

 

Stock

 

 

Performance

 

As of December 31, 2020

 

Options

 

 

Share Units

 

Stock
Options		Restricted StockPerformance
Share Units		Restricted
Stock Units

Unrecognized expense

 

$

9,064

 

 

$

1,176

 

Unrecognized expense$4,193 $0 $297 $3,235 

Weighted average remaining years

 

 

1.69

 

 

 

1.31

 

Weighted average remaining years1.92—0.981.32

Stock Options

Stock Options granted by the Company generally expire between 5five to 10ten years from the grant date and generally vest over a 1one- to 3 yearthree-year service period commencing on the grant date.

The Company used the modified Black-Scholes model to estimate the fair value of employee Stock Options on the date of grant utilizing the assumptions noted below. The risk-free rate is based on the U.S. Treasury bill yield curve in effect at the time of grant for the expected term of the option. The expected term of options granted represents the period of time that the options are expected to be

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outstanding. Expected volatilities are based on historical volatilities of our Common Stock. The dividend yield was based on expected dividends at the time of grant.

The following table provides the assumptions utilized in the Black-Scholes model for Stock Options granted during the periods presented:

 

Years Ended December 31,

 

 Years Ended December 31,

 

2017

 

 

2016

 

 

2015

 

 202020192018

Weighted-average risk-free interest rate

 

 

1.94

%

 

 

1.40

%

 

 

0.54

%

Weighted-average risk-free interest rate0.49 %2.44 %2.69 %

Expected term of option in years

 

 

5.84

 

 

 

5.44

 

 

 

3.38

 

Expected term of option in years6.006.006.00

Weighted-average volatility

 

 

45.1

%

 

 

45.2

%

 

 

44.3

%

Weighted-average volatility35.8 %38.1 %40.2 %

Dividend yield

 

 

2.0

%

 

 

3.4

%

 

 

3.4

%

Dividend yield4.3 %2.4 %1.7 %

Weighted average grant date fair value per share

 

$

10.18

 

 

$

6.01

 

 

$

6.34

 

Weighted average grant date fair value per share$3.67 $9.82 $11.74 

Restricted Stock, Grants

Performance Share Units and Restricted Stock grantsUnits

Restricted Stock, Performance Share Units and Restricted Stock Units are awarded to certain employees in consideration for services rendered pursuant to terms of employment agreements and or to provide to those employees with a continued incentive to share in the success of the Company. Restricted Stock generally vests over a three yearone to three-year service period commencing on the grant date.

Performance Share Units

PSUs are awarded to certain employees in consideration for services rendered pursuant to terms of employment agreements and provide those employees with a continued incentive to share in the success of the Company. Each performance share unit has a value equal to one1 share of common stock and generally vests over a three yearthree-year service period commencing on the grant date.

Each restricted stock unit has a value equal to 1 share of common stock and generally vests over a one to three-year service period commencing on the grant date.

NOTE 10 – EMPLOYEE BENEFIT PLAN

Effective January 1, 2009, the Company adopted a qualified retirement plan covering substantially all employees. It is designed to help the employees meet their financial needs during their retirement years. Eligibility for participation in the plan is generally based on employee’s date of hire or on completion of a specified period of service. Employer contributions to this plan are made in cash.

The plan titled the “Universal Property & Casualty 401(K)401(k) Profit Sharing Plan and Trust”Plan” (the “401(k) Plan”) is a defined contribution plan that allows employees to defer compensation through contributions to the 401(k) Plan. The contributions are invested on the employees’ behalf, and the benefits paid to employees are based on contributions and any earnings or loss.losses. The 401(k) Plan includes a Company contribution of 100 percent of each eligible participant’s contribution that does not exceed fiveup to a maximum of 5 percent of theirthe participant’s compensation during the 401(k) Plan year. The Company may make additional profit-sharing contributions. However, no0 additional profit-sharing contribution was made during the years ended December 31, 2017, 20162020, 2019 and 2015.

2018.

The Company accrued for aggregate contributions of approximately $1.6$2.6 million, $1.2$2.2 million and $1.0$1.8 million to the 401(k) Plan duringfor the years ended December 31, 2017, 20162020, 2019 and 2015,2018, respectively.


NOTE 11 – RELATED PARTY TRANSACTIONS

Scott P. Callahan, a director of the Company, provided the Company with consulting services and advice with respect to the Company’s reinsurance and related matters through SPC Global RE Advisors LLC, an entity affiliated with Mr. Callahan. The Company entered into the consulting agreement with SPC Global RE Advisors LLC effective June 6, 2013. The Company and SPC Global RE Advisors LLC terminated the consulting agreement on September 18, 2015 by mutual consent.

The following table provides payments made by the Company to related parties for the periods presented (in thousands):

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

SPC Global RE Advisors LLC

 

$

—

 

 

$

—

 

 

$

90

 

There were no amounts due to SPC Global RE Advisors LLC as ofrelated party transactions for the years ended December 31, 2015. Payments due to SPC Global RE Advisors LLC were generally made in the month the services were provided.

90

2020, 2019 and 2018.

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NOTE 12 – INCOME TAXES

Significant components of the income tax provision are as follows for the periods presented (in thousands):

 

For the Years Ended December 31,

 

For the Years Ended December 31,

 

2017

 

 

2016

 

 

2015

 

202020192018

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Current:

Federal

 

$

53,962

 

 

$

50,645

 

 

$

61,830

 

Federal$1,988 $12,328 $31,981 

State and local

 

 

8,278

 

 

 

8,105

 

 

 

7,402

 

State and local349 2,703 7,581 

Total current expense (benefit)

 

 

62,240

 

 

 

58,750

 

 

 

69,232

 

Total current expenseTotal current expense2,337 15,031 39,562 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred:

Federal

 

 

851

 

 

 

4,106

 

 

 

(775

)

Federal2,403 1,622 (3,487)

State and local

 

 

458

 

 

 

617

 

 

 

82

 

State and local386 350 (253)

Total deferred expense (benefit)

 

 

1,309

 

 

 

4,723

 

 

 

(693

)

Total deferred expense (benefit)2,789 1,972 (3,740)

Income tax expense

 

$

63,549

 

 

$

63,473

 

 

$

68,539

 

Income tax expense$5,126 $17,003 $35,822 

The following table reconciles the statutory federal income tax rate to the Company’s effective income tax rate for the periods presented:

 

For the Years Ended December 31,

 

 

2017

 

 

2016

 

 

2015

 

For the Years Ended December 31,

Expected provision at federal statutory tax rate

 

 

35.0

%

 

 

35.0

%

 

 

35.0

%

202020192018
Federal statutory tax rateFederal statutory tax rate21.0 %21.0 %21.0 %

Increases (decreases) resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

Increases (decreases) resulting from:

State income tax, net of federal tax benefit

 

 

3.2

%

 

 

3.2

%

 

 

3.4

%

State income tax, net of federal tax benefit3.1 %3.7 %3.8 %

Effect of change in tax rate

 

 

2.8

%

 

 

—

 

 

 

0.1

%

Effect of change in tax rate0.5 %0.3 %0 

Disallowed meals & entertainment

 

 

0.4

%

 

 

0.3

%

 

 

0.2

%

Disallowed meals & expensesDisallowed meals & expenses0.4 %0.7 %0.3 %

Disallowed compensation

 

 

0.4

%

 

 

0.4

%

 

 

1.1

%

Disallowed compensation6.2 %3.2 %1.3 %

Excess tax benefit

 

 

(3.4

%)

 

 

—

 

 

 

—

 

Liability adjustmentLiability adjustment(9.7)%0 0 
Excess tax (benefit) shortfallExcess tax (benefit) shortfall0.4 %(1.0)%(3.5)%

Other, net

 

 

(1.1

%)

 

 

0.1

%

 

 

(0.6

%)

Other, net(0.7)%(1.1)%0.5 %

Total income tax expense (benefit)

 

 

37.3

%

 

 

39.0

%

 

 

39.2

%

Effective income tax rateEffective income tax rate21.2 %26.8 %23.4 %

During

The Company recognized excess income tax shortfall of $0.2 million during the year ended December 31, 2017, the Company’s2020 and excess income tax benefit of $5.8$0.6 million was reflected as anduring the year ended December 31, 2019 from stock-based compensation awards that vested and/or were exercised. Excess income tax benefitbenefits (shortfalls) are reflected in the consolidated statements of income as a component of the provision for income taxes as a result of the adoption of the accounting guidance for share-based payment transactions. See “–Note 2 (Significant Accounting Policies – Recently Adopted Accounting Pronouncements)” for more information.

Recent changestaxes.

Changes in federal tax law and applicable statutory rates have affected the Company’s balances of deferred income tax assets and liabilities. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. Under US GAAP,The Tax Act amended the effectdefinition of a change in tax law is recorded discretely as a componentannual rate and the computational rules for loss payment patterns. The Tax Act also provided transitional rules for the application of the income tax provision related to continuing operationsamendments in the first taxable year beginning after December 31, 2017. Under the transitional rules, the Company is required to revalue discounted loss reserves under the new computational rules of the Tax Act and include in income that adjustment over an eight-year period in gross income of enactment.the Company. The effect of thethis change in tax law resulted in a reduction to the Company’s net deferred income tax assets of $4.7 million and a corresponding offsetan immaterial adjustment to income tax expense in the consolidated statement of income for the year ended December 31, 2017.

In addition, during the year ended December 31, 2017, the Company recorded another discrete item as a credit to income tax expense of $1.2 million resulting from anticipated recoveries of income taxes paid for the 2014-2015 tax years.

Additional factors giving rise to the differences in the Company’s effective tax rate, when compared to statutory rates in the current and prior years, include non-deductible executive compensation, tax-exempt interest income, and the current expansion outside of Florida into non-income taxing state jurisdictions.

91

2018 through 2020.

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The Company accounts for income taxes using a balance sheet approach. As of December 31, 20172020 and 2016,2019, the significant components of the Company’s deferred income taxes consisted of the following (in thousands):

 

As of December 31,

 

As of December 31,

 

2017

 

 

2016

 

20202019

Deferred income tax assets:

 

 

 

 

 

 

 

 

Deferred income tax assets:

Unearned premiums

 

$

19,916

 

 

$

26,861

 

Unearned premiums$27,496 $23,925 

Advanced premiums

 

 

1,275

 

 

 

1,314

 

Advanced premiums2,325 1,493 

Unpaid losses and LAE

 

 

385

 

 

 

374

 

Unpaid losses and LAE2,375 1,660 

Share-based compensation

 

 

3,894

 

 

 

3,256

 

Share-based compensation4,065 3,837 

Accrued wages

 

 

288

 

 

 

297

 

Accrued wages180 189 

Allowance for uncollectible receivables

 

 

224

 

 

 

284

 

Allowance for uncollectible receivables203 212 

Additional tax basis of securities

 

 

33

 

 

 

51

 

Additional tax basis of securities0 33 

Capital loss carryforwards

 

 

822

 

 

 

759

 

Capital loss carryforwards0 3,143 

Other comprehensive income

 

 

2,544

 

 

 

3,982

 

Other

 

 

84

 

 

 

131

 

Total deferred income tax assets

 

 

29,465

 

 

 

37,309

 

Total deferred income tax assets36,644 34,492 

Valuation allowance

 

 

(523

)

 

 

(133

)

Deferred income tax assets, net of valuation allowance

 

 

28,942

 

 

 

37,176

 

Deferred income tax liabilities:

 

 

 

 

 

 

 

 

Deferred income tax liabilities:

Deferred policy acquisition costs, net

 

 

(18,205

)

 

 

(24,812

)

Deferred policy acquisition costs, net(26,442)(22,613)

Prepaid expenses

 

 

(435

)

 

 

(504

)

Fixed assets

 

 

(881

)

 

 

(880

)

Fixed assets(2,313)(959)
Unrealized gain/lossUnrealized gain/loss(51)(1,480)
Other comprehensive incomeOther comprehensive income(1,052)(5,197)
Unpaid loss and LAE transition adjustmentUnpaid loss and LAE transition adjustment(436)(563)

Other

 

 

(135

)

 

 

(306

)

Other(66)(329)

Total deferred income tax liabilities

 

 

(19,656

)

 

 

(26,502

)

Total deferred income tax liabilities(30,360)(31,141)

Net deferred income tax asset

 

$

9,286

 

 

$

10,674

 

Net deferred income tax asset$6,284 $3,351 

At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred income tax assets when it is more likely than not that all, or some portion, of the deferred income tax assets will not be realized. A valuation allowance would be based on all available information including the Company’s assessment of uncertain tax positions and projections of future taxable income and capital gain from each tax-paying component in each jurisdiction, principally derived from business plans and available tax planning strategies.

Management believes that it is more likely than not thathas reviewed all available evidence, both positive and negative, in determining the need for a portion of the benefit relatingvaluation allowance with respect to the state capital loss carryforward will notgross deferred tax assets. In determining the manner in which available evidence should be realized. In recognition of this risk,weighted, management has determined that the Company has provided an additionalneed for a valuation allowance during 2017 of $297 thousand on the balance of the deferred income tax asset as of December 31, 2017. If management’s assumptions change and determine the Company will be able to realize these capital loss carryforwards, the income tax benefits related to any reversal of the valuation allowance on deferred income tax assets as of December 31, 2017, will be accounted for as a future reduction in income tax expense.

is not warranted at this time.

The Company has adopted Accounting for Uncertainty in Income Taxes (“ASC 740”) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 provides a threshold for the financial statement recognition and measurement of an income tax position taken or expected to be taken in an income tax return. The Company’s policy is to classify interest and penalties related to unrecognized tax positions, if any, in its provision for income taxes. As of December 31, 20172020, 2019 and 2016,2018, the Company determined that no0 uncertain tax liabilities are required.

The Company filed a consolidated federal income tax return for the tax years ended December 31, 2016, 20152019, 2018 and 20142017 and intends to file the same for the tax year ended December 31, 2017.2020. The tax allocation agreement between the Company and the Insurance Entities provideprovides that they will incur income taxes based on a computation of taxes as if they were stand-alone taxpayers. The computations are made utilizing the financial statements of the Insurance Entities prepared on a statutory basis of accounting and prior to consolidating entries which include the conversion of certain balances and transactions of the statutory financial statements to a U.S. GAAP basis.

The Company files its income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. During the 2018 tax year, the Company’s 2015 tax return was subject to audit by the Internal Revenue Service, and the audit subsequently concluded during 2018 with no change to the income tax return. The Company’s 20142017 through 20162019 tax years are still subject to examination by the Internal Revenue Service and various tax years remain open to examination in certain state jurisdiction. In February 2018, the Company received notification from the Internal Revenue Service for an examination of the 2015 tax return.

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jurisdictions.

NOTE 13 – EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of common shares outstanding for the period, excluding any dilutive common share equivalents. Diluted EPS reflects the potential dilution resulting from exercises of stock options, vesting of performance share units, vesting of restricted stock units, vesting of restricted stock, and conversion of preferred stock.

80

The following table reconciles the numerator (i.e., income) and denominator (i.e., shares) of the basic and diluted earnings per share computations for the periods presented (in thousands, except per share data):

 

Years Ended December 31,

 

Years Ended December 31,

 

2017

 

 

2016

 

 

2015

 

202020192018

Numerator for EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for EPS:

Net income

 

$

106,935

 

 

$

99,410

 

 

$

106,484

 

Net income$19,105 $46,514 $117,051 

Less: Preferred stock dividends

 

 

(10

)

 

 

(10

)

 

 

(10

)

Less: Preferred stock dividends(10)(10)(10)

Income available to common stockholders

 

$

106,925

 

 

$

99,400

 

 

$

106,474

 

Income available to common stockholders$19,095 $46,504 $117,041 

Denominator for EPS:

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for EPS:   

Weighted average common shares outstanding

 

 

34,841

 

 

 

34,919

 

 

 

34,799

 

Weighted average common shares outstanding31,884 33,893 34,856 

Plus: Assumed conversion of share-based compensation (1)

 

 

943

 

 

 

706

 

 

 

1,056

 

Plus: Assumed conversion of share-based compensation (1)63 315 905 

Assumed conversion of preferred stock

 

 

25

 

 

 

25

 

 

 

29

 

Assumed conversion of preferred stock25 25 25 

Weighted average diluted common shares outstanding

 

 

35,809

 

 

 

35,650

 

 

 

35,884

 

Weighted average diluted common shares outstanding31,972 34,233 35,786 

Basic earnings per common share

 

$

3.07

 

 

$

2.85

 

 

$

3.06

 

Basic earnings per common share$0.60 $1.37 $3.36 

Diluted earnings per common share

 

$

2.99

 

 

$

2.79

 

 

$

2.97

 

Diluted earnings per common share$0.60 $1.36 $3.27 

Weighted average number of antidilutive shares

 

 

1,504

 

 

 

1,583

 

 

 

311

 

Weighted average number of antidilutive shares2,753 773 445 

(1)

Represents the dilutive effect of unexercised Stock Options, unvested Performance Share Units, and unvested Restricted Stock.

(1)Represents the dilutive effect of unexercised stock options, unvested performance share units, unvested restricted stock units and unvested restricted stock.


NOTE 14 – OTHER COMPREHENSIVE INCOME (LOSS)

The following table provides the components of other comprehensive income (loss) on a pretaxpre-tax and after-tax basis for the periods presented (in thousands):

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

Pre-tax

 

 

Tax

 

 

After-tax

 

 

Pre-tax

 

 

Tax

 

 

After-tax

 

 

Pre-tax

 

 

Tax

 

 

After-tax

 

Net unrealized gains (losses) on

   investments available for

   sale arising during the period

 

$

2,773

 

 

 

1,058

 

 

$

1,715

 

 

$

(1,594

)

 

 

(609

)

 

$

(985

)

 

$

(2,480

)

 

$

(963

)

 

$

(1,517

)

Less: Amounts reclassified

   from accumulated other

   comprehensive income (loss)

 

 

(2,570

)

 

 

(982

)

 

 

(1,588

)

 

 

(2,294

)

 

 

(877

)

 

 

(1,417

)

 

 

(1,060

)

 

 

(406

)

 

 

(654

)

Net current period other

   comprehensive income (loss)

 

$

203

 

 

$

76

 

 

$

127

 

 

$

(3,888

)

 

$

(1,486

)

 

$

(2,402

)

 

$

(3,540

)

 

$

(1,369

)

 

$

(2,171

)

Years Ended December 31,
2020 (1)20192018 (2)
Pre-taxTaxAfter-taxPre-taxTaxAfter-taxPre-taxTaxAfter-tax
Net changes related to
available-for-sale securities:
Unrealized holding gains
(losses) arising during
the period		$33,575 $7,884 $25,691 $38,129 $9,384 $28,745 $(9,111)$(2,254)$(6,857)
Less: Reclassification
  adjustments (gains) losses
  realized in net income
(56,914)(13,605)(43,309)(492)(121)(371)2,803 694 2,109 
Other comprehensive income
(loss)		(23,339)(5,721)(17,618)37,637 9,263 28,374 (6,308)(1,560)(4,748)
Reclassification adjustments
to retained earnings		791 194 597 0 0 0 5,830 2,811 3,019 
Change in accumulated other
comprehensive income (loss)		$(22,548)$(5,527)$(17,021)$37,637 $9,263 $28,374 $(478)$1,251 $(1,729)


(1)Effective January 1, 2020, the Company adopted ASU 2016-13 and this amount represents reclassifications to retained earnings associated with the allowance for expected credit losses within accumulated other comprehensive income (“AOCI”) relating to available-for-sale debt security investments. See “—Note 2 (Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements)” for more information.
(2)Effective January 1, 2018, the Company adopted ASU 2018-02 and ASU 2016-01 and this amount represents reclassifications to retained earnings associated with the disproportional income tax effects of the Tax Act on items within AOCI and unrealized losses in AOCI relating to available-for-sale equity security investments, respectively.
81

The following table provides the reclassificationsreclassification adjustments for gains and losses out of accumulated other comprehensive incomeAOCI for the periods presented (in thousands):

 

Amounts Reclassified from

 

 

 

Accumulated Other

 

 

 

Comprehensive Income

 

 

Amounts Reclassified from
Accumulated Other
Comprehensive Income

Details about Accumulated Other

 

Years Ended December 31,

 

Affected Line Item in the Statement

Details about Accumulated OtherYears Ended December 31,Affected Line Item in the Statement

Comprehensive Income Components

 

2017

 

 

2016

 

 

2015

 

Where Net Income is Presented

Comprehensive Income Components202020192018Where Net Income is Presented

Unrealized gains (losses) on

investments available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on
available-for-sale debt securities		Unrealized gains (losses) on
available-for-sale debt securities

 

$

2,570

 

 

$

2,294

 

 

$

1,060

 

Net realized gains (losses) on investments

$56,914 $492 $(2,803)Net realized gains (losses) on investments

 

 

(982

)

 

 

(877

)

 

 

(406

)

Income taxes, current

(13,605)(121)694 Income taxes, current
Total reclassification for the periodTotal reclassification for the period$43,309 $371 $(2,109)Net of tax

 

$

1,588

 

 

$

1,417

 

 

$

654

 

Net of tax

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NOTE 15 – COMMITMENTS AND CONTINGENCIES

Obligations under Multi-Year Reinsurance Contracts
The Company purchases reinsurance coverage to protect its capital and to limit its losses when certain major events occur. The Company’s reinsurance commitments run from June 1st of the current year to May 31st of the following year. Certain of the Company’s reinsurance agreements are for periods longer than one year. Amounts payable for coverage during the current June 1st to May 31st contract period are recorded as “Reinsurance Payable, net” in the Consolidated Balance Sheet. Multi-year contract commitments for future years will be recorded at the commencement of the coverage period. Amounts payable for future reinsurance contract years that the Company is obligated to pay are: (1) $128.3 million in 2021 and (2) $71.3 million in 2022.
Litigation

Lawsuits are filed against the Company from time to time. Many of these lawsuits involve claims under policies that we underwritethe Company underwrites and reservereserves for as an insurer. We areThe Company is also involved in various other legal proceedings and litigation unrelated to claims under ourthe Company’s 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 ourthe Company’s 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.


NOTE 16 – FAIR VALUE MEASUREMENTS

U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. U.S. GAAP describes three approaches to measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach. Each approach includes multiple valuation techniques. U.S. GAAP does not prescribe which valuation technique should be used when measuring fair value, but does establish a fair value hierarchy that prioritizes the inputs used in applying the various techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the hierarchy while Level 3 inputs are given the lowest priority. Assets and liabilities carried at fair value are classified in one of the following three categories based on the nature of the inputs to the valuation technique used:

•Level 1 –— Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

•Level 2 –— Observable market-based inputs or unobservable inputs that are corroborated by market data.

82

•Level 3 –— Unobservable inputs that are not corroborated by market data. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.

Summary of significant valuation techniquesSignificant Valuation Techniques for assets measuredAssets Measured at fair valueFair Value on a recurring basis

Recurring Basis

Level 1

Common stock: Comprise actively traded, exchange-listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Mutual funds: Comprise actively traded funds. Valuation is based on daily quoted net asset values for identical assets in active markets that the Company can access.

Level 2

U.S. government obligations and agencies: Comprise U.S. Treasury Bills or Notes or U.S. Treasury Inflation Protected Securities. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.

Corporate bonds: Comprise investment-grade fixed incomedebt securities. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.

Mortgage-backed and asset-backed securities: Comprise securities that are collateralized by mortgage obligations and other assets. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields, collateral performance and credit spreads.

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Table of Contents

Municipal bonds:Comprise fixed incomedebt securities issued by a state, municipality or county. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.

Redeemable preferred stock: Comprise preferred stock securities that are redeemable. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.

Other: Comprise investment securities subject to re-measurement with original maturities beyond one year. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.

Short-term investments: Comprise investment securities subject to re-measurement with original maturities within one year but more than three months. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.

As required by U.S. GAAP, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the placement of the asset or liability within the fair value hierarchy levels.

The following tables set forth by level within the fair value hierarchy the Company’s assets that were measured at fair value on a recurring basis as of the dates presented (in thousands):

 

 

Fair Value Measurements

 

 

 

As of December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

 

$

—

 

 

$

59,604

 

 

$

—

 

 

$

59,604

 

Corporate bonds

 

 

—

 

 

 

227,504

 

 

 

—

 

 

 

227,504

 

Mortgage-backed and asset-backed securities

 

 

—

 

 

 

219,452

 

 

 

—

 

 

 

219,452

 

Municipal bonds

 

 

—

 

 

 

120,295

 

 

 

—

 

 

 

120,295

 

Redeemable preferred stock

 

 

—

 

 

 

12,479

 

 

 

—

 

 

 

12,479

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

18,811

 

 

 

—

 

 

 

—

 

 

 

18,811

 

Mutual funds

 

 

43,404

 

 

 

—

 

 

 

—

 

 

 

43,404

 

Short-term investments

 

 

—

 

 

 

10,000

 

 

 

—

 

 

 

10,000

 

Total assets accounted for at fair value

 

$

62,215

 

 

$

649,334

 

 

$

—

 

 

$

711,549

 

 

 

Fair Value Measurements

 

 

 

As of December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government obligations and agencies

 

$

—

 

 

$

74,267

 

 

$

—

 

 

$

74,267

 

Corporate bonds

 

 

—

 

 

 

191,430

 

 

 

—

 

 

 

191,430

 

Mortgage-backed and asset-backed securities

 

 

—

 

 

 

214,776

 

 

 

—

 

 

 

214,776

 

Municipal bonds

 

 

—

 

 

 

91,197

 

 

 

—

 

 

 

91,197

 

Redeemable preferred stock

 

 

—

 

 

 

12,691

 

 

 

—

 

 

 

12,691

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

93

 

 

 

—

 

 

 

—

 

 

 

93

 

Mutual funds

 

 

50,710

 

 

 

—

 

 

 

—

 

 

 

50,710

 

Short-term investments

 

 

—

 

 

 

5,002

 

 

 

—

 

 

 

5,002

 

Total assets accounted for at fair value

 

$

50,803

 

 

$

589,363

 

 

$

—

 

 

$

640,166

 

Fair Value Measurements
As of December 31, 2020
Level 1Level 2Level 3Total
Available-For-Sale Debt Securities:
U.S. government obligations and agencies$0 $59,631 $0 $59,631 
Corporate bonds0 419,844 0 419,844 
Mortgage-backed and asset-backed securities0 319,937 0 319,937 
Municipal bonds0 12,128 0 12,128 
Redeemable preferred stock0 8,321 0 8,321 
Equity Securities:
Common stock2,435 0 0 2,435 
Mutual funds82,452 0 0 82,452 
Total assets accounted for at fair value$84,887 $819,861 $0 $904,748 

83

Fair Value Measurements
As of December 31, 2019
Level 1Level 2Level 3Total
Available-For-Sale Debt Securities:
U.S. government obligations and agencies$0 $54,364 $0 $54,364 
Corporate bonds0 476,218 0 476,218 
Mortgage-backed and asset-backed securities0 311,079 0 311,079 
Municipal bonds0 3,496 0 3,496 
Redeemable preferred stock0 10,127 0 10,127 
Equity Securities:
Common stock2,377 0 0 2,377 
Mutual funds41,340 0 0 41,340 
Total assets accounted for at fair value$43,717 $855,284 $0 $899,001 
The Company utilizes third-party independent pricing services that provide a price quote for each fixed maturity, equityavailable-for-sale debt security and short-term investment.equity security. Management reviews the methodology used by the pricing services. If management believes that the price used by the pricing service does not reflect an orderly transaction between participants, management will use an alternative valuation methodology. There were no adjustments made by the Company to the prices obtained from the independent pricing source for any fixed maturitiesavailable-for-sale debt security or equity securitiessecurity included in the tables above.

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Table of Contents

The following table summarizes the carrying value and estimated fair values of the Company’s financial instruments that are not carried at fair value as of the dates presented (in thousands):

 

As of December 31,

 

 

2017

 

 

2016

 

 

 

 

 

 

(Level 3)

 

 

 

 

 

 

(Level 3)

 

As of December 31,

 

Carrying

 

 

Estimated

 

 

Carrying

 

 

Estimated

 

20202019

 

Value

 

 

Fair Value

 

 

Value

 

 

Fair Value

 

Carrying
Value		(Level 3)
Estimated
Fair Value		Carrying
Value		(Level 3)
Estimated
Fair Value

Liabilities (debt):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities (debt):

Surplus note

 

$

12,868

 

 

$

11,630

 

 

$

14,338

 

 

$

13,282

 

Surplus note$8,456 $8,291 $9,926 $9,365 

Promissory note

 

$

—

 

 

$

—

 

 

$

690

 

 

$

690

 

Level 3

Long-term debt: The fair value of the surplus note was determined by management from the expected cash flows discounted using the interest rate quoted by the holder. The SBA is the holder of the surplus note and the quoted interest rate is below prevailing rates quoted by private lending institutions. However, as the Company’s use of funds from the surplus note is limited by the terms of the agreement, the Company has determined the interest rate quoted by the SBA to be appropriate for purposes of establishing the fair value of the note.

The fair value of the promissory note was not materially different than its carrying value.


NOTE 17 – LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Set forth in the following tables is information about unpaid losses and loss adjustment expenses as of December 31, 2017,2020, net of reinsurance and estimated subrogation, as well as cumulative claim counts and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the liability for unpaid losses and LAE (in thousands).

The liability for losses and loss adjustment expenses includes an amount determined from loss reports and individual cases and an amount, based on past experience, for losses incurred but not reported.reported (“IBNR”). Such liabilities are necessarily based on estimates and, although management believes that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in earnings currently. The reserve for losses and loss adjustment expenses is reported net of receivables for salvage and subrogation of approximately $85$71 million and $76$73 million at December 31, 20172020 and 2016,2019, respectively.


84

The information about unpaid losses and loss adjustment expenses for the years ended December 31, 20132016 to 2015,2019, is presented as supplementary information and is unaudited.

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

 

 

 

 

 

 

As of

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total of Incurred-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

but-Not-Reported

 

 

 

 

 

For the Years Ended December 31,

 

 

Liabilities Plus

 

 

 

 

 

Accident Year

 

 

2013*

 

 

2014*

 

 

2015*

 

 

2016

 

 

2017

 

 

Expected Development (Redundancy) on Reported Claims

 

 

Cumulative Number of Reported Claims

 

2013

*

 

$

100,111

 

 

$

96,993

 

 

$

96,012

 

 

$

88,493

 

 

$

91,065

 

 

$

(4,704

)

 

 

20,440

 

2014

*

 

 

 

 

 

 

111,739

 

 

 

118,289

 

 

 

112,251

 

 

 

112,278

 

 

 

(10,886

)

 

 

22,420

 

2015

*

 

 

 

 

 

 

 

 

 

 

170,381

 

 

 

187,431

 

 

 

194,600

 

 

 

(15,635

)

 

 

26,703

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

269,814

 

 

 

286,252

 

 

 

(17,785

)

 

 

39,885

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

303,944

 

 

 

49,600

 

 

 

93,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

988,139

 

 

 

 

 

 

 

 

 

*UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2020
Total of IBNR
Plus Expected
Incurred Loss and Defense & Cost Containment Expenses, Net of ReinsuranceDevelopment (Redundancy)Cumulative Number
For the Years Ended December 31,on Reported Claimsof Reported Claims
Accident Year2016 *2017 *2018 *2019 *2020
2016$269,814 $286,252 $324,577 $351,487 $362,155 $628 40,568 
2017303,944 334,734 375,123 404,673 5,128 132,576 
2018334,368 335,946 348,792 (1,444)54,185 
2019446,419 452,029 (2,589)47,437 
2020617,795 102,141 76,800 
Total$2,185,444 

96

Table

Cumulative Paid Loss and Defense & Cost Containment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident Year2016 *2017 *2018 *2019 *2020
2016$204,122 $297,374 $328,286 $349,837 $361,067 
2017205,200 328,105 365,588 397,509 
2018253,008 327,310 348,225 
2019335,991 446,997 
2020452,560 
Total$2,006,358 
All outstanding liabilities before 2016, net of reinsurance28 
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance$179,114 
 * Presented as unaudited required supplementary information.
Set forth is the supplementary information about average historical claims duration as of Contents

December 31, 2020:

 

 

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

 

For the Years Ended December 31,

 

Accident Year

 

2013*

 

 

2014*

 

 

2015*

 

 

2016

 

 

2017

 

2013

*

$

61,117

 

 

$

88,843

 

 

$

93,489

 

 

$

95,059

 

 

$

95,383

 

2014

*

 

 

 

 

 

69,703

 

 

 

112,059

 

 

 

119,798

 

 

 

122,579

 

2015

*

 

 

 

 

 

 

 

 

 

115,328

 

 

 

191,481

 

 

 

208,592

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

204,122

 

 

 

297,374

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

205,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

929,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All outstanding liabilities before 2013, net of reinsurance*

 

 

 

(3,469

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities for claims and claim adjustment expenses, net of reinsurance

 

 

$

55,542

 

*UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance *
Years12345
60.6 %18.9 %10.1 %5.2 %2.7 %


Set forth is the following reconciliation of the net incurred and paid claims development tables to the liability for unpaid losses and LAE in the consolidated Balance Sheet as of December 31, 20172020 (in thousands):

 

 

 

 

 

 

 

December 31, 2017

 

Liabilities for unpaid claims and claim

  adjustment expenses, net of reinsurance

 

$

55,542

 

Reinsurance recoverable on unpaid claims

 

 

182,405

 

Unallocated claims adjustment expenses and other

 

 

10,478

 

Total gross liability for unpaid claims and claim

  adjustment expense

 

$

248,425

 

December 31, 2020
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance$179,114 
Reinsurance recoverable on unpaid claims119,522 
Liabilities for adjusting and other claim payments23,829 
Total gross liability for unpaid claims and claim adjustment expense$322,465 

Set forth is the supplementary information about average historical claims duration as of December 31, 2017:

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance

 

Years

 

1

 

 

2

 

 

3

 

 

4

 

 

5

 

 

 

 

51.0

%

 

 

17.7

%

 

 

11.2

%

 

 

9.1

%

 

 

6.6

%

Set forth in the following table is the change in liability for unpaid losses and LAE for the periods presented (in thousands):

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Balance at beginning of year

 

$

58,494

 

 

$

98,840

 

 

$

134,353

 

Less: Reinsurance recoverable

 

 

(106

)

 

 

(13,540

)

 

 

(47,350

)

Net balance at beginning of period

 

 

58,388

 

 

 

85,300

 

 

 

87,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incurred (recovered) related to:

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

 

322,929

 

 

 

305,919

 

 

 

188,040

 

Prior years

 

 

27,499

 

 

 

(4,690

)

 

 

(301

)

Total incurred

 

 

350,428

 

 

 

301,229

 

 

 

187,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid related to:

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

 

215,274

 

 

 

229,761

 

 

 

123,952

 

Prior years

 

 

127,522

 

 

 

98,380

 

 

 

65,490

 

Total paid

 

 

342,796

 

 

 

328,141

 

 

 

189,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net balance at end of period

 

 

66,020

 

 

 

58,388

 

 

 

85,300

 

Plus: Reinsurance recoverable

 

 

182,405

 

 

 

106

 

 

 

13,540

 

Balance at end of year

 

$

248,425

 

 

$

58,494

 

 

$

98,840

 

85

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As a result of changes in estimates of insured events in prior years, the loss and loss adjustment expense increased by $27.5 million in 2017.


Years Ended December 31,
202020192018
Balance at beginning of year$267,760 $472,829 $248,425 
Less: Reinsurance recoverable(123,221)(393,365)(182,405)
Net balance at beginning of period144,539 79,464 66,020 
Incurred (recovered) related to:   
Current year700,473 515,338 314,933 
Prior years58,337 88,068 99,522 
Total incurred758,810 603,406 414,455 
Paid related to:   
Current year513,308 391,161 221,708 
Prior years187,098 147,170 179,303 
Total paid700,406 538,331 401,011 
Net balance at end of period202,943 144,539 79,464 
Plus: Reinsurance recoverable119,522 123,221 393,365 
Balance at end of year$322,465 $267,760 $472,829 
During 20172020, the liability for unpaid losses and loss adjustment expenses, prior to reinsurance, increased by $189.9$54.7 million from $58.5$267.8 million as of December 31, 20162019 to $248.4$322.5 million as of December 31, 2017.2020. The increase in unpaid losses and LAE was the result of significant weather events above plan occurring during 2020, increases in litigated claims, reopened claims and prior years’ reserve development. 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 of 2020 exceeded weather event claims reported during the first three quarters of 2020. Reported losses from Hurricane Sally significantly benefited from the Company’s catastrophe reinsurance protection. The Company reinsurance program reduced its 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 the Company’s 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.
The Company 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.
For the year ended December 31, 2020, development of direct and net losses on previously reported hurricanes was primarily a result$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.
In 2020 the Company has reinsurance recoverableexperienced the highest level of $182.4 million. Other factors leadingunnamed weather events when compared to the increase includeprevious three years. 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, resulting in a pattern of continued increased year over year levels of represented claims, inflation of purported claim amounts, and increased demands for attorneys’ fees. Active solicitation of personal residential claims in Florida by policyholder representatives, remediation companies and repair companies has led to an increase in our underlying exposure due to increased writingsthe frequency and severity of personal residential claims in Florida exceeding historical levels and levels seen in other states, as well asjurisdictions. A Florida statute providing a one-way right of attorneys’ fees against insurers, coupled with other adverse statutes and judicial rulings, have further produced a legal environment in Florida that encourages litigation, in many cases without regard to the underlying circumstances of the claims.
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
86

Company continues to adjust and settle Hurricane Irma claims that were reported prior year adverse development reserveto the expiration of $27.5 million, primarily driven by assignment of benefits (“AOB”) related claims within our Florida book, including the increased litigation frequency experienced during 2017 surrounding the AOB issue. Total reserve re-estimates conducted in 2016 and 2015, resulted in favorable development of $4.7 million in 2016, and $0.3 million in 2015. The favorable development in 2016 was principally the result of increases in estimated subrogation recoveries.

three-year period.

Basis for estimating liabilities for unpaid claims and claim adjustment expenses

The Company establishes a liability to provide for the estimated unpaid portion of the costs of paying losses and LAE under insurance policies the Insurance Entities have issued. Predominately all of the Company’s claims relate to the Company’s core product, homeowners insurance and the various policy forms in which it is available. The liability for unpaid losses and LAE consists of the following:

•Case reserves, which are the reserves established by the claims examiner on reported claims.

•Incurred but not reported (“IBNR”), which are anticipated losses expected to be reported to the companyCompany and development of reported claims, including anticipated recoveries from either subrogation orand ceded reinsurance.

Ceded reinsurance for both paid and unpaid claims are reported separately as reinsurance recoverable.

•LAE, which are the estimated expenses associated with the settlement of case reserves, and IBNR.

Underwriting results are significantly influenced by the Company’s practices in establishing its estimated liability for unpaid losses and LAE. The liability is an estimate of amounts necessary to ultimately settle all current and future claims and LAE on claimslosses occurring during the policy coverage period each year as of the financial statement date.

Characteristics of Reserves

The liability for unpaid losses and LAE, also known as reserves, areis established based on estimates of the ultimate future amounts needed to settle claims, either known or unknown, less losses and LAE that have been paid to date. ClaimsHistorically, claims are typically reported promptly with relatively little reporting lag between the date of occurrence and the date the loss is reported. Certain number of claims are not known immediately after a loss and insureds are delayed at reporting those losses to us. In the current Florida market, an increased number of claims are reported well after the purported dates of loss. Reporting delays at times are material. In addition, claims which the Insurance Entities believed were settled often are reopened based on newly reported claim demands from our insureds as a result of third party representation. The Company is seeing increased litigation and changes to consumer behavior over the reporting and settlement process especially with Florida-based claims. The Company’s claim settlement data suggests that the Company’s typical insurance claims have an average settlement time of less than one year.

year from the reported date unless delayed by some form of litigation or dispute.

Reserves are estimated for both reported and unreported claims, and include estimates of all expenses associated with processing and settling all incurred claims, including consideration for anticipated subrogation recoveries that will offset future loss payments. The companyCompany updates reserve estimates periodically as new information becomes available or as events emerge that may affect the resolution of unsettled claims. Changes in prior year reserve estimates (reserve re-estimates), which may be material, are determined by comparing updated estimates of ultimate losses to prior estimates, and the differences are recorded as losses and LAE in the Consolidated Statements of Income in the period such changes are determined. Estimating the ultimate cost of losses and LAE is an inherently uncertain and complex process involving a high degree of subjective judgment and is subject to the interpretation and usage of numerous uncertain variables as discussed further below.

Reserves for losses and LAE are determined in three primary sectors. These sectors are (1) the estimation of reserves for Florida non-catastrophe losses, (2) hurricane losses, and (3) non-Florida non-catastrophe losses and any other losses. Evaluations are performed for gross loss, LAE and subrogation separately, and on a net and direct basis for each sector. The analyses for non-catastrophe losses are further separated into data groupings of like exposure or type of loss. These groups are property damage on homeowner policy forms HO-3 and HO-8 combined, property damage on homeowner policy forms HO-4 and HO-6 combined, property damage on dwelling fire policies, sinkhole claims, and water damage claims. Although these sectors are aggregated into the single tables noted above, analyses are performed in these three sectors, due to the analogous nature of the product and similar claim settlement traits.

As claims are reported, the claims department establishes an estimate of the liability for each individual claim called case reserves. For certain liability claims of sufficient size and complexity, the field adjusting staff establishes case reserve estimates of ultimate cost, based on their assessment of facts and circumstances related to each individual claim. Opportunities for subrogation are also identified for further analysis and collection. For other claims which occur in large volumes and settle in a relatively short time frame, it is not practical or efficient to set case reserves for each claim, and an initial case reserve of $2,500 is set for these claims. In the normal course of business, wethe Company may also supplement ourits claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims.

The Actuarial Methods used to Develop Reserve Estimates

Reserve estimates for both unpaid losses and LAE are derived using several different actuarial estimation methods in order to provide the actuary with multiple predictive viewpoints to consider for each of the sectors discussed above. Each of the methods has merit,

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because they each provide insight into emerging patterns. These methods are each variations on two primary actuarial techniques: “chain ladder development” techniques and “counts and average” techniques. The “chain ladder development” actuarial technique is an estimation process in which historical payment and reserving patterns are applied to actual paid and/or reported amounts (paid losses, recovered subrogation or LAE plus individual case reserves established by claim adjusters) for an accident period to create an estimate of how losses or recoveries are likely to develop over time. The “counts

87

“counts and average” technique includes an evaluation of historical and projected costs per claim, and late-reported claim counts, for open claims by accident period. An accident period refers to classification of claims based on the date in which the claims occurred, regardless of the date they were reported to the company. These analyses are used to prepare estimates of required reserves for payments or recoveries to be made in the future. Transactions are organized into half-year accident periods for purposes of the reserve estimates. Key data elements used to determine ourthe Company’s reserve estimates include historical claim counts, loss and LAE payments, subrogation received, case reserves, earned policy exposures, and the related development factors applicable to this data.

The first method for estimating unpaid amounts for each sector is a chain ladder method called the paid development method. This method is based upon the assumption that the relative change in a given accident period’s paid losses from one evaluation point to the next is similar to the relative change in prior periods’ paid losses at similar evaluation points. In utilizing this method, actual 6-month historical loss activity is evaluated. Successive periods can be arranged to form a triangle of data. Paid-to-Paid (“PTP”) development factors are calculated to measure the change in cumulative paid losses, LAE, and subrogation recoveries, from one evaluation point to the next. These historical PTP factors form the basis for selecting the PTP factors used in projecting the current valuation of losses to an ultimate basis. In addition, a tail factor is selected to account for loss development beyond the observed experience. The tail factor is based on trends shown in the data and consideration of industry loss development benchmarks. Utilization of a paid development method has the advantage of avoiding potential distortions in the data due to changes in case reserving methodology. This method’s implicit assumption is that the rate of payment of claims has been relatively consistent over time, and that there have been no material changes in the rate at which claims have been reported or settled. In instances where changes in settlement rates are detected, the PTP factors are adjusted accordingly, utilizing appropriate actuarial techniques. These adjusted techniques each produce additional development method estimates for consideration.

A second method is the reported development method. This method is similar to the paid development method; however, case reserves are considered in the analysis. Successive periods of reported loss estimates (including paid loss, subrogation recoveries, paid LAE and held case reserves) are organized similar to the paid development method in order to evaluate and select Report-to-Report (“RTR”) development factors. This method has the advantage of recognizing the information provided by current case reserves. Its implicit assumption is that the relative adequacy of case reserves is consistent over time, and that there have been no material changes in the rate at which claims have been reported or settled. In cases where significant reserve strengthening or other changes have occurred, RTR factors are adjusted accordingly, utilizing appropriate actuarial techniques.

A third method is the Bornhuetter-Ferguson (“B-F”) method, which is also utilized for estimating unpaid loss and LAE amounts. Each B-F technique is a blend of chain ladder development methods and an expected loss method, whereby the total reserve estimate equals the unpaid portion of a predetermined expected unpaid ultimate loss projection. The unpaid portion is determined based on assumptions underlying the development methods. As an experience year matures and expected unreported (or unpaid) losses become smaller, the initial expected loss assumption becomes gradually less important. This has the advantage of stability, but it is less responsive to actual results that have emerged. Two parameters are needed in each application of the B-F method: an initial assumption of expected losses and the expected reporting or payment pattern. Initial expected losses for each accident period other than the current year is determined using the estimated ultimate loss ratio from the prior analysis. Initial expected losses for the current year’s accident periods are determined based on trends in historical loss ratios, rate changes, and underlying loss trends. The expected reporting pattern is based on the reported or paid loss development method described above. This method is often used in situations where the reported loss experience is relatively immature or lacks sufficient credibility for the application of other methods.

A fourth method, called the counts and averages method, is utilized for estimates of loss, subrogation and LAE for each Florida sector. In this method, an estimate of unpaid losses or expenses is determined by separately projecting ultimate reported claim counts and ultimate claim severities (cost or recoveries per claim) on open and unreported claims for each accident period. Typically, chain ladder development methods are used to project ultimate claim counts and claim severities based on historical data using the same methodology described in the paid and reported development methods above. Estimated ultimate losses are then calculated as the product of the two items. This method is intended to avoid data distortions that may exist with the other methods for the most recent years as a result of changes in case reserve levels, settlement rates and claims handling fees. In addition, it may provide insight into the drivers of loss experience. For example, this method is utilized for sinkhole losses due to unique settlement patterns that have emerged since the passage of legislation that codified claim settlement practices with respect to sinkhole related claims and subsequent policy form changes, wethe Company implemented. The method is also utilized to evaluate segments impacted by the implementation of ourthe Company’s Fast Track Initiative, which is an initiative to settle claims on an accelerated basis. These claims are expected to be reported and settled at different rates and ultimate values than historically observed, requiring a departure from traditional development methodologies.

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The implicit assumption of these techniques is that the selected factors and averages combine to form development patterns or severity trends that are predictive of future loss development of incurred claims. In selecting relevant parameters utilized in each estimation method, due consideration is given to how the patterns of development change from one year to the next over the course of several consecutive years of recent history. Furthermore, the effects of inflation and other anticipated trends are considered in the reserving process in order to generate selections that include adequate provisions to estimate the cost of claims that settle in the future. Finally, in addition to paid loss, reported loss, subrogation recoveries, and LAE development triangles, various diagnostic triangles, such as triangles showing historical patterns in the ratio of paid-to-reported losses and closed-to-reported claim counts are prepared. These diagnostic triangles are utilized in order to monitor the stability of various determinants of loss development, such as consistency in claims settlement and case reserving.

Estimates of unpaid losses for hurricane experience are developed using a combination of company-specific and industry patterns, due to the relatively infrequent nature of storms and the high severity typically associated with them. Development patterns and other benchmarks are based on consideration of all reliable information, such as historical events with similar
88

landfall statistics, the range of estimates developed from industry catastrophe models, and claim reporting and handling statistics from our field units. It is common for the company to update its projection of unpaid losses and LAE for a significant hurricane event on a monthly, or even weekly basis, for the first 6-months following an event.

Estimation methods described above each produce estimates of ultimate losses and LAE. Based on the results of these methods, a single estimate (commonly referred to as an actuarial point/central estimate) of the ultimate loss and LAE is selected accordingly for each accident-year claim grouping. Estimated IBNR reserves are determined by subtracting reported losses from the selected ultimate loss, and the paid LAE from the ultimate LAE. The estimated loss IBNR reserves are added to case reserves to determine total estimated unpaid losses. Note that estimated IBNR reserves can be negative for an individual accident-year claim grouping if the selected ultimate loss includes a provision for anticipated subrogation, or if there is a possibility that case reserves are overstated. NoNaN case reserves are carried for LAE, therefore the estimated LAE IBNR reserves equal the total estimated unpaid LAE. For each sector, the reserving methods are carried out on both a net and direct basis in order to estimate liabilities accordingly. When selecting a single actuarial point/central estimate on a net basis, careful consideration is given for the reinsurance arrangements that were in place during each accident year, exposure period and segment being reviewed.

How Reserve Estimates are Established and Updated

Reserve estimates are developed for both open claims and unreported claims. The actuarial methods described above are used to derive claim settlement patterns by determining development factors to be applied to specific data elements. Development factors are calculated for data elements such as claim counts reported and settled, paid losses and paid losses combined with case reserves, loss expense payments, and subrogation recoveries. Historical development patterns for these data elements are used as the assumptions to calculate reserve estimates.

Often, different estimates are prepared for each detailed component, incorporating alternative analyses of changing claim settlement patterns and other influences on losses, from which a best estimate is selected for each component, occasionally incorporating additional analyses and actuarial judgment as described above. These estimates are not based on a single set of assumptions. Based on a review of these estimates, the best estimate of required reserves is recorded for each accident year and the required reserves are summed to create the reserve balance carried onin the Consolidated Balance Sheets.

Reserves are re-estimated periodically by combining historical payment and reserving patterns with current actual results. When actual development of claims reported, paid losses or case reserve changes are different than the historical development pattern used in a prior period reserve estimate, and as actuarial studies validate new trends based on indications of updated development factor calculations, new ultimate loss and LAE predictions are determined. This process incorporates the historic and latest trends, and other underlying changes in the data elements used to calculate reserve estimates. The difference between indicated reserves based on new reserve estimates and the previously recorded estimate of reserves is the amount of reserve re-estimates. The resulting increase or decrease in the reserve re-estimates is recorded and included in “Losses and loss adjustment expenses” in the Consolidated Statements of Income.

Claim frequency

The methodology used to determine claim counts is based first around the event and then based on coverage. One event could have one or more claims based on the policy coverage, for example an event could have a claim for the first party coverage and a claim for third party liability regardless of the number of third party claimants. If multiple third-party liability claims are reported together, they would be counted as one claim.

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NOTE 18 – VARIABLE INTEREST ENTITIES
The Company entered into a reinsurance captive arrangement with a VIE in the normal course of Contents

business and consolidated the VIE since the Company is the primary beneficiary. See “—Note 2 (Summary of Significant Accounting Policies—Accounting Policies)” for more information.

On a consolidated basis, the balance sheet classification and exposure is comprised of $10.1 million of restricted cash held in a reinsurance trust account, which can be used only to settle specific reinsurance obligations of that VIE.
89

NOTE 1819 – QUARTERLY RESULTS FOR 20172020 AND 20162019 (UNAUDITED)

The following table provides a summary of quarterly results for the periods presented (in thousands except per share data):

 

 

First

 

 

Second

 

 

Third

 

 

Fourth

 

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

 

Quarter

 

For the Year Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned, net

 

$

161,559

 

 

$

169,009

 

 

$

174,517

 

 

$

183,708

 

Investment income

 

 

2,704

 

 

 

3,223

 

 

 

3,085

 

 

 

4,448

 

Total revenues

 

 

174,874

 

 

 

185,487

 

 

 

190,243

 

 

 

201,312

 

Total expenses

 

 

127,503

 

 

 

137,564

 

 

 

173,644

 

 

 

142,721

 

Net income

 

 

31,199

 

 

 

29,376

 

 

 

9,964

 

 

 

36,396

 

Basic earnings per share

 

$

0.89

 

 

$

0.84

 

 

$

0.29

 

 

$

1.05

 

Diluted earnings per share

 

$

0.86

 

 

$

0.82

 

 

$

0.28

 

 

$

1.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned, net

 

$

152,448

 

 

$

156,461

 

 

$

159,534

 

 

$

163,973

 

Investment income

 

 

1,605

 

 

 

2,142

 

 

 

2,304

 

 

 

3,489

 

Total revenues

 

 

164,446

 

 

 

169,802

 

 

 

172,436

 

 

 

178,605

 

Total expenses

 

 

123,347

 

 

 

114,908

 

 

 

128,273

 

 

 

155,878

 

Net income

 

 

25,226

 

 

 

33,647

 

 

 

26,882

 

 

 

13,655

 

Basic earnings per share

 

$

0.73

 

 

$

0.96

 

 

$

0.77

 

 

$

0.39

 

Diluted earnings per share

 

$

0.71

 

 

$

0.94

 

 

$

0.75

 

 

$

0.38

 

First
Quarter		Second
Quarter		Third
Quarter		Fourth
Quarter
For the Year Ended December 31, 2020
Premiums earned, net$220,829 $226,370 $234,191 $242,173 
Net investment income6,834 6,179 4,557 2,823 
Total revenues235,275 252,704 311,665 273,126 
Total expenses207,691 225,266 315,457 300,125 
Net income (loss)20,067 19,882 (3,169)(17,675)
Basic earnings (loss) per share$0.62 $0.62 $(0.10)$(0.57)
Diluted earnings (loss) per share$0.61 $0.62 $(0.10)$(0.57)
For the Year Ended December 31, 2019
Premiums earned, net$209,727 $210,357 $206,599 $215,819 
Net investment income8,142 7,410 7,613 7,578 
Total revenues236,586 233,722 229,641 239,402 
Total expenses182,842 182,792 201,745 308,455 
Net income (loss)40,148 37,293 20,146 (51,073)
Basic earnings (loss) per share$1.16 $1.09 $0.60 $(1.55)
Diluted earnings (loss) per share$1.14 $1.08 $0.59 $(1.55)

Total revenues in the fourth quarter of 20172020 exceeded 2016 principally2019 driven by increasedan increase in premium rates, organic growth in policy and premium counts year over year driven by organic growth in, and outside of Florida.Florida partially offset by an increase in ceded earned premium reflecting both an increase in the exposures covered by reinsurance and its pricing. The fourth quarter included a benefit within loss and LAE from Hurricane Irmaincrease in expenses was due to reinsurance recoveries recognized during the quarter from our Other States Reinsurance Program, as well as additional income generated by our service company subsidiaries following Hurricane Irma. These benefits were largely offset by unfavorable reserve development for both currenta higher amount of net losses and prior accident years. The fourth quarter of 2016 was impacted by severe weather event losses of $26.6 million as a result of Hurricane Matthew. Net income for the fourth quarter of 2017 increased 166.5%, or $22.7 million, to $36.4 million, compared to net income of $13.7 millionloss adjustment expenses recorded in the fourth quarter of 2016.

2020 compared to 2019 which was due primarily to an increase in volume of policies and a higher loss experience in the 2020 accident year due to increased weather events in the current year offset by a reduction in adverse prior year development.

NOTE 1920 – SUBSEQUENT EVENTS

The Company performed an evaluation of subsequent events through the date the financial statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the consolidated financial statements as of December 31, 2017.

On January 22, 2018, the Company declared a dividend of $0.14 per share on its outstanding common stock payable on March 12, 2018, to shareholders of record on February 28, 2018.

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2020.

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ITEM

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

NONE

None.

ITEM

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of December 31, 2017.

2020.

Management’s Report on Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control – Integrated Framework. Based on this assessment under the framework in 2013 Internal Control – Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2017.

2020.

Plante & Moran, PLLC, the independent registered public accounting firm who also audited the Company’s consolidated financial statements included in this Form 10-K, has issued their attestation report on the Company’s internal control over financial reporting is presented above atin Part IV, Item 15 of this report under “Report of Independent Registered Public Accounting Firm.”

Changes in Internal Control Over Financial Reporting

There werewas no changeschange in the Company’s internal controlcontrols over financial reporting during the fourth quarter of 20172020 that havehas materially affected, or areis reasonably likely to materially affect, the Company’s internal control over financial reporting.


ITEM

ITEM 9B.

OTHER INFORMATION

NONE

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None.

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part iii


PART III

ITEM

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Code of Business Conduct and Ethics

The Company has adopted a Code of Business Conduct and Ethics that is applicable to all directors, officers and employees of the Company.Company, including our principal executive, principal financial and principal accounting officers, or persons performing similar functions. The codeCode is available on the Company’s website at www.universalinsuranceholdings.com.https://UniversalInsuranceHoldings.com. A copy of the Company’s Code of Business Conduct and Ethics may be obtained free of charge by written request to Frank C. Wilcox, CFO, Universal Insurance Holdings, Inc., 1110 West Commercial Boulevard, Suite 100, Fort Lauderdale, FL 33309.

For We intend to disclose future amendments to certain provisions of the Code of Business Conduct and Ethics, and waivers of the Code of Business Conduct and Ethics granted to executive officers and directors, on the website within four business days following the date of the amendment or waiver.

The information regardingincluded in the section entitled “Corporate Governance Framework” to be set forth in our Directors, Executive Officers and Corporate Governance, reference is made to our definitive proxy statementProxy Statement for ourthe 2021 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2017 and which(“2021 Proxy Statement”) is hereby incorporated herein by reference (the “2018 Proxy Statement”).

into this Item 10.

ITEM

ITEM 11.

EXECUTIVE COMPENSATION

For

The information regarding Executive Compensation, reference is made to such disclosureincluded in the 2018sections entitled “ Compensation, Discussion and Analysis” and “Director Compensation” to be set forth in our 2021 Proxy Statement which is hereby incorporated herein by reference.

reference into this Item 11.

ITEM

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

For

The information regarding Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, reference is made to such disclosureincluded in the 2018section entitled “Beneficial Ownership” and “Equity Compensation Plan Information” to be set forth in our 2021 Proxy Statement which is hereby incorporated herein by reference.

reference into this Item 12.  

ITEM

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

For

The information regarding Certainincluded in the sections entitled “Certain Relationships and Related Transactions,Party Transactions” and Director Independence, reference is made“Corporate Governance Framework” to such disclosurebe set forth in the 2018our 2021 Proxy Statement which is hereby incorporated herein by reference.

reference into this Item 13.

ITEM

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

For

The information regarding Principal Accountantincluded in the section entitled “Accounting Fees and Services, reference is madeServices” to such disclosurebe set forth in the 2018our 2021 Proxy Statement which is hereby incorporated herein by reference.

103

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PARTreference into this Item 14.


PART IV

ITEM

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(1)

Financial Statements

(1)Financial Statements

The following consolidated financial statements of the Company and the report of the Independent Registered Public Accounting Firm thereon are filed with this report at Item 8:

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets as of December 31, 20172020 and 2016.

2019.

Consolidated Statements of Income for the Years Ended December 31, 2017, 20162020, 2019 and 2015.

2018.

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 20162020, 2019 and 2015.

2018.

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 20162020, 2019 and 2015.

2018.

Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 20162020, 2019 and 2015.

2018.

Notes to Consolidated Financial Statements.

(2)

Financial Statement Schedules

(2)Financial Statement Schedules

92

The following additional financial statement schedules are furnished herewith pursuant to the requirements of Form 10-K.

Page

Page
Schedules required to be filed under the provisions of Regulation S-X Article 7:

108

97

112

101

113

102

114

103

All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or in notes thereto.

(3)Exhibits
3.1 
Amended and Restated Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10‑K filed on February 24, 2017 and incorporated herein by reference)
3.2 
Amended and Restated Bylaws of Universal Insurance Holdings, Inc. (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 19, 2017 and incorporated herein by reference)
4.1 
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (filed as Exhibit 4.1 to the Company’s Annual Report on Form 10‑K filed on March 2, 2020 and incorporated herein by reference)
10.1 
Florida Insurance Capital Build-Up Incentive Program Surplus Note (“Surplus Note”) between the Company and the State Board of Administration of Florida (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 10, 2009 and incorporated herein by reference)
10.2 
Addendum No. 1 to the Surplus Note between the Company and the State Board of Administration of Florida (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 10, 2009 and incorporated herein by reference)
10.3 
Multiple Line Quota Share Reinsurance Contract between the Company and Everest Reinsurance Company (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 10, 2009 and incorporated herein by reference)
10.4 
Universal Insurance Holdings, Inc. Second Amended and Restated 2009 Omnibus Incentive Plan, as amended through June 8, 2012 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 14, 2012 and incorporated herein by reference) †
10.5 
Amendment to Second Amended and Restated 2009 Omnibus Incentive Plan (filed as Exhibit 4.12 to the Company’s Registration Statement on Form S-8 filed on June 6, 2013 and incorporated herein by reference) †
10.6 
Form of Non-qualified Stock Option Agreement (filed as Exhibit 10.6 to the Company’s Annual Report on Form 10‑K filed on March 1, 2019 and incorporated herein by reference) †
10.7 
Form of Performance Share Award (filed as Exhibit 10.7 to the Company’s Annual Report on Form 10‑K filed on March 1, 2019 and incorporated herein by reference) †
10.8 
Form of Restricted Stock Agreement (filed as Exhibit 10.8 to the Company’s Annual Report on Form 10‑K filed on March 1, 2019 and incorporated herein by reference) †
10.9 
Form of Restricted Stock Unit Agreement (filed as Exhibit 10.9 to the Company’s Annual Report on Form 10‑K filed on March 2, 2020 and incorporated herein by reference) †
10.10 
Form of Non-Employee Director Option Grant (filed as Exhibit 10.9 to the Company’s Annual Report on Form 10‑K filed on March 1, 2019 and incorporated herein by reference) †
10.11 
Employment Agreement, dated January 12, 2016, by and between the Company and Sean P. Downes (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 19, 2016 and incorporated herein by reference) †
10.12 
Employment Agreement, dated February 27, 2019, by and between the Company and Sean P. Downes (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 4, 2019 and incorporated herein by reference) †
10.13 
Employment Agreement, dated February 22, 2018, between Stephen J. Donaghy and the Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 27, 2018 and incorporated herein by reference) †
10.14 
Employment Agreement, dated February 12, 2020, between Stephen J. Donaghy and the Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 18, 2020 and incorporated herein by reference) †
93

10.15 
Amendment No. 1 to Employment Agreement, dated April 20, 2020, between Stephen J. Donaghy and the Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 24, 2020 and incorporated herein by reference) †
10.16 
Employment Agreement, dated April 11, 2018, between Jon W. Springer and the Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 13, 2018 and incorporated herein by reference) †
10.17 
Employment Agreement, dated December  17, 2018, between Jon W. Springer and the Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 21, 2018 and incorporated herein by reference) †
10.18 
Employment Agreement, dated May 12, 2020, between Jon W. Springer and the Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 14, 2020 and incorporated herein by reference) †
10.19 
Employment Agreement, dated February 22, 2018, between Frank C. Wilcox and the Company (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 27, 2018 and incorporated herein by reference) †
10.20 
Employment Agreement, dated April 20, 2020, between Frank C. Wilcox and the Company (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 24, 2020 and incorporated herein by reference) †
10.21 
Employment Agreement, dated February 22, 2018, between Kimberly D. Cooper and the Company (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 27, 2018 and incorporated herein by reference) †
10.22 
10.23 
10.24 
Director Services Agreement, dated June 6, 2013, by and between the Company and Scott P. Callahan (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 6, 2013 and incorporated herein by reference) †
10.25 
Director Services Agreement, dated June 5, 2014, by and between the Company and Ralph J. Palmieri (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 6, 2014 and incorporated herein by reference) †
10.26 
Director Services Agreement, dated June 5, 2014, by and between the Company and Richard D. Peterson (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 6, 2014 and incorporated herein by reference) †
10.27 
Director Services Agreement, dated July 12, 2007, by and between the Company and Ozzie A. Schindler (filed as Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on August 10, 2007 and incorporated herein by reference) †
10.28 
Director Services Agreement, dated July 12, 2007, by and between the Company and Joel M. Wilentz (filed as Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on August 10, 2007 and incorporated herein by reference) †
10.29 
Form of Indemnification Agreement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 15, 2012 and incorporated herein by reference) †
10.30 
Restricted Share Unit Award Agreement, dated August 5, 2019, by and between Stephen J. Donaghy and the Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 7, 2019 and incorporated herein by reference) †
10.31 
Stock Award Agreement, dated March 18, 2020, between Kimberly Cooper Campos and the Company (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 23, 2020 and incorporated herein by reference) †
21 
23.1 
94

31.1 
31.2 
32 
101.1The following materials from Universal Insurance Holdings, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.
------------------
† Indicates management contract or compensatory plan or arrangement.


ITEM 16.

FORM 10-K SUMMARY

None.

(3)

Exhibits


3.1

Registrant’s Certificate

95

SIGNATURES
Pursuant to the requirements of Incorporation, as amended (14)

3.2

Registrant’s Amended and Restated Bylaws (9)

4.1

Form of Common Stock Certificate (3)

10.1

The Universal Insurance Holdings, Inc. Second Amended and Restated 2009 Omnibus Incentive Plan (4)

10.2

Non-qualified Stock Option Agreement dated November 12, 2013, by and between Company and Sean P. Downes (11)

10.3

Director Services Agreement, dated July 12, 2007, by and between the Company and Ozzie A. Schindler (1)

10.4

Director Services Agreement, dated July 12, 2007, by and between the Company and Joel M. Wilentz (1)

10.5

Non-qualified Stock Option Agreement dated June 15, 2015, by and between Company and Sean P. Downes (11)

10.6

Non-qualified Stock Option Agreements dated February 29, 2016, by and between Company and Sean P. Downes (12)

10.7

Form of Indemnification Agreement (5)

10.8

Employment Agreement, dated January 12, 2016, by and between the Company and Sean P. Downes (10)

10.9

Director Services Agreement, dated June 6, 2013, by and between the Company and Scott P. Callahan (6)

104

Table of Contents

10.10

Director Services Agreement, dated June 6, 2013, by and between the Company and Darryl L. Lewis (6)

10.11

Amendment to Second Amended and Restated 2009 Omnibus Incentive Plan (7)

10.12

Florida Insurance Capital Build-Up Incentive Program Surplus Note (“Surplus Note”) between the Company and the State Board of Administration of Florida (2)

10.13

Addendum No. 1 to the Surplus Note between the Company and the State Board of Administration (2)

10.14

Multiple Line Quota Share Reinsurance Contract between the Company and Everest Reinsurance Company (2)

10.15

Director Services Agreement, dated June 5, 2014, by and between the Company and Ralph J. Palmieri (8)

10.16

Director Services Agreement, dated June 5, 2014, by and between the Company and Richard D. Peterson (8)

10.17

Performance Share Unit Agreement dated January 1, 2016, by and between the Company and Sean P. Downes (12)

10.18

Performance Share Unit Agreement dated January 1, 2016, by and between the Company and Jon W. Springer (12)

14

Code of Business Conduct and Ethics (13)

21

List of Subsidiaries

23.1

Consent of Independent Registered Public Accounting Firm (Plante & Moran, PLLC)

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Title 18, United States Code, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101. INS

XBRL Instance Document

101. SCH

XBRL Taxonomy Extension Schema Document

101. CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101. DEF

XBRL Taxonomy Extension Definition Linkbase Document

101. LAB

XBRL Taxonomy Extension Label Linkbase Document

101. PRE

XBRL Taxonomy Extension Presentation Linkbase Document

-----------

(1)

Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on August 10, 2007.

(2)

Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on November 10, 2009.

(3)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011 filed on March 26, 2012.

(4)

Incorporated by reference to the Registrant’s Current Report on Form 8-K, file with on June 14, 2012.

(5)

Incorporated by reference to the Registrant’s Current Report on Form 8-K, file on November 15, 2012.

(6)

Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on June 6, 2013.

(7)

Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 333-189122) deemed effective on June 6, 2013.

(8)

Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on June 6, 2014.

(9)

Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on June 19, 2017.

(10)

Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on January 19, 2016.

(11)

Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed February 22, 2013.

(12)

Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed January 19, 2016.

105

Table of Contents

(13)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed February 24, 2016.

(14)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016, filed February 24, 2017.

106

Table of Contents

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrantregistrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, hereuntothereunto duly authorized.

UNIVERSAL INSURANCE HOLDINGS, INC.

Dated: February 23, 2018

By:

/s/ Sean P. Downes 

Date: February 26, 2021

By:

Sean P. Downes,/s/ Stephen J. Donaghy 

Stephen J. Donaghy, Chief Executive Officer and Principal Executive Officer

By:

/s/ Frank C. Wilcox 

Frank C. Wilcox, Chief Financial Officer and Principal Accounting Officer

In accordance with

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Sean P. Downes 

Executive Chairman and Director

February 26, 2021
Sean P. Downes
/s/ Stephen J. DonaghyChief Executive Officer (Principal Executive Officer) and Director (Principal

February 23, 2018

26, 2021

Sean P. Downes

Stephen J. Donaghy

Executive Officer)

Director

/s/ Jon W. Springer 

President, Chief Risk Officer and Director

February 23, 2018

Jon W. Springer

/s/ Frank C. Wilcox

Chief Financial Officer (Principal Accounting Officer)

February 23, 2018

26, 2021

Frank C. Wilcox 

/s/ Kimberly D. Cooper

Campos

Chief Information Officer, Chief Administrative Officer and

February 23, 2018

26, 2021

Kimberly D. Cooper

Campos

Director

/s/ Scott P. Callahan 

Director

February 23, 2018

26, 2021

Scott P. Callahan

/s/ Darryl L. Lewis 

Marlene M. Gordon

Director

February 23, 2018

26, 2021

Darryl L. Lewis

Marlene M. Gordon

/s/ Ralph J. Palmieri

Director

February 23, 2018

26, 2021

Ralph J. Palmieri

/s/ Richard D. Peterson 

Director

February 23, 2018

26, 2021

Richard D. Peterson

/s/ Michael A. Pietrangelo 

Director

February 23, 2018

26, 2021

Michael A. Pietrangelo

/s/ Ozzie A. Schindler 

Director

February 23, 2018

26, 2021

Ozzie A. Schindler

/s/ Jon W. Springer

DirectorFebruary 26, 2021
Jon W. Springer
/s/ Joel M. Wilentz 

Director

February 23, 2018

26, 2021

Joel M. Wilentz

107


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Table of Contents

SCHEDULE


SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Universal Insurance Holdings, Inc. had no long-term obligations, guarantees or material contingencies as of December 31, 20172020 and 2016.2019. The following summarizes the major categories of the parent company’s financial statements (in thousands, except per share data):

CONDENSED BALANCE SHEETS

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

67,509

 

 

$

3,951

 

Investments in subsidiaries and undistributed earnings

 

 

359,847

 

 

 

362,759

 

Fixed maturities, at fair value

 

 

3,111

 

 

 

3,003

 

Equity maturities, at fair value

 

 

5,238

 

 

 

625

 

Income taxes recoverable

 

 

9,472

 

 

 

3,262

 

Deferred income taxes

 

 

9,286

 

 

 

10,674

 

Other assets

 

 

431

 

 

 

1,003

 

Total assets

 

$

454,894

 

 

$

385,277

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4

 

 

$

50

 

Dividends payable

 

 

40

 

 

 

—

 

Other accrued expenses

 

 

14,862

 

 

 

14,037

 

Total liabilities

 

 

14,906

 

 

 

14,087

 

 

 

 

 

 

 

 

 

 

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

 

 

458

 

 

 

453

 

Authorized shares - 55,000

 

 

 

 

 

 

 

 

Issued shares - 45,778 and 45,324

 

 

 

 

 

 

 

 

Outstanding shares - 34,735 and 35,052

 

 

 

 

 

 

 

 

Treasury shares, at cost - 11,043 and 10,272

 

 

(105,123

)

 

 

(86,982

)

Additional paid-in capital

 

 

86,186

 

 

 

82,263

 

Accumulated other comprehensive income (loss), net of taxes

 

 

(6,281

)

 

 

(6,408

)

Retained earnings

 

 

464,748

 

 

 

381,864

 

Total stockholders' equity

 

 

439,988

 

 

 

371,190

 

Total liabilities and stockholders' equity

 

$

454,894

 

 

$

385,277

 

As of December 31,
20202019
ASSETS
Cash and cash equivalents$62,934 $86,508 
Investments in subsidiaries and undistributed earnings357,375 378,906 
Available-for-sale debt securities, at fair value0 808 
Income taxes recoverable30,545 34,253 
Deferred income tax asset, net6 0 
Other assets72 149 
Total assets$450,932 $500,624 
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Accounts payable$30 $20 
Deferred income tax liability, net0 2,602 
Dividends payable138 80 
Other accrued expenses1,085 3,587 
Total liabilities1,253 6,289 
STOCKHOLDERS’ EQUITY:
Cumulative convertible preferred stock, $.01 par value0 0 
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 value468 467 
Authorized shares - 55,000
Issued shares - 46,817 and 46,707
Outstanding shares - 31,137 and 32,638
Treasury shares, at cost - 15,680 and 14,069(225,506)(196,585)
Additional paid-in capital103,445 96,036 
Accumulated other comprehensive income (loss), net of taxes3,343 20,364 
Retained earnings567,929 574,053 
Total stockholders’ equity449,679 494,335 
Total liabilities and stockholders’ equity$450,932 $500,624 
See accompanying notes to condensed financial statements

108

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Table of Contents


CONDENSED STATEMENTS OF INCOME

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income (expense)

 

$

259

 

 

$

(35

)

 

$

22

 

Net realized gains (losses) on investments

 

 

255

 

 

 

667

 

 

 

66

 

Management fee

 

 

151

 

 

 

138

 

 

 

140

 

Other revenue

 

 

12

 

 

 

80

 

 

 

—

 

Total revenues

 

 

677

 

 

 

850

 

 

 

228

 

OPERATING COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

30,819

 

 

 

35,342

 

 

 

48,056

 

Total operating cost and expenses

 

 

30,819

 

 

 

35,342

 

 

 

48,056

 

LOSS BEFORE INCOME TAXES AND EQUITY IN NET

   EARNINGS OF SUBSIDIARIES

 

 

(30,142

)

 

 

(34,492

)

 

 

(47,828

)

Benefit from income taxes

 

 

(18,296

)

 

 

(12,055

)

 

 

(17,495

)

LOSS BEFORE EQUITY IN NET EARNINGS OF

   SUBSIDIARIES

 

 

(11,846

)

 

 

(22,437

)

 

 

(30,333

)

Equity in net income of subsidiaries

 

 

118,781

 

 

 

121,847

 

 

 

136,817

 

CONSOLIDATED NET INCOME

 

$

106,935

 

 

$

99,410

 

 

$

106,484

 

For the Years Ended December 31,
202020192018
REVENUES
Net investment income273 2,249 1,635 
Net realized gains (losses) on investments38 (1,908)0 
Net change in unrealized gains (losses) of equity securities0 3,186 (2,648)
Management fee166 166 157 
Other revenue16 10 0 
Total revenues493 3,703 (856)
OPERATING COSTS AND EXPENSES
General and administrative expenses15,448 21,526 32,063 
Total operating cost and expenses15,448 21,526 32,063 
LOSS BEFORE INCOME TAXES AND EQUITY IN NET
   EARNINGS OF SUBSIDIARIES		(14,955)(17,823)(32,919)
Benefit from income taxes(215)(2,984)(10,434)
LOSS BEFORE EQUITY IN NET EARNINGS OF SUBSIDIARIES(14,740)(14,839)(22,485)
Equity in net income of subsidiaries33,828 61,336 139,987 
CONSOLIDATED NET INCOME$19,088 $46,497 $117,502 



























See accompanying notes to condensed financial statements

109

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CONDENSED STATEMENTS OF CASH FLOWS

 

 

For the Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

106,935

 

 

$

99,410

 

 

$

106,484

 

Adjustments to reconcile net income to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Equity in net income of subsidiaries

 

 

(118,781

)

 

 

(121,847

)

 

 

(136,817

)

Distribution of income from subsidiaries

 

 

122,156

 

 

 

46,914

 

 

 

58,224

 

Depreciation

 

 

3

 

 

 

2

 

 

 

4

 

Amortization of share-based compensation

 

 

10,515

 

 

 

10,288

 

 

 

17,386

 

Amortization of original issue discount on debt

 

 

10

 

 

 

149

 

 

 

521

 

Accretion of deferred credit

 

 

—

 

 

 

(149

)

 

 

(521

)

Net realized (gains) losses on investments

 

 

(255

)

 

 

(667

)

 

 

(66

)

Deferred income taxes

 

 

1,309

 

 

 

4,724

 

 

 

(693

)

Excess tax benefits from share-based compensation

 

 

(5,793

)

 

 

1,154

 

 

 

(5,310

)

Issuance of common stock

 

 

634

 

 

 

—

 

 

 

—

 

Net changes in assets and liabilities relating to operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes recoverable

 

 

(417

)

 

 

1,004

 

 

 

255

 

Income taxes payable

 

 

—

 

 

 

—

 

 

 

3,510

 

Other operating assets and liabilities

 

 

574

 

 

 

(596

)

 

 

(1,338

)

Other liabilities and accrued expenses

 

 

778

 

 

 

(2,896

)

 

 

—

 

Net cash provided by (used in) operating activities

 

 

117,668

 

 

 

37,490

 

 

 

41,639

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of equity securities, available for sale

 

 

(4,990

)

 

 

(2,037

)

 

 

(1,442

)

Purchase of fixed maturities, available for sale

 

 

(3,000

)

 

 

(3,000

)

 

 

—

 

Proceeds from sales of equity securities, available for sale

 

 

3,255

 

 

 

2,456

 

 

 

1,481

 

Proceeds from sales of fixed maturities, available for sale

 

 

—

 

 

 

3,229

 

 

 

—

 

Net cash provided by (used in) investing activities

 

 

(4,735

)

 

 

648

 

 

 

39

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Repayment of debt

 

 

—

 

 

 

—

 

 

 

(7,000

)

Preferred stock dividend

 

 

(10

)

 

 

(10

)

 

 

(10

)

Common stock dividend

 

 

(24,001

)

 

 

(24,192

)

 

 

(22,287

)

Issuance of common stock for stock option exercises

 

 

—

 

 

 

119

 

 

 

511

 

Purchase of treasury stock

 

 

(18,141

)

 

 

(8,510

)

 

 

(18,649

)

Sale of treasury stock

 

 

—

 

 

 

2,965

 

 

 

—

 

Purchase of preferred stock

 

 

—

 

 

 

—

 

 

 

(256

)

Payments related to tax withholding for share-based compensation

 

 

(7,223

)

 

 

(5,451

)

 

 

(12,141

)

Excess tax benefits (shortfall) from share-based compensation

 

 

—

 

 

 

(1,154

)

 

 

5,310

 

Net cash provided by (used in) financing activities

 

 

(49,375

)

 

 

(36,233

)

 

 

(54,522

)

Net increase (decrease) in cash and cash equivalents

 

 

63,558

 

 

 

1,905

 

 

 

(12,844

)

Cash and cash equivalents at beginning of period

 

 

3,951

 

 

 

2,046

 

 

 

14,890

 

Cash and cash equivalents at end of period

 

$

67,509

 

 

$

3,951

 

 

$

2,046

 

For the Years Ended December 31,
202020192018
Cash flows from operating activities:
Net cash provided by (used in) operating activities$149,329 $84,752 $87,306 
Cash flows from investing activities:
Capital contributions to affiliates(118,897)0 0 
Purchases of equity securities0 (107)(35)
Purchase of available-for-sale debt securities0 (3,750)0 
Proceeds from sales of equity securities0 3,481 0 
Proceeds from sales of available-for-sale debt securities787 6,530 0 
Net cash provided by (used in) investing activities(118,110)6,154 (35)
Cash flows from financing activities:
Preferred stock dividend(10)(10)(10)
Common stock dividend(24,547)(26,106)(25,508)
Issuance of common stock for stock option exercises0 239 102 
Purchase of treasury stock(28,921)(66,186)(25,276)
Payments related to tax withholding for share-based compensation(1,315)(3,709)(12,714)
Net cash provided by (used in) financing activities(54,793)(95,772)(63,406)
Net increase (decrease) in cash and cash equivalents(23,574)(4,866)23,865 
Cash and cash equivalents at beginning of period86,508 91,374 67,509 
Cash and cash equivalents at end of period$62,934 $86,508 $91,374 




























See accompanying notes to condensed financial statements

110


99

Table of Contents


NOTE 1 – GENERAL

The financial statements of the Registrant should be read in conjunction with the consolidated financial statements in “Item 8.”

Nature of Operations and Basis of Presentation

Universal Insurance Holdings, Inc. (the “Company”) is a Delaware corporation incorporated in 1990. The 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 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.

The Company generates revenues from earnings on investments and management fees. The Company also receives distributions of earnings from its insurance and non-insurance subsidiaries.

Certain amounts in the prior periods’ condensedconsolidated financial statements have been reclassified in order to conform to current period presentation. Such reclassifications had no effect on net income or stockholders’ equity.

Dividends received from

Capital Contributions to Subsidiaries

During the year ended December 31, 2017, UPCIC paid dividends2020, the Company made a capital contribution of $30.0$114.0 million to Universal Insurance Holdings, Inc. No dividendsUPCIC to increase UPCIC’s statutory capital and surplus. There were paid from APPCICno capital contributions by the Company to Universal Insurance Holdings, Inc. forUPCIC during the yearyears ended December 31, 2017.2019 and 2018.
Dividends received from Subsidiaries
The Company received distributions from the earnings of its non-insurance consolidated subsidiaries of $151.0 million, $121.3 million and $96.6 million during the years ended December 31, 2020, 2019 and 2018, respectively. There were no0 dividends paid by UPCIC and APPCIC to Universal Insurance Holdings, Inc.the Company during the years ended December 31, 20162020, 2019 and 2015.

Capitalization of Subsidiaries

During the year ended December 31, 2016, Universal Insurance Holdings, Inc. made a capital contribution of $2.0 million to APPCIC, in conjunction with APPCIC’s plan to begin writing commercial residential products in Florida. There were no capital contributions by Universal Insurance Holdings, Inc. to APPCIC during the years ended December 31, 2017 and 2015.

2018.

NOTE 2 – SUBSEQUENT EVENTS

The Company performed an evaluation of subsequent events through the date the financial statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the consolidated financial statements as of December 31, 2017.

On January 22, 2018,2020.

In February 2021, the Company declaredfunded a dividend$77.0 million capital contribution to UPCIC to increase UPCIC’s statutory capital and surplus. UPCIC included this contribution in their statutory capital and surplus at December 31, 2020 with the permission of $0.14 per share on its outstanding common stock payable on March 12, 2018, to shareholders of record on February 28, 2018.

111

the FLOIR under statutory accounting principles.




100

Table of Contents

SCHEDULE


SCHEDULE V – VALUATION ALLOWANCES AND QUALIFYING ACCOUNTS

The following table summarizes activity in the Company’s estimated credit losses and allowance for doubtful accounts for the periods presented (in thousands):

 

 

 

 

 

 

Additions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charges to

 

 

 

 

 

 

 

 

 

 

 

Beginning

 

 

Charges to

 

 

Other

 

 

 

 

 

 

Ending

 

 

 

Balance

 

 

Earnings

 

 

Accounts

 

 

Deductions

 

 

Balance

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

527

 

 

 

505

 

 

 

—

 

 

 

352

 

 

$

680

 

Year Ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

344

 

 

 

397

 

 

 

—

 

 

 

214

 

 

$

527

 

Year Ended December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

357

 

 

 

395

 

 

 

—

 

 

 

408

 

 

$

344

 

112

Table

  Additions  
Beginning
Balance		Charges to
Earnings		Charges to
Other
Accounts		DeductionsEnding
Balance
Description     
Year Ended December 31, 2020     
Estimated credit losses (1)$749 528 — 646 $631 
Year Ended December 31, 2019     
Allowance for doubtful accounts$711 456 — 418 $749 
Year Ended December 31, 2018     
Allowance for doubtful accounts$680 470 — 439 $711 

(1) See “Part II—Item 8—Note 2 (Summary of Contents

SCHEDULESignificant Accounting Policies)”. On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic ASC 326), which introduces a new process for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new ASU applies to premiums receivable and results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP.

101

SCHEDULE VI – SUPPLEMENTAL INFORMATION CONCERNING CONSOLIDATED PROPERTY

AND CASUALTY INSURANCE OPERATIONS

The following table provides certain information related to the Company’s property and casualty operations as of, and for the periods presented (in thousands):

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

For the Year Ended December 31,

 

 

 

Reserves

 

 

Incurred

 

 

Incurred

 

 

 

 

 

 

 

 

 

 

 

for Unpaid

 

 

Loss and

 

 

Loss and

 

 

 

 

 

 

Net

 

 

 

Losses and

 

 

LAE Current

 

 

LAE Prior

 

 

Paid Losses

 

 

Investment

 

 

 

LAE

 

 

Year

 

 

Years

 

 

and LAE

 

 

Income

 

2017

 

$

248,425

 

 

$

322,929

 

 

$

27,499

 

 

$

342,796

 

 

$

13,460

 

2016

 

$

58,494

 

 

$

305,919

 

 

$

(4,690

)

 

$

328,141

 

 

$

9,540

 

2015

 

$

98,840

 

 

$

188,040

 

 

$

(301

)

 

$

189,442

 

 

$

5,155

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

For the Year Ended December 31,

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policy

 

 

 

 

 

 

Net

 

 

Net

 

 

 

 

 

 

 

Acquisition

 

 

Amortization

 

 

Premiums

 

 

Premiums

 

 

Unearned

 

 

 

Cost ("DPAC"), Net

 

 

of DPAC, Net

 

 

Written

 

 

Earned

 

 

Premiums

 

2017

 

$

73,059

 

 

$

(136,702

)

 

$

737,060

 

 

$

688,793

 

 

$

532,444

 

2016

 

$

64,912

 

 

$

(125,350

)

 

$

656,094

 

 

$

632,416

 

 

$

475,756

 

2015

 

$

60,019

 

 

$

(87,871

)

 

$

626,448

 

 

$

503,999

 

 

$

442,366

 

 As of December 31,For the Year Ended December 31,
Reserves
for Unpaid
Losses and
LAE		Incurred
Loss and
LAE Current
Year		Incurred
Loss and
LAE Prior
Years		Paid Losses
and LAE		Net
Investment
Income
2020$322,465 $700,473 58,337 $700,406 $20,393 
2019$267,760 $515,338 $88,068 $538,331 $30,743 
2018$472,829 $314,933 $99,522 $401,011 $24,816 

113

     
 As of December 31,For the Year Ended December 31,
Deferred
Policy
Acquisition
Cost (“DPAC”)		Amortization
of DPAC, Net		Net
Premiums
Written		Net
Premiums
Earned		Unearned
Premiums
2020$110,614 $(199,154)$1,004,903 $923,563 $783,135 
2019$91,882 $(176,843)$869,645 $842,502 $661,279 
2018$84,686 $(163,187)$827,674 $768,382 $601,679 

102

Table of Contents





Report of IndependentIndependent Registered Public Accounting Firm

on Supplemental Information


To Thethe Stockholders and Board of Directors and Stockholders
of

Universal Insurance Holdings, Inc. and Subsidiaries

Fort Lauderdale, Florida


We have audited, in accordance with the accompanyingstandards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheetsfinancial statements of Universal Insurance Holdings, Inc. and Subsidiaries (the "Company"“Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2017,2020, and the Company's internal control over financial reporting as of December 31, 2017, basedissued our report thereon dated February 26, 2021 which expressed an unqualified opinion on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO); such consolidatedthose financial statements and report areis included elsewhereat Item 8 in this Form 10-K and are incorporated herein by reference.  Our audits also included10-K. The supplemental information contained in the consolidated financial statement schedules of the Company listed in the accompanying index at Item 15.  These15 in this Form 10-K has been subjected to audit procedures performed in conjunction with the audit of the Company's consolidated financial statement schedules arestatements. The supplemental information is the responsibility of the Company’sCompany's management. Our responsibility isaudit procedures included determining whether the supplemental information reconciles to express an opinion based on our audits.the consolidated financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In our opinion, such consolidated financial statement schedules, when consideredthe supplemental information is fairly stated, in all material respects, in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

whole.



/s/ Plante & Moran, PLLC

Certified Public Accountants




Chicago, Illinois

February 23, 2018

114

26, 2021

103